My presentation on 26th April 2012 at the Working Party on Globalisation of Industry meeting at OECD headquarters in Paris

1. Who Creates and Captures Value
in Global Supply Chains?
Timo Seppälä
ETLA, The Research Institute of the Finnish Economy
OECD, Paris, France
Thursday, 26th April, 2012
* This research is a part of the ongoing research project
SUGAR – Finnish Firms in Global Value Networks (2010-2012)
funded by the Finnish Funding Agency for Technology and
Innovation

2. Global supply chains operate at ever-finer
resolutions in terms of where & when
individual tasks are carried out
From the 1st to the 2nd unbundling
(Richard Baldwin, 2006)
From trading goods to trading tasks
(Grossman & Rossi-Hansberg, 2008)
Empirics:
What does the new geography
of global value creation and capture
look like?

3. 2nd Unbundling
DRIVERS RESULTS
• Communications • ‘Coordination glue’ that
costs have dropped kept job tasks in close
proximity began to loosen.
• Real-time
communications • Competition has moved
from industry level to the
• Multinationals as level of tasks.
major actors to
diffuse know-how • From trade of goods to
internationally trade in tasks.

4. Why Value Added?
MACRO FIRM PRODUCT
LEVEL LEVEL LEVEL
GDP VALUE VALUE
ADDED ADDED
(Gross Domestic
Product) (Sales of all (Product’s sales
GDP is the sum of products - all price - all
values added by purchases) purchased
all organizations inputs)
in a national
economy
Jyrki Ali-Yrkkö

5. Breakdown Processors, €34, 6%
of the phone’s
Memories, €15, 3%
Integr.circuits, €32, 6%
€546 (+tax) retail Display, €22, 4%
price circa 2007 Camera (5 mp), €17, 3%
Other parts, €59, 11%
Refers to unbundled & unsubsidized official
retail price w/o taxes. Excluding discounts &
other possibly purchased products/services. Licenses, €21, 4%
Licenses include protocols, the operating
system, pre-installed software etc. Nokia is a
major IPR holder in this domain & it does not
Value added
pay fees to itself; thus value of its own IP is in Nokia’s
not included here. Furthermore, non-monetary internal
payments (e.g., cross-licensing) is not
included here. For a firm without own its IP,
support
licensing fees could have be manifold. fns, €169, 31%
As compared to some other studies, the cost
of final assembly may seem high. Some (Excl. Operating profit &
other estimates, however, only include direct assembly listed below)
labor costs and refer to simpler goods.
Nokia’s value added covers its innovation,
advertising, design, marketing, financial, legal Nokia’s
& management costs and depreciation & operating
investment. It also includes some aspects of profit, €89, 16%
outsourcing, which we are unable to
separate from Nokia’s internal functions: Final assembly, €11, 2%
purchases of “billable hours”, some R&D and
software sub-contracting, outbound logistics,
Distribution, €19, 4%
and certain external warranty & other services.
Nokia’s profit is assigned to Finland. Retailing, €60, 11%
Based on publicly available information.

6. Who Captures Value in Global
Supply Chains? The Case of 3 Entry
Level Handsets *
Ali-Yrkkö, J. & Seppälä, T. (2012). Changing Geographies of
Value Creation in Global Supply Chains: The Case of 3 Entry
Level Handsets; Forthcoming
* This research is a part of the ongoing research project
SUGAR – Finnish Firms in Global Value Networks (2010-2012)
funded by the Finnish Funding Agency for Technology and
Innovation

7. Global supply chains operate at ever-finer
resolutions in terms of where & when
individual tasks are carried out
Empirics:
How has the distribution of value add changed over time?
How has the task level globalization enhanced changed over time?
How has the geography of global value added tasks changed over time?

8. Task
Value added by actors (firms/individuals), functions (R&D…)
& geographies (locations/countries) in a case of one good
Mapping out the whole global supply chain from
raw materials / idea generation to a consumer’s
final purchase of a 3310, 1100 and 1200 at a retail store
– All direct & indirect hard & soft inputs
– 1–8 stages before the final assembly & 2–4 after it
– For each, the loc. of innovation, direct labor & support (cap.)
Mapping out the geographical location of value
added tasks
– All direct & indirect work inputs

9. Approach
Our own examination of 3310, 1100 and 1200 with electrical engineers
Public (Internet etc.) & private (industry contacts) sources
to study value added of 600+ parts & software
Teardown report by Portelligent (and iSuppli)
In-depth interviews with industry actors/experts
Company reporting, industry press/services
Previous literature (by Linden & others)
A few researcher-years of work …

10. Value Added Distribution by
Participants
Nokia 3310 Components Nokia Distribution
Consumer channel 17%
price 78e
40% 43%
(in 2003) Engine mfg 4.8%
ATO 4.6%
Production OH 2.8%
Others+profit 30.9%
43%
Nokia 1200
Consumer Components Distribution
Nokia 21%
price 27e 54% channel 25%
(in q4/2007)
Engine mfg 1.9%
ATO 1.9%
Production OH 2.7%
Others+profit 14.6%
21%
Notes: The share of distribution channel includes warranty, outbound logistics, distributor and retailer. Consumer prices are global average prices without sales taxes.

