Measuring Industrial Upgrading through Integration into Global Value Chains: The Case of Mexico’s Denim Apparel Industry

By Jonathan A. FinkPalo Alto College

San Antonio, Texas

Introduction

Global Value Chain Theory: Industrialized world buyers govern transnational value/supply chains by transferring tacit knowledge to upstream suppliers situated in LDC’s. Transfer of knowledge and skills places LDC firms on dynamic learning curves and spawns industrial upgrading at both firm and industry level.

Purpose of Paper: Part 1: Review past fifteen years of GVC based literature and assess

status of the current discourse.

Part 2: Replicate a model of industrial upgrading proposed by Kaplinsky & Readman (2004) to assess upgrading trajectory of Mexico’s export oriented denim apparel sector 1989-2005.

Key Research Question: Has Mexico’s denim apparel industry experienced measurable upgrading over a period in which the industry experienced transformation from maquiladora to full package OEM and OBM manufacturing.

Buyer-Driven Commodity Chain (BDCC) Labor IntensiveTextiles and Apparel

Footwear

Consumer Electronics

Toys

Assembly

OEM

OBM

Traders Overseas

Buyers

Firms baed in Less Developed and Developing Countries

Firms based in the Industrialized World

Importers

Branded Branded

Marketer Manufacturer

RetailerPattern of Increasing concentration

Source: Adapted from Gereffi, Gary (1999). International Trade and Industrial Upgrading in the Apparel Commodity Chain. Journal of International Economics No. 48. p. 42

Tacit Knowledge

Tacit Knowledge

DOWNSTREAM

Functional Upgrading: Moving up the chain assembly to turn-key/full packageProduct Upgrading: Higher quality which constitutes higher per unit pricesProcess Upgrading: Use of efficiency enhancing capital, technology and processesInter-industry Upgrading: Movement to new industries in higher value added chains

Note: Delineation of upgrading types developed by Humphrey & Schmitz, 2000; 2001.

Upgrading: Operational Definitions in Buyer-Driven GVC Case Study Research

Linear Functional UpgradingBarriers to entry = Skills Required for Design and Branding

Original Equipment Manufacture (OEM) or Commodity Processing

Original Brand Manufacturing (OBM)

Upward Trajectory & Enhanced Value AddedHighly competitive OligopolisticNear Pefect Competition

Assembly or Commodity Exports

Measuring Industrial Upgrading: Kaplinsky & Readman (2004)

Industrial Upgrading: Innovation at the firm level which leads to increase in per unit prices and enhanced market share relative to competitors in same segment of an industry (Kaplinsky & Readman 2004; Amighini 2006). Kaplinsky & Readman (2004) define possible outcomes for product upgrading or downgrading within an industry.

Matrix of Upgrading Possibilities

Market Share Market Share Decreases Increases

Unit Value RisesRelative to Industry Ambiguous UpgradingAverage

Unit Value FallsRelative to Industry Downgrading AmbiguousAverage

Source: Kaplinsky & Readman, 2004, p. 5

Measuring Upgrading: Kaplinsky & Readman’s Product Upgrading Quotient.

PUQ = Composite Index number that reflects changes in both unit prices and market share. Equal 50/50 weight given to each of the two variables that define upgrading trajectory.

PUQ = dP%X + ∆ MSX where:

a. dP%X is equal to the deviation of the percentage change in unit price from Year1 to Yearn for country X from the average percent change of unit price from Year1 to Yearn for the product sector and,

b. ∆ MSX is the change in market share from Year1 to Yearn for country X.

Upgrading: Increase in both unit price from Year1 to Yearn relative to change in the average unit price for all countries in sample and an increase in the market share of country X from Year1 to Yearn.

Downgrading: Country X experiences a decline in unit price from Year1 to Yearn relative to change in the average unit price for all countries in sample and a loss in the market share of country X from Year1 to Yearn.

The Study: Methodology & Data Collection

Study replicates Kaplinsky & Readman’s PUQ as applied to the case of Mexico’s denim apparel industry. USA market used as proxy for Mexico’s upgrading trajectory in world market. According to official trade statistics compiled by Instituto Nacional Estadistica e

Geografia (INEGI) in 2005 the U.S. accounted for 98% of entire export market for Mexican origin Men’s and boys denim jeans and 99% of women’s/girl’s denim jeans. (INEGI,2006)

Data Source: US Department of Commerce, Office to Textiles and Apparel Major shippers report. Disaggregated trade date at 10-digit harmonized system level.

Sample set for study = Exporting countries (i.e. competitors) considered to be all countries with at least 2% market share of US import market in 2005.

Why Mexico?

Between 1990 and 2000 Mexico’s export oriented denim apparel industry exhibited both dynamic growth and transformation from pure assembly maquiladora to full package manufacturing (Bair & Gereffi 2001, 2003).

