Dynamics of value-added chains

Dynamics of value-added chains

The reduction in the share of value-added in sectors such as textiles and footwear is due to increased reliance on import of raw materials, writes Aishwarya Sanas.

In early 2019, Uniqlo, one of the largest Japanese Apparel Retailers began a strenuous process of closing all the production units in Japan. In the words of the founder-President Tadashi Yanai, “It’s hard to do garment production in Japan because of the ageing population and the high factory wages”. The company which holds several production outlets in China, Vietnam, Indonesia and Bangladesh has not had it smooth in its overseas factories either. Back in April 2015, a number of Jaba Indonesian Garment workers filed a complaint at the Fair Labor Association (FLA) against Uniqlo for serious violations of FLA’s Workplace Code of Conduct. Uniqlo was going bankrupt and ending its procurement from Indonesian factories without any notice and denied any obligation to pay compensation from whom they procured almost 50 per cent of their finished apparel.

In another incident earlier the same year, a group of non-governmental organisations called on the European Commission on introducing a Corporate Accountability Legislation on the MNCsof the North. This came after a series of serious allegations were made on the corporations for showing non-complianceand ill-maintenance of a rigorous work-place safety programme, which led to several mishaps at factory-locations costing many lives. Such incidents amongst several that have shook the labour-community and prompted to doubt the credibility of these brands in maintaining the integrity of their supply chains and their suppliers.

The history of value-added chain systems, beginning from the Industrial Revolution to the present day, has developed an intrinsic path that has been studied by the scholarship working in this field. This paper is an attempt to make a valuable contribution in this field, but specifically in the garment industry. As Alex Newmann has said, “the sprawling (garment) industry has moved around the world, paying low wages and producing ever-cheaper fabric at ever-faster rates”.

India, a home for 487 million labourers, ranking only second after China in the world, is an important stop for these global value-added chains. This article looks at global value added chains that Indian and Chinese labourers participate in, specifically in the Garment Industry. It attempts to introspect on the contemporary labor trends in the countries and its implications on the chains. Essentially, the paper argues that in the face of rising rates of domestic wages, India’s position, as the third-largest supplier offinished garments to the retailers of the post-advanced economies is weaker than that of China’s. It analyses the recent trends of wage-rates in thecountry to test the hypothesis.

The article argues that India, being a democratic country,holds very little maneuvering capacity to retain or nurture advantages in the chains, like China, being a communist country can.These arguments of India and China are juxtaposed with each other, as the paper suggests that, in the respect of wage-rates,China has a better capacity to maintain itsdominance because of its unique Chinese socialism which is a mixture of semi-capitalism and communism. Additionally, the paper studies India and China in the light of various economic concepts such as the domestic content in the value chains, presence in the downstream part of the industry, etc.

Let us look at the quantitative datas specifically for studying the labor trends across the world, majorly focusing on India and China. The wages across the globe are increasing from 1999 to 2017. While the rate of growth of the wages in the G20 emerging countries is the highest as compared to the G20 advanced. This understanding needs to be further developed by looking at Table 2, which illustrates a regional account of economic growth. The rate of increase in the rates has been the highest in Asia, followed by Sub-Saharan Africa. Although the wage rates have increased, the rate of increase has reduced from 6.8 per cent in 2015 to 6.5 per cent in 2017. This trend can be further carefully studied in Table 3 which gives the rates of wages from 2006 to 2017. It shows that there is an obvious decline in the rate at which wage rates are growing, however, they happen to be the highest at the global level. Most of these trends are due to the player: China, India, Vietnam and Malaysia (ILO, 2018: 9).

Table 4 illustrates the real wage rate indices for the emerging countries. It depicts the ever-rising wage rates, especially in China and India. Certain countries like Indonesia, Russia, Mexico, South Africa and Brazil are experiencing either a stagnation or decline in the wage rates.

The larger trends playing in the global economy poses an obvious question as to how these trends affect the garment industry. One of the most important databases published by the International Labor Organization, whose one of the industry/sectors of interest is the textile, clothing, leather and footwear also known as TCLF is about the wage rate performance in this sector. As per the ILO report, the monthly minimum wages in China are $800 and India are between $60-70. One may argue that the two wages are almost incomparable, which may be true, neither are the number of laborers employed in this industry; India employs 22,41,953, while China employs 1,12,01,100. Similarly, in Table 4 above, it has been illustrated that China has the highest increase in the wage rates and also Table 5 shows that China leads the TCLF industry by capturing almost 38 per cent of the total production.

Garment is a huge employment in the two countries. Moreover, both India and China are the only countries in the entire lot that show similar chain composition and population trends. Their contrasting political systems offer us with prospects to study their abilities to fight, rather face the future trends by maintaining/maneuvering their value chains. In order to understand the possible behavior of the two countries, it is important to look at the future value chain trends.