11. Task level globalization: 3310

12. Task level globalization: 1200

13. Value Added Distribution by
Geographies

14. Preliminary observations #1/2
Knowledge transfer from arvanced economies to
emerging economies…
The relocation of different types of tasks has required
competence transfer from advanced economies to
emerging economies and particularly to China.
Instead of sudden change, this process has spread over
several years.

15. Preliminary Observations #2/2
Trade statistics…Imports and exports of goods are
measured in gross-value terms.
Our case study data show that if we take services flows
into account and use value added based information we
come up with strikingly different conclusions on global
trade flows than by using gross values of flows of goods.
This implicates that the estimates based on trade in
goods statistics and national accounts tend to give a
somewhat biased and inadequate picture of how value
added spreads geographically.

16. Who Captures Value in Global
Supply Chains? Case Alpha, Beta and
Gamma – 3 different Metals Products *
Seppälä, T., Kenney, M. & Ali-Yrkkö, J. (2012). Value Creation
versus Value Capture: Evidence from Global Production
Networks, Forthcoming
* This research is a part of the ongoing research project
SUGAR – Finnish Firms in Global Value Networks (2010-2012)
funded by the Finnish Funding Agency for Technology and
Innovation

17. Global supply chains operate at ever-finer
resolutions in terms of where & when
individual tasks are carried out
Empirics:
How does the distribution of value added look like by participant and by
region?
How does the distribution of value capture look like by participant by
region?
How does the geography of value added look like
by region?

18. Task
Value added by actors (firms/individuals), functions (R&D…)
& geographies (locations/countries) in a case of one industrial
product
Mapping out the whole global supply chain from
raw materials / idea generation to a customer’s
final purchase of a Final Product at a MNE’s sales office
– All direct & indirect hard & soft inputs
– 3-4 stages before the final assembly & 1- 2 after it
– For each, the loc. of innovation, direct labor & support (cap.)

19. Approach
Our own examination with MNE’s Team (Alpha, Beta, and
Gamma)
Public (Internet etc.) & private (industry contacts) sources
to study value added of 1000+ parts & software
In-depth interviews with industry actors/experts
Company reporting, industry press/services
Previous literature (by Ali-Yrkkö et. al.)
A few researcher-months of work …

20. Why Value Capture?
MACRO FIRM PRODUCT
LEVEL LEVEL LEVEL
VALUE OPERATING OPERATING
CAPTURE PROFIT PROFIT
(Operating (Total sales - all (Product’s sales
surplus + variable and price – all cost
Consumption of fixed costs - allocated to the
fixed capital) depreciations) product )
Jyrki Ali-Yrkkö

21. Value Added Distribution by
Participants by Region: Case Alpha

22. Value Capture Distribution by
Participants by Region: Case Alpha

23. Value Added Distribution by
Geographies by Region: Case Alpha

24. Value Added Distribution by
Participants by Region: Case Beta

25. Value Capture Distribution by
Participants by Region: Case Beta

26. Value Added Distribution by
Geographies by Region: Case Beta

27. Value Added Distribution by
Participants by Region: Case Gamma

28. Value Capture Distribution by
Participants by Region: Case Gamma

29. Value Added Distribution by
Geographies by Region: Case Gamma

30. Preliminary observations #1/2
Manufacturing still matters!
Each participant’s value capture in depended on MNE’s
transfer price mechanism between different locations
Each region’s value capture in depended on MNE’s global
transfer price mechanism
Value Capture Distribution by Geographies by Region to be
calculated

31. Preliminary Observations #2/2
Trade statistics…Imports and exports of goods are
measured in gross-value terms.
Our case study data show that if we take services and
profits flows into account and use value added and
operating profit based information we come up with
strikingly different conclusions on global trade flows
than by using gross values of flows of goods.
This implicates that the estimates based on trade in
goods statistics and national accounts tend to give a
somewhat biased and inadequate picture of how value
added and value capture spreads geographically.

32. Thank You!
Comments, remarks & discussion
are more than welcomed:
timo.seppala@etla.fi
 +358–9–60990261