Gvc in Electronics Industry (Sturgeon - Sep 2010)

Abstract This paper presents evidence of the importance of electronics global value chains (GVCs) in the global economy, and discusses the effects of the recent economic crisis on the industry. The analysis focuses on how information is exchanged and introduces the concept of “value chain modularity. ” The authors identify three key firm level actors—lead firms, contract manufacturers, and platform leaders—and discuss their development, or “coevolution” in the context of global integration.

Company, cluster, and country case studies are then presented to illustrate how supplier capabilities in various places have developed in the context of electronics global value chains. The findings identify some of the persistent limits to upgrading experienced by even the most successful firms in the developing world.

Four models used by developing country firms to overcome these limitations are presented: (1) global expansion though acquisition of declining brands (emerging multinationals); (2) separation of branded product divisions from contract manufacturing (original design manufacturing (ODM) spinoffs); (3) successful mixing of contract manufacturing and branded products (platform brands) for contractors with customers not in the electronic hardware business; and (4) the founding of factory-less product firms that rely on global value chains for a range of inputs, including production (emerging factory-less start-ups).

This paper—a product of the DFID supported Global Trade and Financial Architecture (GTFA) project—is part of a larger research effort to explore the impact of the crisis on global value chains and developing countries in particular. Policy Research Working Papers are also posted on the Web at http://econ. worldbank. org. The authors may be contacted at [email protected] edu and [email protected] go. jp. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues.

An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Global Value Chains in the Electronics Industry:

Was the Crisis a Window of Opportunity for Developing Countries? by Timothy J. Sturgeon MIT Industrial Performance Center [email protected] edu and Momoko Kawakami Institute of Developing Economies, JETRO [email protected] go. jp Keywords: Global Value Chains, Value Chain Modularity, Electronics Industry, Offshoring, Outsourcing, Globalization, Electronics Manufacturing, China JEL Codes: L63, N65, 014, P3 Global Value Chains in the Electronics Industry Sturgeon and Kawakami Introduction The electronics hardware industry is the world’s most important goods-producing sector.

Not only does it employ more workers and generate greater revenue than any other sector, its products also enhance productivity in other activities and stimulate innovation across entire economies (Mann and Kirkegaard 2006). It is what Hirschman (1958) calls a “propulsive sector. ” Consider the case of the United States, where innovation in electronics hardware, which employed 1,105,900 in 2009, has helped spawn a host of downstream service industries, including the computer systems design services, telecommunications, as well as data processing, hosting, and related information services, which together employed 2,697,200.

1 The heavy use of computers and information technology in other sectors, including retail and wholesale trade, transportation, finance, real estate, education, professional services, and industrial production, make it clear how pervasive the changes made by electronic hardware have been. The goal of this paper is to delineate the central characteristics of global value chains (GVCs) in the electronics hardware sector, describe how they have evolved to incorporate newly developed and developing countries, and discuss how they have been affected by the 2008–09 economic crisis.

As is common GVC analysis, we focus on the key actors in the chain of valueadded activities, where various activities are located geographically, and how information and knowledge flow within the chain. This paper first presents evidence for the importance of electronics GVCs in the global economy, then discusses the effects of the recent economic crisis on the industry. The third section focuses on how information is exchanged in electronics GVCs, introducing the concept of “value chain modularity.

” The next section identifies three key firm-level actors: lead firms, contract manufacturers, and platform leaders, and discuss their development, or “co-evolution. ” A series of company, cluster, and country case studies are then presented to illustrate how supplier capabilities in various places have developed in the context of electronics GVCs. The sixth section identifies some of the persistent limits to upgrading experienced by even the most successful firms in the developing world.

Four models used by developing country firms to overcome these limitations are then presented: (1) global expansion though acquisition of declining brands (Emerging Multinationals), (2) separation of branded product divisions from contract manufacturing (ODM Spinoffs), (3) successful mixing of contract manufacturing and branded products (platform brands) for contractors with customers not in the electronic hardware business, and (4) the founding of factory-less product firms that rely on GVCs for a range of inputs, including production.

