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236
Int. J. Automotive Technology and Management, Vol. 11, No. 3, 2011
How to cope with the global value chain:
lessons from Italian automotive suppliers
Cristina Castelli
Italian Institute for Foreign Trade (ICE),
via Liszt, 21, 00144 Rome, Italy
Email: [email protected]
Massimo Florio
Department of Economics, Business and Statistics,
Milan University,
via Conservatorio 7, 20122 Milan, Italy
Email: [email protected]
Anna Giunta*
Department of Economics,
Roma Tre University,
via Silvio D’Amico 77, 00145 Rome, Italy
Email: [email protected]
*Corresponding author
Abstract: In the past 20 years the automotive industry has been subject to
fundamental changes, resulting in deverticalisation and dispersion of
production across different regions. The structural changes strongly impacted
on supplier firms localised in Turin (Italy), a hub and spoke district, featuring a
wide supply chain polarised around Fiat Group, the lead company. Our case
study examines the strategies implemented in the period 2000–2005 by a group
of 13 selected suppliers, located in Turin area, to successfully participate to the
global value chain. Our findings show that companies are pursuing a ‘high road
development strategy’, based on client portfolio diversification, product and
process innovation, cumulative internationalisation. More in general, future
prospects for the local firms to survive international competitive pressures
seem crucially depending on continuous learning and innovative firms’ activities.
Keywords: automotive industry; hub and spoke district; fragmentation; global
value chains; innovation; internationalisation, Turin; Italy; Fiat Group.
Reference to this paper should be made as follows: Castelli, C., Florio, M. and
Giunta, A. (2011) ‘How to cope with the global value chain: lessons from
Italian automotive suppliers’, Int. J. Automotive Technology and Management,
Vol. 11, No. 3, pp.236–253.
Biographical notes: Cristina Castelli is employee at the Italian Institute for
Foreign Trade (ICE, Rome, Italy) and involved in research projects of CSIL
(Centre for Industrial Studies, Milan). Her main research interests lie in firm’s
internationalisation processes, fragmentation of production as well as trade
policy issues.
Copyright © 2011 Inderscience Enterprises Ltd.
How to cope with the global value chain
237
Massimo Florio is Professor of Public Economics and Head, Department of
Economics, Business, and Statistics, University of Milan. His main research
interests include applied welfare economics, project evaluation, privatisation,
public enterprises, regional policy, industrial policy. He has been involved in
several projects by the European Commission, the European Investment Bank,
the European Parliament, the OECD, the World Bank and other international
bodies.
Anna Giunta is Professor of Applied Economics at the Roma Tre University.
She is co-editor of QA – Rivista dell’Associazione Rossi-Doria, Franco Angeli
Publisher, Milan; member of the scientific committee of Rivista Economica del
Mezzogiorno, Il Mulino Publisher; member of the CSIL (Centre for Industrial
Studies, Milan) scientific committee. She has been scientific supervisor of several
research groups and consultant to organisations and institutions such as the
Ministry of Economy and Finance, Ministry of Industry, Capitalia Research
Department, Svimez. Her current research interests are firms’ organisation and
internationalisation, firms’ boundaries and ICT, firms’ growth, industrial and
regional policy evaluation.
1
Introduction and research motivation
As stated by several authors (e.g. Jones and Kierzkowski, 1990; Feenstra, 1998; Arndt
and Kierzkowski, 2001; Hummels et al., 2001; Jones and Kierzkowski, 2005), in the past
20 years the production of a final commodity can take place through a vertically integrated
process or by ‘production blocs’ separated by distance, located in the same country or
abroad, that can be either under the control of the same firm or performed by independent
companies. Fragmentation of productive processes, facilitated by service links in the
form of transportation, communication and other coordinating activities, may lead to an
increased dispersion of production worldwide, while simultaneously encouraging national
agglomeration (Jones and Kierzkowski, 2005).