Facts and Figures: US imports of textiles and apparel grew from $26b in 1989 to $93b in 2006. China is leading supplier to USA with 29% market share in 2006 Mexico was 2nd leading supplier to USA with 7% market share in 2006. Mexico’s textile and apparel industry experienced dynamic growth between 1989 and 2006 rising

from 11th leading supplier to 2nd. Mexico’s specialization = men's and women’s denim jeans. In 2005 Mexico held 52% market

share of men’s/boys denim imports and 39% share of women’s/girls denim imports. Denim pants accounted for 32% of Mexico’s total apparel exports to USA in 2005. Apparel production capacity in denim cluster of La Laguna increased from 500 thousand pieces

per week in 1990 to 6 Million pieces per week in 2000.

Figures compiled from US Department of Commerce Office of Textiles and Apparel, Major Shippers Report. (http://www. http://otexa.ita.doc.gov/).

Assessing Upgrading Trajectories

Women's and Girls Denim Jeans: Product Upgrading Quotient

0.99

0.67

0.58

-0.17

0.28

-0.42

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

PUQ

Costa Rica

Brazil

Pakistan

Jordan

Mexico

Guatemala

Assessing Upgrading Trajectories

Mens and Boys Denim Jeans: Product Upgrading Quotient

0.55

0.41

0.25

-0.02

-0.32

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

PUQ

China

Dominican Republic

Lesotho

Mexico

Guatemala

Critique of the PUQ: Time Sensitivity

Figure #5

Source: US Department of Commerce, Office of Textiles and Apparel Major Shippers Report

Women's & Girls Denim Bottoms: Mexico's Market Share of the US Import Market, 1989-2005

11% 15%23% 22% 20%

29%

45%53%

61% 63% 65%73%

62%52%

44% 47%

36%

0%10%20%30%40%50%60%70%80%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Ma

rke

t S

ha

re (

by

vo

lum

e)

Figure #6

Source: US Department of Commerce, Off ice of Textiles and Apparel Major Shippers Report

Mexico's Share of the US Import Market: Men's & Boys Cotton Denim Bottoms

21%17%

31%34% 35%

38%

46% 46%

54%59%

65%61% 60%

57%55%

52% 50%

0%

10%

20%

30%

40%

50%

60%

70%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Ma

rke

t S

ha

re (

by

vo

lum

e)

Critique of the PUQ

Figure #7

Source: US Department of Commerce, Office of Textiles and Apparel

Note: volume measured in square metric equivalent (SME)

Mexico's Market Share of the USA Apparel Market

6%

8%

11%

16%14%

13%

10%10%

8%

16%

14%15%

4%4%3% 3% 4%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Mar

ket

Sh

are

(mea

sure

d b

y vo

lum

e)

Building on Kaplinsky & Readman’s Model

Assertion: The concept of upgrading is only relevant if economic and social conditions at the firm and industry levels are improving in a sustainable manner over time. Gains in per unit prices must provide for potential across the board real gains in social welfare measured in real wages for those employed in the industry.

Implication = Per unit prices currently measured in current $US should be converted into Real inflation adjusted prices.

Chart below depicts changes in real per unit prices for Mexico’s leading apparel exports to the USA over period 1993-2005. Table created by converting per unit prices in $US to Pesos using average annual exchange rates. Per unit prices in Pesos adjusted to constant Pesos (base year 2000) through use of Mexico CPI general indices at www.laborsta.ilo.org.

Percentage Change in Per Unit Export Prices for Mexico's Leading Apparel Exports to the USA (1993-2005)

334

238

98

227242

100

39 45

422

176

122

65

-16 -15

44

18

-50

0

50

100

150

200

250

300

350

400

450

Mens/Boys Cotton Denim

Bottoms

Women's/Girls Cotton

Denim Bottoms

Men's/Boys Cotton

Bottoms

Knitted or crocheted

cotton T-shirts

Men's/boys woven trousers

and shorts of synthetic

fibres

Cotton T-shirts/singlets Women's/Girls woven

cotton trousers/shorts

Knitted cotton sweaters

and pullovers

Apparel Type (ranked left to right by volume of exports in 2005)

% C

hang

e in

Pric

e pe

r Pie

ce, 1

993-

2005

Current Pesos

Constant Pesos(base 2000)

Conclusions

Kaplinsky & Readman’s PUQ is a rudimentary model of upgrading based on arbitrary notion of equally weighted variables DOES ALLOW for identification of countries that have systemically experienced upgrading or downgrading trajectories. But caution should be used in interpretations due to sensitivity related to specific period under investigation.

Research calls for evaluation of per unit prices to be based on inflation adjusted

prices instead of nominal prices in order to better assess potential for real wage gains over time. Upgrading needs to be defined as a process that yields the potential for social welfare gains.

Analysis of two key outcome related variables (per unit prices and market share) indicates:

Despite a near perfectly competitive market structure, denim apparel industry does not exhibit law of one price.

China has not (as originally predicted—see USITC, 2004) displaced regional supplier exports to the USA. Ongoing regional presence highlighted by upgrading of Guatemala’s denim exports and Chinese downgrading in men’s/boy’s niche.

Trade Policy is dictating geographical shifts in supply patterns. Exemplified by rise of Lesotho, Jordan & Kenya as global denim suppliers.

Mexico has experienced unambiguous upgrading if measured over the period 1989 -2005 but a clear pattern of downgrading has taken place in the men’s/boy’s niche since 2000 and in the women’s/girls denim export niche since 2003.