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Locating Global Advantage Industry Dynamics In The International Economy Martin Kenney Editor Richard Florida Editor

Locating Global Advantage Industry Dynamics In The International Economy Martin Kenney Editor Richard Florida Editor Locating Global Advantage Industry Dynamics In The International Economy Martin Kenney Editor Richard Florida Editor Locating Global Advantage Industry Dynamics In The International Economy Martin Kenney Editor Richard Florida Editor

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Locating Global Advantage Industry Dynamics in the International Economy
Innovation and Technology in the World Economy a series edited by Martin Kenney, University of California, Davis / Berkeley Round Table on the International Economy Bruce Kogut, Wharton School, University of Pennsylvania Urs von Burg, The Triumph of Ethernet: Technological Communities and the Battle for the LAN Standard Gary Fields, Territories of Profit: Communications, Capitalist Development, and the Innovative Enterprises of G. F. Swift and Dell Computer Martin Kenney and Richard Florida, eds., Locating Global Advantage: Industry Dynamics in the International Economy
Locating Global Advantage Industry Dynamics in the International Economy Edited by Martin Kenney with Richard Florida Stanford University Press, Stanford, California, 2004
Stanford University Press Stanford, California ©2004 by the Board of Trustees of the Leland Stanford Junior University Printed in the United States of America Library of Congress Cataloging-in-Publication Data Kenney, Martin Locating global advantage : industry dynamics in the international economy / edited by Martin Kenney with Richard Florida. p. cm. — (Innovation and technology in the world economy) Includes bibliographical references and index. isbn 0-8047-4757-1 (alk. paper) — isbn 0-8047-4758-x (pbk. : alk. paper) 1. International economic integration. 2. International business enterprises. 3. Globalization. 4. Electronic industries—Location. I. Kenney, Martin. II. Florida, Richard L. III. Series hf1418.5 .l33 2004 2003018429 338.8'8—dc21 This book is printed on acid-free, archival-quality paper. Original printing 2004 Typeset at Stanford University Press in 10/12.5 Minion
Acknowledgments The papers in this book are the result of four workshops funded by the Sloan Foundation. We also thank three graduate students, Jennifer Bair, Theresa Lynch, and Greg Linden, who helped organize parallel graduate student work- shops. Our workshops were enriched by the participation of Avron Barr, Lee Branstetter, Tim Bresnahan, Steve Cohen, Rob Feenstra, Gary Gereffi, Gor- don Hanson, Bruce Kogut, William Miller, Shirley Tessler, and John Zysman. The authors of all eight industry chapters and the editors acknowledge the Alfred P. Sloan Foundation for the research support that made these papers and this book possible. Special thanks go to Hirsh Cohen, Frank Mayadas, and Gail Pesyna, the project officers, who encouraged all of the contributors to pursue their interest in better understanding how industries globalize. Pa- tient, understanding, and committed project officers are essential for this type of research. We would like to thank Gary Fields, Nichola Lowe, and Tim Sturgeon for invaluable suggestions, and we gratefully acknowledge the efforts and sug- gestions of three reviewers. We also thank Sarah Brassmassery and Allison Gillespie for their assistance throughout this project. We both thank the au- thors for being so willing to help facilitate the process of putting this volume together. Patricia Katayama and Nathan McBrien of Stanford University Press helped mightily in making this book a reality. M.K. R.F.
Contents Preface: In Vino Veritas? xiii paul duguid Contributors xxvii 1. Introduction 1 martin kenney PART ONE 2. Globalization in the Apparel and Textile Industries: What Is New and What Is Not? 23 frederick h. abernathy, john t. dunlop, janice h. hammond, and david weil 3. Globalization, Deverticalization, and Employment in the Motor Vehicle Industry 52 timothy sturgeon and richard florida 4. The Shifting Value Chain: The Television Industry in North America 82 martin kenney PART TWO 5. The Organizational and Geographic Configuration of the Personal Computer Value Chain 113 james curry and martin kenney
viii / Contents 6. Leveraging Locations: Hard Disk Drive Producers in International Competition 142 david g. mckendrick 7. Industry Creation and the New Geography of Innovation: The Case of Flat Panel Displays 175 thomas p. murtha, stefanie ann lenway, and jeffrey a. hart 8. Globalization of Semiconductors: Do Real Men Have Fabs, or Virtual Fabs? 203 robert c. leachman and chien h. leachman 9. The Net World Order’s Influence on Global Leadership in the Semiconductor Industry 232 greg linden, clair brown, and melissa m. appleyard PART THREE 10. Conclusion: From Regions and Firms to Multinational Highways: Knowledge and Its Diffusion as a Factor in the Globalization of Industries 261 bruce kogut References 283 Index 301
Tables 2.1 Change in Import Share for Quota Constrained and Unconstrained Product Baskets, China/Hong Kong Quotas, 1990–1998 34 2.2 Top Ten Imports by Product Category and Volume Shipped: Mexico and China, 1991 and 1999 36 2.3 Product Composition and Replenishment Status: Mexico and China, 1991 versus 1999 38 3.1 The Eight Effects of Globalization 56 3.2 Vehicle and Parts Trade between Mexico and the United States, 1994–1998 61 3.3 Total and Intra-regional Exports of Finished Vehicles from Canada, Mexico, Spain, and East Europe, 1994–98 62 3.4 Top Fourteen Motor Vehicle Parts Suppliers, 1995 and 2000: Rank by Home Region and Country, 1995–2000 Compound Annual Growth Rate 72 3.5 Top Fourteen Motor Vehicle Parts Suppliers, Percentage of Sales in North America, 1995 and 2000 73 3.6 Regional Share of Motor Vehicle Sector Employment and Relative Wages 76 4.1 The Ten Largest CTV Manufacturers in the World, 1978 84 4.2 The Ten Largest CTV Manufacturers in the World, 1987 84 4.3 The Ten Largest CTV Manufacturers in the World, 1997 85 4.4 The Status of Japanese Television Assembly Plants in the U.S. as of 1999 95 4.5 Television Assembly Plants in tU.S., by Location, Product, and Employment, 1999 100 4.6 World’s Largest Television CPT Producers in Units, 1981 and 1995 107
x / Tables 5.1 PC Assembler Business Models 121 5.2 Global Ranking of PC Sales by Units, First Quarter 2003, 2001, 1999, 1997, and 1990 127 5.3 Global Location of U.S. PC Firms’ Factories 128 5.4 The Value and Time Sensitivity of Personal Computer Components 130 5.5 Financial Results for Selected Firms in the PC Value Chain, 2000 131 6.1 Dynamics of Industry Location and Benefits: HDD in Southeast Asia 160 6.2 The Geographic Pattern of Employment in Seagate, 1981–98 164 6.3 Summary Characteristics of Firms Assembling in Southeast Asia 170 7.1 Main Commercial Generations of Color TFT LCD Substrates 185 8.1 Comparison of Revenue per Wafer in Different Segments of the Industry 207 8.2 Regional Shares of Worldwide Fabrication Capacity 210 8.3 Distribution by Country of Fabrication Capacity in the Asia Pacific Region 210 8.4 Distribution of Worldwide Fabrication Capacity by Region of Ownership 211 8.5 Distribution of Fabrication Capacity by Product Type 212 8.6 Distribution of Pure-Play Foundry Capacity 212 8.7 Industry Ranking of Criteria for Locating Fabrication Facilities 226 9.1 The Chip Markets of the Net World Order 236 9.2 Market Attributes in the Net World Order 237 9.3 The Relevance of Competencies in the Net World Order 240 9.4 Value Chain Configurations of the Net World Order 244 9.5 Regional Chip Consumption by Product Markets, 2000 248 9.6 Home Substitution Index for Global Semiconductor Sales, 1992–2000 253 10.1 Estimated Failure Rates of Foreign Subsidiaries 271
Figures 2.1 Impact of Short Cycle Manufacturing on Profits and Inventory, Simulation Results 28 2.2 Changes in the Sources of U.S. Apparel Imports, 1984 and 2000 30 2.3 Trend in Apparel Imports: Physical Imports to the United States, 1988–2000 32 2.4 Trend in Apparel Imports: Value of Shipments from Two Regions to the United States, 1991–2000 32 3.1 U.S. Motor Vehicle Industry Assembly and Parts Employment, 1958–2000 54 3.2 Average Hourly Earnings of U.S. Production Workers in Manufacturing and Motor Vehicle Assembly and Parts, 1958–2000 54 3.3 From Part to Module to System 75 5.1 Taiwan’s IT Hardware Industry’s Overseas Production, 1998 and 1999 135 6.1 Seagate: Highest Capacity Drive at Each Production Location 162 8.1 Growth of Worldwide Semiconductor Fabrication Capacity 209 9.1 Sales of Semiconductors by Final Product Market, 1988–2000 235 9.2 Share of Worldwide Sales by Top 40 Semiconductor Firms, Grouped by Region, 1980–2000 251 10.1 Comparative Advantage and the Location of Economic Activities 263
Preface In Vino Veritas? p a u l d u g u i d Is there truth in wine as Pliny said? Or is there just a brief flash of delusive (if delightful) insight that soon gives way to dullness? I shall leave that to read- ers of this preface to decide. But as I read the intriguing essays in this book I was frequently reminded of the eighteenth- and nineteenth-century wine trade. Before I try to show why, I must quickly acknowledge that, as Aber- nathy et al. wisely note in their chapter, there is undoubtedly something profoundly new about the new globalization. It is this new new thing that the different case studies and Kenney’s and Kogut’s broad overviews address so well. Nonetheless, historians of earlier global trade will find in these exem- plary case studies much that is familiar. In the wine trade, for example, as in the modern economy, commodities came from numerous competing points of production, covered vast distances, and passed through multiple hands to reach the major international market. Before the twentieth century, that major market was Britain. Here production was negligible, but because con- sumption was prodigious, merchants could exert significant influence back along the whole chain. This collection makes a similar point about supply chains that lead from overseas production to consumers in the United States, where production dwindles as consumption grows, and with it control over the supply chain.1 But, critically, these essays are not simply about chains, industries, or markets. They are also about particular firms. Directly or indirectly, each es- say records the ability of particular firms—specific links in these long supply chains—to achieve relative autonomy, and in the process assert control over the chain as a whole without, intriguingly, having to resort to formal inte-
xiv / Preface gration. This “action at a distance”—both spatially and organizationally—is a distinctive feature of the new globalization, as firms disaggregate the old hi- erarchical forms. There are, in particular, several discussions here of “pressures” and “squeezes” exerted by dominant players over subordinate ones. While there are many clear examples, the most outstanding is surely McKendrick’s stark account that 196 million disk drives are manufactured by eight firms but result in no significant profit. That is a squeeze indeed. Such examples of supply chain subordination prompt me to wonder who gets to dominate, how, and how they manage to hold on, despite the dra- matic pace of change that Kenney rightly emphasizes in his introduction. Clearly, many of the successful firms described here have risen to both prominence and relative dominance in their particular supply chain without having to assume formal upstream or downstream control through integra- tion. Yet from what point they dominate seems highly variable. Sometimes it’s retail (Wal-Mart in clothing and apparel markets), sometimes it’s an OEM (Dell and Hewlett Packard, whose rise up Curry and Kenney’s Table 5.2 is perhaps as remarkable as it is unremarked, in the PC market),2 some- times it’s a major producer (Intel in the chip business), and sometimes (though not a central topic of discussion here) a software firm (such as Mi- crosoft in the PC value chain). Undoubtedly, there are numerous contrib- uting factors, many with a particularly modern character, and several that are quite industry specific. But this action at a distance, this struggle for domi- nance in global supply chains, was also, I shall try to show, a distinctive fea- ture of the old globalization. So a look at the era when firms traded globally (admittedly in a smaller world) but before they were hierarchically integrated might still throw some light on the challenges facing globally active firms to- day now that many have disaggregated.3 A brief glance at a longish durée (some two hundred years) in the history of the port wine trade reveals power similarly accruing to particular points in the chain, allowing particular firms not only to compete effectively with ri- vals but also to dominate their suppliers and even their customers. For while they must cooperate, links in these chains inevitably live in tension with one another. And as the case studies here suggest, significant rents accrue to the dominant link while others both up and down the chain get squeezed. (We’d surely all rather be Intel than a beleaguered packaging and testing house in Southeast Asia.) “Winning” the game of “vertical competition,” as Curry and Kenney suggest, can be as important (and rewarding) as beating your com- petitors in the marketplace.
Preface / xv A Short History of the Port Trade If, as several writers in this volume claim, history matters, then wine should certainly tell us something about international trade. It is one of the oldest international commodities. Heroditus speaks of boats carrying wine to Babylon in the sixth century b.c.e. A century later, Greek trade was suffi- ciently important (and lucrative) to be the subject of legislation. Pliny’s Natural History includes some forty foreign wines among the ninety varieties available in Rome at the beginning of the Christian era. If the Dark Ages were not much kinder to wine than to learning (Goths, Vandals, and Huns, with their strong preference for beer and violence, seem to have been the linear ancestors of Britain’s “lager louts”), the Middle Ages saw a resurgence in both, with monastic vineyards, as productive as their libraries, fostering trade from the vine-rich regions of the Mediterranean and southern Europe to the colder regions in the north. The wine trade grew with the European economy and wine merchants proved eager, restless entrepreneurs. As often happens with transnational trade, England’s thirst for foreign- produced commodities came into conflict with its foreign policy. France be- came as natural an enemy as it was a natural source for wine. With the Eng- lish government repeatedly embargoing French wine, diplomacy as much as supply constrained demand. Portugal, eager for a Protestant ally to keep it free of the predatory Catholic power over its border, was an obvious alterna- tive. For England, there were other wine-producing options. But Portugal had an Atlantic-facing coast: proximity to major markets, as so many authors here note, helps. The year 1703 marked a significant point in this blend of trade and diplo- macy. The queen of England and the king of Portugal signed the Methuen Treaty guaranteeing Portuguese wine lower duties than French wine in Eng- land. In return, it guaranteed to English woolens unfettered access to Portu- gal. Addressing central issues of international trade—comparative advantage and the international division of labor, in particular—the treaty is of interest to more than wine (or textile) historians. Adam Smith saw in the treaty an invidious tax on domestic consumers. The Methuen advantage, in his eyes, was all Portugal’s. The Anglo-Portuguese economist Ricardo, however, saw things quite differently. Such trade, he thought, allowed the two countries with complementary assets to gain comparative advantage. More recent analysis of Anglo-Portuguese trade (Sideri 1970) tipped this balance once more, but in the opposite direction to Smith. In short-term annual budget- ary balances, the two may have shown comparative advantage, but not in long-term development. The complementary assets represented, on Eng- land’s side, the rising industrial economy, but on Portugal’s side, the falling,
xvi / Preface agricultural economy. So England developed its “new economy,” while Portugal, under physiocratic governments, was left with the old. Several of the essays in this volume (in particular, Linden et al.) do show labor divided principally between high value-added work in one part of the world and low value-added “old economy” assembly work elsewhere. Much of Western Europe, Japan, and the United States works in the knowledge economy; the people of Southeast Asia, China, and Mexico are more likely to work for it. Consequently, modern debates over the benefits of this form of globalization sound strikingly similar to those initiated by Smith and Ri- cardo over the Methuen Treaty. Yet, as Leachman and Leachman show, Tai- wan’s semiconductor manufacturing is in the forefront of innovation and has proven sustainable and very profitable. Similarly, as McKendrick’s study suggests, Singapore has benefited greatly by becoming the global manufac- turing headquarters for hard disk drives. In other words, these papers do show that not all manufacturing regions can be assigned to the “old econ- omy.” The challenge raised by all these papers and faced by governments around the developing world, then, is to understand the different conditions and outcomes of comparative advantage in globalization. The Methuen Treaty raises one more critical yet controversial topic that recurs throughout these essays: government intervention. The bilateral ar- rangements for textiles allowed under MFA (Abernathy et al.) has clear ante- cedents in the Methuen Treaty, as, in their way, do the local content (Sturgeon and Florida) and antidumping (Murtha et al.) laws: these serve, much as the discriminatory wine tax against the French, to keep undesired goods out of a particular market. The early history of the port trade is rife with government intervention. Wine was not only much desired but also shipped in bulk containers. Con- sequently it was an easily taxed commodity. From the Methuen Treaty on, British governments continuously tinkered with the fiscal arrangements for its most popular wine until, with Gladstone’s “single bottle” act of 1860, port finally lost its exceptional status. From their end, Portuguese governments sought to promote (and feed their treasury from) this important trade. Faced with increasing disarray in the 1750s, the Portuguese demarcated the port wine region—the Alto (or upper) Douro River valley where the port grapes are grown. (Port takes its name from the city of Oporto, the entrepôt at the mouth of the Douro River.) This demarcation survived until 1834, when a new, economically liberal Portuguese government removed all regulation. (Curiously, this deregulation occurred just as other countries started to adopt this innovative idea—one that is echoed not only in modern wine re- gions but also in maquiladoras, free ports, and other types of fiscally privi- leged zones.)
Preface / xvii The end of regulation spurred a burst of globalization impressive even by today’s standards. Before the lifting of restrictions, wine had flowed princi- pally to Great Britain and Ireland, with lesser amounts trickling to northern Europe and to outposts of the Portuguese and British empires. Upon liber- alization, these trickles swelled. The widely connected port merchants sent wine to Baltimore, Boston, New York, and Philadelphia; to Halifax, New- foundland, Quebec, and Nova Scotia; to Archangel, Riga, and St. Petersburg; to Amsterdam, Bremen, Copenhagen, Genoa, Hamburg, Stettin, and Stock- holm; to Tenerife, Madeira, and the Canaries; to the Cape of Good Hope, Jamaica, St. Johns, Barbados, and Demerara; to Pernambuco, Valparaiso, and Batavia; to Hobart, Sydney, Bombay, Calcutta, and Madras; and to Jer- sey and Guernsey. Only Asia and Antarctica are missing from this global sweep. As this expansion indicates, as merchant accounts show, and as historians remind us, the merchants of the past were integrated into far-flung trading networks. Most merchants needed fewer than six degrees of separation to span the globe.4 When opportunity arose, relatively passive links between merchants on opposite sides of the globe turned into active trading relations with extraordinary speed, allowing merchants to practice arbitrage in both goods and bills of exchange across space and time—a practice still vital, as I suggest below, to globalization today. Struggle in the Supply Chain Unfortunately, for those who see in this dramatic expansion of the port trade a clear lesson about the benefits of trade liberalization, boom swiftly turned to bust. Low-cost imitations, potent substitutions, falling reputation, dwindling protection, and widespread falsification made the previously complacent port trade struggle to protect its appeal and reputation, in the short term, and its markets in the long. The highly disaggregated supply chain made such organization complicated. But the way in which the port trade took on this task is instructive. This unruly chain began in the Alto Douro with the smallest farmers who sold grapes to big farmers. With these and their own larger crops, the big farmers made wine. To this they added brandy (one of the distinguishing features of port) to stabilize the wine, which they stored through winter. As stockholding is expensive and risky, all but the wealthiest farmers hoped to sell their wine in early spring to either brokers or exporters who then took the wine to Oporto. There more brandy was added, the wine was stored (young port is harsh and crude) before exporters blended it for export (using their own stocks and, if these fell short, those of brokers), and it was shipped
xviii / Preface to British ports in response to orders from importers. These sold the wine to hoteliers, innkeepers, wine merchants, and retailers, who in turn sold to con- sumers. Most tensions in this chain revolve around stockholding. Wine was costly and volatile. When it moved, high duties had to be paid. When it sat, it tied up large amounts of capital. If it aged well, it could command high prices to justify the investment. But stocks could both deteriorate (aging a product that can literally go sour is always risky) or depreciate if the next year’s wine was better. Furthermore, taste and fashion fluctuated rapidly and unpre- dictably. No one wanted to be caught holding depreciating stocks. Yet no one wanted to be out of wine when the market surged. (For this reason, the brokers, a little like Ingram’s and other wholesalers today, played a critical role in the chain, providing just-in-time wine.) So the port chain faced many of the stockholding issues discussed in this volume: from the textile industry, with its volatile fashions, to the auto in- dustry, with its high-cost components, to the PC, chip, and hard-disk indus- try, with their rapidly depreciating components. Port, like the PC (Curry and Kenney) and its various components, especially semiconductors (Leachman and Leachman) and hard disk drives (McKendrick), and garments (Aber- nathy et al.), had some of the properties of Curry’s and Kenney’s “hot po- tato.” Everyone wanted adequate supply, but not the stockholding risks. Each link sought to pass these to someone else up or down the chain. As Sturgeon and Florida suggest, this urge to transfer stockholding risks may even explain the way in which objects are designed. The modularity of the PC and the car allows not only for distributed production but also for the easy transfer of stockholding from more powerful to less powerful partici- pants. Port, too, had “design features” that allowed such transfers. Standard explanations of the brandy it contains are enological. Some explanations, however, are more strategic, arguing that brandy was added because, though it did not affect the time needed for the wine to become drinkable, it de- creased the time it needed to become transportable (Thudichum and Dupré, 1872). Thus brandy allowed the farmers to pass the cost of storage to ex- porters and exporters to pass it to importers. In response, the importers en- gaged in a “blend-to-order” policy, a little like Dell’s “built-to-order” strat- egy. Blending to order, while allowing customers greater choice, allowed im- porters to pass such customized wine hurriedly to customers (in this case, merchants, inns, hotels, and retailers). If these could not as quickly persuade the end user either to “lay down” venerable wine or to drink cheap wine, they ended up as the most likely candidates to bear the cost in this supply- chain game of pass the parcel.5 But retailers and wine-merchants (described by one port merchant as “the most rotten set in London”) had a tendency to
Preface / xix default on payments, causing tremors all down the chain. So a great deal of what Abernathy et al. call “short cycle” storage fell to the more solvent im- porters in Britain, while the “long cycle” storage fell to the exporters in Oporto. As these two were also often closely linked through interlocking shareholdings, inevitably it was these two that pushed to organize the supply chain in their particular interests. They faced, of course, competition from others in the chain, each of whom no doubt realized that those who did not squeeze would instead be squeezed. So, farmers sought to put their stamp on the trade, appealing im- plicitly to the concept of terroir to turn the brand they burned on their bar- rels into recognizable signs of quality assurance in the retail marketplace. Here, in a nationally divided trade, they were probably undone as much by the historic Portuguese demarcation as by their British “vertical competi- tors.” Whereas in France, in the absence of strict demarcation, the names of particular chateaux became a sign of reliability, in Portugal the demarcation and the tradition of blending wines from different estates at export tended to obscure the role and name of the originating farmers. Nonetheless, certain estates (such as Roriz) did acquire a reputation in Britain as, on the one hand, wine merchants used them as tokens of quality, and on the other, farmers tried to subordinate the supply line, diminish the role of middle- men, and establish their own outlets in Britain. At the opposite end of the chain, wine merchants sought to overcome their bad collective name and establish individual good ones. They were aided by the fact that port in the nineteenth century was more or less anon- ymous. It was advertised as “good,” “strong,” “rich,” “natural,” “old,” and the like, but just as the names of the originating chateaux (or quintas, as they are known in Portugal) were obscured, so were those of most of the mid- dlemen. Instead, wine merchants in Britain offered their names as the distin- guishing feature. The practice starts early. The Daily Courant of 1703 and af- ter, for example, advertises many generic wines (port, lisbon, claret, bur- gundy, and the like). The only proprietary names that appear are those of wine merchants and innkeepers. Slowly wine merchants grasped the signifi- cance of this position. Advertisements for port and sherry for sale at H. B. Fearon’s turn subtly into advertisements for “H. B. Fearon’s port.” By the mid–nineteenth century, the new names in wine marketing and retailing— Hedges & Butler, Gilbey’s, Victoria Wines—required exporters in Portugal to bottle port in Oporto with proprietary labels and corks as if Hedges & Butler, Gilbey’s, and Victoria Wines had their own Oporto operation. In the process, they increasingly standardized their product for multiple retail out- lets so that, as one historian puts it, “a Gilbey claret bought at Reading, say, should have the same look and taste as a claret bought in Wolverhampton
xx / Preface . . . a consumer in other words, could learn to rely on a Gilbey’s label. . . . They marketed standard brands.”6 In effect, the retailers were transforming their strategy from the equivalent of the “build to order” (BTO) strategy, familiar in the modern PC market, to the equivalent of “buyers’ own brand” (BOB) retailing, familiar in the mod- ern food and wine industry, whereby, once again, retailers get their name on the label while their suppliers become anonymous and interchangeable. Standards and Brands Two things relevant to both past and present are I hope evident by now. First, as the quotation above indicates, the struggle ran along, not across, supply chains. If retailers established the identity, standardization, and reli- ability of the wine this way, they effectively made all others in the chain anonymous and put in their own hands effective control of the disaggregated chain. (If one supplier caused problems, Gilbey’s could—and did—switch to another without customers being any the wiser.) Second, the key weapons in this struggle are standards and brands. If you can establish a reliable standard that is as predictable in Wolverhampton as Reading, if you can associate your name with that standard, and if you can protect that name, then you can grow from niche to mass markets and make others dance to your tune. Hence the triumphantly (if, for some, only transitorily) significant names in- voked in this volume—Nike, Wal-Mart, Dell, HP, Zenith, Sharp, Intel, Mi- crosoft, Sony, AMD, Jeep, Volkswagen, Nokia, and Motorola. So in the middle of the century the wine trade in general became a rather familiar battle of standards and names. “Tawny” (once an insult) turned into the term for one particular category of wine. “Vintage” port was transformed from a general to a specific term to designate wine aged for the high-end market. And “ruby” was introduced to characterize the wine for the cheap market.7 And firm names known today—not only Hedges & Butler, Gilbey’s, and Victoria but also Cockburn, Graham, Sandeman, Taylors, and Roriz— became prominent and valuable trademarks. In homage to their value, these names were rapidly flattered by imitators, appropriated by fraudsters, pro- tected by courts, alienated in sales, and seriously cultivated by owners. What is noticeable about this list, as well as its modern equivalent above, is that neither represents only one particular point in the supply chain. Wal- Mart and Victoria are retailers, HP and Sandeman are intermediators, Intel and Roriz are producers. Although they occupy different points in the chain, each manages to stake a claim for itself. Of particular interest are the intermediators, who might seem to have no
Preface / xxi essential role to play. Indeed, one contemporary champion of the farmers in- sisted in 1883 that with “the compression of space and time,” farmers should be able to sell to consumers without any rent-seekers intervening. The lan- guage remains fresh in debates about disintermediation today. But while some were cut out and others subordinated, a few intermedia- tors did manage to take charge of their own supply chain. Although wine merchants and retailers pushed to make themselves the ones whose name would become the brand, they suffered, as I noted, from their own notoriety and the regularity with which their names appeared in lists of bankrupts. The generally short lives of retailers made them a risky source for wines that the buyer might not get to drink for one, two, or more decades. To whom would you protest if the wine turned out bad, but the retailer went under twenty years ago? Better established merchants fought this by broadcasting their age (“Established Upwards of 45 Years,” “Importers for 40 Years,” “Established 1793,” and so forth). But they also started to use the more enduring names of suppliers. Thus, while retailers like Gilbey’s sought to make their suppliers anonymous, others boasted that their port was Sandeman’s, Cockburn’s, or Offley’s “shipping.” Such claims played the role that the label “Intel inside” plays for low-end PC assemblers or VARs, providing for purchasers a war- ranty of quality that the VAR itself lacks credentials to provide. But unlike Intel’s trademarked claim, exporters’ names were not neces- sarily used with permission—nor even with the exporter’s wine. Thus the exporters themselves moved to protect their own name, and in the process to promote their brand over that of the retailers and the farmers. They did this in a variety of ways. They participated in the standard setting for the main types of wine (“tawny,” “vintage,” and “ruby”), as described above. They in- creasingly took over bottling.8 (Wine had previously been bottled at a variety of different points in the chain: exporter, importer, retailer, and even con- sumer.) And they began to promote their brands as available “at most re- spectable retail houses.” In so doing, they suggested to consumers that, while the importer was essential, retailers played an inconsequential and substitut- able role in supply.9 And so, with standard and brand strategies of their own, they fought back against the retailers in the tussle to see who could both as- sert their own brand and blot out that of their vertical competitor. Yet, as is usually the case with vertical competition, cooperation was also important. Exporters, importers, and retailers needed each other, and were often complicit in others’ competitive strategies. As Acer both manufactures PCs under its own name and assembles computers for competitors, so port firms like Sandeman provided both Sandeman-branded port and retailer- branded port (for Gilbey’s). Here the exporter wisely segmented the market,
xxii / Preface allowing the new retail chains to service the cheaper end of the market with “buyers’ own brands,” while promoting their own name on high-end and vintage wines.10 Arbitrage in the Space of Flows There are, then, intriguing parallels between nineteenth- and twenty-first- century global chains. But can it be said that the age of sail and steam can tell us truths about what has grandly been called the “space of flows” (Castells 1996)? I believe it can. In particular, the parallels help emphasize that it is not only the length of the globalized supply chain that is of interest. We need to note as well its particular shape and the topography of power that it instanti- ates. The parallels also suggest that, while many explanations of modern supply chain management have technological causes, these may be necessary but not sufficient. Business process innovation, in particular the skillful ma- nipulation of brands, has proved an effective means to shape a supply chain.11 And thus overheated rhetoric about a new economy built on new technology is likely to miss critical aspects of where value is added (and rents extracted) in the flow of goods and information. Indeed, old and new juxtaposed particularly help understand the limits to claims about the “compression of space and time.” A key word here, which I mentioned above, is arbitrage. Global businesses, both old and new, make their money through arbitrage between prices at the point of production and prices at the point of consumption.12 For arbitrage to be possible, the flow between these two places has to be impeded, by government regulation and borders, by coordination and communication problems, by transportation costs, and so forth. While these remain, intermediaries, arbitraging across the barriers, will also remain. (Disintermediation, that is to say, is not the same thing as disaggregation.) Much as histories of the port trade need to understand the impediments it faced, so the essays in this volume, then, are all in their way studies of mod- ern impediments to flow and the resulting arbitrage. The flow of material goods is constrained by tariffs, embargoes, prejudice, but also, more simply, by transportation, its time and costs. The river and the estuary, so important to the growth of the port trade, have perhaps today been replaced by such things as the highway and the FedEx airport hub. More adaptable than rivers, these new interchanges nonetheless have a significant determining relation- ship on global flow and continue to ensure, in Kogut’s words, that “we never escape the pull of geography.” The magic of a communications infrastruc- ture will not magically lift those without transportation infrastructure into
Preface / xxiii the “new economy,” in part because aspirants to the new usually have to prove their value by working on material goods, not informational ones. Less discussed in these pages, but ever present, are the impediments to the flow of labor and their role in the ensuing global arbitrage of wages. The space of flows, an informational concept, does not readily allow for the flow of labor. Thus many people remain inescapably trapped in low-wage areas, making arbitrage by intermediaries easier. In several of the cases outlined here, arbitrageurs have to balance the price of goods and labor in the form of weight and wages. Goods that are cheap to transport, such as DRAM, can be sourced from the accessible lowest-wage areas. Those that are too heavy to transport either cheaply or quickly, such as car engines, come from points geographically closer to the market. So, because of impediments to the flow of goods and labor, countries can still gain disproportionately, rather as Portugal did, from the serendipity of proximity. The dramatic differences, despite other similarities, between FDI and GDP in Ireland and New Zealand would seem to bear this out. Distance is not dead. Capital, of course, flows more readily than either goods or labor. It always did. (The original commercial meaning of arbitrage referred to the trade of bills of exchange between markets to take advantage of different currency rates.) Here too, however, the essays note that flow is not completely unim- peded. Modern global firms, these essays remind, have also to be skilled at arbitraging around currency fluctuation, as Oporto merchants were before them.13 Today, instead of just moving cash to counter unfavorable shifts in exchange, supply chains move production itself to other regions. A weak but relatively stable exchange rate with the dollar can thus be a great asset, though investing arbitrageurs are in part investing in the stability of that weakness. Finally and intriguingly, the essays remind us that knowledge does not, as many seem to feel it must, escape the pull of geography. There are impedi- ments to the flow of knowledge. Yet, while we can understand that port mer- chants clustered in Oporto, because that’s where the commodity comes from, it isn’t as easy to see why knowledge also clusters. Gilder would have us believe that in the telecosm, “anyone can transmit any amount of infor- mation, any experience, any opportunity to anyone or everyone, anywhere, at any time, instantaneously, without barriers of convenience or cost, the re- sulting transformation becomes a transfiguration” (Gilder 2000: 263–64). But in reality the world still resembles the world of the port merchants, where dominant clusters in one place exert distal control over distributed supply chains. Today the critical clusters are, in fact, knowledge clusters. They are found in places like Silicon Valley, Route 128, Fairfax, Virginia, De-
xxiv / Preface troit, and in similar spots around the United States and the developed world. In these places the design work, the high-value intellectual property, in- creasing returns, and even increasing control continue to reside, as most of these essays emphasize. Indeed, paradoxically it is knowledge workers, whose labor is in theory independent of location, who apparently need (and are al- lowed) to travel most. So Silicon Valley becomes increasingly polyglot, and the knowledge economy appears to concentrate in the United States. As the essays here indicate, the international division of labor is increasingly a divi- sion between knowledge work, which clusters in the metropoles (though the movement of the laborers is relatively unrestricted), and manual labor, which flows around the globe to fit with new supply chains (though the movements of the laborers are highly restricted as the global supply chain spreads and disaggregates to allow for arbitrage). Arbitrage, it’s worth noting, initially referred to a capacity for self- determination, which is the converse of subordination. And, as I have tried to show and the following essays wonderfully illustrate, in the new global supply chains as in the old, participants struggle to achieve self-determina- tion. The stakes are high. The losers face subordination or even bankruptcy. And technological shifts alone are not enough to unpick the lock that loca- tion and brands can give the winners. Notes 1. I accept Kenney’s reservation that a chain is not necessarily a good metaphor, but as it is the generally accepted one, I use it here. 2. Given its recent decision to purchase Compaq and the well known difficulty that technology firms have in integrating mergers, the meteoric rise of Hewlett Packard may presage a similarly dramatic fall. 3. These comments draw heavily on two important, recent, and historically in- formed treatises: one by Gary Fields (2003), which compares Dell’s reorganization of the PC supply chain in the late twentieth century with the rise of the Net to Swift’s reorganization of meat packing in the late nineteenth century with the rise of the railway; the other by Teresa da Silva Lopes (2002), which looks at both the integra- tion and disintegration of supply chains in the alcoholic beverage industry at the end of the twentieth century. Where Fields stresses the significance of technological in- novation, Silva Lopes stresses innovations in marketing, branding, and intellectual property. 4. See in particular Woolf (1982), Curtin (1984), and Hancock (1995). 5. As the century progressed, the novelist Anthony Trollope (1927) noted, con- sumers increasingly expected wine merchants to stock high-quality wine, allowing consumers to send “for a dozen at a time, and wisely impose upon [the merchant] the duty of keeping the wine,—and charging for the capital required” (p. 76). 6. Waugh (1957), pp. 18 and 19. 7. At about the same time, the French were classifying their grand cru.