Some of the cases presented here suggest that the 2008–09 economic crisis presented a window of opportunity, in particular, for firms based in Taiwan (China), which represent a key point of transformation in the industry and appear to be gaining more leverage in the industry in 1 U. S. Bureau of Labor Statistics Current Employment Statistics program, http://www. bls. gov/data/#employment, accessed Janurary 15, 2010. 2 Global Value Chains in the Electronics Industry Sturgeon and Kawakami

the wake of the crisis. The conclusion states the case that firms in the developing world will, in one or all of the ways described, soon come to play a more central role in driving the innovative trajectory of the industry by leveraging the full complement resources that have become available in GVCs. The Electronics Industry’s Role in Global Value Chain Formation Each year, the electronics industry generates a mushrooming array of products and services increasingly used in nearly every human endeavor.

2 Now deeply entwined in our social fabric, electronics products and systems now support critical aspects of communication, education, finance, recreation, and government. Thousands of companies from dozens of countries contribute to the industry on a daily basis. Even a single product can contain work carried out by dozens of firms in multiple countries.

Because there is less need for co-location of engineers than in other technology-intensive sectors, such as with the co-location of design with manufacturing, it is relatively easy for electronics firms to engage in the twin strategies of outsourcing and off-shoring. Global sourcing is common. Factories can be relocated with relative ease and produce a wide variety of end products. As a result, GVCs in the electronics industry are more geographically extensive and dynamic than in any other goods-producing sector. Evidence of the importance of the electronics industry in GVC formation can be found in statistics on intermediate goods trade.

Trade in intermediate goods is indicative of GVCs because fragmented production processes require that parts, components, and partially manufactured subassemblies cross borders—sometimes more than once—before finished goods are shipped to final markets (Feenstra 1998; Dean, Fung, and Wang 2007; Brulhart 2008). Table 1 shows the relative importance of various goods-producing industries in GVCs: intermediate electronics and automotive goods dominate total trade in the top-50 manufactured intermediate products (a combined 64. 7 percent in 2006).

Next important is a group of undifferentiated materials including metal stock (copper, aluminum, and steel), wood, and paper (8. 4 percent in 2006), followed by chemicals and plastics, manufactured metal parts, gold and diamonds, aircraft parts, and so on. The share of electronics intermediates (including semiconductors, printed circuit boards, and so on) has grown dramatically since 1988, from 24. 4 percent of the top 50 products to 43. 3 percent in 2006.

The share of automotive intermediates fell from the top spot in 1988 (25.1 percent) to the number two spot in 2006 (21. 4 percent). As a result, the growth rate of electronics intermediates was the highest in the top-50 product groupings (13. 8 percent per year). 2 This section draws from Sturgeon and Memedovic (forthcoming). 3 Global Value Chains in the Electronics Industry Sturgeon and Kawakami Table 1 Industries in Manufactured Intermediate Goods in 1988 and 2006 Ranked According to 2006 Total Trade 1988 Share of top-50 MIG (percent) 24. 4 25. 1 17. 4 9. 4 6. 0 7. 1 5. 6 3. 0 0.

0 0. 0 1. 9 100. 0 Share in total MIG trade (percent) 8. 1 8. 3 5. 8 3. 1 2. 0 2. 4 1. 8 1. 0 0. 0 0. 0 0. 6 33. 1 2006 Share of top -50 MIG (percent) 43. 3 21. 4 8. 4 6. 6 5. 6 5. 3 4. 8 2. 0 1. 7 0. 9 0. 0 100. 0 Share in total MIG trade (percent) 17. 4 8. 6 3. 4 2. 7 2. 2 2. 1 1. 9 0. 8 0. 7 0. 4 0. 0 40. 3 1988– 2006 Annual growth rate (percent) 13. 8 9. 3 5. 9 8. 1 9. 7 8. 4 9. 3 7. 9 NA NA NA 10. 2 Industries and product groups in top-50 MIG product list Electronics Automotive and motorcycle Basic mat.

