Need for spe­cial­i­sa­tion to join global value chain

New Straits Times - - Business / News - The writer is the chief ex­ec­u­tive of­fi­cer of Malaysia Au­to­mo­tive In­sti­tute.

ONE im­por­tant talk­ing point from re­cent eco­nomic tides is the in­te­gra­tion of small and medium en­ter­prises (SMEs) into the Global Value Chain (GVC).

Tra­di­tion­ally, par­tic­i­pa­tion into the global econ­omy was based on sup­ply chain mod­els, i.e. as a busi­ness en­tity, spe­cial­is­ing in spe­cific prod­ucts and ser­vices and of­fer­ing them to the global mar­kets.

Sup­ply chain mod­els re­quire over­all own­er­ship of pro­cesses, from prod­uct devel­op­ment, logistics, op­er­a­tions and mar­ket­ing. This means that com­pa­nies aim­ing to com­pete glob­ally are re­quired them to mas­ter all the above, de­spite not hav­ing com­par­a­tive ad­van­tage of do­ing so.

On the other hand, value chain think­ing fo­cuses on value ad­di­tion to the sub-pro­cesses within the sup­ply chain. This al­lows com­pa­nies to de­velop spe­cial­i­sa­tion to a spe­cific process, which adds value to the en­tire prod­uct devel­op­ment and de­liv­ery cy­cle.

For ex­am­ple, a steer­ing wheel mod­ule re­quires nu­mer­ous spe­cial­i­sa­tions to com­plete, in­clud­ing plas­tic in­jec­tion, steel form­ing, air bag mod­ule assem­bly, and leather stitch­ing.

Within these sub-pro­cesses, spe­cial­i­sa­tions are re­quired at each level, in­clud­ing re­search and devel­op­ment on both prod­uct func­tion and ma­te­ri­als se­lec­tion, mar­ket­ing knowl­edge, process ex­per­tise, logistics and even pro­to­typ­ing ca­pa­bil­i­ties.

This need to de­velop a wide range of spe­cial­i­sa­tion has, for quite some time, de­terred SMEs from en­ter­ing the global mar­ket, hand­i­capped by mas­sive cap­i­tal risk and tal­ent needs.

Trends show that this will change, most likely re­sult­ing in a mi­gra­tion of sup­ply chain mod­els to a global value chain model.

This opens op­por­tu­ni­ties for SMEs to start pen­e­trat­ing the global mar­kets through the spe­cial­i­sa­tion of spe­cific pro­cesses, re­duc­ing cap­i­tal ex­pen­di­ture and fo­cussing on pro­cesses they are best at.

If the re­gion has learned any­thing from the 2011 To­huku earth­quake and floods in Thai­land, it should be that sup­ply chain mod­els of­ten re­sult in sin­gle sourc­ing, which is ex­tremely vul­ner­a­ble to dis­rup­tions such as the nat­u­ral dis­as­ters.

Orig­i­nal equip­ment man­u­fac­tur­ers (OEMs) around the world are now re­al­is­ing they can never be sus­tain­able with­out sus­tain­able value chains.

There­fore, it is high time that Malaysian busi­nesses start look­ing into new busi­ness mod­els.

Firstly, we must start recog­nis­ing that cheap labour, which used to be our com­pet­i­tive ad­van­tage some decades ago, has been re­placed with many over-qual­i­fied grad­u­ates seek­ing chal­lenges in a high-in­come econ­omy.

This means that we have reached the point where we can­not be con­sumers of tech­nol­ogy, but are tech­nol­ogy-based in­no­va­tors — pos­sess­ing the abil­i­ties and ca­pac­i­ties to bridge read­ily avail­able tech­nol­ogy and util­is­ing them to breed and cre­ate new value-adding ac­tiv­i­ties.

OEMs around the world are sourc­ing their parts and ser­vices from around the globe. At the same time, the fourth in­dus­trial rev­o­lu­tion has al­lowed a level of com­mu­ni­ca­tion and process dig­i­tal­i­sa­tion that has paved the way for more SMEs to be part of the global value chain.

If there is such a time for our do­mes­tic in­dus­try to breach its glass ceil­ing, that time is now.

BLOOMBERG PIC

An air­craft pro­duc­tion line at Boe­ing’s fi­nal assem­bly fa­cil­ity in Charleston, the United States. Boe­ing is a mas­ter at set­ting up global sup­ply chains.

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