Knitting Asia, Weaving Development: Globalization of the Korean Apparel Industry 9819937639, 9789819937639

Citation preview

Knitting Asia, Weaving Development Globalization of the Korean Apparel Industry Edited by Joonkoo Lee · Hyunji Kwon · Hyun-Chin Lim

Knitting Asia, Weaving Development “This edited collection provides a rare look at the dynamic growth and multinationalization of Korean apparel firms. Despite their economic and social significance at home and abroad, little attention has been paid to the evolving nature of their business and strategies. This volume highlights their contributions as well as the challenges they are confronting in the fast-changing global apparel industry.” —Kihak Sung, Chairman/CEO of Youngone Corporation and Former President of the International Textile Manufacturers Federation (ITMF) “The Korean apparel industry is an intriguing case in the study of industrial development because it was one of Korea’s leading export sectors in the 1970s and 1980s, and then Korea adopted a critical middleman role in the subsequent internationalization of the apparel global value chain (GVC) since the 1990s. This edited volume highlights this new phase of globalization and regionalization by zooming in on Korean multinational first-tier suppliers and their role in fostering the expansion of the apparel GVC in Southeast Asia, Central America and other global regions.” —Gary Gereffi, Emeritus Professor of Sociology and Director of the Global Value Chains Center at Duke University

Joonkoo Lee · Hyunji Kwon · Hyun-Chin Lim Editors

Knitting Asia, Weaving Development Globalization of the Korean Apparel Industry

Editors Joonkoo Lee School of Business Hanyang University Seoul, Korea (Republic of)

Hyunji Kwon Department of Sociology Seoul National University Seoul, Korea (Republic of)

Hyun-Chin Lim Department of Sociology, Asia Center Seoul National University Seoul, Korea (Republic of)

ISBN 978-981-99-3763-9 ISBN 978-981-99-3764-6 (eBook) https://doi.org/10.1007/978-981-99-3764-6 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: Alex Linch shutterstock.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Acknowledgments

The idea about this book grew out of a research project about six years ago. Led by Hyunji Kwon and joined by some of the other contributors to this volume, the project examined Korean multinational corporations (MNCs) and their regional expansion in several sectors, and the apparel industry eventually emerged as one of the key cases for the project. Throughout the project, more than two dozen apparel executives and managers were interviewed at the headquarters of Korean first-tier suppliers (FTSs) and offshore factories of their own or their suppliers. The experience intrigued us by what these firms have achieved as well as the various challenges they are facing in fast changing apparel global value chains (GVCs). We had the opportunity to expand our interest as we were selected for a research grant from Seoul National University Asia Center. The granted project started in early 2020, but then came the outbreak of Covid-19. The pandemic and the ensuring travel restrictions completely changed the course of the project. We were not able to travel to factories abroad, and those at both headquarters and overseas were extremely busy dealing with constant disruptions along the supply chains. What we could do was to get a glimpse of what was happening through several Zoom interviews with managers abroad. We thank all the companies and people who opened their factories or offices to us and generously shared their stories, experiences, and insights in person or via Zoom in Korea, Vietnam, Bangladesh, and Indonesia, although we do not name them all v

vi

ACKNOWLEDGMENTS

here to keep them anonymous. Thankfully, the online interviews in 2020 were supported by the research project led by Dr. Myung-Joon Park at the Korea Labor Institute. We also thank Gayoung Kim, Jungmin Shin, and Jongseok Yoon for their support as research assistants on our field trips to Vietnam in 2018–2019. Because we were unable to carry out a full-blown, field-based research, we eventually decided to publish a collection that brings together our own work on Korean FTSs and those of our colleagues who have long been working on the Korean apparel industry. We thank all the contributors that joined this book project and contributed their valuable work. We believe this is one of the rare compilations of the past and the present of the export-oriented Korean apparel sector and some of the leading companies as FTSs. Despite their expanding roles in GVCs, their experience of survival and growth and the challenges they constantly faced have been little documented and rarely introduced to readers outside Korea. We believe this collection not only delivers stories about them but also offers some insights on the shifting relationship Korea has with Asia and the changing dynamics of regionalization and globalization. We hope it lays a foundation for future work on these subjects from a comparative perspective through the lens of the connections weaved by Korean and other East Asian firms across Asia and beyond. This research was supported by the Research Grants for Asian Studies funded by Seoul National University Asia Center (SNUAC) in 2020– 2022. We thank Professor Gary Gereffi at Duke University and Chairman Gihak Sung, Chief Executive Officer of Youngone Corporation, for their support. We also thank Dr. Suk-Ki Kong and the staff at SNUAC and Jongyoon Hong and Suho Lee at Hanyang University for their assistance to our granted project. Finally, this book project was featured in the session we organized at the Society for the Advancement of SocioEconomics 2022 Annual Meetings in Amsterdam, and we thank the participants in that session. Joonkoo Lee Hyunji Kwon Hyun-Chin Lim

Contents

Introduction: Globalization, Value Chain Governance, and Supplier Experimentation Joonkoo Lee, Hyunji Kwon, and Hyun-Chin Lim Expanding Overseas, Becoming Multinational, and Moving Up the Value Chain: Three Waves of Globalization in the Korean Apparel Industry Joonkoo Lee and Hyun-Chin Lim

1

25

Korea’s Multinational Garment Suppliers: Growth Through Disintermediation Solee Shin

53

Toward a Bipolar Apparel GVC? From the Perspective of First-Tier Suppliers Hyunji Kwon, Jinsun Bae, Joonkoo Lee, and Sun Wook Chung

81

A Hidden Champion? An Experimental Journey for Digital Integration of a First-Tier Supplier in the Apparel GVCs Hyunji Kwon and Seri No

105

Formalizing Foreign Manufacturer Status While Deepening Local Embeddedness: Korean Manufacturers in Myanmar’s Export-Oriented Apparel Industry Jinsun Bae Index

