Growth and Change
Vol. 40 No. 1 (March 2009), pp. 30–53
The Governance of Global Production
Networks and Regional Development: A Case
Study of Taiwanese PC Production Networks
DANIEL YOU-REN YANG AND NEIL M. COE
ABSTRACT This article applies a global production networks (GPN) perspective to the transborder investments of Taiwanese personal computer (PC) companies in the Northern Taiwan,
Greater Suzhou and Greater Dongguan regions. The findings of extensive field research are used
to illustrate two conceptual arguments. First, we show the on-the-ground complexity of inter-firm
governance arrangements within the PC industry, thereby casting doubt upon attempts to reduce
notions of governance to simplistic, industry-wide categorisations. Second, by comparing Greater
Suzhou and Greater Dongguan, we demonstrate that even within a single production system, there
is geographical variation in the nature of the strategic coupling between the GPN and local
institutional formations. We argue that conceptualising such geographical and organisational
complexity is critical to understanding the regional development potential of GPNs.
Introduction
I
n this paper, we mobilise a global production networks (GPN) perspective to
explore the trans-border investments of Taiwan’s leading personal computer
(PC) firms in mainland China. The GPN perspective (see, e.g., Coe et al. 2004;
Coe, Dicken, and Hess 2008; Dicken et al. 2001; Henderson et al. 2002) is an
approach being developed within economic geography that seeks to build on the
considerable insights provided by the cognate global commodity chain (GCC) and
global value chain (GVC) approaches into the organisation of global production
systems. In general terms, the GPN approach seeks to emphasise the multi-scalar
geographical and institutional complexity of production systems. A particular
concern has been to try and conceptualise processes of regional development as
Daniel You-Ren Yang is a visiting fellow in Geography, School of Environment and Development,
University of Manchester, UK. His email address is yyren@ms34.hinet.net. He is also affiliated with
the Graduate School for Social Transformation Studies, Shih Hsin University, Taipei, Taiwan. Neil M.
Coe is a Reader in Economic Geography, School of Environment and Development, University of
Manchester, Arthur Lewis Building, Oxford Road, Manchester M13 9PL, UK. His email is: neil.coe@
manchester.ac.uk. The authors wish to acknowledge the comments of Tom Leinbach and three anonymous referees. Funding assistance was provided by the National Science Council, R.O.C., Taiwan.
Submitted October 2005; revised July 2008; accepted August 2008.
© 2009 Copyright the Authors
Journal compilation © 2009 Wiley Periodicals, Inc.
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 31
occurring through the intersection or “strategic coupling” of local assets with the
strategic requirements of GPNs, an interface that is heavily mediated by a variety
of institutional forces. While there have been a range of empirical studies that have
started to mobilise these ideas (see, e.g., Coe and Hess 2005; Hess and Coe 2006;
Johns 2006; Yeung 2007), it is still perhaps fair to say that the empirical evidence
lags theoretical development within the GPN approach (Hess and Yeung 2006).
In this paper, we contribute to rectifying this deficit through presenting a
detailed study of Taiwan’s PC industry. More specifically, we focus on the transborder investments of Taiwan’s leading original design manufacturers (ODMs)
into mainland China. There are two compelling reasons for studying this particular industry. First, Taiwanese firms account for a significant share of global PC
production—in 2005, for example, it was estimated that they produced some 75
percent of world notebook computer output. Second, the move of productive
capacity from Taiwan to the mainland has been extremely rapid, growing from
virtually nothing in 2000 to a level today that is approaching 100 percent (Dedrick
and Kraemer 2006). The vast majority of this production has moved from the
Northern Taiwan Region (NTR) to two specific regions in China: the Yangtze
River Delta or Greater Suzhou Region (GSR), and the Pearl River Delta or Greater
Dongguan Region (GDR) (see Figure 1).
While our study clearly resonates with general work on PC production
networks (e.g., Curry and Kenney 2004; Fields 2004; Foster et al. 2006), more
specifically, it contributes to a small but growing body of research on the
Taiwanese trans-border investments described above (see, e.g., Hsu 2005; Poon,
Hsu, and Jeongwook 2006; Sturgeon and Lee 2005; Tong and Wang 2002; Yang
2006, 2007; Yang and Hsia 2007; Yeung 2006, 2007). Yang and Hsia (2007), for
example, have explored the just-in-time logistics model of Taiwanese transborder production networks and its implication for clustering dynamics in the
GSR. Yang (2007) has investigated the divergent trajectories of cluster development in the GDR promoted by inward investment from Hong Kong and
Taiwan. Hsu (2004, 2005) has profiled the ways in which small- and mediumsized Taiwanese ICT firms used relational guanxi assets during the early stages
of cross-border investment to “buffer” themselves against problematic forms of
state regulation in the GDR. And in exploring patterns of regional development
in East Asia more broadly, Yeung (2006, 2007) has argued that the longstanding Silicon Valley to Taipei/Hsinchu connections (see also Saxenian 1994,
2006) have become enlarged into a triangular pattern of relationships that now
incorporates the GDR.
In our analysis, we seek to exemplify two theoretical arguments from our
GPN perspective. First, we endeavour to move beyond the somewhat simplistic
32 GROWTH AND CHANGE, MARCH 2009
FIGURE 1. THE LOCATIONS OF NTR, GSR, AND GDR.
NTR, Northern Taiwan Region; GSR, Greater Suzhou Region; GDR, Greater
Dongguan Region.
typologies of governance regimes found in some areas of the GCC and GVC
literatures. In contrast, by looking primarily at the “forward” relationships of
Taiwanese ODMs with their branded customers and “backward” connections to key
suppliers, we seek to demonstrate the multiple and overlapping governance modes
that exist concurrently within the industry. Second, by comparing and contrasting
the activities found in the GDR and GSR, we demonstrate how the nature of
strategic coupling between GPNs and regional production clusters can vary due to
both the different functionalities of those clusters within the broader system and the
ways in which they are shaped by local institutional and economic contexts.
