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The Experience of Canadian Firms and Industries Jo Van Biesebroeck Economics Department, University of Toronto Industry Canada & Rotman Offshore Outsourcing: Capitalizing on Lessons Learned Outsourcing Multiple Parts: An Application to the Automotive Industry (with Lijun Zhang)

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The experience of canadian firms and industries l.jpg

The Experience of Canadian Firms and Industries

Jo Van Biesebroeck

Economics Department, University of Toronto

Industry Canada & Rotman

Offshore Outsourcing: Capitalizing on Lessons Learned


Outsourcing multiple parts an application to the automotive industry with lijun zhang l.jpg

Outsourcing Multiple Parts: An Application to the Automotive Industry(with Lijun Zhang)

Global Value Chains in the Automotive Industry: Prospects for Canada

(with Gary Gereffi and Tim Sturgeon)


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Overview

  • Why does it matter to look at many parts?

    • It accelerates outsourcing

    • for a variety of reasons

  • Preliminary findings for the automotive industry

  • Importance for Canadian firms


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Looking at many parts

  • The whole is more than the sum of its parts: cars are the prototype of integral design

  • Organize activities along a supply chain

    • Relational contracts become feasible

  • As costs fall and quantity rises, high FC/ low MC strategies become more attractive

  • There might be complementarities

    • Institutions can develop


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1. Integral design

  • Clark-Fujimoto (1991) “Product Development Performance: Strategy, Organization, and Management in the World Auto Industry”

    • Most components interact in myriad ways

    • Difficult to separate design from manufacturing

    • Car components trade in Asia lags other sectors (relative to the West)

    • When production jobs disappear, engineering jobs might go with them

Looking at many parts


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1. Integral design

  • Question: Why are so few finished cars traded?

    • Industry developed in high-wage countries (skill involved in design!)

    • Poor countries served by exports of second hand cars and second hand designs (for local mfg)

    • Once low-wage countries acquire design capabilities, why wouldn’t we see exports to NA?

      (p – MC margins are huge >50%)

Looking at many parts


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2. Supply Chains – Value Chains

  • A structured organization helps to

    • exploit comparative advantage across countries

    • exchange information efficiently

    • conduct innovation

  • Relational Contracts expand feasible set

    • Long tradition in economics  in a repeated game more equilibria can be supported

    • E.g. Toyota outsourcing: suppliers recover FC in unit price (‘they have infinite memory’)

Looking at many parts


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2. Supply Chains – Value Chains

  • Note: Division of sales (in trade data) will differ from division of value added

    • Electronics: intermediate parts often embody most of the technology

  • Question: who initiates offshoring?

    • Automobiles: OEMs

    • Apparel: further upstream low-tech intermediates

    • Electronics (modular): contract manufacturing

Looking at many parts


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3. high FC / low MC strategy

  • Antrás (2005) – life cycle model

    • Cut-offs between organizational forms are a function of quantity, which is linked to cost/price through final good demand

      we augment the model for multiple parts

  • Melitz (2004) – heterogeneous firms

    • Activities follow productivity ranking:

      FDI > exporting > only domestic sales

Looking at many parts


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3. high FC / low MC strategy

  • Questions: What to make of opposite predictions on relation between productivity & offshoring?

    • Serving domestic market (Antras): low productivity firms go first

    • Serving foreign market (Melitz): high productivity firms go first

Looking at many parts


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4. Complementarities

  • Novak-Stern (2003): when you outsource one part, you might as well outsource more

    • IP protection

    • Compete on cost or time to market

    • Coordination efforts are interdependent

  • Van Biesebroeck (2007):

    • Outsourcing is complementary to other production decision (e.g. greater product variety)

Looking at many parts


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4. Complementarities – institutions

  • Nunn (2007) ↔ Acemoglu, et al. (2005)

    • Does contracting environment provides comparative advantage for goods requiring specific investments or vice versa?

       we allow production to affect institutions

      δ = f(# of components outsourced)

    • Empirical finding: past outsourcing predicts price (↑) time to off-shore (↓)

Looking at many parts


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Findings for the automotive industry

  • Within-component price heterogeneity is important (quality?)

  • Very distinct trade patterns

  • Sourcing pattern generates a (somewhat) intuitive ordering of parts and countries

  • Some evidence of contracting complementarities / institutions developing




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2. Trade patterns

  • Very large regional trade flows

    • NAFTA

    • EU

    • South-East Asia (Japan, Korea, Thailand, China)

  • MNEs supply their overseas assembly locations from their home base

    • Customized components follow the product-cycle

    • Domestic content requirements abound

  • Oursourcing to low-wage countries is rising

Findings for the automotive industry


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3. Ordering of parts and countries

Average year (post 1989) that exports to the U.S. start for a list of 34 parts/modules

* North is Japan and Western Europe

Findings for the automotive industry


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3. Ordering of parts and countries

Average year (post 1989) exports to the U.S. start

Findings for the automotive industry


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4. Complementarities - institutions?

Findings for the automotive industry


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Importance for Canadian firms

Revisit the four findings

  • Price

  • Trade

  • Sourcing

  • Complementarities


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1. Price

  • For many parts, Canadian prices are at the low end, i.e. very competitive

  • Within each part, there is demand for high quality – high price varieties

Importance for Canadian firms


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2. Trade

  • Regional: given that production volumes in NA won’t increase, the almost total reliance on U.S. is precarious

  • Low cost: Especially since NAFTA, this is not going to be Canada’s comparative advantage

  • Supply overseas plants:

    • customized inputs – Head-Reis-Spencer (2004)

    • Through exports or FDI – APMA survey (2005)

Importance for Canadian firms


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3. Sourcing

  • In a world of incomplete contracting, attractiveness is a combination of “production cost” and “quality of institutions”

  • Off-shoring is not all or nothing, new parts and technologies are introduced continuously

Importance for Canadian firms


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4. Complementarities

  • Generates feedback effects

    • Changes that strengthen Canada’s position for one part, will increase marginal productivity of investments in other parts

    • Also works in reverse: “failure to …”

  • Coordination helps

    • One of the strengths of the industry in Canada

Importance for Canadian firms


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Thanks

For a copy of the slides: [email protected]


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