127

165 vii

Notes on Contributors

Jinsun Bae is an Assistant Professor in International Business at the Sprott School of Business, Carleton University, Canada. Her research centers on responsible business conduct in global supply chains with particular attention to how supply chain actors understand and implement private and public governance to regulate labor practices. She received her Ph.D. in Business Economics and Management from Copenhagen Business School in Denmark. Her doctoral dissertation examines corporate social responsibility perceptions and practices in Myanmar’s apparel industry, for which she conducted fieldwork during 2014–2015. Before joining Sprott, she was a postdoctoral fellow at the Global Labor Institute at the School of Industrial and Labor Relations (ILR) at Cornell University, United States. She holds a Master of Science degree in Asian Studies from Lund University in Sweden and a Bachelor of Foreign Service degree from Georgetown University, United States. Sun Wook Chung is a Professor of International HRIR at the Sogang Business School (SBS), Sogang University, Seoul, South Korea. His research centers on globalization and its impact on business and labor in East Asia. He has studied the changing HR/ER practices of Korean firms in host country, the expatriate managers and their roles amid the speedy foreign expansion of Korean firms, the compliance responses of Korean suppliers in the global supply chains, and labor activism in the online game industry in harsher global competition. He has long studied the context of electronic industry, as well as the post-socialist countries ix

x

NOTES ON CONTRIBUTORS

including China. His work has appeared in journals such as Employee Relations, Human Relations, International Journal of Human Resource Management, and Journal of Asian Sociology. He received his Ph.D. at the School of Industrial and Labor Relations at Cornell University. Hyunji Kwon is a Professor of Sociology at Seoul National University. Her research interests center around flexible employment arrangements, changes in organizational-level employment relations, and labor market inequality. As the principal investigator (PI), she has recently completed a multi-year research project funded by Korea’s National Research Foundation, which examined the roles and strategic actions of globalizing actors in the complex and turbulent fields of transnational corporations and global production networks. Currently, she is paying close attention to the evolving work contracts and norms, as well as the precarity and resilience of workers in the labor market with a particular focus on the creative and knowledge economy industries. She received her Ph.D. from the School of Industrial and Labor Relations at Cornell University. Before joining Seoul National University, she worked as a research fellow at Korea Labor Institute and as a lecturer in the Department of Management at King’s College London. Joonkoo Lee is Associate Professor of Organization Studies, School of Business at Hanyang University in Seoul, South Korea. His main areas of research include globalization and development, specifically global and regional value chains, value chain governance, and economic and social upgrading in apparel, electronics, and cultural/creative industries, focusing on Asia. He co-authored a book titled Mobile Asia Capitalisms, Value Chains and Mobile Telecommunication in Asia (Seoul National University Press, 2018). His work has appeared in journals such as Proceedings of the National Academy of Sciences, Industrial and Corporate Change, International Labour Review, Journal of Business Ethics, critical perspectives on international business, and Journal of International Business Policy. He received his Ph.D. in sociology from Duke University and M.A. and B.A. from Seoul National University. Hyun-Chin Lim is Professor Emeritus of Sociology and Director of Civil Society Program, Seoul National University. He is also Elected Member, National Academy of Sciences, Republic of Korea. His main areas of research include global civil society, sociology of development, comparative capitalism, and democracy, focusing on Asia and Latin America.

NOTES ON CONTRIBUTORS

xi

He authored and edited books, such as Dependent Development in South Korea (Seoul National University Pres, 1985), East meets West (Brill, 2007), Democracy in Crisis (Baiksan, 2018), and Capitalism and Capitalism in Asia (Seoul National University, 2018). He contributed his papers to journals, such as Journal of Contemporary Asia, Korean Social Science Journal, Korean Observer, Development and Society, and Journal of International Business Policy. He received his Ph.D. in Sociology from Harvard University, after obtaining M.A. and B.A. from Seoul National University. Seri No is Research Fellow of Industrial Relations Department, Korea Labor Institute, Sejong, South Korea. Her main areas of research include innovation and organizational development, specifically workplace innovation, flexible work organization, human-centered human resource management, quality of working life of employees, and digitalization in various industries. She received her Ph.D. from Hanyang University Business School in Korea. Her doctoral dissertation examines organizational learning in Korean auto parts small and medium-sized business, for which she conducted fieldwork in 2016–2017. She was a member of the Workforce Innovation Taskforce in the Presidential Committee on Jobs in 2019–2021. Solee Shin, Ph.D. is an economic sociologist and international business scholar whose research examines institutionalized East Asian business development within evolving global supply chain environments. Her work has been published in various disciplinary and interdisciplinary journals including the Journal of Development Studies, Journal of Contemporary Asia, Competition and Change, and the European Journal of Social Theory. She previously held appointments at Lund University, National University of Singapore, and University of Illinois at Urbana-Champaign, and currently works as a technology researcher at Amazon Web Services.

List of Figures

Expanding Overseas, Becoming Multinational, and Moving Up the Value Chain: Three Waves of Globalization in the Korean Apparel Industry Fig. Fig. Fig. Fig. Fig. Fig. Fig.

1 2 3 4 5 6 7

Apparel global value chains and the expanding role of FTS Korea’s apparel exports, 1965–2000 East Asian countries’ apparel exports to the US, 1965–1990 Korea’s textile and garment exports, 1991–2014 Triangular manufacturing in apparel: US-Korea-Vietnam case Korea’s outward FDI in textiles and garments, 1991–2017 Major Asian destinations of Korea’s outward FDI in garments, 1991–2017

32 34 36 37 38 39 43

Korea’s Multinational Garment Suppliers: Growth Through Disintermediation Fig. 1 Fig. 2

Li & Fung’s annual sales and net profits Growth trajectories of three supplier firms

59 62

A Hidden Champion? An Experimental Journey for Digital Integration of a First-Tier Supplier in the Apparel GVCs Fig. 1 Fig. 2

The pressures challenging supplier sustainability The textile production process at the smart factor

112 115

xiii

xiv

LIST OF FIGURES

Fig. 3 Fig. 4

A summary of the digital-integrated process innovation at Hansoll A Korean government-suggested Apparel GVC model under its Apparel Digital New Deal Initiative

117 119

Formalizing Foreign Manufacturer Status While Deepening Local Embeddedness: Korean Manufacturers in Myanmar’s Export-Oriented Apparel Industry Fig. 1 Fig. 2

Major importers of Myanmar’s apparel exports, 2002–2013 US Dollar to Burmese Kyat exchange rate chart for 5 years, 2017–2022

133 151

List of Tables

Expanding Overseas, Becoming Multinational, and Moving Up the Value Chain: Three Waves of Globalization in the Korean Apparel Industry Table 1 Table 2 Table 3

East Asia countries’ share in US apparel imports, 1965–1990 (Unit: %) Regional distribution of Korea’s OFDI in garments, 1985–2017 (USD million) Korean textile and apparel ODI in China: Before and after 1998

34 41 42

Korea’s Multinational Garment Suppliers: Growth Through Disintermediation Table Table Table Table

1 2 3 4

Profile of sample firms Coding scheme for archival sources Notable Asian garment suppliers Competitive priorities and required supplier resources and capabilities

56 57 60 72

Toward a Bipolar Apparel GVC? From the Perspective of First-Tier Suppliers Table 1 Table 2

Anonymized interviewee profiles Diversification of offshore production locations

89 94

xv

xvi

LIST OF TABLES

Formalizing Foreign Manufacturer Status While Deepening Local Embeddedness: Korean Manufacturers in Myanmar’s Export-Oriented Apparel Industry Table 1 Table 2

Selection of internationally funded programs to facilitate the development of the Myanmar apparel industry Selected KOGAM activities 2017–2020

139 145

Introduction: Globalization, Value Chain Governance, and Supplier Experimentation Joonkoo Lee , Hyunji Kwon, and Hyun-Chin Lim