Our argument unfolds in five further stages. First, we position our conceptual
arguments against the wider literatures on GVCs and production networks and
offer some methodological background to our empirical materials. Second, we
introduce and outline the functional and geographical characteristics of the PC
industry GPN and start to explore the pivotal role played within it by Taiwanese
ODM firms. Third, by unpacking processes of technical standard and specification
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 33
formation, we move beyond simplistic “buyer-driven” representations of governance mechanisms within the GPNs to reveal the variety and complexity of
mechanisms that co-exist at different points. Fourth, we turn our attention to the
PC manufacturing clusters in the GTR and GSR to look at the geographically
variable strategic coupling between the GPNs and different regional institutional
and economic formations. Fifth, we offer some brief concluding comments and
return to the wider implications of our analysis.
GPNs, Modes of Governance, and Strategic Coupling
GPNs can be thought of as “the globally organized nexus of interconnected
functions and operations by firms and non-firm institutions through which goods
and services are produced and distributed” (Coe et al. 2004:471). This approach is
an avowedly network one, reflecting the fundamental structural and relational
nature of how the production, distribution, and consumption of goods and services
are organised. From this perspective, networks are not new: although they have
undoubtedly become far more complex organisationally, as well as far more
extensive geographically, production networks are a generic form of economic
organisation rather than a hybrid form existing somewhere in-between markets
and hierarchies. Importantly, from a GPN perspective, production networks are
inherently dynamic and are always in flux organisationally and geographically in
response to both internal and external circumstances. While some networks are
very stable, others are more transitory; while some are geographically extensive,
others are more geographically localised. Accordingly, the GPN approach seeks to
provide a heuristic framework that is both time and space sensitive (see Coe,
Dicken, and Hess 2008 for more).
The GPN approach attempts to go beyond the very valuable, but in practice,
more restricted, GCC and GVC formulations. Although the core of all three
conceptualisations is similar, in practice there are a number of crucial differences.
First, GCCs/GVCs are essentially linear structures, whereas GPNs strive to go
beyond such linearity to incorporate all kinds of network configuration. Second,
GCCs/GVCs focus narrowly on the governance of inter-firm transactions, while
GPNs attempt to encompass all relevant sets of actors and relationships. Third, the
GPN approach is explicitly multi-scalar and places greater emphasis on intranational variations than has hitherto been the case in much GCC/GVC work.
Finally, there is recognition that GPNs are “social” and “cultural” phenomena as
much as they are economic formations. GPN configurations and characteristics
are shaped by and in turn shape the geographically differentiated social, political,
and cultural circumstances in which they exist, as well as the material transformations which lie at the heart of a particular GPN.
34 GROWTH AND CHANGE, MARCH 2009
In this paper, we mobilise a GPN-inspired approach to make two arguments
relating to first, the complexity of inter-firm governance relationships, and second,
the geographical variability inherent to production networks and how they intersect with regional institutional formations. We now consider each of these dimensions in turn. In the GCC/GVC literatures, the governance aspect has received by
far the most attention, arguably to the neglect of other dimensions. Recently,
Gereffi, Humphrey, and Sturgeon (2005) have intersected three variables, namely,
the complexity of inter-firm transactions, the ability to codify transactions, and the
capabilities of the supply base to produce a fivefold classification of governance
modes within GVCs. In addition to arm’s length market transactions, this analysis
breaks down buyer-driven chains into “modular” and “relational” forms of governance, and producer-driven chains into “captive” and the traditional “hierarchy”
variants (Sturgeon 2008). In modular linkages, complex information regarding the
transaction is codified before being passed to highly competent suppliers. In
relational networks, tacit information is passed between buyers and highly competent suppliers, and in the captive situation, detailed instructions are passed on to
less able suppliers. The five modes are aligned along a spectrum of explicit
coordination and power asymmetry from market (low), through modular, relational, and captive networks, to hierarchy (high).
This expanded governance framework is a significant step forward from
Gereffi’s rather static categories of buyer-driven and producer-driven chains (e.g.,
Gereffi and Korzeniewicz 1994). Specifically, it demonstrates a more nuanced
understanding of power relationships, although it is notable that only one set of
relationships—between firms and suppliers—is considered. However, despite its
greater breadth and depth, it remains, as do all typologies, a set of ideal types. We
would argue, however, that the specific configurations and asymmetries of power
within GPNs are infinitely more complex, contingent, and variable over time than
such typologies would seem to suggest. Moreover, we need to recognise that
different modes of governance can and do exist within the same GPN. Gibbon and
Ponte (2005) suggest in this context that we need to make a distinction between
the multitude of different, network-based coordination forms within a given value
chain and the meta-structure of governance (power, authority) shaping the value
chain as a whole, which they argue is still buyer-driven in many cases. Such a
distinction may be helpful in the case of Taiwanese PC production networks,
allowing us to distinguish between the generally buyer-driven, modular nature of
the system (e.g., Sturgeon and Lee 2005), and the more complex, multiple modes
of “on-the-ground” governance that we will illustrate in this paper.
Importantly, the position a firm develops within a GPN may well, in itself,
confer significant bargaining power, especially when one bears in mind that firms
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 35
tend to belong to more than one production network at the same time (e.g.,
production for brand buyers and own-brand production in the case of Taiwanese
systems manufacturers). In this vein, Andersen and Christensen (2005) identify
five types of supplier which, they argue, may act as important “connective nodes”
in GPNs, while Hobday, Davies, and Prencipe (2005) focus upon the processes of
system integration involving complex networks of firms. In the case of Taiwanese
PC production networks, we will see the significance of the systems integration
role played by the manufacturers and also their ability to mediate between the
technological requirements and capabilities of brand buyers and key component
suppliers, respectively.
Another valid critique of Gereffi, Humphrey, and Sturgeon’s (2005) analysis
surrounds their confidence “that the variables internal to our model influence the
shape and governance of global value chains in important ways, regardless of
the institutional context within which they are situated” (99). This leads us on
to the second conceptual argument that we would like to illustrate in this paper,
namely, the geographically variable strategic coupling of GPNs with regional
economies, and the geographical variations in governance regimes that results.
