Regional supply base

By the end of the 1970s, US electronics firms were almost completely dependent

on Japanese competitors for the supply of the underlying component technologies

(for example tuners, picture tubes, recording heads, miniature motors) necessary

to produce consumer electronics products. In most cases, thoroughgoing

technology dependence was a first step toward market exit. US firms were far

enough removed from the technological state of the art to impede new product

development, and, as a result, their principal competitors could dictate the timeto-market, product cost, and feature quality. Under those circumstances, profits

were minimal if any were to be had at all. By 1980 most major US firms had

exited the consumer segment of the market, and the remaining players like GE

and RCA survived largely by putting their brands on Japanese OEM production.

A few years later, even RCA and GE, who had created most of the consumer

electronic technologies that Japanese firms perfected, left the business.

The loss of the high-volume demand of consumer electronics eroded the US

supply basefor the other segments of the electronics industry, and threatened them

with an equally, competitively constraining architecture of supply. The supply base

is the local capability to supply the component, machinery, materials, and control

technologies (e.g. software) and the associated know-how that producers use to

develop and manufacture products. The architecture of supply is the structure of

the markets and other organized interactions (such as joint development) through

which underlying technologies reach producers. In effect, US producers of

industrial electronics such as computers and communications were in danger of

becoming dependent on their Japanese competitors for memory chips, displays,

precision components, and a wealth of the other essential technologies and

associated manufacturing skills that went into electronic systems. The only

alternative to increasing dependence on a closed oligopoly of rivals was to make

the supply architecture more open and competitive. In conjunction with government policies and local private investors in Asia, US firms gradually turned

their Asian production networks into a flexible alternative to Japanese suppliers.

The transformation from affiliates based on low-cost labor to an alternative

supply base occurred in three stages: an initial stage from the late 1960s to late

1970s during which US firms established their presence through foreign direct

investments; a second stage in which their Asian affiliates developed extensive

local relationships in the shadow of the dollar appreciation from 1980–5; and a

third stage from the late 1980s through the early 1990s, when the technical

capabilities in their regional production networks were significantly upgraded and

local affiliates gained global product responsibilities. The US progression from

simple assembly affiliate to technologically able Asian production network

contrasts sharply with the development pattern of Japanese investments in the

region over the same time period. A brief review of key developments in each of

the three stages will highlight the differences.

After an earlier round of market access investments by a few large US MNCs

(notably IBM, GE, and RCA), most US electronics firms in the 1960s sought not

market access but cheap production locations in Asia. US investment was led by

US chipmakers, then consumer electronics and calculator producers, and finally,

toward the end of the 1970s, producers of industrial electronic systems like

computers and peripherals. Most of the US investments in this first stage

established local assembly affiliates. Cheap but disciplined Asian labor permitted US firms to compete on price at home and in Europe. Right from the start, then, the

Asian affiliates of US electronics firms were established as part of a multinational

production network to serve advanced country markets. Japanese investment was often turnkey, with knockdown kits exported from Japan for local final assembly and sale in the local affiliate’s domestic market. While the Japanese and US investments in this first stage were both oriented to simple assembly and superficially appear similar, the vastly different markets being served pulled their respective investments in divergent directions.

Consider the resulting logic of sunk investment for the two sets of firms. Because

their Asian affiliates were integrated into a production operation serving advanced

country markets, US firms upgraded their Asian investments in line with the pace

of development of the lead market being served, the US market. In essence, they

upgraded in line with US rather than local product cycles. By contrast, Japanese

firms were led to upgrade the technological capacities of their Asian investments

only at the slower pace necessary to serve lagging local markets. As local US

affiliates became more sophisticated through several rounds of reinvestment, a

division of labor premised on increasing local technical specialization developed

throughout the US firms’ global production operations. Local needs began to

diverge from those elsewhere in the United States and the overall operations and affiliates of firms were sought out, and, where necessary, local partners were

trained to meet them.

To be sure, the growth of local autonomy and relationships was constrained by

overall corporate strategies (e.g. where economies of scale dictated a global rather

than local sourcing arrangement), but over time US investments still led to greater

technology transfer and increasing technological capabilities for locals. By

contrast, stuck in developing market product cycles, offshore Japanese affiliates

benefited from no such incentives to upgrade and no need to develop local supply

relationships. Japanese firms served the domestic and US markets wholly from

home. Whatever their lagging Asian affiliates needed could be easily supplied from

Japan. As local Asian markets demanded the marginally more sophisticated goods

whose product cycles had already peaked in the advanced countries, the entire

production capability for those could also be transferred from Japan. Overall, less

technology was transferred, and even that remained locked up within the Japanese

firms’ more limited circle of relations.

Thus, during the second stage (1980–5) US-owned assembly platforms were

upgraded and enhanced technically to include more value-added, e.g. from

assembly to test in chips, from hand to automation assembly techniques, from

simple assembly of PCBs to more complex subsystems and final assembly in

industrial electronics. As they gained more autonomy, US affiliates began to

source more parts and components locally (a range of mechanical parts, monitors,

discrete chips, and power supplies). As US affiliates developed and as the US

industry exited the consumer segment, local electronics producers in places like

Taiwan began to concentrate more and more of their own investment (and their

government’s attentions) on industrial electronics. As these developments

occurred, the contour began to appear of an ever more elaborate and deepening

technical division of labor between US and Asian-based operations, bound

together in production networks serving US firms’ advanced country markets. In

essence, a new supply base was being created in Asia under the control of US and

local, but not Japanese capital.

Indeed, while Asia’s indigenous electronics capabilities (excluding Japan)

developed in close symbiosis with the strategies and activities of American

MNCs, they were driven by local private investment and supported by

government policies. Outside of Korea (where the chaeboldominated domestic

electronics development), resident ethnic Chinese investors played the principal,

private entrepreneurial role in the China circle, Singapore, and later in Malaysia,

Indonesia, and Thailand. During this period, in the NICs (and later in Southeast

Asia) governments provided a panoply of fiscal and tax incentives, invested

heavily in modern infrastructure, generic technology development, and the

technical upgrading of the work force, engaged in selective strategic trade

interventions, and in some cases, even provided market intelligence and product

development roadmaps. The aims were both to plug into the developing

multinational production networks in the region and to use them as a lever

toward autonomous capabilities. The result, by the end of the 1980s, was burgeoning indigenous electronics production throughout the region, with most

of it outside of Korea, under the control of overseas Chinese (OC) capital.