1

Introduction

The apparel industry played a historically important role as a steppingstone for export-oriented industrial development, spurring the growth of exports and manufacturing employment in the early stages of many developing countries. Asia was no exception; the region has long been the center of global apparel production and exports (Appelbaum & Gereffi, 1994; Bonacich et al., 1994). In 1980, four East Asian economies (Japan, Taiwan, Korea, and Hong Kong), accounted for 65 percent of apparel imports in the U.S., the world’s largest market. In 2020, Asia accounted for 65 percent of the world’s apparel exports, and now China,

J. Lee (B) School of Business, Hanyang University, Seoul, South Korea e-mail: [email protected] H. Kwon Department of Sociology, Seoul National University, Seoul, South Korea e-mail: [email protected] H.-C. Lim Department of Sociology, Asia Center, Seoul National University, Seoul, South Korea e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. Lee et al. (eds.), Knitting Asia, Weaving Development, https://doi.org/10.1007/978-981-99-3764-6_1

1

2

J. LEE ET AL.

Bangladesh, and Vietnam, three leading exporters in Asia, represented 47 percent of the world total.1 This rise of Asia as the leading apparel producer and exporter closely relates to the global nature of contemporary apparel production. Over the past several decades, the apparel sector pioneered a now widespread trend of organizing production through a global scale of a decentralized production system, global value chains (GVCs). Most apparel goods sold in advanced economies are produced through such tightly knit, cross-border inter-firm relationships, which link retail buyers and end consumers in the Global North with suppliers and workers in the Global South. The linkages connecting the two geographically separate but organizationally integrated worlds have enabled a massive scale of apparel production and consumption worldwide. In 2021, the world’s garment exports, combined with textile exports, amounted to four percent of the world’s total manufacturing exports.2 From a scholar perspective, the apparel sector has provided fertile ground for advancing our understanding on how global industries are structured and operated. Particularly, the notion of buyer-driven chains highlights that western retail buyers and merchandisers, by extending their supply chains to Asia, significantly affected the economic and social conditions of apparel production and those of workers in the region (Gereffi, 1999). The literature has since documented the growing power and influence of buyers in other sectoral GVCs such as agrifood (Dolan & Humphrey, 2004). Yet, little known is about the recent rise of Asian multinational enterprises (MNEs) as key intermediaries in apparel GVCs. Since the global financial crisis of 2008–2009, some Asian suppliers have emerged as strategic suppliers for major buyers in the U.S. and Europe. They expanded operations beyond their home countries and enlarged their value chain roles beyond production into design and other production-related services. Despite their growing presence, little has been studied about these large transnational first-tier suppliers (FTSs) as important middlemen in apparel GVCs with some exceptions (Appelbaum, 2008; Azmeh & Nadvi, 2014).

1 Compiled from UN Comtrade dataset (https://comtrade.un.org/). 2 Compiled from The World Trade Organization’s STAT Dashboard (https://stats.wto.

org/dashboard/merchandise_en.html) on March 18, 2023.

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

3

This book offers a fresh look at the global, and regional, apparel industry by focusing on export-oriented Korean apparel MNEs and their expanding role in weaving regional connections and shaping economic and social development across Asia.3 Over the past two decades, Korean apparel firms rapidly expanded their operations across Asia and beyond, and gradually moved up the value chain to play a bigger role as strategic suppliers to global buyers such as Gap and Walmart. In this process of expansion and upgrading, they have become important foreign exportoriented investors in major apparel production countries such as Vietnam, Indonesia, Bangladesh, and Myanmar. At the same time, these emerging MNEs have confronted multiple new challenges in the rapidly changing landscape of the global apparel industry, such as increasing pressure toward cost-cutting and shorter time-to-market and a rapid transition to digital technology and automation. A mounting demand for social compliance and evolving host country institutions have added an extra layer of complexity. In this collection, scholars in management, sociology, and labor research delve into the regional expansion and multinationalization of Korean apparel producers and their evolving relationship with western markets as well as developing Asia through international trade, capital flow, talent migration, and institutional adaptation. Based on extensive field research and archival data, the authors investigate how Korean apparel firms navigate these challenges to survive and grow while affecting GVC governance as well as economic and social conditions in Asia. In this introductory chapter, we introduce major themes that cut across this volume, highlighting the following three aspects: (1) GVC integration, upgrading, and regional expansion, (2) GVC governance and the rise of FTSs, and (3) their experiences of navigating complex technological and institutional uncertainties. We then outline each of the chapters to follow and conclude this chapter with a brief discussion of the impact of the Covid-19 pandemic.

3 This book solely focuses on Korea-based multinational apparel producers catering to foreign, mostly American and European, buyers. Domestically oriented producers with or without their own brands are not addressed here despite some overlap. For their divergence, see Shin (2019).

4

J. LEE ET AL.

2

Major Themes of This Volume

This collection intends to engage with several streams of research centered on the apparel industry. First, the chapters on the historical trajectories of Korea’s export-oriented apparel sector, chapters ‘Expanding Overseas, Becoming Multinational, and Moving Up the Value Chain: Three Waves of Globalization in the Korean Apparel Industry’ and ‘Korea’s Multinational Garment Suppliers: Growth Through Disintermediation’, examine the process of its integration to apparel GVCs and upgrading therein, and the role of regional expansion, multinationalization, and disintermediation in firms’ growth and upgrading. Second, chapters based on the recent studies of Korean apparel FTSs, chapters ‘Toward a Bipolar Apparel GVC? From the Perspective of First-Tier Suppliers’ and ‘A Hidden Champion? An Experimental Journey for Digital Integration of a First-Tier Supplier in the Apparel GVCs’ especially, address the rise of FTSs as a strategic supplier to global buyers with a possibility for GVCs to shift toward a bipolar governance structure. Finally, chapters ‘A Hidden Champion? An Experimental Journey for Digital Integration of a First-Tier Supplier in the Apparel GVCs’ and ‘Formalizing Foreign Manufacturer Status While Deepening Local Embeddedness: Korean Manufacturers in Myanmar’s Export-Oriented Apparel Industry’ focus on how Korean firms have been navigating complex technological and institutional environments amid growing uncertainties in market, technology, and regulations surrounding GVCs. In this section, we outline each of the three key themes and illuminate this volume’s contributions to our understanding of apparel GVCs, Korean multinationals, and beyond. 2.1

GVC Integration, Upgrading, and Regional Expansion

Buyer-driven value chains have been a key feature of the global apparel industry. Unlike producer-driven types, large retailers (e.g., Walmart) and brands (e.g., GAP, H&M) play a key role in operating and controlling the value chains by determining what, when, where, and how much to produce. The lead firms set the design and specifications of the product they intend to sell, but outsource manufacturing to internationally dispersed suppliers, which specialize in production in the middle of the value chains (Gereffi, 1994). Since emerging in the 1950s and 1960s, buyer-driven GVCs lowered entry barriers for suppliers, particularly for small and medium-sized ones in developing economies. This provided