(metal/wood/paper) Chemicals and plastics Manufactured metal parts Gold and diamonds Aircraft parts Const equip & gen ind mach pts Pharmaceuticals Propane Textiles (and hides) Total top-50 MIG Total MIG for three industries Electronics MIG total Automobiles and motorcycle Apparel and footwear Total MIG for three industries Total MIG trade MIG trade (US$, millions) 162,980 167,506 116,339 62,954 40,328 47,596 37,131 20,166 0 0 12,657 667,657 MIG trade (US$, millions)

1,670,940 824,392 325,676 254,523 215,085 203,064 184,575 78,688 66,503 35,946 0 3,859,393 231,295 212,961 73,610 517,866 2,018,297 11. 5 10. 6 3. 6 25. 7 100. 0 1,942,283 974,278 239,866 3,156,427 9,579,710 20. 3 10. 2 2. 5 32. 9 100. 0 12. 5 8. 8 6. 8 10. 6 9. 0 Source: Sturgeon and Memedovic (forthcoming) from UN Comtrade Standard International Trade Classification (SITC) Rev. 1 data.

To identify commodities as Consumption, Capital, and Intermediate goods, the conversion table Broad Economic Category (BEC) to SITC Rev. 1 from World Integrated Trade Solution (WITS) was used. In order to calculate constant price data, National Accounts data from United Nations Industrial Development Organization (UNIDO) Statistics Unit and a GDP deflator were applied. Note: MIG - manufactured intermediate goods.

As the data show, the electronics industry accounts for a growing share of intermediate goods trade and, by extension, of GVC formation. Trade in automotive and motorcycle intermediates is also very important, but strong incentives for local content have undoubtedly dampened their growth. Somewhat surprisingly, given the attention paid to the industry in the GVC literature (for example, Gereffi and Korzeniewicz 1994; Gereffi 1999), intermediate inputs to the apparel industry appear to be far less important in terms of the value of total intermediate goods trade, than inputs to the electronics and passenger vehicle industries.

3 Of course, this probably reflects the low unit value of textiles and other inputs to apparel and footwear relative to inputs to electronics and motor vehicles, as well as the establishment of fiber and fabric production within the world’s largest major apparel and footwear production centers, including 3 In 1988, only two products likely to be inputs to apparel and footwear products appeared in the top 50, bovine hides and skins (SITC 46) and cotton yarn (SITC 48), comprising 1. 9 percent of the value of the top 50 and 0.

6 percent of total trade in all manufactured intermediates. By 2006 no apparel inputs ranked among the top 50. The four highest ranked apparel inputs in 2006 were knitted and crocheted fabrics (#94), non-woven fabrics (#109 out of 1,600), impregnated (waterproof) fabrics (#129), and parts of footwear (#175). 4 Global Value Chains in the Electronics Industry Sturgeon and Kawakami China, Mexico, and Bangladesh. In fact, the unit value of intermediate goods is likely to have a great effect on the composition of Table 1.

For example, while GVCs in the aircraft industry are important drivers of global integration (see Kimura 2007), the high unit value of aircraft parts likely elevates their ranking in the Table 1 gold and diamonds also rank high in the table. Turning to a comparison of total manufactured intermediates, rather than just the top 50, the increasing importance of the electronics industry in GVCs is evident in both absolute and relative terms. The lower portion of Table 1 shows that the share of total manufactured intermediate goods trade accounted for by the electronics industry increased from 11. 5 percent in 1988 to 20.

3 percent in 2006, and the average annual growth rate of electronics intermediates was the highest (12. 5 percent per year) of the three industries most often discussed in the literature on GVCs. Inputs to apparel and footwear accounted for only 3. 6 percent of manufactured intermediates in 1988, a share that fell to 2. 5 percent in 2006 (see the lower portion of Table 1). The Shift of Electronics Production to China In the past 20 years, East Asia in general and China in particular have become increasingly important in electronics as well as other industries, both as production locations and final markets.