Preface / xxv 8. In this they followed the lead of the Champagne houses, who had imposed their name on the trade by bottling in France rather than in Britain. 9. Here port exporters were following beer brands (particularly Bass and Guin- ness) that advertised their brands as available. 10. The port trade, this integration suggests, shows aspects of the modern chain as if in a film run backward. The modern global supply chain described in this book is the result of shift from large, hierarchically ordered supply to a disaggregated model. The port trade was actually moving in the other direction. It began disaggregated, but as different players came to dominate their particular supply chain, integration followed. The Oporto exporters, in particular, integrated backward into production and forward into imports, and for some, retail. Similarly, well-branded retailers inte- grated backward into both imports and production. And some producers even inte- grated forward. 11. The most powerful brand in the digital world, Microsoft, has almost always been a technological follower. It has, however, both managed its brand and squeezed its upstream and downstream supply chain with innovative ferocity. 12. Those who propound the annihilation of space and time (Gilder 2000; Cairn- cross 1997) need to explain how businesses will make money. 13. Several Oporto bill-brokering merchants crucially helped the Rothschild brothers service their continental loans during the Napoleonic and later wars.
Contributors frederick h. abernathy joined John T. Dunlop in a 1979 study of the tailored clothing industry, which led to the establishment of the Tex- tile/Clothing Technology Corporation [TC2]. His continued involvement with the apparel industry led the Alfred P. Sloan Foundation to support re- search resulting in the book he coauthored, A Stitch in Time (Oxford, 2000). He is Abbott and James Lawrence Professor of Engineering, and Gordon McKay Professor of Mechanical Engineering at Harvard University. melissa m. appleyard is an Assistant Professor of Business Admini- stration at the Darden Graduate School of Business Administration, Univer- sity of Virginia. Her research examines the motivation behind and conse- quences of knowledge sharing in technology-intensive settings. Her research on knowledge diffusion both across and within company boundaries has been published in academic and practitioner journals, as well as books. Cur- rently Appleyard is analyzing the role of knowledge accumulation in shaping buyer-supplier alliances and the global patterns of knowledge diffusion in the semiconductor industry. clair brown is Professor of Economics and the Director of the Center for Work, Technology, and Society at the University of California, Berkeley. Prof. Brown has published extensively on labor market issues. She heads the human resources group of the Sloan Competitive Semiconductor Manufac- turing (CSM-HR) program at U.C. Berkeley. She coauthored Work and Pay in the United States and Japan (with Nakata, Reich, and Ulman; Oxford, 1997). Brown’s work on the relationship between work roles, economic growth, and living standards and how the standard of living has changed during the twentieth century is examined in American Standards of Living, 1918–1988 (Blackwell, 1994).
xxviii / Contributors james curry is Professor-Researcher in the Department of Social Studies at the Colegio de la Frontera Norte in Tijuana, Baja California, Mexico. He has recently published articles on manufacturing in the U.S.-Mexico border region and open source software. He is currently involved in research proj- ects on the personal computer industry in North America and Mexico, and electronic commerce in the United States and Latin America. paul duguid is an independent scholar. For the past ten years he has been a research associate at the University of California, Berkeley. From 1988 to 2001 he was a consultant at the Xerox Palo Alto Research Center. He is currently (2001–2002) a fellow of the Center for the Public Domain and a visiting professor at Copenhagen Business School. He is coauthor, with John Seely Brown, of The Social Life of Information (Harvard Business School Press, 2000) and numerous articles on topics from the design of interfaces to the design of organizations. His recent articles on the port trade have ap- peared in the Scandinavian Economic History Review, The European Yearbook of Business History, and the Portuguese journal Douro. john t. dunlop has had an extensive career in labor relations and gov- ernment, including serving as U.S. Secretary of Labor from 1975 to 1976 and, more recently, as chair of President Clinton’s Commission on Worker- Management Relations. He has also served as a mediator and arbitrator in a wide range of industries and is the author of more than ten books on labor re- lations and labor economics. He is the coauthor of A Stitch in Time (Oxford, 2000). He is Lamont University Professor, Emeritus at Harvard University. richard florida is the Heinz Professor of Regional Economic Devel- opment at Carnegie Mellon University and founder and codirector of the Sloan Software Industry Center there. He is author of several books, includ- ing most recently The Rise of the Creative Class (Basic Books, 2002) and also Industrializing Knowledge (with Lewis Branscomb and Fumio Kodama, MIT Press, 1999), Beyond Mass Production (Oxford University Press, 1993), and The Breakthrough Illusion (Basic Books, 1990) the latter two with Martin Kenney. He is a co-organizer of the Sloan Globalization Network and cali- brated with Tim Sturgeon on the Globalization of the Automobile Industry project reported in this volume. janice h. hammond investigates how manufacturing and logistics sys- tems develop the speed and flexibility to respond quickly and efficiently to changing customer demand—critical capabilities in the retail-apparel-textile channel. She is the UPS Foundation Professor of Business Logistics at the Harvard Business School. She is a coauthor of the book A Stitch in Time (Oxford, 2000).
Contributors / xxix jeffrey a. hart is Professor and Department Chair of Political Science at Indiana University, Bloomington. His coauthored book, Managing New Industry Creation: Global Knowledge Formation and Entrepreneurship in High Technology, was published by Stanford University Press in 2001. In addition to publishing many books as well as articles in leading academic journals, he has worked at the Office of Technology Assessment of the United States Congress, helping to write International Competition in Services in 1987. Hart has been a visiting scholar at the Berkeley Roundtable on the International Economy. martin kenney is a Professor in the Department of Human and Com- munity Development at the University of California, Davis, and a Senior Project Director at the Berkeley Roundtable on the International Economy at the University of California, Berkeley. Most recently, he edited the book Understanding Silicon Valley (Stanford 2000). He has studied the globaliza- tion of the electronics industry and is currently working on the evolution of venture capital in the United States and globally. He has authored or edited four books and more than a hundred articles and book chapters. bruce kogut is the Dr. Felix Zandman Professor of International Man- agement at the Wharton School of the University of Pennsylvania, and Co- Director of the Reginald H. Jones Center for Management Policy, Strategy and Organization. He has been a visiting scholar at the Humboldt Univer- sity in Berlin, Stockholm School of Economics, Science Center Berlin, and the Ecole Polytechnique, Paris. His research has been on such topics as labor markets for ideas and the effects on organizations, the expansion of U.S. and Japanese firms internationally, alliances and networks, and the competitive- ness of countries. His current research focuses on the virtual location of software and intellectual labor activities in the global economy. His research has been supported by the German Marshall Fund, Fulbright, International Research and Exchange Board, the French Ministry of Science and Technol- ogy, the National Institute of Standards and Technology, and Wissenschafts- zentrum in Berlin. chien h. leachman is an Assistant Research Engineer in the Engineer- ing Systems Research Center at the University of California, Berkeley. She has served on the staff of the Competitive Semiconductor Manufacturing Program at UC Berkeley since 1993. She was an Assistant Professor of Opera- tions and Information Management at the University of Connecticut in 1995–96. She holds a Ph.D. in Management Systems from SUNY Buffalo, and an MBA and BA in Business Administration degrees from Chengchi Univer- sity in Taiwan. She is the author of twelve publications concerning informa- tion systems, decision support, and semiconductor manufacturing.
xxx / Contributors robert c. leachman is a Professor of Industrial Engineering and Op- erations Research at the University of California, Berkeley, where he serves as Director of the Competitive Semiconductor Manufacturing (CSM) Program. He is the author of more than 50 technical publications concerning produc- tion operations management and productivity improvement, and he has been a consultant in these areas to many corporations. He received his A.B. degree in Mathematics and Physics, an M.S. in Operations Research, and a Ph.D. in Operations Research, all from UC Berkeley, and has been a member of the UC Berkeley faculty since 1979. In 1995 he was the winner of the Franz Edelman Award Competition sponsored by the Institute for Operations Re- search and the Management Sciences (INFORMS), and in 2001 was the run- ner-up for the Franz Edelman Award. stefanie ann lenway is Professor, Department Chair, and Carlson Term Chair of Strategic Management and Organization at the University of Minnesota. Her coauthored book, Managing New Industry Creation: Global Knowledge Formation and Entrepreneurship in High Technology, was pub- lished by Stanford University Press in 2001. She has published numerous ar- ticles in leading academic journals on the role of managerial mindsets in global strategy implementation, business-government strategic interaction, and the politics of international trade. Lenway is a member of the Board of Governors of the Academy of Management. greg linden is a Post-doctoral Fellow at the Center for Work, Technol- ogy and Society, a research unit at the University of California, Berkeley, where he earned a Ph.D. in Economics in 2000. He has published extensively on various aspects of the global electronics industry and consulted on proj- ects in Asia dealing with industrial policy in high-technology industries. His current research interests include the competitive dynamics of the electron- ics industry, research consortia in the semiconductor industry, the emer- gence of global competitors from industrializing countries, and the effect of foreign direct investment on economic growth. david g. mckendrick is Research Director of the Information Storage Industry Center at the University of California, San Diego, and coauthor of From Silicon Valley to Singapore: Location and Competitive Advantage in the Disk Drive Industry (Stanford University Press, 2000). Prior to joining UCSD, he taught in the business schools at the University of California, Ber- keley, and the University of Texas at Dallas. He received his Ph.D. in busi- ness from the University of California, Berkeley. thomas p. murtha is Associate Professor of Strategic Management and Organization at the University of Minnesota’s Carlson School of Man-
Contributors / xxxi agement. His coauthored book, Managing New Industry Creation: Global Knowledge Formation and Entrepreneurship in High Technology, was pub- lished by Stanford University Press in 2001. He has published articles in leading academic journals on the role of managerial mindsets in global strategy implementation, and on business-government strategic interaction. Tom Murtha has also written on the arts and consumer electronics for leading newspapers and magazines, including Rolling Stone and the Min- neapolis Star Tribune. timothy j. sturgeon is a Research Associate and Executive Director of the Industrial Performance Center’s Globalization Study at the Massachu- setts Institute of Technology (MIT). Prior to this, Mr. Sturgeon served as Globalization Research Director for the International Motor Vehicle Pro- gram at MIT. He received his Ph.D. in Economic Geography for a disserta- tion entitled Turnkey Production Networks: Industrial Organization, Economic Development, and the Globalization of Electronics Contract Manufacturing. His articles have appeared in a number of edited volumes, scholarly journals, and trade magazines. Prior to entering academe, he held a variety of industry and consulting positions. david weil has written widely on the impact of technology and human resource policy on business performance based in part on his studies of the retail-apparel-textile industries. His research spans the areas of labor market policy, industrial and labor relations, occupational safety and health, and regulatory policy. He is Associate Professor of Economics at Boston Univer- sity School of Management and Research Fellow, John F. Kennedy School of Government, Harvard University.
Locating Global Advantage Industry Dynamics in the International Economy
ch a p ter o n e Introduction m a rt i n ken n ey Globalization is much more than simply moving employment and activities from developed nations into nations with lower-cost labor forces. Such a sim- ple conclusion obscures the complicated skein of cross-border relationships that have evolved out of firm strategies seeking to balance a kaleidoscope of variables including labor and inventory costs, transportation, quality, concen- tration of valuable knowledge in clusters, and temporal proximity to cus- tomers. Understanding firm strategies at a single moment in time is compli- cated enough, but unfortunately these variables also fluctuate. For example, Singapore—at one time a low-cost environment with a weak infrastructure for hard disk drive manufacturing—over two decades evolved into a high-cost en- vironment with a very sophisticated infrastructure. Today Singapore is a man- ufacturing, R&D, and logistics center. For firms, the global map is a gigantic, evolving chessboard upon which boundedly rational corporate strategists op- erating in internal and external political environments must not only situate production but also decide to make or buy.1 These decisions, though compli- cated, are not random; corporate managers are responding to real constraints and opportunities. For most Americans, the closest interaction with the enormous number of nations in the United Nations occurs on visits to their local Wal-Mart, which, of course, means that the world is in our homes, a part of our everyday life. A stroll through Wal-Mart’s aisles reveals national origin labeling on objects from Bangladesh, China, Haiti, Honduras, Indonesia, Korea, Mauritius, Mexico, Tai- wan, and a myriad of other nations. But as the chapters in this book show, these labels are deceptive, because the product is an assemblage of physical and intel- lectual inputs from yet other nations. The goods we buy are the end result of an elaborately choreographed transnational odyssey. These objects are part of an
2 / m a rt i n ken n ey economy whose tendrils reach ever further outward, linking, integrating, and transforming both far-flung and nearby places. Firms and industries generate powerful economic forces shaping the lives of all human beings. Often industries are treated as black boxes, a perspective im- plying that economic shifts, technological change, and market dynamics will shape every industry similarly. Our chapters recognize that firms are remark- ably different, and thus their repertoires for creating advantage are diverse. We are unified by an understanding that firms within industries are evolving, as are the locations in which they operate. Current configurations are responses to past conditions and prior firm strategies. History matters, insofar as previous decisions shape the contemporary landscape within which firms compete for future competitive advantage. In the current conjuncture, firms scan the globe for favorable combinations of production factors and factor prices. And yet, as Paul Duguid in his foreword and Bruce Kogut in his concluding chapter remind us, cross-border trade has a long history. All of the parties to this trade have attempted to create power asymmetries to strengthen their bargaining positions versus those of their part- ners and rivals. The resulting configurations can lock in for extended periods. However, as Kogut points out in his chapter, multinational firms often also op- erate as highways for the diffusion of knowledge, thereby sowing the seeds of change. Firm strategies are important for creating regional economies and in- stitutions. Locating Global Advantage This book is the result of an ongoing commitment by the Alfred P. Sloan Foundation to study how U.S. firms are both actors in and subjects of global- ization.2 The foundation’s tenet has been that the evolution of national economies and firm behavior can be understood only through intensive exam- ination of firm actions within an industry context. All of the chapters focus on the organizational configuration and locational choices of U.S. firms. Although the decisions and actions of these firms can be critical to local economic devel- opment, the chapters were not meant to assess the economic development im- pacts of corporate actions. Nonetheless, this book will be useful for readers in- terested in international development, as the chapters elucidate the dynamics that frame corporate locational choices. The contributors to this volume share certain common beliefs, both methodological and philosophical. Fieldwork (especially practitioners’ inter- views) is particularly important; it is only through factory visits and personal interviews that a researcher can grasp the dynamics within which corporate ac-
Introduction / 3 tors make decisions. We also are influenced by evolutionary economics (Nelson and Winter 1982) and share its perspective that firms and industries can be un- derstood only in a historical context. Put succinctly, globalization is an evolu- tionary process. Locating Global Advantage quite properly studies the spatial dimension. Each of the authors treats the spatial dimension as an organizational and operational outcome of an evolutionary set of decisions, and as such the meaning of vari- ous locations may not be so obvious. But, more important, our authors recog- nize the evolutionary and nonergodic character of spatial configurations (Arthur 1994; David 1986) and the evolution of places as knowledge-laden lo- cations or learning regions (Florida 1995; Storper and Salais 1997). To rephrase Storper and Walker (1989), firms and industries build places, and this process is the source of clusters that benefit from both traded and untraded interdepen- dencies. To examine the globalization of industries, the authors recognize that often the production and marketing of a commodity are segmented into juridically separate organizations or, as Winter (1987) termed them, “units of accrual.” While recognizing that the intellectual roots of the social division of labor (Sayer and Walker 1993) can be traced at least as far back as Adam Smith, we draw most directly upon Michael Porter’s (1990, 1986) concept of value chains, Kogut’s (1985) concept of value-added chains, and Hopkins’s and Wallerstein’s (1986) concept of commodity chains, which was further developed by Gereffi (1994, 1999). The chapter authors more frequently use the term value chain be- cause it explicitly recognizes the significance of less commodified activities such as R&D and marketing.3 There are difficulties with the“chain”metaphor, which is probably more ap- propriate for thinking about the internal activities of the firm but can create a misleading image when considering the production of an assembled product. The other metaphor that has long been used to describe these interfirm ties is, of course, “networks” (Bartlett and Ghoshal 1989). More recently, the use of networks to describe social and economic relationships has become ubiquitous. Despite some felicitous aspects of networks as a metaphor for the way a pro- duction system might be modeled, there are also difficulties. For example, in the network conceptualization there is no sense of a relatively unidirectional motion of goods toward the consumer (though obviously information and money flow in the other direction). If a metaphor is necessary, then we believe a more appropriate metaphor would be the one used often in industry— namely, that of a dendritic river basin that drains into the sea, which is the final consumer. However, the authors in this book, for the sake of ease and unifor- mity, adopt the chain metaphor.
4 / m a rt i n ken n ey We are interested in how and why the various processes involved in value creation are distributed among different firms. For example, as Leachman and Leachman show, the producers of DRAMs (dynamic random access memories) and microprocessors for personal computers integrate a larger portion of the value chain than do firms involved in the custom logic chip chain. For custom chips an interorganizational division of labor between chip design firms and silicon foundries has evolved. Even within industries there is often an astonish- ing richness in the way interorganizational linkages are structured. This is very often overlooked by those who have not studied the firms and industries closely. Individual industries have their own logic, so globalization and vertical disintegration should be expressed differently in each industry (for an excellent overview, see Dicken 1998). Our book complements research in international trade economics that rec- ognizes that differing industries have distinct profiles in how they organize their praxis and create advantage (Feenstra 1998). Still, for methodological rea- sons, economists generally view globalization in terms of trade statistics disag- gregated at the three- or four-digit Standard Industrial Category (SIC) code. While helpful, these studies sometimes suffer from a lack of specificity and thus ignore firm strategy. They also find it difficult to explain the reasons for chang- ing patterns of trade. For example, SIC Code 3344 contains all semiconductors including DRAMs, microprocessors, and other logic chips, but the difficulty with this aggregation, as Leachman and Leachman indicate, is that corporate strategies, spatial and organizational configurations, and evolutionary dynam- ics in each category differ.4 This is not easily captured in the statistics but can obscure some of the underlying firm choices shaping the global economy and America’s place in that economy. For example, is a semiconductor designed and marketed by a Silicon Valley firm, but fabricated in Taiwan, a Taiwanese semi- conductor, an American semiconductor, or what? The chapters provide the thick description that excavates below numbers and statistics to expose the dif- ficult, complicated world of business in a global economy. Five Cross-cutting Dynamics The richness of these industry studies provides insight into five dynamics that are propelling globalization and appear in different guises in nearly every chapter. The first dynamic concerns the technological and organizational ad- vances in the fields of transportation and communication that operate in the background of each industry. The second dynamic is the multifaceted drive for greater speed, in terms of speed-to-market, more rapid product design, and more rapid inventory turnover—all meant to reduce various cycle times. Unre-
Introduction / 5 lenting cost pressure that continually commodifies existing products forcing businesses to lower costs is the third dynamic. In situ knowledge creation, whereby deep experience and capabilities are concentrated in certain locations or industries, is the fourth dynamic. Finally, the fifth dynamic concerns man- agement’s decisions regarding where to site the various corporate functions in relationship to their customers. These dynamics pressure firms to continually consider the location for various activities. Like a kaleidoscope for which each twist of the cylinder creates a different picture, in each industry and even in- dustrial subsector, these dynamics create different patterns. Transportation, Communications, and Globalization The decreasing cost and increasing speed and capabilities in transportation and communication networks are the foundations for the expanding reach of global value chains. Technical improvements allow firms to pursue innovative approaches to operating the value chain. Multimodal transportation systems based on standardized cargo containers for land-sea shipping and sophisticated air freight systems have shortened the elapsed time and increased reliability. These innovations and others are loosening some earlier locational con- straints.5 Transportation improvements lag compared with the even more dra- matic decline of information transmission prices. The result has been an elec- tronic data interchange web connecting an ever greater number of the nodes in the value chain, thereby increasing information sharing. Decreasing costs of communication are only one benefit, as significant as the far greater flexibility and transmission bandwidth created by developments such as the graphical na- ture and open protocols of the Internet (Cohen et al. 2001). This is not the first time that new transportation and communication tech- nologies have affected the organization of capitalism. Chandler (1977) credited the railroad and telegraph as critical technologies in enabling the creation of the multidivisional firm. In the last decade, there has been a metamorphosis of transportation providers into logistics firms capable of handling both the movements of bits of information and atoms of product. Increasingly, com- munications networks permitting the tracking of an artifact’s progress from in- ception to the final consumer are interlinking a value chain’s disparate activi- ties. The impacts of these advances are stunning. By one account, in 1980 U.S. logistics spending was 17.2 percent of total GDP, and of that 9 percent of total GDP was inventory investment. By 1995 this had dropped to 10.8 percent and 4.3 percent, respectively (Lappin 1996). Today, transport costs constitute only approximately 1 percent of the final price of consumer goods (Taggart 1999). From the rapid replenishment system described by Abernathy et al. for gar- ments to Dell’s build-to-order PC production system described by Curry and
6 / m a rt i n ken n ey Kenney, the transportation and communications advances are providing firms with more efficient and transparent logistics systems. Logistics specialists such as UPS or Federal Express not only handle deliver- ies on a global scale but are also capable of undertaking some measure of final assembly: packaging, inventory management, and distribution. Retailers, as- semblers, suppliers, and logistics firms responsible for moving the physical goods are having their software systems woven into an integrated global web. What began as a just-in-time (JIT) system that required close proximity be- tween assemblers and suppliers is evolving into a JIT system spanning national boundaries and oceans as firms strive to access widely dispersed production factors even while reducing inventory costs and depreciation risks by keeping goods continuously flowing downstream toward the final consumer. Logistics firms experience continuous pressure to further shorten transit times, improve delivery predictability, and lower costs. As the recent West Coast dock lockout showed, there is also heightened vulnerability caused by the constantly swelling tide of goods in motion. For example, the number of freight containers handled by the world’s ports increased from 6.3 million in 1972 to 163.7 million in 1997, while prices on the Asia-U.S. route dropped by an inflation-adjusted 65 percent during the same time period (Taggart 1999). Although shipping costs have dropped significantly, communication and data processing costs have fallen far more precipitously, while international (and national) bandwidth has grown dramatically. For example, the annual cost of leasing an E-1 telecommunications circuit from New York to London dropped from $125,000 in October 1998 to approximately $10,000 in February 2002, an annual decrease of 50 percent per year (Telegeography 2002). Put dif- ferently, the investment cost per minute decreased from $2.443 per minute in 1956 to $0.001 in 2001 (Blake and Lande 2001). The decreasing cost of commu- nications permits the transmission of ever greater amounts of information in real time, thereby keeping upstream participants in the value chain better in- formed, allowing them to make more timely decisions, thus decreasing uncer- tainty. The Internet has created even more opportunities to use communica- tions systems to rationalize the value chain (see, for example, Hammond and Kohler 2001; Kenney and Curry 2001; Fields 2003). Users can take advantage of the availability of low-cost communications bandwidth to develop innovative solutions to production and distribution bot- tlenecks, thereby minimizing the impediments to the flow of goods. For exam- ple, new information systems make it possible to pack garments into shipping containers in Hong Kong properly ordered so that they can be unloaded di- rectly into U.S. retail stores. This eliminates the need to unload the container en route, thereby saving time and money (Taggart 1999). As another example, Leachman and Leachman show that these communication networks permit
Introduction / 7 real-time monitoring by Silicon Valley chip designers of the progress of their orders in Taiwanese fabrication facilities. In the contemporary market, delivery times are often more important than prices; failure to get the right part or component or even the finished product to the right place at the right time may cause bottlenecks and adversely affect an entire value chain—or simply miss the market. We are witnessing the unfold- ing of a system capable of ever more closely synchronizing production with de- mand, thereby removing inventory that is not in motion. The continuing im- provement in logistics of air, sea, and land freight continues to drive transportation costs down, while computational advances combined with less expensive communication technologies are increasing the predictability and transparency of the supply chain. But most powerfully, each advance creates the base for yet further experimentation. Time and Speed Clock time appears to be invariant. And yet, each industry operates on a dif- ferent tempo. Transportation and communications are only one dimension of the time equation with which managers wrestle (Fine 1998; Kenney and Curry 1999). Businesses must constantly grapple with the relationship between space and time (Schoenberger 1997). One salient expression of this is just-in-time production, which was introduced to the U.S. automobile industry by Japanese manufacturers (Womack et al. 1990). On a more fundamental level, the history of capitalism indicates a secular trend toward an accelerating pace. With the ex- ception of the television industry, accelerating the tempo of activity seems a central concern of managers. The character of globalization is shaped by the emphasis on time and speed. The preoccupation with time management is not new to contemporary in- dustry.6 For example, the standardization of time into time zones was spear- headed by the railroad firms (O’Malley 1990). However, today’s firms face more complex temporal dimensions than those contained in simple concepts such as transit times (Curry and Kenney 1999). For example, as Abernathy et al. indi- cate, location and distance affect the placement of activities, but that is only the most obvious dimension of temporality. More recently, other temporal dimen- sions such as speed to market and speed in terms of ramping up production have become considerations for globalization. In the case of hard disk drives (HDDs), McKendrick shows how important managing a rapid production ramp-up in Singapore is for corporate success. In the case of the semiconduc- tor industry, Leachman and Leachman show how being late to the market can significantly depress profitability. Even the automobile industry has been press- ing to shorten its three-year design cycles.
8 / m a rt i n ken n ey Technological time and its grim reaper, obsolescence, are central issues in a number of chapters.7 Each of our chapters on HDDs, personal computers, flat panels, and semiconductors indicates that they are plagued by endemic and rapid technological change that inexorably devalues yesterday’s products. As Abernathy et al. show, in “fashion-forward” garments, a similar dynamic is manifested because of the creativity of designers and the changing sensibilities of customers. For these items, the market value of products is transient and product life spans are truncated. A fashion-forward item or personal computer idling in a shipping container on the way from a distant low-cost production site could easily lose much of its value prior to being unpacked. This obsoles- cence threat affects an industry’s spatial fix—that is, where various activities are undertaken (Harvey 1982). Producers of assembled goods can have an even more difficult situation be- cause components may “age” at different speeds. For example, as Curry and Kenney show, a personal computer contains components such as fans, the case, and floppy drives that age very slowly, and components such as semiconductors and HDDs that age very rapidly. Within a single box, the effect of time varies dramatically by component. The components that are most subject to aging should, of course, be purchased as close as possible to the time when the final consumer purchases the PC. Temporal dynamics color the industrial organization and geography of each industry. In the emerging industrial environment characterized by rapid new product development and accelerated production and delivery times (D’Aveni 1994), slower-moving firms will find that moving production to lowest-cost foreign labor sites will not necessarily prevent them from being outflanked. As our chapters show, for some firms the temporal dynamics are forcing a reloca- tion of certain functions closer to the final customer, while in other cases it has meant that there must be a closer integration between value chain nodes in dif- ferent countries. Pricing Pressure and Overcapacity Competition has always been fierce, but during the last decade it appears to have become more ferocious than ever. Japan is already grappling with deflation, which some believe is occurring in the United States. Every industry in this book suffers pricing pressure, which is manifested at the macroeconomic level by price declines, or, at least, near price stagnation, combined with strong productivity growth. In 2002, overcapacity plagued the auto, PC, television, HDD, and semi- conductor industries, though in semiconductors this was previously a cyclical phenomenon. In industries such as garments and televisions, which are depen- dent on large retailers (or what Gereffi 1994 terms buyer-driven chains), profit
Introduction / 9 margins are thin, even for Wal-Mart. In DRAMs, Flat Panel Displays (FPDs), and HDDs, profits are cyclical and only the leaders experience profits during the positive portions of their business cycles.With the exception of Dell, none of the major PC firms enjoy predictable profits—and Dell as the price leader continues to drive prices lower. For most firms the pressures appear only to be increasing. The intense pricing pressure forces a continual reassessment not only of the proper spatial location of value-chain activities but also whether to perform them internally or to outsource them. As Sturgeon and Florida show in autos, outsourcing has resulted in an increase in jobs among the parts suppliers em- ploying less expensive, usually nonunionized labor as opposed to the high-wage unionized assemblers. In addition, the importation of finished automobiles from lower-wage production facilities in Mexico continues to increase, though U.S. parts exports to Mexico increased apace. In the PC industry, Dell recently introduced a very low price machine (retail $499) assembled by the Taiwanese firm Mitac in China and shipped directly to the customer. Each ratcheting down of prices conditions consumers to expect still lower prices, thus placing pressure on rivals to match the reduction or face a market share loss. For many of these industries, the endemic overcapacity has been insoluble. Sturgeon and Florida describe this problem for the auto industry: even while the industry suffers from global overcapacity, Japanese and European assem- blers continue expanding factories and building new plants in North America. In 2001 semiconductor overcapacity was perhaps the worst it has ever been, as a result of a boom in plant construction during the late 1990s and a slump in con- sumer demand. With prices stagnant, the only way to increase profits is either to lower costs or to increase efficiency. Locating a plant or some of the processes in a lower factor cost environment can momentarily overcome the price pres- sure problem. And yet, paradoxically, this often increases global capacity. With the high cost of labor in developed nations, there is a constant tempta- tion to relocate not only routine production, but also engineering and other ac- tivities, to lower wage environments. Skilled personnel are not uniformly dis- tributed, however, so relocation is constrained by the capabilities of the workforce. Because of the pricing pressure, China has become the destination of choice for relocated production activities, a shift that both solves and exac- erbates overcapacity and the downward pressure on prices. However, even for developing nations such as Malaysia and Mexico, which are losing production to China, there is the possibility of upgrading. It should be possible to carve out production niches by further increasing the division of labor. And yet, despite all of this turbulence, design, R&D, and marketing have largely remained lo- cated in their traditional havens, where labor costs are high. In the meantime, manufacturing or certain manufacturing processes have been relocated, often
10 / m a rt i n ken n ey repeatedly.8 Most recently, firms have begun offshoring some of their business processes to nations like India (Dossani and Kenney 2003). Overcapacity and downward pressure on prices appear to be inextricably linked with globalization. For routine assembly activities, the allure of low wages is powerful, but not overwhelming. The continuing brutal competition almost surely means that overcapacity will remain high, as firms continue to ramp up production in lower-cost environments. This could be further exacer- bated if the deflationary environment continues. Knowledge, Capabilities, and Clusters The relationship between specialized knowledge and clusters has been rec- ognized since at least Alfred Marshall (1890). Outside of economic geography, this insight was largely ignored by the social sciences. Then in the early 1980s, clustering once again attracted scholarly attention from outside the geography community. The enormous interest in the book The Second Industrial Divide by Michael Piore and Charles Sabel (1984) heralded this reawakening.9 In the early 1990s, economist Paul Krugman (1991) and business strategy professor Michael Porter (1990) highlighted the importance of clusters for business performance. These contributions and others sparked a line of research examining the link- ages between firms and the external knowledge in their locational environment (see Almeida and Kogut 1997, 1999; Jaffe et al. 1993; Kogut 2000). Brown and Duguid (2000b) explained this by the participation of the denizens of these re- gions in networks of practice through which knowledge and information flow.10 Murtha et al. persuasively illustrate the importance of active participa- tion in the knowledge creation process by recounting how the U.S. firms that actively participated in creating the FPD cluster in Japan profited handsomely. Most significant, those U.S. firms choosing not to participate in that localized knowledge-creation process, which in this case was concentrated in Japan, were unable to enter the industry profitably. Paraphrasing the Peter Sellers movie, being there is important. Industries are based on sets of knowledge bases and capabilities that are cre- ated, at least temporarily, spatially fixed, and exercised in specific social envi- ronments (Brown and Duguid 2000b; Kogut 2000; Kogut et al. 1993; Dunning 2000). Very broadly speaking, an industry can either cluster or not, and then a cluster can either consist of rivals (i.e., a horizontal cluster) or complementary firms (i.e., vertical clusters) such as suppliers and customers—or contain both.11 The industries in this book exhibit a spectrum of clustering behaviors.12 For example, the PC industry exhibits little clustering outside of Taiwan (and now China), where manufacturing is clustered, while in HDDs, as McKendrick shows, there is a dominant design cluster in Silicon Valley and a production cluster centered in Singapore.
