Fernando Alcoforado *
Before conceptualizing Global Value Chains (GVC), it is important to define what Supply Chain Management (SCM) adopted by many companies in the world in their productive activities. In essence, for a supply chain to reach its maximum level of effectiveness and efficiency, material flow, money flow and information flow throughout the production chain must be managed in an integrated manner, geared to the desired service objectives and lower cost. The goal of SCM is, in short, to synchronize customer needs with suppliers’ material flow, with emphasis on the importance of product flow optimization and related information.
Material flow management represents the source of much of the SCM theory. It can be said that the whole field of logistics is fundamentally involved in the efficient and effective management of the flow of materials through supply chains. It seeks to ensure that the right materials are in the right part of the supply chain at the right time. Looking at the flow of materials (products and services) from the source of materials to the end customer, it is noticed that there is also a reverse flow of materials, mainly associated with the return of products from customers to the company. The increasing importance of reverse logistics in recent years has also taken into account the management of these flows.
Cash flow management is also part of the SCM. Money flows from the end customer back through the supply chain. The timing of this flow is critical to ensuring that supply chain companies retain the ability to meet their operational expense commitments. The working capital cycle is a well-known model in the field of financial management and provides a useful representation of financial flows in a supply chain. A performance indicator used is the time of the cash-to-cash cycle. This is defined by adding the number of days of raw material stock and inputs in value held to the number of days of accounts receivable minus the number of days of accounts payable. The result is an indicator of the number of working capital days that are “immobilized” in the supply chain.
Information flow management is also part of SCM. The management of information flow in the supply chain is bidirectional. It can be said that information flow management is the most critical of a company’s activities. This is because the flow or movement of materials and money is usually triggered by an associated information movement. Effective management of the flow of materials and money is attributed to the effective management of the related flow of information. It is therefore no surprise that the past few years have been of great interest to large companies in managing the information area. Poor information management in the supply chain leads to the need for high levels of inventory of materials and inputs. Good information effectively helps to avoid high levels of stockpiles of materials and inputs.
Supply chain management that in the past was restricted to a company in its relationship with suppliers and customers became more complex evolving into supply chains with the participation of several companies reflecting the change of managerial orientations from internal and functional to external and processes in recent years. Other technologies, in particular Electronic Data Interchange (EDI) and the Internet, have enabled supply chain partners to use common data. This streamlines the supply chain because companies can operate based on actual demand rather than being dependent on orders that are passed from one step to another in an extended chain.
The Global Value Chain (GVC) represents an evolution of the Supply Chain Management (SCM), which has been adopted in the internationalization of production. The Global Value Chain (GVC) also means the operational expression of productive globalization. To understand this concept, just think about the process of producing the i-Phone. It has the design and brand origin of the United States, but its components are produced in various industries scattered in countries like Germany, Japan, South Korea, China, etc. Basically it is a product that is made separately in various parts of the world. It is a product made in the world.
- The Global Value Chain
The pattern of international trade has developed remarkably in recent years. Companies distribute today their operations around the world – from product design to parts manufacturing, assembly and marketing. It is called the Global Value Chain (GVC), which began to be noticed in the 1960s, but has only achieved great development in the last 25 years. The acceleration and scope of this production model is currently the central theme in any global trade debate. The best meter in the Global Value Chain is the number of intermediate products that participate in international trade. Today it is around 40%. It was 20% twenty years ago. And the forecast is that it reaches 60% in the coming years. It will be increasingly common for a country to use the inputs of another to transform it and re-export it as the final product. In the future, hardly anyone will find a product that has been made 100% in a single country.
It should be noted that GVCs are not yet entirely “global”. The nature of the operation is still regional and is geographically concentrated in three nuclei: North America, Europe and East Asia. The first two regions are mainly consumer centers, and the third is a source of supplies. The Asian region has undergone transformations, as China continues to move its economy towards domestic market-oriented growth. The costs of transport, communication and quality of the infrastructure have contributed to create this format. The pattern of international trade has developed remarkably in the last 25 years. Companies today distribute their operations around the world – from product design to parts manufacturing, assembly and marketing. This has contributed to the formation of international production chains, which have altered the productive process and the commercial models in the world. Indeed, the emergence of GVCs has triggered a strong increase in the trade flow of intermediate goods, which currently account for more than half of the goods imported by the economies of the Organization for Economic Cooperation and Development (OECD) and almost three-quarters of the countries’ imports such as Brazil and China.