When seeking to understand regional development in a globalising world,
analytical attention needs to be paid to both endogenous growth factors within
specific regions and also to the strategic needs of trans-local actors coordinating
GPNs (Coe et al. 2004). Regional development can thus be conceptualised as a
dynamic outcome of the complex interaction between region-specific networks
and GPNs within the context of changing regional governance structures. GPN
analysis suggests that “regional assets”—namely, the local human, technological, and institutional resource base—are only advantageous to regions insofar as
they can meet the strategic needs of trans-local actors situated within GPNs.
When such a complementary effect exists between regions and GPNs, a coupling process will take place through which the advantages of regions interact
with the strategic needs of actors in these GPNs. Regional development thus
depends on a coupling process that evolves over time in relation to the rapidly
changing strategic needs of GPNs and the rather slower transformations in
regional economies of scale and scope.
Importantly, the process of “matching” regional assets with the strategic needs
of GPNs is heavily mediated through institutional structures that simultaneously
promote regional advantages and enable the region’s articulation into GPNs. It is
crucial here that the notion of “regional” institutions includes not only regionally
specific institutions but also local arms of national/supranational bodies (e.g., a
trade union’s “local” chapters) and extra-local institutions that affect activities
within the region without necessarily having a presence (e.g., a national tax
36 GROWTH AND CHANGE, MARCH 2009
authority). These multi-scalar “regional” institutions are important because they
can provide the “glue” that ties down GPNs in particular localities. This institutional dimension—which is present but arguably underplayed in many GVC
analyses—explains why it is crucial to take into account the variability in strategic
coupling within GPNs. The ensuing analysis will demonstrate how the two
Chinese production hubs fulfil different functions and exhibit different governance characteristics within the wider PC industry GPNs. These differences are
shaped both by the strategic needs of the wider GPNs and pre-existing institutional differences between the host regions. Our conceptualisations then need to
account for how governance mechanisms are reworked as new regional institutions and cultural influences are incorporated during the process of a production
network’s geographical extension (cf. earlier debates about the geographical
transfer of “best practices”; e.g., Abo 1994; Florida and Kenney 1991; Gertler
2001).
In summary, our objective in this paper is to demonstrate the complexity of
network governance and the geographically varied strategic coupling that can
occur as production networks expand across national borders. In the sections that
follow, we will use the example of Taiwanese trans-border PC production
networks to illustrate these arguments. The empirical research upon which our
analysis is based was undertaken between March 2003 and October 2004 and
consisted of semi-structured interviews with representatives of Taiwanese PC
companies and their key customers and suppliers. In all, 173 corporate representatives were interviewed across the three regions (more than one per firm in some
cases). In Northern Taiwan, research and development (R&D) or marketing managers from 28 Taiwanese systems companies were interviewed, including representatives from Quanta, Compal, Winstron, Inventec, ASUSTek, Arima, Gigabyte,
and FIC. In addition, interviews were undertaken with the international procurement offices of 16 branding companies—including Dell, HP, IBM, Toshiba,
Fujitsu, Hitachi, IngramMicro, Nokia, Actibit, and Dixon—and with the Taiwan
branches of 12 key component suppliers, including INTEL, AMD, Nvidia,
Atheros, Philips, Seagate, TI, Powerchip Semiconductor, and VIA. In Greater
Suzhou, 21 systems companies—including Quanta, Compal, Winstron, Inventec,
Arima, FIC, ASUSTek, Uniwell, and Twinhead—were interviewed, as well as
27 components companies, including Delta, Yageo, Darfon, Catcher, Gold
Circuit Electronics, Ji-Haw, Sumida, and Ralec. In Greater Dongguan, 28 system
companies were interviewed—including Winstron, Mitac, GigaByte, MSI,
LiteOn, D-Link, Proview, Elite, Foxconn, UMEC, FIC, EMC, and PLE—in addition to 22 components firms, for example, Yageo, Delta, AVC, Ideal Elethermal,
Seventeam, Fong Kai, Team Young, CFI, Wisefull, and Datech.
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 37
The companies in these samples were carefully and systematically selected to
cover the most important firms in the market and in each region. For example, all
top 12 systems manufacturers, accounting for over 60 percent of the total value of
PC-related industrial output in Taiwan, were included. Across the three regions, 56
different Taiwanese systems manufacturers were interviewed in total. In sum,
these 56 companies accounted for over 80 percent of the total value of PC-related
industrial output in Taiwan, thus making our industry coverage strongly representative. The interviews themselves were designed to reveal both qualitative and
quantitative details about the key network relations of the firm in question, with a
particular focus on the relationships between branded buyers and Taiwanese
ODMs, and between those ODMs and their key suppliers. The fieldwork was in
part facilitated by ongoing contacts with industry representatives (e.g., at technology seminars and procurement events) through the first author’s position as a
consultant for the Taipei Computer Association (TCA), the largest PC industry
trade body in Taiwan.
PC Industry GPNs
We start by outlining the Taiwanese PC GPNs in functional and geographical
terms. PCs are made up of hundreds of different components. The PC industry is
therefore a complex network of firms involved in a wide range of different
industry segments—from microprocessors and other electronic components to
applications and systems software providers—and covering a wide range of activities: R&D and design, manufacturing, assembly, logistics, distribution, sales,
marketing, service, and support. A complex “tiered” network has evolved in which
most companies concentrate on one particular market segment, e.g., assembling
PCs or making circuit boards or disk drives (see Figure 2). The PC can be
described as a modular product, whereby 10–15 relatively self-contained
sub-components (e.g., keyboard, monitor, hard drive) are brought together and
assembled, an attribute that facilitates the disintegration of the production network
into separate firms. Branded PC companies now focus primarily on design and
customer relations, “outsourcing” the remainder of the production process to other
firms. Only limited value is added by assembling a PC: in most cases, branded PC
firms add value through customer relationships, either directly through their own
direct sales and service relationships (e.g., help desks, repairs) or indirectly
through their branding, marketing, and quality assurance practices.
