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My presentation on 26th April 2012 at the Working Party on Globalisation of Industry meeting at OECD headquarters in Paris
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Who Creates and Captures Value in Global Supply Chains?
Timo Seppälä ETLA, The Research Institute of the Finnish Economy
OECD, Paris, France Thursday, 26th April, 2012 * This research is a part of the ongoing research project SUGAR – Finnish Firms in Global Value Networks (2010-2012) funded by the Finnish Funding Agency for Technology and Innovation
Global supply chains operate at ever-finer resolutions in terms of where & when individual tasks are carried out
From the 1st to the 2nd unbundling (Richard Baldwin, 2006)
From trading goods to trading tasks (Grossman & Rossi-Hansberg, 2008)
Empirics:
What does the new geography of global value creation and capture look like?
2nd Unbundling
• ‘Coordination glue’ that kept job tasks in close proximity began to loosen.
• Competition has moved from industry level to the level of tasks.
• From trade of goods to trade in tasks.
• Communications costs have dropped
• Real-time communications
• Multinationals as major actors to diffuse know-how internationally
DRIVERS RESULTS
Jyrki Ali-Yrkkö
GDP
(Gross Domestic Product)
MACRO LEVEL
FIRM LEVEL
VALUE ADDED
(Sales of all products - all purchases)
PRODUCT LEVEL
VALUE ADDED
(Product’s sales price - all purchased inputs)
GDP is the sum of values added by all organizations in a national economy
Why Value Added?
Processors, €34, 6%
Memories, €15, 3%
Integr.circuits, €32, 6%
Display, €22, 4%
Camera (5 mp), €17, 3%
Other parts, €59, 11%
Licenses, €21, 4%
Nokia’s operating profit, €89, 16%
Final assembly, €11, 2%
Distribution, €19, 4%
Value added in Nokia’s internal support fns, €169, 31%
(Excl. Operating profit & assembly listed below)
Retailing, €60, 11%
Breakdown
of the phone’s
€546 (+tax) retail
price circa 2007
Refers to unbundled & unsubsidized official retail price w/o taxes. Excluding discounts & other possibly purchased products/services.
Licenses include protocols, the operating system, pre-installed software etc. Nokia is a major IPR holder in this domain & it does not pay fees to itself; thus value of its own IP is not included here. Furthermore, non-monetary payments (e.g., cross-licensing) is not included here. For a firm without own its IP, licensing fees could have be manifold.
As compared to some other studies, the cost of final assembly may seem high. Some other estimates, however, only include direct labor costs and refer to simpler goods.
Nokia’s value added covers its innovation, advertising, design, marketing, financial, legal & management costs and depreciation & investment. It also includes some aspects of outsourcing, which we are unable to separate from Nokia’s internal functions: purchases of “billable hours”, some R&D and software sub-contracting, outbound logistics, and certain external warranty & other services.
Nokia’s profit is assigned to Finland.
Based on publicly available information.
Who Captures Value in Global Supply Chains? The Case of 3 Entry
Level Handsets * Ali-Yrkkö, J. & Seppälä, T. (2012). Changing Geographies of Value Creation in Global Supply Chains: The Case of 3 Entry Level Handsets; Forthcoming
* This research is a part of the ongoing research project SUGAR – Finnish Firms in Global Value Networks (2010-2012) funded by the Finnish Funding Agency for Technology and Innovation
Global supply chains operate at ever-finer resolutions in terms of where & when individual tasks are carried out
Empirics:
How has the distribution of value add changed over time? How has the task level globalization enhanced changed over time? How has the geography of global value added tasks changed over time?
Task Value added by actors (firms/individuals), functions (R&D…)
& geographies (locations/countries) in a case of one good
Mapping out the whole global supply chain from raw materials / idea generation to a consumer’s final purchase of a 3310, 1100 and 1200 at a retail store – All direct & indirect hard & soft inputs – 1–8 stages before the final assembly & 2–4 after it – For each, the loc. of innovation, direct labor & support (cap.)