Against this background, insights deriving from another strand of literature, the
Global Value Chain Analysis (GVCA, henceforth) are very useful to describe the context
and the current trends in the automotive sector, where centrifugal and centripetal forces
are determining the location of production (Sturgeon and Florida, 2004; Gereffi et al.,
2008; Gereffi et al., 2009). The GVCA – first proposed by Gereffi (1994) and then
followed by a number of contributions (Gereffi and Korzeniewicz, 1994; Kaplinsky,
2000; Henderson et al., 2002; Humphrey and Schmitz, 2002; Sturgeon et al., 2008) –
focuses upon firms’ dynamics, suggesting that the positioning of a firm and its upgrading
along the global value chain, as well as the pattern of governance of the chain it feeds
into, are crucial in determining its growth performance. Gereffi (1999) outlines a distinction
between two types of production chains: a buyer-driven commodity chain – common
among labour-intensive industries such as textiles and shoes – and a producer-driven
commodity chain – typical of industries such as automotive, electronics and civil
aviation. Global value chains are usually characterised by a leading company with
coordinating and controlling function, hosting several ‘global production networks’
consisting of subsidiaries, affiliates, subcontractors, suppliers, partners in strategic alliances
located in different countries. Competitive success increasingly depends on the capacity
238
C. Castelli, M. Florio and A. Giunta
of managing effectively these global networks (Sturgeon and Florida, 2004) and on
sourcing in a selective way from vertically specialised firms (Ernst, 2005), taking advantage
of the progress in Information and Communication Technologies (ICTs, henceforth) to
coordinate productive processes located in different parts of the world.
The main research question of the paper is to analyse to what extent firms, based in
the Turin province (Piedmont Region, Northern Italy), a hub and spoke district, for long
time operating in a local context under quasi-monopsonistic relationship with Fiat Group
and regarding foreign markets prevalently as outlet markets, are able to successfully
participate into the global value chain.
In order to fulfil our research questions, we analyse the main strategies that have been
adopted by these firms in the Turin district to take part in the global value chain. In
particular, we analyse, by means of a case-study, how a group of selected suppliers,
belonging to different segments of the automotive production chain, is facing both the
international reorganisation and, at the same time, the profound crisis of the Italian lead
group, from which it partially recovered only after 2005. Our analysis was conducted on
13 firms by means of direct interviews,1 taking into consideration several structural,
organisational and performance variables related to the 2000–2005 period, years marked
by the most severe crisis of the lead Italian Group. In order to analyse which were the
main firms’ strategies to accomplish successful participation in the global value chain,
interviewees were selected among firms which met three out of four requirements:
1
operating in the upper part of the automotive suppliers’ pyramid (i.e. supply directly
the car manufacturers and/or the ‘first tier’)
2
showing a satisfactory performance of turnover, that is above the average of the
Turin Chamber of Commerce, Industry, Agriculture and Handicrafts (CCIAAT
henceforth), sample equals to 5.6% during the reference period 2000–2005
3
being active on foreign markets, i.e. exporting a considerable share of total turnover:
above the average of the CCIAAT sample equals to 39.4%
4
make extensive use of ICTs.
The ratio of our choice was to investigate which were the strategies of firms positioned in
the top section of the ‘pyramid’, more likely to succeed in the global value chain because
of an ex ante higher productivity level, less at risk to be crowded out by competitors from
emerging countries. The main limitations of our methodology come from the fact that
results cannot be generalised to the whole automotive supplier firms’ population, as the
firms interviewed are not statistically representative. Bearing in mind this caveat,
nevertheless, the findings of our case study seem to have timely implications since Fiat,
the Italian leader firm, has recently accelerated the ongoing restructuring of its spatial
dimension, loosening its embeddings in the Turin district. Such a strategy will force
Turin suppliers to look for alternative markets outlets abroad, thus facing the increasing
challenges coming from the participation in the global value chains.
The paper is organised as follows: Section 2 briefly traces the main features of the
automotive industry and the changes of the international context in which the supply
chain is currently operating. Section 3 supplies some evidence on the increasing integration
of the Piedmont Region in international production networks. Section 4 illustrates the
main results of our case study by focussing upon the main strategies adopted by a group
How to cope with the global value chain
239
of selected firms in response to the structural changes. In Section 5, we will attempt to
outline under what circumstances supplier firms will continue or discontinue their operations
in the Turin district, and finally, Section 6 offers some concluding remarks.
2
The globalisation of the automotive industry: fragmentation of the
value chain and geographical reorganisation
The automotive industry can be defined as a ‘producer-driven’ global value chain,
characterised by a high degree of concentration, resulting from a consolidation process
that took place in the 1990s and is currently going on, driven by the international crisis.
During the same years, a deep reorganisation has led to a deverticalisation of the industry
and to outsource many activities, which was also made possible by the increasing
modularisation of production (Frigant and Lung, 2002; Larsson, 2002; Sturgeon, 2002;
Sturgeon and Florida, 2004; Frigant, 2007; Volpato, 2008). Accordingly, the automotive
production chain is made up of a number of sections or levels (‘tiers’), at the top of
which is the car manufacturer.
