Electronics industry in central Europe: Explaining the emergence of a new global production location

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Electronics industry in central Europe
Explaining the emergence of a new global
production location

• Dr Slavo Radosevic
• s.radosevic_at_ssees.ucl.ac.uk

School of Slavonic and East European Studies
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Background

• The way countries integrate at a micro-level into
  the global economy will have important effects on
  their long-term growth
• Market integration necessary but not sufficient
  condition
• Industry integration (production and technology)
  neglected aspect of integration gt assumed that
  follows automatically from market integration

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Our perspective

• Whether FDI will lead to growth depends on a
  variety of micro/mezzo/macro factors and
  complementarities among them
• Morphology of industry networks is the key to
  understanding what we may expect from FDI in
  growth
• International business (business networks MNCs)
  
• Political economy (governance systems)
• Corporate, local, national, EU governance
• Political economy that is centered on firm
  behavior gt a variety of institutional
  relationships matter to firm behavior.

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Key problem

• Industrial dynamics is open system gt multi-level
  and multi-dimensional gt which variables to
  include?

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Network alignment conceptual basis

• Network alignment effective coupling between
  the evolution of national specific systems and
  the global (regional) production networks.
• The issue is not only 'the question of developing
  networks but of integrating locally and
  nationally emerging networks with global network
  structures' (Kim and Tunzelmann, 1998, p. 1).
• Nature of individual networks Network linkages
• Our perspective the ways in, which markets,
  firms, CEE states and EU actions can bring about
  the 'alignment' of these networks.

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Networks and their alignment II

• Global networks
• closed/open
• frontrunners followers peripheral lock out
  networks
• Domestic firms
• growth issues (market. technology, finance gaps)
• control issues (privatisation)
• State
• Strategic FDI policy
• Privatisation policy
• Trade regulations
• Local governments
• EU
• EU regulations

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Questions

• How do we explain the emergence of central Europe
  as global production location in electronics?
• What management and policy lessons we can draw
  from the success of CEE electronics?

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Major companies

• OEM
• Philips
• Siemens
• IBM
• Nokia
• Ericsson
• Motorola
• Sony
• Matshushita
• Samsung

• CEM
• Flextronics
• Celestica
• Jabil
• Solectron
• Elcoteq
• Endogenous manufacturers
• Videoton
• Tesla Ecimex

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Investors perspective on CEECs tiering of the
region

• CEE sweet spots (Hungary, Czech R and Poland)
• Developing CEE (Romania, Bulgaria, Baltics)
• Future CEE low cost bases (Serbia, Belarus,
  Ukraine, Russia, Bosnia, Moldova)

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Structural change in electronics industry works
in favour of CE as production location

• from highly localised to highly globalised
  production pattern
• decoupling of manufacturing from product
  development and their dispersion across firms and
  national boundaries
• focus on reducing costs of integral supply chain
  through outsourcing, relocation to low cost
  sites, reduction in number of suppliers, common
  standards to improve flexibility and global
  product range
• shift from expensive to cheaper areas but also to
  locate close to main markets in order to achieve
  flexibility

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Patterns of upgrading

• Specialized operators
• Hungary European product mandates
• Extensive production capability upgrading
• Rare functional upgrading
• From subcontracting to FDI
• Critical mass?
• Clustering among MNCs

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Relatively favourable quality of general factors
of relevance for electronics industry..
but huge technology gap in electronics market
access gap finance gap (cash flow problem) .

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What explains the emergence of CE as global
production location?

