Global Value Chains: An Odyssey Toward E-commerce

Interview with Gary Gereffi, Founding Director of the Global Value Chains Center at Duke University, North Carolina.

By: Guillermo Máynez Gil

Global Value Chains: An Odyssey Toward E-commerce
After analyzing the transformation of global value chains in recent decades, Gary Gere?—a pioneer and one of the most recognized authors on the subject—highlights in this interview with Comercio Exterior the growing importance of electronic commerce and the “last mile” delivery for the location of production links, the response capacity of value chains to critical scenarios such as the pandemic, and outlines the next great challenge for economies such as Mexico: creating their own designs and their own brands.

Global value chains provided a very useful methodological approach to understand the dynamics of the globalization of production. From this perspective, how would you summarize the evolution of international trade in recent decades?
The first wave of global chain values appeared in the late 1970s when, in their eagerness to reduce costs, US multinationals—and also from other countries—chose to segment their production processes and move the most labor-intensive phases to relatively less developed countries. Thus begins a period of increasing production fragmentation, in which this production model is extended to other industries and its supply network is spread throughout the planet. It is the “global factory” model in which the components and inputs of a final good are manufactured in certain countries, and assembled and consumed in others.

After the 2008-2009 crisis, however, there was a change in the course of production fragmentation. On the one hand, it seeks to mitigate the risks inherent in a broad and distant global production network by relocating some of the production sites and reducing the number of suppliers. Nike, for example, went from a supply network of more than 1,000 individual suppliers to one made up of 35 or 40 really good factories strategically located based on their proximity to mainly large consumer markets.

In recent years, the massification of electronic commerce and the digital economy has become one of the factors that most gravitates around the consolidation of value chains. This emerging form of commerce and distribution is redefining the location of production units based on the crucial “last mile delivery.” It’s no longer just a matter of getting the products of a distant manufacturer to the country of consumption but, increasingly, to the home of the consumer himself.

 

From the perspective of emerging economies, why is value creation and capture so important within global chains?

As I said before, global value chains were initially developed with the purpose of reducing costs by moving the most labor-intensive phases to relatively less developed countries. This was the case in Mexico and the maquila boom. However, this model based on the simple assembly of final goods very soon evolved into what is known as “complete package production.” Under this new production arrangement, not only can manufacturers integrate their own value chains, but also large retailers and renowned brands, such as Walmart and Nike.

Along with value chains governed by producers, value chains governed by buyers began to form. Thus, the model went from assembly processes to “contracts by specification.” In these, brands and retailers identify a supplier and send them the specifications of costs, quality, and delivery mechanisms. From there, the supplier takes care of the entire process. Neither Walmart nor Nike are now “manufacturers”—they decide what they need and order it from others. This emerging production arrangement favored the incorporation of more added value in developing countries, and was decisive in the rise of Southeast Asia and the incredible expansion of international trade.

 

Are chains based on contracts by specification the ones that most favor the incorporation of added value?

With the change in the governance of chains, large retailers and renowned brands also have an important participation in production dynamics, without implying that they are obliged to know how goods are manufactured. They simply decide which product they want and find a supplier qualified to make it. It is a demand model governed by buyers. This production arrangement gives contractors more room to maneuver and, in principle, broadens the possibilities to capture a greater portion of added value.

 

Can governments promote the incorporation of greater added value among their companies? What measures would you recommend to achieve this goal?

This has been a key issue in recent years. Thanks to government intervention, some countries occupy a more significant position in global production than their size would suggest. An example close to Mexico is Costa Rica, a country with a population of close to 5 million that since the 1990s decided to bet on the export of high technology. They were successful in attracting Intel, which in 1998 established a large test and assembly plant in that country. Between that year and 2014, the export profile of Costa Rica was completely transformed. Government support was decisive in getting this investment. Unfortunately, as semiconductor manufacturing became more dependent on scale and not just cost, Intel decided to close its plant in Costa Rica and concentrate that production in Vietnam.

But the government of Costa Rica did not give up on its efforts and identified a new opportunity in the medical device industry to write another success story. The advantage of this industry is that it has a greater number of players and a greater trickle-down effect for the manufacturing country in terms of local inputs and manufacturing. Mexico also bet on the medical device industry, but on a larger scale. Now, a crucial question arises from these success stories: Can these countries take the next step? Take a decisive leap in their development strategy, and create their own designs and their own brands. In the case of South Korea, the answer is yes and it’s encouraging, with examples like Samsung or Hyundai.

 

How would you say value chains have reacted to the measures imposed by health authorities around the world to stop the spread of the SARS-CoV-2 virus? Did they make it?

It was a particularly difficult situation. Even before COVID-19, the disruptions were mainly local in nature. Even the impact of a nuclear catastrophe of the magnitude of Fukushima was very limited geographically. There will always be earthquakes, floods and other critical situations. The most surprising thing about COVID-19 was its global nature, as well as its simultaneous and dissimilar impact on both supply and demand. Production in export industries came to a halt in virtually the entire world, while the pandemic created large spikes in demand for health protection equipment and supplies.