In a context of increasing trade liberalisation and cheaper ICTs, the production chain
has been fragmented among the countries of origin and abroad. Most car manufacturers
have focussed on some core competences and perform in their plants mainly the final
assembling of the vehicles, relying on a network of local and foreign suppliers. The latter
can be located near the lead firms or may produce in other countries, depending on their
product specialisation, the relevance of trade costs (packaging, transport, communication
and coordination) and of delivery time, and may (or may not) refer to lower tier
subcontractors. By establishing multiple foreign plants, automakers triggered the creation
of different regional industrial systems, relatively close to the final markets, where
production is typically clustered. In Europe there have been increasing investments in the
new EU Member States, while Asia has become the region in the world where most
vehicles are assembled (STEP-CCIAT, 2008), especially China and India playing a
growing role.
Compared to other industries, proximity to the final markets is particularly relevant
because of the high transport costs of motor vehicles and their main parts, and due to the
industry-wide adoption of lean production techniques, implying timely delivery and justin-time organisation. Hence, time and distance both act like an entry barrier and a trade
cost; these two factors are of a growing importance for the choice of suppliers to be
included in the production chain (Nordås, 2005), determining an increasing co-location
near the automaker’s assembly plants (‘follow the client’ strategy, see Balcet and
Enrietti, 2002; Humphrey and Memedovic, 2003; Frigant and Layan, 2009), as suppliers
might otherwise lose their customers (Sturgeon and Florida, 2004, Gereffi et al., 2009).
As regional poles develop towards what we can define ‘global districts’, where
multinational affiliates and locally owned suppliers are setting their plants, carmakers
(and multinational suppliers) may gradually replace international trade with arm’s-length
contracts. In order to ensure high quality and reliability, suppliers are selected according
to their financial and productive capabilities, and procurement is based upon two
fundamental criteria: firms’ know-how and logistic costs. Whenever trade costs are high
and suppliers need to be very specialised, carmakers tend to source locally or encourage
the productive internationalisation of supplier firms from the home district; conversely, if
the incidence of transport costs is low, the ‘global sourcing’ logic is adopted to purchase
products worldwide, at the best price-quality ratio.
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C. Castelli, M. Florio and A. Giunta
Up to now, locally owned suppliers in emerging countries are considered competitive
merely in price, while advanced countries’ manufacturers seem superior for all other
factors such as reliability and technology. It follows that simpler, standardised, easy-tomake parts are increasingly sourced from local firms, while more sophisticated
components are usually produced by subsidiaries of multinationals (Humphrey and
Memedovic, 2003) relying, on turn, on their own production networks. Nonetheless, like
in other industries, local producers can gradually increase their capabilities (Humphrey
and Schmitz, 2002; Giuliani et al., 2005) and, in fact, the gap is rapidly shrinking,
especially as Chinese and Indian engineers are improving their skills. This process is
backed by carmakers’ strategies whose aim is to develop quality and reliability of a host
of suppliers and to increase sourcing from locally owned firms.
3
The internationalisation of Piedmont Region
Similarly to other carmakers, since the early 1990s, Fiat Group started restructuring the
productive activities by locating plants worldwide, in different regions. The development
of the spatial reorganisation process can be appreciated by looking at Table 1: while the
EU still represents in 2007 the most important area for the Piedmont carmakers’ foreign
investments in terms of turnover, the higher share of workforce relative to turnover in
most emerging countries confirms that the more labour-intensive phases and lower end
productions are located in these areas, which may function as export platforms (Table 1).
Table 1
Foreign investmentsa performed by Italian car manufacturers of the Piedmont Region,
as on 1 January 2007 (million Euros)
Number of
employees
% share
Turnover
27,586
37.4%
20,549
67.5%
EU-15b
21,147
28.7%
17,405
57.1%
EU-12c
6439
8.7%
3145
10.3%
Other European countries
9854
13.4%
2442
8.0%
Eastern European countries
4399
6.0%
275
0.9%
Central and South America
European Union
% share
20,535
27.8%
5310
17.4%
Asia
9280
12.6%
1445
4.7%
Africa
1823
2.5%
182
0.6%
298
0.4%
260
0.9%
73,775
100%
30,463
100%
Other countries
Total
Source: Processing of ICE-Milan Polytechnic Reprint data.
Notes: aCommercial and productive FDIs.
b
EU-15 countries: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK.
c
EU-12 countries: Bulgaria, Cyprus, Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia.
How to cope with the global value chain
241
Following the geographical reorganisation of production operated by Fiat Group and other
carmakers, the suppliers based in the Turin area have been increasingly involved in global
production networks. On one hand, several first- and second-tier firms have ‘followed the
client’, decentralising their production in the multiple regional industrial poles, where Fiat
Group is operating. On the other, exports of parts and components originating from the
Region experienced a steady growth, particularly after 2001, reflecting increasing intraindustry and intra-firm trade, especially with the EU Members of recent accession
(see Figure 1).
