The Experience of Canadian Firms and Industries

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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

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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 wouldnt 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
• d 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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1. Price heterogeneity chassis
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1. Price heterogeneity tires
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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
  wont increase, the almost total reliance on U.S.
  is precarious
• Low cost Especially since NAFTA, this is not
  going to be Canadas 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 Canadas 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 jovb_at_chass.utoronto.ca