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Global Value Chains, Industrial Policy, and Industrial Upgrading: Automotive Sectors in Malaysia, Thailand, and China in Comparison with Korea

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Abstract

This study compares the evolution of automotive sectors in Malaysia, Thailand, and China with that of Korea by focusing on industrial policy, particularly local content requirements (LCRs) and global value chains (GVCs). Although LCRs show common effects of increasing the localization ratio to a certain degree, the eventual development paths of automotive sectors diverge in the three countries. In terms of three measures of upgrading in GVC, namely, the share of domestic (or foreign) value-added in their exports, export orientation (re-exported intermediate imports), and international competitiveness of their intermediate parts (domestic value-added embodied in foreign exports), China is the most successful (highest in two measures), followed by Thailand with strong export orientation, and with Malaysia being the least successful. Such divergent outcomes in three countries are explained in terms of three key factors, namely, local ownership, disciplines from market competition, and firm-level effort and strategies. Given the monopoly by national brand makers, Malaysia lacks discipline from market competition, whereas Thailand lacks local ownership and consistency in promoting domestic value-added. China is neither a national monopoly nor dominated by foreign joint ventures, but a strong entry by locally owned firms result in fierce market competition. In addition, Chinese firms attempt to build their technological capabilities and localize the production of key parts and components.

Résumé

Cette étude compare l’évolution du secteur automobile en Corée avec celui de la Malaisie, de la Thaïlande et de la Chine en se concentrant sur la politique industrielle, en particulier sur les exigences de contenu local (ECL) et les chaînes de valeur mondiales (CVM). Bien que, dans une certaine mesure, les ECL montrent des effets communs en terme d’augmentation du taux de localisation, en bout de compte, les trajectoires de développement des secteurs automobiles divergent dans les trois pays. Si l’on considère trois mesures permettant l’amélioration des CVM, à savoir la part de la valeur ajoutée nationale (ou étrangère) dans leurs exportations, l’orientation des exportations (importations intermédiaires réexportées) et la compétitivité internationale de leurs parties intermédiaires (valeur ajoutée intérieure intégrée dans les exportations étrangères), la Chine est la plus performante (elle l’emporte sur deux des mesures), suivie de la Thaïlande qui est fortement orientée vers l’exportation, et la Malaisie est la moins performante. Des résultats si divergents dans trois pays s’expliquent par trois facteurs clés, à savoir l’appropriation locale, la discipline face à la concurrence sur le marché et les efforts et stratégies au niveau des entreprises. Compte tenu du monopole exercé par les fabricants de marques nationales, la Malaisie manque de discipline face à la concurrence sur le marché, tandis que la Thaïlande manque d’appropriation locale et de cohérence dans la promotion de la valeur ajoutée nationale. La Chine n’est ni un monopole national ni dominé par des entreprises communes (joint venture) étrangères, mais l’importante entrée sur le marché d’entreprises locales entraîne une concurrence féroce. En outre, les entreprises chinoises tentent de renforcer leurs capacités technologiques et de localiser la production de pièces et de composants clés.

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Fig. 1

Source: Authors’ estimation using the Input–Output table data of Korea 1975–1993; 1995–2011 data are from TiVA 2016 and 2012–2016 data are from TiVA 2018

Fig. 2

Source: Authors’ estimation using the Input–Output table data of Korea 1975–1993; 1995–2011 data are from TiVA 2016 and 2012–2016 data are from TiVA 2018

Fig. 3

Source: Data are from the OECD TiVA database version 2016 and version 2018 (1995–2011 data are from TiVA 2016 and 2012–2016 data are from TiVA 2018)

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Notes

  1. According to Hobday (1994), OEM is a specific form of subcontracting under which a complete, finished product is made to fit exact buyer specifications. Several OEMs evolve into ODM firms, which perform most of the detailed product design. The final mode is the OBM in which firms are responsible for all functions, including design of new products, R&D for materials, production, and sales and distribution for their own brand.

  2. The main point is that building an entire value chain in a latecomer economy is highly difficult and risky, and such activity does not provide sufficient economy of scale required to achieve cost competitiveness due to limited market size (as in the case of Proton in Malaysia).

  3. CBU and CKD tariff rate ranges were 30–80% and 20–30%, respectively, in 1966 (Bower 1991).

  4. Local content ratio or localization rate is defined as the percentage of the value of domestically produced parts or components in the value of finished products (Thuy 2008).

  5. An example from Lee et al. (2016) is the mobile handset sector in China. To take advantage of the large market, MNCs formed various JVs with indigenous firms to produce mobile phones in China. Nevertheless, in 2001, most MNCs stopped their JV collaborations after China joined the WTO. The same occurrence was observed in Korea when Korean IC chip firms caught up with foreign firms, and the latter became increasingly reluctant to provide designs for chip production (Kim 1997; Lee and Lim 2001).

  6. Before the 1990s, the Thailand government used to charge high import tariffs, as high as 300%, for PVs larger than 2300 cm3. Imports of PVs lower than 2300 cm3 were not allowed (Natsuda and Thouburn 2013).

  7. Source https://www.thestar.com.my/business/business-news/2017/05/24/drb-hicom-to-sell-49pt9pct-in-proton-to-geely-holding/.

  8. In the 1990s, a joint venture agreement between SAIC and GM in 1997, followed by Guangzhou-Honda (1998), Tianjin-Faw-Toyota (2000), Changan-Ford (2001), Beijing-Hyundai (2002), Brilliance-BMW (2002), and Dongfeng-Nissan (2002); and the Chinese auto market became a global battlefield (Chu 2011).

  9. The Shanghai Volkswagen case provided by Brandt and Thun (2010) is useful in understanding the upgrading effect of LCRs on local supply chains.

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Acknowledgements

This paper has benefitted from useful comments by the editors, Ha-joon Chang and Antonio Andreoni, and three anonymous referees, and from the discussion at the workshop held in London in June 2019. The first author acknowledges the support by the Laboratory Program for Korean Studies through the Ministry of Education of the Republic of Korea and the Korean Studies Promotion Service of the Academy of Korean Studies (AKS-2018LAB-1250001). The research for this paper started first as the MA thesis of the second author, with the first author as the supervisor, and then the first and third authors have worked to turn it into a journal paper, in particular with all the new and updated figures provided by the third author.

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  1. Department of Economics, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul, 08826, Korea

    Keun Lee & Di Qu

  2. Fellow, IEP Program of CIFAR, Toronto, Canada

    Keun Lee & Di Qu

  3. DST/NRF South African Research Chair in Industrial Development, College of Business and Economics, University of Johannesburg, 31 Henley Road, Auckland Park, Johannesburg, 2092, South Africa

    Zhuqing Mao

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Lee, K., Qu, D. & Mao, Z. Global Value Chains, Industrial Policy, and Industrial Upgrading: Automotive Sectors in Malaysia, Thailand, and China in Comparison with Korea. Eur J Dev Res 33, 275–303 (2021). https://doi.org/10.1057/s41287-020-00354-0

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