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

5

them with the opportunity to integrate into a global network of production and move up to higher value-added positions. They also offered the opportunity for developing countries lacking in technology and capital to quickly build the apparel industry with a large pool of unskilled labor at the early stage of export-led industrial development. The Korean export-oriented apparel industry is, as detailed in chapter ‘Expanding Overseas, Becoming Multinational, and Moving Up the Value Chain: Three Waves of Globalization in the Korean Apparel Industry’, considered a successful case of integration and upgrading in buyer-driven GVCs. From the late 1960s, Korean firms joined apparel GVCs driven by Japanese and western buyers, initially serving as export processing platform based on imported input materials. Alongside a similar move in footwear and other light manufacturing, the initial engagement jumpstarted the country’s exports and generated manufacturing jobs for a young, mostly female, domestically migrated, low-skilled workforce. Over time, Korean firms, while relying on foreign buyers in design and specifications, accumulated capabilities in organizing their own production and directly sourcing input materials (Lee et al., 2018). They also gradually reduced their reliance on foreign intermediaries, such as trading firms in Japan and Hong Kong, in securing foreign orders by working directly with western buyers, as shown in chapter ‘Korea’s Multinational Garment Suppliers: Growth Through Disintermediation’ on this disintermediation process. Such efforts led some of the Korean suppliers to move to so-called ‘full package’ production (Bair & Gereffi, 2001), and the functional upgrading, or moving to higher value-added value chain activities, facilitated them to grow rapidly throughout the 2000s. In the coming decade, they further expanded their functional scope to the original design manufacturer (ODM) stage, where suppliers engage in developing and designing their own products. It was facilitated in the aftermath of the global financial crisis particularly as lead firms consolidated their supplier base to a smaller set of more capable suppliers that can handle a wider range of value chain activities (Cattaneo et al., 2010). This move accelerated the rise of large transnational first-tier suppliers (FTSs), whose competitiveness increasingly lies in the ability to quickly identify market demand and trends, develop their own design portfolios, and organize complex cross-border networks of production to address buyer demands in a flexible manner (Appelbaum, 2008; Raj-Reichert, 2019).

6

J. LEE ET AL.

Korea’s integration and upgrading in apparel GVCs historically interacted with the development of the apparel industry in Asia (Gereffi, 2005). Korea’s initial entry in the 1970s to the regional circuit of production coincided with Japanese firms’ effort to move away from labor-intensive garment production toward higher value-added activities like capital-intensive textile production. Japanese firms, once the major apparel exporter to the U.S. market, began to invest and outsource garment production to Korea and other neighbors such as Taiwan and Hong Kong. This facilitated the rise of export-oriented garment production in these newly industrializing economies (NIEs), or the ‘Asian Tigers’ (Appelbaum et al., 1994). A similar dynamic took place in the late 1980s, as documented in chapter ‘Expanding Overseas, Becoming Multinational, and Moving Up the Value Chain: Three Waves of Globalization in the Korean Apparel Industry’. In the face of rising costs at home and trade barriers abroad, garment producers in these East Asian NIEs migrated to lower-cost locations that have quota access to the western market, such as Guam and Saipan, and later to China and other developing Asian economies, shifting the geography of apparel production in Asia. At the same time, firms in the NIEs attempted to upgrade to an upstream part of the chains like design and textile production. By the end of the last decade, China, Bangladesh, and Vietnam emerged as the world’s leading apparel exporting nations, and other Southeast and South Asian countries, such as Indonesia, India, Cambodia, and Myanmar, also play a key role in the world’s garment production and export nowadays (Lopez-Acevedo & Robertson, 2012). In this way, Asia’s export-oriented apparel production has evolved into a tightly knit and dense cross-border network of production. International trade, multinational enterprises (MNEs), foreign direct investment (FDI), and outsourcing orders play a key role in knitting and weaving countries, firms, and workers across Asia into regional production networks (Athukorala, 2011; Lee & Lim, 2018, Chapter 3; Zhu & Pickles, 2014). In this context, regional expansion provided a significant momentum to the growth of Korean suppliers in apparel GVCs. The availability of a large pool of low-cost labor and cross-national wage gap have long been critical factors in shaping the geography of apparel production, alongside quota systems and other trade-related measures. Apparel suppliers persistently seek to find a location with lower cost and favorable trade terms for survival in the sector notorious for thin margins and cutthroat competition (Gereffi & Frederick, 2010). For Korean first-tier

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

7

suppliers, however, overseas expansion and the establishment of regional production networks also played a key role in growing faster and solidifying their positions against competitors. By expanding their operation and sourcing network to multiple countries favored by buyers, this new breed of emerging multinational firms strengthened relationships with key buyers to secure more and better orders, which served as a major driver for their growth. Such a geographically expanded and diversified overseas production network allows them to respond to a wider variety of buyers with different types of orders, from mass-market to small-batch ones, by flexibly switching orders internally from one factory or line to another or utilizing compatriotic or local contract suppliers in foreign locations. As discussed in chapter ‘Toward a Bipolar Apparel GVC? From the Perspective of First-Tier Suppliers’, this highlights that regional expansion not only helps Korean FTSs reduce costs, but also improves responsiveness and flexibility in addressing buyer and market demands in the era of ‘fast fashion’ (Berg et al., 2017; Tokatli, 2008). Despite this dynamic development of the Korean apparel industry and its engagement in GVCs, little research has been done on what has happened over the last decades. Most of the work until the mid-tolate 1990s focused on the rise of the export-oriented apparel sector in Korea and other East Asian NIEs as the powerhouse of global apparel production (Bonacich et al., 1994; Gereffi, 1999). Although some of the work traced migrating apparel firms to offshore locations (Smith, 1996), interest in such firms was not sustained but gradually dwindled at home.4 That is particularly striking for several reasons. First, public and scholarly scrutiny intensified on labor conditions in apparel factories in developing countries (Locke & Romis, 2010; Rodriguez-Garavito, 2005), and many of such factories are run by migrated multinational suppliers from East Asia NIEs as well as from China and India. Second, these foreign-owned firms play an expanding role in shaping export performance, sourcing networks, and working conditions in host countries (Merk, 2014; Tewari, 2008; Zhu & Pickles, 2014). Furthermore, recent market, regulatory and technological changes in apparel GVCs pose novel challenges to these emerging-market MNEs, to say the least, the rise of online retailing and 4 It is partly because many of apparel firms, unlike many capital-intensive manufacturers, entirely moved their production operations abroad, only leaving HQs and functions like design and sales at home. As the clout of the apparel sector as a source of employment and export demised, so did public and academic interest at home.