Manufacturing operations usually are subcontracted by branded PC companies to ODMs who not only assemble the PCs, but also contribute to the design
process through the negotiation of product specifications. Taiwan is home to
many of the world’s leading ODMs. Most branded manufacturers—such as
38 GROWTH AND CHANGE, MARCH 2009
Worldwide
Brand Name
Buyers
End
Customers
Technical
Standardisation
Key Component
Suppliers
Brand Name
Buyers’ Warehouse
NTR
ODM System
Manufacturers
Production
Base
Component
Suppliers
Distributors
GSR, GDR
FIGURE 2. THE TAIWANESE PC INDUSTRY’S GLOBAL PRODUCTION NETWORK.
PC, personal computer; NTR, Northern Taiwan Region; GSR, Greater Suzhou
Region; GDR, Greater Dongguan Region; ODM, original design manufacturer.
Dell, HP, Apple, and Toshiba—rely on Taiwanese ODM firms for manufacturing
and product development. For example, in terms of notebook computer production, while in 1995, Taiwanese companies accounted for 27 percent of world
production; by 2004, the figure had reached 72 percent, with the top 10 Taiwanese manufacturers producing 33 million of the 46 million notebooks sold
worldwide. Each leading brand name vendor tends to contract with two or three
Taiwanese firms, arrangements which in the cases of Dell and HP account for
upwards of 90 percent of their total global notebook production: for Japanese
companies such as Toshiba and Sharp, the proportion tends to be lower (20–50
percent).
Taipei—and the NTR more generally—is therefore a critical node in the PC
production network. However, Taiwanese electronics firms, ODMs included, have
been moving production “offshore”—to Southeast Asia, Europe, and, most importantly, China—since the early 1990s. As noted earlier, there are now two key PC
clusters in China: the Shenzhen area of Guangdong province (the GDR), specialising in desktop machines, and the Shanghai/Suzhou/Yangtze River delta area (the
GSR), home to the notebook PC industry. Before 2001, the Taiwanese government
prohibited its manufacturers from undertaking final assembly in China. When this
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 39
restriction was lifted, the ODMs moved collectively, and incredibly rapidly, to the
mainland: for example, in 2001 only 5 percent of Taiwanese notebooks were
produced in China, but by 2004, the figure had shot up to 80 percent, and is soon
expected to near 100 percent. The lower costs of land, labour, and facilities on the
mainland allowed the firms to build giant factories, expand output, and reduce
costs through scale economies. By 2004, for example, Quanta (a Taiwanese firm)
was manufacturing over 1 million notebooks per month at its four plants in China.
Our survey encompassed 56 separate Taiwanese PC system manufacturers
across the three study regions. In terms of their spatial/functional division of
labour between Taiwan and China, it was evident that mainland China was primarily a production base—all 56 had a manufacturing presence there and 55 had
trial or pilot run capability—but that it was also rapidly expanding its R&D and
marketing/sales functions—28 and 24 firms, respectively, had established such
operations on the mainland, including Inventec, BenQ, and Mitac. Twenty-five
still also had a manufacturing presence in Taiwan at that time (2003–2004), but
that number is likely to have decreased significantly since then. Our study also
found that more than half of the components used by Taiwan systems manufacturers could be purchased locally in China, and only 25 percent of components are
purchased from Taiwan. Many Taiwanese component suppliers have followed the
ODMs to mainland China. Some estimates now suggest that 90 percent of the
parts needed to make a notebook computer—excluding the highest value components, such as the central processor, hard drive, and displays, which tend to be
made by Japanese, Korean, and U.S. companies—can be found in the GSR. In
2002, for example, the notebook keyboard supplier Sunrex built a factory in
Wujiang to be close to Quanta and its other customers. Moving the entire supply
chain to the Shanghai region in this way has allowed the Taiwanese firms to
overcome deficiencies in the Chinese logistics and distribution sectors.
The offices of these firms in the NTR are primarily responsible for product
R&D, technology research, materials procurement, financial management, and
marketing (Saxenian 2006). In our survey, for example, all but 2 of the 56 system
manufacturers maintained a marketing/sales and R&D presence in the NTR. In
terms of procurement, there are two reasons why activity remains in the NTR.
First, because the key components—such as dynamic random access memory
chips, central processor units, and liquid crystal display panels—usually have
frequent and relatively extreme price fluctuations, firms need to adopt an “initial
purchase” (IP) strategy, similar to futures exchange investment, which requires
great sensitivity to product development and market trends. Informed by our
interviews with companies such as Compal, Acer, Arima, and FIC, we can assert
that this procurement method involves high risks, so usually senior purchasing
40 GROWTH AND CHANGE, MARCH 2009
Negotiating key standard and
platform (e.g., chipset…)
18~24 months
Market
research
RFP
1~4 months
Kick
Mass
RFQ
production
-off
1~3 months
3~6 months
Feasibility studies
Rough spec. assignment
R&D
Detailed spec.
assignment
Mock-up
Product development
Industrial design
Sample
Pilot run
Production engineering
Logistical arrangement
FIGURE 3. ORIGINAL DESIGN MANUFACTURE (ODM) BUSINESS PROCESS IN THE
COMPUTER INDUSTRY.
RFP, Request for Proposal; RFQ, Request for Quote; R&D, research and
development.
personnel are responsible for the IP in order to obtain competitive pricing and
timely component supplies. As a result, many key component suppliers, market
information, and procurement personnel are concentrated in the NTR, making it
a more advantageous procurement location compared with either the GDR or the
GSR. Second, the procurement of key components needs to be closely coordinated
with the activities of R&D departments so that purchasing personnel are always
well informed about the key component characteristics.
Having broadly mapped out the functional and geographical characteristics of
the PC GPNs, we can now turn our attention to its governance characteristics. On
a very general level, branded PC companies share the characteristics of the lead
firms in buyer-driven systems, such as clothing and shoe production, taking the
purchasing decisions that drive the whole system and coordinating the activities of
the other main players, including the Taiwanese ODMs. However, we argue that
this is a simplistic reading of what are in fact complex governance relations, with
high levels of cooperation and knowledge exchange within the GPNs. Extending
our analysis beyond the manufacturing process to consider how a product specification is developed allows us to appreciate this complexity.