Introduction / 11 As Kogut indicates in his concluding chapter, the relationships between multinational firms and regions are complex and contingent and should be un- derstood in processual terms rather than as single events. Our chapters indicate a complicated skein within which there is an interaction between firm-based knowledge and region-based knowledge that is difficult to fully disentangle, quite specific, tacit, and even inimitable (Gertler 2001). The firm-based knowl- edge is, as Kogut argues in his conclusion, embedded in routines and may be transmitted transnationally, though not without friction, difficulty, and fre- quent failure. Regional knowledge is far more constrained to place and con- texts. Brown and Duguid (2000b) perceptively note that Xerox Palo Alto Re- search Center had enormous difficulty transferring knowledge inside Xerox, but the knowledge transferred nearly effortlessly to the surrounding Silicon Valley community. Thus firms have internal knowledge that they can attempt to transmit internally, even while they absorb external knowledge and con- tribute to a knowledge commons (Kogut and Zander 1992). Proximity to the Customer From the Anglo-Portuguese wine industry to the PC industry, proximity to customers can make the difference.As shown in each of the chapters, firms must decide the relative importance of proximity to customers. Given the increasing efficiency of transportation and communications, it might be thought that low factor costs would become the dominant aspect of deciding where to locate. However, in a number of value chains, proximity to customers can modify and even in some cases overwhelm factor costs such as inexpensive labor. The im- portance of proximity to customers can be driven by very different reasons. For example, in the auto industry the importance of customer proximity at the in- ternational level is driven by a combination of trade barriers and an ability to better understand the market by immersion in it. At the macro-regional level, the strong supplier base in the U.S. Midwest helps offset the high costs of labor and thus continues to attract investment, if not directly in the Midwest, then in the Middle South. In personal computers, Dell has been remarkably successful by assembling computers in the market within which they will be sold (with the exception of the previously mentioned low-priced machine assembled in Chi- na). However, in the Dell case the location of the supplier’s production is not as significant an issue as proximity to the final customer. The chapters carefully ex- amine the role of proximity in determining location. Each segment of the value chain has a downstream customer. Thus, there are a number of supplier-customer relations, each of which might require a differ- ent spatial configuration. In some cases, the market is another set of down- stream corporations, while in other cases, it is the final consumer. In textiles, as Abernathy et al. demonstrate, it is the rapidity of change in the tastes of the fi-
12 / m a rt i n ken n ey nal consumer in particular products that determines the most efficient pro- duction location. On the other hand, Murtha finds that in the case of FPDs, for U.S. equipment and materials makers, proximity to customers was critically im- portant, while proximity to U.S. notebook computer vendors did not appear to be of great significance for the FPD producers. Most interestingly, it is also pos- sible that the necessity of proximity may also shift over time as production cost factors, the role of tacit knowledge, and brand strength change. The detailed research in these chapters highlights the fact that proximity to customers is often loosely used, and that it is more valuable to consider which corporate function(s) should be located in close proximity to the customer. For example, is proximity required for R&D, design, headquarters, and/or manu- facturing, and why? In the auto industry, Sturgeon and Florida show that the new global suppliers have been pressured to locate their R&D facilities close to their auto assembler customers’ R&D facilities. In garments and textiles, there seems to be little pressure to locate any functions close to each other. In the PC industry, Dell requires that suppliers except Intel place a warehouse within twenty minutes of its assembly facilities. In the television industry, there seem to be no immediate clustering requirements regarding R&D or television tube facilities, although over the longer run the tube facilities are attracted to large clusters of TV assembly plants, because of the costs and risks of transporting tubes long distances. Our chapters show that it is necessary to decompose the concept of proximity to customer and comprehend when and what makes proximity economically attractive. The Chapters This book is divided into three parts. The first examines globalization in three mature industries in order of their chronological emergence: garments/ textiles, automobiles/auto parts, and televisions. The garments industry pio- neered the Industrial Revolution, and the auto industry pioneered mass pro- duction. The television industry built upon the pre–World War II radio indus- try and grew quickly in the postwar period, but by the early 1970s it had become a relatively mature industry. The end-users for the products of these three in- dustries are household consumers, and brands are extremely important for their success. Given their long histories and the development of powerful inter- est groups, these industries also are far more subject to government interven- tion in the form of tariffs, duties, quotas, and various other trade restraints. Globalization in the garment and textile industry is fascinating, because de- spite the fact that it is one of the oldest industries, success depends on closely tracking consumer preferences. Since it is a fashion industry and consumers are
Introduction / 13 fickle, inventory risk is a pervasive problem. Garment production was one of the first industries to be moved offshore because of the relative lack of skills needed for assembly processes and the low-capital intensity. The casual ob- server accepts that it is natural for garment production to move to the lowest cost environment, particularly given the enormous pricing pressure on manu- facturers. Drawing upon their book A Stitch in Time, in Chapter 2 Abernathy et al. show that for certain garments, a new locational logic has emerged moti- vated by what they term“lean retailing.”In this system, retailers carry only min- imal inventory, finding that it is more economical to rapidly replenish goods that have sold. Lean inventory decreases the risk of holding stocks that might become obsolete with a quick change in consumer preference. However, lean- ness implies that the danger of being out of stock increases. Rapid replenish- ment depends upon having factories close to the end market and linked to re- tailers by sophisticated communications systems. This desire for rapid replenishment has led to a production shift for many types of garments for the U.S. market from Asia to the Caribbean Basin and Mexico, while in Western Eu- rope production is being relocated from Asia to North Africa and Eastern Eu- rope. Firms must balance between production and transportation costs and speed, which, in rough measure, is a function of distance and transportation modality. They explore the trade-offs that garment firms must make when de- ciding where to source their production. This is illustrated by a provocative demonstration of how low labor costs can be offset by the inventory cost sav- ings and risk reduction that can be achieved by producing in a higher cost en- vironment in closer proximity to the customer. The third chapter, on the automobile industry, provides insight into many facets of globalization. The automobile is a particularly interesting product, be- cause it is the paragon of the mass production system, and with more than thirty thousand individual parts, it is the most complicated and bulky mass-as- sembled product. Because of the large number of parts and interdependence involved, Sturgeon and Florida study the globalization of both the auto assem- blers and their major suppliers. Given its complexity and importance to na- tional governments, globalization in the automotive industry has always had a political dimension. They argue that there are four different forms of globalization underway in the industry. The first form of globalization is characterized by increasing im- ports and exports, though they predict that this trend will decline because of the second form, which consists of the establishment of assembly plants in closer proximity to the final consumer. The impact of this form of globalization will be moderated by a movement to establish new plants in low-wage nations, such as Mexico for the United States market and Spain and Eastern Europe for
14 / m a rt i n ken n ey the Western European market. Because of this, they predict that the shipment of automobiles across oceans will decrease. However, the new plants being es- tablished by foreign competitors are exacerbating an already severe overcapac- ity problem that is driving prices down. The third form is the cross-national consolidation through merger and acquisition of the industry into an ever fewer number of major auto assemblers. The final form is the globalization of vehicle platforms and models as the same vehicle is introduced in a number of different markets. The evolution of these different forms not only affects the auto assemblers but also is propelling the establishment of global parts suppli- ers that can service their customers in every market. However, these new forms are not simply spreading automobile production uniformly over the landscape, since transplants tend to be sited relatively close to traditional automobile man- ufacturing regions, albeit with some shifts to proximate, lower-wage environ- ments. More important, Sturgeon and Florida find that global design clusters are emerging, given the increasing need for interaction between auto assem- blers and parts suppliers earlier in the vehicle design process. Their chapter richly illustrates the multiple dimensions of globalization, and how the interac- tion between assemblers and parts suppliers affects the dimensions of global- ization. In the fourth chapter by Martin Kenney, the long sweep of globalization in the television industry is examined using North America as a case study. The spatial configuration of the value chain for televisions, unlike that for automo- biles, has shifted substantially during the last five decades as it has for a number of other industries in this book. And yet, transportation and communication, though significant, have not profoundly influenced the industry. What has been most important is finding relatively low cost labor pools in reasonably close proximity to the final consumer. In terms of speed of change and obsolescence, of course, shrinking inventory is important, but televisions do not experience the same loss of value dynamics as garments and PCs. However, since televi- sions are commodities, price pressures are ferocious. Chapter 4 examines the shifting location of television production, and doc- uments the reasons for the growth and decline of U.S. firms and domestic pro- duction. Fittingly, this globalization begins with RCA’s transfer of technology to Japan and ends with the relocation of television production to northern Mex- ico. Segmenting the television value chain into components, color picture tubes (CPTs), and final assembly provides the reader with greater insight into the un- folding and constantly changing map of globalization, which in the case of North America ends with a production cluster created by Asian firms in north- ern Mexico to serve the U.S. market. This Mexican production cluster that be- gan with simple assembly has deepened as it has attracted an increasing num-
Introduction / 15 ber of parts makers from Asia and CPT producers from the United States, drawn by Mexico’s proximity to U.S. consumers. Part II examines globalization in the new industries formed in the postwar period. In Chapter 5, James Curry and Martin Kenney examine the dynamics of globalization in the personal computer industry, which plays a major role as a consumer of the outputs of the component industries studied in the chapters that follow. Its juxtaposition with the television industry discussed in the pre- vious chapter is also fascinating because the PC shares so many similarities with the television in terms of assembly process and components; in fact many be- lieve these two products might converge. As Linden et al. in their chapter and, to a lesser degree, Murtha et al. in their chapter argue, the centrality of the desktop PC may decline in the case of semi- conductors and FPDs. This may also be true in the HDD industry with the ad- vent of TiVo, which uses an HDD to record television programs. Thus the tele- vision might compete with the PC even if the proverbial convergence never occurs, and it will provide new outlets for the components discussed in Part II. Another feature distinguishing the industries in Part II is that they experi- ence value erosion based on the speed of technical change. They share this em- phasis on speed with the oldest industry in Part I, garments, revealing that tech- nical change and fashion experience similar loss-of-value dynamics. The PC industry is characterized by extremely rapid change caused by the devaluation of its constituent semiconductors and the HDD. This rapid pace creates a business environment in which proximity to the final customer is es- pecially important because long transit times for a finished PC can lead to sig- nificant losses of value. This intense pace of depreciation creates an interesting anomaly. Taiwan is the only discernible PC cluster in the world, housing the headquarters for firms that in factories situated around the world assemble more than 50 percent of all PCs sold; yet the most important brand name firms are not located in this clus- ter. The reason is that the highly modular nature of the PC with its rigorously specified interfaces between components means that tacit knowledge about production is not especially important. Proximity to the market is more criti- cal. Thus, while one might think that the ease of assembly and ready availabil- ity of all the constituent components of the PC would allow Asian firms to gain dominance, this is not the case. U.S. firms dominate the industry because they not only provide the components with the greatest value added but also are lo- cated in, and can learn from, the world’s largest market and its highly sophisti- cated customers. The next three chapters discuss industries that produce the three most valu- able PC components, and the concluding industrial chapter argues that, at least
16 / m a rt i n ken n ey in semiconductors, a “post-PC” world is dawning. In Chapter 6, McKendrick draws upon and extends his research, first presented in the book From Silicon Valley to Singapore, to elucidate how the dynamics of globalization affect the HDD industry. The HDD is the final major assembled component in the PC that continues to be dominated by U.S. producers. This chapter traces the his- torical evolution of the spatial configuration of the manufacturing, R&D, and headquarters functions. It finds that R&D and headquarters functions continue to be clustered in Silicon Valley, with a smaller cluster in Japan, even while man- ufacturing is concentrated in Asia, especially Southeast Asia and China. In fact, the HDD industry demonstrates that it is possible to internalize both R&D and manufacturing within the firm and manage both processes, though they occur on different continents. HDDs resemble semiconductors and FPDs in that they experience rapid change, short product cycles, and severe cost pressures. How- ever, in contrast to semiconductors and FPDs, an HDD consists of a relatively large number of components that must be physically assembled to very tight tolerances. As in the case of DRAMs, the need for speed, cost, and quality have meant that the leading firms have integrated much of the value chain and con- duct manufacturing in-house. In contrast to PCs, consumer proximity was not necessary for the HDD industry. In Chapter 7, Murtha et al., drawing upon their book Managing New Indus- try Creation, examine the global dimensions of the establishment and growth of the flat panel display industry. They show how the initial research was under- taken in the United States, but the commercialization occurred in Japan, where an early cluster of FPD manufacturers and equipment makers ignited a knowl- edge-creation dynamic that soon outdistanced firms not located in the cluster. They differ from conventional accounts by showing how a number of U.S. firms that embedded themselves in and contributed to this knowledge-creation dy- namic experienced great success. In FPDs, globalization was a process of partic- ipating in a very local knowledge-creation dynamic. For materials and equip- ment suppliers, proximity to lead customers was vital for success, because of the great amount of tacit information that was both exchanged and mutually cre- ated. The semiconductor has probably been the most important artifact of the second half of the twentieth century. Semiconductors are the devices that process data; they are components that make computing and the Information Age possible. Semiconductors share a technical commonality with FPDs— namely, they are both based upon the substrate silicon. Unfortunately, the mar- ket for semiconductors is treacherous because of notoriously rapid improve- ment cycles, escalating capital expenditures, and brutal competition. The final two industrial chapters comprising Part II examine the semicon-
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me. Senior officers of the General Staff of the Army were also assigned. The basic strength requirements assumed in these military exercises were: The launching of one army group south of the Pripet territory, specifically from southern Poland and from Romanian territory, with the aim of reaching the Dnieper-Kiev line and south of it; north of the Pripet territory another army group, the strongest, from the area around Warsaw and northward, with the general direction of attack being the Minsk-Smolensk line, the intention being to direct it against Moscow later; then a further army group, namely Army Group North, from the area of East Prussia, with the initial direction of attack being through the Baltic States toward Leningrad. The conclusion which was drawn from these military exercises was at that time that in case of actual hostilities provision should be made firstly for reaching the general line Dnieper-Smolensk- Leningrad, and then the operation was to be carried forward if the situation developed favorably, supply lines, et cetera being adjusted accordingly. In connection with these military exercises and for the evaluation of the theoretical experience gained therefrom, there was a further conference of the Chief of the General Staff of the Army and the chiefs of the general staffs of the army groups which had been planned for the East. And further, in connection with this conference, there was a speech about Russia by the then chief of the section Foreign Armies East, Colonel Kinsel, describing Russia’s geographic and economic conditions, the Red Army, et cetera. The most significant point here was that no preparations whatever for an attack by the Soviet had come to our attention. With these military exercises and conferences that I have just described the theoretical considerations and plans for this offensive were concluded. Immediately thereafter, that is on 18 December 1940, the Supreme Command of the Armed Forces issued Directive Number 21. This was the basis for all military and economic preparations which were to be carried out. In the Supreme Command of the Army this directive resulted in going ahead with the drafting and working out of directions for troop deployments for this operation. These first directions for troop deployment were authorized on 3 February 1941 by Hitler after a report by the
Commander-in-Chief of the Army at the Obersalzberg; thereupon they were forwarded to the troops. Later on several supplements were issued. For the beginning of the attack the Supreme Command of the Armed Forces had calculated the time which would make it possible for large troop movements to be made on Russian territory. That was expected from about the middle of May on. Preparations were made in accordance with this. Then at the end of March this date underwent a change, when Hitler decided, due to the development of the situation in Yugoslavia, to attack this country. Consequently, in the orders issued at the beginning of April 1941 this tentative date for the start of the operation. . . . THE PRESIDENT: I am afraid you are a little too fast. I think you had better begin again where you said that at the end of March Hitler made a change in the plan. PAULUS: [Continuing] Because of his decision to attack Yugoslavia, the date foreseen for the beginning of the attack had to be postponed by about five weeks, that is to the last half of June. And, indeed, this attack then did take place on 22 June 1941. In conclusion, I confirm the fact that the preparation for this attack on the Soviet Union, which actually took place on 22 June 1941, dated back to the autumn of 1940. GEN. RUDENKO: In what way and under what circumstances. . . . THE PRESIDENT: One moment. Did the witness give the date? He said that preparations for this attack had been made, and what I want to know is, did he give the date from which it had been prepared? [To the witness] Did you give the date from which the preparations went forward? PAULUS: I gave it at the beginning: From the time my personal observations began, when I entered office, on 3 September 1940. GEN. RUDENKO: In what way and under what circumstances was the participation of the satellite states secured? PAULUS: From personal observation, I can say the following regarding this:
About September 1940, just at the time when I had received this operational study for the attack on the Soviet Union there was planned from the outset the use of Romanian territory for the deployment of the German right or, that is to say, south wing, and that was taken into consideration from the outset. A military mission headed by the then Lieutenant General of Cavalry, Hansen, was sent to Romania. A whole panzer division, the 13th, was transferred to Romania as a training unit. To those who knew about the plans for the future it was obvious that this step could only serve the purpose of preparing the future partner in the war for the task intended for him. Further, in regard to Hungary: In December 1940 Colonel Lazslo, the chief of the operational group of the Hungarian General Staff, came to the headquarters of the Army High Command at Zossen. He asked for a conference regarding questions of organization. The Hungarian Army at that time was concerned with the question of regrouping its units, which were organized in brigades, into divisions and also with the setting up of motorized troops and of panzer units. The chief of the Organization Division of the General Staff of the Army, then Major General Buhle, and myself advised Colonel Lazslo. At the same time, several Hungarian military commissions were in Berlin, and with them also the Hungarian Minister of War, General Von Bartha, and they discussed armament deliveries to Hungary with German authorities. It was clear to all of us who were informed as to future plans that all these measures, including the supplying of arms to other armies, were only conceivable at that time if these weapons were to be employed in future military projects. Regarding Hungary there is a further point: Due to the development of events in Yugoslavia, Hitler, at the end of March 1941, decided to attack Yugoslavia. On 27 or 28 March I was called to the Reich Chancellery in Berlin, where there had just been a conference between Hitler, Keitel, and Jodl, in which the Commander-in-Chief and the Chief of Staff of the Army had participated, that is, had been ordered to be present.
When I arrived I was advised by the Chief of Staff of the Army, General Halder, that Hitler had decided to attack Yugoslavia in the first place to eliminate a threat to the flank of the intended operation against Greece, and get hold of the rail line going from Belgrade southward through Nish, and then also with an eye to the future—to Plan Barbarossa—to keep the right flank free from the outset. I was instructed to go to Vienna, taking with me a number of competent General Staff officers of the Army, to deliver and explain pertinent orders to German commanders, and then to travel on without fail to the Hungarian General Staff in Budapest and to reach an understanding with it on the deployment of German troops on Hungarian territory and the participation of Hungarian troops in the attack on Yugoslavia. On 30 March, early in the morning, I arrived in Budapest and had a conference with the Chief of the Hungarian General Staff, General Werth, of the infantry and then with the chief of the operational group of the Hungarian General Staff, Colonel Lazslo. These conferences went along in good order and ended very quickly, and the desired result was achieved. This result was then put down on maps. The map that I received from the Hungarian General Staff contained not only the deployment of the troops intended for the attack against Yugoslavia, but also forces on the Carpatho-Ukrainian border, which were to be placed there to protect our rear against the Soviet Union. The fact of the creation and existence of this force is a sign that even on the side of Hungary there was the realization that an attack by Germany against Yugoslavia would have to be considered as an aggressive action by the Soviet Union. As regards the principle of calling upon Hungary in the preparation and later in the execution of the planned operations, I learned Hitler’s view at that time. He was of the opinion that Hungary was anxious, through German help, to recapture and expand the areas lost in 1918; and in addition, that she was afraid of falling behind Romania which was allied with Germany. Hitler saw Hungary from this point of view also with regard to his policy. But he was, as I could observe in many instances myself, very reserved
toward Hungary, and for two reasons. For one, he did not believe Hungary could guarantee secrecy with regard to future war plans, due to her close connections with foreign countries hostile to Germany, and secondly, he did not want to make Hungary too many premature promises of territory. I can cite one example: The question of the Dragowitsch oil territory. Later, when the attack began against Soviet Russia, the 17th German Army which was fighting at that point had the explicit order from the Supreme Command to take the Dragowitsch oil fields at all costs before the arrival of the Hungarians. Regarding this future partner, according to my observation the procedure of Hitler was such that he counted on her certain participation and therefore delivered the armament to her and helped with the training, but that he kept to himself the time when he would initiate the ally into his plans. Thirdly, the Finnish question. In December 1940 the first visit of the Chief of the Finnish General Staff, Lieutenant General Heinrichs, was made to the headquarters of the High Command of the Army in Zossen. Lieutenant General Heinrichs had a conference with the Chief of the Army General Staff, the contents of which I no longer remember; but he made a speech about the Russo-Finnish war of 1939-1940 before the General Staff officers of the High Command of the Army, and the General Staff officers of the Army groups who happened to be present at the time in connection with the discussion of the military exercises. This speech before these General Staff officers had its great significance at that time because of the fact that it was delivered at the same time that Directive Number 21 of 18 December was issued. This speech was significant, it dealt with experiences won in the war with the Red Army and in addition gave an insight into the value of the Finnish troops as possible future partners in the war. I took part in a second conference with the Chief of the Finnish General Staff at the headquarters of the High Command of the Army in Zossen, in the second half of May 1941. The Chief of the Finnish General Staff arrived from Salzburg where he had had conferences with the High Command of the Army. The subject of the subsequent
conferences in Zossen with the General Staff of the High Command of the Army was the co-operation of the Finnish forces in the south in Plan Barbarossa—in co-operation with Army Group North—which was to proceed from the deployment area in East Prussia towards Leningrad. At that time the agreement was reached that the Finnish troops in the south were to synchronize their movements with the advance of German Army Group North and likewise that the joint advance later against Leningrad should be subject to consultations and agreements depending on the development of events. Those are the personal observations which I made regarding the first appearance and the enlistment of allies in preparations for the aggression. GEN. RUDENKO: How, and under what circumstances, was the armed attack on the U.S.S.R. carried out—the attack which was prepared by the Hitlerite Government and the Supreme Command of the German Armed Forces? PAULUS: The attack on the Soviet Union took place as I have related, according to a plan prepared carefully and well in advance. The troops for this attack were at first assembled in the rear of the deployment area. By special orders they were then moved by groups into jumping-off positions, and then took up their position along the entire long front from Romania to East Prussia for a simultaneous attack. The Finnish theater of war was excluded from this operation. Just as the large-scale operational plan, as I described it at the beginning, was to a certain extent tried out theoretically, the detailed employment of troops was discussed during military exercises by the staffs of army groups, corps, and divisions and drawn up in orders down to the details long before the beginning of the war. A large-scale diversion, which was to be organized in Norway and along the coast of France was designed to simulate an invasion of Britain in June 1941 and thus divert Russia’s attention. All measures were taken not only for operational but also for tactical surprise, as for instance, the prohibition of open reconnaissance on and across the boundary before the beginning of the war. That meant on the one hand, that possible losses which might be caused due to the lack of reconnaissance had to be taken
into account for the sake of surprise, but on the other hand it meant that a surprise attack across the boundary by the enemy was not feared. All of these measures show that it was a question of a criminal attack. GEN. RUDENKO: How would you define the aims pursued by Germany in attacking Soviet Russia? PAULUS: The aim to reach the Volga-Archangel line, which was far beyond German strength, is in itself characteristic of Hitler’s and the National Socialist leadership’s boundless policy of conquest. From a strategic point of view, the achievement of these aims would have meant the destruction of the armed forces of the Soviet Union. With the winning of the line I have mentioned the main areas of Soviet Russia with the capital, Moscow, would have been conquered and subjugated, together with the leading political and economic center of the Soviet Union. Economically, the winning of this line would have meant the possession of important agricultural areas, the most important natural resources, including the oil wells of the Caucasus and the main centers of production in Russia, and also the main network of communications in European Russia. How much Hitler was bent on taking economic objectives in this war can best be shown from an example out of my personal experience. On 1 June 1942, on the occasion of a conference of commanders-in-chief in the region of Army Group South in Poltava, Hitler declared, “If I do not get the oil of Maikop and Grosny, then I must end this war.” For the utilization and the administration of the territories to be conquered, economic and administrative organizations had already been formed and were kept in readiness long before the beginning of the war. To summarize I should like to state that the objectives given indicate the conquest of the Russian territories for the purpose of colonization with the utilization and spoliation of and with the resources of which the war in the West was to be brought to a
conclusion, with the aim of finally establishing domination over Europe. GEN. RUDENKO: And one last question: Whom do you consider as guilty of the criminal initiation of the war against Soviet Russia? PAULUS: May I please have the question repeated? GEN. RUDENKO: I repeat the question. . . . THE PRESIDENT: The Tribunal is about to address an observation to General Rudenko. The Tribunal thinks that a question such as you have just put, as to who was guilty for the aggression upon Soviet territory, is one of the main questions which the Tribunal has to decide, and therefore is not a question upon which the witness ought to give his opinion. Is that what Counsel for the Defense wish to object to? DR. LATERNSER: Yes, Mr. President, that is what I want to do. GEN. RUDENKO: Then perhaps the Tribunal will permit me to put this question rather differently. THE PRESIDENT: Yes. GEN. RUDENKO: Who of the defendants was an active participant in the initiation of a war of aggression against the Soviet Union? PAULUS: Of the defendants, as far as I observed them, the top military advisers to Hitler. They are the Chief of the Supreme Command of the Armed Forces, Keitel; Chief of the Operations Branch, Jodl; and Göring, in his capacity as Reich Marshal, as Commander-in-Chief of the Air Forces and as Plenipotentiary for Armament Economy. GEN. RUDENKO: In concluding the interrogation I shall make a summary. Have I rightly concluded from your testimony, that long before 22 June the Hitlerite Government and the Supreme Command of the Armed Forces were planning an aggressive war against the Soviet Union for the purpose of colonizing the territory of the Soviet Union? PAULUS: That is beyond doubt according to all the developments as I described them, and also in connection with all the directives issued in the well-known Green File. GEN. RUDENKO: I have no more questions, Mr. President.
THE PRESIDENT: Does any member of the French Prosecution wish to ask any questions? FRENCH PROSECUTOR: No. THE PRESIDENT: The British? BRITISH PROSECUTOR: No. THE PRESIDENT: The United States? UNITED STATES PROSECUTOR: No. THE PRESIDENT: Any member of the defendants’ counsel? DR. LATERNSER: Mr. President, as Counsel for the General Staff, I ask you to afford me the opportunity to examine the witness tomorrow morning. The presentation of the witness by the Prosecution came as a surprise to the defendants’ counsel, at any rate, and I think a consultation about the questions to be asked, especially in view of the importance of the testimony, is absolutely necessary. I therefore ask to be permitted to conduct the cross- examination at the beginning of tomorrow morning’s session. THE PRESIDENT: General Rudenko, if the Prosecution has no objection, the Tribunal thinks that this application ought to be granted. GEN. RUDENKO: If the Tribunal so wishes, the Prosecution will not object. THE PRESIDENT: Yes, very well. I don’t know whether any other member of the defendants’ counsel would prefer to cross-examine now. DR. NELTE: Mr. President, I assume that all defendants’ counsel may conduct their cross-examination of the witness, General Paulus, tomorrow morning? THE PRESIDENT: Yes, certainly. I was only asking whether any other member of the defendants’ counsel would prefer to cross- examine now. DR. NELTE: I personally would be able to put my questions after the recess. THE PRESIDENT: Very well. Then the witness can retire and the case will go on. He will be recalled tomorrow morning and in the meantime you will go on with your case.
[The witness left the stand, and Major General Zorya approached the lectern.] THE PRESIDENT: General, you won’t, I presume, think it necessary to read any more of Field Marshal Paulus’ statement, will you? GEN. ZORYA: No. THE PRESIDENT: Very well, go on, then. GEN. ZORYA: Referring to the explanation concerning the beginning of the criminal attack of Fascist Germany on the Soviet Union, I should like to remind the Tribunal that in the morning session of the Tribunal on 30 November 1945, the witness, Lahousen, was interrogated and gave evidence of sufficient interest in our case. Among other things, this witness, when enumerating the more intimate members of the inner circle of Admiral Canaris, Chief of the Intelligence and Counterintelligence Services of the German Army, mentioned Pieckenbrock by name. I present to the Tribunal as Document Number USSR-228, the testimony of the former chief of Section I of the German Military Intelligence and Counterintelligence Services, Lieutenant General of the former German Army, Hans Pieckenbrock, former chief and colleague of Lahousen. Pieckenbrock gave this testimony in the order prescribed by the laws of the Soviet Union, in Moscow, on 12 December 1945. For the moment I should like to read a few lines only into the record from Pieckenbrock’s testimony, relating to the matter which we are now investigating. These lines are on Page 1 of the Russian text of his testimony and they are marked with a red pencil. This Page 1 corresponds to Page 34 of the document book.
