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In Conversation with Hau L. Lee: On Disruptors Within Global Value Chains

In Conversation with Hau L. Lee: On Disruptors Within Global Value Chains

Posted on Tuesday, September 22, 2015

What factors are likely to create sea changes within today’s global value chains?Hau L. Lee, member of Asia Global Institute's Advisory Board, names a few.

Q: What would you consider to be the top technological disruptors to global value chains?

The first disruptor is information, which has enabled today’s developing economies to scale the learning curve, discover new things and take advantage of new knowledge much more quickly than their predecessors did. It took the United States a long, long time before it learned how to make textiles, and then America became a major manufacturing region with the ability to compete with old Europe. Even if it took a good number of years, it also took China a much shorter time to go up the learning curve.

Every country needs some time, but today, with the advacement of information, the internet and the coming of a “flat world,” I believe that developing economies, including countries in Africa will move up the learning curve very quickly. They will potentially become part of the manufacturing chain in an easier way. The ability to educate people has also moved more quickly. The more I travel to Africa, the more I discover that the workforce which used to be less educated and less savvy about what the world was like, are actually today, better educated. It is easy to find people who know about what the rest of the world is like, and I think this is because of the advancement of information. So that is number one.

The second major, major driver I would say, is the development of an integrated transportation network. The advancement of third-party logistics companies, along with the improved ability and the use of information to coordinate the movement of goods from one state to another, or from one country to another, has made it easier to move goods from one country to another country. That ability has even enabled landlocked countries like Ethiopia to potentially be able to become a big exporter of items like apparel goods. As a landlocked country, Ethiopia doesn’t have its own port and that used to be a big disadvantage. The geography is still a disadvantage and infrastructure is still poor, but advancements in logistics has made the ability to ship even easier.

The third big disruptor is the awareness of the importance of social and environmental responsibilities. I think this is going to be a major disruptor. While this isn’t a technological disruptor, it is a mindset change. Consumers and trading partners and, in some cases, even the government, are awakening to the need to be responsible; responsible because the world’s resources are limited; and we have to make sure the planet will stay the way it is now – to not pollute and not waste. We also have to be aware of how we treat workers; we need to be aware of compliance issues and so on. I think this awareness creates a new order – that is, when companies are leveraging on workers and low cost provisions of regions like Bangladesh and Africa, they have to do it in a responsible way, because otherwise you won’t be sustainable – and your consumers will be demanding answers. So companies have to do it in the right way.

Along with this, we have to be more clever in the use of energy and resources, which means innovations can happen in that area. We can have energy-saving manufacturing processes, we can have new ways of using water for irrigation purposes so we learn to conserve water for agriculture needs; we have to come up with a new way of using hemicals and dyes in the manufacture of garments so that we don’t pollute – since plenty of water is required to wash out chemicals, and chemicals themselves are pollutants. These are just examples of areas where we need to come up with innovations so that we can at least address the problems of social and environmental responsibility. I think this is a big disruptor that everyone is paying attention to.

Q: Do you think that the business and industrial communities are on board with developments within the CSR space?

Today, if you look at the journeys that many companies are embarking on, I would say that there are still a relatively small number of more forward-thinking companies, global companies such as Nestle and Unilever; and there are some Chinese companies as well which are very aggressive within this space. But these companies are still in the minority, and the reason we are not yet seeing too many companies take this on board, even if companies are aware of this issue; is because there is the mindset is that it costs money to be responsible. It costs money to treat wastewater. It costs money for us to change our ways to new methods of manufacturing, when in fact market price distortions are what make manufacturing costs cheap. I have spoken to factory owners in China who have said “why should I care about a new way of treating water, or wastewater when water is cheap?” Of course water is cheap because some local governments subsidize the use of this water, and actions like these provide a distorted picture of the market.

So most people think: if I have to do something in an environmental and socially responsible way, it costs me money. I think it’s the forward-thinking companies that view corporate social responsibility as a value-creating opportunity which is, if you are actually able to conserve well you can reduce the cost of manufacturing. It reduces the need for you to keep moving from one country to the other, chasing lower labor costs – because if you are actually able to use a new way of manufacturing that doesn’t require you to go into the excessive use of overtime labor then you do not have to work like a nomad, moving from one country to the other continuously. That is actually saving money.

That’s what Starbucks discovered. If they are able to use the same coffee farmers, they can make sure that the coffee farmers engage in sustainable practices. They grow coffee in a sustainable way, and they can make a good living – and Starbucks doesn’t have to constantly look for new farmers, which is costly. It is much easier and far less costly to train, teach, provide incentives and even pay a little more to existing farmers to ensure that these farmers are sustainable, than to constantly look for new farmers and chase after lower costs.

Photo courtesy: Nestle

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