8

J. LEE ET AL.

small-batch production, tightened labor and environment standards, and the introduction of digital and automated technologies (Berg et al., 2017; Lopez-Acevedo & Robertson, 2012; Wood et al., 2019). All these raise questions on how these emerging players address such wide-ranging challenges, from business to technology and labor, cutting across host, home, and buyer countries. Little explored in the context of Korean apparel suppliers is how they have attempted to advance their positions in apparel GVCs to increase their leverage and value capture against global buyers in the face of thin margins and diversified market demands. Also, it remains unclear how they manage their regional production networks in the face of volatility of markets, regulations, and technology in apparel GVCs. In addressing these questions, the Korean case, first, can serve as a gateway to understand East Asian apparel suppliers; for example, whether and to what extent their experience can be emulated in a situation when a growing number of developing country suppliers continue to join competition for foreign orders (Whitfield et al., 2021), and what consequences their strategies can make in both home and host countries economically and socially, particularly when reshoring is considered as a real possibility in a post-pandemic GVCs (Bárcia de Mattos et al., 2021). Second, the Korean apparel case can illustrate a unique trajectory of being multinational FTSs, the one distinctive from the other East Asian NIEs or Chinese and Indian emerging-market MNEs (Ramamurti & Singh, 2009). It is also different from those of other sectors, such as electronics and automotive, where chaebol-affiliated large manufacturers partnered with their close compatriot suppliers in transplanting their supply chains abroad (Chung et al., 2021). While not being comparative, the contributions of this volume will provide a foundation for any cross-national or cross-sectoral comparison in the future. 2.2

First-Tier Suppliers and Governance in GVCs

GVCs have been reorganized since the global financial crisis of the late 2000s. As part of the effort to rationalize their global supply bases, lead firms concentrated sourcing and production networks into Asia, notably in China, which emerged as the ‘factory of the world.’ This geographic concentration coincided with organizational consolidation as global buyers increasingly worked with a smaller set of larger suppliers with extensive operations across multiple regions and countries (Cattaneo

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

9

et al., 2010; Lee & Gereffi, 2013). The role of large, transnational FTSs has increased in many industries over the past two decades or so (Appelbaum, 2008). In addition to the automobile industry, where mega-suppliers already played a prominent role in close cooperation with automakers, this type of emerging MNES have taken on prominence in diverse GVC-intensive sectors such as apparel, footwear, and electronics (Chung et al., 2021; Kwon et al., 2021a, 2021b; Raj-Reichert, 2019). Several factors came together to bring about these changes. First, facing a recession, lead firms downsized and transferred some value chain functions to suppliers to invest in new areas such as big data analytics. They also needed to work with suppliers with higher capabilities and resources as apparel production increasingly required an agile response to market changes. As a result, large FTSs began to newly assume functions traditionally conducted by buyers, such as product design, logistics, and supply chain management. At the same time, such changes in the division of labor are the result of suppliers’ steady efforts to upgrade their capabilities to attract more lucrative orders and increase their value capture. Also, tightened social and environmental demands led to the changes. Most notably, the Rana Plaza collapse in Bangladesh in 2013 gave rise to widespread criticisms about poor working conditions in apparel GVCs (Taplin, 2014). Lead firms scrambled to set their own labor standards and considered compliance with such standards as a prerequisite for supplying them. Larger suppliers with the capabilities and resources enough to meet higher standards have gradually assumed a broader role to play. The emergence of transnational FTSs and their growing role in GVCs raises new questions in several respects. First, a detailed analysis of how individual companies have strategically achieved such growth is needed. It is largely unknown how these FTSs strategically upgrade their products and capabilities in the rapidly changing environment. It is also important to understand their strategies in many different but interrelated areas to advance and consolidate their value chain positions amid accelerated technological, market, and regulatory changes. These include managing regional expansion and cross-national production network, achieving technological and managerial innovation, responding to cost-cutting pressure, and addressing stringent requirements of labor and environmental standards. On the one hand, given the multinationalized nature of their operations, economies of scale may give them a scalability that other suppliers cannot easily match. On the other hand, many of the FTSs still rely on low margins and a handful of large buyers, while facing persistent

10

J. LEE ET AL.

challenges from emerging competitors, as discussed in chapter ‘Toward a Bipolar Apparel GVC? From the Perspective of First-Tier Suppliers’. In this respect, the question of how these FTSs build and maintain their competitive advantage while embedded in the value chain driven by global buyers requires a closer attention to what FTSs try to do and what they have achieved. Second, the rise of large FTSs throws new questions into existing views about the dynamic and power structure in a broader set of GVCs beyond the apparel industry. In many other industries, from agriculture to electronics, the power of buyers with well recognized global brands and a direct contact to (and data on) end consumers has had a significant impact on the structure and operation of GVCs. In agriculture and fisheries, the market dominance of large wholesalers and retailers such as Wal-Mart exerted strong market and regulatory power over a massive number of small, widely dispersed producers on the other end of the chains (Lee et al., 2012; Tran et al., 2013). In electronics, the division of labor between brand buyers like Apple and contract manufacturers like Foxconn takes a modular form. Yet, as shown on the value distribution of Apple’s iPhone (Kraemer et al., 2011), buyers still retain an overwhelming share of added value despite the enlarged role FTSs play in GVCs. Thus, some scholars point out that given the power of global buyers and the ‘monopsonic’ structure of many GVCs nowadays, FTSs find it difficult to avoid cost reduction pressures in the middle of the chain (so-called ‘squeeze the middlemen’). Others argue, in contrast, that multinational FTSs are emerging as ‘pivotal actors’ in GVCs by establishing close and long-term relationship with their buyers (Azmeh & Nadvi, 2014; Horner & Nadvi, 2018). They have become strategic partners of global brands as a small number of FTSs play a critical role in a wide range of activities. These activities include managing cross-border production network, developing and implementing innovation in product and technology, and overseeing lower-tier supply chains in from quality management to compliance with labor and environmental standards. In a similar vein, regarding the role of FTSs in shaping labor conditions in GVCs, some content that they make oppressive and exploitative practices persisting, while others point out a potential for increased transparency and monitoring effectiveness as more FTSs are subject to public scrutiny and workers in larger-scale factories can be better empowered collectively (Lee, 2016; Merk, 2014). There are also reasons why we pay attention to the rise of transnational FTSs in the Korean context. First, many Korean manufacturers that