“I must say”—said Pieckenbrock—“that already since August and September 1940 the Foreign Armies East of the General Staff of the Army began to increase considerably its intelligence assignments to the Abwehr concerning the U.S.S.R. These assignments were unquestionably connected with the preparation of war against Russia. “The more precise dates for Germany’s attack on the Soviet Union I learned in January 1941 from Canaris. I do not know what sources Canaris used, but he told me that the attack on the Soviet Union was fixed for 15 May.” The Soviet Prosecution also has at its disposal the testimony of the former chief of Department III of the German Military Intelligence and Counterintelligence Services, Lieutenant General Franz von Bentivegni of the former German Army, which was given by him on 28 December 1945. I present those documents under Document Number USSR-230. I shall at the same time also only read into the record those parts of Bentivegni’s testimony underlined in red pencil, which have a direct bearing on the beginning of military preparations against the Soviet Union. These first two excerpts of the testimony are on Page 37 in the document book which is submitted to the Military Tribunal: “I learned first of Germany’s preparation for a military attack on the Soviet Union in August 1940, from the head of the German Intelligence and Counterintelligence Service, Admiral Canaris. In an unofficial conversation which took place in Canaris’ office he told me that Hitler had started to take measures for an Eastern campaign, which he had spoken about as early as 1938 in his speech at a meeting of Gauleiter in Berlin. “Canaris said to me that these plans of Hitler’s had now begun to take concrete form. This was evident from the fact that divisions of the German Army were being forwarded in large numbers from the West to the eastern frontiers and, in accordance with a special order
by Hitler, were taking up positions from which to start the coming invasion of Russia.” These are the first two paragraphs of Bentivegni’s testimony. And finally, in order to finish with the question of the actual time of fascist Germany’s military preparations for the treacherous attack on the Soviet Union, I should like to dwell for a moment on the testimony of General Müller. This testimony, dated 8 January 1946, was written in a camp for prisoners of war. I present it to the Tribunal as Document Number USSR-149. All the material to which I have so far referred emanated from circles of the highest commanding officers of the German Army. THE PRESIDENT: General, on this document of General Müller, does it appear where that document was made and where General Müller is now? GEN. ZORYA: The photostat bears a date written in General Müller’s hand. This date is 8 January 1946. THE PRESIDENT: Where? GEN. ZORYA: If I might have a look at the photostatic copy which I have just presented to the Tribunal, I would be able to tell you where the date is written. THE PRESIDENT: Yes, but there are many prisoners-of-war camps. We want to know which one and where it is. GEN. ZORYA: In a camp located near Moscow. THE PRESIDENT: Has this document got any authenticating signature on it at all? So far as we are concerned, isn’t it simply a photostatic copy of a writing by somebody? GEN. ZORYA: Mr. President, this document, like all other documents which have been submitted so far by the Soviet Delegation, is a noncertified photostatic copy. Taking into consideration the wish of the Tribunal and in execution of this wish the Soviet Prosecution took measures to ensure that only the originals of these documents or documents whose authenticity is certified will be presented in complete order to the General Secretary. This will be done in the course of several days
and all the material will be given in best order to the General Secretary. THE PRESIDENT: Can you tell us where the writer of the document is now? GEN. ZORYA: I am hardly in a position to say more than I have already. If the Tribunal will permit me, I can consult my colleagues, make inquiries, and report to the Tribunal as soon as possible on the general’s whereabouts. THE PRESIDENT: Well, we will adjourn now. That will enable you to consult your colleagues. [A recess was taken.] DR. NELTE: Mr. President, to my regret I must present the same objections to this document submitted by the prosecutor of the Soviet Union under USSR-149, and must submit the same request which I made this morning. As far as I know, the High Tribunal have not yet made a decision in regard to this question. THE PRESIDENT: I beg your pardon, Dr. Nelte. The Tribunal has already made a decision. I think it would be better if, when defendants’ counsel go to the place from which they wish to speak, they would arrange these earphones before they speak. I say the Tribunal has already made a decision which governs this case. They pointed out the other day to counsel for the Soviet Union that documents which were not identified as authentic documents, must be identified as authentic, and the Soviet prosecutor at that time undertook to certify that all documents which he made use of were certified as authentic documents. And if they are not so certified, they will be struck out of the record. That ruling applies to this document. This document is a document which appears to be a document, a letter, or report to the Government of the Soviet Union, but it does not contain upon its face any certification showing that it is an authentic document. The Counsel for the Soviet Union said before we adjourned, that he undertook—as he had already undertaken—to
produce a certificate that the document was an authentic document; that is to say, that it was written by the person who purported to write it, and in those circumstances, the Tribunal accepts the document provisionally. If no such certificate is forthcoming, then the document will be stricken from the record. DR. NELTE: If I understand you correctly, the Tribunal will accept a letter written to the Soviet Government or a statement as documentary evidence for the contents of this statement. THE PRESIDENT: Certainly. I have already said provided that it is certified as an authentic document. I have said that more than once. DR. NELTE: In this way, every letter sent to the Prosecution or the Government of the Soviet Union or to any other Prosecution would become documentary evidence by the certification that it has actually been written by the person who signed it, which would make it impossible for the Defense to cross-examine the witness. THE PRESIDENT: That depends on where the witness is. We are dealing with witnesses who are scattered all over the globe, and as we are informed that it is not the practice in the Soviet Union for affidavits to be made in such cases, the Tribunal considers such a document to fall within Article 19—provided it is an authentic document. We are affording the defendants’ counsel the greatest assistance in bringing witnesses to this Court, but we cannot undertake to bring witnesses from all over the world upon questions which are very often of very little importance. DR. NELTE: I quite appreciate the difficulties, and I am grateful to the Tribunal for their willingness to assist us. Therefore I only request to ascertain in each case where the person, who has made that statement, has his residence, so that the Defense may try to reach him. THE PRESIDENT: Yes. If the witness is in, or in the immediate vicinity of, Nuremberg, the Tribunal would think that it was only fair, if such a document as this were to be put in evidence, that he should be produced for examination or cross-examination by the defendants’ counsel, but we do understand that the man who wrote
this letter is not in the vicinity of Nuremberg. We have no reason to think he is, and I am reminding defendants’ counsel that they can always apply, if they think right, to issue interrogatories which would be put to any such person as this who has written such a document as this. DR. NELTE: Thank you. GEN. ZORYA: I have availed myself of the recess to make inquiries about General Müller. General Müller is in a prisoner-of-war camp, Number 27, in Krasnogorsk, in the Moscow region. May I continue my statement? THE PRESIDENT: Certainly. GEN. ZORYA: All the material, Your Honors, which I have mentioned to date emanated from circles of the Supreme Command of the German Armed Forces. If I can so express myself, General Müller belonged to the middle category of German generals. He was Chief of Staff of an army; he commanded an army group. His testimony reflects a series of events which may be considered worthy of attention, since they explain the circumstances accompanying Germany’s preparations against the Soviet Union. I wish to refer to Page 40 of the document book. There you will find the first page of General Müller’s statement. The first paragraph, Page 1, of the statement is marked with red pencil. I now proceed to quote from it: “The preparation for the attack on the Soviet Union began as early as July 1940. At that time I was first general staff officer in the staff of Army Group C at Dijon in France. General Field Marshal Von Leeb was commander-in-chief. This army group consisted of the 1st, 2d, and 7th Armies, which were occupation armies in France. Besides this, Army Group A (Rundstedt), whose task was to prepare ‘Case Sea Lion’ (the invasion of England by Army Group B—Von Bock) was also in France. The staff of Army Group B was transferred to the East (Posen) during July and was given the following forces, transferred from France—part of the armies of occupation: The 12th Army Command (List), 4th Army Command (Von Kluge), and 18th Army Command (Von Küchler), plus several general commands and
about thirty divisions. A greater part of this number was taken from Army Group C (Von Leeb). “Directly after the campaign in the West, the OKH gave the order for the demobilization of 20 divisions. This order was cancelled, and the 20 divisions were not demobilized. Instead of this, after their return to Germany they were sent on leave, and thus kept ready for rapid mobilization. “Both measures, the transfer of about five hundred thousand men to the Russian frontier and the cancellation of the order disbanding about three hundred thousand men, show that already in July 1940 plans existed for war operations in the East. “The next order which gives evidence of Germany’s preparations for attacking the Soviet Union, was the written OKH order issued in September 1940 regarding the formation in Leipzig of a new army command (A.O.K. 11) of several general commands and about forty divisions and panzer divisions. The forming of these units was carried out from September 1940 onwards by the commander of the reserve army (Generaloberst Fromm), partly in France, but mainly in Germany. Towards the end of September 1940 the OKH called me to Fontainebleau. The Chief Quartermaster I in the General Staff of the Army, then Lieutenant General (afterwards Field Marshal) Paulus, informed me, at first orally, of the order that my staff (Army Group C) was to be transferred to Dresden by 1 November and that Army High Command II (Generaloberst Weichs) which was under the command of the staff, should be transferred at the same time to Munich. The task was the leading of training of the above-mentioned 40 divisions which were to be newly created. “In accordance with this order, confirmed later by signature by the Chief of the General Staff Halder, the transfer of these units was carried out on time. These 40 divisions were put into action in the invasion of the Soviet Union.” Thus initiated, the preparation for the military attack on the Soviet Union was carried out at a heightened tempo and with
customary German pedantry. I would, Your Honors, remind the Tribunal that the witness, Paulus, stated at this session that in August 1940 the elaboration of the previous plan of attack on the Soviet Union, known as Plan Barbarossa, was already so far advanced as to render possible the conducting of two military exercises under the direction of Paulus. THE PRESIDENT: General, I don’t think it is necessary to read the statement of Field Marshal Paulus, as he has already given the evidence in the witness box. GEN. ZORYA: I am not reading it into the record. I am merely referring to a circumstance which will enable me to proceed to General Müller’s statement that this system of military exercises, which originated in the General Staff of the German Army, eventually spread over the entire Army and that the entire armed forces participated in the execution of these games which, per se, were already a preparation for the attack on the Soviet Union. I am reading into the record that passage of the statement which is underlined in blue pencil, Page 41 of the bundle of documents: “Insofar”—General Müller states—“as in the future the Army was to attack the Soviet Union, the first plan was to train soldiers and general staff officers. “Towards the end of January 1941 I received telegraphic orders from the Chief of the General Staff Halder to attend the military exercises of Rundstedt’s army group at St. Germain, near Paris. The object of this military exercise was the attack and advance from Romania and South Poland in the direction of Kiev and southwards. The plan had in mind the intention also of the participation of Romanian troops. In the main this military exercise anticipated the conditions of the future order concerning the strategic deployment of forces, to which I will refer later. “The director of the military exercises was the Chief of the General Staff of the Rundstedt army group. There were present: Rundstedt, Halder, the Chiefs of the General Staff of the 6th Army, Colonel Heim, of the 11th Army, Colonel Wöhler, and of Kleist’s tank group,
Colonel Zwickler and several generals of the panzer forces. The military exercises were held at the place occupied by Rundstedt’s army group, approximately between the 31st January and 2d February 1941. The exercise demonstrated the necessity for a strong concentration of tank forces.” The documents I have presented to date characterize the measures of the military command of the German Armed Forces for the preparation of the strategic deployment of the German armies for launching an attack against the Union of the Soviet Socialist Republics. As for time, these measures embraced a considerable period of 1940 and were put into action at least 6 months prior to the appearance on the scene of Directive Number 21 concerning the Plan Barbarossa. I shall now proceed to the second group of documents presented by the Soviet Prosecution which characterize the espionage measures undertaken by the fascist conspirators in preparation for war against the Soviet Union. Trend and task of espionage work in connection with Plan Barbarossa were, as we know, determined by a directive from the Supreme Command of the German Armed Forces, addressed to counterintelligence on 6 September 1940 and signed by the Defendant Jodl. This document was presented by the American Prosecution under Number 1229-PS; it is to be found on Pages 46 and 47 of our document bundle. I do not intend to quote this document again, but I do consider it essential to remind you that in it the intelligence organizations demand that the regrouping of armies on Germany’s Eastern front should be camouflaged in every possible way and that the Soviet Union should remain under the impression that action of some kind was brewing against the Balkans. The activities of the intelligence organizations were strictly regulated. These activities included measures for concealing, as far as possible, the number of German forces in the East and of giving an impression of insignificant concentrations in the north of the
Eastern provinces, at the same time conveying the impression of very considerable concentrations of forces in the southern part, in the Protectorate and in Austria. The necessity was pointed out of creating an exaggerated impression of the number of antiaircraft units and of the insignificant extent of roadbuilding activities. I here take the liberty of making two pertinent observations. According to Pieckenbrock’s testimony, the intensification of the work of this intelligence organization against the Soviet Union began prior to the appearance of this directive in August 1940. And this work, of course, was not limited to the spreading of false information on the regrouping of forces from West to East. I beg you, Your Honors, to revert to the testimony, which I have already presented, of the former Chief of Department III of the Intelligence and Counterintelligence Services of the German Armed Forces, Von Bentivegni. On Pages 1, 2, and 3 of the Russian text of Bentivegni’s deposition, it is said—I quote the passage underlined in blue pencil— beginning at the last paragraph, Page 1 of the document which corresponds to Page 37 of the document book: “In connection with this, as early as November 1940 I received from Canaris orders to intensify the work for counterintelligence in the localities where concentration of the German armies on the Soviet German frontier was taking place.” On Page 2 of the statement, Page 38 of the document book, Paragraph 1, Bentivegni continues: “In accordance with this order, I immediately gave a corresponding order to the German Abwehr agencies, Danzig, Königsberg, Posen, Kraków, Breslau, and Vienna.” And finally, on Page 3 of the statement, which corresponds to Page 39 of the document book, I read: “In March 1941 I received from Canaris the following directives for the preparations for the execution of the Plan Barbarossa.
“a) Preparation of all links of Abwehr III for carrying out active counterintelligence work against the Soviet Union, as for instance the creation of the necessary counterintelligence groups, their distribution among various fighting units intended for taking part in the operations on the Eastern front, and paralyzing the activity of the Soviet intelligence and counterintelligence organs. “b) Spreading false information via their foreign intelligence agencies, partly by creating the semblance of an improvement in relations with the Soviet Union and of preparations for a blow against Great Britain. “c) Counterintelligence measures to keep secret the preparations being made for war with the Soviet Union and to ensure that the transfer of troops to the East be kept secret.” The same question is touched upon in the minutes of the interrogation of the Chief of the Intelligence and Counterintelligence Department I of the German Army, Pieckenbrock, which I have already presented in evidence. This statement contains the following passage regarding the activities of the intelligence service of the German Army in connection with the preparations for the realization of Plan Barbarossa. I would refer you to Page 35 of the document book and to Paragraph 2 from the top. This corresponds to Page 2 of Pieckenbrock’s testimony. Pieckenbrock states: “In March 1941 I was present at a conversation between Canaris and the chief of the espionage detachment (Abwehr II), Colonel Lahousen, about measures connected with Plan Barbarossa. During this conversation they kept referring to a written order on this subject, which Lahousen had. I, personally, as head of Abwehr I, beginning in February 1941 and up to 22 June 1941, more than once had official talks with the Chief Quartermaster IV, Lieutenant General Tippelskirch, and with the head of the detachment Foreign Armies East, Colonel Kienzl. These conversations dealt with the more precise definition of various tasks assigned to Abwehr, with regard to the Soviet Union, and in particular with the verification of old intelligence data about the Red Army, and also details about the
dislocation of the Soviet armies during the period of preparation of the attack on the Soviet Union.” I now skip one paragraph of Pieckenbrock’s statement and read further: “All Abwehrstellen which were working with the espionage against Russia were given the task of intensifying the dispatch of agents to the U.S.S.R. A similar task—the intensification of espionage work against Russia—was given to all intelligence organs existing in the armies and army groups. For the more successful direction of all these field Abwehr organs, a special intelligence staff was created in May 1941 under the code name of Wally I. This staff was in the vicinity of Warsaw in the village Sulajewek. Major Baun, as the best specialist on work against Russia, was appointed chief of the staff of Wally I. Later, when following our example, Abwehr II and Abwehr III had also established staffs Wally II and Wally III, this organ became known as a whole staff Wally, and directed the entire intelligence, counterintelligence, and diversionary work against the U.S.S.R. as a staff had to become active in the front line. At the head of staff ‘Wally’ was Lieutenant Colonel Schmalschläger.” I now pass on to the last paragraph of Pieckenbrock’s statement on Page 36 of the document book: “From numerous reports given by Colonel Lahousen and Canaris, at which I was also present, I know that a great amount of preparatory work for the war with the Soviet Union was carried out by this department. In the period of February to May 1941 many conferences of the leaders of Abwehr II took place at the quarters of Jodl’s deputy, General Warlimont. They were held in a cavalry school in Krampnitz. One particular question settled at these conferences in accordance with the needs of the war with Russia, was that of increasing the special task units, Brandenburg 800, and of distributing contingents of these units among the individual army groups.”
In Pieckenbrock’s testimony which has just been read into the record, special attention is drawn to his references to the special tasks with which Lahousen’s department had been entrusted, and to special task units known under the code name of Brandenburg 800. Here these points are clarified by the testimony of a former colonel of the German Army, Erwin Stolze, who was Lahousen’s deputy in Department II, Ausland Abwehr, attached to the Supreme Command of the German Armed Forces. Stolze was taken prisoner by the Red Army. I wish to submit to the Tribunal as evidence Stolze’s testimony of 25 December 1945, which was given to Lieutenant Colonel Burashnikov, of the Counterintelligence Service of the Red Army and which I submit to the Tribunal as Document Number USSR-231 (Exhibit Number USSR-231), which I beg you to accept as evidence. I shall read into the record individual extracts from this testimony which are underlined in red pencil. I begin the quotation from Page 48 of the document book. Stolze testified as follows: “I received instructions from Lahousen to organize and to lead a special group under code name ‘A,’ which had to engage in the preparation of diversionary acts and in the work of disintegration of the Soviet rear in connection with the intended attack on the U.S.S.R. “At the same time, in order that I should become acquainted with it and for my guidance, Lahousen gave me an order which came from the Operational Staff of the Armed Forces and which contained basic directives for the conduct of subversive activities in the territory of the U.S.S.R. after Germany’s attack on the Soviet Union. This order was signed by Field Marshal Keitel and initialed by General Jodl (or by General Warlimont on Keitel’s instructions—I do not quite remember which.)” I am omitting two lines which are irrelevant to our case and read on: “It was pointed out in the order that for the purpose of delivering a lightning blow against the Soviet Union, Abwehr II, in conducting subversive work against Russia, with the help of a net of V men,
must use its agents for kindling national antagonism among the people of the Soviet Union.” I now request you to turn over the page and on Page 49 in the document book on Page 2 of the minutes of the interrogation, and to note the following passages in his testimony: “In carrying out the above-mentioned instructions of Keitel and Jodl, I contacted Ukrainian National Socialists who were in the German Intelligence Service and other members of the nationalist fascist groups, whom I roped in to carry out the tasks as set out above. “In particular, instructions were given by me personally to the leaders of the Ukrainian Nationalists, Melnik (code name ‘Consul I’) and Bandara, to organize immediately upon Germany’s attack on the Soviet Union, and to provoke demonstrations in the Ukraine in order to disrupt the immediate rear of the Soviet armies, and also to convince international public opinion of alleged disintegration of the Soviet rear. “We also prepared special diversionist groups by Abwehr II for subversive activities in the Baltic republics of the Soviet Union.” I must again request you to turn over the page. On Page 50 in the document book, beginning with the third line from the top you will find Stolze’s testimony: “Apart from this, a special military unit was trained for subversive activities on Soviet territory, a special duty training regiment for special tasks, Brandenburg 800, under the immediate command of the head of Abwehr II, Lahousen. Among the objects of this special unit, created in 1940, was the seizure of operationally important points, such as bridges, tunnels, and important military installations, and holding them till the arrival of the advance units of the German Army. “Contrary to the international rules governing the conduct of war, the personnel of this regiment, mainly composed of Germans from beyond the border, made extensive use of enemy uniforms and equipment in order to camouflage their operations.
“During the course of preparations for Germany’s attack on the U.S.S.R., the command of the Brandenburg Regiment also collected supplies of Red Army uniforms, equipment, and arms, and organized separate detachments of Germans acquainted with the Russian language.” Your Honors, the testimonies of Stolze, Bentivegni, and Pieckenbrock, which I have presented in evidence, disclose the working methods of the German Intelligence Service in the preparation and execution of Plan Barbarossa. I shall not detain the Tribunal any further with these questions. But before proceeding to a further presentation, I should like to point out that the department of the Defendant Kaltenbrunner was likewise interested in intelligence work. I shall limit myself to submitting one document which is typical of the manner in which the Hitlerites, by exploiting their connections, created difficulties in Iran, through which country, as was known, the supply routes passed for the delivery to the U.S.S.R. of motor vehicles and war material of the most varied nature. The document, which I intend to submit to the Tribunal as Exhibit Number USSR-178 (Document Number USSR-178) was taken by us from the German Foreign Office archives, which fell into the hands of advance units of the Red Army. This document is the Defendant Kaltenbrunner’s letter to the Defendant Von Ribbentrop. The letter is typed on a sheet of note paper with the letterhead of the Chief of the Security Police and SD. In the document book before you, you will find this document on Page 52. I read into the record the underlined extracts from this letter: “28 June 1943; top secret. “To the Foreign Minister Herr Von Ribbentrop; Berlin; Object: Elections to the Iranian Parliament. “Most honorable Herr Reich Minister: We have made direct contact with Iran and have received information on the possibilities of exercising German influence on the course of the imminent Iranian parliamentary elections.”
And a few lines further on it is stated: “In order to exercise a decisive influence on the results of the elections, bribery is necessary. For Teheran 400,000 tomans, and for the rest of Iran at least 600,000 tomans are necessary. . . . It should also be noted that nationally oriented Iranian circles expect the intervention of Germany. “I beg you to inform me whether it is possible to obtain one million tomans from the Foreign Office. This money can be sent by the people whom we are sending there by airplane. “Heil Hitler. Yours devotedly, Kaltenbrunner, SS Obergruppenführer.” This document will help you to form an idea of the range of questions which interested the Reich Foreign Minister. Such a peculiar activity of the Foreign Office was not in the nature of a chance episode. In the course of time, the collaboration of the German Foreign Office and of the Reich Führer SS waxed in strength and developed more and more. As a result, a very curious document appeared, which might be considered as an agreement between Himmler and Ribbentrop on the organization of espionage work. I submit this document as Exhibit Number USSR-120 (Document USSR-120), and request the Tribunal to accept it as documentary evidence. This document is on Page 53 and 55 of the document book before you. The text of this agreement will be read into the record with a few remarks. The text of the agreement reads: “By the order dated 12 February 1944, the Führer has entrusted the Reich Führer SS with the creation of a unified German Secret Intelligence Service. The Secret Intelligence Service has as its purpose, so far as foreign countries are concerned, to get information in the political, military, economic, and technical spheres for the Reich. In addition, the Führer has established that the direction of the Intelligence Service, insofar as foreign countries are concerned, must be conducted in agreement with the Foreign
Minister. In this connection, the following agreement between the Reich Foreign Minister and the Reich Führer SS had been reached: “1. The Secret Intelligence Service of the Reich Führer SS represents an important instrument for obtaining information in the sphere of foreign politics, and this instrument is placed at the disposal of the Foreign Minister. The first condition for this is close, comradely, and loyal co-operation between the Foreign Office and the main office of the Reich Security Service. The collection of information on foreign politics by the diplomatic service is not affected by this. “2. The Foreign Office places at the disposal of the main office of the Reich Security Service the information on the situation in the field of foreign politics necessary for the conduct of the Intelligence Service and the directive regarding German foreign policy. It hands over to the main office of the Reich Security Service its intelligence and other tasks in the sphere of foreign policy, which are to be performed by the organs of the Secret Intelligence Service. “3. Intelligence material in the field of foreign politics, obtained by the Secret Intelligence Service, is placed. . . .” THE PRESIDENT: Wouldn’t it be a sufficient summary of this document with which you are dealing to say that it is a document signed by Himmler and Ribbentrop and that it shows that there was a unification of the German Secret Intelligence Service? The details of that unification are not really a matter which very much concerns this Tribunal, and therefore, as we are directed by the Charter to be as expeditious as possible, it is not necessary to read all the details of this unification. GEN. ZORYA: I summarize this document and would add that this agreement, signed by Himmler and Ribbentrop, created such a state of affairs that it became extremely difficult to differentiate prevailing conditions in fascist Germany or to distinguish where Himmler’s Gestapo service ended and the Foreign Office activities of the Defendant Ribbentrop began. I shall now, with the permission of the Tribunal, proceed to the presentation of the next document. The document which I have just
read—I am referring to the Himmler-Ribbentrop agreement concerning the conduct of intelligence work abroad—also justifies the assumption that under the name of German diplomatic representation in such countries which maintained normal diplomatic relations with Germany, a whole intelligence network of the Gestapo was actively functioning. If this summary, in the opinion of the Tribunal, corresponds to the contents of the document, I shall proceed to the following section of the report, “The Satellites of Germany.” When Plan Barbarossa was read into the record in Court, there was one part of the entire case which, in my opinion, received comparatively little attention. I refer to Part II of Plan Barbarossa, Document Number 446-PS. This part bears the name of “Presumed Allies and Their Tasks.” I should like, here and now, to draw the attention of the Tribunal to the questions touched on in this part. In the first place, I consider it essential to remind you of the contents of this part by repeating it. Document Number 446-PS, Plan Barbarossa, is on Page 14 of the bundle of documents submitted to the Tribunal. I consider it essential to read out Part II of this case: “1. On the flanks of our operation, we can count upon the active participation of Romania and Finland in the war against Soviet Russia. “The Supreme Command of the German Armed Forces will, at the appropriate time, settle and lay down in what way the armed forces of the two countries will be subordinated to the German command on their entry into the war. “2. Romania’s task will be to tie up, in co-operation with the group of the armed forces advancing there, the enemy forces facing her, and, for the rest, to maintain the auxiliary services in the rear area. “3. Finland will have to cover the advance of the German northern landing group (units of Group XXI) due to arrive from Norway, and then operate together with it. In addition, it will be up to Finland to eliminate Hangö.
“4. It is possible to count upon the Swedish railways and coal being available for the movements of the German northern group not later than the beginning of the operation.” In the speech of the Chief Prosecutor from the U.S.S.R., General Rudenko, attention was drawn to the opening sentence of this section: “On the flanks of our operation, we can count upon the active participation of Romania and Finland in the war against Soviet Russia.” This justified the Chief Prosecutor of the U.S.S.R. in pointing out in his speech that on 18 December 1940, the date of the Barbarossa document, Romania and Finland were already following in the wake of the predatory policy of the Hitlerite conspirators. There is only one more document which was submitted by the United States Prosecution and which mentioned Germany’s presumed allies in her aggression against the U.S.S.R. This document, numbered C-39, is entitled “Provisional Case Barbarossa.” It is, as the Defendant Keitel pointed out in his covering letter, a timetable for the preparations of Plan Barbarossa after June 1941. This timetable was confirmed by Hitler. The text of this plan is on Page 57 of the document book. In Part II of this document, entitled “Negotiations with Friendly Powers,” we read: “a) A request has been sent to Bulgaria not to reduce to any large extent the units stationed for security reasons on the Turkish frontier. “b) The Romanians have begun, at the instigation of the Commander-in-Chief of the German troops in Romania, a partial, camouflaged mobilization in order to be able to close their frontiers against a presumed attack by the Russians. “c) Hungarian territory will be used for the deployment of Army Group South only insofar as it would be expedient for introducing German units to link up the Hungarian and Romanian forces. Until
the middle of June, however, no representations on this subject will be made to Hungary. “d) Two German divisions have been deployed in the eastern part of Slovakia; the next ones will be unloaded in the area of Prosov. “e) Preliminary negotiations with the Finnish general staff take place as from 25 May.” Mr. President, in order to correlate the following documents with the testimony given by Paulus, I shall merely refer to the fact that this witness testified to the previous preparations for military aggression in that fortress which was Romania, thereby proving that corresponding measures for the reorganization of the Romanian Army, founded in the image and pattern of the German Army, were taken in September 1940 when a special military mission was sent to Romania. The chief of this mission was Cavalry General Hansen. His Chief of Staff was Major General Hauffe, his chief quartermaster Major Merk. Major General Von Rotkirch commanded the 13th Panzer Division. The task of this military mission was the reorganization of the Romanian Army and its preparation for the subsequent attack on the Soviet Union in the spirit of Plan Barbarossa. The preliminary trend of this task, as Paulus has testified, was given to Hansen and his Chief of Staff by Paulus and they got the last directives from the Commander-in-Chief, Field Marshal Von Brauchitsch. General Hansen received directives from two sources: from the OKW where his military mission was concerned, and from the OKH in all questions dealing with the Army. Directives of a military and political nature were received only from the OKW. The military mission acted as liaison between the German and the Romanian general staffs. The form assumed by the agreement and, even more, the publication of the true aims of high-ranking fascist leaders in the country, did not always suit the satellites. I now present, as Exhibit Number USSR-233 (Document Number USSR-233), the minutes of a conversation between Ion Antonescu
and the Defendant Ribbentrop which took place on 12 February 1942. This document was taken from the personal archives of Marshal Antonescu which were captured by the advance units of the Red Army. This document, Your Honors, figures on Pages 59-62 of your document book. In connection with Ribbentrop’s speech in Budapest on the subject of Transylvania, Antonescu makes the following annotation in the course of this speech—last paragraph, Page 2 of the Russian text of the document, Page 60 of the document book: “Without hesitation, I stressed the point that as early as 6 September, when I took over the government of the country, supported only by Monsieur Mihai Antonescu, I declared, without asking the opinion of my people, that we must follow a policy of adherence to the Axis powers. I said that this was the only example in the history of nations when two persons dare to make an open declaration and to call upon their people to follow a policy which no doubt could only appear odious. . . .” When making this cynical entry, Ion Antonescu could hardly have expected it to receive such wide publicity. Mr. President, I intend to read into the record a long document which will take considerable time. THE PRESIDENT: We will adjourn now. [The Tribunal adjourned until 12 February 1946 at 1000 hours.]
FIFTY-SEVENTH DAY Tuesday, 12 February 1946 Morning Session THE PRESIDENT: General Rudenko, you were going to recall the witness who was being called yesterday, Field Marshal Paulus, were you not, so that the defendants’ counsel may have the opportunity of questioning him? Will you do that now? GEN. RUDENKO: Yes, according to the wish of the Tribunal the witness is in the Palace of Justice. [The witness, Paulus, took the stand.] THE PRESIDENT: Field Marshal Paulus, I want to remind you that you should pause after the question that has been asked you before you answer it, in order that the translation shall get through. Do you follow what I mean? PAULUS: I have understood. DR. NELTE: Witness, I should like to ask several questions. On 3 September 1940, you came as Chief Quartermaster I to the High Command of the Army; is that correct? PAULUS: That is correct. DR. NELTE: Who was the Commander-in-Chief of the Army at that time? PAULUS: It will be very well known to you that at that time the Commander-in-Chief of the Army was Field Marshal Von Brauchitsch. DR. NELTE: I believe that the phraseology that you have used is not correct because I did not put this question for any other reason
than just to explain the situation to the people who are assembled here. It is known to us but may not be known to the Tribunal. Who was at that time the Chief of Staff of the Army? PAULUS: It was Generaloberst Halder. DR. NELTE: Were you, as Chief Quartermaster I, the permanent representative of the Chief of Staff? PAULUS: I was the deputy of the Chief of Staff for those cases which he told me to supervise, and as for the rest I had to execute the tasks with which he charged me. DR. NELTE: In this case were you especially charged with the adaptation of the plan which we later learned to know as Plan Barbarossa? PAULUS: Yes, to the extent of which I told you yesterday. DR. NELTE: Field Marshal Brauchitsch, your former Commander- in-Chief and superior, in an affidavit presented by the Prosecution has made a statement about the treatment of military plans. With the permission of the Tribunal, I should like to ask you to tell me whether this statement by Field Marshal Von Brauchitsch is also your opinion. I quote: “When Hitler decided to use military pressure or force to achieve his political aims, the Commander-in-Chief of the Army, if he was involved, first received orally a sort of orientation or a corresponding order.” Is that your opinion also? PAULUS: I have no knowledge of that. DR. NELTE: Generaloberst Halder, your immediate superior, in an affidavit which also has been submitted by the Prosecution, has said the following about the handling of such military operational things: “Special military affairs were the responsibility of those parts of the Wehrmacht, that is, Army, Navy, and Air Force, which were immediately under the Supreme Command of the Wehrmacht, that is to say, under the command of Hitler, who was at the same time the Chief of the Reich.” Is that your opinion likewise?
PAULUS: I ask you please to repeat this once more because I could not understand exactly what you meant. DR. NELTE: It is about the question: Who were the military persons responsible to Hitler in the forming of important plans? In respect to that, Von Brauchitsch said what you have just heard, and Halder said the following: “Special military affairs were the responsibility of those parts of the Wehrmacht, that is, Army, Navy, and Air Force, which were immediately under the Supreme Command of the Wehrmacht, that is to say, under the command of Hitler, who was at the same time the Chief of the Reich.” Is that so? PAULUS: We received the orders about military measures from the High Command of the Wehrmacht. Such was the Directive Number 21. I thought that those people held responsibility who were the first military advisers of Hitler in the High Command of the Wehrmacht. DR. NELTE: If you have seen Directive Number 21, then you must also know who signed it. Who was that? PAULUS: As far as I can remember, that was signed by Hitler; and Keitel and Jodl initialed it. DR. NELTE: But, at any rate, signed by Hitler, like all directives— is that correct? PAULUS: At any rate, most of the directives, unless they were signed by other people in his name. DR. NELTE: In other words, I may conclude that the man who gave the orders was the Supreme Commander of the Wehrmacht, that is to say, Hitler? PAULUS: That is correct. DR. NELTE: From the statements of Von Brauchitsch and Halder we can see, in my opinion, that the General Staff of the Army with its large machinery was to work out ideas which Hitler conceived, work them out in detail. Do you not believe that? PAULUS: That is correct. It had to relegate the orders which were given it by the Supreme Command to the proper departments.
DR. NELTE: It is clear that these orders were given to the High Command, that is, the Commander-in-Chief of the Wehrmacht. There was in all planning, as I can see from your statement also, in the execution of such aggressive plans a close collaboration between Hitler as Supreme Commander of the Wehrmacht and the General Staff of the Army. Is that correct? PAULUS: This co-operation exists between the Supreme Command and all persons who are charged to carry out the orders of the Supreme Commander. DR. NELTE: From your explanation I believe I can conclude that the incomplete plan which you found on 3 September 1940—that you have developed that, and that then, after you had achieved a certain measure of completeness, you presented it to the Supreme Commander, Hitler, personally, or through General Halder? PAULUS: The detailed completion of the plan was presented by the Chief of the General Staff or by the Commander-in-Chief of the Army; then it was either accepted or rejected. DR. NELTE: That is, it had to be accepted by Hitler or refused? PAULUS: Yes. DR. NELTE: Did I understand you correctly yesterday to say that you had already in the fall of 1940 understood that Hitler wanted to attack the Soviet Union? PAULUS: I said yesterday that the preparation of that plan of operations was the theoretical preparation for an attack. DR. NELTE: But already at that time you thought that that was Hitler’s intention, didn’t you? PAULUS: From the way in which this task was started one could see that, after the theoretical preparation, a practical application would follow. DR. NELTE: Furthermore, you said yesterday that no news of the Abwehr had been received which would prove that there were any intentions of the Soviet Union to attack. PAULUS: Yes. DR. NELTE: Did anybody in the circle of the General Staff of the Army ever speak about these matters?
PAULUS: Yes, these matters were discussed. They had serious misgivings about them, but no reports about any visible preparations for war on the side of the Soviet Union were ever made known to me. DR. NELTE: So you were firmly convinced that it was a straight attack on the Soviet Union? PAULUS: At any rate, the indications did not exclude that. THE PRESIDENT: The witness must speak more slowly. DR. NELTE: The witness has said, if I understood correctly, that there were signs which did not exclude these inferences. PAULUS: The order for the execution of this theoretical study of the conditions for attack was considered not only by myself but also by other informed experts as the first step for the preparation for an attack, that is to say, an aggressive attack on the Soviet Union. DR. NELTE: In realizing these facts, did you or the General Staff of the Army or the Commander-in-Chief of the Army make any protests to Hitler about it? PAULUS: Personally, I do not know in what form or whether the Commander-in-Chief of the Army made any protests. DR. NELTE: Did you, yourself, speak about having any doubts to Generaloberst Halder or to Commander-in-Chief Von Brauchitsch? PAULUS: If I judge correctly, then I believe that I am supposed to be here as a witness for the events with which the defendants are charged. I ask the Tribunal, therefore, to relieve me of the responsibility of answering these questions which are directed against myself. DR. NELTE: Field Marshal Paulus, you do not seem to know that you also belong to the circle of the defendants, because you belonged to the organization of the High Command which is indicted here as criminal. PAULUS: And, therefore, since I believe that I am here as witness for the events which have led to the indictment of these defendants here, I have asked to be relieved of answering this question which concerns myself. DR. NELTE: I ask the Tribunal to decide.
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Locating Global Advantage Industry Dynamics In The International Economy Martin Kenney Editor Richard Florida Editor

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    Locating Global Advantage IndustryDynamics in the International Economy
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    Innovation and Technologyin the World Economy a series edited by Martin Kenney, University of California, Davis / Berkeley Round Table on the International Economy Bruce Kogut, Wharton School, University of Pennsylvania Urs von Burg, The Triumph of Ethernet: Technological Communities and the Battle for the LAN Standard Gary Fields, Territories of Profit: Communications, Capitalist Development, and the Innovative Enterprises of G. F. Swift and Dell Computer Martin Kenney and Richard Florida, eds., Locating Global Advantage: Industry Dynamics in the International Economy
  • 7.