Mapping out the geographical location of value added tasks – All direct & indirect work inputs
Approach
Our own examination of 3310, 1100 and 1200 with electrical engineers Public (Internet etc.) & private (industry contacts) sources to study value added of 600+ parts & software Teardown report by Portelligent (and iSuppli) In-depth interviews with industry actors/experts Company reporting, industry press/services Previous literature (by Linden & others) A few researcher-years of work …
Value Added Distribution by Participants
Components
54% Nokia 21%
Distribution
channel 25%
Engine mfg 1.9%
ATO 1.9%
Production OH 2.7%
Others+profit 14.6%
21%
Components
40%
Nokia
43%
Engine mfg 4.8%
ATO 4.6%
Production OH 2.8%
Others+profit 30.9%
43%
Distribution
channel 17%
Nokia 3310 Consumer
price 78e
(in 2003)
Nokia 1200 Consumer
price 27e
(in q4/2007)
Notes: The share of distribution channel includes warranty, outbound logistics, distributor and retailer. Consumer prices are global average prices without sales taxes.
Task level globalization: 3310
Task level globalization: 1200
Value Added Distribution by Geographies
Preliminary observations #1/2
Knowledge transfer from arvanced economies to emerging economies…
The relocation of different types of tasks has required competence transfer from advanced economies to emerging economies and particularly to China.
Instead of sudden change, this process has spread over several years.
Preliminary Observations #2/2
Trade statistics…Imports and exports of goods are measured in gross-value terms.
Our case study data show that if we take services flows into account and use value added based information we come up with strikingly different conclusions on global trade flows than by using gross values of flows of goods.
This implicates that the estimates based on trade in goods statistics and national accounts tend to give a somewhat biased and inadequate picture of how value added spreads geographically.
Who Captures Value in Global Supply Chains? Case Alpha, Beta and
Gamma – 3 different Metals Products *
Seppälä, T., Kenney, M. & Ali-Yrkkö, J. (2012). Value Creation versus Value Capture: Evidence from Global Production Networks, Forthcoming * This research is a part of the ongoing research project SUGAR – Finnish Firms in Global Value Networks (2010-2012) funded by the Finnish Funding Agency for Technology and Innovation
Global supply chains operate at ever-finer resolutions in terms of where & when individual tasks are carried out
Empirics:
How does the distribution of value added look like by participant and by region? How does the distribution of value capture look like by participant by region? How does the geography of value added look like by region?
Task Value added by actors (firms/individuals), functions (R&D…)
& geographies (locations/countries) in a case of one industrial product
Mapping out the whole global supply chain from raw materials / idea generation to a customer’s final purchase of a Final Product at a MNE’s sales office – All direct & indirect hard & soft inputs – 3-4 stages before the final assembly & 1- 2 after it – For each, the loc. of innovation, direct labor & support (cap.)
Approach
Our own examination with MNE’s Team (Alpha, Beta, and Gamma) Public (Internet etc.) & private (industry contacts) sources to study value added of 1000+ parts & software In-depth interviews with industry actors/experts Company reporting, industry press/services Previous literature (by Ali-Yrkkö et. al.) A few researcher-months of work …
Jyrki Ali-Yrkkö
MACRO LEVEL
VALUE CAPTURE
(Operating surplus + Consumption of fixed capital)
FIRM LEVEL
OPERATING PROFIT
(Total sales - all variable and fixed costs - depreciations)
Why Value Capture?
PRODUCT LEVEL
OPERATING PROFIT
(Product’s sales price – all cost allocated to the product )
Value Added Distribution by Participants by Region: Case Alpha
Value Capture Distribution by Participants by Region: Case Alpha
Value Added Distribution by Geographies by Region: Case Alpha
Value Added Distribution by Participants by Region: Case Beta
Value Capture Distribution by Participants by Region: Case Beta
Value Added Distribution by Geographies by Region: Case Beta
Value Added Distribution by Participants by Region: Case Gamma
Value Capture Distribution by Participants by Region: Case Gamma
Value Added Distribution by Geographies by Region: Case Gamma
Preliminary observations #1/2
Manufacturing still matters!
Each participant’s value capture in depended on MNE’s transfer price mechanism between different locations Each region’s value capture in depended on MNE’s global transfer price mechanism
Value Capture Distribution by Geographies by Region to be calculated
Preliminary Observations #2/2
Trade statistics…Imports and exports of goods are measured in gross-value terms.
Our case study data show that if we take services and profits flows into account and use value added and operating profit based information we come up with strikingly different conclusions on global trade flows than by using gross values of flows of goods.
This implicates that the estimates based on trade in goods statistics and national accounts tend to give a somewhat biased and inadequate picture of how value added and value capture spreads geographically.