The analysis of more modern GVC management practices shows that they are increasingly moving towards maintaining low inventory levels in an effort to cut costs as part of so-called “lean production strategies.” It is also observed that the greater the distance between the participating countries, the smaller the chances of a global productive chain. Another conclusion to be drawn from this analysis is that a country located far from the regions where the CGVs (North America, Europe and East Asia) are located will be able to participate in an international productive chain only if it compensates for the high costs in the form of savings in production costs. It should be noted that transport costs depend on the volume, level of “containerization” of cargo, degree of competition among transport companies, and quality of transport-related infrastructure, among other things. Differences in port efficiency, for example, make freight rates for exports from Latin America and the Caribbean to the United States about 30 percent higher than those practiced in Europe. It should be noted that a significant part of Latin America and Africa remains outside the structure of GVCs.
- Advantages and disadvantages for Brazil to participate in the Global Value Chains
A central question for the countries of the world is to know the advantages and disadvantages, risks and opportunities to participate in GVCs. The main advantage of participating in CGVs is to insert the country in international trade and increase the country’s GDP (Gross Domestic Product). However, there is the disadvantage of assuming the commercial risks of GVC operations that may in the occurrence of crises affect the domestic economy of the country, besides submitting themselves to the leadership of the GVCs exercised by multinational companies. There is a risk that members of the OECD will manage international trade with GVCs to make the world a “safe” place for the operation of multinational corporations and that central capitalist countries use GVCs to ensure its advantages in the world market. The disadvantages of a peripheral country of the world capitalist system like Brazil participating in large GVCs are, therefore, greater than the advantages of their participation.
The most appropriate strategy for a country like Brazil would be to develop its own regional GVCs. This could be the case, for example, between the countries of Latin America and the Caribbean where some regional value chains already exist. This strategy is also justified by the fact that the GVCs are, in most cases, regional, which is mainly due to transport costs, which increase with distance, and to trade agreements, which are usually signed between neighboring countries. Some countries in Latin America and Africa have remained on the periphery of the GVCs because they are distant from the main GVC groups and do not necessarily have trade agreements with the hub regions of the GVCs. The Brazilian government should promote participation in the regional GVCs in Latin America and the Caribbean through industrial and scientific and technological development policies, investing in infrastructure and providing incentives for companies in the country. Education and professional training policies can help create comparative advantages with a “domestic” basis, especially in the service sector – an activity in which human capital and skills are essential for competitiveness. Government policies can be especially useful and necessary for overcoming difficulties such as access to finance and information about potential partners that affect the participation of companies in global value chains.
China is a good example of a country that acts in virtually every sector of the economy in this value chain model and is managing to position itself well in that process. Before, China was seen as a nation whose main attraction was cheap labor. With China’s economic growth, the labor force has become more expensive. China wants to keep the flow of investment in other sectors of its economy that can bring more income and more economic growth to the country. Mexico, which is part of NAFTA and has strong integration with the United States, is at a basic level in the GVC because Mexican companies function as “maquiladoras” in the productive process. The United States sends a virtually ready-made product to Mexico which, in turn, adds very little value to this product before sending it back.
Brazil, for example, has a low integration with global value chains. Brazil is very strong in the production of agricultural commodities and minerals, which are no more than inputs to other countries, which places the country at a basic level of the GVCs. Although there is a process of deindustrialization of the Country, Brazil has a robust and diversified industrial base that would make it possible to be part of a global value chain or even to control one. The aeronautics sector, for example, has a highly competitive company at Embraer. It is part of an area that brings innovation, qualification, technology, highly skilled labor, integration with research areas, local and international suppliers, uses imported inputs and manages to integrate the whole process. The pity is that Embraer is in the process of absorption by Boeing which makes this alternative unfeasible. Like this example, there are other companies internationalized in Brazil and that are world leaders in their sectors, like Marcopolo, that produces buses, Weg, that manufactures electric motors, Ambev, in the sector of drinks. The question is how to make successful companies like these acts as a basis for the formation of GVCs. One fact is evident: the insertion of a country into a GVC must be part of a development strategy and the elaboration of an integrated industrial policy with public policies that Brazil lacks because adopts the neoliberal economic model.
* Fernando Alcoforado, 78, member of the Bahia Academy of Education, engineer and doctor in Territorial Planning and Regional Development by the University of Barcelona, university professor and consultant in the areas of strategic planning, business planning, regional planning and planning of energy systems, is the author of 13 books addressing issues such as Globalization and Development, Brazilian Economy, Global Warming and Climate Change, The Factors that Condition Economic and Social Development, Energy in the world and The Great Scientific, Economic, and Social Revolutions that Changed the World.
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