The Complexity of Organisational Governance
The product development process illustrated in Figure 3 provides a basis for
the further exploration of the governance mechanisms within different segments
of the PC GPNs. In particular, it emphasises the important mediating role played
by Taiwanese ODMs. To initiate the production process, a branding company
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 41
(such as Dell, HP, Toshiba, or ACER) issues a Request for Proposal (RFP) to their
potential ODM supplier in Taiwan (such as Quanta, Compal, Winstron, and
Inventec), inviting them to build a basic system structure in accordance with the
client’s needs and the functions of the components to be supplied. Branding
companies then release a Request for Quote (RFQ), and more concrete system
specifications are defined. These specifications are composed of a set of feature
lists. Some of the feature lists are outlined by the ODMs during their discussions
with branding companies, and the RFQs are very helpful for ODM technological
development, since branding companies spend a lot of time analysing user
demand, and the solutions they propose are usually superior. The strength of
Taiwanese ODMs lies in systems integration, i.e., their ability to combine all the
related components. As we shall see, system specifications are also defined
through discussions between Taiwanese ODMs and key component companies
(such as Intel, Nvidia, Broadcom, or TI), who produce specifications that are in
turn passed back to the branding company. The PC industry GPN, then, is not just
constituted by manufacturing processes and flows of products and materials, but
also by complex knowledge relationships that are of a more cooperative and
interdependent nature. We will now move on to look in more detail at three
important kinds of relationships—standard setting through international bodies,
the links between branded buyers and Taiwanese ODMs, and relations between
Taiwanese ODMs and their key component suppliers.
Negotiating industry standards. Industry standard and specification negotiation is the longest stage of the product development process, and once the specifications and standards have been established and become mainstream, they are
usually maintained for a long period of time before new specifications and standards are developed to replace them. Semiconductor companies play a dominant
role in defining specifications. At this stage, interactions take place with organisations that formulate global industry standards, such as the Institute of Electrical
and Electronics Engineers (IEEE). These organisations play a very important
role in determining industry-wide standards and specifications. In other words,
working with such organisations is an effective way for companies to gain support
for their attempts to establish new product specifications, and almost all companies with product development capabilities join such international-specification/
standard-establishing organisations in order to gain access to the most up-to-date
information.
For example, IEEE 1394—a high-speed communications interface—is one of
the technologies for which Taiwanese companies have been able to participate in
defining specifications. Through conducting intensive interviews with key participants in the 1394 Forum, including one board director who was the former
42 GROWTH AND CHANGE, MARCH 2009
vice-president of VIA, a leading semiconductor design company in Taiwan that
joined the initial process of IEEE1394 standard setting, we can shed light on the
general operation of such a standard-setting organisation. The 1394 Forum is a
strategic alliance of companies aiming to develop new technical specifications;
member companies first elect a board of directors, which then establishes subgroups with different team leaders and committees. Under this organisational
structure, each subgroup contains two to three leading companies with significant
R&D capabilities. These dominant companies are responsible for basic R&D and
develop a preliminary draft. Then, when the technology is applied to different
areas for further development, member companies work together, both in order to
overcome any resistance from individual member firms and because the process
from basic R&D to application consumes far more resources than a single
company can afford.
Intense technical discussions also take place within the organisation on the
different versions of technologies developed by different companies. Because not
all companies hold the same views on future trends, the board of directors must
make final decisions by voting. In other words, the process of developing specifications involves establishing strategic alliances and an element of political
lobbying. These organisations also play a role in regulating R&D resource investment and returns and the determination of property rights within the strategic
alliance structure. In sum, while the mechanisms governing the final development
of technological standards are broadly reflective of wider power dynamics, they
are also dependent on the effective establishment and manipulation of strategic
alliances with other leading technology providers.
Branding firm–Taiwanese ODM relations. The relationships connecting
Taiwanese ODMs and branding customers exhibit at least three different and
overlapping modes of governance, namely, long-term partnerships, institutionalised price competition, and arm’s length transactions. In terms of long-term
partnerships, Taiwanese ODMs provide branding customers with an abundance of
technical resources, and manufacturers with solutions more acceptable to customers, or even included in customers’ RFQ system specification requirements, will
obtain the orders more easily. In this relationship, Taiwanese ODM system manufacturers will get a certain level of return on the R&D resources they invest.
Taiwan ODM system manufacturers can also remain autonomous and be sure of
the openness of their transaction networks and technical reference resources. The
key to establishing a long-term partnership is having the solution proposed by a
group of ODM partners accepted by customers, who thus give orders to the ODM
companies with the total solution. A typical case in this mode of governance is the
Toshiba–Compal cooperation.
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 43
Some branding customers, however, base their decisions about ODM partnerships on institutionalised price competition. The most extreme example is Hewlett
Packard, especially since it has adopted online bidding, which has led to severe
price competition among Taiwanese suppliers. This kind of price competition is
based on an institutional arrangement that minimises the costs associated with
information collection: previous experience of cooperation and initial system
specification designs are all-important considerations. One concrete form of institutionalisation is to compile an approved list of suppliers (AVL) that meet buyers’
requirements. This mechanism is similar to that of the long-term partnership
because the initial system specification definition involves knowledge exchange,
communication, and blueprint exchange with Taiwanese ODM companies. The
biggest difference, however, is that while companies such as Hewlett Packard may
include one ODM company’s system solution into its RFQ specifications, it will
still adopt price-based bidding when placing the order. In other words, the buyer
seeks to both capture the intellectual property of the Taiwan system manufacturers
and gain the benefits of price comparisons.
The third type, arm’s length transactions, is also related to the two relationships
described above. When solutions designed by Taiwanese ODMs are not accepted
by international branding companies, and thus the ODMs cannot obtain the order,
they often turn to the so-called “clone” market to sell their models, since buyers
in the clone market do not have system specifications, and all the technology and
design proposals are determined by Taiwanese ODMs. This model is relevant to
some second-tier ODMs (such as FIT, Uniwill, and Twinhead) that are weaker in
competing with the larger ODMs for giant customers’ orders. This type of transaction mainly takes place at the world’s second largest IT exhibition, COMPUTEX TAIPEI. Tens of thousands of international buyers from all over the world
come to the exhibition looking for appropriate suppliers, and Taiwanese ODMs
decide which models are suitable for which market and cooperate with different
distribution channels according to their own market research. These are essentially
market transactions with “distant” buyers.