We are experiencing something quite unique and that’s why I don’t believe people who predict the end of globalization because of this event. The response of value chains was appropriate, no other model would have done it better. Demand multiplied uncontrollably and the great challenge was meeting it with supply in a particularly adverse environment. COVID-19 has taught us multiple lessons about the resilience of value chains. Analyzing the case of the United States, we see how imports of masks and ventilators were suddenly suspended. It took a long time for the government to acknowledge the magnitude of the problem, but large manufacturers like 3M or Honeywell very quickly adapted their production lines and formed alliances with automakers to meet the demand, even for complex products such as ventilators. In this case, the imbalance was due to political malpractice rather than to market failures. Another case—which very much surprised me—was the agile response of the Chinese export market. Between January and March 2020, they supplied their domestic market, but between April and June they were already exporting to the entire world.

 

The pandemic overlapped the climate crisis and the challenge posed by the carbon footprint of global supply chains. What future is shaping up for world trade under these circumstances?

The climate crisis has highlighted the urgency of promoting the sustainability of value chains and of defining what exactly “sustainability” means. A lot of it has to do with clean energy; but also, with the working conditions that prevail among the companies that make up the global supply network. The need to move to a production arrangement that is more committed to preserving the environment has accelerated the emergence of new industries, such as electric cars, in which China is a leader. In this industry, the key component is batteries with the highest capacity for energy storage, charging speed, and duration. To achieve these improvements, the incentive under the figure of government purchases is crucial.  The Biden administration, for example, is trying to replace its country’s current postal service fleet with electric cars, a measure that will encourage the participation of companies in the energy transition process.

 

What impact will the ongoing technological revolution and the pandemic experience have on the current locations of global value chains?

One of its main manifestations will be the increasingly prominent role of shared production between neighboring countries, i.e. the strengthening of regional value chains. In fact, many global chains are actually regional chains whose commercial and production links extend throughout the world. Another one, which I talked about earlier, is the compaction of the production sites of the value chain to guarantee the supply of inputs and components, and to respond to the challenge posed by the massification of electronic commerce.

The new lifestyle makes the convenience factor something very important. Business executives know that from now on online sales will be as important as on-site sales. This will clearly be a significant change that will force countries to develop, from now on, reliable systems of universal access to the Internet. The incursion and development of the digital world will be more decisive than ever.

 

Do you think the digitization and automation of production processes will replace globalized production with one that favors shared production between neighboring countries?

I don’t think so. The recent rise of economic nationalism (Brexit, Trump, etc.) has distorted the real impact of technological changes. There is a contradiction between the automation of processes, and the variety of designs and models that consumers ask for. Logistics companies were distressed because these automation processes, by bringing production closer to consumption, could eliminate much of international trade. Shoe manufacturers like Adidas tried to set up automated factories in countries like Germany, but found that there were no more suppliers of materials there. So, to guarantee the manufacturing of sports shoes, they had to reduce the number of components, so much so that the shoes ended up being very simple and unattractive to consumers. That’s why China, Vietnam, and Indonesia are still the main suppliers of sports shoes. These countries do have clusters specialized in the manufacturing of components and supplies for this type of product. That’s why I insist on saying that, in this type of industry, long distance trade will continue to be important, although certainly with less participating countries.

 

Are knowledge-intensive services a good alternative for developing countries to increase the local content of their exports?

One thing we’ve discovered about global manufacturing is that it relies heavily on high-value services. Once again, the example of Costa Rica is revealing: when Intel closed its plant, and since it was so satisfied with the quality of the local workforce, it decided to keep an engineering services center with over two thousand employees and serve the entire continent from the Central American country. Manufacturing value chains go hand in hand with service value chains, which can become a new source of growth. Another example is in Chile, which has become a global consulting supplier for the development of mining software due to the increase in mining extraction automation. There are useful lessons to be learned here for many countries, but all of this of course depends on the quality of the education system and the skills of its workforce.

 

As a sociologist, what do you think about the current international situation where such complex phenomena like nationalist trends, greater migration pressures, an aging population, climate change, and significant changes in the dynamics of production and consumption converge?

It is worth looking at from the long-term perspective. We had this very pragmatic centrifugal wave from the 1980s until it was replaced by a consolidating wave. The new geopolitical changes are very relevant because they imply a profound revision of the post-WWII world order and its multilateral institutions. A major disruption to this model has been emerging economies. Of course, there is the case of China that stands out in the world production of electric cars, in the development of 5G and other technologies. But there’s also India, which is a leader in certain pharmaceutical products and offshore services. This reconfiguration of the global economy leads us, surely, to a reconfiguration of world trade and investment flows that—in no way—will mean the end of globalization. I definitely don’t see how the various current global value chains can be relocated. The risks and inefficiencies of trying to produce everything, even very simple products, locally, are very high. The challenge is to make value chains more sustainable, more inclusive, with a greater participation of small and medium-sized companies. E-commerce can play a key role in this, precisely because it facilitates inclusion. In addition, the need for high-value services also benefits entrepreneurship in small, highly specialized firms.

 

Are you usually more optimistic or pessimistic about the near future?

I am optimistic by nature; but I am also convinced that the re-globalization to which I refer means adapting value chains to the new social needs of sustainability and inclusion. As a sociologist and for several decades, I have been interested in the study of value chains because it helps us understand the dynamics and rationality of globalized production. I am convinced that, with good leadership and an adequate response to new political pressures, supply chains are perfectly capable of being reconfigured to meet the new realities of the international order and that of countries. For this, we need a robust system of multilateral institutions that prevent global trade from being captured by a few multinationals focused on profit maximization or by national governments with political interests. We need a strengthened United Nations system and supported by an effective network of institutions.