The changing geography and ownership of value creation: evidence from mobile telecommunications

Abstract

Through an innovative trade-in-task case study, we explore how Nokia, which is historically one of the most important mobile phone manufacturers in the world, offshored the development and production of three distinct mobile phones at three different points in time. Adjacent to these processes, we find that the value creation in areas such as design and manufacturing knowledge has rapidly shifted away from advanced economies to emerging economies. Moreover, we find that the value added captured by Nokia decreased dramatically over the studied time period. Based on our results, we uss more generally the challenge of multinational corporations to preserve value and how the realisation of the benefits of offshoring must be assessed with respect to the altered requirements for controlling value-adding activities.

Keywords:

• Offshoring
• outsourcing
• value creation
• Nokia
• trade-in-task case study

JEL Classifications:

• F23
• L1
• L22
• L23

Acknowledgements

This article has been finalized as a part of the BRIE-ETLA 'Work and Wealth in the Era of Digital Platforms' research and study project. Timo Seppälä has also received financial support from the ‘Digital Disruption of Industry’ research project (DDI) funded by Academy of Finland. The authors would like to express their deepest gratitude to Professor Wolfgang Sofka from Copenhagen Business School.

Notes

¹ Specialisation or division of labour is becoming an important source of economic growth for any national economy. Trade-in-task method represents a way to understand the deepening specialisation in division of labour. It also provides the tools to understand the expansion of the market and its productivity growth across national economies (Lanz, Miroudot, and Nordås 2011).

² http://www.telegraph.co.uk/technology/picture-galleries/9818080/The-20-bestselling-mobile-phones-of-all-time.html?frame=2458860 (information retrieved 26.5.2015).

³ This added value includes all direct research and development contributions for developing one mobile phone model, as in this study.

⁴ Because of the topic’s sensitivity, we had to ensure full anonymity to our interviewees. The interviews were semi-structured, and the questions varied among interviewees depending on their positions in the supply chain and financials.

⁵ For the companies that conform to US GAAP accounting principles, labour costs are unavailable. For these firms, we assume the value-added margin to be identical to that of its nearest competitor(s). For example, in the case of the charger included in the sales package of the Nokia 1200, the factory price of the charger is approximately €0.8, and Astec supplied a part of the chargers to this phone model. Astec (US) is a part of the Emerson Network Power group that adheres to US GAAP. Its direct competitor, Salcomp Oy (Finland), the leading global mobile phone charger vendor, follows IFRS. In its 2007 financial statement, Salcomp’s value-added margin was 23.3%. Thus, we estimated Astec’s value added to be approximately €0.19. Similarly, in the case of Texas Instruments (US), we employed the average of the value-added margins of three competitors it identified in its 2007 Form 10-K report (pp. 3–4) required by the US Securities and Exchange Commission, i.e. NXP (the Netherlands), Infineon Technologies AG (Germany) and STMicroelectronics (Switzerland). For the other models (i.e. the Nokia 3310 and Nokia 1100), we use year 2003 and 2004 Form 10-K reports.

⁶ The sum of the bill of materials related to the engine’s final assembly for the Nokia 3310, the Nokia 1100 and the Nokia 1200 varies from 80% to 90% of the total bill of materials cost, depending on the phone model.

⁷ Mobile phone sales margins are difficult to estimate because of various types of tie-ins and bundlings with subscriptions and/or other services, in which case the initial transaction is often undertaken at a loss. We consider margins without any bundlings. However, retailers themselves decide how much to charge for the product or service; therefore, their sales margins vary.

⁸ This includes some outsourced work that was purchased as billable hours. However, because of the lack of data, we were not able to allocate this to other companies.

⁹ These findings should not be confused with the results in Chapter 3.1, which discusses the location of the physical tasks and intangible knowledge (i.e. the direct evidence of offshoring). However, we obviously expect a strong correlation between the two analyses.