Taiwanese ODM–key component supplier relations. As we have already
noted, mastering technologies and application trends for key components is one of
the core competitive advantages of Taiwanese ODMs. The relationships between
key component suppliers and Taiwanese ODMs system are definitely not arm’s
length transactions. In order to adequately integrate related component functions
into a total solution, Taiwanese ODM system manufacturers usually exchange
information and communicate with key component suppliers about whether
the specification of components meets their requirements. In addition, because
Taiwanese ODM system manufacturers are closer to market applications than
44 GROWTH AND CHANGE, MARCH 2009
their component suppliers, system manufacturers’ suggestions about related
specifications are an important reference for component suppliers; knowledge
exchanges in both directions have thereby become routine. Such interactions
require face-to-face communication because much of the information exchanged
requires in-depth explanation. Key component supplier product promotions often
initiate a series of technology development and specification-related knowledge
exchanges. Interactions also revolve around the development of a joint technology
“roadmap,” which significantly shapes the future product development paths on
both sides. The marketing departments of the component suppliers usually possess
a certain level of technical capability, and information/knowledge exchange also
revolves around technical blueprints. In this way, Taiwanese ODM system manufacturers play a very important role: on the one hand, integrating key component
suppliers’ products and solutions into commercially applicable technologies, and
on the other hand, feeding technical demands back to the component suppliers
from the perspective of systems integration. We argue that these complementary
relations are best characterised as a mode of “pragmatic collaboration” (Helper,
MacDuffie, and Sabel 2000; Sabel 1995; Sabel and Zeitlin 2004).
In some instances, component suppliers may need to pass through a verification system in order to be placed on an ODM’s AVL, allowing further transactions
to then take place. The AVL system is commonly used by almost all Taiwanese
ODMs, although the concrete details of its operation may vary from firm to firm.
Usually, the more technically complex a component is, the stricter its inspection
process will be, and so system companies establish guidelines for suppliers to
follow according to the component’s characteristics. This governance structure
based on a verification system can be understood as a form of “institutional trust”
(Shapiro 1987), in which system companies build relationships of trust with
suppliers through an objective evaluation process rather than purely a heavy
reliance on trust established through interpersonal relationships. Once again, we
see that one kind of relationship within the wider GPNs can exhibit different
forms of governance.
To summarise, in order to dominate the defining of industry specifications,
companies must either possess basic R&D capability and/or market share. These
two elements are the main weaknesses of Taiwanese Original Equipment Manufacturer (OEM)/ODM companies. However, companies that aim to redefine mainstream specifications must obtain support from “followers,” and this is why many
organisations actively promote their specifications to Taiwanese companies in the
NTR, hoping to gain their support, because Taiwanese ODM system companies
have considerable influence over their branding customers’ decisions about key
component procurement, and their system integration/development capabilities
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 45
also make them very important sources of reference. In other words, specifications
definition cannot be dominated by a small number of companies in isolation.
At the R&D stage, the Taiwanese model of innovation sets off widespread
technical interaction between different organisations in order to achieve interface
standardisation and prevent systemic bottlenecks. In this way, Taiwanese companies play a central role in rebuilding and updating the functions of modules.
Pragmatic knowledge exchange around particular modules, as well as between the
modules, has become core to the competitiveness of Taiwanese companies, their
customers, and their suppliers. For some product development processes, Taiwanese system manufacturers are more active, even leading some system specifications design, and they are able to flexibly and rapidly grasp market and technology
trends, enabling them to propose new product ideas to customers. Overall, then,
the PC GPN is in reality a complex web of knowledge exchanges and interdependencies. As a result, we argue that any notion of unidirectional “driven-ness” does
not do justice to the complexity of these governance relationships.
The Formation of Differentiated Production Clusters in China
Having used the process of standard setting and technical specification formation to demonstrate the variety and complexity of governance arrangements
within PC GPNs, we now turn to the manufacturing operations in the GSR and
GTR to demonstrate the geographically variable strategic coupling of the GPNs
with local economic and institutional formations (Coe et al. 2004). The result is
that the on-the-ground production networks are conditioned by geographically
differentiated governance mechanisms.
In addition to the broad focus on desktop (GTR) and notebook computers
(GSR), respectively, there are other important differences between the two
clusters. First, Taiwanese IT companies in the GSR and the GDR have different
investment motivations. In the GSR, meeting the cost demands of overseas
customers has been the main reason for their cross-border investments, with ODM
orders from international branding companies representing their main source of
business (Yang and Hsia 2007). For component companies, choosing the GSR has
simply been a matter of following the location decisions of system manufacturers,
thus demonstrating that the choice of locations by ODMs generates wider
clustering effects. Taiwanese IT manufacturers have likewise chosen the GDR
for investment because of the low labour costs, but its convenient location for
logistics and transportation is also an important factor. Being so close to Hong
Kong is especially helpful for export business and is also used by companies
engaging in “domestic sales disguised as exports” (i.e., export for reimportation).
Furthermore, many products from Taiwanese component companies in the GDR
46 GROWTH AND CHANGE, MARCH 2009
are distributed through trading companies. Compared with the GSR, the distribution networks of component companies in the GDR are more diverse and not only
limited to local Taiwanese ODM buyers (Yang and Hsia 2005).
Second, there are major differences between the development of the local
supply chain in the GSR and the GDR. Our research into the purchasing patterns
of Taiwanese ODM operations found that branches in the GSR controlled significantly more (approximately 20 percent, on average) of their procurement in value
terms than those in the GDR. Moreover, we found that the branches in the GDR
procured more material in value terms from Taiwan (14 percent more, on average)
than those in GSR. Therefore, at the stage of component procurement, the Taiwan
headquarters continue to play a more significant role for firms investing in the
GDR than those investing in the GSR.