This is reflected in the flow of intermediate goods. As Table 2 shows, “greater China” (mainland China, Hong Kong, and Taiwan) accounts for 33. 1 percent of world imports of intermediate electronics goods and 29. 4 percent of exports. Growth since 1988, especially on mainland China, has been extraordinarily high. The tendency for trade to be intra-industry, that is, for countries to specialize in imports and exports in the same industry, is also striking.

All 15 countries in Table 2 appear on both the top importer and exporter lists, albeit in slightly different rank order after the top four: China, Hong Kong, the United States, and Singapore. While strong intra-industry trade can be a function of transshipment (for example, importing and exporting materials and parts via Hong Kong and perhaps Singapore).

The tendency for specific countries to both import and export intermediate products in the same industry reveals the highly integrated nature of the global economy and, for developing countries, the rich opportunities for industrial upgrading, even when parts imports are high. 5 Global Value Chains in the Electronics Industry Sturgeon and Kawakami Table 2 Top-15 Intermediate Goods Importers and Exporters in the Electronics Industry, 2006 Electronics intermediate importers China Hong Kong, China United States Singapore Germany Japan Malaysia Taiwan.

China Mexico Korea, Rep. of Netherlands Philippines United Kingdom France Thailand Percentage change 1988–2006 15219. 0 1452. 2 194. 0 590. 5 236. 3 422. 5 466. 8 405. 6 3048. 9 365. 8 392. 9 1052. 6 79. 5 118. 8 423. 3 Electronics intermediate exporters China Hong Kong, China United States Singapore Japan Taiwan, China Korea, Rep.

of Germany Malaysia Netherlands United Kingdom Philippines France Thailand Mexico Percentage change 1991–2006 21649. 1 2580. 0 179. 4 942. 2 160. 8 834. 0 543. 2 235. 5 512. 9 520. 2 121. 1 1186. 4 131. 3 438. 6 3594. 1 US$, millions 186,294 104,856 94,466 73,040 51,569 45,639 44,695 35,899 35,705 35,486 26,868 23,685 23,130 19,577 18,607 % of total 18. 9 10. 6 9. 6 7. 4 5. 2 4. 6 4. 5 3. 6 3. 6 3. 6 2. 7 2. 4 2. 3 2. 0 1. 9 US$, millions 109,433 101,873 101,807 97,278 88,994 63,824 55,028 52,685 43,966 30,637 22,538 22,024 19,148 15,756 13,115.

% of total 11. 7 10. 9 10. 9 10. 4 9. 5 6. 8 5. 9 5. 7 4. 7 3. 3 2. 4 2. 4 2. 1 1. 7 1. 4 Source: UN Comtrade Standard International Trade Classification (SITC) Rev. 1 data. To identify commodities as Consumption, Capital, and Intermediate goods, the conversion table Broad Economic Category (BEC) to SITC Rev.

1 from World Integrated Trade Solution (WITS) was used. In order to calculate constant price data, National Accounts data from United Nations Industrial Development Organization (UNIDO) Statistics Unit and a GDP deflator were applied. While the importance of the electronics industry in GVC formation is undeniable, note that the trade statistics presented here contain no information about trade in services or the ownership of physical or intellectual assets.

As a result, GVCs can exist without strong growth in intermediate goods trade. 4 Nevertheless, while current trade statistics cannot capture the more For example, in the automotive industry a pattern of regional production has been intensifying since the mid-1980s for both political and technical reasons.

This has undoubtedly dampened trade in both final and intermediate goods. Nevertheless, global integration has proceeded at the level of buyer-supplier relationships, especially between automakers and their largest suppliers, which have plants in multiple regions. As a result, local, national, and regional value chains in the automotive industry are “nested” within the global organizational structures and business relationships of the largest firms (Sturgeon, Van Biesebroeck, and Gereffi 2008).

