Services In Global Value Chains: Manufacturing-related Services

Manufacturing-Related Services

Patrick Low, Gloria O Pasadilla

• Publisher: WSPC
• Year: 2016
• eBook ISBN: 9789813141476
• Topic: Business
• Subtopic: Business internazionale
• Index: Business

This compilation of 22 firm-specific case studies is an important contribution to the discussion of 'servicification' trends in manufacturing. 'Services have increased in importance and value in many manufacturing value chains, making companies that produce physical products look more like service enterprises. What services do global value chains use in their operations, how important are they and how do economic policies shape firms' configurations, operations, and location of global value chains? This book addresses these questions and more.

The interviewed firms, based in 12 APEC economies, come from different sectors ranging from multinational automotive, construction equipment, and electrical appliance manufacturers to small and medium manufacturers of watches or chemical for water treatment. The book analyses what specific services are important in different stages of the value chain, and whether they are typically provided in-house or outsourced.

Contents:

• Manufacturing-Related Services (Patrick Low and Gloria O Pasadilla)
• Manufacturing of Aircraft Control Systems in the Philippines (Andre Wirjo and Gloria O Pasadilla)
• Industrial Welding Services in Thailand (William Haines)
• Manufacturing of Mining and Construction Equipment (David Sit and Patrick Low)
• Manufacturing of Computer Servers (Yuhua Zhang)
• Wastewater Treatment Services (Arian Hassani and Andre Wirjo)
• Manufacturing of Automotive Components in the ASEAN Region (Denise Cheung)
• Manufacturing of Oil and Gas Industry Equipment in Singapore (Andre Wirjo and Gloria O Pasadilla)
• Car Manufacturing in the Philippines (Sherry Stephenson)
• Manufacturing of Thermal Power Generation Equipment (Gloria O Pasadilla)
• Production of Precision Die and Machine Parts in Thailand (Denise Cheung and Andre Wirjo)
• Manufacturing of Refrigerators (David Sit)
• Watch Manufacturing (Deborah Elms)
• Manufacturing of Automotive Components in Mexico: Perspectives from Three Firms (Andre Wirjo, Gloria O Pasadilla and Joel G Bassig)
• Manufacturing of Telecommunications Equipment (Huani Zhu and Gloria O Pasadilla)
• Manufacturing of Printed Circuit Boards in Canada (Ben Shepherd)
• Wine Industry in Chile (Karina Fernandez-Stark and Penny Bamber)
• Integrated Logistics Solutions Provider in Mexico (Andre Wirjo and Gloria O Pasadilla)
• Remanufacturing Services in the Construction Machinery Value Chain (Katherine Tait and Gary Gereffi)
• Manufacturing of Consumer Electronic Appliances in Indonesia (Emmanuel A San Andres)
• Fresh Cherry Industry in Chile (Penny Bamber and Karina Fernandez-Stark)

Readership: Researchers, students and academics who are interested in international trade; trade economists; policymakers and general public who are interested in manufacturing related topics.

Chapter 1

MANUFACTURING-RELATED SERVICES

Patrick Low and Gloria O. Pasadilla

1.1.INTRODUCTION

This report contains an analysis of the role of services in manufacturing value chain activities as well as policy issues that affect the supply of these services. It responds to a request by the APEC Committee on Trade and Investment to look at the increasing importance of services in global trade. The approach, for analysing services under this project, was to undertake case studies of the value chains of firms in order to understand how services entered production, trade and consumption, and what functions they performed. The primary reason for this analysis was to identify the policy frameworks and specific policies in various economies within the region that affected both the establishment and operation of manufacturing-related services. The project has compiled 22 case studies from different APEC economies, 14 from Asia and 8 from North America and Chile. Nine out of twenty-two are big multinational firms or their subsidiaries, ten can be considered medium-to-large firms either with growing international operations or as strategic suppliers to multinational firms, and one is a small and medium-sized enterprise (SME) in the technology industry.

The report is organised in three main sections. Section 1.2 discusses the evolving role of services in the global economy. Section 1.3 presents the case studies and draws out some of the ways services are important both in terms of the value they add and also as a vehicle for new opportunities to deepen participation in value chains at the economy level. The final section presents an analysis of how policies have affected the configuration, operation and location of value chains, with particular reference to the contribution of services.