Third, with regards to logistics, from our extensive fieldwork, we understand
that system manufacturers in the GSR mostly adopt a model called “processing
imported materials” (jinliao jiagong), while in the GDR, system manufacturers
employ a model called “processing supplied materials” (lailiao jiagong) instead.
Basically, under the “processing supplied materials” model, material inputs are
procured externally and delivered to the manufacturing plant to produce a specific
batch of outputs. This means that the Taiwan headquarters are responsible for
receiving orders and the overall planning of component procurement, and then
pass the materials onto their mainland China division for production. In the GSR,
however, the model of “processing imported materials” is more commonplace,
which means the branches in the GSR are responsible for most of the component
procurement. This means that material deployments are more flexible, and materials purchased for one project can be used for others as well. In this way,
“processing imported materials” gives the China branches more flexibility and
purchasing power.
Summarising, then, the GSR is a PC cluster formed by Taiwanese trans-border
production networks in which downstream brand-name client demands have a
significant impact. The strategy of “firming the region” (Dicken 2000) by Taiwanese companies makes their branches in the GSR increasingly complete in terms of
functions. Companies in the GDR have been attracted by cheaper production
factors, and since the rise of the GSR, the GDR has gradually transformed itself
from an export enclave to a bridgehead for domestic marketing. For example,
almost all the motherboard companies we interviewed in the GDR had started
domestic marketing businesses. Examination of firm upstream and downstream
relations reveals that Taiwanese ODM branches in the GSR have more autonomy
in purchasing components and are responsible for a higher portion of local
procurement, but their marketing networks are more limited to existing branding
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 47
customers, especially leading international companies. System manufacturers’
branches in the GDR, on the other hand, have more diverse marketing networks
and actively explore the Chinese domestic market even though procurement is
predominantly handled by Taiwan headquarters.
These different forms of strategic coupling between the GPNs and the local
region in the GTR and the GDR are shaped by the intersection of the strategic
requirements of the GPNs and local institutional and business conditions. For
example, in the GSR, most of the Taiwanese information and communication
technology (ICT) companies are private companies, and are embedded within a
more formal local business environment, with an established customs and tax
system, and clarified industrial land property rights. On the contrary, in the GDR,
a great number of manufacturers operate as “contracted materials processors,” a
special kind of joint venture. Contracted materials processing factories do not have
to pay the tax imposed by the central government—they only pay the so-called
processing fees to their local partner, such as the village committee. They also
leverage their “quanxi capital” with local officials to reduce operating costs (see
also Hsing 1996, 1998). Finally, as mentioned above, the logistics/operation models
are different—processing imported materials ( jinliao jiagong) in GSR and
processing supplied materials (lailiao jiagong) in GDR—reflecting the different
functional roles of the branches in these two host regions.
The IT cluster in the GSR has a distinctive governance pattern called “buyerside zero stock,” especially in the notebook industry. During our fieldwork, we
found that almost all the notebook ODMs in the GSR adopted such a pattern at the
time of research. This pattern results from the fact that component suppliers in the
GSR must deliver according to the market forecasts of ODMs. However, due to
wide fluctuations in the downstream market, the accuracy of market forecasts
provided by the Taiwanese system manufacturers and their overseas brand name
buyers is usually not high. Consequently, suppliers have to bear the pressure of
inventories. This governance structure reflects the asymmetry of power between
component buyers and suppliers, with component suppliers taking on downstream
market fluctuation risks when system manufacturers transfer inventory pressure
onto component suppliers as their profit margins are progressively squeezed by
downstream overseas customers. In other words, this governance structure is
shaped by positionality within the wider GPNs and the fact that downstream
brand-name client demand has significant influence on upstream Taiwanese
suppliers in the GSR.
Relatedly, many ODMs in the GSR have adopted a “competitive procurement”
strategy by including more suppliers in their AVLs, including mainland Chinese
suppliers. Each product item will have at least two to three suppliers, rather than
48 GROWTH AND CHANGE, MARCH 2009
depending on one single source of supply. Price competition has been used to
eliminate some of the suppliers who cannot lower costs accordingly. However, in
addition to this emphasis on cost competition, Taiwanese ODMs still place great
importance on the quality of component supplies, as reflected in the establishment
of vendor quality assurance systems within their organisational structures for the
purpose of assisting AVL suppliers with technology and quality control. The
principle stresses that quality control should be undertaken during the early stages
of manufacturing, not after the components are delivered. Such quality assurance
systems form another special feature, linking system companies and suppliers:
after component suppliers pass the first stage of verification and before actual
component procurement and transaction, they receive technical assistance from
the quality assurance department. In some instances, the cooperation between
systems companies and their suppliers extends to being mutual shareholders,
which in turn can lead to the vertical integration of ODM companies. This is
particularly prevalent in the GDR, where most ODMs have engaged in a degree of
vertical integration by internally manufacturing components such as molds, injection mold plastic, cases, and fans in order to assure component quality, and also to
lower costs through economies of scale.
The governance mechanisms linking system manufacturers and component
suppliers in the GSR and in the GDR have yet another feature. That is, even
though faced with pressure to lower costs, system manufacturers still emphasise
trust-based business and formalise such relationships through various institutionalised monitoring mechanisms. This type of governance structure may be understood as another facet of institutional trust. Many component suppliers such as
Darfon and Ji-Haw, for example, conduct credit checks on their customers, and
demand cash transactions from customers with poor credit, especially mainland
Chinese customers. On the other hand, for customers with good credit, component
suppliers can usually accept post-dated cheques. The terms of payment ODMs get
from suppliers usually allow 4–5 months, while in Taiwan, it is generally 60 days.
Such a long period of time indicates the pressure of cost competition faced by
companies in China; because the payment terms overseas customers give Taiwanese systems companies are already 120 days, this pressure has also affected
component suppliers. In order to make business transactions smooth, many component suppliers place more importance on institutional trust relationships.