These relationships structure not only the flow of physical goods, but also the flow of information, instructions, payments, and investment that characterize GVC development. The stable share of automotive parts in total manufactured intermediate goods trade, despite the establishment of dozens of final assembly plants in developing countries over the period (Sturgeon and Florida, 2004), probably reflects the strong drive for local content in this industry, both for regulatory and operations reasons (see Sturgeon, Van Biesebroeck, and Gereffi (2008) for an extended discussion).

Similarly, apparel GVCs are highly dynamic, extensive, and robust, even though inputs (for example, fabric, fiber, and other footwear and apparel parts) make up a small fraction of total intermediate goods trade and none of the top 50. While the capacity to produce inputs and final products in developing countries has been growing strongly, orders are highly specific in terms of fabric and other accessories such as buttons and zippers. 4 6

Global Value Chains in the Electronics Industry Sturgeon and Kawakami “intangible” aspects of GVCs with any degree of specificity, the scale and rapid growth of intermediate goods trade in the electronics industry is certainly indicative of its importance and dynamism in GVC formation. Effects of the Economic Crisis on Electronics Industry GVCs As with almost all other sectors, the electronics industry was deeply affected by the economic crisis of 2008–09.

The scale of the crisis in trade is reflected in figures on overall ocean transport traffic, which carried all but the most lightweight and expensive electronics shipped over long distances. The combined results of the 16 largest ocean container carriers publishing quarterly figures—including Maersk Line, Hapag-Lloyd, China Shipping, “K” Line, and NYK Line—showed revenue declines of 40 percent for the first nine months of 2009, $56 billion, in comparison to figures from a year earlier, $94 billion (Barnard 2009).

Aggregate international trade statistics for 2008 and 2009 are still being finalized at this time, and preliminary estimates are unreliable. Nevertheless, past patterns are a reasonable indicator of recent and future patterns. Figure 1 shows world export growth from 1962 to 2006 in terms of intermediate, capital, and consumption goods, as well as capital and consumption goods combined into a “final goods” category. As the figure indicates, trade in intermediate goods appears to be much more volatile than trade in capital or consumption goods.

This supports the notion of “bullwhip” effects of recessions and business cycles, where slowdowns and downturns affect part and component shipments more than final goods shipments because final goods producers tend to draw down parts inventories and delay reordering during periods of uncertainty (Escaith, Lindenberg, and Miroudot 2010). In addition, intermediate goods trade usually grows notably after recessions, especially U. S. recessions—U. S. company outsourcing has been one of the most important drivers of GVC expansion—but also following sectoral bubbles (for example, the 1985 PC bubble and the 2001 dot.

com bubble), regional crises (the East Asian financial crisis), and worldwide slowdowns (the oil shocks of 1972 and 1979). It is well documented that companies tend to be reluctant to hire new workers after the trough of recessions until demand improvements are sustained, making employment a lagging indicator of recovery. Related to this, however, and less well-documented, is a reluctance to invest in new production capacity and a carryover from efforts during recession to cut costs, leading to more aggressive implementation of outsourcing and off-shoring strategies.

This pattern is in line with the findings of qualitative research (Sturgeon 2003) that lead firms in the electronics industry increase outsourcing and off-shoring following recessions because demand uncertainty makes investments in internal capacity seem more risky. Then, as the cycle continues, Design features are most often dictated by global buyers and change constantly as fashions and seasons vary, and deliveries are very timely, coordinated with the needs of retailers.

In some cases, store pricing and barcode labels are attached to garments in the factory prior to direct delivery to retail stores. This type of explicit coordination is an important driver of industrial upgrading in developing countries, as suppliers expand their capabilities to meet the demands of global buyers, and is an important determinant for where value is captured in the industry: largely by the brand-carrying firms and large retailers based in industrialized countries.