• Factor advantages by themselves cannot explain
  why CE has emerged as global production location
• Favourable constellation of network alignment
  elements has produced virtuous circle in Hungary
  and Czech R
• but its effects are limited on production
  capabilities and on few countries
• How to spread gains in achieved production
  capabilities to technology activities (functional
  upgrading?) given rise in labour costs
• FDI in RD and SW is primarily in stand
  alone investments
• Weaknesses of national systems of innovation and
  of local firms, in particular

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Network alignment elements in CEE electronics
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Case study Videoton

• The success stories will not be the vast
  government organisations that are easy to
  identify - Robotron in what was once East
  Germany, Videoton in Hungary, Iskra in Yugoslavia
  - but companies founded by men and women whose
  names are as yet unfamiliar
• Harvard Business Review, January February 1991,
  p. 26, Micro Capitalism Eastern Europes
  Computer Future by Esther Dyson

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Videoton a step back in value added chain

• State owned enterprise (1945 gt)
• - Military, hunting rifle cartridges
• - Bicycle motors
• - Consumer radio sets
• - BW Television
• - Loudspeaker system
• - Military radio transceivers
• - Car stereo system
• - Computers, terminals
• - Colour TVs
• - Line printers
• - Defence communication systems

• Privatised 1992
• Contract manufacturing (95)
• Export 80
• OBM (5)
• Loudspeaker system
• Colour TVs
• Defence communication system
• CDs

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Contract manufacturing the basis for survival
and growth Downsize radically, stop developing
new products, focus on labour intensive
manufacturing to serve MNCs Services -
qualified middle management and labour - -
flexible technological base and facilities - -
reduced investment risks and costs - - quick
project start up time - - openness towards
innovation for strategic partners - We dont
want the high cost and risk of marketing our own
products
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CD Ltd. (1993), 100, from the Dutch partner.
Acquisition
MBKE Ltd. (1997), 100, from Austrian owner
BRG Radiotechnika Ltd., (1999), 1000, ?
DZU, (1999), 51, Bulgarian government
Informatics Ltd., to Philips, 1995.
Television Ltd. and Galvano Plastic Ltd., to MB
Video, 1995.
Subcontracting
Mechatronics Ltd., to IBM, 1995.
Informatics Ltd., to Alcoa Fujikura, 1995.
AFL-VT Electronics Ltd., to AFL-Stribel, 1995.
VT Kenwood Ltd., to Kenwood (France), 1996.
VT MBKE Ltd., to Sanyo, 1998.
Videoton Holding
VT MBKE Ltd., to Philips, 1998.
VT, to VW, 1998.
MT-Liz Ltd. (1989), VT 49, Muszertechnika 49,
15 private investors 2.
VT Fuba Ltd. (1994), VT and Fuba Printed
Circuits GmbH.
Joint Ventures
VT Artrans Ltd. (1996), VT and a private
Hungarian firm (?).
Hungarian Speaker Systems Ltd., VT and Philips.
VT-t Hybrid Electronics Ltd. and VT Soft Ltd.
VT Slider Ltd., leasing to IBM, 1996.
Motorola, a regional service centre, 1998.
Alliances
Goodsman Loudspeaker Ltd. provide production
lines of the newly established loudspeaker
plant, 1999.
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VT Holding as a network organiser

• Fortunately attempts to break up VT holding
  failed
• Advantages and disadvantages of holdings
• concentration of strategic functions
• managing firms as profit and cost centres
• credibility
• cost of finance
• Entrepreneurship in a large firm

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• Industrial parks and local networks
• VT as a facilitator
• Local government (Szekesfehervar)
• Relations with government
• Productive rents
• head start all liabilities forgiven
• industrial park development programme
• preferential loan for privatisation deals
• VT goes east Europe
• DZU Stara Zagora - Bulgaria

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Key management challenge How to avoid
subcontracting trap?
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VT conclusion

• Entrepreneurship
• Network alignment
• MNCs
• Government keen on attracting FDI
• Local government
• EU accession

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CEE Electronics Conclusions I

• FDI gt the primary vehicle of integration of the
  CEE electronics firms into global production
  networks,
• Hungary has moved the furthest along this path,
  positioning itself as a major low-cost supply
  base in the region.
• Central Europe (Hun, Cz R, Pol) as the first tier
  gt Other countries the emerging second tier
• EU the main source of demand for the CEE
  electronics industry.
• Networks reflect the strategy of the dominant
  actor MNC gt confined on subsidiary with still
  limited local subcontracting, are export oriented
  and are expanding.
• Local subsidiaries gt mastered production
  capabilities several subsidiaries in Hungary
  are European Product Mandate Suppliers