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

11

have grown internationally over the past 20 years since the Asian financial crisis of the late 1990s fall into this category. From apparel to electronics, they are in charge of cross-border production catering to large buyers and retailers such as Wal-Mart or manufacturing of key parts and components for global brands such as Apple. Through these processes, they are deeply integrated into GVCs driven by global lead firms while achieving rapid growth and expansion as multinational FTSs. While the growth of Korean firms in the earlier era of economic development was largely due to export-oriented yet locally based production relying on employment at home, the overseas expansion and globalization of many Korean FTSs since the Asian financial crisis was made possible through building their regional production network with the wide use of FDI, international trade of intermediate goods and offshore outsourcing (Lee & Jung, 2015; Lee & Lim, 2018). Such expansion coincided with the economic opening of developing and transition economies in Asia and their integration to GVCs partly facilitated by East Asian multinationals. Furthermore, their regional expansion has elevated the influence of the Korean economy on the countries and communities in which they operate. They play such roles as major exporters, taxpayers, and employers in respective countries and regions while the responses to their roles varied from being positive to negative. Their business strategies, including where to locate, what to produce, and who to hire, affected not only the production and export performance of the given country or region, but also directly and indirectly shaped the degree of technology transfer to local companies, the level of skill development for local workforce, and working and living conditions for workers and their family. At the same time, their impacts are shaped and constrained by various factors, including management styles and strategies, and institutional differences and complexities, as discussed below. Also, amid a potential ‘decoupling’ of the world economy as a result of the recent US-China trade war, Russia’s invasion of Ukraine, and the US’s effort to bring manufacturing back and reconfigure GVCs around their allies, their strategies are increasingly influenced by rapidly changing political and economic environment in the global economy (Gereffi et al., 2021).

12

J. LEE ET AL.

2.3

Navigating Uncertainties Through Experimentation

Today, the global economy is characterized as turbulent and complex, with continuous growth in economic, political, and technological uncertainties. MNCs exist in a contested field where organizational actors compete, negotiate, disrupt, and consistently create and recreate work norms and structures in rapidly changing environments (Ferner et al., 2012). The existing literature on the global economy and its governance should respond more actively to this evolving field. A prevailing notion that has shaped the perception of garment suppliers operating foreign facilities in GVCs is that they are uncommitted opportunists who prioritize achieving the lowest possible labor costs in a ‘race to the bottom’ and make footloose moves. However, this rather conventional view of suppliers has constrained our comprehension of a variety of—and often strategic—choices made by contemporary global suppliers, such as the settle-down. One factor contributing to this new development is the emergence of transnational FTSs, mainly from East Asia, which serve as strategic partners for global brands and retailers seeking to concentrate on critical value-added activities while mitigating risks in the ever more unpredictable post-crisis global markets. As a result of manufacturing consolidation centered around strategic and capable FTSs, these firms have made substantial investments to maintain their competitive edge. However, a strong local presence is not limited to those large-scale transnational FTSs. We have also observed that relatively small-scale foreign suppliers have chosen to establish themselves locally rather than join the footloose race to the bottom. Bae’s case study, presented in chapter ‘Formalizing Foreign Manufacturer Status While Deepening Local Embeddedness: Korean Manufacturers in Myanmar’s Export-Oriented Apparel Industry’, offers fascinating insights into Korean suppliers who, despite facing financial pressures and compliance requirements, have chosen to remain in Southeast Asian developing nations like Myanmar, while adapting to constant political and market uncertainties. This suggests that even small-scale entrepreneurs can benefit from a long-term localized approach. Additionally, the choice of these entrepreneurs to stay in the country is linked to regional migration flows: foreign direct investment is accompanied by personal migration from Korea, a country that has been rapidly restructuring its industrial sector toward heavy and hightech industries. With the exception of small workshops located in city

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

13

centers that specialize in the fast distribution of highly tailored products, garment manufacturing has all but disappeared from Korea and has moved to developing countries in the region that are newly integrated into the global production network. Entrepreneurs who are part of this regional value chain arrangement have become permanent migrants, often marrying local partners and opting for local adaptation. This forms a contrasting picture to the increasingly mobile parent-country expatriates engaging in short-term assignments for one of the chaebol-affiliated FTSs under the dominance of the headquarters as frequently observed in electronics. This shows that migration studies with an individual focus can have a novel perspective when combined with the GVC perspective, which also lacks how individual-level factors can contribute to firms’ integration strategies. The two case studies presented in chapters ‘A Hidden Champion? An Experimental Journey for Digital Integration of a First-Tier Supplier in the Apparel GVCs’ and ‘Formalizing Foreign Manufacturer Status While Deepening Local Embeddedness: Korean Manufacturers in Myanmar’s Export-Oriented Apparel Industry’ focus on suppliers’ various adaptation strategies for navigating multiple sources of uncertainty. Low-tech apparel GVCs were traditionally depicted as buyer-driven due to the low capability of suppliers. As discussed earlier, neo-liberal restructuring at the buyer level and consequent delegation of key supply chain functions enabled the company to upgrade its capabilities. As a result, mutual reliance between buyers and strategic first-tier suppliers such as the case company has increased in recent years, although unequal power dynamics tilted in favor of buyers persist (Kwon et al., 2021a, 2021b). While several strategic remedies that large FTSs partnering with lead firms can employ have been identified, the case FTS in chapter ‘A Hidden Champion? An Experimental Journey for Digital Integration of a First-Tier Supplier in the Apparel GVCs’ has illustrated the potential of smart factorization as a means to capitalize on the global trend of digital transition. This approach not only reduces costs by minimizing redundancies, lead-time, and defects, but also enables the diversification of products, customization for high value added, and access to new clients. Additionally, it can potentially comply with environmental regulations and thus supports the transition to the greener production process. However, despite its great potential, the process of smartization has turned out to enter a years-long experimentation loop in such FTSs that prioritize low-cost production and have not developed high-tech engineering capabilities.

14

J. LEE ET AL.

Digital innovation does not merely involve technological investment and breakthroughs, but also entails organizational restructuring through new ways of working and changes to organizational norms which might bring internal conflicts. The concept of globalizing actors and their roles within or working with MNCs—individuals and organizations who create, diffuse, interpret, and negotiate norms across international operations (Kern et al., 2019) can offer a better understanding of this process. MNCs are regarded as globalizing actors as organizations because they navigate multiple and often conflicting norms, including formal and informal rules, while conducting business (Geppert et al., 2016). Moreover, they also play a role in contributing to the emergence and reinforcement of global-level norms and practices (Scherer & Palazzo, 2011). In the case study, for example, the key globalizing actor who initiated and implemented the experimentation was a new head of the MNC who introduced the idea and experience of smartization to foreign subsidiaries, especially those located in developing countries, from the advanced industry and teamed up with third-country nationals who had expertise in smart technology in the garment industry. The team’s approach and roles were multi-dimensional, including ideation, invention, and negotiation of both norms and new technology. They also diffused these elements across their multinational network through organizational restructuring. The team encountered successes and failures within the constraints and opportunities presented by the organizational, industrial, and institutional conditions. The globalizing actors played complex roles with a comprehensive understanding of the conflicting process within the complicated structure, and this led to a more gradual, step-by-step experimental process. Furthermore, the experimentation with digitalization had two sides from the workers’ perspective. On the one hand, technological innovation required substantial skill upgrades for workers, which resulted in the firm investing in worker training. On the other hand, however, it posed risks of redundancies and stress for adaptation, raising questions about the issues of a just transition. The roles of globalizing actors often involve institutional experimentation, as demonstrated in chapter ‘A Hidden Champion? An Experimental Journey for Digital Integration of a First-Tier Supplier in the Apparel GVCs’. When individual actors have limited capabilities and resources, globalizing actors facing high levels of political and economic uncertainties form interest groups and evolve into institutional actors to survive. They gradually formalize their collective identity and associational power,

