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S. Venu
K. Padmanabhan

VALUE chain analysis essentially describes the full range of activities from conception of a product/service till its disposal. Competitiveness of firms in markets necessarily means systemic competitiveness, and the efficient transformation of goods/services is only a necessary condition to succeed. This is more so in global markets where firms seek systemic efficiency in the delivery of goods/services. Value chain analysis gives useful leads to value creation as also potential areas of value migration.

Firms entering global markets need to make a choice as to which part of the value chain it wishes to participate, particularly in view of the fact that increasingly intangibles such as brands/logistics/patents capture a substantial share of the value chain. In a very simplistic sense, the value added in the conversion of goods to its final selling price will be an indicator of a firm's participation in the value chain.

Let us for example take the production of leather shoes, wherein the transformation income is $2 (output price-input cost) and the final selling price is $100 at the retail level; the firm would represent 2 per cent in the value chain process.

Lead firms in the value chain decide where and how other firms will participate in the value chain. In the context of globalisation, value chain analysis comprises buyer- driven commodity chains and producer-driven chains.

In the former, lead firms such as retailers/manufacturers searching for lower labour costs, get their products produced in Third World countries by providing designs, supervising quality and delivery, and these are typically consumer goods such as bicycles, shoes, garments etc. In producer-driven commodity chains, the lead firm sets up either on its own or with partners in developing countries, technology-intensive products such as automobiles to take advantage of lower labour costs and other systemic efficiencies (such as proximity to markets/access local markets) that may accrue. The former represents trade-related industrialisation while the later takes the form of FDI-related industrialisation.

The Indian telecom industry consists of two segments — manufacturers and service providers. The former comprises terminal services (basic telephone instrument, cordless phone etc), switching/transmission equipment (cables) and connectors. The second encompasses basic services such as exchange lines and value-added services such as cellular phones, paging, e-mails and so on. Line connection network can be regarded as a third segment. The value-addition chain of the telecom industry indicates the percentage of the price to the final end-user of each value-adding segment.

Many developing countries, including India, have concentrated on trade-driven globalisation and, with firms not moving up the value-chain, have ended up achieving immiserising growth — even while increasing overall economic activity the returns from the activity fall, which means that returns from the activity continuously erodes value.

Therefore, increased exports can only be achieved by reduced real wages, leading to ultimate closure of these firms. The same lead firms that helped establish industries move to newer locations in search of even lower prices and, in effect, many of the trade-led firms end up with products that typically behave like commodity exports of the earlier era. In effect, these Third World firms ensure that inflation in consuming countries is kept low.

Singapore, Korea, Taiwan, through active government intervention, have ensured that their firms moved up the value chain and became major beneficiaries of globalisation. India, with policies such as reservation to SSI, labour and exit policies, poor infrastructure and trade policies oriented towards low value creation, have gained through increased exports, yet lost in globalisation.

In an analysis of any value chain, there are distinct skill sets which can be classified as knowledge assets and supply capabilities. Firms and countries must plan to move away from supply capability to owning knowledge assets if they are to truly benefit from the process of globalisation. To do this, firms need to study the value chain of their product/service and decide which part of the value chain they must enter and how they plan to upgrade — for example, from being an intermediary producer to an OEM to upgrading to the final product of the OEM and, thereafter, creating design capabilities to finally branding the product. The process of doing this is indeed a long journey that will call for enormous commitment, but it is the only way by which a long-term value creation can be achieved.

In the study of value chain analysis, there are countries/firms that enjoy endogenous and exogenous factors that can make them more competitive than another firm, like the possession of raw materials or superior infrastructure. In India, infrastructure bottlenecks have been a source of lack of systemic competitiveness in spite of the fact that a given firm may have excellent transformation skills.

China went in for globalisation on the basis of "one nation two systems", where areas where industries would become globally competitive were clearly demarked, and much of its trade and FDI-related growth was achieved through this strategy. This belt was provided infrastructure of international standards, with no restrictions on entry/exit. The EPZ is indeed a poor version of the Chinese model. The entry of China in the global markets with its huge pool of trained labour force has meant that many more countries have had to exit from traditional industries making China one of the largest base for contract manufacturing. Apart from this, the huge FDI into China has also meant that this has increased Chinese capability in manufacturing, paving the way for upgrading to the next stage of the value chain.

In contrast, post-1991, it is not very clear as to what the Government wanted to achieve. The focus apparently was to build forex reserves either through trade or FDI or through other capital inflows with little attention on how to make India competitive. As a result, a number of firms entered trade-related growth to take advantage of a depreciated rupee, no taxes and government subsidies. In course of time, a narrow-minded focus on improving forex reserves without improving infrastructure will increasingly make more firms irrelevant in the globalisation process.

Distribution of income among countries and within countries can take place in the context of globalisation only if firms/countries continuously move up the value chain and avoid immiserising growth. The trickle down effect through economic growth can only take place when firms gain a higher share of the value chain.

(S. Venu is an economist and management consultant and K. Padmanabhan is Group President, Apollo Hospitals.)

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