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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


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the experience of canadian firms and industries

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

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)

overview
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
looking at many parts
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
1 integral design
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

1 integral design6
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

2 supply chains value chains
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

2 supply chains value chains8
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

3 high fc low mc strategy
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

3 high fc low mc strategy10
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

4 complementarities
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

4 complementarities institutions
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

findings for the automotive industry
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
2 trade patterns
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

3 ordering of parts and countries
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

3 ordering of parts and countries18
3. Ordering of parts and countries

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

Findings for the automotive industry

4 complementarities institutions19
4. Complementarities - institutions?

Findings for the automotive industry

importance for canadian firms
Importance for Canadian firms

Revisit the four findings

  • Price
  • Trade
  • Sourcing
  • Complementarities
1 price
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

2 trade
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

3 sourcing
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

4 complementarities24
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

thanks
Thanks

For a copy of the slides: jovb@chass.utoronto.ca