Imports have not grown much in recent years, as sourcing parts and components from
low-cost countries is not (yet) a widely diffused strategy among Piedmont firms
(although China and India play a growing role) and the final assembling of vehicles has
been shifted to a considerable extent to other regions (Figure 1).
Evidence from trade flows indicates also that neither the growing number of FDIs,
performed by carmakers or by firms of the supply chain to locate near the lead
customers, nor an increased local sourcing in the new regional poles, operated by
carmakers and top suppliers, have substantially affected exports originating from the
district and that, so far, Turin’s supplier seem to have been able to remain competitive
(STEP-CCIAT, 2008).
Figure 1
Piedmont Region: trade flows of car parts and components (thousands Euros)
(see online version for colours)
6,000,000
5,000,000
Imports
Exports
Balance
4,000,000
3,000,000
2,000,000
1,000,000
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
0
Source: Processing of ISTAT data
4
The Turin automotive suppliers: the case study
Against this background of global changes and increasing integration of the markets, in
this section we analyse how a specific group of suppliers, located in the Turin district is
facing the global context and which strategies have been chosen to take part in the
international production networks and enhance their competitiveness. In-depth interviews
were conducted with 13 firms, identified from the CCIAAT database that collects
information on a representative sample of 786 firms of the automotive chain, out of a
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C. Castelli, M. Florio and A. Giunta
universe of an estimated 3500 firms. In order to analyse which were the main firms’
strategies to successfully participate in the global value chain, interviewees were selected
among firms which met three out of four requirements, previously outlined (see Section 1).
The ratio of our choice was to investigate which were the strategies of firms positioned in
the top section of the pyramid, more likely to succeed in the global value chain likely
because of an ex ante higher productivity level, less at risk to be crowded out by
competitors from emerging countries.
By examining the strategic approaches adopted during these years, our case study
allows to understand the reaction of the firms to international competition and to the
severe crisis of their most important customer, Fiat Group. With internationalisation
processes becoming increasingly relevant, it also confers an in-depth insight about the
various ways of participating in the global production networks (from merely exporting
to the establishment of production plants abroad) and the related motivations.
4.1 Firms’ characteristics
Apart from one foreign subsidiary, the firms considered in this case study are all Italian,
mainly family owned and the majority of them does not belong to a group. Their productive
activities widely differ and include the design and realisation of whole production lines
(machinery, handling systems, automated warehouses), the design and production of
systems (for example anti-vibrations components) as well as parts for motor vehicles
(lighting, electro mechanics, aluminium objects for powertrain). Firms show a high and
growing export propensity, as foreign sales represent on average 45% of turnover
(compared to 34.6% in 2000) with peaks of 60–70%. Although their dimension
considerably varies both in terms of employees and turnover, there is a net predominance
of medium-large firms, a consequence of the fact that internationalisation processes are
correlated with size, and this is particularly true when firms adopt more ‘complex’
internationalisation modes (Table 2).
Table 2
Distribution of firms by size
Number of employees
Micro
Small
Medium
Large
<10
10–49
50–249
>250
Number of companies
0
2
7
4
Turnover (million Euros)
<2
2–10
10–50
>50
Number of companies
0
3
7
3
Total
13
13
Source: Processing of balance sheet data
With regard to firms’ positioning in the automotive value chain, as requested by our ex
ante selection criteria, all companies supply directly the car manufacturers and most of
them (10 out of 13) supply the ‘first tier’ as well, engaging in cooperative relations.
Moreover, only a few firms supply the aftermarket, where competition is mainly pricebased and delivery time is less crucial than for parts entering the assembling process of a
new car (Gereffi et al., 2009) (Table 3). Many supplier firms are in charge of their own
supply networks, supported by a rather advanced endowment of ICTs to interact with
customers and suppliers.
How to cope with the global value chain
Table 3
243
Distribution of firms according to the type of customer
Number of firmsa
Car manufacturer
13
Tier-1 supplier
10
Tier-2 supplier
4
After market
2
Source: Interviews
a
Multiple answers are allowed.
Note:
4.2 Main strategies
The global changes in the automotive sector have led firms of the supply chain to adopt a
number of strategies, often used in combination with each other (Figure 2). In general,
looking at the strategies which reported the highest ranking (between 4.17 and 3.50, in all
figures the evaluation scale ranks from 1 to 5, where 1 = unimportant strategy and 5 =
very important strategy), it seems that companies are pursuing a ‘high road development
strategy’, based upon: (a) the expansion and diversification of their client portfolio, and
here the different internationalisation modes play a crucial role, as we will shortly see.