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

15

allowing the institutionalized actor to go beyond playing a passive role in merely sharing information in response to institutional and regulatory environments. They strategically represent their collective interests by reaching out to external actors, including other country manufacturer associations, political agents, and international organizations such as the International Labour Organization (ILO) and other third parties. As small-scale suppliers, compliance requirements are usually seen as constraints, but this institutionalized actor uses them as a strategic lever for further industrial upgrading. Even under extreme instability, such as a coup d’etat, the experiment for industrial upgrading for sustainability carried out by institutionalized globalizing actors may slow down but never stop. Previous studies have documented how global suppliers accessed new consumer markets, utilized local resource endowments, and pursued cheap labor by, for example, offshoring or outsourcing labor-intensive production activities (Choi & Rhee, 2014). However, this depiction of Asia is being challenged and changing, as evidenced through the case studies of Korean global suppliers presented in this volume. This shift in the portrayal of Asia is in line with the growing interest in studying MNCs from other Asian countries that have upgraded as strategic partner suppliers to global companies (Azmeh & Nadvi, 2014). The two examples, situated in different institutional situations and different layers of the garment GVCs, demonstrate that conventional understandings of passive and single-purposed suppliers fail to adequately capture the new developments in the apparel GVCs.

3

Contributions of This Volume

This section provides a brief introduction to each of the chapters to follow. Chapter ‘Expanding Overseas, Becoming Multinational, and Moving Up the Value Chain: Three Waves of Globalization in the Korean Apparel Industry’ (Joonkoo Lee and Hyun-Chin Lim) South Korea has had a central role in post-war global garment production. Initially positioned as an offshore processing location for Japan in the 1960s, Korea’s garment sector emerged as one of the leading suppliers in the global garment industry in the ensuing decades. Tightly integrated to buyer-driven global value chains (GVCs) linking East Asian producers to Western consumers, leading Korean garment vendors have

16

J. LEE ET AL.

become multinational, first-tier suppliers (FTSs) for U.S. and European brands and retailers. As a result of intensive efforts to go overseas to reduce production costs, these FTSs now have strong footprints across Asia and Central America. Despite their significant presence in garment GVCs, little research has been done on the history and current state of the Korean garment sector in GVCs, particularly leading FTSs. This chapter aims to fill this research gap, first, by revisiting the history of the Korean garment industry from a GVC perspective, starting from its initial industrial built-up and subsequent export growth in the 1960s–1980s to a massive migration of production to lower-cost locations in China and South/Southeast Asia throughout the 1990s. Based on the statistics on international trade and foreign direct investment (FDI), this chapter then examines the changing geographic and organizational features of Korean FTSs’ production network over the last two decades, a period interspersed with the Asian economic crisis, the end of the Multi-Fiber Arrangement (MFA), the rise of ‘fast fashion,’ and the global financial crisis. The findings are discussed in the context of the shifting dynamics of governance in post-crisis garment GVCs and the challenges the Korean FTSs confront in the rapidly changing apparel GVCs in terms of market, technology, and regulation. Chapter ‘Korea’s Multinational Garment Suppliers: Growth Through Disintermediation’ (Solee Shin) This chapter examines multinational garment suppliers as an emergent organizational entity that is playing an increasingly prominent role in orchestrating global garment supply chains. Suppliers’ competitive advantage stems from complementarities generated through internal coordination of geographically dispersed plants which enables suppliers to orchestrate production along buyers’ varied priorities of cost, volume, speed, and flexibility. Offshoring no longer simply constitutes effort to reduce cost or navigate quota restrictions but also encompasses suppliers’ efforts to rationalize complex production operations. Multinationalization, however, tends to be overlooked in the extensive GVC (Global Value Chain) literature on supplier capability building. I illustrate the centrality of multinationalization through an examination of the growth of Korea’s garment suppliers. Chapter ‘Toward a Bipolar Apparel GVC? From the Perspective of First-Tier Suppliers’ (Hyunji Kwon, Jinsun Bae, Joonkoo Lee and Sun Wook Chung)

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

17

This case study of a Korea-based apparel first-tier supplier hypothetically examined the evolution of Global Value Chains (GVCs) toward a bi-polar governance structure in the apparel industry, a stronghold of lead-firm dominant and uni-polar chain. It also hypothesized that strategic suppliers’ emergence is a necessary condition for the governance transformation toward bipolarity. Company K provides a compelling case to corroborate this hypothesis as it fulfilled a wide array of value chain functions that encourage buyers to form collaborative relationships with them. Our single case study provides a multi-level analysis of how the bipolarity has emerged (global, industry-level, and organizational-level). Its unique contribution to the germane literature is the articulation of organizational strategies that these suppliers undertook to stay costcompetitive while building capability. Supplier upgrading tends to focus on capability building with less regard to how they manage their human resources and ways of working. In this study, we give due attention to organizational changes these first-tier suppliers undertake to secure and improve their positions within GVCs, which holds useful managerial insight for emerging MNEs hoping to do the same. Chapter ‘A Hidden Champion? An Experimental Journey for Digital Integration of a First-Tier Supplier in the Apparel GVCs’ (Hyunji Kwon and Seri No) The purpose of this chapter is to investigate the process by which a Korean garment manufacturer, SuppZ has evolved into one of the major strategic suppliers as an emerging multinational within apparel global value chains (GVCs). In light of recent consolidation strategies implemented by U.S. buyers for GVCs, which involve shedding production-related functions and focusing investment on marketing and sales, first-tier suppliers (FTSs) seize the opportunities for a further upgrade by establishing competitive differentiation strategies while still maintaining their price leadership. This chapter explores one such differentiation strategy employed by an FTS through a single case study. The strategy involves embracing the smart factory movement gradually and experimentally, resulting in a hybrid production approach that combines price-competitive mass production with flexible product diversification and labor-intensive production with machine-controlled production. While this movement is widely discussed in the apparel industry, its implementation poses significant challenges, including a substantial initial investment that can be a major risk for a manufacturer operating on very narrow margins. In addition, there is little accumulated

