value creation in global chains: role of finland
DESCRIPTION
Seminar Keynote (Investments and Innovations Enhancing Forest Sector Competitiveness)TRANSCRIPT
Value Creation in GlobalChains : Role of Finland
Petri Rouvinen ETLA , The Research Institute of
the Finnish Economy
Seminar on Investments and Innovations Enhancing Forest Sector Competitiveness Helsinki, Unionink. 40 B, ls. 6, 3rd floor Monday, 25 Mar. 2013, 12:30–16:00
80%of global value chains are shaped by transnational corporations
Source: UNCTAD 2013, p. iiiGlobal Value Chains and Development: Investment and Value Added Trade in the Global Economy (A preliminary analysis; Advance unedited version). Geneva: United Nations Conference on Trade and Development.
http://unctad.org/en/PublicationsLibrary/diae2013d1_en.pdf
… the service sector contributes over
50of total exports in the United States, the United Kingdom, France …
OECD-WTO Database on Trade in Value Added. First estimates: 16 January 2013.https://www.wto.org/english/res_e/statis_e/miwi_e/tradedataday13_e/oecdbrochurejanv13_e.pdf
” %
€12 €20
ChinaFactory
FranceSales office
FinlandHeadquarters
FI brand, Made in China
MoneyM
oney
€120€100€1
2
Principles of Triangle Trade
Profits Should Follow Risks
Outputs of Business UnitsShould Be Purchased
at Market Prices
88 €
Source: Ali-Yrkkö 2013.Mysteeri avautuu: Suomi globaaleissa arvoverkostoissa. Taloustieto, ETLA B257.
What the #@% !?
How to MakeSense of This?
Drawing: Hufvudstadsbladet, 8 October 2010, p. 14
Solution: Screwdriver economics! =Grass roots detective work in specific cases
ETLA startedWith an analysisOf Nokia N95Smartphone &has since doneover 40 similarcases. Globallyunique: OECD, WTO etc. followwith interest …
Mapping out the whole global supply chain from raw materials / idea generation to final purchase/use
– All direct & indirect hard & soft inputs
Value added by actors (firms/individuals), functions (R&D…)
& geographies (locations/countries) for a good/service
Nokia N95 smartphone: 600 individual components, dozens of separate pieces of software, millions of lines of embedded software
Mines, refiners, raw material traders
Component vendors and assemblers
Technology and software licensors
NokiaDistribution
channel
Mining andextraction
Traders and distributors
Refiners,traders
PureComponent
suppliers
Sub-componentsuppliers
Components manuf. by
sub-assemblers
Sub-assemblers
Finalassembly
of theengine(withoutvarying parts)
Assemblyto order(adding
customer varying
hard- and software)
Technologylicensors
Softwarelicensors
Distributors
Smallerretailers
Biggerretailers
Consumer,end-user
Processors, €34, 6%
Memories, €15, 3%
Integr.circuits, €32, 6%
Display, €22, 4%
Camera (5 mp), €17, 3%
Other parts, €59, 11%
Licenses, €21, 4%
Nokia’s operating profit, €89, 16%
Final assembly, €11, 2%Distribution, €19, 4%
Value addedin Nokia’sinternalsupportfns, €169, 31%
(Excl. Operating profit & assembly listed below)
Retailing, €60, 11%
Breakdownof the phone’s€546 (+tax) retailprice circa 2007
Refers to unbundled & unsubsidized official retail price w/o taxes. Excluding discounts & other possibly purchased products/services.
Licenses include protocols, the operating system, pre-installed software etc. Nokia is a major IPR holder in this domain & it does not pay fees to itself; thus value of its own IP is not included here. Furthermore, non-monetary payments (e.g., cross-licensing) is not included here. For a firm without own its IP, licensing fees could have be manifold.
As compared to some other studies, the cost of final assembly may seem high. Some other estimates, however, only include direct labor costs and refer to simpler goods.
Nokia’s value added covers its innovation, advertising, design, marketing, financial, legal & management costs and depreciation & investment. It also includes some aspects of outsourcing, which we are unable to separate from Nokia’s internal functions: purchases of “billable hours”, some R&D and software sub-contracting, outbound logistics, and certain external warranty & other services.
Nokia’s profit is assigned to Finland.
Based on publicly available information.
