The Globalization Process:
Advancing Capabilities in Chinese
and Indian Manufacturing
Sources



Sutton, Quality,Trade and the ‘Moving
Window’, Economic Journal , Nov 2007
Brandt, Rawski, Sutton, China’s Industrial
Development, in press
Sutton, The auto-component industry in
China and India: A Benchmarking Study
The “Capability” Concept

At one level, this is a straightforward
generalisation of the standard concept of
productivity.
The “Capability” Concept

At a deeper level it involves
(a) relating the capability of the firm to
the know-how of individual workers.
(b) Analysing the decision of the firm to
invest in capability building …… what is of
central interest here is that this decision
takes place in a climate of true (Knightian)
uncertainty.
Capabilities
d
c = ‘productivity’
u
u = ‘quality’
c
d
Capability is a pair (c, u) for each
technical trajectory (submarket)
Competing in Capabilities
u
(Quality)
x
x
u/c = a
u/c = b
1/c (Productivity)
Key feature:
The consumers choose products offering the best u/p
Implication: if u>v, the market share of a firm
offering u cannot be eroded to zero by any number of
firms offering v
Proposition 1
- given any configuration of
capabilities
(c1,u1), (c2,u2) . . (cn,un)
there is a lower bound in (c,u)
space below which a firm cannot
achieve positive sales at
equilibrium
(ex. Cournot equilibrium)
u
F (u , c)   
c

Proposition 2
Suppose one element in building
capability is the expenditure of fixed
outlays (“sunk costs”)
- Then competition in ‘capability
building’ will lead to a bound on the
number of firms ‘in the window’.
Two Polar Patterns
PROLIFERATION
ESCALATION
Flowmeters
Aircraft
σ
Linkages Across Submarkets
Large
Commercial
Jets
β
Effectiveness
of Capability
Building
Flow meters
Numerical
controls
Machine
Tools
Cement
σ
Linkages Across Submarkets
β
Effectiveness
of Capability
Building
Low
Concentration
Wide Window
High R&D
intensity
High
Concentration
Narrow Window
High R&D
intensity
Low concentration
Wide Window
Low R&D intensity
Capabilities and Trade



Key Point: Breakdown of equivalence
between productivity and quality
(Sutton EJ 2007)
Idea: once a tradeable input
(Component, Raw material, etc.) is
used, it sets a lower bound to price,
so low wages can offset low
productivity, but not low quality
The Globalization Process

Phase I: Impact phase…Capabilities given

Phase II: Transfer phase

Phase III: Re-investment (escalation)
phase
Main substantive argument


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
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The case for globalisation should rest primarily
on the transfer and growth of capabilities it
induces
A fundamental set of mechanisms are driven by
the coexistence of high capabilities and low
wages
These mechanisms include, inter alia,
---self help driven by new incentives
---Transfers via FDI/ Supply chains, etc.
Going it Alone


The Bharat Forge story
Increasingly difficult as we move across
industrial spectrum
The Speed of Transfer
-
-
Delicately dependent on industry characteristics
Key channels differ by industry
(a) Buyer search channel: Textiles
(b) Trade Fairs: Ubiquitous
(c) Supply chains: Vertical Transfers
The Evidence on “FDI Spillovers”
Speed of Transmission
FAST
Auto components:
Vertical relations
with shared technology;
standardization and
codification of
working
practices.
Domestic Appliances: Horizontal JVs – here
incentives of senior
partner are critical
(cf.
China).
Machine Tools: Licencing;Public sector bodies .
SLOW
Industry Specific influences


Textiles and apparel..Contact with
Buyers(Ever Glory)
Steel: Equipment Suppliers(Shougang)
Changing Market Structures

Escalation and Shakeout : Chinese White
Goods ; Beer

Market Share Volatility

Changing Leadership : Chinese TVs
A Tale of Two Industries :I Auto
Components



…Globally integrated
… Capabilities codified
...Supply Chain aligns incentives
Car Production
800,000
700,000
million/yr
600,000
500,000
India
400,000
China
300,000
200,000
100,000
0
93
94
95
96
97
98
99
00
01
Note: Indian figures for fiscal year ’93-’94 are shown here as ’93, etc.
Figure 16. Car Production in India and China 1993-2001
Component Suppliers to Multi-National Car Makers
0.6
0.5
0.4
0.3
0.2
India
China
0
>2
50
0
0
-2
50
0
0
20
0
-1
00
0
-7
00
0
-3
50
0
-1
00
-7
30
0
10
0-
<1
00
p
pm
0.1
0
Component Suppliers to Steering Gear Firms
1
0.8
0.6
India
0.4
China
0.2
0
<1%
1-10%
10-20%
20-40%
>40%
A Timescale for Capability Building



A multinational seat maker on a greenfield
site in India drops from initial 2,085 ppm
to 65 ppm in year 3.
A domestic Indian seat maker drops from
20,000 ppm to 200 ppm over 5 years.
Greenfield vs. Joint Venture
The Mahindra Story
II : Machine Tools



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

Globally Fragmented
Supply Chain plays no role
Bilateral licencing deals
Some successful collaborations
Huge loss of position by Indian leaders
Chinese experience mixed
CNC Machine Tools
The Invidious Trade-Off
controls
55%
15%
ball-screws
wages
15% Bought-in Components
15%
Materials, Energy costs,
etc.
A typical cost breakdown
size & complexity
3-axis, 15
kW
Japan
11 kW,
350mm
Taiwan
India
7.5 kW,
165mm
0.25
1
Gross Labour Productivity
4
Japan
Japan
Taiwan
Taiwan
India*
5
10
India*
15
Design staff (% of employees)
Figure 3.
20
10
100
1000
Design staff (no. of employees)
The size of design teams as a proportion of total firm employment (Panel a) and in terms of the number of employees
(Panel b).
*For India the HMT company is excluded from this comparison.
25
20
15
10
5
0
-3
Figure 5.
-2
-1
0
1
2
3
Difference in general satisfaction with machine (1-5 rating) (Indian-Foreign). In this and subsequent
figures, outcomes favourable to the Indian Machine are shown in green, and those favourable to the
foreign machine re shown in red.
30
25
20
15
10
5
0
>-8
Figure 7.
-8
-6
-4
-2
0
2
4
6
8
10
<10
Difference in % lost hours due to breakdown/no of machine hours booked. (Indian-Foreign)
ACE Designers

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
Small new entrant
Understands importance of quality/ price
nexus
Focus on building capability in one core
product
China in Machine Tools

Now exporting basic CNC machines

Serious challenges to capability building
OECD Perspectives

The Bernard – Schott Evidence

Survival and Flexibility

The European Debate and ‘Social Europe’

Unfortunate Confusions