by Pavida Pananond, Gary Gereffi, and Torben Pedersen
The coronavirus pandemic (COVID-19) has evidently become the single most disruptive event in recent months. The scale of disruptions caused by the sudden shock to global movement of goods, services and people, has put the spotlight on the supply chain management of global industries, ranging from crucial medical equipment such as face masks and ventilators to everyday staples like toilet papers and eggs.
Global value chain (GVC) management has become a buzzword in global news headlines. But not all value chains are created alike or operate in the same way. To better gauge pandemic implications on GVCs requires a better understanding of the structure, and the relationships and strategies of companies that are involved in making specific products.
In our recent paper, we proposed that managers must take into consideration how cross-border economic activities in global industries are organized and managed. Two central questions are: who controls the value chain of industries and how that control is exercised. Answering these questions provides an analytical tool to understand GVCs and to better explain how crises, such as Covid-19, could rattle and ruin global industries everywhere.
The question on who controls the value chain of industries concentrates on the different role each actor plays. Most global industries are driven by multinational enterprises (MNEs) ‘lead firms’ that play a central role in determining how products and services are created, produced, and delivered to consumers.
However, in their global expansion, these lead multinational firms often need domestic suppliers in other countries to undertake part of the value chain activities. Increasingly, supplier firms in leading emerging economies, particularly China, are playing a more significant role in many global industries and their strategies may differ from multinational lead firms.
The second question focuses on how the control of the value chain is exercised. Whether this control is internalized within the boundaries of lead MNEs, through their own subsidiaries, or extended to cover a variety of external networks of other firms, including suppliers of raw materials or outsourced logistic providers.
Answering these two crucial questions sheds more light on the mechanism that underlies different types of global industries. From lead firms’ perspective, the principle of GVC management can range from the optimization of operation efficiency such as costs, or of network value that can result from drawing knowledge and expertise of external partners.
On the other hand, when viewed through the eyes of suppliers, the key mechanism for participating in global industries could be opportunities to upgrade their skills or to co-evolve with lead firms in a sustainable manner that is also beneficial to other stakeholders, such as workers and the broader society.
Because the value chain of different global industries is driven by their own distinct mechanism, understanding these aspects enables managers and policy makers to better anticipate the direction and extent that the Covid-19 pandemic could wreak havoc on their industries.
Applying the above analytical lens can better unravel the fragility and resilience of GVCs. Take the medical supplies industries, for example. In the Covid-19 aftermath, shortages in two essential products of ventilators and face masks have led to stringent export controls in as many as 80 countries across the world in April 2020, according to the World Trade Organization.
While adjusting to sudden disruptions would require both industries to consider boosting domestic production capacity as well as diversifying overseas sources of supplies, the degree of flexibility for these two value chains may differ due to the nature of their GVC.
Although both the ventilator and face mask are both medical supplies, their value chains are rather distinct. Ventilators are a high-tech medical device with MNE lead firms in developed countries, while face mask is a more scale- and cost-driven product with a supplier-centric value chain mainly located in Asia.
For ventilators, the global trade has been concentrated in the hands of large, vertically integrated MNEs, headquartered in advanced industrial economies with subsidiaries mostly located in specialized locations of medical device production, such as Ireland, Singapore or New Zealand. Supply chain resilience for ventilators would require not only increased production capacity of companies, like Philips, GE Healthcare and Medtronics, but also expertise of logistics providers, such as DHL, FedEx and other national postal services.
The production of face masks, on the other hand, is heavily concentrated in China. Because China was the epicenter of the initial COVID-19 outbreak and because the mask value chain involves a large degree of external contracts to third-party suppliers, many countries in Asia are wooing multinational lead firms, such as 3M, to consider setting up alternative production sites in their countries. As production of face masks is much less skill-intensive, compared to ventilators, increasing resilience in face mask chains may depend more on diversifying regional production sites to countries and regions with strong demands.
Applying our framework could help unravel the complexity of GVC management in global industries. In the context of COVID-19, an increasingly urgent question has been how global industries should be organized to prepare for inevitable future shocks. This question entails a better understanding of how global value chains are structured and whether the strategy of firms involved could enable the industry to be more resilient from disruptive events like the coronavirus pandemic.
Based on:
Gereffi, G. (forthcoming). What does the COVID-19 pandemic teach us about global value chains? The case of medical supplies. Journal of International Business Policy, 3(3). DOI: 10.1057/s42214-020-00062-w.
Pananond, P., Gereffi, G., and Pedersen, T. (2020). An integrative typology of global strategy and global value chains: The management and organization of cross-border activities. Global Strategy Journal, 10(3). DOI: 10.1002/gsj.1388.