7 Global Value Chains in the Electronics Industry Sturgeon and Kawakami firms report expanding outsourcing relationships that proved successful during the recession because there is insufficient time to install new capacity to meet rapidly growing demand. Figure 1 World Imports of Intermediate, Capital, and Consumption Goods, 1962–2006 4,500,000,000,000 Imports Intermediate Goods 4,000,000,000,000 Imports Consumption Goods Imports Capital Goods 3,500,000,000,000 Imports Final Goods (Capital + Consumption) 3,000,000,000,000 Dot-com bubble 2,500,000,000,000

Asian financial crisis 1991 US Recession 2,000,000,000,000 1982 US Recession Second oil shock First oil shock 1985 PC bubble 1,500,000,000,000 1,000,000,000,000 500,000,000,000 0 Source: Sturgeon and Memedovic (forthcoming) from UN Comtrade Standard International Trade Classification (SITC) Rev. 1 data. To identify commodities as Consumption, Capital, and Intermediate goods, the conversion table Broad Economic Category (BEC) to SITC Rev. 1 from World Integrated Trade Solution (WITS) was used.

In order to calculate constant price data, National Accounts data from United Nations Industrial Development Organization (UNIDO) Statistics Unit and a GDP deflator were applied. In the case of the United States, where up-to-date trade statistics are available (Table 3), the value of electronic component imports decreased at an average rate of 11 percent per year during the crisis period 2008–09 after being relatively stable during the period 1996–2007 at about $70 billion per year. Remarkably, imports of final products decreased much less.

While these declines are significant, declines in imports of automobiles (–23. 0 percent) and auto parts (– 20. 2 percent) were more dramatic. The value of electronic component exports also decreased during the crisis period, by 9 percent per year, which is even more remarkable since component exports increased at an average annual rate of nearly 6. 7 percent per year during the 1996–2007 period, regaining in 2007 the peak of $50 billion reached in 2001, the height of the technology bubble (see Table 3). 8 Global Value Chains in the Electronics Industry Sturgeon and Kawakami

Table 3 Average Annual Change in United States Imports and Exports, Final and Intermediate Goods in Three Industries, 1997–2009 Average annual change (percent) — value of trade Imports Electronics final goods Electronic components Motor vehicles Motor vehicle parts Apparel Textiles and fiber Total non-petroleum Imports Exports Electronics final goods Electronic components Motor vehicles Motor vehicle parts Apparel Textiles and fiber Total non-petroleum exports 8. 0 6. 7 0. 5 0. 6 –8. 7 4. 2 4. 8 –17. 3 –8. 9 –9. 5 –14. 7 –3. 8 –11. 7 –6. 2 1997–2007 8. 7 –0. 4 5. 8 7. 1 4. 9 1. 6 7.

3 2007–2009 –3. 8 –11. 0 –23. 0 –20. 2 –7. 4 –15. 8 –10. 1 Source: U. S. International Trade Commission, http://dataweb. usitc. gov Because electronic hardware and systems are rightly perceived as having a “propulsive” effect on other industries, and because deep expertise has tended to be concentrated in only a few places (for example, in Silicon Valley, California, and in large firms based in the United States, Europe, and Japan), politicians and policy makers have been loath to put too much pressure on firms to produce locally or to put up barriers to trade, even during economic crises.

Intense competition, at first between American and Japanese producers, is what pushed early fragmentation of electronics GVCs, rather than trade barriers and local content rules. Producing electronic hardware in low-cost locations lowers prices, which speeds adoption of information technologies at home and leads to productivity spillovers (Mann and Kirkegaard 2006).

Because trade barriers have been minimal in this industry worldwide, the main impact of the economic crisis has been to sharply reduce demand, driving the full absorption of operating inventories and accelerating existing trends toward consolidation and low-cost geographies discussed throughout this paper. However, the crisis may have hastened the longstanding trends of consolidation and supplier learning and GVC upgrading that will be discussed at length in subsequent sections of the paper.

