OEM and ODM china textile

1. Analysis on the Factors Affecting the Organizational Study Effect of the Textile Original Equipment Manufacturers in the Global Value Chain system Tang Haiyan Shanghai Lixin University of Commerce Shanghai, P. R. China Yanjiulilun2@126.com while the quality and level of such interaction affects the step of the textile OEMs in technological progress and management innovation to a large degree. Abstract—The global value chain system provides a possibility for the textile original equipment manufactures (OEMs) to study, absorb and learn the advanced technology, management and marketing knowledge of the transnational corporations in developed countries. The guidance of transnational corporations and the study of the textile OEMs is a kind of interaction existing in the subcontracting model, while the quality and level of such interaction affects the step of the textile OEMs in technological progress and management innovation to a large degree. To achieve the sustainable industrial upgrade of the textile industry, it is far from enough to only depend on learning from the transnational corporations. The textile OEMs should extend the organizational study and use many study methods at the same. II. THE MAIN FACTORS AFFECTING THE ORGANIZATION STUDY RESULTS OF THE TEXTILE OEMS IN THE GLOBAL VALUE CHAIN SYSTEM The global value chain governance pattern can not only directly affects the upgrade of textile OEMs, but also can produce indirect effect through its impact on the organizational study results in the textile OEM chain. The organizational study effect of the textile OEMs, i.e. the increase of the knowledge assets, depends on the structure of transnational corporations’ knowledge transfer platform and whether the mechanism for the textile OEMs to accept the knowledge transfer could operate smoothly. The above two aspects in turn are affected by the respective characteristics of the textile OEMs and transnational corporations. Keywords-global value chain; textile original equipment manufactures; organizational study; industrial upgrade I. INTRODUCTION Many textile original equipment manufacturers (OEMs) including OEM, ODM and the enterprises which process the materials provided by clients have contributed a lot to the rapid development of Chinese economy. They use the simplest technology, the largest production scale, the lowest cost and obtain the irreplaceable advantages in global textile industry. The subcontracting pattern not only solved the long-time problem of foreign exchange and capital shortage in China in the past 30 years, but also drove the society to transfer from the planned mechanism to market mechanism, making the domestic economy go towards internationalization. As the knowledge transferring party and the mentor of learning, transnational corporations’ own will and type determines their promise to the organizational study of the textile OEMs, which in turn affects the impact of their study. The will of transnational corporations to transfer knowledge and provide guidance to the textile OEMs depends on whether the cost of such activities can be offset by the benefits brought to transnational corporation by the improvement of the textile OEMs’ ability. In this respect, the incurred cost not only includes the tangible cost such as the expenses arising from the spot guidance, personnel training, etc, but also includes intangible cost such as the losses caused by the loss of knowledge, the potential competition effect produced by the textile OEMs’ using the knowledge to serve for other transnational corporations. The benefits can also be divided into two parts: one is that after the textile OEMs obtain relevant skills by organizational study, the transnational corporations may have higher quality products, more timely delivery, etc, which are the direct benefits; the second is that after the textile OEMs obtain the skills required by transnational corporations, the transnational corporation may fully subcontract certain links in the value chain to the OEMs, so that they can accumulate resources and ability to conduct the high value added links in the value chain (that are more strategic) to marketization and However, the disadvantages of such production pattern are also obvious. Although it can produce in large quantities, it can not create brands; although it can increase GDP rapidly, it can not product high profit; although it can employ many persons, it can not greatly increase the employees’ income and benefits. In fact, many Chinese domestic textile enterprises lack the research and development capital, and the technological innovation ability. Whether the domestic textile enterprises can effectively obtain the knowledge transfer of foreign advanced enterprises through subcontracting is an issue which the academy and the practice area pay attention to. The guidance of transnational corporations and the study of the textile OEMs is a kind of interaction existing in the subcontracting model, 978-1-4244-6581-1/11/$26.00 ©2011 IEEE

2. respond to the fiercer and fiercer competition, which are the indirect benefits. The transnational corporations in the subcontracting pattern can be simply divided as two categories: the manufacturer and the purchaser. In the course of knowledge transfer, the manufacturer will focus more on the establishment and improvement of the quality system, technical flow; the product design and improvement; the supply of advanced spare parts, etc. As such, more implicit knowledge will be transferred through socialization and externalization. The quantity and quality of the interaction with the textile OEMs will also be higher. When transferring knowledge, the transnational corporations as purchasers more emphasize the explicit knowledge, which usually specify what to produce (product design), how to produce (technical flow, quality system, labor and environment standards, etc) and the time