The finding is particularly relevant since until the mid of 1990s, most Turin suppliers
firms mainly operated in a quasi-monopsonistic market (Enrietti and Withford, 2005); (b)
the introduction of higher value-added products by investing in R&D and adopting
product/process innovation2; (c) the involvement in productive internationalisation.
These three aspects will be in-depth analysed in the following sub-sections. Investment in
human capital, a crucial aspect to foster both innovation and internationalisation
processes, scored on average a relatively high mark (very important for 7 firms out of
13), even though firms did not give much insights on this issue.
Figure 2
Firms’ strategies (see online version for colours)
244
C. Castelli, M. Florio and A. Giunta
4.2.1 Customer expansion and diversification
Following the prolonged crisis of the Fiat Group, the firms in the Turin district tried to
accelerate the diversification of their customer portfolio in order to reduce the quasimonopsonistic dependence from Fiat Group (Calabrese and Erbetta, 2005). Our findings
show that, in the period 2000–2005, several firms have been able to diversify their
clients: only in two cases firms relied on Fiat for more than 50% of their turnover.
As a result of customer diversification policy, firms recorded a considerable
geographical extension of markets as well. In 2005, the then 15 Members of the
European Union still represent the main market, while increasing shares are recorded by
the countries in Central and Eastern Europe, and other emerging countries (Russia,
Turkey, China), due to their growing importance as industrial poles and export platforms.
The customer diversification strategy was backed in some cases by investments to set up
foreign commercial branches in order to facilitate the penetration of the market (4 firms
out of 13).3 Most of these suppliers are small-sized, and two use their commercial branch
also to coordinate their local suppliers. A third one first established sales offices abroad
(in UK), before deciding more recently to relocate part of its production in China.
4.2.2 Product positioning, investment in R&D, product and process innovation
Improving the positioning in the global automotive chain by manufacturing higher valueadded products is considered of crucial importance, confirming the GVCA predictions.
In fact, GCVA analysis identifies four, not mutually exclusive, paths of expansion for
subcontracting firms:
1
increasing their x-efficiency
2
strengthening inter-firm connections with partners to build a more consistent and
cooperative network than those of rivals
3
improving the quality of their functions along the chain, or moving to higher quality
functions (e.g. from production to design)
4
introducing new products or widening the range of products offered.
While first two paths seem to be essential requirements for participation in the value
chain, but do not warrant per se upgrading in the value chain or ensure against the risk of
a future decline, strategies 3 and 4 are key to higher returns and growth. In relation to
innovation in particular, Gereffi (1999) points out that the motivation for product
innovation primarily comes from global assemblers, the key players in the global value
chain, who push supplier firms to meet their demands for more value-added and more
sophisticated products. All firms have mentioned their efforts to innovate products and
processes, and most of them have succeeded during the 2000–2005 period. On average
sampled firms’ investment in R&D is relatively high (between 3% and 5% of the
turnover in 2005, with one firm investing as much as 10%).4 Most of the firms cooperate
with universities (e.g. with the Politecnico of Turin), carrying out joint research project
supported by public funds or EU schemes for innovation.
How to cope with the global value chain
245
Nonetheless, most firms have described their products as ‘mature’, and few claimed
to have innovative products in their portfolio (Table 4). Among the latter, one company
defines itself as a ‘fast follower’, being able to adopt rapidly innovations already on the
market, while another produces electromechanical components that are considered ‘niche
products with few competitors’. Only one firm reported to have patented its innovation
(a new casting technology).
Table 4
Products positioning
Number of firmsa
Innovative
4
Mature, with good profit margins
8
Mature, with narrow profit margins
4
Source: Interviews
a
Note:
Multiple answers are allowed.
As to the type of relation with the customers, most firms of the sample have claimed
to be involved in relational and market type linkages; however, three companies
indicated to be exclusively engaged in co-makership (‘relational’ linkages). This is an
interesting aspect, as the more the products are customised and commitments are based
on trust, the higher the entry barrier vis-à-vis other global and local competitors. In
one case, co-makership is required for the product’s specific requirements (lighting
components), while the other two firms supply turn-key systems (for testing engines and
automated production systems), with a continuous interaction with the customer,
especially during the projecting phase. Two firms declared instead to engage exclusively
in ‘market type’ linkages: one of them produces parts almost only for the aftermarket
(filters for engines), while the second company supplies die-casted components for
engines, following the customers’ specifications. Moreover, according to our interviewees,
the involvement in relational (market) linkages seems to be associated with a higher
(lower) level of qualification of the firm’s employees.
