The Unbelievable Lightness of Manufacturing

Horizontal integration was the recipe for success enabling economies of scale, while discouraging investment of  the technologically capable to invest in high value added  manufacturing unless it was able to engage large amounts of capital.  Segmentation is changing this  paradigm.  Task trading is becoming the new form of international division of labour.


Foreign Direct Investment  is mutating and “non equity modes of international production and development” are becoming “the new paradigm”.  The moral of the story for the company has become vertical specialization.  The target is to improve operational efficiency on the respective segment of production along the value chain.

Corporate strategies are not alone in this evolution where government policies play as important a role, as  national business and labour practices.  Regulatory interventions are becoming influential in  emerging international  business.  The role of national industrial policies  are becoming particularly relevant in the improvement of competitiveness of vertically specialized manufacturing companies.  This process is supporting national industries, while affecting the global level playing field in a negative manner. 


Size of the domestic  market in countries  like China encourage manufacturing companies to continue with their traditional horizontal investments; Volkswagen invested in China to cater to domestic demand for vehicles. 


However, this example does not change the genuine nature of of economic activity in China, where  over USD105 billion FDI  has played an important role in its exports of  USD1.6 trillion in 2010.  Work is underway at the WTO and Groningen University to identify the amount of value added in such trading.  Initial estimates show that a heavy proportion of gains accrue to those investors which have designed the products and engineered the supply chain.


IKEA is an example of  FDI, where the investor designs its supply chain management  targeting   low cost manufacturing locations.  Vertical specialization becomes important in this case, and it is upto the manufacturer to identify hinal now it can increase its value added in the process. 


Value added at the maquiladores on the Mexican-USA frontier  most likely produce low value added; apparel and automotive component manufacurers in Turkey are in situation where they supply  final manufacturers or first tier suppliers, and, therefore, do not necesssarily collect the better part of profits.


Operational Efficiency: Where is the Company located along the Value Chain?


It is important to focus on “operational efficiency” and ways and means of increasing it.   It was indicated above that national industrial and economic policies may influence operational efficiency.  It is advisable that manufacturing companies identify their respective strengths and weaknesses, and take the necessary steps to improve their competitiveness.  A competitiveness inventory  would be useful to identify the current situation in order  to design scenarios to successfully meet global challenges. 


Such strategies  were introduced in countries of east and southeast Asia,  where trilateral trading arrangements  played an important role in the globalization process.  Labour costs were important in this process in some of the countries; however, cheap labor countries soon shifted to higher value added products, and displaced many of their “western” competitors from global markets.


Vertical Specialisation Index


This evolution encouraged research into vertical specialisation at national level.  David Hummel and his colleagues developed the vertical specialisation index to explain shifts in comparative advantages across countries. 


Calculations made using this methodology show that  in Turkey the vertical specialisation index  increased to 62 % between 1995 and 2002.  However, since the latest input output study  fort he Turkish economy was carried out in 2002, this figure does reflect the current situation.


Is This Evolution Inevitable?


Manufacturing is an economic activity that shifts from advanced to emerging countries.  Companies which design the products and efficient processes collect the better part of the overall value added. This requires specific technological capabilities and financial strength.  Above all it requires the vision to compete at high value added activities and to design the relevant strategies.


What it all boils down to is to put together the physical, financial and strategic infrastructure ensure market penetration and  sustaninable growth.  Business models developed with this perspective would contribute to corporate success and to improvement in Turkey’s current account deficit.