Quick questions on Global value chains and production networks: HSC Geography

Value capture is uneven across the chain. The "smile curve" shows that intangible-intensive stages (R&D, design, brand, retail, services) capture the highest margins, while tangible production (component manufacture, assembly) captures the lowest. Lead firms organise the chain to capture both ends of the smile.

The corporation that designs the product, owns the brand, and organises the chain. Examples by industry:

Lead firms typically deal directly with tier-1 suppliers (Foxconn for Apple), who in turn coordinate tier-2 suppliers, who source from tier-3 producers. Visibility falls deeper into the chain, which is why supply-chain transparency for labour and environmental conditions is a persistent issue.

GVCs often coexist with regional clusters of specialist firms. Shenzhen's electronics cluster contains thousands of component and module suppliers within a 50 km radius. Italy's Prato textile cluster, Germany's Stuttgart automotive cluster, and Bangalore's IT services cluster show the same pattern: specialist knowledge plus specialised suppliers plus skilled labour create regional advantages that compound over time.

Even highly global activities are anchored to specific places. Apple's chip design happens in Cupertino because the engineers are there and the cluster network is there. BHP's iron ore mining happens in the Pilbara because the geology is there. The choice of location is not arbitrary; it reflects historic accumulation of skills, infrastructure, and resource endowments.

Lockdowns in Shanghai (2022) and Vietnam (2021) shut down assembly plants. Container shipping rates rose from around US$1,500 per 40-foot box (2019) to peaks above US$20,000 (late 2021). Lead firms responded by increasing inventory buffers, diversifying assembly geography (the "China plus one" strategy), and onshoring some capacity.

US tariffs on Chinese goods from 2018 onwards forced electronics assemblers to move final assembly out of China to Vietnam, India, Mexico, and Malaysia. The Inflation Reduction Act (2022) and CHIPS Act (2022) provide US subsidies for semiconductor manufacturing in the US, restructuring the geography of chip production.

China imposed import barriers on Australian barley, wine, beef, coal, lobster, timber and cotton from 2020. Australian exporters reoriented to other markets (India, ASEAN, the Middle East). Tariffs were progressively lifted from 2023, with wine the last to resume in May 2024.

The grounding of the Ever Given for six days disrupted around 12 percent of global trade volume. Lead firms with thin inventory buffers (auto manufacturers running just-in-time supply) lost weeks of production.

Houthi attacks on shipping forced Asia-Europe container traffic around the Cape of Good Hope, adding 10-14 days transit and 25-30 percent to freight costs.