Overall, it is worth mentioning firms’ efforts to increase the share of custom-made
products and foster cooperation on projecting and design, as products resulting from
cooperative process with the customer usually feature higher innovative content and
higher profit margins. Nonetheless it is has to be considered that customers (especially
car manufacturers) usually maintain the intellectual property on products developed in
cooperation with their suppliers; such a behaviour reduces the incentive of supplier firms
to innovate, because of the fear to be expropriated of the surplus coming from their
innovation propensity.
4.2.3 Productive internationalisation
As showed by Table 5, during the reference period, several firms have followed a
‘cumulative’ internationalisation process (Basile et al., 2003), increasing, at the same
time, both their exports and foreign direct investments or partnerships with foreign firms.
Firms pursued FDIs through acquisitions and greenfield investments (in China, Poland,
Mexico, France and the USA). In other cases, however, firms have preferred to establish joint
ventures with local partners (in Mexico, Poland, Brazil, China and France) (Table 5).
Exports from Italy
Exports from Italy
Large
Firm9
Firm10 Large
Source: Interviews
Firm13 Medium Exports only from Italy
Firm11 Medium Exports from Italy
Firm12 Medium Exports only from Italy
Medium Exports from Italy
Firm8
Exports from Italy
Small
Firm7
Firm5
Firm6
Firm4
Sales abroad
Commercial FDIs
FDIs or JVs for productive activities
Branches in the UK
50% JV in China; Greenfield FDI in
USA; FDI with the purchase of existing
firms (France, Poland, Mexico, Brazil)
50% JV in Brazil (1999); greenfield
FDI in Poland (2006)
Greenfield FDI in Mexico (2001)
Greenfield FDI in France (2006)
FDI with the acquisition of a firm in
China (2007)
Exports from Italy;
Technical-commercial
agent in Germany
base in India (2000)
Medium Exports only from Italy
Medium Exports from Italy
FDI in Poland (2003); JV in Mexico
(2005)
Large
Exports from Italy
Technical-commercial FDIs in 19 countries including Brazil,
base
Argentina, Australia, USA, Canada,
Mexico, China, Russia, India, South
Africa and a number of European
countries (Spain, France, Germany,
Poland, Romania, Sweden, Belgium,
UK). All takeovers executed
Medium Exports only from Italy
Small
Exports from Italy;
Commercial offices in
representative in Spain Turkey and Brazil
Size
Small
Arm’s length contracts
Future prospects
The offices in Turkey and
Brazil manage purchases and
the local suppliers
Plans for a JV in Poland
Plans to open a factory and a
commercial unit in Eastern Europe
in 2008; is also considering the
possibility of building a factory in
China, shifting some production to
Brazil and forming a JV with an
Indian partner
Plans for an agreement in India for
the transfer of know-how
Plans to open a production unit in
Bulgaria
Will consider whether to carry out
design and planning abroad
Will consider whether to
decentralise more production abroad
Consolidate current activities
Production through suppliers Evaluating the possibility of setting
managed by the office in India up a factory in India
Table 5
Firm2
Firm3
Firm
Firm1
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C. Castelli, M. Florio and A. Giunta
Firms’ size, modes of internationalisation and future prospects
How to cope with the global value chain
247
As shown in Figure 3, the main factors determining productive internationalisation are
proximity to outlet markets and co-location, followed by the reduction of transport costs,
which are all motivations to enhance market access (Figure 3). The decentralisation of
production occurs in particular when: (a) products are specialised and cannot be easily
supplied from local firms in emerging areas; (b) when products have to be finished by the
customer (for example die-casted parts); (c) when transport costs are relevant. These
motivations are often considered more relevant than relative advantages deriving from
lower labour costs. Nevertheless, some firms – mainly characterised by more labourintensive (e.g. the casting of iron products) or standardised parts – are strongly motivated
by efficiency gains deriving from producing in low-cost countries and have chosen to
shift part of the production abroad not only because of the customers’ proximity.
Figure 3
Determinants of productive internationalisation (see online version for colours)
With regard to which functions are transferred abroad, production carried out in the
foreign plants has often been defined as ‘similar to the production in Italy’. Most FDIs
(or joint ventures) are therefore horizontal rather than vertical5 and are aimed at
substituting exports from the district of Turin or expanding the home-based activity. Due
to the deverticalisation of the production chain, productive processes tend to be
established in other countries according to their technological content and to the degree
of automation, rather than according to the different phases of the value chain. The more
value-added processes and R&D are still performed in Italy; however, some firms have
shifted part of these functions abroad, in particular when the R&D unit has to work in
close connection with production.
