From servant to master: Power repositioning of emerging-market companies in global value chains

Abstract

In this article, I analyze how emerging-market firms upgrade their capabilities. Complementing the upgrading-through-technological capabilities view, I propose a power-repositioning argument, whereby local firms improve their power position through taking more control of the chain as part of the upgrading process. In particular, I argue that international expansion toward downstream activities enhances the power position of emerging-market supplier firms in globally integrated buyer-driven industries. This process enables local firms to break away from low-value-added positions within the value chain and exert more power within the governance structure of global value chains.

Appendix

A background of Thai Union’s (TU) development and the canned-tuna industry

Upgrading process of TU group

The TU group rose from a small exporter to become the world’s largest producer of shelf-stable tuna products and one of the world’s largest seafood producers in less than 50 years. The group now employs over 35 000 people in global operations spanning four continents, recording a revenue of US$3.8 billion in 2014 and aiming to reach $8 billion in 2020 (see company Website, www.thaiuniongroup.com). TU global manufacturing footprints cover nine different countries: Thailand, Vietnam, India, Papua New Guinea, the United States, France, Portugal, Ghana and the Seychelles. Its chronological development can be divided into four stages: product and process upgrading under contract manufacturing (1977–1994); domestic functional and sectoral upgrading (1994–1997); value-chain upgrading in downstream activities (1997–2010); and global scale and scope via international acquisitions (2010–present).

Product and process upgrading under contract manufacturing (1977–1994)²

The group’s beginnings date back to 1977, when Thai Union Manufacturing was established as a small tuna-canning company. The company’s tuna exports formally took off with the establishment of Thai Union Frozen Products (TUF) in 1988 as an OEM producer.³ Its initial products were frozen cooked tuna and canned cat food.

The first milestone took place in 1992, when the company formed a strategic partnership with Mitsubishi Corporation and Hagoromo Foods Corporation, two Japanese trading companies with dominant market share in Japan. This relationship proved to be critical in transforming TU into an internationally qualified exporter, as the Japanese companies contributed significantly to its product and process upgrading, especially in the areas of supply-chain management, raw-material sourcing and quality control (Jeenanunta et al, 2013).

The next major step came in 1994, when TU became a publicly listed company on the Stock Exchange of Thailand. Public listing allowed the company to raise capital to further its growth both domestically and internationally. By 1998, the TU group had acquired other domestic tuna canneries to solidify its position as the country’s largest seafood producer and exporter.

Functional and sectoral upgrading in domestic value chain (1994–1997)

TU’s next stage of development was characterized by attempts to move into higher-value-added stages of the value chain, particularly toward the downstream functions of building its own brands in the domestic market. In 1994, the group launched its own brand, Sealect, for canned tuna and other ready-to-eat tuna products (for example, tuna spread). In addition, the group also extended its product line to fish-based snacks and launched another brand, Fisho, for this product line.

Creating its own brands allowed TU to engage in functional upgrading through moving downstream into marketing and sales functions. Despite Sealect’s domestic orientation, having its own brand was a crucial step allowing the group to expand its activities from solely manufacturing into marketing and sales. Similarly, launching different product lines enhanced the group’s inter-sectoral upgrading, as the competence acquired from the canned-tuna industry could be extended to other product lines. This step was key, as TU continues to expand into different product lines in the seafood industry.

Global value chain upgrading in downstream activities (1997–2010)

The decade following the 1997 Asian financial crisis was crucial for TU’s development. The devaluation of the Baht in July 1997 benefited Thailand’s exporters, including TU. The group’s strong financial position enabled rapid international expansion in the years following the 1997 crisis. This period is marked by TU’s international acquisitions of canned-tuna downstream activities, particularly those that could strengthen its portfolio of brands and its marketing and distribution channels. At the same time, international acquisitions were also used to extend the group’s product lines in its major markets, particularly in the United States.

TU’s most important internationalization milestone was the 1997 joint acquisition of Chicken of the Sea – the third-largest canned-tuna brand in the United States. TU later bought out its partners and became sole owner in 2001. The group set up Chicken of the Sea Frozen Foods to extend the product line from canned tuna to frozen seafood under the same brand in 2006. Another leading brand was acquired in 2005 with the purchase of Century Trading, owner of China’s leading canned-tuna brand, Century. It was during this stage that TU began to increase its power in the canned-tuna industry through international acquisitions of downstream activities.

Global scale and scope via international acquisitions (2010–present)

With more experience from its major investment in the United States, TU set its sights on more international acquisitions. These deals signal its entry into another stage of development, in which it seeks to enhance its global scale and scope through backward integration into upstream activities such as fishing-fleet operations and control of more global brands.

Another milestone acquisition was the 2010 acquisition of the European canned-seafood giant, MW Brands, from Trilantic Capital Partners (see Hamilton et al, 2011, p. 163). This takeover significantly strengthened TU’s foothold in Europe, especially France, the United Kingdom, the Netherlands, Ireland and Italy, through acquisitions of four leading brands, namely John West, Petit Navire, Mareblu and Hyacinthe Parmentier. TU also reinforced its position as the world’s leading seafood supplier when the group acquired the French smoked-salmon producer, MerAlliance, and Norway’s leading seafood company, King Oscar, in 2014. The group’s planned acquisition of Bumble Bee Seafood, another large US seafood company, rival to TU’s Chicken of the Sea, was aborted in December 2015 when the deal triggered an antitrust investigation by the US Department of Justice.

Canned-tuna industry

The canned-tuna industry is one of the most globalized, characterized by three important trends: increasing globalization in production and consumption; increasing concentration of the industry; and intensifying power of retailers. Established since the 1860s, when tuna was a low-value substitute for salmon or sardines, the industry has since expanded globally both in production and consumption (Miyake et al, 2010).

While Europe, the United States and Japan remain the largest markets, tuna production facilities have moved from key locations near those markets to developing economies further away. Thailand, Ecuador and Iran are now among the world’s top producers, with Thailand accounting for 40 per cent of the world market (Kuldilok et al, 2013). The global integration of production facilities across many developing economies makes canned tuna one of the world’s most complex and globally integrated industries (Miyake et al, 2010).

The second characteristic of the canned-tuna industry is its concentrated nature. Its value chain can be broadly divided into four stages: fishing, trading, processing, and retail and distribution (see Hamilton et al, 2011). Most stages are now under the control of a few large multinational firms that exert strong influence in the industry. Trading is the most concentrated, with only three companies dominating all tuna trading in the world. Developing economies, especially Thailand and Ecuador, have become influential players in the production of canned tuna thanks to their abilities to achieve economies of scale, cluster synergies in food production industries and tandem development of supporting industries like packaging. Owing to the need for scale, mergers and acquisitions have been common at domestic, regional and global levels.

The concentrated nature of the industry is similarly increasing among canned-tuna buyers. The third feature of this industry is the growing dominance of multinational retailers as lead buyers. The increasing dominance of retailers and supermarkets reinforces this demand-driven characteristic of the industry even further, forcing firms in upstream sectors to pay more attention to consumer demands in key markets. As a result, tuna processors have been increasingly squeezed between the upstream end, dominated by tuna trading companies and the downstream side, in which retailers dominate the sales of private labels and brands in canned tuna.

In sum, the canned-tuna industry exemplifies a globally integrated value chain in which dominant global buyers and suppliers exert strong power over tuna canneries. Osterblom et al (2015) posit that there are 13 MNEs in the world that dominate the value chain of seafood production, from sourcing to distributing to end consumers.