Furthermore, under the special “processing supplied materials” system in the
GDR, two unique organisational governance mechanisms have resulted. Basically,
“processing supplied materials” operates as a form of domestically funded enterprise. However, Taiwanese companies govern the operations—local personnel are
managers in name only, leasing land and factories to Taiwanese companies. In
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 49
other words, this form of organisation is a kind of “informal joint venture,” with
Taiwanese companies in China effectively pretending to be domestically funded.
This way, Taiwanese companies only have to pay rent and so-called “processing
fees,” and can be exempted from more stringent taxes, such as the value-added tax.
These companies are limited to 100 percent exports only, and this type of regulation provides a very advantageous environment for Taiwanese companies that
focus on exports. As a result, a pattern referred to as “falsifying accounts across
the Taiwan Strait” (liang-an-zuo-zhang) has been established, where the Taiwan
headquarters controls related component prices and also play an important financial role in material procurement in order to decrease the processing fees payable
in the GDR. The vast majority of the Taiwanese companies we interviewed
adopted this pattern, including firms such as Elite, D-Link, and Delta. This
governance pattern also accounts for ODM firm branches in the GDR having
relatively less procurement power compared with those operating in the GSR.
In addition, Taiwanese PC companies in the GDR adopt a governance pattern
that might be described as “manipulating local relationships.” Many Taiwanese
companies adopt a flexible processing fee payment practice of paying a fixed
amount when receiving many orders, and when there are fewer orders, only paying
a portion of the processing fee to decrease operation costs. The flexible payment
agreement requires good relationships with local elites, such as the leaders of
village committees and external trade committees. Moreover, under the customs
regulations of the GDR, one important matter for inspection is whether tax-bound
export materials are also used in domestic sales. And to prevent former employees
from reporting such activities to customs, Taiwanese companies have formed a
unique organisational structure in which the companies establish customs declaration departments staffed with mostly local personnel to avoid staff reporting
illegal incidents. In other words, “falsifying accounts across the Taiwan Strait”
(liang-an-zuo-zhang) and “manipulating local relationships” are governance
mechanisms Taiwanese companies have generated in response to the particular
regional institutions of the GDR.
In sum, what we have sought to demonstrate in this section is the geographically variable strategic coupling between the PC GPNs and regional economies.
Although seemingly occupying the same functional position within the wider
GPNs, the GSR and GDR are very different PC manufacturing clusters, shaped
both by their different roles within the wider production system (e.g., overseas
brand versus domestic market focused) and the local political–institutional conditions. In addition to the complex governance described earlier, therefore, we
also need to recognise the development of regional variations in governance
mechanisms.
50 GROWTH AND CHANGE, MARCH 2009
Conclusion: The Dynamic GPN Territory Nexus
The last decade has witnessed significant trans-border investment into the
GSR and GDR by Taiwanese ODMs with profound transformative effects on the
economies in the two host regions. The networks established by these firms have
integrated the various PC production activities of the three regions into a highly
effective and efficient system that has enabled Taiwan to maintain a dominant
production share within the global PC industry. This system is perhaps best
characterised as one of flexible mass production (Dicken 2007), controlled from
Northern Taiwan. There, R&D teams continually generate new product designs
with market potential and use their mass production bases in the GSR and the
GDR, combined with tight just-in-time coordination, to efficiently produce new
products while seeking to decrease inventory costs. In this way, the trans-border
investments of the ODMs tightly tie the GSR and GDR into a global production
system that also includes the extensive technology/production cooperation
between the NTR and Silicon Valley that has been described elsewhere
(Hsu 2005; Hsu and Saxenian 2000; Saxenian and Hsu 2001).
In this paper, we have used detailed evidence from an extensive study of these
networks to make two arguments. First, by taking a holistic approach to the
production process to include preliminary specifications, as well as order receiving, R&D, procurement, and production, we have demonstrated the wide range of
inter-firm governance forms that are present, encompassing long-term relationships, pragmatic collaboration, institutional trust, price competition, hierarchical
controls, and formal and informal joint ventures. These various governance
mechanisms are multiple and overlapping, meaning that an ODM is simultaneously managing a wide variety of relationships with both customers and suppliers of different kinds. Indeed, it may be difficult to reduce the relationship
between an ODM and a single buyer or supplier to just one form of governance.
Suppliers may be involved in both a long-term relationship and institutionalised
price competition, for example. These complex, varied, and dynamic governance
mechanisms cannot be sufficiently described by simplistic notions of “buyerdriven” or “producer-driven” chains, and attempts to fashion more discriminating
typologies (e.g., Gereffi, Humphrey, and Sturgeon 2005) may still oversimplify
on-the-ground realities.
Second, by comparing and contrasting the kinds and nature of the activities in
the GSR and GDR, we have demonstrated the geographically varied strategic
coupling of GPNs and local economies and institutional formations within the
Taiwanese PC industry. Approaches that focus primarily on sectoral and inter-firm
logics may tend towards assuming that production clusters within an industry
perform similar functions and operate in similar ways. Our evidence suggests
TAIWANESE PC GLOBAL PRODUCTION NETWORKS 51
otherwise. As we have shown, the GSR and GDR perform different functions
within the wider GPNs, and, additionally, how the clusters function is different.
Such differences are driven both by the different positions within the wider
production network—for example, the GSR prioritising production for foreign
branding clients and the GDR increasingly focused on production for the Chinese
market—and also the local institutional conditions in the host regions. The complexity of governance described above, therefore, is also mirrored by geographic
variability in governance mechanisms.
The wider theoretical implication of our analysis is that conceptualisations of
global production systems need to look beyond analyses of input–output structures and broad notions of governance to take the geographical and institutional
complexity and variability of GPNs seriously. The Taiwanese trans-border investments we have profiled in this paper have promoted regional development and
change in the GSR and GDR but have also been differentially conditioned by their
evolving institutional and economic conditions. Exploring “globalized regional
development” (Coe et al. 2004), therefore, must recognise that strategic coupling
is a dynamic and spatially variable process. Such a recognition is crucial both to
understanding the competitive strategies of firms within production networks and
their success (or not) and for making reasoned assessments of the regional development impacts of different forms of inward investment.
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