Global Value-added Chains will survive as long as the status-quo in the international political economy remains. In other words, it will remain as long as the countries nurture the forces of globalisation. We must also look at what may prompt a country, especially like China to isolate itself, thereby stepping down from its participation in the economic chains. It is interesting to look at the recent case of Coronavirus. Notwithstanding the health concerns which demand the state to quarantine itself, there have been and will be serious implications on the value-added chains across the region.

Anubhav Sahu (2020) writes that the closure of the chains will affect India on two fronts, the forward as well as the backward of the chemical industry; forward as China will stop imports of the finished goods from India and backward because China will not supply the essential chemical raw materials to India. Therefore, India, as a location where the finished goods have been produced will be at a disadvantageous position. This is one of the cases among others.

The case of India shows that the more fragmentation of the chain and country participation at a very small level will lead to greater disadvantage for that country. If there is a closure of value chains in China, surely it means that China too will be at the losing end. However, that may not be the case. Because China has a large domestic content in its chains, therefore the disadvantage always goes to the other countries who play a small part in the chain. Kee and Tang (2015: 1) argue that China has brilliantly defied the global trend of increase in imports to keep the chains going. This is because along with increasing its participation in the value-added chains, it has also been increasing the domestic content in the final product. Due to this, it has been able to keep its exports under check. Thei research shows that China’s domestic content has increased from 65 per cent to 70 per cent between 2000 and 2007. Therefore, in a value chain, China not only brings its domestic inputs but also engages in the final assembly of the goods before exporting it, thereby reducing its reliance on importing raw material which has a high value-added.

Let us look at the various factors that will predict the future of the value-added chains. The report published by De and Flag (2017) have laid down factors that will promote further fragmentation of chains and factors that will impede the chains. For the former, they lay down the following factors: greater liberalisation, regional trade agreements and removal of barriers, improvement in the ICT and digitalisation, relocation of centres of production to low-cost countries, rise of consumer demand and retailing tendency in the emerging markets and finally, the rise of multinational headquarters in the developing countries. Baldwin argues that greater polarisation of the individual processes will take place due to ‘robotisation of manufacturing’. He also argues that the wage rates of developed countries will fall, with a subsequent rise in developing (as we have seen earlier in the paper) leading to a convergence in the wage rates globally.
Having looked at the opportunities, let us look at the impediments as well. De and Flag argue that the increasing wages in the emerging countries will lead to further erosion of chains into offshoring from other destinations or increased automation of the production. In other words, there will be further ‘island hopping’. He also argues that certain extra costs known as hidden costs may arise, making chains rather expensive. However, they also argue that the hopping would be such that the developed countries outsource from other emerging economies. The value chain will remain, as the developed countries will not go back to the primitive method of domestic production as their own labor rates continue to be higher.

Coming back to the cases such as coronavirus, or SARS outbreak in China in 2003, which is an external factor affecting the temporary functioning of the chains; there are internal dynamics, such as rising wage rates that could change the face of these chains entirely in the next decade. The response of both the countries will be largely controlled by their political structures, cultures and environment. The last part of the paper looks at the difference between India and China to deal with these incoming forces in the form of opportunities and impediments for the economic chains in the future.

Quer at. All argue that China and India, among the long list of dissimilarities, there exists just one prominent similarity in the economy; the conditions under which they opened their economies, that is, via political changes. The Chinese miracle began in the 1980s while India’s journey started in the 1990s. However, the single biggest difference is the political structure. China is a semi-liberal, communist country. The government is controlled by one single party- Chinese Communist Party.

The conduct of business in India is highly legal and procedural. This imposes upon them several rules and regulations, stringent responsibilities and accountability as well as legal options. They need to adhere to tax regimes, civil society interests but at the same time, enjoy legal protection and recognition of their intellectual property. These are the advantages to the credit of India for the conduct of businesses by domestic and foreign players. In China, on the other hand, businesses are carried out by interpersonal and cultural connections. Moreover, lack of a democratic legal and accountability systems, businesses are at the behest of the Party. The Party enjoys dominance over the activities in the economy. China can also make easy and quick decisions because the Politburo has the power to do so.

Quer et. all state that the degree of liberalisation in China is greater than India. The latter, being a democratic country needs to adhere to the interests of its people before introducing high cuts on tariffs and investments while China has been able to liberalise its economy. Chinese formal institutions still lack an effective judiciary, but are well sustained by the informal connections between the businessmen and the executive, while in India, there is an excess presence of formal and informal institutions which delays the processes.

Another significant reason is that India never reached the peak of development in its manufacturing sector, that labor thus, never entered their shining phase. India directly became a service sector economy from the primary. While, China had consciously deviced an elaborate phase of secondary sector development. The above factors point to India having certain disadvantages in its capabilities of maneuvering its economy, at least, when compared to China.

