1.1 Introduction
Learning Objectives
After reading this chapter, you should be able to understand and answer the following questions:
- Define the term value chain, global value chain and outline its components.
- Highlight the importance of international trade process, stakeholders and documents in understanding the concept of global value chain.
- Examine the relationship between global value chain and global supply chain management.
Introduction
It is easy to think that trade is just about business interests of different countries. But in real, global trade is much more. There is a convergence and, at times, a conflict of the interests of different stakeholders — from businesses to governments to local citizens. In recent years, advancements in technology, a renewed enthusiasm for entrepreneurship, and a global sentiment that favors free trade have further connected people, businesses, and markets—all flatteners that are helping expand global trade and investment. An essential part of international business is understanding the history of international trade and what motivates countries to encourage or discourage trade within their borders. In this chapter, we will look at the concept of international trade, its process, stakeholders and documents. This chapter will also provide an introduction to the concept and role of global value chains and their relation with supply chain management.
Assessing What you Already Know
Read through the following case which will help in building a framework for our discussion in further sections.
Opening Case: Q-Cells
Q-Cells exemplifies the successes and challenges of global importing and exporting. Founded in Germany in 1999, by 2010, it was experiencing losses due, in part, to mistiming some of the entry strategies.
Figure 1.1
Q-Cells
Note. Q-CELLS. From Wikimedia Commons, 2019. CC BY-SA 4.0.
First, it’s important to know that Germany is a high-cost manufacturing country compared to China or Southeast Asia. On the other hand, Germany is known for its engineering prowess. Q-Cells gambled that customers would be willing to pay a premium for German-made solar panels. The trouble was that solar cells aren’t that sophisticated or complex to manufacture, and Asian competitors were able to provide reliable products at 30 percent less cost than Q-Cells.
The Cost Advantage
Q-Cells recognized the Asian cost advantage—not only are labor and utility costs lower in Asia, but so are the selling, general, and administrative (SG&A) costs. What’s more, governments like China provide significant tax breaks to attract solar companies to their countries. So, Q-Cells opened a manufacturing plant in Malaysia. Once the Malaysian plant is fully ramped up, the costs to manufacture solar cells there will be 30 percent less than at the Q-Cells plant in Germany.
Then, Q-Cells entered into a joint venture with China-based LDK, in which Q-Cells used LDK silicon wafers to make its solar cells. The two companies also used each other’s respective expertise to market their products in China and Europe (Kessler,2009). Although the joint venture gave Q-Cells local knowledge of the Chinese market, it also locked Q-Cells into buying wafers from LDK. These wafers were priced higher than those Q-Cells could source on the spot market. As a result, Q-Cells was paying about 20 cents more for its wafers than competitors were paying. Thus, in the short term, the joint venture hurt Q-Cells. However, the company was able to renegotiate the price it would pay for LDK wafers.
To stay cost competitive, Q-Cells has decided to outsource its solar-panel production to contract manufacturer Flextronics International. Q-Cells’ competitors, SunPower Corp. and BP’s solar unit, also have outsourced production to contract manufacturers. The outsourcing has not only saved manufacturing costs but also brought the products physically closer to the Asian market where the greatest demand is currently. This has reduced the costs of shipping, breakage, and inventory carrying (Walet, 2012).
Media Attributions and References
Q CELLS. (2019, March 2). Solar module manufacturing plant in Dalton, Georgia, USA [Photograph]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Hanwha_Q_CELLS_Dalton_J_023.jpg. CC BY-SA 4.0 International.
World101. (2019, June 18). International trade explained | World101 [Video]. YouTube. https://www.youtube.com/watch?v=HfN8BnRJryQ
All the parties who participate in International Trade
Activity of Setting up a business
Purchasing from a foreign supplier