1.2.THE EVOLVING ROLE OF SERVICES IN THE GLOBAL ECONOMY

1.2.1.Services in a Historical Context

The role of services has been evolving, driven in particular by technology, globalisation and new business models. Services now make up a dominant share of income in most economies. The global share of gross domestic product (GDP) accounted for by services was 70 per cent in 2012. Unsurprisingly, the prominence of services as a source of income translates into jobs. In the Organisation for Economic Co-operation and Development (OECD) economies, total civilian employment in services in 2011 amounted to 73 per cent of all jobs (OECD, 2014). Shares in developing and emerging economies are lower than in industrial economies for the most part, but rising. In APEC, the average share of employment in services in 2010 is 60 per cent. Notwithstanding variations in the shares of GDP attributable to services, manufacturing, agriculture and mining, in the majority of economies the services share is often greater than that of the other three components of economic activity combined.

Considering what the statistics tell us about the importance of services, it may seem odd that they have received neither greater analytical attention nor policy attention in many cases. One reason for this is the long shadow cast by classical economic thought. Adam Smith famously wrote in The Wealth of Nations that

[T]he labor of a menial servant…adds to the value of nothing… services generally perish in the very instant of their performance, and seldom leave any trace or value behind (Smith, 1776).

The reason services were relegated zero value status turned essentially on their non-storability. Value was equated to the accumulation of capital, which required the production of something physical and storable. This thinking persisted in Ricardian and Marxian thought, and arguably also influenced neoclassical economic analysis. It is true, of course, that services played a less important role in seventeenth- and eighteenth-century economies, and their non-storability would have been a dominant feature.

In the 1960s, a new concern was raised about services, further relegating them to “poor cousin” status in scholarly (Baumol, 1967; Fuchs, 1968) and policy circles. The essential issue was that if services assumed a growing share of production, they would threaten the overall health of an economy. Costs would rise and be unmatched by productivity gains. Services were intrinsically hampered by their incapacity to generate efficiency gains. In other words, they were considered poor generators of productivity growth. Despite rising prices, some services might continue to be supplied because they were considered socially necessary (particularly in the case of social and other services supplied by governments). Wages would match productivity in other sectors and pull up wages in the services industries. This was known as the Baumol Cost Disease.

Recent work has largely dispelled this pessimism. Technology, the internationalisation of production and evolving business models have all contributed to making a significant range of modern-day services, an important source of productivity growth. As services have become a more prominent source of value in modern economies, their contribution to innovation has grown significantly. The innovation may be of a process variety, or it may involve new technology and be bundled with goods.

Several factors account for growing shares of services in global economic activity (Francois and Hoekman, 2010). As incomes have risen, the composition of consumption has shifted in the direction of services. On the supply side, the increased internationalisation of production has intensified the reliance on services. When products can be sourced, made and sold anywhere in the world, services become especially critical. For example, design, research and development (R&D) and prototyping services help decrease the cost of production failure and shorten the product development cycle. For sourcing of intermediate inputs, logistics and transportation services as well as supply chain management services make the geographic dispersion of global value chain (GVC) operations possible (Pasadilla and Wirjo, 2014). Similar structural and compositional shifts have taken place in consumption, both in terms of its internationalisation and changed consumer preferences enabled by technological advances in information and communications technology, including the Internet.

1.2.2.Contrasts Between Services and Goods

Some of the neglect of services has arisen from their intangibility, making them analytically and statistically elusive. Systematic efforts to deepen our understanding of the economic role played by services — particularly at the international level — have only started relatively recently. These efforts have intensified with the increased presence of GVCs, where services fulfil a vital and complex role.

Services are typically differentiated from goods in four ways. The first, which troubled the classical economists, is a lack of storability. This means that production and consumption must be simultaneous, the typically cited example of which is a haircut. The second has been the impossibility of transporting them or providing them at a distance, thus requiring that the producer and consumer be in the same place. The haircut comes to mind again. The third is that many services are customised and not commoditised. This variation in the characteristics of units of output makes it difficult to establish reliable value estimates and sometimes product prices, and to settle on an agreed nomenclature for service products. Finally, services are intangible, which makes them hard to see and measure.

The first two of the above characteristics — limits to storability and transportability — have been rendered far less important than they used to be by technological advances in information and communications technology. The third — customisation — is a characteristic that may also apply to some categories of goods, although product differentiation in the goods domain may well be the consequences of the addition of services components into production. Only the final element — intangibility — is unchangeable over time and truly distinguishes goods from services.

