lecture extra credit_clustering_shortversion for website_001
TRANSCRIPT
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Pump Clusters in China:Explaining the Organization of
the Industry
Lecture 14
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C h i n
Ind ia
T h e G r e e n R e v o lu t io n c h a n g e d t h e
f o o d s u p p l y in d e m a n d in m a n y d e v
W h e n fe r t i l iz e r w a s a d d e d t o n ev a r ie i t ie s , p r o d u c t io n in c o u n t r ie s l ik
In d ia r o s e r a p id l y , s t a r t in g in t h e e a
C h i n a
C h i n a
I n d i a
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But, the Green Revolution did not affect all
countries the same?
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Bang lade
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Bang lade
F or exam p le : In B ang la p ro d u c tio n g re w s lo
du r ing the 1960s and 1
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Bang lade
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Bang lade
W h a t h a pp e n e d in t h e
1 9 8 0 s ?
A fter grow ing a t a fa i r lyra te du r ing the 1 960s a
197 0s , p roduc t ion sud d
ac ce le ra ted in the e ar ly
m i d -1 9 8 0 s?
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One explanation
Perhaps the most important development in parts of theAsian rice economy during the past 15 years [that isduring the 1980s and early 1990s] has been thewidespread adoption of cheap pumping technology
(Pingali, Hossein, and Gerpacio, 1997).
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IWMI agrees
In the 1980s, trade policy in many South/Southeast Asian countries(including Bangladesh) opened up their markets including themarket for pumps and engines.
That is not to say that there were not pumps available in the 1960s
and 1970s in the case of Bangladesh there were pumps fromboth India and Japan
But, they were not always appropriate for use in the poor,undeveloped countryside of nations such as Bangladesh India pumps were heavy, awkward to move around and unreliable
Japanese pumps were lighter and more reliable, but when they didbreakdown and need repair, often the only place to fix them was back inJapan this would obviously take months and was very costly in fact,Japanese pumps were expensive themselves to buy in the first place
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So what changed in the 1980s? In fact, the beginning of the upward trend in rice
production in Bangladesh coincides almost preciselywith the emergence of China as manufacturer andexporter of light manufactured goods (CNBS).
The rise in production in Bangladesh also coincideswith the appearance of pumps and engines fromChina in the fields of farmers in South Asia.
Randy Barker (and colleagues), in fact, argue thatone of the main determinants of the BangladeshsGR takeoff is the access of farmers to the relativelyinexpensive, fairly reliable, easy-to-repair pumps and
engines from China
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From Questions to Search for Answers
Economists and observers of the GR in Asia began to ask:Where exactly did these pumps and engines come from?
Who makes them?
How can they produce such a reasonably reliable product at such a reasonable price?
When IWMI asked us these questions initially, none of us onCCAP/UCDavis water team had any idea
There was literally nothing known about this topic
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The overall goal is to increase ourunderstanding of the pump industry in Chinaand find out who helped create the GR inlarge parts of the developing world
Specific objectives:Describe the pump industry and its structure in
China
Offer an explanation of why it is organized theway it is (and why it was able to emerge in theway that it did)
Think about where it is going
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Data
So how did we find where these pumps
were being made?
Tried many sources Review the literature [NOTHING]
Ask people in agricultural economics [NOTHING]
Ask people in water engineering fields [NOTHING]
Finally turned to where we are increasingly
turning to these days [GOOGLE IT]
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Two of the largest pump industry clusters
Fujian
Province
Zhejiang
province
Daxi Town,Wenling City
Fuan
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The next step
Just went
Went through the TVE Management Bureau of
each of the counties in which Daxi and Fuan werelocated
Interviews
Designed survey (that we have never run $ )[both our questions during the interviews and the
unused survey draft are based a lot on the surveys
used by Keijiro Otsuka and colleagues]
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Characteristics of the pump industry
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Clustered
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Small factory
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Father
Son
Mother
Daughter-in-law
Home business
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Technology simple and easily copied
A factory for developing mouldsthat are used for casting the key
parts of the pumps
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High degree of specialization: For every
part of a pump, there are suppliers
Pump
(Engine and
pump
in the same
machine)( )
Engine
Stator (
)
Rotor (
)
Enamel-insulated wire (
)
Capacitor ( )
Pump
Pump case ( )
Pump impeller ( )
Bearing ( )
Seal ( )
Other non-
essential
parts
Valve ( )
Screw ( )
Inspection
Assembling
Readytosell
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Bearings
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Summary:
The nature of the pump industry
Hundreds of small factories
All next to each other [clustered!]
