Influence Of The Value Chain Governance On Chinese OEM Upgrading Strategies

The concept of"Governance"is central to global value chain theory. The purpose of this thesis is to study the impact of global value chain governance on the upgrading strategies of Chinese OEM manufacturers. Governance is a tool used by international buyers to reduce supply risks. This report of risks on the shoulders of the suppliers has an impact on the upgrading decisions of the Chinese OEMs.Past research has identified three parameter of value chain governance: Complexity of transactions (the complexity of information and knowledge transfer required to sustain a particular transaction, particularly with respect to product and process specifications), Codifiability of information (the extent to which this information and knowledge can be codified and, therefore, transmitted efficiently and without transaction-specific investment between the parties to the transaction) and the Capability of suppliers (the capabilities of actual and potential suppliers in relation to the requirements of the transaction). We have added one last variable: the degree of explicit coordination and power asymmetry (degree of the supplier dependence to it's buyers and the degree of vertical cooperation achieved between the companies).Using this parameters, former research has identified five analytical types of global value chain governance: market governance, modular, relational, captive and hierarchic governance.The markets governance type is a very fluid type of governance. Market linkages do not have to be completely transitory, as is typical of spot markets; they can persist over time, with repeat transactions. The essential point is that the costs of switching to new partners are low for both parties. Market governance is characterized by easily codified transactions, relatively simple product specifications , and suppliers have the capability to make the products in question with little input from buyers, asset specificity is low. In market exchange buyers respond to specifications and prices set by sellers. Because the complexity of information exchanged is relatively low, transactions can be governed with little explicit coordination.Modular value chains are characterized by a high degree of transaction codiafibilty. Typically, suppliers in modular value chains make products to a customer's specifications, which may be more or less detailed. However, when providing'turn-key services'suppliers take full responsibility for competencies surrounding process technology, use generic machinery that limits transaction-specific investments, and make capital outlays for components and materials on behalf of customers. When the ability to codify specifications extends to complex products, value chain modularity can arise. This can come about when product architecture is modular and technical standards simplify interactions by reducing component variation and by unifying component, product, and process specifications, and also when suppliers have the competence to supply full packages and modules, which internalizes hard to codify (tacit) information, reduces asset specificity and therefore a buyer's need for direct monitoring and control. Linkages based on codified knowledge provide many of the benefits of arms-length market linkages– speed, flexibility, and access to low-cost inputs– but are not the same as classic market exchanges based on price. Because of codification, complex information can be exchanged with little explicit coordination, and so, like simple market exchange, the cost of switching to new partners remains low.Relational value chains are characterized by a high importance of personal relationships. In these networks we see complex interactions between buyers and sellers, which often creates mutual dependence and high levels of asset specificity. This may be managed through reputation, or family and ethnic ties. When product specifications cannot be codified, transactions are complex, and supplier capabilities are high, relational value chain governance can be expected. This is because tacit knowledge must be exchanged between buyers and sellers, and because highly competent suppliers provide a strong motivation for lead firms to outsource to gain access to complementary competencies. The mutual dependence that then arises may be regulated through reputation, social and spatial proximity, family and ethnic ties, and the like. It can also be handled through mechanisms that impose costs on the party that breaks a contract. The exchange of complex tacit information is most often accomplished by frequent face-to-face interaction and governed by high levels of explicit coordination, which makes the costs of switching to new partners high.Captive value chains are characterized by a high level of suppliers'dependence to the buyers. In these networks, small suppliers are transactionally dependent on much larger buyers. Suppliers face significant switching costs and are, therefore,'captive'. Such networks are frequently characterized by a high degree of monitoring and control by lead firms. When the ability to codify– in the form of detailed instructions– and the complexity of product specifications are both high but supplier capabilities are low, then value chain governance will tend toward the captive type. This is because low supplier competence in the face of complex products and specifications requires a great deal of intervention and control on the part of the lead firm, encouraging the build-up of transactional dependence as lead firms seek to lock-in suppliers in order to exclude others from reaping the benefits of their efforts. Therefore, the suppliers face significant switching costs and are'captive'. Captive suppliers are frequently confined to a narrow range of tasks– for example, mainly engaged in simple assembly– and are dependent on the lead firm for complementary activities such as design, logistics, component purchasing, and process technology upgrading. Captive inter-firm linkages control opportunism through