The Globalization Process: Advancing Capabilities in Chinese and Indian Manufacturing

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The Globalization Process Advancing Capabilities
in Chinese and Indian Manufacturing

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Sources

• Sutton, Quality,Trade and the Moving Window,
  Economic Journal , Nov 2007
• Brandt, Rawski, Sutton, Chinas Industrial
  Development, in press
• Sutton, The auto-component industry in China and
  India A Benchmarking Study

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The Capability Concept

• At one level, this is a straightforward
  generalisation of the standard concept of
  productivity.

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The Capability Concept

• At a deeper level it involves
• (a) relating the capability of the firm to the
  know-how of individual workers.
• (b) Analysing the decision of the firm to
  invest in capability building what is of
  central interest here is that this decision takes
  place in a climate of true (Knightian)
  uncertainty.

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Competing in Capabilities
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• Key feature
• The consumers choose products offering the best
  u/p
• Implication if ugtv, the market share of a firm
  offering u cannot be eroded to zero by any number
  of firms offering v

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Proposition 1 - given any configuration of
capabilities (c1,u1), (c2,u2) . .
(cn,un) there is a lower bound in (c,u) space
below which a firm cannot achieve positive sales
at equilibrium (ex. Cournot equilibrium)
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Proposition 2
Suppose one element in building capability is the
expenditure of fixed outlays (sunk costs) -
Then competition in capability building will
lead to a bound on the number of firms in the
window.
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s Linkages Across Submarkets
Large Commercial Jets
ß Effectiveness of Capability Building
Flow meters
Numerical controls
Machine Tools
Cement
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s Linkages Across Submarkets
ß Effectiveness of Capability Building
High Concentration Narrow Window High
RD intensity
Low Concentration Wide Window High RD intensity
Low concentration Wide Window Low RD intensity
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Capabilities and Trade

• Key Point Breakdown of equivalence between
  productivity and quality
• (Sutton EJ 2007)
• Idea once a tradeable input (Component, Raw
  material, etc.) is used, it sets a lower bound to
  price, so low wages can offset low productivity,
  but not low quality

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The Globalization Process

• Phase I Impact phaseCapabilities given
• Phase II Transfer phase
• Phase III Re-investment (escalation) phase

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Main substantive argument

• The case for globalisation should rest primarily
  on the transfer and growth of capabilities it
  induces
• A fundamental set of mechanisms are driven by the
  coexistence of high capabilities and low wages
• These mechanisms include, inter alia,
• ---self help driven by new incentives
• ---Transfers via FDI/ Supply chains, etc.

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Going it Alone

• The Bharat Forge story
• Increasingly difficult as we move across
  industrial spectrum

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The Speed of Transfer

• Delicately dependent on industry characteristics
• Key channels differ by industry
• (a) Buyer search channel Textiles
• (b) Trade Fairs Ubiquitous
• (c) Supply chains Vertical Transfers
• The Evidence on FDI Spillovers

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Speed of Transmission

• FAST
• Auto components Vertical relations
  with shared technology
  standardization and codification of
  working practices.
• Domestic Appliances Horizontal JVs here
  incentives of senior partner
  are critical (cf. China).
• Machine Tools LicencingPublic sector
  bodies .
• SLOW

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Industry Specific influences

• Textiles and apparel..Contact with Buyers(Ever
  Glory)
• Steel Equipment Suppliers(Shougang)

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Changing Market Structures

• Escalation and Shakeout Chinese White Goods
  Beer
• Market Share Volatility
• Changing Leadership Chinese TVs

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A Tale of Two Industries I Auto Components

• Globally integrated
• Capabilities codified
• ...Supply Chain aligns incentives

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Note Indian figures for fiscal year 93-94 are
shown here as 93, etc.
Figure 16. Car Production in India and China
1993-2001
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A Timescale for Capability Building

• A multinational seat maker on a greenfield site
  in India drops from initial 2,085 ppm to 65 ppm
  in year 3.
• A domestic Indian seat maker drops from 20,000
  ppm to 200 ppm over 5 years.
• Greenfield vs. Joint Venture

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The Mahindra Story
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II Machine Tools

• Globally Fragmented
• Supply Chain plays no role
• Bilateral licencing deals
• Some successful collaborations
• Huge loss of position by Indian leaders
• Chinese experience mixed

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CNC Machine Tools
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Figure 3. The size of design teams as a
proportion of total firm employment (Panel a) and
in terms of the number of employees (Panel b).
For India the HMT company is excluded from
this comparison.
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Figure 5. Difference in general satisfaction
with machine (1-5 rating) (Indian-Foreign). In
this and subsequent figures, outcomes favourable
to the Indian Machine are shown in green, and
those favourable to the foreign machine re shown
in red.
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20
15
10
5
0
2
4
-8
0
6
8
10
gt-8
-6
-4
-2
lt10
Figure 7. Difference in lost hours due to
breakdown/no of machine hours booked.
(Indian-Foreign)
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ACE Designers

• Small new entrant
• Understands importance of quality/ price nexus
• Focus on building capability in one core product

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China in Machine Tools

• Now exporting basic CNC machines
• Serious challenges to capability building

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OECD Perspectives

• The Bernard Schott Evidence
• Survival and Flexibility
• The European Debate and Social Europe
• Unfortunate Confusions