Global Value Chain 1

THE GLOBAL VALUE CHAIN DEVELOPMENT

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 Global Value Chain 2

The Global Value Chain Development

Introduction

Since times immemorial the producers are implementing several alterations and new

ideas in the process of production to ensure efficient, low-cost production and thus a higher

margin of profit. The term “value chain” means a business model inclusive of a complete set of

activities that are required for product and service provision. The value chain includes every

process from product development to product distribution in the market. The global value chain

comprises breaking the stages in the production process and scattering them across various firms

and workers in different nations. Lately, many industries all over the globe are embracing GVC

because integrating GVC into their industries' development has been noticed. Countries and

industrial firms that have embraced GVCs have profited greatly since GVCs are driven by cost

efficiencies, technological progress, trade reforms, and access to the resource market. For third-

world countries and developing countries, GVCs have reduced the costs of both imports and

exports by integrating deeply with the global markets (Tardi 2020). The firms connecting to

GVCs aim to perform sophisticated and complex tasks to move up the value chain by use of

sophisticated knowledge and technologies to perform activities that add value more than before.

This paper argues more in favor of upgrading into higher activities in a GVC. This paper focuses

on the automotive industry of various industries around the globe and observes how these firms

embrace GVC and thus profit from upgrading.

Liberalization and globalization have played an active role in erasing borders among countries to

facilitate cross-border trade. Cross-border production was highly popularized by the

Transnational Corporations (TNCs) which are composed of entities situated in two or more

countries that either share a common owner or these companies can exercise substantial mutual
 Global Value Chain 3

control. Ideally, GVCs encourage the countries to open up by removing barriers to foreign trade

and investment much like other cross-border production activities one distinguishing feature is

that the production activities under GVCs are increasingly undertaken by third parties that have

no links to the TNCs (Seric & SiongTong 2019). Fragmentation of production within the GVC

has always been driven by multinational enterprises. One of the characteristics of GVC is the

distribution of the distribution processes of a single product across different countries by

different firms. Value chains have been used much in this case and they have been used to

analyze international trade in global value chains. There are two ways in which value chains can

be organized namely, offshoring and outsourcing.

Outsourcing comprises value chain activities that are conducted outside the firm whereas

offshoring entails the value chain activities that are conducted outside the home country. There

are two types of GVCs namely, producer-driven and buyer-driven. Although the line

distinguishing these two categories is blurred, producer-driven GVCs lead firms are the

designers of specifications. Automotive and electronic industries are examples of producer-

driven GVCs whereas clothing and agriculture are buyer-driven industries where lead firms

purchase goods with specific standards.

The automotive industry is very different from other industries. First and foremost, the industry

has limited lead firms capable of managing supplier co-location at all levels. Secondly, the lack

of robust industry-wide standards and codification schemes can limit the value chain modularity.

The automaking firms can lure suppliers from across the world to set up local engineering

capabilities after setting up their local technical centers (GVCC 2017). Through this, an entire

cluster develops and the firms grow big enough to attract foreign investment and succeed. The

production process of centrally designed vehicles is sliced and scattered to different lucrative
 Global Value Chain 4

regions. The integration into the GVC has helped the buyer-supplier relationship in the

automotive industry to reach new horizons. The automotive industry comprises heavy and

models specific parts of production located close to the assembly department to ensure speedy

production and delivery. The light production parts are manufactured in regions with low labor

costs.

The automotive industry is becoming highly integrated with the global markets as the suppliers

are taking over the designer roles. This thus helps automotive firms to set up design centers in

regions that guarantee easy collaboration with customers. Several reasons have influenced

automobile makers to implement GVC. The political challenges within a nation can influence the

establishment of assembly units in other countries with huge markets. Developing countries such

as China and India have low operating costs lure many automotive firms to take advantage of

scale economies (Ray and Miglani 2018). Integration into the GVC helps in the creation of jobs

and the establishment of strong industrial clusters dedicated to a specific aspect like vehicle

design or manufacturing components with common characteristics. Due to the evolution of

GVCs, the local automotive firms in the developing countries get the opportunity to upgrade and

become lead firms themselves.

Firms and industries in developing countries benefit from GVC by upgrading to higher-value

activities within the value chain. The small firms in developing countries help the larger players

in the market as they get to explore their specialties and thus learn which specific niche product

category they should focus on. The firms in the middle of the global value chain curve are

engaged in low value-added activities. Middle firms face high price competition due to low

barriers to entry. The firms try to upgrade their position by performing more complex activities

which add more value and thus relocate themselves to areas where competition is less and firms
 Global Value Chain 5

receive high firm protection. The firms in the middle of the global value chain curve can upgrade

in four to five ways. First, process upgrading entails increasing the efficiency of the production

process to improve the firm’s productivity. Efficient production is met and ensured by

knowledge capital and tangible investments.

Secondly, the firms are in a position to upgrade their products to ones with higher values.

Thirdly, the middle firms in the global value chain curve can upgrade their functionality by

entering into a new GVC segment; i.e., from manufacturing to research and development.

