**_Global Value Chains in the Electronics Industry                       Sturgeon and Kawakami_**

outsourcing; and the entrepreneurial agility displayed by Taiwanese firms to recognize and quickly seize new opportunities to specialize in narrow segments of the value chain.<sup>14</sup>

# **Upgrading: Pluses and Minuses for Developing Country Firms**

The advantages of incumbent lead firms with deep technological expertise, in terms of value extraction in GVCs, as well as the limitations for firms based in developing countries, are illustrated by the well-known case of Apple Computer Inc. Linden, Kraemer, and Dedrick (2007) estimate that only $4 of the $299 retail price of an Apple 30 gigabyte video iPod MP3 player is captured in China, where they are assembled and tested by the Taiwan-based ODM contract manufacturer Inventec. The share captured by domestic Chinese companies is even less; probably limited to packaging and local services. This is, in part, because iPods are assembled from components made mostly in other countries, such as the United States, Japan, and Korea. But more importantly, it is because Apple—which conducts high-level design work and software development in-house and orchestrates the product’s development, production, marketing and distribution—is estimated to capture $80 of the sale price. This study also estimates that $83 is captured in the United States by Apple’s technology suppliers and by retailers. Clearly, assigning the $183 per unit wholesale price of exported iPods (as would be reported in trade statistics) to the Chinese economy misrepresents where value is created in the global economy. Similarly, a “teardown analysis” of the recently released iPad tablet computer by the consulting firm iSuppli estimated Apple’s gross margin for the product (the $499 sale price less the component costs) to be $270, or 54 percent (Hesseldahl 2010). Assembly costs for the iPad may be higher than for the iPod, but it can still be assumed that very little of the product’s value is captured in China, and even less by mainland Chinese companies.

For developing country lead firms involved in product innovation, the solution in technologically intensive product areas like electronics is to purchase highly modular design solutions from platform leaders. This allows quick market entry, but can also lead to several traps. First, as already mentioned and to be covered in more depth later, there are the high costs associated with acquiring highly functional components and subsystems, as well as the royalties that must be paid, directly or indirectly, to the platform leaders and other standard setters in the industry. Second, there is the “modularity trap,” as identified by Chesbrough and Kusunoki (2001), where the highly integrated off-the-shelf components and subsystems provided by platform leaders reduce product distinctiveness. By and large, the world’s major contract manufacturers have been trapped in low value-added segments of the electronics GVC: manufacturing and iterative, detailed design. In the PC industry, most of the industry’s profits have been captured by branded lead firms such as Dell and Hewlett-Packard, and especially by platform leaders in software operating systems (Microsoft) and CPU chipsets (Intel).

> 14 Another important factor that has not been discussed here is the role of Japanese technology partners, which provided critical technologies and components, such as disk drives, that came as “black boxes” or with licensing restrictions that inhibited Taiwanese firms from building up fully independent technological capabilities. Restrictive licensing agreements have continued to be important, for example in Taiwan’s flat-panel display industry (see Akinwande, Douglas, and Sudini 2005).

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