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C. Castelli, M. Florio and A. Giunta
Alternatively, productive internationalisation can take place through ‘lighter’ modes
of internationalisation, i.e. outsourcing part of the production abroad by means of
contractual agreements. For example, two firms supplying complete production systems
have set up commercial offices to coordinate their local contractual partners. In this way
sunk costs are lower, even if there may be other disadvantages in terms of transactions
costs, imperfect information and contractual incompleteness (Antras and Helpman, 2004;
Barba Navaretti and Venables, 2004).
Determinants for the choice of adopting more or less complex forms of
internationalisation can be derived from the literature on firms’ heterogeneity, which
links firms’ productivity levels to the different degrees of international involvement
(Helpman et al., 2004; Greanaway and Kneller, 2007). Size has also to be included
among other firms’ characteristics that may exert an influence on different
internationalisation modes.
5
Where to operate in the near future? The prospects of
Turin supplier firms
Evidence from the case study may allow us a certain degree of generalisation and outline
under what circumstances suppliers are more likely to maintain their production in the
district of origin or whether they may choose to locate (in part or completely) their
productive activities abroad, in order to remain competitive (Table 6). In particular, two
product characteristics seem to have a particular influence on the firms’ decision to
operate in the district of origin or in the new regional poles: the degree of innovation and
the relevance of trade costs.
Specialised, innovative firms with products characterised by relatively low trade costs
may choose to export directly from the Turin area, as car manufacturers source these
products ‘globally’, provided that local Turin suppliers can keep the pace of innovation.
Conversely, suppliers with innovative products but high trade costs may need to locate
near their customers, in order to comply with just-in time requirements. Carmakers are
actively triggering their internationalisation process, and supplier firms can successfully
compete in the new global districts also with specialised multinational top suppliers.
On the other side, suppliers characterised by mature, labour-intensive products and
high trade costs are able to survive to global competition only if capable of relocating in
one or more regional poles, especially in emerging countries, in order to improve their
cost efficiency, besides complying with lean production organisation. Nonetheless, if
these firms base their strategy only on price-competitiveness, they are at risk of being
crowded out by locally owned suppliers, learning from cooperative relationships with
their customers to meet higher quality standards.
Finally, firms selling mature products, where the incidence of trade costs is relatively
low, could improve their competitiveness by decentralising part of their productive phases
in the emerging countries, keeping in the district the higher value-added production, and
concentrate, at the same time, on innovating the home-based activities.
How to cope with the global value chain
Table 6
6
249
Trade costs, products and location of automotive suppliers
Innovative products
Mature products
High Trade Costs
Location near the customer in
‘global districts’, where firms
compete also with specialised
multinational suppliers.
Location near the customer, preferably
in emerging countries to improve pricecompetitiveness. Risk of being crowded
out by locally owned competitors
upgrading in the value chain.
Low Trade Costs
Location in the district of
origin, exports directly from
the district, as car
manufacturers source these
products globally.
Location of the production in
emerging countries to improve pricecompetitiveness; higher value-added
phases may be maintained in the district
of origin, as car manufacturers source
these products globally.
Conclusion
The geographical dispersion of productive activities near the final markets is leading to
the establishment of global industrial districts, where foreign and local suppliers tend to
establish plants near the lead carmakers (often in emerging countries), as transport costs
and lean production techniques may require proximity to the customer. These ‘new’
districts supply not only local markets, which are often still potential, but are a way to
improve cost-efficiency and to serve as export platforms for other areas. Recent figures
on the Piedmont Regions’ trade flows of car parts and components, as well as our empirical
findings, confirm the involvement of Turin firms which have been able to increase,
during the past decade, their participation in the global production chain, pushed by the
internationalisation of Fiat Group and the need to diversify their customer’s portfolio.
Our case study has illustrated how a group of Turin suppliers – mainly medium-sized
firms belonging to the upper level of the pyramid – is acting to increase their
involvement in international production processes and upgrade in the value chain, also as
a reacting strategy to the crisis of the lead Italian Group which characterised the whole
reference period, 2000–2005 (Berta, 2006; Volpato, 2008). Our findings show that
companies are pursuing a ‘high road development strategy’. On one side, they have
expanded and diversified their customers, pursuing different ways of internationalisation
to take part in the global networks and to become less dependent from Fiat Group. Foreign
expansion reaches from exporting to producing abroad, in order to supply directly the
foreign customers, by means of lighter or more complex forms of internationalisation,
according to their products and firms’ characteristics. The drive to further internationalise
is strong and is determined more by trade costs and market access factors than by
efficiency gains deriving from lower labour costs, the latter being more relevant for firms
producing standardised and labour-intensive parts. On the other side, most suppliers
engage in innovative activities (product and process) to upgrade in the value chain, also
pursuing relational linkages with their customers, in order to raise entry barriers vis-à-vis
new competitors.