Finally, these firms can upgrade by entering into new value chains (Baldwin 2012). During the

upgrading process, there are some challenges that the firms in the middle global value chain

curve can face. To access the benefits of upgrading the firms require more complex and

sophisticated knowledge and technology. Moreover, the firms in the middle of the GVC curve

need to be exposed to a new market to create forward and backward linkages. Unfortunately, it

becomes hard for small and middle chain curve industries in developing countries to meet these

requirements

In developed countries such as China and India upgrading of automotive industries has been

witnessed. In China, the automotive industry has contributed to the massive growth of the

country. For a long time, the automotive industry in China has operated in the middle of the

GVC curve. The industry took investments from firms in the west which took advantage of

China’s cheap factors of production and labor (Ylomaki 2016). The firms were used for the basic

production process and never took part in the design process and other engineering expertise of

the vehicle. Upgrading was necessary for the firms to participate fully in the GVC. Recently the

Chinese automotive industry is performing high-value-adding activities like designing,

engineering, and even crucial production process. The rapid movement up the GVC can be
 Global Value Chain 6

attributed to the recent economic crisis which encouraged the firms in the Chinese automotive

industry to acquire technological knowledge involving vehicle design and system integration as

these were available at prices lower than ever. Two viewpoints helped the Chinese automotive

industry to upgrade (Ylomaki 2016). These viewpoints are the external linkages (Els) and

internal technological innovation capacity (ITIC). The ITIC considers the internal accumulation

of technologies and nurturing of independent innovation.

Complex knowledge and technologies help the automotive industry to train the workers with

better equipment and hence ensure better and more efficient high-quality production than before.

The second viewpoint the external linkages of the industries both local and global give it a great

chance to upgrade by exposing the industry to foreign technology through technology transfer

and spillover. The contribution of the two viewpoints to upgrading varies from stage to stage.

Although both the ITICs and Els have played a role in the rising and the dominance of the

Chinese automotive industry currently the role of ITIC is more important. The automotive

industry of China has been exposed to advanced technology for a long time to a point now China

can develop its technology and designs along with creating a strong R&D base to increase its

internal technological innovation capacity. The strong R&D base has enabled China to depend

less on external linkages when it's time to upgrade. The Chinese automotive industry now has

moved up the GVC transforming itself into an industry operating at each stage of the automotive

value chain. Some of the famous automotive Chinese industries include the SAIC motor, BYD,

and Great Wall Motor.

India is a country with a middle-class population and faces a great demand for vehicles. The high

demand makes it one of the world’s leading producers of vehicles. Automotive industrialization

started way back in 1981 when Suzuki with the domestic company Maruti created Maruti Suzuki
 Global Value Chain 7

India Limited (MSIL). Foreign acquisitions by companies such as Tata Motors and Mahindra

gave the country’s automotive industry a new dimension. The unique firm strategies used helped

built the technological capabilities. The industry's integration with GVC resulted in the

establishment of new plants and inflow of FDI from global manufacturers like Hyundai Motor

Company, Honda Motor Company, Suzuki Motor Company, and many others. During this time

India became one of the most important export centers for small vehicles because India had a

low cost of labor and scale economies. Having attained the complex knowledge soon India

started upgrading its’ automotive industry (Sturgeon and Biesebroeck 2011). To ensure process

upgrading, companies like Maruti trained their workers for multiple operations. Training centers

such as Dojo were soon set up to ensure quality and premium supply of labor.

To improve the quality of the vehicles the industries produced, older parts were replaced with

new ones. The production process was also improved by popularizing platform sharing for non-

consumer product parts. To ensure product upgrading the industry kept on innovating to provide

the customers with improved features also the industry worked to abide by the government

enactments. Ideally, functional upgrading was also met through unique designing, marketing,

and new branding strategies. A great example of functional upgrading is the launch of Hyundai’s

Santro which captured a huge market owing to its unique design. Finally, the industrial firms in

India used their pre-acquired experience in their sector to move to a new one. Starting as a

merely closed industry with one foreign firm the Indian automotive industry is among the top 20

leading global automotive industries (Lu et al. 2015). This was possible through its participation

in the GVC and undertaking the step to upgrade itself in every way possible.
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Conclusion

Upgrading into higher-value activities in a global value chain is possible. This has been proven

by the automotive industries of China and India. The automotive industries of these two

countries were weak in the beginning. Once the industries in these countries embraced GVC

remarkable change was noted. The industries in India and China moved from a position in the

middle of the global value chain curve to going above by performing complex high value-added

activities. There are four different ways of upgrading. In a country like China, the automotive

industry focused more on process upgrading India on the other hand used all the four means to

upgrade itself. These developing countries have to face certain challenges while they upgrade

themselves but they have proved to overcome them by reaching great heights. Catering to the

peaking demand of the huge middle-class population the Chinese and Indian automotive industry

has been a huge pillar supporting their respective economies. All the above instances have

proven that firms and industries in developing countries can upgrade and benefit from the global

value chain.
 Global Value Chain 9

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