The geography of N95’s value added depends on both the locations of the final assembly (Beijing/Salo) & sale
Consider for Europe the least favorable case: a N95Made in China for consumption in the United States
China scores a €467 hi-tech export (on the basis of Nokia Beijing’s factory price)
Europe had little role in the physical goods but, in the least favorable case, EU-27 captured 51% of value added
Europe dominated intangible aspects of the supply chain
Finland(EU-27)
OtherEU-27
Asia16%
USA28%
Rest 5%
N95 from Beijing to the US – EU-27’svalue addedshare: 51%
Exports from Chinato the US on value
added basis?
Lessons of the Nokia N95 Case
Value capture detached from the physical flows – alsoin manufactures (internal) services & intangibles dominate
Assembly has moved offshore, but developed countriescapture most of the value added generated globally
China is not as dominant as a casual glance of tradestatistics would seem to suggest
Beijing Salo39% 41%
The assembly location –China versus Finland – makes no difference for Finland !?
Source: Ali-Yrkkö, Rouvinen, Seppälä & Ylä-Anttila 2011 http://v.gd/oLoC2n
Kalm & Seppälä:. ETLA Discussion Paper 1287
Lithuania Indonesia Finland58% 59% 67%
The Value Captureof Finland in Caseof a Bicycle
The Location of Assembly Is More Important in Engineering Products
Abroad In Finland24% 54%
Why? Localization of parts/supplies & supporting services
Role/location of IPRs
The location of the profit center
Transfer pricing practices
Source: Ali-Yrkkö 2013.Mysteeri avautuu: Suomi globaaleissa arvoverkostoissa. Taloustieto, ETLA B257.
1 2 3 4 5 6 7 8 9 1075 90 61 54 38 31 64 48 42 4055 51 45 26 21 20 15 5 2 2
Assembled in Finland,Finnish Value Added, %
Assembled Abroad
But the Previous Average Hides aGreat Variation Across Products*
* The calculations here assume final delivery outside Finland.
Source: Ali-Yrkkö 2013.Mysteeri avautuu: Suomi globaaleissa arvoverkostoissa. Taloustieto, ETLA B257.
• Sweet spots– Brand owner, orchestrator
– Interfacing with customers
– Gatekeeper in the chain
• Who captures value?– High-level ”supporting”
service tasks
– Creation & managementof intangible assets
Nice, but what aboutThe Forest Sector ?
Inputs & outputs often have low value/weight ratio
An intimate connection to a renewable resource base
Finland arguably the most forest-specialized country in the world – mostly a minor sector elsewhere
Relative to other sectors, less dispersed value chains
Often a narrow understanding of what the sector is
1/2 of value added captured in Finland
Assembly in Finland,profitably
Dense local networkof suppliers
Key aspect: Software
1st tier suppliers
19%
2nd and highertier suppliers
40%Logistics + Purchased services 3%
PonsseAssembly + Other
10% + 28%
* The analyzed machine is not the pictured one. Source: Ali-Yrkkö 2013.Mysteeri avautuu. Taloustieto, ETLA B257.
Sawn timber 2” by 4” *
100 % of value added created & captured in Finland …
55 % if made out of imported Russian tree trunks (logistics etc.)
* Sawn timber provided at a loss: Saleable side-products, e.g., woodchips make the process economically viable
Guesstimate of value added shares in “a typical wood-based product”
56 – 67 % Raw materials, Process/Manuf.33 – 44 % Services, Intangibles, Profits
Sowhat?
Value Creation & CaptureNation-State
GDPProduct/Service
Firm
Value Added
+ Sales price
– Purchased inputs
Value Added
Operating profit
+ Labor cost
+ Depreciation
+ Rents
Source: Ali-Yrkkö 2013.Mysteeri avautuu: Suomi globaaleissa arvoverkostoissa. Taloustieto, ETLA B257.
National Policy Goal
Labor: Finns hold tasks that
are tradable & scalableCapital: Value capture – Profits generated & shown by Finns and preferably for the Finns(ownership)
Source: Pajarinen, Rouvinen & Ylä-Anttila 2012. For Whom Does the Value Chain Smile? Finnish Engineering Industry in Global Competition (in Finnish: Kenelle arvoketju hymyilee? Koneteollisuus globaalissa kilpailussa). Helsinki: Taloustieto (Sitra 297).
The Globalization Cold Rush has ended, but globaldivision of labor continues to deepen – smart-sourcing
Our cases suggest that Finland retains advantages,even over China etc, but global pressure intensifies
While printing/publishing papers are doomed, the forest sector at large still holds a lot of promise & has a real chances to ride global megatrends