requirement. However, the interaction with the subcontracted party and the transfer of implicit knowledge during this process is very limited. Generally speaking, for the same category products, compared to the purchasers, the textile OEMs can obtain much more knowledge transfer and ability from the manufacturer than the former. organizational study and knowledge innovation depends on the quantity and quality of the knowledge transferred by the transnational corporations rather than their own absorptive ability. Besides the above two factors, the organizational study effect of the textile OEMs is also directly affected by the relationship between the transnational corporations and the textile OEMs. Linked to this, the stability of the subcontracting relationship and the global value chain governance mechanism are the two most important aspects. When the cooperation relationship between the transnational corporations and the textile OEMs is permanent and stable, the transnational corporations will gain more profits from the knowledge transfer to the textile OEMs. Accordingly, they are more willing to make efforts to build the knowledge transfer platform, and guide the subcontracted party to have further knowledge transfer. In the meantime, the subcontracted party will have opportunity to learn from the transnational corporations systematically, and receive more advanced and more complicated technological and managerial knowledge. Generally speaking, the enterprises of the developing countries participate in the global value chain system as the subcontracted party, which produces the captive governance mechanism dominated by the transnational corporations. In this mechanism, the transnational corporations start from their advantages, organize, coordinate the value creation activities in various links of the value chain by many ways, and control the value distribution among different geographical spaces, economic players. One way is to try to guide and control the organizational study of the subcontracted party. Specifically speaking, the transnational corporations will tolerate and encourage the subcontracted party to study the aspects which they consider non-core activities, such as improving the input- output efficiency, reducing production cost, improving the product quality, etc. However, when the subcontracted party tries to learn and grasp the core technological and marketing ability in the value chain, the transnational corporations will hamper such learning process by many methods, and restrict the improvement of the learning activities and ability of the subcontracted party in the production area. Under the subcontracting pattern, whether the textile OEMs can learn from transnational corporations by effective interaction depends on their own strategic intention and absorptive ability. If the strategic intention of the enterprises to engage in the subcontracting is only to make use of the advantage of low labor cost and obtain the assembling profit, their organizational study is usually negative and passive and the purpose is to meet the basic requirement of transnational corporations. In respect of the building of knowledge transfer platform, they are content with the knowledge transfer conducted according to the transnational corporations’ will, and have no strong motivation to obtain the non-will knowledge transfer. During the course of obtaining knowledge transfer, they more emphasize the combination and internalization of the explicit knowledge while ignoring the socialization and externalization of the implicit knowledge. On the contrary, if the enterprises treat the subcontracting as one method to obtain knowledge, improve their own ability and achieve the industrial grade, they will study actively. When building the knowledge transfer platform, they will not only facilitate the transnational corporations to make more knowledge transfer, but also try to have the non-will knowledge transfer as much as possible by observation, imitation, reverse engineering, etc. In the specific learning, they not only pay attention to the absorption of the transnational corporations’ explicit knowledge, but also will use many ways to promote the socialization and externalization of the implicit knowledge. Besides the strategic intention, the absorption ability of the textile OEMs also play an important role in the effect of the organizational study. The so called “absorption ability” refers to the ability of the enterprises to recognize the value of the new external knowledge, and absorb and use these knowledge. During the subcontracting, only the textile OEMs have certain knowledge storage can they correctly know and evaluate the transnational corporations’ knowledge and ability, and understand what to learn and how to learn, so as to promote the transnational corporations to transfer knowledge more specifically and use these knowledge. As such, the efficiency and speed of the subcontracted party’s III. THE EFFECT OF THE TEXTILE OEMS’ ORGANIZATIONAL STUDY IN THE GLOBAL VALUE CHAIN SYSTEM ON THE INDUSTRIAL UPGRADE The direct outcome of the organizational study of the textile OEMs is the enrichment and improvement of the knowledge assets, but its final purpose should be to achieve industrial upgrade along the value chain, i.e. leaping from the low value added link of the industry to the high link. According to the analysis on the innovation activities undertaken by the enterprises of the developed countries and the developing ones in different links of the global value chain, there are four industrial upgrade processes in the development countries undertaking the subcontracting: the flow upgrade, product upgrade, function upgrade and chain upgrade. Learning from transnational corporations by subcontracting helps the industrial upgrade of the textile OEMs. However, such effect is limited. In order to have sustainable upgrade, the textile OEMs should make further expansion.