Value Chain Modularity Why is it that before and likely after the crisis, GVCs in the electronics industry are more extensive and dynamic than in any other goods-producing sector? One reason is that electronic parts and most final products have a high value-to-weight ratio that makes long-distance shipping relatively inexpensive. For the high-value components and some final products, such as notebook computers and mobile phone handsets, air shipment is common. Obviously, low transportation.

9 Global Value Chains in the Electronics Industry Sturgeon and Kawakami costs and the option for rapid delivery supports the movement of goods within GVCs and allows companies to engage in operating cost arbitrage based on geographic variations in operating costs. Moreover, the industry’s propulsive nature has motivated a host of national policies to encourage its development, though not at the expense of liberal import policies to ensure access to advanced products, systems, and services.

Given the fast pace of technological development in the industry, import substitution policies have rarely been implemented. More often, the industry has seen incentives for investment, including by multinational firms, and other industry supports. Another reason for the global character of electronics production is the nature of the industry’s product and value-chain architecture, which can be characterized as highly “modular.

” The industry’s roots in large, highly complex military systems developed in the United States and Europe during the 1950s and 1960s (Principe, Davies, and Hobday 2003), and the myriad of commercial and consumer applications and product variations that followed during the 1970s and 1980s, led to the development of explicit de facto and de jure standards for describing components, system features, and production processes.

Since then, the ability to codify electronic systems and system. elements has been greatly enhanced by the advent of computeraided design (CAD) technologies, and the shift away from hard-to-quantify analog systems toward digital systems that can by fully characterized in terms of unambiguous binary codes consisting of ones and zeros.

Not only does digitization expand the scope of what can be achieved with electronics and information technology, but the codification and standardization it allows enhances interoperability and allows components and other system elements to be substituted without the need to redesign the entire product (Ulrich 1995).

This “product modularity” has in turn enabled a high level of “value chain modularity,” in which multiple firms can contribute to the realization of specific products and where component producers and other firms in the supply chain can be substituted without a need for thoroughgoing engineering changes (Langlois and Robertson 1995; Balconi 2002; Langlois 2003).

The key business processes in the electronics industry that have been formalized, codified, standardized, and computerized are product design (for example, computer-aided design), production planning and inventory and logistic control (for example, enterprise resource planning), as well as various aspects of the production process itself (for example, assembly, test and inspection, materials handling). Furthermore, because it is “platform independent,” that is, not tied to any specific computing platform, the Internet has provided an ideal vehicle for sharing and monitoring the data generated and used by these systems.

These technologies and practices are at the core of value chain modularity. It is the formalization of information and knowledge at the inter-firm link and the relative independence of the participating firms that gives value chain modularity its essential character: flexibility, resiliency, speed, and economies of scale that accrue at the level of the industry rather than the firm. One of the most important implications of value chain modularity is that it makes it easier to accomplish work across great distances.

This has created opportunities for developing countries, both as production locations for multinational firms and for local firms seeking to participate in the industry as suppliers and contract manufacturers. Once a local supplier has gained a role in a GVC, rapid product innovation and short product life cycles keep opportunities 10 Global Value Chains in the Electronics Industry Sturgeon and Kawakami for learning and industrial upgrading coming.

A handful of recent developers have taken particular advantage of these opportunities to compress their development experience (Whittaker et al. forthcoming). Singapore, Taiwan (China), the Republic of Korea, and, more recently, mainland China and the “ASEAN four” (Indonesia, Malaysia, the Philippines, and Thailand) stand out as examples. Lead Firms, Contract Manufacturers, and Platform Leaders in Electronics GVCs In the electronics industry’s hardware “ecosystem” there are three principal actors: lead firms, contract manufacturers, and platform leaders.

Of course, dozens of other entities play important roles in the broader industry, including software vendors, production equipment manufacturers, distributors, and producers of more generic components and subsystems. Nevertheless, an analysis of how these three firm-level actors interact in the industry’s GVCs provides a useful if simplified portrait of the global electronics industry. The value captured by the most powerful firms in GVCs—lead firms with global brands and component suppliers with strong positions of “platform leadership”—can be extremely high.