Mukherjee argues that India’s recent performance has been essentially weak. Indian manufacturers are shifting businesses into the even lower value-addition-activities. India’s share of textile exports has reduced from 16 per cent in 2000 to 5 per cent in 2011, moreover the value-added has dropped from 90 per cent to 80 per cent between 2000 and 2011. The data shows that domestic content in the Indian exports of manufacturing goods is reducing, however, it is increasing only in the goods coming from the primary and tertiary sector.

The reduction in the share of value-added in sectors such as textiles and footwear is due to increased reliance on import of raw materials. This is not to say that India’s GVC participation is poor but the nature of participation is on the side of low-value addition. If India must escape from this low value-added trap, it needs to introduce a number of changes such as; electrification of the country or industrial pockets, investment is skill-improvement in the labor.

With respect to the domestic content of the textile goods in China, the share is increasing over the years. This is because of lessened import of raw materials. By this, China is concentrating multiple activities within its economic purview. Thus, China is not only exporting the finished products, but also accruing its own raw materials, thereby capturing two distinct functions of the production chain. This shall enable China to tackle the challenges of future trends better as it has a better dominance and presence in the entire chain than the other participants. Subsequently, the rise of China along the chain in the downstream economic activities of high value-addition is also highlighted by the work of Irun.

In the backdrop of the ‘Make in China’ programme, there has been a surge of well-functioning apparel brands in the country. There has been a diversification in the segments in the fast fashion industry, with men’s and women’s fashion apparel industry becoming a knowledge intensive activity. “Every year, around 8.000 fashion collegestudents graduate from a university in Wuhan”. There has been a rise of local fashion companies which run alongside the global outsources such as Zara, Uniqlo, etc. Wuhan, is the hub of the lo-cost apparel production, located in Central China. It hosts almost 1600 fashion and apparel enterprises. “Since 2012, Wuhan International Fashion Week has been an annual event held in autumn. This event aims to integrate fashion, art, photography, jewelry and other fashion elements and also includes participants from Hong Kong, France, Italy and Germany”. This shows that China has been engaging in high-end activities.

If one was to juxtapose the Chinese initiatives with the Indian context, there is very little being done in India. Therefore, it seems that the future is set to bring two different fates for the two countries.

It is rightly said that China is the world’s greatest factory while India is the world’s back-office. The countries have often been generalised, as being a hardware and software prowess. Although, this description is too simplistic, it shows us that the two countries innately possess certain characteristics that are an absolute contrast of the other. India and China, both when faced with the same forces of international political economy, contain very different mechanisms to deal with them. China, on the one hand, has established its formal institutions with informal, interpersonal and cultural connections, and manages and leads its economy in an non-democratic fashion (Nadeem, 2017: 45). On the other hand, India, with its legally supreme institutions has been lesser equipped to move higher in the global value-added chains.

This paper looked at economics of GVA, particularly the participation of Indian and Chinese economies, in the Garment Industry. China shows high export percentages of its textile (unfinished goods and intermediary product for the apparel industry) and equally higher for apparel. In other words, China outsources raw materials from its own domestic economy, rather than importing them, and specialises in two distinct activities along the chain. This has given the country a levy in the form of a greater control over the chains and a better maneuvering capacity against the future opportunities and impediments. The paper also explored the role of political structures of the two countries in testing their maneuvering capabilities.

The crux of the paper was addressing the opportunities in the labor force, that is, how to uphold the Pullmans strike’s values in the new world order. Although Wallerstein calls all the socio-economic actors of this theory as organs of the body, there is clearly a hierarchy and power asymmetry among them. This asymmetry manifests into neglect towards the needs to labor and sacrificing of labor interests for cost-cutting activities. Therefore, there is a need for mainstreaming of social upgrading with economic upgrading as the industry develops from a captive to relational one. Finally, the fate of the labor counts on the fate of the chain itself. Therefore, the paper studied the rising wage rates in the emerging countries and the opportunities and impediments it offers to the chains. It then analysed the prospects of India and China in maneuvering these trends to their advantage.

The paper was a contribution to the field of labor studies as well as value-chain economics. With the world becoming lucrative and fast-paced day by day, the magnitude of new technologies, it is bound to affect the existing arrangements. It is important to upgrade the chains, as a principle medium of global economic production, with the changing times. The scope of the paper remains ever-increasing. Today, chains are present even in service oriented industries such as the global care industry that exists across the United States, Middle East and South-East Asia. One thing that remains the same across them is that they need to be made profitable and amiable for the labor. Labor is the single largest body by size and type across the world, and the system needs to be made fitting for them.

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The article is authored by Aishwarya Sanas ftrom the Christ University, Bengaluru. She can be contacted on: +91-7045466418.

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