    Locating Global Advantage IndustryDynamics in the International Economy Edited by Martin Kenney with Richard Florida Stanford University Press, Stanford, California, 2004
  • 8.
    Stanford University Press Stanford,California ©2004 by the Board of Trustees of the Leland Stanford Junior University Printed in the United States of America Library of Congress Cataloging-in-Publication Data Kenney, Martin Locating global advantage : industry dynamics in the international economy / edited by Martin Kenney with Richard Florida. p. cm. — (Innovation and technology in the world economy) Includes bibliographical references and index. isbn 0-8047-4757-1 (alk. paper) — isbn 0-8047-4758-x (pbk. : alk. paper) 1. International economic integration. 2. International business enterprises. 3. Globalization. 4. Electronic industries—Location. I. Kenney, Martin. II. Florida, Richard L. III. Series hf1418.5 .l33 2004 2003018429 338.8'8—dc21 This book is printed on acid-free, archival-quality paper. Original printing 2004 Typeset at Stanford University Press in 10/12.5 Minion
  • 9.
    Acknowledgments The papers inthis book are the result of four workshops funded by the Sloan Foundation. We also thank three graduate students, Jennifer Bair, Theresa Lynch, and Greg Linden, who helped organize parallel graduate student work- shops. Our workshops were enriched by the participation of Avron Barr, Lee Branstetter, Tim Bresnahan, Steve Cohen, Rob Feenstra, Gary Gereffi, Gor- don Hanson, Bruce Kogut, William Miller, Shirley Tessler, and John Zysman. The authors of all eight industry chapters and the editors acknowledge the Alfred P. Sloan Foundation for the research support that made these papers and this book possible. Special thanks go to Hirsh Cohen, Frank Mayadas, and Gail Pesyna, the project officers, who encouraged all of the contributors to pursue their interest in better understanding how industries globalize. Pa- tient, understanding, and committed project officers are essential for this type of research. We would like to thank Gary Fields, Nichola Lowe, and Tim Sturgeon for invaluable suggestions, and we gratefully acknowledge the efforts and sug- gestions of three reviewers. We also thank Sarah Brassmassery and Allison Gillespie for their assistance throughout this project. We both thank the au- thors for being so willing to help facilitate the process of putting this volume together. Patricia Katayama and Nathan McBrien of Stanford University Press helped mightily in making this book a reality. M.K. R.F.
  • 11.
    Contents Preface: In VinoVeritas? xiii paul duguid Contributors xxvii 1. Introduction 1 martin kenney PART ONE 2. Globalization in the Apparel and Textile Industries: What Is New and What Is Not? 23 frederick h. abernathy, john t. dunlop, janice h. hammond, and david weil 3. Globalization, Deverticalization, and Employment in the Motor Vehicle Industry 52 timothy sturgeon and richard florida 4. The Shifting Value Chain: The Television Industry in North America 82 martin kenney PART TWO 5. The Organizational and Geographic Configuration of the Personal Computer Value Chain 113 james curry and martin kenney
  • 12.
    viii / Contents 6.Leveraging Locations: Hard Disk Drive Producers in International Competition 142 david g. mckendrick 7. Industry Creation and the New Geography of Innovation: The Case of Flat Panel Displays 175 thomas p. murtha, stefanie ann lenway, and jeffrey a. hart 8. Globalization of Semiconductors: Do Real Men Have Fabs, or Virtual Fabs? 203 robert c. leachman and chien h. leachman 9. The Net World Order’s Influence on Global Leadership in the Semiconductor Industry 232 greg linden, clair brown, and melissa m. appleyard PART THREE 10. Conclusion: From Regions and Firms to Multinational Highways: Knowledge and Its Diffusion as a Factor in the Globalization of Industries 261 bruce kogut References 283 Index 301
  • 13.
    Tables 2.1 Change inImport Share for Quota Constrained and Unconstrained Product Baskets, China/Hong Kong Quotas, 1990–1998 34 2.2 Top Ten Imports by Product Category and Volume Shipped: Mexico and China, 1991 and 1999 36 2.3 Product Composition and Replenishment Status: Mexico and China, 1991 versus 1999 38 3.1 The Eight Effects of Globalization 56 3.2 Vehicle and Parts Trade between Mexico and the United States, 1994–1998 61 3.3 Total and Intra-regional Exports of Finished Vehicles from Canada, Mexico, Spain, and East Europe, 1994–98 62 3.4 Top Fourteen Motor Vehicle Parts Suppliers, 1995 and 2000: Rank by Home Region and Country, 1995–2000 Compound Annual Growth Rate 72 3.5 Top Fourteen Motor Vehicle Parts Suppliers, Percentage of Sales in North America, 1995 and 2000 73 3.6 Regional Share of Motor Vehicle Sector Employment and Relative Wages 76 4.1 The Ten Largest CTV Manufacturers in the World, 1978 84 4.2 The Ten Largest CTV Manufacturers in the World, 1987 84 4.3 The Ten Largest CTV Manufacturers in the World, 1997 85 4.4 The Status of Japanese Television Assembly Plants in the U.S. as of 1999 95 4.5 Television Assembly Plants in tU.S., by Location, Product, and Employment, 1999 100 4.6 World’s Largest Television CPT Producers in Units, 1981 and 1995 107
  • 14.
    x / Tables 5.1PC Assembler Business Models 121 5.2 Global Ranking of PC Sales by Units, First Quarter 2003, 2001, 1999, 1997, and 1990 127 5.3 Global Location of U.S. PC Firms’ Factories 128 5.4 The Value and Time Sensitivity of Personal Computer Components 130 5.5 Financial Results for Selected Firms in the PC Value Chain, 2000 131 6.1 Dynamics of Industry Location and Benefits: HDD in Southeast Asia 160 6.2 The Geographic Pattern of Employment in Seagate, 1981–98 164 6.3 Summary Characteristics of Firms Assembling in Southeast Asia 170 7.1 Main Commercial Generations of Color TFT LCD Substrates 185 8.1 Comparison of Revenue per Wafer in Different Segments of the Industry 207 8.2 Regional Shares of Worldwide Fabrication Capacity 210 8.3 Distribution by Country of Fabrication Capacity in the Asia Pacific Region 210 8.4 Distribution of Worldwide Fabrication Capacity by Region of Ownership 211 8.5 Distribution of Fabrication Capacity by Product Type 212 8.6 Distribution of Pure-Play Foundry Capacity 212 8.7 Industry Ranking of Criteria for Locating Fabrication Facilities 226 9.1 The Chip Markets of the Net World Order 236 9.2 Market Attributes in the Net World Order 237 9.3 The Relevance of Competencies in the Net World Order 240 9.4 Value Chain Configurations of the Net World Order 244 9.5 Regional Chip Consumption by Product Markets, 2000 248 9.6 Home Substitution Index for Global Semiconductor Sales, 1992–2000 253 10.1 Estimated Failure Rates of Foreign Subsidiaries 271
  • 15.
    Figures 2.1 Impact ofShort Cycle Manufacturing on Profits and Inventory, Simulation Results 28 2.2 Changes in the Sources of U.S. Apparel Imports, 1984 and 2000 30 2.3 Trend in Apparel Imports: Physical Imports to the United States, 1988–2000 32 2.4 Trend in Apparel Imports: Value of Shipments from Two Regions to the United States, 1991–2000 32 3.1 U.S. Motor Vehicle Industry Assembly and Parts Employment, 1958–2000 54 3.2 Average Hourly Earnings of U.S. Production Workers in Manufacturing and Motor Vehicle Assembly and Parts, 1958–2000 54 3.3 From Part to Module to System 75 5.1 Taiwan’s IT Hardware Industry’s Overseas Production, 1998 and 1999 135 6.1 Seagate: Highest Capacity Drive at Each Production Location 162 8.1 Growth of Worldwide Semiconductor Fabrication Capacity 209 9.1 Sales of Semiconductors by Final Product Market, 1988–2000 235 9.2 Share of Worldwide Sales by Top 40 Semiconductor Firms, Grouped by Region, 1980–2000 251 10.1 Comparative Advantage and the Location of Economic Activities 263
  • 17.
    Preface In Vino Veritas? pa u l d u g u i d Is there truth in wine as Pliny said? Or is there just a brief flash of delusive (if delightful) insight that soon gives way to dullness? I shall leave that to read- ers of this preface to decide. But as I read the intriguing essays in this book I was frequently reminded of the eighteenth- and nineteenth-century wine trade. Before I try to show why, I must quickly acknowledge that, as Aber- nathy et al. wisely note in their chapter, there is undoubtedly something profoundly new about the new globalization. It is this new new thing that the different case studies and Kenney’s and Kogut’s broad overviews address so well. Nonetheless, historians of earlier global trade will find in these exem- plary case studies much that is familiar. In the wine trade, for example, as in the modern economy, commodities came from numerous competing points of production, covered vast distances, and passed through multiple hands to reach the major international market. Before the twentieth century, that major market was Britain. Here production was negligible, but because con- sumption was prodigious, merchants could exert significant influence back along the whole chain. This collection makes a similar point about supply chains that lead from overseas production to consumers in the United States, where production dwindles as consumption grows, and with it control over the supply chain.1 But, critically, these essays are not simply about chains, industries, or markets. They are also about particular firms. Directly or indirectly, each es- say records the ability of particular firms—specific links in these long supply chains—to achieve relative autonomy, and in the process assert control over the chain as a whole without, intriguingly, having to resort to formal inte-
  • 18.
    xiv / Preface gration.This “action at a distance”—both spatially and organizationally—is a distinctive feature of the new globalization, as firms disaggregate the old hi- erarchical forms. There are, in particular, several discussions here of “pressures” and “squeezes” exerted by dominant players over subordinate ones. While there are many clear examples, the most outstanding is surely McKendrick’s stark account that 196 million disk drives are manufactured by eight firms but result in no significant profit. That is a squeeze indeed. Such examples of supply chain subordination prompt me to wonder who gets to dominate, how, and how they manage to hold on, despite the dra- matic pace of change that Kenney rightly emphasizes in his introduction. Clearly, many of the successful firms described here have risen to both prominence and relative dominance in their particular supply chain without having to assume formal upstream or downstream control through integra- tion. Yet from what point they dominate seems highly variable. Sometimes it’s retail (Wal-Mart in clothing and apparel markets), sometimes it’s an OEM (Dell and Hewlett Packard, whose rise up Curry and Kenney’s Table 5.2 is perhaps as remarkable as it is unremarked, in the PC market),2 some- times it’s a major producer (Intel in the chip business), and sometimes (though not a central topic of discussion here) a software firm (such as Mi- crosoft in the PC value chain). Undoubtedly, there are numerous contrib- uting factors, many with a particularly modern character, and several that are quite industry specific. But this action at a distance, this struggle for domi- nance in global supply chains, was also, I shall try to show, a distinctive fea- ture of the old globalization. So a look at the era when firms traded globally (admittedly in a smaller world) but before they were hierarchically integrated might still throw some light on the challenges facing globally active firms to- day now that many have disaggregated.3 A brief glance at a longish durée (some two hundred years) in the history of the port wine trade reveals power similarly accruing to particular points in the chain, allowing particular firms not only to compete effectively with ri- vals but also to dominate their suppliers and even their customers. For while they must cooperate, links in these chains inevitably live in tension with one another. And as the case studies here suggest, significant rents accrue to the dominant link while others both up and down the chain get squeezed. (We’d surely all rather be Intel than a beleaguered packaging and testing house in Southeast Asia.) “Winning” the game of “vertical competition,” as Curry and Kenney suggest, can be as important (and rewarding) as beating your com- petitors in the marketplace.
  • 19.
    Preface / xv AShort History of the Port Trade If, as several writers in this volume claim, history matters, then wine should certainly tell us something about international trade. It is one of the oldest international commodities. Heroditus speaks of boats carrying wine to Babylon in the sixth century b.c.e. A century later, Greek trade was suffi- ciently important (and lucrative) to be the subject of legislation. Pliny’s Natural History includes some forty foreign wines among the ninety varieties available in Rome at the beginning of the Christian era. If the Dark Ages were not much kinder to wine than to learning (Goths, Vandals, and Huns, with their strong preference for beer and violence, seem to have been the linear ancestors of Britain’s “lager louts”), the Middle Ages saw a resurgence in both, with monastic vineyards, as productive as their libraries, fostering trade from the vine-rich regions of the Mediterranean and southern Europe to the colder regions in the north. The wine trade grew with the European economy and wine merchants proved eager, restless entrepreneurs. As often happens with transnational trade, England’s thirst for foreign- produced commodities came into conflict with its foreign policy. France be- came as natural an enemy as it was a natural source for wine. With the Eng- lish government repeatedly embargoing French wine, diplomacy as much as supply constrained demand. Portugal, eager for a Protestant ally to keep it free of the predatory Catholic power over its border, was an obvious alterna- tive. For England, there were other wine-producing options. But Portugal had an Atlantic-facing coast: proximity to major markets, as so many authors here note, helps. The year 1703 marked a significant point in this blend of trade and diplo- macy. The queen of England and the king of Portugal signed the Methuen Treaty guaranteeing Portuguese wine lower duties than French wine in Eng- land. In return, it guaranteed to English woolens unfettered access to Portu- gal. Addressing central issues of international trade—comparative advantage and the international division of labor, in particular—the treaty is of interest to more than wine (or textile) historians. Adam Smith saw in the treaty an invidious tax on domestic consumers. The Methuen advantage, in his eyes, was all Portugal’s. The Anglo-Portuguese economist Ricardo, however, saw things quite differently. Such trade, he thought, allowed the two countries with complementary assets to gain comparative advantage. More recent analysis of Anglo-Portuguese trade (Sideri 1970) tipped this balance once more, but in the opposite direction to Smith. In short-term annual budget- ary balances, the two may have shown comparative advantage, but not in long-term development. The complementary assets represented, on Eng- land’s side, the rising industrial economy, but on Portugal’s side, the falling,
  • 20.
    xvi / Preface agriculturaleconomy. So England developed its “new economy,” while Portugal, under physiocratic governments, was left with the old. Several of the essays in this volume (in particular, Linden et al.) do show labor divided principally between high value-added work in one part of the world and low value-added “old economy” assembly work elsewhere. Much of Western Europe, Japan, and the United States works in the knowledge economy; the people of Southeast Asia, China, and Mexico are more likely to work for it. Consequently, modern debates over the benefits of this form of globalization sound strikingly similar to those initiated by Smith and Ri- cardo over the Methuen Treaty. Yet, as Leachman and Leachman show, Tai- wan’s semiconductor manufacturing is in the forefront of innovation and has proven sustainable and very profitable. Similarly, as McKendrick’s study suggests, Singapore has benefited greatly by becoming the global manufac- turing headquarters for hard disk drives. In other words, these papers do show that not all manufacturing regions can be assigned to the “old econ- omy.” The challenge raised by all these papers and faced by governments around the developing world, then, is to understand the different conditions and outcomes of comparative advantage in globalization. The Methuen Treaty raises one more critical yet controversial topic that recurs throughout these essays: government intervention. The bilateral ar- rangements for textiles allowed under MFA (Abernathy et al.) has clear ante- cedents in the Methuen Treaty, as, in their way, do the local content (Sturgeon and Florida) and antidumping (Murtha et al.) laws: these serve, much as the discriminatory wine tax against the French, to keep undesired goods out of a particular market. The early history of the port trade is rife with government intervention. Wine was not only much desired but also shipped in bulk containers. Con- sequently it was an easily taxed commodity. From the Methuen Treaty on, British governments continuously tinkered with the fiscal arrangements for its most popular wine until, with Gladstone’s “single bottle” act of 1860, port finally lost its exceptional status. From their end, Portuguese governments sought to promote (and feed their treasury from) this important trade. Faced with increasing disarray in the 1750s, the Portuguese demarcated the port wine region—the Alto (or upper) Douro River valley where the port grapes are grown. (Port takes its name from the city of Oporto, the entrepôt at the mouth of the Douro River.) This demarcation survived until 1834, when a new, economically liberal Portuguese government removed all regulation. (Curiously, this deregulation occurred just as other countries started to adopt this innovative idea—one that is echoed not only in modern wine re- gions but also in maquiladoras, free ports, and other types of fiscally privi- leged zones.)
  • 21.
    Preface / xvii Theend of regulation spurred a burst of globalization impressive even by today’s standards. Before the lifting of restrictions, wine had flowed princi- pally to Great Britain and Ireland, with lesser amounts trickling to northern Europe and to outposts of the Portuguese and British empires. Upon liber- alization, these trickles swelled. The widely connected port merchants sent wine to Baltimore, Boston, New York, and Philadelphia; to Halifax, New- foundland, Quebec, and Nova Scotia; to Archangel, Riga, and St. Petersburg; to Amsterdam, Bremen, Copenhagen, Genoa, Hamburg, Stettin, and Stock- holm; to Tenerife, Madeira, and the Canaries; to the Cape of Good Hope, Jamaica, St. Johns, Barbados, and Demerara; to Pernambuco, Valparaiso, and Batavia; to Hobart, Sydney, Bombay, Calcutta, and Madras; and to Jer- sey and Guernsey. Only Asia and Antarctica are missing from this global sweep. As this expansion indicates, as merchant accounts show, and as historians remind us, the merchants of the past were integrated into far-flung trading networks. Most merchants needed fewer than six degrees of separation to span the globe.4 When opportunity arose, relatively passive links between merchants on opposite sides of the globe turned into active trading relations with extraordinary speed, allowing merchants to practice arbitrage in both goods and bills of exchange across space and time—a practice still vital, as I suggest below, to globalization today. Struggle in the Supply Chain Unfortunately, for those who see in this dramatic expansion of the port trade a clear lesson about the benefits of trade liberalization, boom swiftly turned to bust. Low-cost imitations, potent substitutions, falling reputation, dwindling protection, and widespread falsification made the previously complacent port trade struggle to protect its appeal and reputation, in the short term, and its markets in the long. The highly disaggregated supply chain made such organization complicated. But the way in which the port trade took on this task is instructive. This unruly chain began in the Alto Douro with the smallest farmers who sold grapes to big farmers. With these and their own larger crops, the big farmers made wine. To this they added brandy (one of the distinguishing features of port) to stabilize the wine, which they stored through winter. As stockholding is expensive and risky, all but the wealthiest farmers hoped to sell their wine in early spring to either brokers or exporters who then took the wine to Oporto. There more brandy was added, the wine was stored (young port is harsh and crude) before exporters blended it for export (using their own stocks and, if these fell short, those of brokers), and it was shipped
  • 22.
    xviii / Preface toBritish ports in response to orders from importers. These sold the wine to hoteliers, innkeepers, wine merchants, and retailers, who in turn sold to con- sumers. Most tensions in this chain revolve around stockholding. Wine was costly and volatile. When it moved, high duties had to be paid. When it sat, it tied up large amounts of capital. If it aged well, it could command high prices to justify the investment. But stocks could both deteriorate (aging a product that can literally go sour is always risky) or depreciate if the next year’s wine was better. Furthermore, taste and fashion fluctuated rapidly and unpre- dictably. No one wanted to be caught holding depreciating stocks. Yet no one wanted to be out of wine when the market surged. (For this reason, the brokers, a little like Ingram’s and other wholesalers today, played a critical role in the chain, providing just-in-time wine.) So the port chain faced many of the stockholding issues discussed in this volume: from the textile industry, with its volatile fashions, to the auto in- dustry, with its high-cost components, to the PC, chip, and hard-disk indus- try, with their rapidly depreciating components. Port, like the PC (Curry and Kenney) and its various components, especially semiconductors (Leachman and Leachman) and hard disk drives (McKendrick), and garments (Aber- nathy et al.), had some of the properties of Curry’s and Kenney’s “hot po- tato.” Everyone wanted adequate supply, but not the stockholding risks. Each link sought to pass these to someone else up or down the chain. As Sturgeon and Florida suggest, this urge to transfer stockholding risks may even explain the way in which objects are designed. The modularity of the PC and the car allows not only for distributed production but also for the easy transfer of stockholding from more powerful to less powerful partici- pants. Port, too, had “design features” that allowed such transfers. Standard explanations of the brandy it contains are enological. Some explanations, however, are more strategic, arguing that brandy was added because, though it did not affect the time needed for the wine to become drinkable, it de- creased the time it needed to become transportable (Thudichum and Dupré, 1872). Thus brandy allowed the farmers to pass the cost of storage to ex- porters and exporters to pass it to importers. In response, the importers en- gaged in a “blend-to-order” policy, a little like Dell’s “built-to-order” strat- egy. Blending to order, while allowing customers greater choice, allowed im- porters to pass such customized wine hurriedly to customers (in this case, merchants, inns, hotels, and retailers). If these could not as quickly persuade the end user either to “lay down” venerable wine or to drink cheap wine, they ended up as the most likely candidates to bear the cost in this supply- chain game of pass the parcel.5 But retailers and wine-merchants (described by one port merchant as “the most rotten set in London”) had a tendency to
  • 23.
    Preface / xix defaulton payments, causing tremors all down the chain. So a great deal of what Abernathy et al. call “short cycle” storage fell to the more solvent im- porters in Britain, while the “long cycle” storage fell to the exporters in Oporto. As these two were also often closely linked through interlocking shareholdings, inevitably it was these two that pushed to organize the supply chain in their particular interests. They faced, of course, competition from others in the chain, each of whom no doubt realized that those who did not squeeze would instead be squeezed. So, farmers sought to put their stamp on the trade, appealing im- plicitly to the concept of terroir to turn the brand they burned on their bar- rels into recognizable signs of quality assurance in the retail marketplace. Here, in a nationally divided trade, they were probably undone as much by the historic Portuguese demarcation as by their British “vertical competi- tors.” Whereas in France, in the absence of strict demarcation, the names of particular chateaux became a sign of reliability, in Portugal the demarcation and the tradition of blending wines from different estates at export tended to obscure the role and name of the originating farmers. Nonetheless, certain estates (such as Roriz) did acquire a reputation in Britain as, on the one hand, wine merchants used them as tokens of quality, and on the other, farmers tried to subordinate the supply line, diminish the role of middle- men, and establish their own outlets in Britain. At the opposite end of the chain, wine merchants sought to overcome their bad collective name and establish individual good ones. They were aided by the fact that port in the nineteenth century was more or less anon- ymous. It was advertised as “good,” “strong,” “rich,” “natural,” “old,” and the like, but just as the names of the originating chateaux (or quintas, as they are known in Portugal) were obscured, so were those of most of the mid- dlemen. Instead, wine merchants in Britain offered their names as the distin- guishing feature. The practice starts early. The Daily Courant of 1703 and af- ter, for example, advertises many generic wines (port, lisbon, claret, bur- gundy, and the like). The only proprietary names that appear are those of wine merchants and innkeepers. Slowly wine merchants grasped the signifi- cance of this position. Advertisements for port and sherry for sale at H. B. Fearon’s turn subtly into advertisements for “H. B. Fearon’s port.” By the mid–nineteenth century, the new names in wine marketing and retailing— Hedges & Butler, Gilbey’s, Victoria Wines—required exporters in Portugal to bottle port in Oporto with proprietary labels and corks as if Hedges & Butler, Gilbey’s, and Victoria Wines had their own Oporto operation. In the process, they increasingly standardized their product for multiple retail out- lets so that, as one historian puts it, “a Gilbey claret bought at Reading, say, should have the same look and taste as a claret bought in Wolverhampton
  • 24.
    xx / Preface .. . a consumer in other words, could learn to rely on a Gilbey’s label. . . . They marketed standard brands.”6 In effect, the retailers were transforming their strategy from the equivalent of the “build to order” (BTO) strategy, familiar in the modern PC market, to the equivalent of “buyers’ own brand” (BOB) retailing, familiar in the mod- ern food and wine industry, whereby, once again, retailers get their name on the label while their suppliers become anonymous and interchangeable. Standards and Brands Two things relevant to both past and present are I hope evident by now. First, as the quotation above indicates, the struggle ran along, not across, supply chains. If retailers established the identity, standardization, and reli- ability of the wine this way, they effectively made all others in the chain anonymous and put in their own hands effective control of the disaggregated chain. (If one supplier caused problems, Gilbey’s could—and did—switch to another without customers being any the wiser.) Second, the key weapons in this struggle are standards and brands. If you can establish a reliable standard that is as predictable in Wolverhampton as Reading, if you can associate your name with that standard, and if you can protect that name, then you can grow from niche to mass markets and make others dance to your tune. Hence the triumphantly (if, for some, only transitorily) significant names in- voked in this volume—Nike, Wal-Mart, Dell, HP, Zenith, Sharp, Intel, Mi- crosoft, Sony, AMD, Jeep, Volkswagen, Nokia, and Motorola. So in the middle of the century the wine trade in general became a rather familiar battle of standards and names. “Tawny” (once an insult) turned into the term for one particular category of wine. “Vintage” port was transformed from a general to a specific term to designate wine aged for the high-end market. And “ruby” was introduced to characterize the wine for the cheap market.7 And firm names known today—not only Hedges & Butler, Gilbey’s, and Victoria but also Cockburn, Graham, Sandeman, Taylors, and Roriz— became prominent and valuable trademarks. In homage to their value, these names were rapidly flattered by imitators, appropriated by fraudsters, pro- tected by courts, alienated in sales, and seriously cultivated by owners. What is noticeable about this list, as well as its modern equivalent above, is that neither represents only one particular point in the supply chain. Wal- Mart and Victoria are retailers, HP and Sandeman are intermediators, Intel and Roriz are producers. Although they occupy different points in the chain, each manages to stake a claim for itself. Of particular interest are the intermediators, who might seem to have no
  • 25.
    Preface / xxi essentialrole to play. Indeed, one contemporary champion of the farmers in- sisted in 1883 that with “the compression of space and time,” farmers should be able to sell to consumers without any rent-seekers intervening. The lan- guage remains fresh in debates about disintermediation today. But while some were cut out and others subordinated, a few intermedia- tors did manage to take charge of their own supply chain. Although wine merchants and retailers pushed to make themselves the ones whose name would become the brand, they suffered, as I noted, from their own notoriety and the regularity with which their names appeared in lists of bankrupts. The generally short lives of retailers made them a risky source for wines that the buyer might not get to drink for one, two, or more decades. To whom would you protest if the wine turned out bad, but the retailer went under twenty years ago? Better established merchants fought this by broadcasting their age (“Established Upwards of 45 Years,” “Importers for 40 Years,” “Established 1793,” and so forth). But they also started to use the more enduring names of suppliers. Thus, while retailers like Gilbey’s sought to make their suppliers anonymous, others boasted that their port was Sandeman’s, Cockburn’s, or Offley’s “shipping.” Such claims played the role that the label “Intel inside” plays for low-end PC assemblers or VARs, providing for purchasers a war- ranty of quality that the VAR itself lacks credentials to provide. But unlike Intel’s trademarked claim, exporters’ names were not neces- sarily used with permission—nor even with the exporter’s wine. Thus the exporters themselves moved to protect their own name, and in the process to promote their brand over that of the retailers and the farmers. They did this in a variety of ways. They participated in the standard setting for the main types of wine (“tawny,” “vintage,” and “ruby”), as described above. They in- creasingly took over bottling.8 (Wine had previously been bottled at a variety of different points in the chain: exporter, importer, retailer, and even con- sumer.) And they began to promote their brands as available “at most re- spectable retail houses.” In so doing, they suggested to consumers that, while the importer was essential, retailers played an inconsequential and substitut- able role in supply.9 And so, with standard and brand strategies of their own, they fought back against the retailers in the tussle to see who could both as- sert their own brand and blot out that of their vertical competitor. Yet, as is usually the case with vertical competition, cooperation was also important. Exporters, importers, and retailers needed each other, and were often complicit in others’ competitive strategies. As Acer both manufactures PCs under its own name and assembles computers for competitors, so port firms like Sandeman provided both Sandeman-branded port and retailer- branded port (for Gilbey’s). Here the exporter wisely segmented the market,
  • 26.
    xxii / Preface allowingthe new retail chains to service the cheaper end of the market with “buyers’ own brands,” while promoting their own name on high-end and vintage wines.10 Arbitrage in the Space of Flows There are, then, intriguing parallels between nineteenth- and twenty-first- century global chains. But can it be said that the age of sail and steam can tell us truths about what has grandly been called the “space of flows” (Castells 1996)? I believe it can. In particular, the parallels help emphasize that it is not only the length of the globalized supply chain that is of interest. We need to note as well its particular shape and the topography of power that it instanti- ates. The parallels also suggest that, while many explanations of modern supply chain management have technological causes, these may be necessary but not sufficient. Business process innovation, in particular the skillful ma- nipulation of brands, has proved an effective means to shape a supply chain.11 And thus overheated rhetoric about a new economy built on new technology is likely to miss critical aspects of where value is added (and rents extracted) in the flow of goods and information. Indeed, old and new juxtaposed particularly help understand the limits to claims about the “compression of space and time.” A key word here, which I mentioned above, is arbitrage. Global businesses, both old and new, make their money through arbitrage between prices at the point of production and prices at the point of consumption.12 For arbitrage to be possible, the flow between these two places has to be impeded, by government regulation and borders, by coordination and communication problems, by transportation costs, and so forth. While these remain, intermediaries, arbitraging across the barriers, will also remain. (Disintermediation, that is to say, is not the same thing as disaggregation.) Much as histories of the port trade need to understand the impediments it faced, so the essays in this volume, then, are all in their way studies of mod- ern impediments to flow and the resulting arbitrage. The flow of material goods is constrained by tariffs, embargoes, prejudice, but also, more simply, by transportation, its time and costs. The river and the estuary, so important to the growth of the port trade, have perhaps today been replaced by such things as the highway and the FedEx airport hub. More adaptable than rivers, these new interchanges nonetheless have a significant determining relation- ship on global flow and continue to ensure, in Kogut’s words, that “we never escape the pull of geography.” The magic of a communications infrastruc- ture will not magically lift those without transportation infrastructure into
  • 27.
    Preface / xxiii the“new economy,” in part because aspirants to the new usually have to prove their value by working on material goods, not informational ones. Less discussed in these pages, but ever present, are the impediments to the flow of labor and their role in the ensuing global arbitrage of wages. The space of flows, an informational concept, does not readily allow for the flow of labor. Thus many people remain inescapably trapped in low-wage areas, making arbitrage by intermediaries easier. In several of the cases outlined here, arbitrageurs have to balance the price of goods and labor in the form of weight and wages. Goods that are cheap to transport, such as DRAM, can be sourced from the accessible lowest-wage areas. Those that are too heavy to transport either cheaply or quickly, such as car engines, come from points geographically closer to the market. So, because of impediments to the flow of goods and labor, countries can still gain disproportionately, rather as Portugal did, from the serendipity of proximity. The dramatic differences, despite other similarities, between FDI and GDP in Ireland and New Zealand would seem to bear this out. Distance is not dead. Capital, of course, flows more readily than either goods or labor. It always did. (The original commercial meaning of arbitrage referred to the trade of bills of exchange between markets to take advantage of different currency rates.) Here too, however, the essays note that flow is not completely unim- peded. Modern global firms, these essays remind, have also to be skilled at arbitraging around currency fluctuation, as Oporto merchants were before them.13 Today, instead of just moving cash to counter unfavorable shifts in exchange, supply chains move production itself to other regions. A weak but relatively stable exchange rate with the dollar can thus be a great asset, though investing arbitrageurs are in part investing in the stability of that weakness. Finally and intriguingly, the essays remind us that knowledge does not, as many seem to feel it must, escape the pull of geography. There are impedi- ments to the flow of knowledge. Yet, while we can understand that port mer- chants clustered in Oporto, because that’s where the commodity comes from, it isn’t as easy to see why knowledge also clusters. Gilder would have us believe that in the telecosm, “anyone can transmit any amount of infor- mation, any experience, any opportunity to anyone or everyone, anywhere, at any time, instantaneously, without barriers of convenience or cost, the re- sulting transformation becomes a transfiguration” (Gilder 2000: 263–64). But in reality the world still resembles the world of the port merchants, where dominant clusters in one place exert distal control over distributed supply chains. Today the critical clusters are, in fact, knowledge clusters. They are found in places like Silicon Valley, Route 128, Fairfax, Virginia, De-
  • 28.
    xxiv / Preface troit,and in similar spots around the United States and the developed world. In these places the design work, the high-value intellectual property, in- creasing returns, and even increasing control continue to reside, as most of these essays emphasize. Indeed, paradoxically it is knowledge workers, whose labor is in theory independent of location, who apparently need (and are al- lowed) to travel most. So Silicon Valley becomes increasingly polyglot, and the knowledge economy appears to concentrate in the United States. As the essays here indicate, the international division of labor is increasingly a divi- sion between knowledge work, which clusters in the metropoles (though the movement of the laborers is relatively unrestricted), and manual labor, which flows around the globe to fit with new supply chains (though the movements of the laborers are highly restricted as the global supply chain spreads and disaggregates to allow for arbitrage). Arbitrage, it’s worth noting, initially referred to a capacity for self- determination, which is the converse of subordination. And, as I have tried to show and the following essays wonderfully illustrate, in the new global supply chains as in the old, participants struggle to achieve self-determina- tion. The stakes are high. The losers face subordination or even bankruptcy. And technological shifts alone are not enough to unpick the lock that loca- tion and brands can give the winners. Notes 1. I accept Kenney’s reservation that a chain is not necessarily a good metaphor, but as it is the generally accepted one, I use it here. 2. Given its recent decision to purchase Compaq and the well known difficulty that technology firms have in integrating mergers, the meteoric rise of Hewlett Packard may presage a similarly dramatic fall. 3. These comments draw heavily on two important, recent, and historically in- formed treatises: one by Gary Fields (2003), which compares Dell’s reorganization of the PC supply chain in the late twentieth century with the rise of the Net to Swift’s reorganization of meat packing in the late nineteenth century with the rise of the railway; the other by Teresa da Silva Lopes (2002), which looks at both the integra- tion and disintegration of supply chains in the alcoholic beverage industry at the end of the twentieth century. Where Fields stresses the significance of technological in- novation, Silva Lopes stresses innovations in marketing, branding, and intellectual property. 4. See in particular Woolf (1982), Curtin (1984), and Hancock (1995). 5. As the century progressed, the novelist Anthony Trollope (1927) noted, con- sumers increasingly expected wine merchants to stock high-quality wine, allowing consumers to send “for a dozen at a time, and wisely impose upon [the merchant] the duty of keeping the wine,—and charging for the capital required” (p. 76). 6. Waugh (1957), pp. 18 and 19. 7. At about the same time, the French were classifying their grand cru.