3. In the subcontracting pattern, with the knowledge transfer of transnational corporations as well as the absorption and creation, the textile OEMs will obtain advanced production knowledge and equipment to build more advanced and improved production management system and quality control method, i.e. the achievement of flow upgrade. In the meantime, during the interaction with transnational corporations, the textile OEMs may also form certain design ability, including the ability to design the product packing, appearance, even the internal structure. Although they still produce according to the orders of clients, they have already developed sufficient internal design ability and could product high quality products, while it is not necessary for them to or they seldom require client to make detailed specifications, i.e. the achievement of product upgrade. Both the flow upgrade and product upgrade meet the requirement of the transnational corporations’ pursuit for more efficiency and higher quality. Therefore, the organizational study aiming at these two targets accords with the transnational corporations’ desire. They will actively build knowledge transfer platform for this and provide guidance for the knowledge transfer activities. However, only learning the transferred knowledge plays a limited role in the industrial upgrade of the textile OEMs and can not promote them to develop to the function upgrade and chain upgrade. Being different from the flow upgrade and product upgrade, which emphasize the production ability’s gradual evolution, both the function upgrade and chain upgrade are the discontinued leaping of the enterprise’s ability and strategy. In respect of the requirement of organizational study, the focus of the study required by function upgrade and chain upgrade has not been the improvement of the production technical flow, quality control system and current products but how to develop core technology, design new product, promote brands, etc by research and development as well as the understanding of the market. It is difficult to satisfy such requirements by the interaction between transnational corporations and the textile OEMs. Especially under the captive governance mechanism, after promoting the textile OEMs to achieve flow upgrade and product upgrade, the transnational corporations will be highly alert to the subcontracted party to have further upgrade by organizational study. They will adopt various measures to avoid their core technological knowledge and market knowledge to spread to the subcontracted party, including making technological knowledge blockage, increasing the technical standards, etc to make the subcontracted party busy with the flow upgrade and product upgrade while having no time to have more advanced organizational study. the market is the marketing knowledge, which means to understand the direction of market demand, seek possible distribution channels, and grasp the skills and methods of brand shaping through the interaction with the clients, distribution channels, and the market research institutions. Learning from the third party refers to the establishment of the strategic alliance with other enterprises, universities and scientific and research institutions, etc to absorb and learn the valuable knowledge assets from the other parties. IV.CONCLUSION The global value chain system provides a possibility for the textile OEMs to study, absorb and learn the advanced technology, management and marketing knowledge of the transnational corporations in developed countries. During this course of organizational study, the textile OEMs should rely on the platform where the transnational corporations transfer knowledge, and make use of various knowledge spread mechanisms, so as to enrich their own knowledge asset, and in turn to provide the knowledge and ability foundation for the industrial upgrade along the value chain and the entry of the high value added link. Of course, whether this study process can proceed smoothly is affected and restricted by the respective characteristics of the subcontracted party and transnational corporations as well as their relationship. In addition, the absorption of the knowledge spread by transnational corporations will promote the process upgrade and product upgrade of textile OEMs, but normally this is of no help to further function upgrade and chain upgrade. As such, to achieve the sustainable industrial upgrade of the textile industry, it is far from enough to only depend on learning from the transnational corporations. The textile OEMs should extend the organization study and use many study methods at the same. ACKNOWLEDGMENT This paper was supported by the Philosophy and Society Science Foundation of Shanghai (No. 2010BJL001), Construct Program of the Key Discipline of Shanghai Municipal Education Commission(No.J51702),Philosophy and Society Science Foundation of Zhejiang Province (No. 10CGGL01ZQ) and Natural Science Foundation of Zhejiang Province (No. Y6080012). REFERENCES In the global value chain, the learning of the textile OEMs from transnational corporations is the learning by doing, learning by using and learning by interaction (DUI) pattern. In order to achieve the sustainable industrial upgrade along the global value chain, the enterprises should expand the organizational study and explore various methods, such as learning by the research and development, learning from the market, the third party, etc. The focus of learning from the research and development is the technological knowledge. After obtaining the scientific and technological knowledge by the research and development activities, the enterprises can use such knowledge in the technology and product innovations to improve the technological ability. 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