the dominance of lead firms, while at the same time providing enough resources and market access to the subordinate firms to make exit an unattractive option. The hierarchy governance form is characterized by vertical integration. The dominant form of governance is managerial control, flowing from managers to subordinates, or from headquarters to subsidiaries and affiliates. When product specifications cannot be codified, products are complex, and highly competent suppliers cannot be found, then lead firms will be forced to develop and manufacture products in-house. This governance form is usually driven by the need to exchange tacit knowledge between value chain activities as well as the need to effectively manage complex webs of inputs and outputs and to control resources, especially intellectual property.We surveyed 241 Chinese OEM companies of various industries so we could conduct regression analysis to test the influence of the governance parameters on the choice of upgrading strategies and ANOVA analysis to investigate the hypothesis that different governance types will threaten the companies with different risks.The upgrading strategies studied are Process upgrading (Firms can upgrade processes: reorganizing production system or introducing superior technology), Product upgrading (upgrade by moving into more sophisticated product lines (increased unit values), Marketing functional upgrading (increase skill content and broaden scope of mission of marketing and sales activities), Brand upgrading (companies can focus on building brand awareness on there international markets, thus becoming an OBM company instead of merely an OEM company), Design functional upgrading or R&D upgrading (increase skill content and broaden scope of mission of design and product development activities), Intersectorial upgrading (apply existing skill to other lines of products in an other sector).The potential risks that were investigated are: risk of foreign exchange rate changes, the impact of financial crisis, changes in policy or law, reliance on a small number of large customers, degree of customer mistrust, dependence on international markets, market competition, seasonal fluctuations, fluctuations in the prices of major raw materials, dependence on a few suppliers, labor shortages or labor costs rise, quality control, dependence on a few or a single product, concentration of production facilities, production safety and environmental protection and risk of law suits and trial.We found significant results indicating that the parameters of global value chain governance impact the choices of upgrading.The choice of a process upgrading strategy has been found to be positively affected by the degree of explicit coordination and power asymmetry, negatively affected by the risk political or legal change, and positively affected by the risk of workforce shortage or HR cost increase.The choice of a marketing upgrading strategy has been found to be positively affected by the degree of explicit coordination and power asymmetry, positively affected by the risk of sudden change of currency prices, negatively affected by the risk of low number of clients dependence, and positively affected by risk of change in the foreign markets.The choice of a R&D upgrading strategy is positively affected by the degree of explicit coordination and power asymmetry, negatively affected by the risk of political or legal change, negatively affected by the risk of dependence on a low number of clients, positively affected by the risk of dependence on foreign markets, negatively affected by the risk of seasonal change, and positively affected by the risk of legal action.The choice of the brand upgrading strategy is positively affected by the capability relative to international averages, positively affected by the risk of financial crisis, negatively affected by the risk of political or legal change, negatively affected by the risk of market competition, and positively affected by the risk of shortage in the workforce or increase of HR costs.The choice of a product upgrading strategy is positively impacted by the capability, relative to national average, and positively affected to the degree of explicit coordination and power asymmetry.The choice of a diversification strategy is positively impacted by the capability, relative to international average, positively affected by the degree of explicit coordination and power asymmetry, positively affected by the risk of financial crisis, negatively affected by the risk of political or legal change, and positively affected by the risk of workforce shortage or increased labor costs.Governance does appear to have an impact on the decision of upgrading. The most important parameter is the degree of explicit coordination and power asymmetry of the global value chain. The abilities of the company relative to competitor in the global value chain come second. This study also included 15 risks variables. Of those, two appear to be particularly significant: the political and legal insecurity, and the risk of labor shortage. The ANOVA analysis of the analytical types had more mixed results.Our sample had sufficient data two study three out of the five analytical types. Companies subject market governance are exposed to a slightly lower level of foreign exchange risk, a slightly lower level of foreign market dependence and a much lower level of quality control risk. The companies subject to modular governance enjoy a lower exposure to the risk of dependence on a low number of suppliers. All in all, analytical types as defined in previous research seem to be of limited use for empirical work. Independents parameters appear to be more suitable.The most important take-away of this study is that the degree of explicit coordination and power asymmetry is the most critical variable of global value chain governance when it comes to choosing upgrading strategies, and that the most critical risks influencing the choices of strategies are the political and legal insecurity, and the risk of labor shortage.