Introduction

An increasing number of developing countries is recognizing that participation in global value chains (GVCs) is an important prerequisite for economic development. At the same time, however, they fear that the prospects for value chain upgrading is limited, because once they join a value chain their production activities become “locked in” to the lower value-added segments of global production systems. But joining and upgrading in GVCs is still possible, if firms’ strategies and policy interventions adapt themselves to the new and evolving technology environment.

Standardization, modularity and digitalization have made even complex technologies progressively more “diffusable” over the years, and this represents a new opportunity for firms from developing countries to join and move up the value chain.

Modularization and standardization lower the entry costs to product upgrading, but this does not translate automatically into technological advancement for the manufacturers. To move up to high value-added segments of technologically advanced value chains requires learning additional and complementary skills, even though they may be unrelated to some parts of manufacturing activities (e.g. marketing, sales, etc.).

Technological progress and value chain dynamics

The extent to which technological progress will disrupt the present configuration of supply chains and open them to new players depends, in part, on the form of GVC power relations.Gereffi et al.(ibid.) define five forms of GVC power relations: market-type, modular-type, relational-type, captive-type, and hierarchy-type, and among them the modular-type GVCs are particularly interesting for our discussion. Modularization can be employed in manufacturing of complex products, where production processes are simplified and partitioned and modularization reduces technological barriers to entry. It lowers the amount of R&D and learning-by-doing necessary to integrate into skill- and capital-intensive value chains. However, adoption of advanced modules alone does not generate technological progress in manufacturers. Modularization helps to move into more complex value chains. But, in order to capture more value and increase profit margins, firms also need to learn to manage more complex processes, and to master more complex tasks.

Opportunities from modularization and platforms: examples from the car and mobile phone industries

Manufacturers in the automotive industry tend to show hierarchical power relations. The developments in design schemes have spurred changes that have increased modularity in the auto industry. For example, in 2013, Nissan introduced a design scheme called the “common module family” into the production lines of several key models. The scheme’s objective was to reconfigure the production system so as to reduce costs yet also maintain the variety of product line-ups. This was pursued through the modularization of products, which increased the proportion of standardized common components that can be shared among different models, while also reducing costs through bulk purchases of common inputs.

The implementation of modularization schemes has opened up new opportunities for firms from developing countries. As discussed earlier, modularization simplifies the production of a complex product by reducing knowledge-intensive segments of production (such as the harmonization of car components), with the effect of substantially lowering technological barriers to market entry.

The electronic equipment industry covers a wide range of products, from personal computers (PCs) to mobile communication devices. Typically, the industry’s supply chains are characterized by long supply lines that connect global buyers with electronic hardware manufacturers and assemblers. At the turn of the new millennium, platforms and platform leaders emerged as dominant new players in the electronics equipment GVCs. A “platform” is defined as “a set of common components, modules, or parts from which a stream of derivative products can be efficiently created and launched” by “constraining the linkages among the other components”. Platforms are built on core technology modules which define the fundamental technical parameters of the products manufactured through the platform. A large-scale integrated circuit, which often determines the performance level of the final product in which it is embedded, provides a good example of a core technology module. A platform leader is a firm that controls core technology modules, and therefore governs the final product’s functions and performance. The advent of platforms has significantly destabilized the traditional set-up of electronic equipment GVCs. The mobile phone industry in China illustrates well the potential for disruption by platforms. By integrating most of the mobile phone’s functionalities, platform solutions (sometimes referred to as “reference Designs”) have lowered the cost and time required by manufacturers to design low-end mobile phones. This has allowed Chinese brands, especially producers of imitative products, known as Shanzhai, to capture significant market shares despite having low expertise in core aspects of mobile phones technology.

Upgrading options

What are the options for firms in developing countries to avoid excessive price competition at the low end and upgrade their value chains? Some local manufacturers have upgraded their own value chains through a commitment to active learning, enabled by open platforms and a shift in consumer demand. In recent years, however, Chinese companies in the industry have achieved remarkable growth and some of them have rapidly achieved international brand status in the global smartphone market. These trends were triggered, in part, by changes in consumer preferences regarding technology features. From 2010 onward, Chinese products gained market share in products with mid-range prices, while still keeping their absolute advantages in the low price market. Some Chinese firms even began to enter the high-end segment of the smartphone market. Over time technological innovation and the strategies of major firms have driven dramatic changes in the participation of domestic firms in the Chinese mobile phone industry.