  • 29.
    Preface / xxv 8.In this they followed the lead of the Champagne houses, who had imposed their name on the trade by bottling in France rather than in Britain. 9. Here port exporters were following beer brands (particularly Bass and Guin- ness) that advertised their brands as available. 10. The port trade, this integration suggests, shows aspects of the modern chain as if in a film run backward. The modern global supply chain described in this book is the result of shift from large, hierarchically ordered supply to a disaggregated model. The port trade was actually moving in the other direction. It began disaggregated, but as different players came to dominate their particular supply chain, integration followed. The Oporto exporters, in particular, integrated backward into production and forward into imports, and for some, retail. Similarly, well-branded retailers inte- grated backward into both imports and production. And some producers even inte- grated forward. 11. The most powerful brand in the digital world, Microsoft, has almost always been a technological follower. It has, however, both managed its brand and squeezed its upstream and downstream supply chain with innovative ferocity. 12. Those who propound the annihilation of space and time (Gilder 2000; Cairn- cross 1997) need to explain how businesses will make money. 13. Several Oporto bill-brokering merchants crucially helped the Rothschild brothers service their continental loans during the Napoleonic and later wars.
  • 31.
    Contributors frederick h. abernathyjoined John T. Dunlop in a 1979 study of the tailored clothing industry, which led to the establishment of the Tex- tile/Clothing Technology Corporation [TC2]. His continued involvement with the apparel industry led the Alfred P. Sloan Foundation to support re- search resulting in the book he coauthored, A Stitch in Time (Oxford, 2000). He is Abbott and James Lawrence Professor of Engineering, and Gordon McKay Professor of Mechanical Engineering at Harvard University. melissa m. appleyard is an Assistant Professor of Business Admini- stration at the Darden Graduate School of Business Administration, Univer- sity of Virginia. Her research examines the motivation behind and conse- quences of knowledge sharing in technology-intensive settings. Her research on knowledge diffusion both across and within company boundaries has been published in academic and practitioner journals, as well as books. Cur- rently Appleyard is analyzing the role of knowledge accumulation in shaping buyer-supplier alliances and the global patterns of knowledge diffusion in the semiconductor industry. clair brown is Professor of Economics and the Director of the Center for Work, Technology, and Society at the University of California, Berkeley. Prof. Brown has published extensively on labor market issues. She heads the human resources group of the Sloan Competitive Semiconductor Manufac- turing (CSM-HR) program at U.C. Berkeley. She coauthored Work and Pay in the United States and Japan (with Nakata, Reich, and Ulman; Oxford, 1997). Brown’s work on the relationship between work roles, economic growth, and living standards and how the standard of living has changed during the twentieth century is examined in American Standards of Living, 1918–1988 (Blackwell, 1994).
  • 32.
    xxviii / Contributors jamescurry is Professor-Researcher in the Department of Social Studies at the Colegio de la Frontera Norte in Tijuana, Baja California, Mexico. He has recently published articles on manufacturing in the U.S.-Mexico border region and open source software. He is currently involved in research proj- ects on the personal computer industry in North America and Mexico, and electronic commerce in the United States and Latin America. paul duguid is an independent scholar. For the past ten years he has been a research associate at the University of California, Berkeley. From 1988 to 2001 he was a consultant at the Xerox Palo Alto Research Center. He is currently (2001–2002) a fellow of the Center for the Public Domain and a visiting professor at Copenhagen Business School. He is coauthor, with John Seely Brown, of The Social Life of Information (Harvard Business School Press, 2000) and numerous articles on topics from the design of interfaces to the design of organizations. His recent articles on the port trade have ap- peared in the Scandinavian Economic History Review, The European Yearbook of Business History, and the Portuguese journal Douro. john t. dunlop has had an extensive career in labor relations and gov- ernment, including serving as U.S. Secretary of Labor from 1975 to 1976 and, more recently, as chair of President Clinton’s Commission on Worker- Management Relations. He has also served as a mediator and arbitrator in a wide range of industries and is the author of more than ten books on labor re- lations and labor economics. He is the coauthor of A Stitch in Time (Oxford, 2000). He is Lamont University Professor, Emeritus at Harvard University. richard florida is the Heinz Professor of Regional Economic Devel- opment at Carnegie Mellon University and founder and codirector of the Sloan Software Industry Center there. He is author of several books, includ- ing most recently The Rise of the Creative Class (Basic Books, 2002) and also Industrializing Knowledge (with Lewis Branscomb and Fumio Kodama, MIT Press, 1999), Beyond Mass Production (Oxford University Press, 1993), and The Breakthrough Illusion (Basic Books, 1990) the latter two with Martin Kenney. He is a co-organizer of the Sloan Globalization Network and cali- brated with Tim Sturgeon on the Globalization of the Automobile Industry project reported in this volume. janice h. hammond investigates how manufacturing and logistics sys- tems develop the speed and flexibility to respond quickly and efficiently to changing customer demand—critical capabilities in the retail-apparel-textile channel. She is the UPS Foundation Professor of Business Logistics at the Harvard Business School. She is a coauthor of the book A Stitch in Time (Oxford, 2000).
  • 33.
    Contributors / xxix jeffreya. hart is Professor and Department Chair of Political Science at Indiana University, Bloomington. His coauthored book, Managing New Industry Creation: Global Knowledge Formation and Entrepreneurship in High Technology, was published by Stanford University Press in 2001. In addition to publishing many books as well as articles in leading academic journals, he has worked at the Office of Technology Assessment of the United States Congress, helping to write International Competition in Services in 1987. Hart has been a visiting scholar at the Berkeley Roundtable on the International Economy. martin kenney is a Professor in the Department of Human and Com- munity Development at the University of California, Davis, and a Senior Project Director at the Berkeley Roundtable on the International Economy at the University of California, Berkeley. Most recently, he edited the book Understanding Silicon Valley (Stanford 2000). He has studied the globaliza- tion of the electronics industry and is currently working on the evolution of venture capital in the United States and globally. He has authored or edited four books and more than a hundred articles and book chapters. bruce kogut is the Dr. Felix Zandman Professor of International Man- agement at the Wharton School of the University of Pennsylvania, and Co- Director of the Reginald H. Jones Center for Management Policy, Strategy and Organization. He has been a visiting scholar at the Humboldt Univer- sity in Berlin, Stockholm School of Economics, Science Center Berlin, and the Ecole Polytechnique, Paris. His research has been on such topics as labor markets for ideas and the effects on organizations, the expansion of U.S. and Japanese firms internationally, alliances and networks, and the competitive- ness of countries. His current research focuses on the virtual location of software and intellectual labor activities in the global economy. His research has been supported by the German Marshall Fund, Fulbright, International Research and Exchange Board, the French Ministry of Science and Technol- ogy, the National Institute of Standards and Technology, and Wissenschafts- zentrum in Berlin. chien h. leachman is an Assistant Research Engineer in the Engineer- ing Systems Research Center at the University of California, Berkeley. She has served on the staff of the Competitive Semiconductor Manufacturing Program at UC Berkeley since 1993. She was an Assistant Professor of Opera- tions and Information Management at the University of Connecticut in 1995–96. She holds a Ph.D. in Management Systems from SUNY Buffalo, and an MBA and BA in Business Administration degrees from Chengchi Univer- sity in Taiwan. She is the author of twelve publications concerning informa- tion systems, decision support, and semiconductor manufacturing.
  • 34.
    xxx / Contributors robertc. leachman is a Professor of Industrial Engineering and Op- erations Research at the University of California, Berkeley, where he serves as Director of the Competitive Semiconductor Manufacturing (CSM) Program. He is the author of more than 50 technical publications concerning produc- tion operations management and productivity improvement, and he has been a consultant in these areas to many corporations. He received his A.B. degree in Mathematics and Physics, an M.S. in Operations Research, and a Ph.D. in Operations Research, all from UC Berkeley, and has been a member of the UC Berkeley faculty since 1979. In 1995 he was the winner of the Franz Edelman Award Competition sponsored by the Institute for Operations Re- search and the Management Sciences (INFORMS), and in 2001 was the run- ner-up for the Franz Edelman Award. stefanie ann lenway is Professor, Department Chair, and Carlson Term Chair of Strategic Management and Organization at the University of Minnesota. Her coauthored book, Managing New Industry Creation: Global Knowledge Formation and Entrepreneurship in High Technology, was pub- lished by Stanford University Press in 2001. She has published numerous ar- ticles in leading academic journals on the role of managerial mindsets in global strategy implementation, business-government strategic interaction, and the politics of international trade. Lenway is a member of the Board of Governors of the Academy of Management. greg linden is a Post-doctoral Fellow at the Center for Work, Technol- ogy and Society, a research unit at the University of California, Berkeley, where he earned a Ph.D. in Economics in 2000. He has published extensively on various aspects of the global electronics industry and consulted on proj- ects in Asia dealing with industrial policy in high-technology industries. His current research interests include the competitive dynamics of the electron- ics industry, research consortia in the semiconductor industry, the emer- gence of global competitors from industrializing countries, and the effect of foreign direct investment on economic growth. david g. mckendrick is Research Director of the Information Storage Industry Center at the University of California, San Diego, and coauthor of From Silicon Valley to Singapore: Location and Competitive Advantage in the Disk Drive Industry (Stanford University Press, 2000). Prior to joining UCSD, he taught in the business schools at the University of California, Ber- keley, and the University of Texas at Dallas. He received his Ph.D. in busi- ness from the University of California, Berkeley. thomas p. murtha is Associate Professor of Strategic Management and Organization at the University of Minnesota’s Carlson School of Man-
  • 35.
    Contributors / xxxi agement.His coauthored book, Managing New Industry Creation: Global Knowledge Formation and Entrepreneurship in High Technology, was pub- lished by Stanford University Press in 2001. He has published articles in leading academic journals on the role of managerial mindsets in global strategy implementation, and on business-government strategic interaction. Tom Murtha has also written on the arts and consumer electronics for leading newspapers and magazines, including Rolling Stone and the Min- neapolis Star Tribune. timothy j. sturgeon is a Research Associate and Executive Director of the Industrial Performance Center’s Globalization Study at the Massachu- setts Institute of Technology (MIT). Prior to this, Mr. Sturgeon served as Globalization Research Director for the International Motor Vehicle Pro- gram at MIT. He received his Ph.D. in Economic Geography for a disserta- tion entitled Turnkey Production Networks: Industrial Organization, Economic Development, and the Globalization of Electronics Contract Manufacturing. His articles have appeared in a number of edited volumes, scholarly journals, and trade magazines. Prior to entering academe, he held a variety of industry and consulting positions. david weil has written widely on the impact of technology and human resource policy on business performance based in part on his studies of the retail-apparel-textile industries. His research spans the areas of labor market policy, industrial and labor relations, occupational safety and health, and regulatory policy. He is Associate Professor of Economics at Boston Univer- sity School of Management and Research Fellow, John F. Kennedy School of Government, Harvard University.
  • 37.
    Locating Global Advantage IndustryDynamics in the International Economy
  • 39.
    ch a pter o n e Introduction m a rt i n ken n ey Globalization is much more than simply moving employment and activities from developed nations into nations with lower-cost labor forces. Such a sim- ple conclusion obscures the complicated skein of cross-border relationships that have evolved out of firm strategies seeking to balance a kaleidoscope of variables including labor and inventory costs, transportation, quality, concen- tration of valuable knowledge in clusters, and temporal proximity to cus- tomers. Understanding firm strategies at a single moment in time is compli- cated enough, but unfortunately these variables also fluctuate. For example, Singapore—at one time a low-cost environment with a weak infrastructure for hard disk drive manufacturing—over two decades evolved into a high-cost en- vironment with a very sophisticated infrastructure. Today Singapore is a man- ufacturing, R&D, and logistics center. For firms, the global map is a gigantic, evolving chessboard upon which boundedly rational corporate strategists op- erating in internal and external political environments must not only situate production but also decide to make or buy.1 These decisions, though compli- cated, are not random; corporate managers are responding to real constraints and opportunities. For most Americans, the closest interaction with the enormous number of nations in the United Nations occurs on visits to their local Wal-Mart, which, of course, means that the world is in our homes, a part of our everyday life. A stroll through Wal-Mart’s aisles reveals national origin labeling on objects from Bangladesh, China, Haiti, Honduras, Indonesia, Korea, Mauritius, Mexico, Tai- wan, and a myriad of other nations. But as the chapters in this book show, these labels are deceptive, because the product is an assemblage of physical and intel- lectual inputs from yet other nations. The goods we buy are the end result of an elaborately choreographed transnational odyssey. These objects are part of an
  • 40.
    2 / ma rt i n ken n ey economy whose tendrils reach ever further outward, linking, integrating, and transforming both far-flung and nearby places. Firms and industries generate powerful economic forces shaping the lives of all human beings. Often industries are treated as black boxes, a perspective im- plying that economic shifts, technological change, and market dynamics will shape every industry similarly. Our chapters recognize that firms are remark- ably different, and thus their repertoires for creating advantage are diverse. We are unified by an understanding that firms within industries are evolving, as are the locations in which they operate. Current configurations are responses to past conditions and prior firm strategies. History matters, insofar as previous decisions shape the contemporary landscape within which firms compete for future competitive advantage. In the current conjuncture, firms scan the globe for favorable combinations of production factors and factor prices. And yet, as Paul Duguid in his foreword and Bruce Kogut in his concluding chapter remind us, cross-border trade has a long history. All of the parties to this trade have attempted to create power asymmetries to strengthen their bargaining positions versus those of their part- ners and rivals. The resulting configurations can lock in for extended periods. However, as Kogut points out in his chapter, multinational firms often also op- erate as highways for the diffusion of knowledge, thereby sowing the seeds of change. Firm strategies are important for creating regional economies and in- stitutions. Locating Global Advantage This book is the result of an ongoing commitment by the Alfred P. Sloan Foundation to study how U.S. firms are both actors in and subjects of global- ization.2 The foundation’s tenet has been that the evolution of national economies and firm behavior can be understood only through intensive exam- ination of firm actions within an industry context. All of the chapters focus on the organizational configuration and locational choices of U.S. firms. Although the decisions and actions of these firms can be critical to local economic devel- opment, the chapters were not meant to assess the economic development im- pacts of corporate actions. Nonetheless, this book will be useful for readers in- terested in international development, as the chapters elucidate the dynamics that frame corporate locational choices. The contributors to this volume share certain common beliefs, both methodological and philosophical. Fieldwork (especially practitioners’ inter- views) is particularly important; it is only through factory visits and personal interviews that a researcher can grasp the dynamics within which corporate ac-
  • 41.
    Introduction / 3 torsmake decisions. We also are influenced by evolutionary economics (Nelson and Winter 1982) and share its perspective that firms and industries can be un- derstood only in a historical context. Put succinctly, globalization is an evolu- tionary process. Locating Global Advantage quite properly studies the spatial dimension. Each of the authors treats the spatial dimension as an organizational and operational outcome of an evolutionary set of decisions, and as such the meaning of vari- ous locations may not be so obvious. But, more important, our authors recog- nize the evolutionary and nonergodic character of spatial configurations (Arthur 1994; David 1986) and the evolution of places as knowledge-laden lo- cations or learning regions (Florida 1995; Storper and Salais 1997). To rephrase Storper and Walker (1989), firms and industries build places, and this process is the source of clusters that benefit from both traded and untraded interdepen- dencies. To examine the globalization of industries, the authors recognize that often the production and marketing of a commodity are segmented into juridically separate organizations or, as Winter (1987) termed them, “units of accrual.” While recognizing that the intellectual roots of the social division of labor (Sayer and Walker 1993) can be traced at least as far back as Adam Smith, we draw most directly upon Michael Porter’s (1990, 1986) concept of value chains, Kogut’s (1985) concept of value-added chains, and Hopkins’s and Wallerstein’s (1986) concept of commodity chains, which was further developed by Gereffi (1994, 1999). The chapter authors more frequently use the term value chain be- cause it explicitly recognizes the significance of less commodified activities such as R&D and marketing.3 There are difficulties with the“chain”metaphor, which is probably more ap- propriate for thinking about the internal activities of the firm but can create a misleading image when considering the production of an assembled product. The other metaphor that has long been used to describe these interfirm ties is, of course, “networks” (Bartlett and Ghoshal 1989). More recently, the use of networks to describe social and economic relationships has become ubiquitous. Despite some felicitous aspects of networks as a metaphor for the way a pro- duction system might be modeled, there are also difficulties. For example, in the network conceptualization there is no sense of a relatively unidirectional motion of goods toward the consumer (though obviously information and money flow in the other direction). If a metaphor is necessary, then we believe a more appropriate metaphor would be the one used often in industry— namely, that of a dendritic river basin that drains into the sea, which is the final consumer. However, the authors in this book, for the sake of ease and unifor- mity, adopt the chain metaphor.
  • 42.
    4 / ma rt i n ken n ey We are interested in how and why the various processes involved in value creation are distributed among different firms. For example, as Leachman and Leachman show, the producers of DRAMs (dynamic random access memories) and microprocessors for personal computers integrate a larger portion of the value chain than do firms involved in the custom logic chip chain. For custom chips an interorganizational division of labor between chip design firms and silicon foundries has evolved. Even within industries there is often an astonish- ing richness in the way interorganizational linkages are structured. This is very often overlooked by those who have not studied the firms and industries closely. Individual industries have their own logic, so globalization and vertical disintegration should be expressed differently in each industry (for an excellent overview, see Dicken 1998). Our book complements research in international trade economics that rec- ognizes that differing industries have distinct profiles in how they organize their praxis and create advantage (Feenstra 1998). Still, for methodological rea- sons, economists generally view globalization in terms of trade statistics disag- gregated at the three- or four-digit Standard Industrial Category (SIC) code. While helpful, these studies sometimes suffer from a lack of specificity and thus ignore firm strategy. They also find it difficult to explain the reasons for chang- ing patterns of trade. For example, SIC Code 3344 contains all semiconductors including DRAMs, microprocessors, and other logic chips, but the difficulty with this aggregation, as Leachman and Leachman indicate, is that corporate strategies, spatial and organizational configurations, and evolutionary dynam- ics in each category differ.4 This is not easily captured in the statistics but can obscure some of the underlying firm choices shaping the global economy and America’s place in that economy. For example, is a semiconductor designed and marketed by a Silicon Valley firm, but fabricated in Taiwan, a Taiwanese semi- conductor, an American semiconductor, or what? The chapters provide the thick description that excavates below numbers and statistics to expose the dif- ficult, complicated world of business in a global economy. Five Cross-cutting Dynamics The richness of these industry studies provides insight into five dynamics that are propelling globalization and appear in different guises in nearly every chapter. The first dynamic concerns the technological and organizational ad- vances in the fields of transportation and communication that operate in the background of each industry. The second dynamic is the multifaceted drive for greater speed, in terms of speed-to-market, more rapid product design, and more rapid inventory turnover—all meant to reduce various cycle times. Unre-
  • 43.
    Introduction / 5 lentingcost pressure that continually commodifies existing products forcing businesses to lower costs is the third dynamic. In situ knowledge creation, whereby deep experience and capabilities are concentrated in certain locations or industries, is the fourth dynamic. Finally, the fifth dynamic concerns man- agement’s decisions regarding where to site the various corporate functions in relationship to their customers. These dynamics pressure firms to continually consider the location for various activities. Like a kaleidoscope for which each twist of the cylinder creates a different picture, in each industry and even in- dustrial subsector, these dynamics create different patterns. Transportation, Communications, and Globalization The decreasing cost and increasing speed and capabilities in transportation and communication networks are the foundations for the expanding reach of global value chains. Technical improvements allow firms to pursue innovative approaches to operating the value chain. Multimodal transportation systems based on standardized cargo containers for land-sea shipping and sophisticated air freight systems have shortened the elapsed time and increased reliability. These innovations and others are loosening some earlier locational con- straints.5 Transportation improvements lag compared with the even more dra- matic decline of information transmission prices. The result has been an elec- tronic data interchange web connecting an ever greater number of the nodes in the value chain, thereby increasing information sharing. Decreasing costs of communication are only one benefit, as significant as the far greater flexibility and transmission bandwidth created by developments such as the graphical na- ture and open protocols of the Internet (Cohen et al. 2001). This is not the first time that new transportation and communication tech- nologies have affected the organization of capitalism. Chandler (1977) credited the railroad and telegraph as critical technologies in enabling the creation of the multidivisional firm. In the last decade, there has been a metamorphosis of transportation providers into logistics firms capable of handling both the movements of bits of information and atoms of product. Increasingly, com- munications networks permitting the tracking of an artifact’s progress from in- ception to the final consumer are interlinking a value chain’s disparate activi- ties. The impacts of these advances are stunning. By one account, in 1980 U.S. logistics spending was 17.2 percent of total GDP, and of that 9 percent of total GDP was inventory investment. By 1995 this had dropped to 10.8 percent and 4.3 percent, respectively (Lappin 1996). Today, transport costs constitute only approximately 1 percent of the final price of consumer goods (Taggart 1999). From the rapid replenishment system described by Abernathy et al. for gar- ments to Dell’s build-to-order PC production system described by Curry and
  • 44.
    6 / ma rt i n ken n ey Kenney, the transportation and communications advances are providing firms with more efficient and transparent logistics systems. Logistics specialists such as UPS or Federal Express not only handle deliver- ies on a global scale but are also capable of undertaking some measure of final assembly: packaging, inventory management, and distribution. Retailers, as- semblers, suppliers, and logistics firms responsible for moving the physical goods are having their software systems woven into an integrated global web. What began as a just-in-time (JIT) system that required close proximity be- tween assemblers and suppliers is evolving into a JIT system spanning national boundaries and oceans as firms strive to access widely dispersed production factors even while reducing inventory costs and depreciation risks by keeping goods continuously flowing downstream toward the final consumer. Logistics firms experience continuous pressure to further shorten transit times, improve delivery predictability, and lower costs. As the recent West Coast dock lockout showed, there is also heightened vulnerability caused by the constantly swelling tide of goods in motion. For example, the number of freight containers handled by the world’s ports increased from 6.3 million in 1972 to 163.7 million in 1997, while prices on the Asia-U.S. route dropped by an inflation-adjusted 65 percent during the same time period (Taggart 1999). Although shipping costs have dropped significantly, communication and data processing costs have fallen far more precipitously, while international (and national) bandwidth has grown dramatically. For example, the annual cost of leasing an E-1 telecommunications circuit from New York to London dropped from $125,000 in October 1998 to approximately $10,000 in February 2002, an annual decrease of 50 percent per year (Telegeography 2002). Put dif- ferently, the investment cost per minute decreased from $2.443 per minute in 1956 to $0.001 in 2001 (Blake and Lande 2001). The decreasing cost of commu- nications permits the transmission of ever greater amounts of information in real time, thereby keeping upstream participants in the value chain better in- formed, allowing them to make more timely decisions, thus decreasing uncer- tainty. The Internet has created even more opportunities to use communica- tions systems to rationalize the value chain (see, for example, Hammond and Kohler 2001; Kenney and Curry 2001; Fields 2003). Users can take advantage of the availability of low-cost communications bandwidth to develop innovative solutions to production and distribution bot- tlenecks, thereby minimizing the impediments to the flow of goods. For exam- ple, new information systems make it possible to pack garments into shipping containers in Hong Kong properly ordered so that they can be unloaded di- rectly into U.S. retail stores. This eliminates the need to unload the container en route, thereby saving time and money (Taggart 1999). As another example, Leachman and Leachman show that these communication networks permit
  • 45.
    Introduction / 7 real-timemonitoring by Silicon Valley chip designers of the progress of their orders in Taiwanese fabrication facilities. In the contemporary market, delivery times are often more important than prices; failure to get the right part or component or even the finished product to the right place at the right time may cause bottlenecks and adversely affect an entire value chain—or simply miss the market. We are witnessing the unfold- ing of a system capable of ever more closely synchronizing production with de- mand, thereby removing inventory that is not in motion. The continuing im- provement in logistics of air, sea, and land freight continues to drive transportation costs down, while computational advances combined with less expensive communication technologies are increasing the predictability and transparency of the supply chain. But most powerfully, each advance creates the base for yet further experimentation. Time and Speed Clock time appears to be invariant. And yet, each industry operates on a dif- ferent tempo. Transportation and communications are only one dimension of the time equation with which managers wrestle (Fine 1998; Kenney and Curry 1999). Businesses must constantly grapple with the relationship between space and time (Schoenberger 1997). One salient expression of this is just-in-time production, which was introduced to the U.S. automobile industry by Japanese manufacturers (Womack et al. 1990). On a more fundamental level, the history of capitalism indicates a secular trend toward an accelerating pace. With the ex- ception of the television industry, accelerating the tempo of activity seems a central concern of managers. The character of globalization is shaped by the emphasis on time and speed. The preoccupation with time management is not new to contemporary in- dustry.6 For example, the standardization of time into time zones was spear- headed by the railroad firms (O’Malley 1990). However, today’s firms face more complex temporal dimensions than those contained in simple concepts such as transit times (Curry and Kenney 1999). For example, as Abernathy et al. indi- cate, location and distance affect the placement of activities, but that is only the most obvious dimension of temporality. More recently, other temporal dimen- sions such as speed to market and speed in terms of ramping up production have become considerations for globalization. In the case of hard disk drives (HDDs), McKendrick shows how important managing a rapid production ramp-up in Singapore is for corporate success. In the case of the semiconduc- tor industry, Leachman and Leachman show how being late to the market can significantly depress profitability. Even the automobile industry has been press- ing to shorten its three-year design cycles.
  • 46.
    8 / ma rt i n ken n ey Technological time and its grim reaper, obsolescence, are central issues in a number of chapters.7 Each of our chapters on HDDs, personal computers, flat panels, and semiconductors indicates that they are plagued by endemic and rapid technological change that inexorably devalues yesterday’s products. As Abernathy et al. show, in “fashion-forward” garments, a similar dynamic is manifested because of the creativity of designers and the changing sensibilities of customers. For these items, the market value of products is transient and product life spans are truncated. A fashion-forward item or personal computer idling in a shipping container on the way from a distant low-cost production site could easily lose much of its value prior to being unpacked. This obsoles- cence threat affects an industry’s spatial fix—that is, where various activities are undertaken (Harvey 1982). Producers of assembled goods can have an even more difficult situation be- cause components may “age” at different speeds. For example, as Curry and Kenney show, a personal computer contains components such as fans, the case, and floppy drives that age very slowly, and components such as semiconductors and HDDs that age very rapidly. Within a single box, the effect of time varies dramatically by component. The components that are most subject to aging should, of course, be purchased as close as possible to the time when the final consumer purchases the PC. Temporal dynamics color the industrial organization and geography of each industry. In the emerging industrial environment characterized by rapid new product development and accelerated production and delivery times (D’Aveni 1994), slower-moving firms will find that moving production to lowest-cost foreign labor sites will not necessarily prevent them from being outflanked. As our chapters show, for some firms the temporal dynamics are forcing a reloca- tion of certain functions closer to the final customer, while in other cases it has meant that there must be a closer integration between value chain nodes in dif- ferent countries. Pricing Pressure and Overcapacity Competition has always been fierce, but during the last decade it appears to have become more ferocious than ever. Japan is already grappling with deflation, which some believe is occurring in the United States. Every industry in this book suffers pricing pressure, which is manifested at the macroeconomic level by price declines, or, at least, near price stagnation, combined with strong productivity growth. In 2002, overcapacity plagued the auto, PC, television, HDD, and semi- conductor industries, though in semiconductors this was previously a cyclical phenomenon. In industries such as garments and televisions, which are depen- dent on large retailers (or what Gereffi 1994 terms buyer-driven chains), profit
  • 47.
    Introduction / 9 marginsare thin, even for Wal-Mart. In DRAMs, Flat Panel Displays (FPDs), and HDDs, profits are cyclical and only the leaders experience profits during the positive portions of their business cycles.With the exception of Dell, none of the major PC firms enjoy predictable profits—and Dell as the price leader continues to drive prices lower. For most firms the pressures appear only to be increasing. The intense pricing pressure forces a continual reassessment not only of the proper spatial location of value-chain activities but also whether to perform them internally or to outsource them. As Sturgeon and Florida show in autos, outsourcing has resulted in an increase in jobs among the parts suppliers em- ploying less expensive, usually nonunionized labor as opposed to the high-wage unionized assemblers. In addition, the importation of finished automobiles from lower-wage production facilities in Mexico continues to increase, though U.S. parts exports to Mexico increased apace. In the PC industry, Dell recently introduced a very low price machine (retail $499) assembled by the Taiwanese firm Mitac in China and shipped directly to the customer. Each ratcheting down of prices conditions consumers to expect still lower prices, thus placing pressure on rivals to match the reduction or face a market share loss. For many of these industries, the endemic overcapacity has been insoluble. Sturgeon and Florida describe this problem for the auto industry: even while the industry suffers from global overcapacity, Japanese and European assem- blers continue expanding factories and building new plants in North America. In 2001 semiconductor overcapacity was perhaps the worst it has ever been, as a result of a boom in plant construction during the late 1990s and a slump in con- sumer demand. With prices stagnant, the only way to increase profits is either to lower costs or to increase efficiency. Locating a plant or some of the processes in a lower factor cost environment can momentarily overcome the price pres- sure problem. And yet, paradoxically, this often increases global capacity. With the high cost of labor in developed nations, there is a constant tempta- tion to relocate not only routine production, but also engineering and other ac- tivities, to lower wage environments. Skilled personnel are not uniformly dis- tributed, however, so relocation is constrained by the capabilities of the workforce. Because of the pricing pressure, China has become the destination of choice for relocated production activities, a shift that both solves and exac- erbates overcapacity and the downward pressure on prices. However, even for developing nations such as Malaysia and Mexico, which are losing production to China, there is the possibility of upgrading. It should be possible to carve out production niches by further increasing the division of labor. And yet, despite all of this turbulence, design, R&D, and marketing have largely remained lo- cated in their traditional havens, where labor costs are high. In the meantime, manufacturing or certain manufacturing processes have been relocated, often
  • 48.
    10 / ma rt i n ken n ey repeatedly.8 Most recently, firms have begun offshoring some of their business processes to nations like India (Dossani and Kenney 2003). Overcapacity and downward pressure on prices appear to be inextricably linked with globalization. For routine assembly activities, the allure of low wages is powerful, but not overwhelming. The continuing brutal competition almost surely means that overcapacity will remain high, as firms continue to ramp up production in lower-cost environments. This could be further exacer- bated if the deflationary environment continues. Knowledge, Capabilities, and Clusters The relationship between specialized knowledge and clusters has been rec- ognized since at least Alfred Marshall (1890). Outside of economic geography, this insight was largely ignored by the social sciences. Then in the early 1980s, clustering once again attracted scholarly attention from outside the geography community. The enormous interest in the book The Second Industrial Divide by Michael Piore and Charles Sabel (1984) heralded this reawakening.9 In the early 1990s, economist Paul Krugman (1991) and business strategy professor Michael Porter (1990) highlighted the importance of clusters for business performance. These contributions and others sparked a line of research examining the link- ages between firms and the external knowledge in their locational environment (see Almeida and Kogut 1997, 1999; Jaffe et al. 1993; Kogut 2000). Brown and Duguid (2000b) explained this by the participation of the denizens of these re- gions in networks of practice through which knowledge and information flow.10 Murtha et al. persuasively illustrate the importance of active participa- tion in the knowledge creation process by recounting how the U.S. firms that actively participated in creating the FPD cluster in Japan profited handsomely. Most significant, those U.S. firms choosing not to participate in that localized knowledge-creation process, which in this case was concentrated in Japan, were unable to enter the industry profitably. Paraphrasing the Peter Sellers movie, being there is important. Industries are based on sets of knowledge bases and capabilities that are cre- ated, at least temporarily, spatially fixed, and exercised in specific social envi- ronments (Brown and Duguid 2000b; Kogut 2000; Kogut et al. 1993; Dunning 2000). Very broadly speaking, an industry can either cluster or not, and then a cluster can either consist of rivals (i.e., a horizontal cluster) or complementary firms (i.e., vertical clusters) such as suppliers and customers—or contain both.11 The industries in this book exhibit a spectrum of clustering behaviors.12 For example, the PC industry exhibits little clustering outside of Taiwan (and now China), where manufacturing is clustered, while in HDDs, as McKendrick shows, there is a dominant design cluster in Silicon Valley and a production cluster centered in Singapore.