All family businesses
Highly specialized
Undifferentiated product based on simple
technology
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Key I-O question
So, why is Chinas pump industry (and
so many of its other industries) organizedlike this
To answer, we need to consider the benefitsand costs of this organization
B fit f th i ti f
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Benefits of the organization of
Chinas pump industry Strong incentives to work hard and invest intelligently (family
firms) Low initial capital investment needed (since all firms of small,
labor intensive and since all the parts can be purchased andassembled from the parts important in developing economies)
Low transaction costs (because neighbors are doing business withneighbors and sometimes among family members reputationenforces contracts NO LAWYERS)
Competition among parts suppliers drive the prices of parts lowproduction costs lower (small firms producing undifferentiatedproducts that are clustered)
Technological changes easily adopted (simple technology andclustering)
Market information easily spread (clustering) Pool of skilled labor (clustering)
Easily recognized by outside buyers. Compete as a whole withpump producers in other places
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Costs of this industrial structure
Disincentive to invest in R&D (simple technology /all parts manufactured by others)
Competition drives down price, less profitable can lead to poor quality (small firms usingundifferentiated technology easy entry)
Difficult to brand and create a high-value added
product (clustering and imitation easy due to simple,undifferentiated technology)
Poor/no after-sales services to customers
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And, this incredibly competitive
industrial structure produces a product
with a particular set of characteristics:
Standardized product (almost a commodity)
Un-branded Inexpensive (competitive on world markets) Relatively reliable No warranty Easy to repair
Exactly the pump that was so much needed by
small, cash constrained farmers in Bangladesh
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And, the form of the organization of
industry has also been successful In just these two clusters. Nearly 1000 pump assembly enterprises and more than
2,000 parts suppliers.
Accounts for almost all of the market share in the domesticmarket. Export to many southeast/south Asian countries. The value
of all products exported reached 1 billion yuan in 2000 andhas been about 1.6-2.4 billion yuan per year since then,
accounting for a large share of the total number of pumpsexported. Daxi was given the name Hometown of Chinas small
water pumps in December 2002 Fuan thinks theydeserve this name since they are the largest exporter
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So will Chinas pump industry be like
this 20 years from now?
Almost certainly not:
From the experience of the rest of the world, we knowthat as industries mature they do not look like this
From the work of others (e.g., Otsuka and colleagues)
things evolve fast in China (in fact, they are alreadychanging)
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Appearance of larger firms
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Large scale production
Productioncapacity(1000 pumps/year)
Numberofworkers
LargeFactory
500 500 ~1,000
SmallFactory
2 20 ~ 50
Perhaps the initial capital constraints are becoming less binding
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Propensity to begin to vertically integrate and produce more of its
own parts especially key parts that can improve quality
[in the original clustered-type organization, hard to protect
technology and difficulty to monitor quality]
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Conclusion
We apologize for not having more quantitative, surveybased data [funding anyone?]
But, using the information available to us, we tried to show
who and how pumps used in world markets have be madeand sold
The key element of the industrial organization structure is: Clusters of small, family run businesses using simple, labor-
intensive technology to manufacture an inexpensive, fairly reliable,
but undifferentiated product We have tried to show that this is a rational industrial
organizational response to the physical and materialenvironment in which China and its customers wereoperating in during the past 20 years
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Role of policy? We also have shown how things are beginning to change
and change in a way that might be expected from theexperience in other industries in China and elsewhere inthe world
Does the government have a role to play in pushingforward the structural evolution of the industry? On one hand there is a need for more capital better technology
However, the government should only be involved in the thingsthat governments are supposed to do they should not try to pickwinners or make strategic decisions (obviously the market has
done well note: in our discussions, the government is almostcompletely absent these are self-forming clusters)
But, making the market environment better through actions suchas courts to providing better property rights support for brandprotection etc. might be needed