So far, we have focused on the impact of disruptive technology embedded in key hardware components (such as IC chipsets). However, disruption of value chains also can be driven by software evolution. Sturgeon and Thun (2019) show how the smartphone market provides an opportunity to assess how companies can upgrade in manufacturing GVCs following disruptive technological change. The introduction of smartphones in 2007 opened up opportunities for upgrading by Chinese firms. With its iPhone handset, launched in 2007, Apple established a platform with a partly open architecture, the Apple iOS.Partly in response to the iPhone, Google launched the Android OS for mobile handsets one year later. In contrast to iOS, Android has an open technology architecture and largely open governance. The same pattern seen in previous waves of technological progress was observed for smartphones. With the availability of highly-integrated chip sets linked to an open-source operating system, Google’s Android lowered the barriers to entry for new firms with lower capabilities, and also reduced product distinctiveness and the value-added from manufacturing handsets. Chinese smartphone producers are upgrading through building their own brands and being strategic on what components to build. By building their brands, these firms moved from their original focus on cost-conscious customers, and increasingly toward midrange consumers demanding value for money. In so doing, they managed to upgrade their position in the mobile phone value chain, serving the Chinese market first, and then becoming increasingly successful in other markets. The smartphone market makes the case that, following disruptive technological change, one key reason for Chinese firms’ upgrading was the strong connectivity to global technology ecosystems. Growing own design and marketing capabilities allowed Chinese firms to respond rapidly to changes in market demand and consumer taste. Their reliance on GVCs allowed them to develop products that are interoperable and compatible with global markets.

Is automation reducing the offshoring potential of low-cost locations?

Historically, new technologies and changing trade patterns have tended to widen the circle of countries benefiting from expanding production. As countries’ costs rise, production tends to move into more capital-intensive goods, with the more labor-intensive tasks moving to lower-cost locations offshore.

There is an increasing amount of anecdotal evidence on how increased automation has already enabled some leading firms to reshore labor-intensive manufacturing activities back to high-income economies. China too is rapidly automating production through robotization to address declining wage competitiveness. The relationship between robots and offshoring, however, varies across sectors. Hallward-Driemeier and Nayyar (2018) show that the use of robots in high-income countries has increased steadily over the past two decades, with the steepest increases in motor vehicles and other transport equipment, and electrical machinery and electronics. As automation increases, penetration rates are starting to increase even in other manufacturing and services industries, such as logistics and food production. However, the textiles and apparel sector still remains amongst the least automated, especially apparel.

Policy implications

Modularization of product architecture offered a new entry point to GVCs for small-scale firms in developing countries. The important message of our study, however, is that entry into GVCs alone does not translate automatically into technological upgrading. To move up to high value-added tasks in technologically advanced value chains requires additional and complementary efforts by local actors.

The development of mutually beneficial relationships between foreign core technology providers and local manufacturers is the key. Local firms have better (and faster) access to technology inputs that boost the competitiveness of their products, and the owners of core technology benefit from expanding their sales in large and growing markets. The ability of governments in developing countries to nurture such relationships depends on their ability to reform the domestic investment environment in a manner to stimulate and rationalize technological transfer/sharing by advanced firms within a sequence of local supply chains.

One important aspect of the reform is building capabilities of local manufacturers. Manufacturing can no longer thrive with unskilled workers alone, and many tradable services are skill intensive. Another important dimension of domestic reform is the development of legal/institutional bases. Creating an attractive investment environment is a multi-faceted task. Policy-planners have to consider various domestic factors that might affect firms’ investment decisions: physical infrastructure, trade policies, competition policies, wage levels, workers’ educational attainment, and so on.

Finally, while automation does not pose immediate risks to shut the door to labor intensive exports from developing countries, governments need to develop a comprehensive digital strategy. Our economies are increasingly sitting on a digital foundation, one that is generating high-speed growth and disruptive change. The employment and investment of tomorrow will be data intensive. Value in a knowledge economy is created by innovative ideas and data. As economies and firms from different countries grow similar in size, international trade will intensify.

(https://www.wto.org/english/res_e/publications_e/gvcd_report_19_e.htm)