3rd Polish Hungarian Bilateral Conference Warsaw, 28-29 September, 2016

1. Prospects for Catching Up After Industrial Upgrading The Analysis of Global Automotive Industry in Eastern Europe Tamás GerőcsInstitute of World Economics HungarianAcademy of Sciencesgerocs.tamas@krtk.mta.hu 3rd Polish Hungarian Bilateral Conference Warsaw, 28-29 September, 2016

2. research question Broaderquestion • HowcanweevaluateEasternEurope’spositioninthe IDL afterthetransition? Narrowerquestion • Our research focuses on the automotive value chain which, among others, has been shaping the structures of the Eastern European economies since their integration into the European and global division of labourafter 1989?

3. methodology: macro approach • world-systems theory • semiperiphery: a position in the international division of labor between core and peripheral countries • „semi-peripheral states have their own manufacturing industries that reflect a predominance of activities at the intermediate levels with regard to the current world-system distribution of capital intensive / labour intensive production” (Chase-Dunn 1998)  • dependent development • it concentrates on TNCs and FDI • „development” because it is characterized by capital accumulation and an increasingly complex differentiation of the internal productive structure, „dependent” because it is indelibly marked by the effects of continued dependence on capital housed in the current core countries • analyzing together the interconnected questions of • the position in the international division of labor (IDL) • and the access to international finances (Gerőcs and Pinkasz 2016)

4. methodology: mezo approach • Gloval Value Chain (GVC)/Global Production Network (GPN) • it concentrates the global disintegration (or fragmentation: Feenstra 1998) of production and its geographical characteristics • unit of analysis: firms within an industrial value chain/production network; institutions (GPN) • some of the main questions of GVC • How does governance in an industry shape and change? • What are the possibilities of upgrading? • some of the main questions of GPN (embeddedness) • To what extent does embed a TNC in a region? • What are the roles of regulation (like European Union)? • What are the impacts of the relations of property on the upgrading?

5. upgrading • „upgrading focuses on the strategies used by countries, regions and other economic stakeholders to maintain or improve their positions in the global economy” (Gereffi 2014) • four types of upgrading (Kaplinsky and Morris 2001)

6. adjusted upgrading: Vernon’s product life-cycle • original upgrading definition is not suitable for a long run analysis • it assumes that the value-added content of a particular product remains stable in time! • we adjust the theory with Vernon’s product life-cycle • the location of production also depends on the stage of the cycle • to produce an internal combustion engine for a luxury car in the 1970s or in the 2010s is not equivalent

7. automotive industry in Eastern Europe • in order to understand how the historically induced Eastern European semi-peripheral dependent development changed after the transition • a good case study is the automobile industry • dominated by TNCs (IDL) and FDI (external finances) • GVC/GPN shows the peripheral integration into Western Europe (e.g. Pavlínek 2015)

8. auto industry – historical background Automakers came under pressure in the Triad to expand globally • 1950-60: golden age: ‚Fordism’ – automobilization in the US, Western Europe, Japan • 1970s: crisis of profitability, oil-crisis:Western markets + Japan stuck in saturation • Saturated markets: global competition intensified especially in the dominant (western, US) markets. • Over-production, excess capacity and the subsequent profitability crisis deepened

9. emergence of GVCs (80s) • Japan managed to conquer the US market by relocating basic component assembly in the US. • Relocation of Knock-down kit (CKD) assembly was launched by Japanese manufacturer,closely tied suppliers followed • US manufacturers were forced to compete in global export markets • 1980s Automotive GVCs appeared due to regionalization of production and inregional market integrations(protection) • GVC: fragmentation of production, outsourcing/relocation (Feenstra) • Geographical expansion into new regional division of labour • Global value chains (GVC) – new international division of labour (Fröbel et al.), global production networks (Czaban-Henderson:2003, Liu-Dicken:2006, Humphrey, Meemedovic, Florida, Sturgeon, van Biesenbroeck…)

10. structure of GVCs • value chains/production networks hierarchical structures • OEM (peak)oligopoly,international brand-owners, production-driven governance (Gereffi), technological monopoly, prime access to customers Tier1: globalexpansion of the supplier-base;captive/modular relationship with the VC • Tier2-Tier3: domestic suppliers: competitive, hierarchical/market driven relationship with the VC

11. trade & technology (Feenstra) Behind the expansion of GVC’s strategic responses to market saturation (profitability squeeze), seeking efficiency by relocation and new markets in the developing world and new market niches by technological innovation • technological innovation: re-allocation investments to new technologies of production process/final product. electronic batteries vs. combustion engine (product life-cycle) • forming newtrade regimes non-tariff regulation FX- trade agreements (monetaryintegration) environmental safetyregulation labourstandards 1990s: emerging new trade regimes around former production centers • US – NAFTA (1992) • Germany – ESM(Maastricht, 1992) • Japan –PacificRim

12. Neo-mercantilist model in the EU German industrial strategy • German trade surpluses through new regional division of labour • StimulatingGerman export by policy mix (Jager et al) • Sustaining competitiveness by wage deflation (targeted real effective exchange rate: real wages kept below productivity) • Low wage sector reorganized: relocated to neighborhood countries. • CEE trade dependence: integrated into the German productive system:

13. Specialization of CEE Two consequences: • German current account surpluses increased considerably after the implementation of the euroand with the accession of new member states • Share of foreign value added in the German export increased to 37%, compared to 11% in the US;28% global average – UNCTAD:2013 After the crisis:German export strategy shifted from EU markets towards outside, BRICS (China)markets. • German export recovered quickly, and the reduction of export to southern Europe was compensated by export increases to BRICS. (Becker, Weissenbacher, 2014:16)

14. CEE position: inferior in the value chain • Weak local embeddedness, however different regional positions: • CZ: stronger embeddedness, e.g. joint ventures in Tier2 (Skoda privatization) • HU, SK: declining domestic supplier base, weakening embeddedness • HU, PL: specialized in combustion-engine production, declining phase in the life-cycle (Audi Győr, the world biggest engine manufacturer) • Property structure • Production for global export (increasingly China), 90% • Despite rising export, controversial effects on the current account: • outflowing profits/dividends • fewer FDI inflow after 2008 • high import dependence due to weak embeddedness • Hypothesis • Further relocation of western production due to intensified global competition • Relocation makes even stronger specialization in the German production networks(reproduction of regional division of labour) • Stronger specialization makes imbalanced economic structure, weakening embeddedness

15. Thank you for your attention!