The rationalisation and selection process that took place in the ‘national’ districts
during the last decades is set to continue and to intensify at a global level, so that in the
long run firms will increasingly have to face the competition of global and local players
of every size and, consequently, experience a growing pressure on their profit margins.
250
C. Castelli, M. Florio and A. Giunta
This may lead to a further change in the structure of the local system, where the more
innovative productions would remain based, while a number of suppliers would continue
to shift their activity in the new industrial poles. However, it is worth mentioning that
some of the (more or less innovative) firms might be hampered in their ‘follow the client’
strategy by their limited size, financial capacity and other structural factors often
described as a weakness of the Italian companies. In particular smaller firms, positioned
at the lower end of the supplier pyramid, risk to be driven out of the market.
Continuous learning and innovation are therefore crucial for Turin firms’ survival,
and competitiveness will be increasingly related to the capacity of meeting higher
requirements and non-price factors (innovative content, quality, design, specialisation
and customisation). Since most firms of the CCIAAT sample, located in the Turin
district, regard their products as ‘mature’, our findings cast some doubts on the ability of
local firms to successfully adapt and compete in the new environment. While the local
district have acted so far as a catalyser of innovation, the global dimension of the value
chain challenges the relatively limited financial and human capital resources of several
small-medium enterprises and undermine the probability to survive international
competitive pressures.
We briefly conclude with some implications for policy from our empirical analysis,
which, in the context of the global crisis in the car industry that started in the second half
of 2008, are particularly important. Our findings show that the most competitive suppliers
seem to be less dependent on the local market and more interested in developing their
own international strategy, as Calabrese (2010) shows for the car-designers cluster in
Turin. Support for them would require a package that should be tailored to their needs. It
is known that public measures, facilitating the flow of export-specific information and
supporting diffusion of knowledge about export markets, may have a positive impact on
the export performance – the case of French firms is documented in Koenig et al. (2010).
A complementary measure could be to incentivise, through financial or fiscal measures,
small and medium sized firms to cooperate – for example, by creating consortia – in
order to achieve the ‘critical mass’ to support the sunk cost of foreign market penetrations.
In a different perspective, investing in local institutions and in those mechanisms that
enhance local social capital and knowledge, particularly in an urban context, will help the
regeneration of the flexible industrial district.
Acknowledgements
The authors are grateful to the interviewed firms for their precious cooperation and to
Marzio Bianchi for his support with the interviews. We thank the Chamber of Commerce
of Turin for allowing the use of their database on automotive suppliers (in particular
Silvia De Paoli and Barbara Barazza) and Elena Mazzeo (ICE) for providing data from
the ICE-Milan Poliytechnic database Reprint. The authors wish to thank anonymous
referees for their comments and useful indications. Moreover, we wish to thank Giorgio
Barba Navaretti, Giuseppe Berta and Giuseppe Calabrese for their comments on a
previous version of the paper. Financial contribution to CSIL and the University of Milan
from the FIRB research project ‘International fragmentation of Italian firms. New
organisational models and the role of information technologies’, funded by the Italian
Ministry of Education, University and Research, is gratefully acknowledged. Cristina
Castelli is the sole responsible for the expressed opinions, which should not be
necessarily considered as the view of ICE.
How to cope with the global value chain
251
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Notes
1
2
3
4
5
The interviews were carried out between June and September 2007, and further evidence was
collected and elaborated in 2008–2009.
Product innovation means either the introduction of a completely new product (new for the
firm) or a significantly improved one. Process innovation means either a radical change in the
production process or a significantly improvement in the production process.
Internationalisation processes can involve different methods, differing degrees of risk,
organisational and relational complexity, and costs. In addition to serving international
markets through exports from the country of origin, firms can invest in distribution and
commercial penetration abroad. Along with contractual outsourcing these forms are considered
‘light’ modes of internationalisation, while more ‘complex’ forms regard the establishment of
productive plants.
These findings are well above the ratio of R&D expenditure on value added in the Italian
industry, which was equal to 0.78% in 2005 (Ministry of Economic Development, 2009), and
above the ratio of R&D expenditure on turnover for the whole automotive sector, which
reached 1.5% in 2003 (see http://www.istat.it/dati/dataset/20070329_00/).
In literature we find traditionally a distinction between horizontal and vertical FDIs: the
former is when the firm replicates in another country the production process that it carries out
in the country of origin, usually maintaining in the home country the headquarters and various
functions (financial management, R&D, marketing.). Vertical FDIs, on the other hand, involve
the geographical separation and dispersion of the different stages of production, by means of
the fragmentation of the value chain, and are typically carried out in countries where production
costs are lower.