Advancing Manufacturing Capabilities in China and India

1. The Globalization Process: Advancing Capabilities in Chinese and Indian Manufacturing

2. 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

3. The “Capability” Concept • At one level, this is a straightforward generalisation of the standard concept of productivity.

4. 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.

5. Capabilities d u c = ‘productivity’ u = ‘quality’ c d Capability is a pair (c, u) for each technical trajectory (submarket)

6. u (Quality) x x u/c = a x u/c = b 1/c (Productivity) Competing in Capabilities

7. 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

8. 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)

10. 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’.

11. Two Polar Patterns ESCALATION PROLIFERATION Flowmeters Aircraft

12. σ Linkages Across Submarkets Large Commercial Jets β Effectiveness of Capability Building Flowmeters Numerical controls Machine Tools Cement

13. σ Linkages Across Submarkets β Effectiveness of Capability Building High Concentration Narrow Window High R&D intensity Low Concentration Wide Window High R&D intensity Low concentration Wide Window Low R&D intensity

14. 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

15. The Globalization Process • Phase I: Impact phase…Capabilities given • Phase II: Transfer phase • Phase III: Re-investment (escalation) phase

16. Main substantive argument • 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.

17. Going it Alone • The Bharat Forge story • Increasingly difficult as we move across industrial spectrum

18. 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”

19. 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

20. Industry Specific influences • Textiles and apparel..Contact with Buyers(Ever Glory) • Steel: Equipment Suppliers(Shougang)

21. Changing Market Structures • Escalation and Shakeout : Chinese White Goods ; Beer • Market Share Volatility • Changing Leadership : Chinese TVs

22. A Tale of Two Industries :I Auto Components • …Globally integrated • … Capabilities codified • ...Supply Chain aligns incentives

23. Car Production 800,000 700,000 600,000 500,000 India million/yr 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

26. 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

27. The Mahindra Story

28. II : Machine Tools • Globally Fragmented • Supply Chain plays no role • Bilateral licencing deals • Some successful collaborations • Huge loss of position by Indian leaders • Chinese experience mixed

29. CNC Machine Tools

30. The Invidious Trade-Off controls ball-screws 55% wages Bought-in Components 15% 15% 15% Materials, Energy costs, etc. A typical cost breakdown

31. 3-axis, 15 kW Japan size & complexity 11 kW, 350mm India Taiwan 7.5 kW, 165mm 0.25 1 4 Gross Labour Productivity

32. Japan 5 10 15 20 Taiwan India* 10 100 1000 Japan Taiwan India* Design staff (% of employees) Design staff (no. of employees) Figure 3. 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.

33. 25 20 15 10 5 0 -1 3 -3 -2 0 1 2 Figure 5. 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.

34. 30 25 20 15 10 5 0 4 2 0 6 8 10 -8 >-8 -6 -4 -2 <10 Figure 7. Difference in % lost hours due to breakdown/no of machine hours booked. (Indian-Foreign)

35. ACE Designers • Small new entrant • Understands importance of quality/ price nexus • Focus on building capability in one core product

36. China in Machine Tools • Now exporting basic CNC machines • Serious challenges to capability building

37. OECD Perspectives • The Bernard – Schott Evidence • Survival and Flexibility • The European Debate and ‘Social Europe’ • Unfortunate Confusions