Crisis and Upgrading: The Case of the Hungarian Automotive and Electronics Sectors

Abstract

By triggering a wave of organisational restructuring, reconfiguration of supply chains and consolidation of business processes at multinational companies, the crisis offered significant upgrading opportunities for peripheral actors in globalised production networks (the so-called global value chains). Drawing on Hungarian case studies of local subsidiaries in the automotive and electronics industries, this essay investigates the crisis-induced product, process and functional upgrading opportunities in low-cost locations. We show Hungary's high level of integration into global value chains and document the rapidly ongoing process of functional upgrading.

Notes

This research was undertaken in the framework of the OTKA project No. K83982.

¹ Interviews with the senior management of respective companies were carried out by the authors in April–June 2010 and April–June 2011, with follow-up interviews conducted in 2012. For details, see the Appendix. Interviews were collected in the context of two projects financed by the Hungarian Scientific Research Fund (OTKA No. K83982 ‘Measuring the Upgrading Performance of TNCs’ Hungarian Subsidiaries' and OTKA No. 68435 ‘International Relocations to Hungary—Theory, Facts, Statistical Analysis and International Comparison’).

² The year 2007, and in some calculations 2008, serve as pre-crisis benchmark years. However, the use of 2010 is arbitrary and somewhat problematic, since it cannot be considered as the end year of the crisis. Our statistical analysis therefore uses 2007 and 2009 to quantify the impact of the crisis, while our case study investigations cover the longer period (2007–2010) to discern the surveyed companies' upgrading performance.

³ The two industries feature important differences in terms of product variety, length of the technological cycle, extent of geographic dispersion of the value chain and the mobility of production activities and thus their geographical ‘stickiness’, meaning the extent to which they are bound to a current location. Accordingly, the automotive industry is more regionally organised while electronics is more rootless (Sturgeon & Van Biesebroeck 2010; Dicken 2011). In this essay we concentrate rather on their common features. Beyond the fact that the electronics industry is a key supplier of the automotive industry, the two industries have a lot in common. (Roland Berger Strategy Consultants estimate the share of electronics in cars was 23% in 2010 (see http://www.elektrobit.com/investors/financials/market_outlook/automotive_market_outlook, accessed 11 July 2012).) They are both intermediates-intensive. In both cases assembly and part production are geographically separated from headquarters-type services such as strategic planning and system integration, branding, design and science-based research. Peripheral actors in vertically integrated value chains also have quite limited opportunities for substantial position improvement in the value chain (Pavlínek & Ženka 2011; Sturgeon & Kawakami 2011).

⁴ As Baldwin (2011) argues, industrialisation today occurs much faster than in the era of import-substitution industrialisation, as industrialising economies do not need to build the whole supply chain at home: their actors may simply join one.

⁵ See among others Cheung and Guichard (2009) or Stehrer et al. (2011).

⁶ See for example, Pavlínek and Ženka (2011) for the Czech Republic, and Domanski and Gwosdz (2009) and Winter (2010) for Poland. Comparative analyses were provided, among others, by Pavlínek et al. (2009), Jürgens and Krzywdzinski (2009) and Szalavetz (2012).

⁷ See Dörrenbächer and Gammelgaard (2006) and references therein.

⁸ The RCA index is calculated as RCA = (X _ij  − M _ij )/(X _ij +M _ij ), where X is exports, M is imports, i refers to country and j to commodity. It can take a value between − 1 (revealed comparative disadvantage of the given country in the production and export of the given product) and 1 (revealed comparative advantage).

⁹ The Lafay index measures revealed comparative advantage or international specialisation. For country i good j LFI _ij  = 100[(X _ij  − M _ij )/(X _ij + M _ij ) − Σ ^N _j = 1(X _ij  − M _ij )/ Σ ^N _j = 1(X _ij + M _ij )] (X _ij + M _ij )/ Σ ^N _j = 1(X _ij+ M _ij ), where X and M are exports and imports and N is the number of goods. Positive values again indicate a comparative advantage and specialisation in the production and export of a given product. The higher the value of the index, the higher is the advantage and level of specialisation. For more details see, e.g. Zaghini (2005), according to whom the Lafay index is a better choice for measuring trade specialisation in the era of GVCs.

¹⁰ In the automotive industry, there were 141 companies on the list of automotive suppliers of the trade development agency, of which 110 were foreign-owned and 31 Hungarian-owned. In terms of employees, these 110 foreign-owned companies altogether employed more than 81,000 workers, while the 31 Hungarian-owned firms employed slightly less than 17,000 (Sass 2009).

¹¹ As mentioned in footnote 3, given that the electronics industry is a key supplier of the automotive industry, the two parts of the sample overlap to some extent. Two companies classified as automotive in our sample manufacture automotive electronics products.

¹² Our interviews showed product upgrading to be subject to major inter-subsidiary competition. Subsidiaries strove to gain the right to manufacture the newly introduced, and the technologically most complex, products. For this they had to present complex calculations—technical and business feasibility studies—and engage in intensive lobbying to influence parent companies' decisions.

¹³ A number of recent national and international surveys have been launched to collect data on the geography and the sourcing of business functions; see http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/International_sourcing_statistics, accessed 12 July 2012.

¹⁴ This was reflected in our interview with the CEO of Company no. 8 (see Appendix for details): ‘With the expansion of production it was no longer sufficient to pay an environmental consultancy firm's employee to spend half a day a week at the company and manage the accumulated environmental affairs. We had to hire a full time environmental engineer’.

¹⁵ As one of the CEOs of company no. 9 put it: ‘We are involved in new projects earlier. Now, we are also involved in preparatory activities before the launch of the manufacturing operations of new products: instead of waiting for the parent company to organise for the transportation of the required machinery, we are entrusted to select, often together with the representative of the customer, and purchase the production equipment’.

¹⁶ Our focus on foreign-owned subsidiaries can be considered an important limitation of the essay. The differences between the upgrading patterns of domestic-owned companies and foreign subsidiaries, the scope for indigenous technological and non-technological capability building and the differences in the evolution perspectives of the Southeast Asian (see for example, Hobday & Rush 2007; Chin 2010) and the Central European electronics and automotive sectors are issues for further research.