The linkages between goods and services in the GVC world, particularly through the bundling of offerings by firms of both goods and services, do raise a question about the wisdom of trying too hard to separate services and goods analytically. The argument for some sort of fusion is even stronger when it comes to the fallout from handling goods and services separately in many international regimes (Low, 2016).

In contrast to goods, services are multi-functional. They are not merely a source of value like any other product. They supply inputs to virtually every economic activity. Producer services, such as transport, telecommunications, financial services, distribution, business and professional services, are essential to the entire operation of an economy. Services are also the ‘glue’ that enables economic linkages and networks to operate both locally and internationally. Without them, there would be a lot less market integration and a lot more market segmentation.

A growing body of work emphasises how much more we need to understand about the role of services in GVCs. Studies by Sweden’s Kommerskollegium (2010a, 2010b, 2012), for example, have introduced the notion of “servicification”, a process whereby manufacturing activities have become increasingly service dependent. Other contributions in a similar vein refer to ‘servicification’ and ‘service science’ (Low, 2013). The OECD has also contributed to a deeper understanding of how knowledge-based capital is an increasingly important invisible asset that contributes to growth (OECD, 2011, 2012).

1.2.3.Understanding the Role of Services in Trade

Traditionally, trade has been measured in gross terms. This contrasts sharply with the way we have always measured domestic production, which is in value-added terms. In other words, GDP is measured — either by returns to factors of production (capital and labour) or by expenditures — through the attribution of value to its source at every stage of the production process. By measuring trade in gross terms, however, the sources of value are unspecified (Ahamed, 2013).

Perhaps, the simplest way of seeing this is to think of an economy’s exports. Exports reported in gross terms include foreign sources of value contained in the imports. These are incorrectly counted as value coming from the exporting economy. It amounts to a kind of double counting and overstates the domestic content of exports. Were the import content to be netted out, exports would reflect domestic value-added just as GDP estimates do.

The implications for understanding the nature of trade relationships among economies are far reaching. At least four perceptions can change radically. First, the true nature of bilateral trade balances is obscured. It transpires, for example, that China’s much-vaunted current account surplus with the United States was significantly over stated. In 2010, for example, China’s trade surplus was estimated at US$176 billion in gross terms but was reduced to US$131 billion in value-added terms — an overstatement of 34 per cent in the bilateral balance (Koopman et al., 2013). Some of that difference was attributable to understated (value added) bilateral trade deficits of Japan and Korea with the United States.

Secondly, if trade flows are recorded in gross terms, it is not difficult to see how the technology content of an economy’s exports could be misspecified. Dedrick et al. (2010) provide a good illustration of this phenomenon with the feted example of the iPhone putatively made in China. The factory gate price of an iPhone in China was recorded as US$144. But less than 10 per cent of this was Chinese value-added and most of that was attributable to assembly. Taken at face value, however, statistics would suggest that China was an exporter of high-tech smartphones to the United States. In this particular case, the United States ...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• List of Boxes
• List of Abbreviations
• About the Authors
• Chapter 1 Manufacturing-Related Services
• Chapter 2 Manufacturing of Aircraft Control Systems in the Philippines
• Chapter 3 Industrial Welding Services in Thailand
• Chapter 4 Manufacturing of Mining and Construction Equipment
• Chapter 5 Manufacturing of Computer Servers
• Chapter 6 Wastewater Treatment Services
• Chapter 7 Manufacturing of Automotive Components in the ASEAN Region
• Chapter 8 Manufacturing of Oil and Gas Industry Equipment in Singapore
• Chapter 9 Car Manufacturing in the Philippines
• Chapter 10 Manufacturing of Thermal Power Generation Equipment
• Chapter 11 Production of Precision Die and Machine Parts in Thailand
• Chapter 12 Manufacturing of Refrigerators
• Chapter 13 Watch Manufacturing
• Chapter 14 Manufacturing of Automotive Components in Mexico: Perspectives from Three Firms
• Chapter 15 Manufacturing of Telecommunications Equipment
• Chapter 16 Manufacturing of Printed Circuit Boards in Canada
• Chapter 17 Wine Industry in Chile
• Chapter 18 Integrated Logistics Solutions Provider in Mexico
• Chapter 19 Remanufacturing Services in the Construction Machinery Value Chain
• Chapter 20 Manufacturing of Consumer Electronic Appliances in Indonesia
• Chapter 21 Fresh Cherry Industry in Chile