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CEE electronics Conclusions II

• Ex-socialist electronics conglomerates gt
  significantly reduced loose associations of
  SMEs
• Videoton gt notable exception
• Layer of local firms gt weak with very limited
  capabilities in core technologies.
• This is the key weakness for further alignment of
  networks in the CEE electronics gt the local
  networks will remain very much dependent on
  foreign investors
• Local governments in Hungary and Poland play an
  important role in network alignment
• Hungary, and after 1996 in Czech R gt national
  government played an important role in attracting
  FDI in electronics.

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Industrial networks in CEE areorganised by MNCs
and are limited in scope (mainly intra-firm)

• Emerging linkages are confined on parent firm and
  local subsidiary and their subcontractors in some
  cases.
• Strategies of MNCs are shaping the profile and
  objectives of these networks

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The weakest node for further industry upgrading
via network alignment are national networks

• National networks Large and small local firms,
  their mutual links and their links to
  infrastructure organizations (university,
  services)
• Local firms are the weakest as potential network
  organizers
• Emergence of few domestic firms that operate as
  network organizers gt seed of potentially
  different pattern of industry upgrading
• Local champions of opening gt firms that grow
  based on networking with foreign firms

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EU demand operates as a strong focal point
(attractor) to the emergence of new industry
networks

• EU demand generates necessary coherence for
  initial and still rudimentary local clustering
  organized by MNCs
• However, accession to EU seem to play secondary
  role

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Regions are emerging as important players in
aligning local and foreign networks

• despite limited decentralization and lack of
  financial autonomy
• Large room for the EU policy actions
• but also need to avoid old recipes

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Policy implications I

• Policy should aim to identify relevant
  complementarities between firm and region
  specific advantages and disadvantages.
• Alignment of different networks cannot be
  enhanced by centralized and coordinated change.
  The real policy challenge is to know what are the
  triggering or missing elements that might
  generate complementarities between national and
  global production and technology networks.
• Rather than trying to be generally attractive to
  foreign investors policy should aim to develop
  those parts of its infrastructure and national
  innovation system that complement the business
  strategies of companies that are moving towards
  knowledge based activities.

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Policy II Support the weakest link!

• Given that domestic large and small firm are the
  weakest links in network alignment there is a
  strong need to enhance NSI of the CEECs within
  the wide EU system of innovation (cf. support
  local and international networking and diffusion
  activities)
• Danger of FDI as the only industrial policy

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Policy III Two steps forward one step back

• EU accession will take further away prerogatives
  for decision making from CEECs in areas like FEZ
  and tax incentives
• (cf. FEZ are the second best institutions)
• EU actions will have to compensate for reduced
  policy freedom with respect to FEZ and tax
  incentives by enhancing first based
  institutional solutions
• Interim outcome may not be positive!

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Window of opportunity strategic FDI policies

• 1st generation policies liberalization of FDI
  flows
• 2nd generation marketing of countries as
  locations and setting of national investment
  agencies
• 3rd generation targeting of foreign investors at
  the levels of industries and clusters
• CEECs should learn fast to implement 2nd and 3rd
  generation polices (cf. CzechInvest as role
  model)
• Strategic FDI policy as the second best policy
  option

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Policy proposal EU wide FDI contests

• Even after the EU accession CEs have remained
  heavily dependent on FDI for industry upgrading
• Instead of trying to limit competition for FDI
  between EU regions EU should use contests for FDI
  between regions as a mechanism to improve
  business environment in the weakest regions
• Purposes
• An incentive device
• Coordination device
• Mechanism to share policy knowledge
• Key policy challenge how to couple policy
  towards value chains and NSI