Global networks and regional specialization

Along with the integration of the world economy, in most product fields, the IT industry tends to be globally organized. Certain geographic regions or clusters have emerged which specialize in one or just a few aspects of production and/or in one or two product families. (1) Some of these regions have a very long history in the production of electronics.

But there is no real stability in this division of labor of the modern IT industry. New regions emerge and begin to play important economic roles in manufacturing of electronics, while the older regions may lose out or manage to sustain while reorienting themselves into a new specialization.

If Vietnam should advance its IT industries, what will be the country's regional specialization within the current context of the world economy? How will Vietnam fit into today's world-wide pattern of specialization of electronics production? What degree of flexibility will be needed in invest- ments into Vietnam's new IT industry, if it should survive a very competitive and changing environment while continuing to grow?

In today's Vietnam, as we will see in Chapter 15, hardware production capabilities are even less well developed than the software sector, which is very small (cf. Chapter 13 above). From such a small beginning, it may seem unrealistic to develop all aspects of production in all product areas at the same time. Instead, policy makers in Vietnam could focus on creating a limited set of capabilities that would make sense for Vietnam's IT industry, given the current trends in the major electronics markets.

There are at least two separate strategies for the development of a viable Vietnamese IT industry. The two strategies have different objectives, but both could lead to an electronics manufacturing capability. One is the manu- facturing of electronics components for international -- not local -- markets, using Vietnam as an internationally-oriented production platform. The other strategy is the making of final products and sub-assemblies.

The first strategy will probably be risky and expensive and would have to involve substantial investments, particularly from internationally operating contract manufacturers. Electronic components are typically produced in technologically advanced, high-volume manufacturing facilities that require large initial investments.

We have already seen some attempts at component manufacturing foq international markets being established in Vietnam. The most recent example is Daewoo, the Korean computer and consumer electronics company, which plans a joint venture to manufacture television picture tubes with Hanel, a Vietnamese electronics company owned by the Hanoi city administration. For Daewoo to succeed in its investment, most of the picture tubes will have to be exported. We should underline that the Vietnamese IT market is not large enough to justify the establishment of component production facilities that produce solely for the local market.

If implemented in Vietnam, this first IT industrialization strategy will have to involve a massive transfer of technology, since the production facili- ties will have to be built more or less from scratch. The single most impor- I tant input from Vietnam to such an investment will not be capital but relatively cheap, well-trained labor. Because of severe price competition in electronics component markets, most foreign companies that would come to Vietnam for the manufacture of components will be seeking low wage rates. Contemporary Vietnam has one of the lowest wage rates in the world. (2)

This first IT industrialization strategy may be more risky than the second, since many electronics components used in IT products are widely available at low costs. Vietnam is located in a region which is especially rich in electronics components, so rich that many European- and US-based IT firms have set up 'international purchasing organizations' (IPOs) in South East Asia to procure parts to supply their own worldwide manufacturing operations. Because of the high level of competition in international markets for electronics components, particularly in East Asia, the profit margins of the producers tend to be low.

� The second IT industrialization strategy takes a different departure. To implement this strategy, manufacturing facilities for final products, located in Vietnam, could easily purchase low-cost components from nearby vendors. The strategy would improve the country's own capacity to produce final IT products and sub-assemblies, while not contributing to the internationally organized manufacture of electronics components by very large corporations.

The strategy suggests that Vietnam builds capacities to manufacture at the product level. Product-level manufacturing capabilities will allow beneficial user-producer interactions in electronics and other IT. It is likely that people deeply involved in IT applications in Vietnam will have ideas about new products. Local product manufacturing capacity -- well-connected to the international supply-base for electronics components -- would ensure that entrepreneurs and advanced users would have the ability to implement their ideas quickly and effectively.

Figure 5

User/producer interaction in final products
(such as computers, local area network hubs, and printers)
Stages of Production
CONCEPTUALIZATION END USE
Product
Design
Manufacturing-Related Functions User-Related Functions
Manufacturing
Design 		Component
Purchasing 		Mktng, Sales
and Service 		System
Integration
Stage 1 Stage 2 Stage 4 Stage 5 Stage 6 Stage 7
User-producer interactions: a positive feedback loop
SOURCE: BRIE (Berkeley Roundtable on the International Economy), University of California, USA.

Figure 5 presents a highly-simplified, schematic representation of user- producer interactions at the level of final products.

Intense user-producer interactions, enforced by mutual trust, allow advanced users to specify the requirements of new systems to product design- ers, speeding up the process of innovation. On the other hand, product designers can suggest to users what is technologically possible, allowing them to try new approaches in solving application problems.

This type of dynamic user-producer interaction stands out as one of the notable features of the regional clusters of activity in the modern IT industry.

Foot Notes:
  1. For example, Singapore and Malaysia have developed a specialization in disk drive manufacturing, circuit board assembly, and final product assembly. South Korea has developed specialties in semiconductor manufacturing (DRAMs in particular) and consumer electronics. Phoenix, Arizona (USA) is the location of many firms (including Motorola) that specialize in manufacturing semiconductor and telecommunications products. Huntsville, Alabama (USA) is home to some of the largest contract manufacturers in the world. Contract manufacturers specialize in assembling circuit boards and final products for other companies on a subcontract basis. The area surrounding Dallas, Texas (USA) houses a cluster of semiconductor activity. Electronics companies in Japan are strong in many areas, but they are particularly so in consumer and industrial electronics. Japan also leads the world in the deployment of advanced manufacturing process technology, such as highly automated final product and circuit board assembly. The southern portion of the San Francisco Bay Area (known worldwide as Silicon Valley) has nearly every aspect of the electronics industry available locally. This is one of the reasons it is so resilient, dynamic, and innovative.

  2. In October 1993, production workers in the state-owned electronics plants earned approximately US$35 per month.
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