  • 49.
    Introduction / 11 AsKogut indicates in his concluding chapter, the relationships between multinational firms and regions are complex and contingent and should be un- derstood in processual terms rather than as single events. Our chapters indicate a complicated skein within which there is an interaction between firm-based knowledge and region-based knowledge that is difficult to fully disentangle, quite specific, tacit, and even inimitable (Gertler 2001). The firm-based knowl- edge is, as Kogut argues in his conclusion, embedded in routines and may be transmitted transnationally, though not without friction, difficulty, and fre- quent failure. Regional knowledge is far more constrained to place and con- texts. Brown and Duguid (2000b) perceptively note that Xerox Palo Alto Re- search Center had enormous difficulty transferring knowledge inside Xerox, but the knowledge transferred nearly effortlessly to the surrounding Silicon Valley community. Thus firms have internal knowledge that they can attempt to transmit internally, even while they absorb external knowledge and con- tribute to a knowledge commons (Kogut and Zander 1992). Proximity to the Customer From the Anglo-Portuguese wine industry to the PC industry, proximity to customers can make the difference.As shown in each of the chapters, firms must decide the relative importance of proximity to customers. Given the increasing efficiency of transportation and communications, it might be thought that low factor costs would become the dominant aspect of deciding where to locate. However, in a number of value chains, proximity to customers can modify and even in some cases overwhelm factor costs such as inexpensive labor. The im- portance of proximity to customers can be driven by very different reasons. For example, in the auto industry the importance of customer proximity at the in- ternational level is driven by a combination of trade barriers and an ability to better understand the market by immersion in it. At the macro-regional level, the strong supplier base in the U.S. Midwest helps offset the high costs of labor and thus continues to attract investment, if not directly in the Midwest, then in the Middle South. In personal computers, Dell has been remarkably successful by assembling computers in the market within which they will be sold (with the exception of the previously mentioned low-priced machine assembled in Chi- na). However, in the Dell case the location of the supplier’s production is not as significant an issue as proximity to the final customer. The chapters carefully ex- amine the role of proximity in determining location. Each segment of the value chain has a downstream customer. Thus, there are a number of supplier-customer relations, each of which might require a differ- ent spatial configuration. In some cases, the market is another set of down- stream corporations, while in other cases, it is the final consumer. In textiles, as Abernathy et al. demonstrate, it is the rapidity of change in the tastes of the fi-
  • 50.
    12 / ma rt i n ken n ey nal consumer in particular products that determines the most efficient pro- duction location. On the other hand, Murtha finds that in the case of FPDs, for U.S. equipment and materials makers, proximity to customers was critically im- portant, while proximity to U.S. notebook computer vendors did not appear to be of great significance for the FPD producers. Most interestingly, it is also pos- sible that the necessity of proximity may also shift over time as production cost factors, the role of tacit knowledge, and brand strength change. The detailed research in these chapters highlights the fact that proximity to customers is often loosely used, and that it is more valuable to consider which corporate function(s) should be located in close proximity to the customer. For example, is proximity required for R&D, design, headquarters, and/or manu- facturing, and why? In the auto industry, Sturgeon and Florida show that the new global suppliers have been pressured to locate their R&D facilities close to their auto assembler customers’ R&D facilities. In garments and textiles, there seems to be little pressure to locate any functions close to each other. In the PC industry, Dell requires that suppliers except Intel place a warehouse within twenty minutes of its assembly facilities. In the television industry, there seem to be no immediate clustering requirements regarding R&D or television tube facilities, although over the longer run the tube facilities are attracted to large clusters of TV assembly plants, because of the costs and risks of transporting tubes long distances. Our chapters show that it is necessary to decompose the concept of proximity to customer and comprehend when and what makes proximity economically attractive. The Chapters This book is divided into three parts. The first examines globalization in three mature industries in order of their chronological emergence: garments/ textiles, automobiles/auto parts, and televisions. The garments industry pio- neered the Industrial Revolution, and the auto industry pioneered mass pro- duction. The television industry built upon the pre–World War II radio indus- try and grew quickly in the postwar period, but by the early 1970s it had become a relatively mature industry. The end-users for the products of these three in- dustries are household consumers, and brands are extremely important for their success. Given their long histories and the development of powerful inter- est groups, these industries also are far more subject to government interven- tion in the form of tariffs, duties, quotas, and various other trade restraints. Globalization in the garment and textile industry is fascinating, because de- spite the fact that it is one of the oldest industries, success depends on closely tracking consumer preferences. Since it is a fashion industry and consumers are
  • 51.
    Introduction / 13 fickle,inventory risk is a pervasive problem. Garment production was one of the first industries to be moved offshore because of the relative lack of skills needed for assembly processes and the low-capital intensity. The casual ob- server accepts that it is natural for garment production to move to the lowest cost environment, particularly given the enormous pricing pressure on manu- facturers. Drawing upon their book A Stitch in Time, in Chapter 2 Abernathy et al. show that for certain garments, a new locational logic has emerged moti- vated by what they term“lean retailing.”In this system, retailers carry only min- imal inventory, finding that it is more economical to rapidly replenish goods that have sold. Lean inventory decreases the risk of holding stocks that might become obsolete with a quick change in consumer preference. However, lean- ness implies that the danger of being out of stock increases. Rapid replenish- ment depends upon having factories close to the end market and linked to re- tailers by sophisticated communications systems. This desire for rapid replenishment has led to a production shift for many types of garments for the U.S. market from Asia to the Caribbean Basin and Mexico, while in Western Eu- rope production is being relocated from Asia to North Africa and Eastern Eu- rope. Firms must balance between production and transportation costs and speed, which, in rough measure, is a function of distance and transportation modality. They explore the trade-offs that garment firms must make when de- ciding where to source their production. This is illustrated by a provocative demonstration of how low labor costs can be offset by the inventory cost sav- ings and risk reduction that can be achieved by producing in a higher cost en- vironment in closer proximity to the customer. The third chapter, on the automobile industry, provides insight into many facets of globalization. The automobile is a particularly interesting product, be- cause it is the paragon of the mass production system, and with more than thirty thousand individual parts, it is the most complicated and bulky mass-as- sembled product. Because of the large number of parts and interdependence involved, Sturgeon and Florida study the globalization of both the auto assem- blers and their major suppliers. Given its complexity and importance to na- tional governments, globalization in the automotive industry has always had a political dimension. They argue that there are four different forms of globalization underway in the industry. The first form of globalization is characterized by increasing im- ports and exports, though they predict that this trend will decline because of the second form, which consists of the establishment of assembly plants in closer proximity to the final consumer. The impact of this form of globalization will be moderated by a movement to establish new plants in low-wage nations, such as Mexico for the United States market and Spain and Eastern Europe for
  • 52.
    14 / ma rt i n ken n ey the Western European market. Because of this, they predict that the shipment of automobiles across oceans will decrease. However, the new plants being es- tablished by foreign competitors are exacerbating an already severe overcapac- ity problem that is driving prices down. The third form is the cross-national consolidation through merger and acquisition of the industry into an ever fewer number of major auto assemblers. The final form is the globalization of vehicle platforms and models as the same vehicle is introduced in a number of different markets. The evolution of these different forms not only affects the auto assemblers but also is propelling the establishment of global parts suppli- ers that can service their customers in every market. However, these new forms are not simply spreading automobile production uniformly over the landscape, since transplants tend to be sited relatively close to traditional automobile man- ufacturing regions, albeit with some shifts to proximate, lower-wage environ- ments. More important, Sturgeon and Florida find that global design clusters are emerging, given the increasing need for interaction between auto assem- blers and parts suppliers earlier in the vehicle design process. Their chapter richly illustrates the multiple dimensions of globalization, and how the interac- tion between assemblers and parts suppliers affects the dimensions of global- ization. In the fourth chapter by Martin Kenney, the long sweep of globalization in the television industry is examined using North America as a case study. The spatial configuration of the value chain for televisions, unlike that for automo- biles, has shifted substantially during the last five decades as it has for a number of other industries in this book. And yet, transportation and communication, though significant, have not profoundly influenced the industry. What has been most important is finding relatively low cost labor pools in reasonably close proximity to the final consumer. In terms of speed of change and obsolescence, of course, shrinking inventory is important, but televisions do not experience the same loss of value dynamics as garments and PCs. However, since televi- sions are commodities, price pressures are ferocious. Chapter 4 examines the shifting location of television production, and doc- uments the reasons for the growth and decline of U.S. firms and domestic pro- duction. Fittingly, this globalization begins with RCA’s transfer of technology to Japan and ends with the relocation of television production to northern Mex- ico. Segmenting the television value chain into components, color picture tubes (CPTs), and final assembly provides the reader with greater insight into the un- folding and constantly changing map of globalization, which in the case of North America ends with a production cluster created by Asian firms in north- ern Mexico to serve the U.S. market. This Mexican production cluster that be- gan with simple assembly has deepened as it has attracted an increasing num-
  • 53.
    Introduction / 15 berof parts makers from Asia and CPT producers from the United States, drawn by Mexico’s proximity to U.S. consumers. Part II examines globalization in the new industries formed in the postwar period. In Chapter 5, James Curry and Martin Kenney examine the dynamics of globalization in the personal computer industry, which plays a major role as a consumer of the outputs of the component industries studied in the chapters that follow. Its juxtaposition with the television industry discussed in the pre- vious chapter is also fascinating because the PC shares so many similarities with the television in terms of assembly process and components; in fact many be- lieve these two products might converge. As Linden et al. in their chapter and, to a lesser degree, Murtha et al. in their chapter argue, the centrality of the desktop PC may decline in the case of semi- conductors and FPDs. This may also be true in the HDD industry with the ad- vent of TiVo, which uses an HDD to record television programs. Thus the tele- vision might compete with the PC even if the proverbial convergence never occurs, and it will provide new outlets for the components discussed in Part II. Another feature distinguishing the industries in Part II is that they experi- ence value erosion based on the speed of technical change. They share this em- phasis on speed with the oldest industry in Part I, garments, revealing that tech- nical change and fashion experience similar loss-of-value dynamics. The PC industry is characterized by extremely rapid change caused by the devaluation of its constituent semiconductors and the HDD. This rapid pace creates a business environment in which proximity to the final customer is es- pecially important because long transit times for a finished PC can lead to sig- nificant losses of value. This intense pace of depreciation creates an interesting anomaly. Taiwan is the only discernible PC cluster in the world, housing the headquarters for firms that in factories situated around the world assemble more than 50 percent of all PCs sold; yet the most important brand name firms are not located in this clus- ter. The reason is that the highly modular nature of the PC with its rigorously specified interfaces between components means that tacit knowledge about production is not especially important. Proximity to the market is more criti- cal. Thus, while one might think that the ease of assembly and ready availabil- ity of all the constituent components of the PC would allow Asian firms to gain dominance, this is not the case. U.S. firms dominate the industry because they not only provide the components with the greatest value added but also are lo- cated in, and can learn from, the world’s largest market and its highly sophisti- cated customers. The next three chapters discuss industries that produce the three most valu- able PC components, and the concluding industrial chapter argues that, at least
  • 54.
    16 / ma rt i n ken n ey in semiconductors, a “post-PC” world is dawning. In Chapter 6, McKendrick draws upon and extends his research, first presented in the book From Silicon Valley to Singapore, to elucidate how the dynamics of globalization affect the HDD industry. The HDD is the final major assembled component in the PC that continues to be dominated by U.S. producers. This chapter traces the his- torical evolution of the spatial configuration of the manufacturing, R&D, and headquarters functions. It finds that R&D and headquarters functions continue to be clustered in Silicon Valley, with a smaller cluster in Japan, even while man- ufacturing is concentrated in Asia, especially Southeast Asia and China. In fact, the HDD industry demonstrates that it is possible to internalize both R&D and manufacturing within the firm and manage both processes, though they occur on different continents. HDDs resemble semiconductors and FPDs in that they experience rapid change, short product cycles, and severe cost pressures. How- ever, in contrast to semiconductors and FPDs, an HDD consists of a relatively large number of components that must be physically assembled to very tight tolerances. As in the case of DRAMs, the need for speed, cost, and quality have meant that the leading firms have integrated much of the value chain and con- duct manufacturing in-house. In contrast to PCs, consumer proximity was not necessary for the HDD industry. In Chapter 7, Murtha et al., drawing upon their book Managing New Indus- try Creation, examine the global dimensions of the establishment and growth of the flat panel display industry. They show how the initial research was under- taken in the United States, but the commercialization occurred in Japan, where an early cluster of FPD manufacturers and equipment makers ignited a knowl- edge-creation dynamic that soon outdistanced firms not located in the cluster. They differ from conventional accounts by showing how a number of U.S. firms that embedded themselves in and contributed to this knowledge-creation dy- namic experienced great success. In FPDs, globalization was a process of partic- ipating in a very local knowledge-creation dynamic. For materials and equip- ment suppliers, proximity to lead customers was vital for success, because of the great amount of tacit information that was both exchanged and mutually cre- ated. The semiconductor has probably been the most important artifact of the second half of the twentieth century. Semiconductors are the devices that process data; they are components that make computing and the Information Age possible. Semiconductors share a technical commonality with FPDs— namely, they are both based upon the substrate silicon. Unfortunately, the mar- ket for semiconductors is treacherous because of notoriously rapid improve- ment cycles, escalating capital expenditures, and brutal competition. The final two industrial chapters comprising Part II examine the semicon-
  • 55.
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  • 56.
    me. Senior officersof the General Staff of the Army were also assigned. The basic strength requirements assumed in these military exercises were: The launching of one army group south of the Pripet territory, specifically from southern Poland and from Romanian territory, with the aim of reaching the Dnieper-Kiev line and south of it; north of the Pripet territory another army group, the strongest, from the area around Warsaw and northward, with the general direction of attack being the Minsk-Smolensk line, the intention being to direct it against Moscow later; then a further army group, namely Army Group North, from the area of East Prussia, with the initial direction of attack being through the Baltic States toward Leningrad. The conclusion which was drawn from these military exercises was at that time that in case of actual hostilities provision should be made firstly for reaching the general line Dnieper-Smolensk- Leningrad, and then the operation was to be carried forward if the situation developed favorably, supply lines, et cetera being adjusted accordingly. In connection with these military exercises and for the evaluation of the theoretical experience gained therefrom, there was a further conference of the Chief of the General Staff of the Army and the chiefs of the general staffs of the army groups which had been planned for the East. And further, in connection with this conference, there was a speech about Russia by the then chief of the section Foreign Armies East, Colonel Kinsel, describing Russia’s geographic and economic conditions, the Red Army, et cetera. The most significant point here was that no preparations whatever for an attack by the Soviet had come to our attention. With these military exercises and conferences that I have just described the theoretical considerations and plans for this offensive were concluded. Immediately thereafter, that is on 18 December 1940, the Supreme Command of the Armed Forces issued Directive Number 21. This was the basis for all military and economic preparations which were to be carried out. In the Supreme Command of the Army this directive resulted in going ahead with the drafting and working out of directions for troop deployments for this operation. These first directions for troop deployment were authorized on 3 February 1941 by Hitler after a report by the
  • 57.
    Commander-in-Chief of theArmy at the Obersalzberg; thereupon they were forwarded to the troops. Later on several supplements were issued. For the beginning of the attack the Supreme Command of the Armed Forces had calculated the time which would make it possible for large troop movements to be made on Russian territory. That was expected from about the middle of May on. Preparations were made in accordance with this. Then at the end of March this date underwent a change, when Hitler decided, due to the development of the situation in Yugoslavia, to attack this country. Consequently, in the orders issued at the beginning of April 1941 this tentative date for the start of the operation. . . . THE PRESIDENT: I am afraid you are a little too fast. I think you had better begin again where you said that at the end of March Hitler made a change in the plan. PAULUS: [Continuing] Because of his decision to attack Yugoslavia, the date foreseen for the beginning of the attack had to be postponed by about five weeks, that is to the last half of June. And, indeed, this attack then did take place on 22 June 1941. In conclusion, I confirm the fact that the preparation for this attack on the Soviet Union, which actually took place on 22 June 1941, dated back to the autumn of 1940. GEN. RUDENKO: In what way and under what circumstances. . . . THE PRESIDENT: One moment. Did the witness give the date? He said that preparations for this attack had been made, and what I want to know is, did he give the date from which it had been prepared? [To the witness] Did you give the date from which the preparations went forward? PAULUS: I gave it at the beginning: From the time my personal observations began, when I entered office, on 3 September 1940. GEN. RUDENKO: In what way and under what circumstances was the participation of the satellite states secured? PAULUS: From personal observation, I can say the following regarding this:
  • 58.
    About September 1940,just at the time when I had received this operational study for the attack on the Soviet Union there was planned from the outset the use of Romanian territory for the deployment of the German right or, that is to say, south wing, and that was taken into consideration from the outset. A military mission headed by the then Lieutenant General of Cavalry, Hansen, was sent to Romania. A whole panzer division, the 13th, was transferred to Romania as a training unit. To those who knew about the plans for the future it was obvious that this step could only serve the purpose of preparing the future partner in the war for the task intended for him. Further, in regard to Hungary: In December 1940 Colonel Lazslo, the chief of the operational group of the Hungarian General Staff, came to the headquarters of the Army High Command at Zossen. He asked for a conference regarding questions of organization. The Hungarian Army at that time was concerned with the question of regrouping its units, which were organized in brigades, into divisions and also with the setting up of motorized troops and of panzer units. The chief of the Organization Division of the General Staff of the Army, then Major General Buhle, and myself advised Colonel Lazslo. At the same time, several Hungarian military commissions were in Berlin, and with them also the Hungarian Minister of War, General Von Bartha, and they discussed armament deliveries to Hungary with German authorities. It was clear to all of us who were informed as to future plans that all these measures, including the supplying of arms to other armies, were only conceivable at that time if these weapons were to be employed in future military projects. Regarding Hungary there is a further point: Due to the development of events in Yugoslavia, Hitler, at the end of March 1941, decided to attack Yugoslavia. On 27 or 28 March I was called to the Reich Chancellery in Berlin, where there had just been a conference between Hitler, Keitel, and Jodl, in which the Commander-in-Chief and the Chief of Staff of the Army had participated, that is, had been ordered to be present.
  • 59.
    When I arrivedI was advised by the Chief of Staff of the Army, General Halder, that Hitler had decided to attack Yugoslavia in the first place to eliminate a threat to the flank of the intended operation against Greece, and get hold of the rail line going from Belgrade southward through Nish, and then also with an eye to the future—to Plan Barbarossa—to keep the right flank free from the outset. I was instructed to go to Vienna, taking with me a number of competent General Staff officers of the Army, to deliver and explain pertinent orders to German commanders, and then to travel on without fail to the Hungarian General Staff in Budapest and to reach an understanding with it on the deployment of German troops on Hungarian territory and the participation of Hungarian troops in the attack on Yugoslavia. On 30 March, early in the morning, I arrived in Budapest and had a conference with the Chief of the Hungarian General Staff, General Werth, of the infantry and then with the chief of the operational group of the Hungarian General Staff, Colonel Lazslo. These conferences went along in good order and ended very quickly, and the desired result was achieved. This result was then put down on maps. The map that I received from the Hungarian General Staff contained not only the deployment of the troops intended for the attack against Yugoslavia, but also forces on the Carpatho-Ukrainian border, which were to be placed there to protect our rear against the Soviet Union. The fact of the creation and existence of this force is a sign that even on the side of Hungary there was the realization that an attack by Germany against Yugoslavia would have to be considered as an aggressive action by the Soviet Union. As regards the principle of calling upon Hungary in the preparation and later in the execution of the planned operations, I learned Hitler’s view at that time. He was of the opinion that Hungary was anxious, through German help, to recapture and expand the areas lost in 1918; and in addition, that she was afraid of falling behind Romania which was allied with Germany. Hitler saw Hungary from this point of view also with regard to his policy. But he was, as I could observe in many instances myself, very reserved
  • 60.
    toward Hungary, andfor two reasons. For one, he did not believe Hungary could guarantee secrecy with regard to future war plans, due to her close connections with foreign countries hostile to Germany, and secondly, he did not want to make Hungary too many premature promises of territory. I can cite one example: The question of the Dragowitsch oil territory. Later, when the attack began against Soviet Russia, the 17th German Army which was fighting at that point had the explicit order from the Supreme Command to take the Dragowitsch oil fields at all costs before the arrival of the Hungarians. Regarding this future partner, according to my observation the procedure of Hitler was such that he counted on her certain participation and therefore delivered the armament to her and helped with the training, but that he kept to himself the time when he would initiate the ally into his plans. Thirdly, the Finnish question. In December 1940 the first visit of the Chief of the Finnish General Staff, Lieutenant General Heinrichs, was made to the headquarters of the High Command of the Army in Zossen. Lieutenant General Heinrichs had a conference with the Chief of the Army General Staff, the contents of which I no longer remember; but he made a speech about the Russo-Finnish war of 1939-1940 before the General Staff officers of the High Command of the Army, and the General Staff officers of the Army groups who happened to be present at the time in connection with the discussion of the military exercises. This speech before these General Staff officers had its great significance at that time because of the fact that it was delivered at the same time that Directive Number 21 of 18 December was issued. This speech was significant, it dealt with experiences won in the war with the Red Army and in addition gave an insight into the value of the Finnish troops as possible future partners in the war. I took part in a second conference with the Chief of the Finnish General Staff at the headquarters of the High Command of the Army in Zossen, in the second half of May 1941. The Chief of the Finnish General Staff arrived from Salzburg where he had had conferences with the High Command of the Army. The subject of the subsequent
  • 61.
    conferences in Zossenwith the General Staff of the High Command of the Army was the co-operation of the Finnish forces in the south in Plan Barbarossa—in co-operation with Army Group North—which was to proceed from the deployment area in East Prussia towards Leningrad. At that time the agreement was reached that the Finnish troops in the south were to synchronize their movements with the advance of German Army Group North and likewise that the joint advance later against Leningrad should be subject to consultations and agreements depending on the development of events. Those are the personal observations which I made regarding the first appearance and the enlistment of allies in preparations for the aggression. GEN. RUDENKO: How, and under what circumstances, was the armed attack on the U.S.S.R. carried out—the attack which was prepared by the Hitlerite Government and the Supreme Command of the German Armed Forces? PAULUS: The attack on the Soviet Union took place as I have related, according to a plan prepared carefully and well in advance. The troops for this attack were at first assembled in the rear of the deployment area. By special orders they were then moved by groups into jumping-off positions, and then took up their position along the entire long front from Romania to East Prussia for a simultaneous attack. The Finnish theater of war was excluded from this operation. Just as the large-scale operational plan, as I described it at the beginning, was to a certain extent tried out theoretically, the detailed employment of troops was discussed during military exercises by the staffs of army groups, corps, and divisions and drawn up in orders down to the details long before the beginning of the war. A large-scale diversion, which was to be organized in Norway and along the coast of France was designed to simulate an invasion of Britain in June 1941 and thus divert Russia’s attention. All measures were taken not only for operational but also for tactical surprise, as for instance, the prohibition of open reconnaissance on and across the boundary before the beginning of the war. That meant on the one hand, that possible losses which might be caused due to the lack of reconnaissance had to be taken
  • 62.
    into account forthe sake of surprise, but on the other hand it meant that a surprise attack across the boundary by the enemy was not feared. All of these measures show that it was a question of a criminal attack. GEN. RUDENKO: How would you define the aims pursued by Germany in attacking Soviet Russia? PAULUS: The aim to reach the Volga-Archangel line, which was far beyond German strength, is in itself characteristic of Hitler’s and the National Socialist leadership’s boundless policy of conquest. From a strategic point of view, the achievement of these aims would have meant the destruction of the armed forces of the Soviet Union. With the winning of the line I have mentioned the main areas of Soviet Russia with the capital, Moscow, would have been conquered and subjugated, together with the leading political and economic center of the Soviet Union. Economically, the winning of this line would have meant the possession of important agricultural areas, the most important natural resources, including the oil wells of the Caucasus and the main centers of production in Russia, and also the main network of communications in European Russia. How much Hitler was bent on taking economic objectives in this war can best be shown from an example out of my personal experience. On 1 June 1942, on the occasion of a conference of commanders-in-chief in the region of Army Group South in Poltava, Hitler declared, “If I do not get the oil of Maikop and Grosny, then I must end this war.” For the utilization and the administration of the territories to be conquered, economic and administrative organizations had already been formed and were kept in readiness long before the beginning of the war. To summarize I should like to state that the objectives given indicate the conquest of the Russian territories for the purpose of colonization with the utilization and spoliation of and with the resources of which the war in the West was to be brought to a
  • 63.
    conclusion, with theaim of finally establishing domination over Europe. GEN. RUDENKO: And one last question: Whom do you consider as guilty of the criminal initiation of the war against Soviet Russia? PAULUS: May I please have the question repeated? GEN. RUDENKO: I repeat the question. . . . THE PRESIDENT: The Tribunal is about to address an observation to General Rudenko. The Tribunal thinks that a question such as you have just put, as to who was guilty for the aggression upon Soviet territory, is one of the main questions which the Tribunal has to decide, and therefore is not a question upon which the witness ought to give his opinion. Is that what Counsel for the Defense wish to object to? DR. LATERNSER: Yes, Mr. President, that is what I want to do. GEN. RUDENKO: Then perhaps the Tribunal will permit me to put this question rather differently. THE PRESIDENT: Yes. GEN. RUDENKO: Who of the defendants was an active participant in the initiation of a war of aggression against the Soviet Union? PAULUS: Of the defendants, as far as I observed them, the top military advisers to Hitler. They are the Chief of the Supreme Command of the Armed Forces, Keitel; Chief of the Operations Branch, Jodl; and Göring, in his capacity as Reich Marshal, as Commander-in-Chief of the Air Forces and as Plenipotentiary for Armament Economy. GEN. RUDENKO: In concluding the interrogation I shall make a summary. Have I rightly concluded from your testimony, that long before 22 June the Hitlerite Government and the Supreme Command of the Armed Forces were planning an aggressive war against the Soviet Union for the purpose of colonizing the territory of the Soviet Union? PAULUS: That is beyond doubt according to all the developments as I described them, and also in connection with all the directives issued in the well-known Green File. GEN. RUDENKO: I have no more questions, Mr. President.
  • 64.
    THE PRESIDENT: Doesany member of the French Prosecution wish to ask any questions? FRENCH PROSECUTOR: No. THE PRESIDENT: The British? BRITISH PROSECUTOR: No. THE PRESIDENT: The United States? UNITED STATES PROSECUTOR: No. THE PRESIDENT: Any member of the defendants’ counsel? DR. LATERNSER: Mr. President, as Counsel for the General Staff, I ask you to afford me the opportunity to examine the witness tomorrow morning. The presentation of the witness by the Prosecution came as a surprise to the defendants’ counsel, at any rate, and I think a consultation about the questions to be asked, especially in view of the importance of the testimony, is absolutely necessary. I therefore ask to be permitted to conduct the cross- examination at the beginning of tomorrow morning’s session. THE PRESIDENT: General Rudenko, if the Prosecution has no objection, the Tribunal thinks that this application ought to be granted. GEN. RUDENKO: If the Tribunal so wishes, the Prosecution will not object. THE PRESIDENT: Yes, very well. I don’t know whether any other member of the defendants’ counsel would prefer to cross-examine now. DR. NELTE: Mr. President, I assume that all defendants’ counsel may conduct their cross-examination of the witness, General Paulus, tomorrow morning? THE PRESIDENT: Yes, certainly. I was only asking whether any other member of the defendants’ counsel would prefer to cross- examine now. DR. NELTE: I personally would be able to put my questions after the recess. THE PRESIDENT: Very well. Then the witness can retire and the case will go on. He will be recalled tomorrow morning and in the meantime you will go on with your case.
  • 65.
    [The witness leftthe stand, and Major General Zorya approached the lectern.] THE PRESIDENT: General, you won’t, I presume, think it necessary to read any more of Field Marshal Paulus’ statement, will you? GEN. ZORYA: No. THE PRESIDENT: Very well, go on, then. GEN. ZORYA: Referring to the explanation concerning the beginning of the criminal attack of Fascist Germany on the Soviet Union, I should like to remind the Tribunal that in the morning session of the Tribunal on 30 November 1945, the witness, Lahousen, was interrogated and gave evidence of sufficient interest in our case. Among other things, this witness, when enumerating the more intimate members of the inner circle of Admiral Canaris, Chief of the Intelligence and Counterintelligence Services of the German Army, mentioned Pieckenbrock by name. I present to the Tribunal as Document Number USSR-228, the testimony of the former chief of Section I of the German Military Intelligence and Counterintelligence Services, Lieutenant General of the former German Army, Hans Pieckenbrock, former chief and colleague of Lahousen. Pieckenbrock gave this testimony in the order prescribed by the laws of the Soviet Union, in Moscow, on 12 December 1945. For the moment I should like to read a few lines only into the record from Pieckenbrock’s testimony, relating to the matter which we are now investigating. These lines are on Page 1 of the Russian text of his testimony and they are marked with a red pencil. This Page 1 corresponds to Page 34 of the document book.
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    “I must say”—saidPieckenbrock—“that already since August and September 1940 the Foreign Armies East of the General Staff of the Army began to increase considerably its intelligence assignments to the Abwehr concerning the U.S.S.R. These assignments were unquestionably connected with the preparation of war against Russia. “The more precise dates for Germany’s attack on the Soviet Union I learned in January 1941 from Canaris. I do not know what sources Canaris used, but he told me that the attack on the Soviet Union was fixed for 15 May.” The Soviet Prosecution also has at its disposal the testimony of the former chief of Department III of the German Military Intelligence and Counterintelligence Services, Lieutenant General Franz von Bentivegni of the former German Army, which was given by him on 28 December 1945. I present those documents under Document Number USSR-230. I shall at the same time also only read into the record those parts of Bentivegni’s testimony underlined in red pencil, which have a direct bearing on the beginning of military preparations against the Soviet Union. These first two excerpts of the testimony are on Page 37 in the document book which is submitted to the Military Tribunal: “I learned first of Germany’s preparation for a military attack on the Soviet Union in August 1940, from the head of the German Intelligence and Counterintelligence Service, Admiral Canaris. In an unofficial conversation which took place in Canaris’ office he told me that Hitler had started to take measures for an Eastern campaign, which he had spoken about as early as 1938 in his speech at a meeting of Gauleiter in Berlin. “Canaris said to me that these plans of Hitler’s had now begun to take concrete form. This was evident from the fact that divisions of the German Army were being forwarded in large numbers from the West to the eastern frontiers and, in accordance with a special order
  • 67.
    by Hitler, weretaking up positions from which to start the coming invasion of Russia.” These are the first two paragraphs of Bentivegni’s testimony. And finally, in order to finish with the question of the actual time of fascist Germany’s military preparations for the treacherous attack on the Soviet Union, I should like to dwell for a moment on the testimony of General Müller. This testimony, dated 8 January 1946, was written in a camp for prisoners of war. I present it to the Tribunal as Document Number USSR-149. All the material to which I have so far referred emanated from circles of the highest commanding officers of the German Army. THE PRESIDENT: General, on this document of General Müller, does it appear where that document was made and where General Müller is now? GEN. ZORYA: The photostat bears a date written in General Müller’s hand. This date is 8 January 1946. THE PRESIDENT: Where? GEN. ZORYA: If I might have a look at the photostatic copy which I have just presented to the Tribunal, I would be able to tell you where the date is written. THE PRESIDENT: Yes, but there are many prisoners-of-war camps. We want to know which one and where it is. GEN. ZORYA: In a camp located near Moscow. THE PRESIDENT: Has this document got any authenticating signature on it at all? So far as we are concerned, isn’t it simply a photostatic copy of a writing by somebody? GEN. ZORYA: Mr. President, this document, like all other documents which have been submitted so far by the Soviet Delegation, is a noncertified photostatic copy. Taking into consideration the wish of the Tribunal and in execution of this wish the Soviet Prosecution took measures to ensure that only the originals of these documents or documents whose authenticity is certified will be presented in complete order to the General Secretary. This will be done in the course of several days
  • 68.
    and all thematerial will be given in best order to the General Secretary. THE PRESIDENT: Can you tell us where the writer of the document is now? GEN. ZORYA: I am hardly in a position to say more than I have already. If the Tribunal will permit me, I can consult my colleagues, make inquiries, and report to the Tribunal as soon as possible on the general’s whereabouts. THE PRESIDENT: Well, we will adjourn now. That will enable you to consult your colleagues. [A recess was taken.] DR. NELTE: Mr. President, to my regret I must present the same objections to this document submitted by the prosecutor of the Soviet Union under USSR-149, and must submit the same request which I made this morning. As far as I know, the High Tribunal have not yet made a decision in regard to this question. THE PRESIDENT: I beg your pardon, Dr. Nelte. The Tribunal has already made a decision. I think it would be better if, when defendants’ counsel go to the place from which they wish to speak, they would arrange these earphones before they speak. I say the Tribunal has already made a decision which governs this case. They pointed out the other day to counsel for the Soviet Union that documents which were not identified as authentic documents, must be identified as authentic, and the Soviet prosecutor at that time undertook to certify that all documents which he made use of were certified as authentic documents. And if they are not so certified, they will be struck out of the record. That ruling applies to this document. This document is a document which appears to be a document, a letter, or report to the Government of the Soviet Union, but it does not contain upon its face any certification showing that it is an authentic document. The Counsel for the Soviet Union said before we adjourned, that he undertook—as he had already undertaken—to
  • 69.
    produce a certificatethat the document was an authentic document; that is to say, that it was written by the person who purported to write it, and in those circumstances, the Tribunal accepts the document provisionally. If no such certificate is forthcoming, then the document will be stricken from the record. DR. NELTE: If I understand you correctly, the Tribunal will accept a letter written to the Soviet Government or a statement as documentary evidence for the contents of this statement. THE PRESIDENT: Certainly. I have already said provided that it is certified as an authentic document. I have said that more than once. DR. NELTE: In this way, every letter sent to the Prosecution or the Government of the Soviet Union or to any other Prosecution would become documentary evidence by the certification that it has actually been written by the person who signed it, which would make it impossible for the Defense to cross-examine the witness. THE PRESIDENT: That depends on where the witness is. We are dealing with witnesses who are scattered all over the globe, and as we are informed that it is not the practice in the Soviet Union for affidavits to be made in such cases, the Tribunal considers such a document to fall within Article 19—provided it is an authentic document. We are affording the defendants’ counsel the greatest assistance in bringing witnesses to this Court, but we cannot undertake to bring witnesses from all over the world upon questions which are very often of very little importance. DR. NELTE: I quite appreciate the difficulties, and I am grateful to the Tribunal for their willingness to assist us. Therefore I only request to ascertain in each case where the person, who has made that statement, has his residence, so that the Defense may try to reach him. THE PRESIDENT: Yes. If the witness is in, or in the immediate vicinity of, Nuremberg, the Tribunal would think that it was only fair, if such a document as this were to be put in evidence, that he should be produced for examination or cross-examination by the defendants’ counsel, but we do understand that the man who wrote
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    this letter isnot in the vicinity of Nuremberg. We have no reason to think he is, and I am reminding defendants’ counsel that they can always apply, if they think right, to issue interrogatories which would be put to any such person as this who has written such a document as this. DR. NELTE: Thank you. GEN. ZORYA: I have availed myself of the recess to make inquiries about General Müller. General Müller is in a prisoner-of-war camp, Number 27, in Krasnogorsk, in the Moscow region. May I continue my statement? THE PRESIDENT: Certainly. GEN. ZORYA: All the material, Your Honors, which I have mentioned to date emanated from circles of the Supreme Command of the German Armed Forces. If I can so express myself, General Müller belonged to the middle category of German generals. He was Chief of Staff of an army; he commanded an army group. His testimony reflects a series of events which may be considered worthy of attention, since they explain the circumstances accompanying Germany’s preparations against the Soviet Union. I wish to refer to Page 40 of the document book. There you will find the first page of General Müller’s statement. The first paragraph, Page 1, of the statement is marked with red pencil. I now proceed to quote from it: “The preparation for the attack on the Soviet Union began as early as July 1940. At that time I was first general staff officer in the staff of Army Group C at Dijon in France. General Field Marshal Von Leeb was commander-in-chief. This army group consisted of the 1st, 2d, and 7th Armies, which were occupation armies in France. Besides this, Army Group A (Rundstedt), whose task was to prepare ‘Case Sea Lion’ (the invasion of England by Army Group B—Von Bock) was also in France. The staff of Army Group B was transferred to the East (Posen) during July and was given the following forces, transferred from France—part of the armies of occupation: The 12th Army Command (List), 4th Army Command (Von Kluge), and 18th Army Command (Von Küchler), plus several general commands and
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    about thirty divisions.A greater part of this number was taken from Army Group C (Von Leeb). “Directly after the campaign in the West, the OKH gave the order for the demobilization of 20 divisions. This order was cancelled, and the 20 divisions were not demobilized. Instead of this, after their return to Germany they were sent on leave, and thus kept ready for rapid mobilization. “Both measures, the transfer of about five hundred thousand men to the Russian frontier and the cancellation of the order disbanding about three hundred thousand men, show that already in July 1940 plans existed for war operations in the East. “The next order which gives evidence of Germany’s preparations for attacking the Soviet Union, was the written OKH order issued in September 1940 regarding the formation in Leipzig of a new army command (A.O.K. 11) of several general commands and about forty divisions and panzer divisions. The forming of these units was carried out from September 1940 onwards by the commander of the reserve army (Generaloberst Fromm), partly in France, but mainly in Germany. Towards the end of September 1940 the OKH called me to Fontainebleau. The Chief Quartermaster I in the General Staff of the Army, then Lieutenant General (afterwards Field Marshal) Paulus, informed me, at first orally, of the order that my staff (Army Group C) was to be transferred to Dresden by 1 November and that Army High Command II (Generaloberst Weichs) which was under the command of the staff, should be transferred at the same time to Munich. The task was the leading of training of the above-mentioned 40 divisions which were to be newly created. “In accordance with this order, confirmed later by signature by the Chief of the General Staff Halder, the transfer of these units was carried out on time. These 40 divisions were put into action in the invasion of the Soviet Union.” Thus initiated, the preparation for the military attack on the Soviet Union was carried out at a heightened tempo and with
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    customary German pedantry. Iwould, Your Honors, remind the Tribunal that the witness, Paulus, stated at this session that in August 1940 the elaboration of the previous plan of attack on the Soviet Union, known as Plan Barbarossa, was already so far advanced as to render possible the conducting of two military exercises under the direction of Paulus. THE PRESIDENT: General, I don’t think it is necessary to read the statement of Field Marshal Paulus, as he has already given the evidence in the witness box. GEN. ZORYA: I am not reading it into the record. I am merely referring to a circumstance which will enable me to proceed to General Müller’s statement that this system of military exercises, which originated in the General Staff of the German Army, eventually spread over the entire Army and that the entire armed forces participated in the execution of these games which, per se, were already a preparation for the attack on the Soviet Union. I am reading into the record that passage of the statement which is underlined in blue pencil, Page 41 of the bundle of documents: “Insofar”—General Müller states—“as in the future the Army was to attack the Soviet Union, the first plan was to train soldiers and general staff officers. “Towards the end of January 1941 I received telegraphic orders from the Chief of the General Staff Halder to attend the military exercises of Rundstedt’s army group at St. Germain, near Paris. The object of this military exercise was the attack and advance from Romania and South Poland in the direction of Kiev and southwards. The plan had in mind the intention also of the participation of Romanian troops. In the main this military exercise anticipated the conditions of the future order concerning the strategic deployment of forces, to which I will refer later. “The director of the military exercises was the Chief of the General Staff of the Rundstedt army group. There were present: Rundstedt, Halder, the Chiefs of the General Staff of the 6th Army, Colonel Heim, of the 11th Army, Colonel Wöhler, and of Kleist’s tank group,
  • 73.
    Colonel Zwickler andseveral generals of the panzer forces. The military exercises were held at the place occupied by Rundstedt’s army group, approximately between the 31st January and 2d February 1941. The exercise demonstrated the necessity for a strong concentration of tank forces.” The documents I have presented to date characterize the measures of the military command of the German Armed Forces for the preparation of the strategic deployment of the German armies for launching an attack against the Union of the Soviet Socialist Republics. As for time, these measures embraced a considerable period of 1940 and were put into action at least 6 months prior to the appearance on the scene of Directive Number 21 concerning the Plan Barbarossa. I shall now proceed to the second group of documents presented by the Soviet Prosecution which characterize the espionage measures undertaken by the fascist conspirators in preparation for war against the Soviet Union. Trend and task of espionage work in connection with Plan Barbarossa were, as we know, determined by a directive from the Supreme Command of the German Armed Forces, addressed to counterintelligence on 6 September 1940 and signed by the Defendant Jodl. This document was presented by the American Prosecution under Number 1229-PS; it is to be found on Pages 46 and 47 of our document bundle. I do not intend to quote this document again, but I do consider it essential to remind you that in it the intelligence organizations demand that the regrouping of armies on Germany’s Eastern front should be camouflaged in every possible way and that the Soviet Union should remain under the impression that action of some kind was brewing against the Balkans. The activities of the intelligence organizations were strictly regulated. These activities included measures for concealing, as far as possible, the number of German forces in the East and of giving an impression of insignificant concentrations in the north of the
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    Eastern provinces, atthe same time conveying the impression of very considerable concentrations of forces in the southern part, in the Protectorate and in Austria. The necessity was pointed out of creating an exaggerated impression of the number of antiaircraft units and of the insignificant extent of roadbuilding activities. I here take the liberty of making two pertinent observations. According to Pieckenbrock’s testimony, the intensification of the work of this intelligence organization against the Soviet Union began prior to the appearance of this directive in August 1940. And this work, of course, was not limited to the spreading of false information on the regrouping of forces from West to East. I beg you, Your Honors, to revert to the testimony, which I have already presented, of the former Chief of Department III of the Intelligence and Counterintelligence Services of the German Armed Forces, Von Bentivegni. On Pages 1, 2, and 3 of the Russian text of Bentivegni’s deposition, it is said—I quote the passage underlined in blue pencil— beginning at the last paragraph, Page 1 of the document which corresponds to Page 37 of the document book: “In connection with this, as early as November 1940 I received from Canaris orders to intensify the work for counterintelligence in the localities where concentration of the German armies on the Soviet German frontier was taking place.” On Page 2 of the statement, Page 38 of the document book, Paragraph 1, Bentivegni continues: “In accordance with this order, I immediately gave a corresponding order to the German Abwehr agencies, Danzig, Königsberg, Posen, Kraków, Breslau, and Vienna.” And finally, on Page 3 of the statement, which corresponds to Page 39 of the document book, I read: “In March 1941 I received from Canaris the following directives for the preparations for the execution of the Plan Barbarossa.
  • 75.
    “a) Preparation ofall links of Abwehr III for carrying out active counterintelligence work against the Soviet Union, as for instance the creation of the necessary counterintelligence groups, their distribution among various fighting units intended for taking part in the operations on the Eastern front, and paralyzing the activity of the Soviet intelligence and counterintelligence organs. “b) Spreading false information via their foreign intelligence agencies, partly by creating the semblance of an improvement in relations with the Soviet Union and of preparations for a blow against Great Britain. “c) Counterintelligence measures to keep secret the preparations being made for war with the Soviet Union and to ensure that the transfer of troops to the East be kept secret.” The same question is touched upon in the minutes of the interrogation of the Chief of the Intelligence and Counterintelligence Department I of the German Army, Pieckenbrock, which I have already presented in evidence. This statement contains the following passage regarding the activities of the intelligence service of the German Army in connection with the preparations for the realization of Plan Barbarossa. I would refer you to Page 35 of the document book and to Paragraph 2 from the top. This corresponds to Page 2 of Pieckenbrock’s testimony. Pieckenbrock states: “In March 1941 I was present at a conversation between Canaris and the chief of the espionage detachment (Abwehr II), Colonel Lahousen, about measures connected with Plan Barbarossa. During this conversation they kept referring to a written order on this subject, which Lahousen had. I, personally, as head of Abwehr I, beginning in February 1941 and up to 22 June 1941, more than once had official talks with the Chief Quartermaster IV, Lieutenant General Tippelskirch, and with the head of the detachment Foreign Armies East, Colonel Kienzl. These conversations dealt with the more precise definition of various tasks assigned to Abwehr, with regard to the Soviet Union, and in particular with the verification of old intelligence data about the Red Army, and also details about the
  • 76.
    dislocation of theSoviet armies during the period of preparation of the attack on the Soviet Union.” I now skip one paragraph of Pieckenbrock’s statement and read further: “All Abwehrstellen which were working with the espionage against Russia were given the task of intensifying the dispatch of agents to the U.S.S.R. A similar task—the intensification of espionage work against Russia—was given to all intelligence organs existing in the armies and army groups. For the more successful direction of all these field Abwehr organs, a special intelligence staff was created in May 1941 under the code name of Wally I. This staff was in the vicinity of Warsaw in the village Sulajewek. Major Baun, as the best specialist on work against Russia, was appointed chief of the staff of Wally I. Later, when following our example, Abwehr II and Abwehr III had also established staffs Wally II and Wally III, this organ became known as a whole staff Wally, and directed the entire intelligence, counterintelligence, and diversionary work against the U.S.S.R. as a staff had to become active in the front line. At the head of staff ‘Wally’ was Lieutenant Colonel Schmalschläger.” I now pass on to the last paragraph of Pieckenbrock’s statement on Page 36 of the document book: “From numerous reports given by Colonel Lahousen and Canaris, at which I was also present, I know that a great amount of preparatory work for the war with the Soviet Union was carried out by this department. In the period of February to May 1941 many conferences of the leaders of Abwehr II took place at the quarters of Jodl’s deputy, General Warlimont. They were held in a cavalry school in Krampnitz. One particular question settled at these conferences in accordance with the needs of the war with Russia, was that of increasing the special task units, Brandenburg 800, and of distributing contingents of these units among the individual army groups.”
  • 77.
    In Pieckenbrock’s testimonywhich has just been read into the record, special attention is drawn to his references to the special tasks with which Lahousen’s department had been entrusted, and to special task units known under the code name of Brandenburg 800. Here these points are clarified by the testimony of a former colonel of the German Army, Erwin Stolze, who was Lahousen’s deputy in Department II, Ausland Abwehr, attached to the Supreme Command of the German Armed Forces. Stolze was taken prisoner by the Red Army. I wish to submit to the Tribunal as evidence Stolze’s testimony of 25 December 1945, which was given to Lieutenant Colonel Burashnikov, of the Counterintelligence Service of the Red Army and which I submit to the Tribunal as Document Number USSR-231 (Exhibit Number USSR-231), which I beg you to accept as evidence. I shall read into the record individual extracts from this testimony which are underlined in red pencil. I begin the quotation from Page 48 of the document book. Stolze testified as follows: “I received instructions from Lahousen to organize and to lead a special group under code name ‘A,’ which had to engage in the preparation of diversionary acts and in the work of disintegration of the Soviet rear in connection with the intended attack on the U.S.S.R. “At the same time, in order that I should become acquainted with it and for my guidance, Lahousen gave me an order which came from the Operational Staff of the Armed Forces and which contained basic directives for the conduct of subversive activities in the territory of the U.S.S.R. after Germany’s attack on the Soviet Union. This order was signed by Field Marshal Keitel and initialed by General Jodl (or by General Warlimont on Keitel’s instructions—I do not quite remember which.)” I am omitting two lines which are irrelevant to our case and read on: “It was pointed out in the order that for the purpose of delivering a lightning blow against the Soviet Union, Abwehr II, in conducting subversive work against Russia, with the help of a net of V men,
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    must use itsagents for kindling national antagonism among the people of the Soviet Union.” I now request you to turn over the page and on Page 49 in the document book on Page 2 of the minutes of the interrogation, and to note the following passages in his testimony: “In carrying out the above-mentioned instructions of Keitel and Jodl, I contacted Ukrainian National Socialists who were in the German Intelligence Service and other members of the nationalist fascist groups, whom I roped in to carry out the tasks as set out above. “In particular, instructions were given by me personally to the leaders of the Ukrainian Nationalists, Melnik (code name ‘Consul I’) and Bandara, to organize immediately upon Germany’s attack on the Soviet Union, and to provoke demonstrations in the Ukraine in order to disrupt the immediate rear of the Soviet armies, and also to convince international public opinion of alleged disintegration of the Soviet rear. “We also prepared special diversionist groups by Abwehr II for subversive activities in the Baltic republics of the Soviet Union.” I must again request you to turn over the page. On Page 50 in the document book, beginning with the third line from the top you will find Stolze’s testimony: “Apart from this, a special military unit was trained for subversive activities on Soviet territory, a special duty training regiment for special tasks, Brandenburg 800, under the immediate command of the head of Abwehr II, Lahousen. Among the objects of this special unit, created in 1940, was the seizure of operationally important points, such as bridges, tunnels, and important military installations, and holding them till the arrival of the advance units of the German Army. “Contrary to the international rules governing the conduct of war, the personnel of this regiment, mainly composed of Germans from beyond the border, made extensive use of enemy uniforms and equipment in order to camouflage their operations.
  • 79.
    “During the courseof preparations for Germany’s attack on the U.S.S.R., the command of the Brandenburg Regiment also collected supplies of Red Army uniforms, equipment, and arms, and organized separate detachments of Germans acquainted with the Russian language.” Your Honors, the testimonies of Stolze, Bentivegni, and Pieckenbrock, which I have presented in evidence, disclose the working methods of the German Intelligence Service in the preparation and execution of Plan Barbarossa. I shall not detain the Tribunal any further with these questions. But before proceeding to a further presentation, I should like to point out that the department of the Defendant Kaltenbrunner was likewise interested in intelligence work. I shall limit myself to submitting one document which is typical of the manner in which the Hitlerites, by exploiting their connections, created difficulties in Iran, through which country, as was known, the supply routes passed for the delivery to the U.S.S.R. of motor vehicles and war material of the most varied nature. The document, which I intend to submit to the Tribunal as Exhibit Number USSR-178 (Document Number USSR-178) was taken by us from the German Foreign Office archives, which fell into the hands of advance units of the Red Army. This document is the Defendant Kaltenbrunner’s letter to the Defendant Von Ribbentrop. The letter is typed on a sheet of note paper with the letterhead of the Chief of the Security Police and SD. In the document book before you, you will find this document on Page 52. I read into the record the underlined extracts from this letter: “28 June 1943; top secret. “To the Foreign Minister Herr Von Ribbentrop; Berlin; Object: Elections to the Iranian Parliament. “Most honorable Herr Reich Minister: We have made direct contact with Iran and have received information on the possibilities of exercising German influence on the course of the imminent Iranian parliamentary elections.”
  • 80.
    And a fewlines further on it is stated: “In order to exercise a decisive influence on the results of the elections, bribery is necessary. For Teheran 400,000 tomans, and for the rest of Iran at least 600,000 tomans are necessary. . . . It should also be noted that nationally oriented Iranian circles expect the intervention of Germany. “I beg you to inform me whether it is possible to obtain one million tomans from the Foreign Office. This money can be sent by the people whom we are sending there by airplane. “Heil Hitler. Yours devotedly, Kaltenbrunner, SS Obergruppenführer.” This document will help you to form an idea of the range of questions which interested the Reich Foreign Minister. Such a peculiar activity of the Foreign Office was not in the nature of a chance episode. In the course of time, the collaboration of the German Foreign Office and of the Reich Führer SS waxed in strength and developed more and more. As a result, a very curious document appeared, which might be considered as an agreement between Himmler and Ribbentrop on the organization of espionage work. I submit this document as Exhibit Number USSR-120 (Document USSR-120), and request the Tribunal to accept it as documentary evidence. This document is on Page 53 and 55 of the document book before you. The text of this agreement will be read into the record with a few remarks. The text of the agreement reads: “By the order dated 12 February 1944, the Führer has entrusted the Reich Führer SS with the creation of a unified German Secret Intelligence Service. The Secret Intelligence Service has as its purpose, so far as foreign countries are concerned, to get information in the political, military, economic, and technical spheres for the Reich. In addition, the Führer has established that the direction of the Intelligence Service, insofar as foreign countries are concerned, must be conducted in agreement with the Foreign
  • 81.
    Minister. In thisconnection, the following agreement between the Reich Foreign Minister and the Reich Führer SS had been reached: “1. The Secret Intelligence Service of the Reich Führer SS represents an important instrument for obtaining information in the sphere of foreign politics, and this instrument is placed at the disposal of the Foreign Minister. The first condition for this is close, comradely, and loyal co-operation between the Foreign Office and the main office of the Reich Security Service. The collection of information on foreign politics by the diplomatic service is not affected by this. “2. The Foreign Office places at the disposal of the main office of the Reich Security Service the information on the situation in the field of foreign politics necessary for the conduct of the Intelligence Service and the directive regarding German foreign policy. It hands over to the main office of the Reich Security Service its intelligence and other tasks in the sphere of foreign policy, which are to be performed by the organs of the Secret Intelligence Service. “3. Intelligence material in the field of foreign politics, obtained by the Secret Intelligence Service, is placed. . . .” THE PRESIDENT: Wouldn’t it be a sufficient summary of this document with which you are dealing to say that it is a document signed by Himmler and Ribbentrop and that it shows that there was a unification of the German Secret Intelligence Service? The details of that unification are not really a matter which very much concerns this Tribunal, and therefore, as we are directed by the Charter to be as expeditious as possible, it is not necessary to read all the details of this unification. GEN. ZORYA: I summarize this document and would add that this agreement, signed by Himmler and Ribbentrop, created such a state of affairs that it became extremely difficult to differentiate prevailing conditions in fascist Germany or to distinguish where Himmler’s Gestapo service ended and the Foreign Office activities of the Defendant Ribbentrop began. I shall now, with the permission of the Tribunal, proceed to the presentation of the next document. The document which I have just
  • 82.
    read—I am referringto the Himmler-Ribbentrop agreement concerning the conduct of intelligence work abroad—also justifies the assumption that under the name of German diplomatic representation in such countries which maintained normal diplomatic relations with Germany, a whole intelligence network of the Gestapo was actively functioning. If this summary, in the opinion of the Tribunal, corresponds to the contents of the document, I shall proceed to the following section of the report, “The Satellites of Germany.” When Plan Barbarossa was read into the record in Court, there was one part of the entire case which, in my opinion, received comparatively little attention. I refer to Part II of Plan Barbarossa, Document Number 446-PS. This part bears the name of “Presumed Allies and Their Tasks.” I should like, here and now, to draw the attention of the Tribunal to the questions touched on in this part. In the first place, I consider it essential to remind you of the contents of this part by repeating it. Document Number 446-PS, Plan Barbarossa, is on Page 14 of the bundle of documents submitted to the Tribunal. I consider it essential to read out Part II of this case: “1. On the flanks of our operation, we can count upon the active participation of Romania and Finland in the war against Soviet Russia. “The Supreme Command of the German Armed Forces will, at the appropriate time, settle and lay down in what way the armed forces of the two countries will be subordinated to the German command on their entry into the war. “2. Romania’s task will be to tie up, in co-operation with the group of the armed forces advancing there, the enemy forces facing her, and, for the rest, to maintain the auxiliary services in the rear area. “3. Finland will have to cover the advance of the German northern landing group (units of Group XXI) due to arrive from Norway, and then operate together with it. In addition, it will be up to Finland to eliminate Hangö.
  • 83.
    “4. It ispossible to count upon the Swedish railways and coal being available for the movements of the German northern group not later than the beginning of the operation.” In the speech of the Chief Prosecutor from the U.S.S.R., General Rudenko, attention was drawn to the opening sentence of this section: “On the flanks of our operation, we can count upon the active participation of Romania and Finland in the war against Soviet Russia.” This justified the Chief Prosecutor of the U.S.S.R. in pointing out in his speech that on 18 December 1940, the date of the Barbarossa document, Romania and Finland were already following in the wake of the predatory policy of the Hitlerite conspirators. There is only one more document which was submitted by the United States Prosecution and which mentioned Germany’s presumed allies in her aggression against the U.S.S.R. This document, numbered C-39, is entitled “Provisional Case Barbarossa.” It is, as the Defendant Keitel pointed out in his covering letter, a timetable for the preparations of Plan Barbarossa after June 1941. This timetable was confirmed by Hitler. The text of this plan is on Page 57 of the document book. In Part II of this document, entitled “Negotiations with Friendly Powers,” we read: “a) A request has been sent to Bulgaria not to reduce to any large extent the units stationed for security reasons on the Turkish frontier. “b) The Romanians have begun, at the instigation of the Commander-in-Chief of the German troops in Romania, a partial, camouflaged mobilization in order to be able to close their frontiers against a presumed attack by the Russians. “c) Hungarian territory will be used for the deployment of Army Group South only insofar as it would be expedient for introducing German units to link up the Hungarian and Romanian forces. Until
  • 84.
    the middle ofJune, however, no representations on this subject will be made to Hungary. “d) Two German divisions have been deployed in the eastern part of Slovakia; the next ones will be unloaded in the area of Prosov. “e) Preliminary negotiations with the Finnish general staff take place as from 25 May.” Mr. President, in order to correlate the following documents with the testimony given by Paulus, I shall merely refer to the fact that this witness testified to the previous preparations for military aggression in that fortress which was Romania, thereby proving that corresponding measures for the reorganization of the Romanian Army, founded in the image and pattern of the German Army, were taken in September 1940 when a special military mission was sent to Romania. The chief of this mission was Cavalry General Hansen. His Chief of Staff was Major General Hauffe, his chief quartermaster Major Merk. Major General Von Rotkirch commanded the 13th Panzer Division. The task of this military mission was the reorganization of the Romanian Army and its preparation for the subsequent attack on the Soviet Union in the spirit of Plan Barbarossa. The preliminary trend of this task, as Paulus has testified, was given to Hansen and his Chief of Staff by Paulus and they got the last directives from the Commander-in-Chief, Field Marshal Von Brauchitsch. General Hansen received directives from two sources: from the OKW where his military mission was concerned, and from the OKH in all questions dealing with the Army. Directives of a military and political nature were received only from the OKW. The military mission acted as liaison between the German and the Romanian general staffs. The form assumed by the agreement and, even more, the publication of the true aims of high-ranking fascist leaders in the country, did not always suit the satellites. I now present, as Exhibit Number USSR-233 (Document Number USSR-233), the minutes of a conversation between Ion Antonescu
  • 85.
    and the DefendantRibbentrop which took place on 12 February 1942. This document was taken from the personal archives of Marshal Antonescu which were captured by the advance units of the Red Army. This document, Your Honors, figures on Pages 59-62 of your document book. In connection with Ribbentrop’s speech in Budapest on the subject of Transylvania, Antonescu makes the following annotation in the course of this speech—last paragraph, Page 2 of the Russian text of the document, Page 60 of the document book: “Without hesitation, I stressed the point that as early as 6 September, when I took over the government of the country, supported only by Monsieur Mihai Antonescu, I declared, without asking the opinion of my people, that we must follow a policy of adherence to the Axis powers. I said that this was the only example in the history of nations when two persons dare to make an open declaration and to call upon their people to follow a policy which no doubt could only appear odious. . . .” When making this cynical entry, Ion Antonescu could hardly have expected it to receive such wide publicity. Mr. President, I intend to read into the record a long document which will take considerable time. THE PRESIDENT: We will adjourn now. [The Tribunal adjourned until 12 February 1946 at 1000 hours.]
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    FIFTY-SEVENTH DAY Tuesday, 12February 1946 Morning Session THE PRESIDENT: General Rudenko, you were going to recall the witness who was being called yesterday, Field Marshal Paulus, were you not, so that the defendants’ counsel may have the opportunity of questioning him? Will you do that now? GEN. RUDENKO: Yes, according to the wish of the Tribunal the witness is in the Palace of Justice. [The witness, Paulus, took the stand.] THE PRESIDENT: Field Marshal Paulus, I want to remind you that you should pause after the question that has been asked you before you answer it, in order that the translation shall get through. Do you follow what I mean? PAULUS: I have understood. DR. NELTE: Witness, I should like to ask several questions. On 3 September 1940, you came as Chief Quartermaster I to the High Command of the Army; is that correct? PAULUS: That is correct. DR. NELTE: Who was the Commander-in-Chief of the Army at that time? PAULUS: It will be very well known to you that at that time the Commander-in-Chief of the Army was Field Marshal Von Brauchitsch. DR. NELTE: I believe that the phraseology that you have used is not correct because I did not put this question for any other reason
  • 87.
    than just toexplain the situation to the people who are assembled here. It is known to us but may not be known to the Tribunal. Who was at that time the Chief of Staff of the Army? PAULUS: It was Generaloberst Halder. DR. NELTE: Were you, as Chief Quartermaster I, the permanent representative of the Chief of Staff? PAULUS: I was the deputy of the Chief of Staff for those cases which he told me to supervise, and as for the rest I had to execute the tasks with which he charged me. DR. NELTE: In this case were you especially charged with the adaptation of the plan which we later learned to know as Plan Barbarossa? PAULUS: Yes, to the extent of which I told you yesterday. DR. NELTE: Field Marshal Brauchitsch, your former Commander- in-Chief and superior, in an affidavit presented by the Prosecution has made a statement about the treatment of military plans. With the permission of the Tribunal, I should like to ask you to tell me whether this statement by Field Marshal Von Brauchitsch is also your opinion. I quote: “When Hitler decided to use military pressure or force to achieve his political aims, the Commander-in-Chief of the Army, if he was involved, first received orally a sort of orientation or a corresponding order.” Is that your opinion also? PAULUS: I have no knowledge of that. DR. NELTE: Generaloberst Halder, your immediate superior, in an affidavit which also has been submitted by the Prosecution, has said the following about the handling of such military operational things: “Special military affairs were the responsibility of those parts of the Wehrmacht, that is, Army, Navy, and Air Force, which were immediately under the Supreme Command of the Wehrmacht, that is to say, under the command of Hitler, who was at the same time the Chief of the Reich.” Is that your opinion likewise?
  • 88.
    PAULUS: I askyou please to repeat this once more because I could not understand exactly what you meant. DR. NELTE: It is about the question: Who were the military persons responsible to Hitler in the forming of important plans? In respect to that, Von Brauchitsch said what you have just heard, and Halder said the following: “Special military affairs were the responsibility of those parts of the Wehrmacht, that is, Army, Navy, and Air Force, which were immediately under the Supreme Command of the Wehrmacht, that is to say, under the command of Hitler, who was at the same time the Chief of the Reich.” Is that so? PAULUS: We received the orders about military measures from the High Command of the Wehrmacht. Such was the Directive Number 21. I thought that those people held responsibility who were the first military advisers of Hitler in the High Command of the Wehrmacht. DR. NELTE: If you have seen Directive Number 21, then you must also know who signed it. Who was that? PAULUS: As far as I can remember, that was signed by Hitler; and Keitel and Jodl initialed it. DR. NELTE: But, at any rate, signed by Hitler, like all directives— is that correct? PAULUS: At any rate, most of the directives, unless they were signed by other people in his name. DR. NELTE: In other words, I may conclude that the man who gave the orders was the Supreme Commander of the Wehrmacht, that is to say, Hitler? PAULUS: That is correct. DR. NELTE: From the statements of Von Brauchitsch and Halder we can see, in my opinion, that the General Staff of the Army with its large machinery was to work out ideas which Hitler conceived, work them out in detail. Do you not believe that? PAULUS: That is correct. It had to relegate the orders which were given it by the Supreme Command to the proper departments.
  • 89.
    DR. NELTE: Itis clear that these orders were given to the High Command, that is, the Commander-in-Chief of the Wehrmacht. There was in all planning, as I can see from your statement also, in the execution of such aggressive plans a close collaboration between Hitler as Supreme Commander of the Wehrmacht and the General Staff of the Army. Is that correct? PAULUS: This co-operation exists between the Supreme Command and all persons who are charged to carry out the orders of the Supreme Commander. DR. NELTE: From your explanation I believe I can conclude that the incomplete plan which you found on 3 September 1940—that you have developed that, and that then, after you had achieved a certain measure of completeness, you presented it to the Supreme Commander, Hitler, personally, or through General Halder? PAULUS: The detailed completion of the plan was presented by the Chief of the General Staff or by the Commander-in-Chief of the Army; then it was either accepted or rejected. DR. NELTE: That is, it had to be accepted by Hitler or refused? PAULUS: Yes. DR. NELTE: Did I understand you correctly yesterday to say that you had already in the fall of 1940 understood that Hitler wanted to attack the Soviet Union? PAULUS: I said yesterday that the preparation of that plan of operations was the theoretical preparation for an attack. DR. NELTE: But already at that time you thought that that was Hitler’s intention, didn’t you? PAULUS: From the way in which this task was started one could see that, after the theoretical preparation, a practical application would follow. DR. NELTE: Furthermore, you said yesterday that no news of the Abwehr had been received which would prove that there were any intentions of the Soviet Union to attack. PAULUS: Yes. DR. NELTE: Did anybody in the circle of the General Staff of the Army ever speak about these matters?
  • 90.
    PAULUS: Yes, thesematters were discussed. They had serious misgivings about them, but no reports about any visible preparations for war on the side of the Soviet Union were ever made known to me. DR. NELTE: So you were firmly convinced that it was a straight attack on the Soviet Union? PAULUS: At any rate, the indications did not exclude that. THE PRESIDENT: The witness must speak more slowly. DR. NELTE: The witness has said, if I understood correctly, that there were signs which did not exclude these inferences. PAULUS: The order for the execution of this theoretical study of the conditions for attack was considered not only by myself but also by other informed experts as the first step for the preparation for an attack, that is to say, an aggressive attack on the Soviet Union. DR. NELTE: In realizing these facts, did you or the General Staff of the Army or the Commander-in-Chief of the Army make any protests to Hitler about it? PAULUS: Personally, I do not know in what form or whether the Commander-in-Chief of the Army made any protests. DR. NELTE: Did you, yourself, speak about having any doubts to Generaloberst Halder or to Commander-in-Chief Von Brauchitsch? PAULUS: If I judge correctly, then I believe that I am supposed to be here as a witness for the events with which the defendants are charged. I ask the Tribunal, therefore, to relieve me of the responsibility of answering these questions which are directed against myself. DR. NELTE: Field Marshal Paulus, you do not seem to know that you also belong to the circle of the defendants, because you belonged to the organization of the High Command which is indicted here as criminal. PAULUS: And, therefore, since I believe that I am here as witness for the events which have led to the indictment of these defendants here, I have asked to be relieved of answering this question which concerns myself. DR. NELTE: I ask the Tribunal to decide.
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