18

J. LEE ET AL.

knowledge on applying smart factory systems to pliable fabric materials, and the company lacks experience in adopting advanced and automated production processes. Moreover, the company must justify the potential employee outcome of downsizing resulting from digitalization. This chapter focuses on how the company has utilized institutional resources and its organizational capabilities to effect changes as an organizational outcome. Chapter ‘Formalizing Foreign Manufacturer Status While Deepening Local Embeddedness: Korean Manufacturers in Myanmar’s Export-Oriented Apparel Industry’ (Jinsun Bae) In Myanmar’s export-oriented apparel industry, foreign manufacturers, accounting for nearly two-thirds of the factories, play a significant role in the industry’s development. This paper focuses on Korean manufacturers that have maintained a long-standing and sizeable presence in the country. They played a part in starting Myanmar’s export-oriented apparel industry and sustaining it through economic sanctions. The industry experienced profound changes following the country’s 2011 reform and the subsequent easing of the sanctions. The Myanmar government strengthened its legal labor regime with the assistance of international actors, and newly available European and North American buyers require suppliers to comply with their private labor standards. Korean manufacturers adapted to these changes and formalized their collective identity as industry stakeholders. Central to this formalization process is Korean Garment Manufacturer Association in Myanmar. That formalization was propelled by greater participation of small and entrepreneurial manufacturers in the association’s governance and rapid industry-level changes necessitating better information flow within the membership and strategic representation of their collective interests to external actors. This historical overview underscores the Korean manufacturers’ high adaptability to changing local and value chain contexts. They have simultaneously pursued being competent suppliers for international buyers and conforming to local rules and norms. Since the Covid-19 pandemic and the return of the military junta, the industry’s growth has come to an abrupt halt. International buyers ceased sourcing from Myanmar, and a nosedive in orders forced factory closure and layoff of workers whose livelihoods are at severe risk. Korean manufacturers and their association are currently grappling with the question of how to adapt to this uncertain business environment.

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

4

19

Conclusion

The Covid-19 pandemic has drastically changed the landscape of the global economy. In apparel, it caused a series of disruptions along the global supply chains and posed serious challenges to the way in which the apparel industry operated. The concentration of production in China and other developing countries amplified the impact of the pandemic and the ensuring disruptions caused by factory lockdown and travel restrictions. At the same time, the retail disruption caused by widespread lockdown in the U.S. and Europe jeopardized the supply chains as retailers responded to it by canceling orders and delaying payments to suppliers. According to Anner (2022), brands and retailers were estimated to cancel their orders amounting to US$40 billion in the early stage of the pandemic. Suddenly, such actions generated a huge ripple effect along the chains, leading to massive layoffs in many apparel factories across developing countries and hitting hard the most vulnerable people in the industry such as migrant workers who were stuck in between. While buyers were forced to pay US$21 billion to suppliers for canceled orders in the face of push back from workers advocates, outspoken suppliers, and media reports, it did not stop the practice of ‘squeezing the middlemen,’ reaffirming the established power disparity in buyer-driven apparel GVCs. The interviews we conducted during the pandemic show that facing a series of order cancellations, Korean FTSs scrambled to avoid work stoppage and adapt to rapidly evolving situations at home and abroad. They kept monitoring the business situation of their buyers by constantly communicating with them and managed to keep pace with government quarantine measures in host countries. Although the number is still unknown, many of Korean apparel suppliers failed to weather the crisis and eventually had to close their factories. Yet, the interviews also show that resilience was a key in turbulent times. Some of the interviewees said that building trust with buyers had become more important than ever, and adaptive strategies such as quickly securing new, albeit smaller, orders to fill the gap and shifting orders from one to another factory also helped to keep factories running and avoid a large scale of layoffs. Some firms even switched to production of face masks to minimize the financial damage caused by order shortage at the same time to retain most of their workers even during the most challenging period (Park et al., 2020). This must be a partial picture given the scale of the crisis in contrast to our accessibility to firms and workers. We still have highly limited information

20

J. LEE ET AL.

about how Korean apparel suppliers, big or small, have been affected by the pandemic and who, and how, has been able to ride out the crisis. Therefore, future research is needed to better understand their experiences during and after the pandemic as well as their realities and future strategies in the post-pandemic apparel industry.

References Anner, M. J. (2022). Power relations in global supply chains and the unequal distribution of costs during crises: Abandoning garment suppliers and workers during the COVID-19 pandemic. International Labour Review, 161(1), 59– 82. Appelbaum, R. P. (2008). Giant transnational contractors in East Asia: Emergent trends in global supply chains. Competition & Change, 12(1), 69–87. Appelbaum, R. P., & Gereffi, G. (1994). Power and profits in the apparel commodity chain. In E. Bonacich, L. Cheng, N. Chinchilla, N. Hamilton, & P. Ong (Eds.), Global production: The apparel industry in the Pacific Rim (pp. 42–62). Temple University Press. Appelbaum, R. P., Smith, D., & Christerson, B. (1994). Commodity chains and industrial restructuring in the Pacific Rim: Garment trade and manufacturing. In G. Gereffi & M. Korzeniewicz (Eds.), Commodity chains and global capitalism (pp. 187–204). Greenwood Press. Athukorala, P.-c. (2011). Production networks and trade patterns in East Asia: Regionalization or globalization? Asian Economic Papers, 10(1), 65–95. Azmeh, S., & Nadvi, K. (2014). Asian firms and the restructuring of global value chains. International Business Review, 23(4), 708–717. Bair, J., & Gereffi, G. (2001). Local clusters in global chains: The causes and consequences of export dynamism in Torreon’s blue jeans industry. World Development, 29(11), 1885–1903. Bárcia de Mattos, F., Eisenbraun, J., Kucera, D., & Rossi, A. (2021). Disruption in the apparel industry? Automation, employment and reshoring. International Labour Review, 160(4), 519–536. Berg, A., Hedrich, S., Lange, T., Magnus, K.-H., & Mathews, B. (2017). Digitization: The apparel sourcing Caravan’s Next Stop. McKinsey Apparel, Fashion & Luxury Group. Retrieved from https://www.mckinsey.com/ industries/retail/our-insights/digitization-the-next-stop-for-the-apparel-sou rcing-caravan Bonacich, E., Cheng, L., Chinchilla, N., Hamilton, N., & Ong, P. (Eds.). (1994). Global production: The apparel industry in the Pacific Rim. Temple University Press.

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

21

Cattaneo, O., Gereffi, G., & Staritz, C. (2010). Global value chains in a Postcrisis World: Resilience, consolidation, and shifting end markets. In O. Cattaneo, G. Gereffi, & C. Staritz (Eds.), Global value chains in a Postcrisis World: A development perspective (pp. 3–20). World Bank. Choi, B.-i., & Rhee, C. (eds.) (2014). Future of factory Asia. Asia Development Bank & Korea Economic Research Institute. Chung, S. W., Kwon, H., Bae, J., & Lee, J. (2021). A double-edged sword of strong ties: The case of a Korean MNC and its labor auditing. Journal of Asian Sociology, 50(1), 33–53. Dolan, C., & Humphrey, J. (2004). Changing governance patterns in the trade in fresh vegetables between Africa and the United Kingdom. Environment and Planning A, 36(3), 491–509. Ferner, A., Edwards, T., & Tempel, A. (2012). Power, institutions and the crossnational transfer of employment practices in multinationals. Human Relations, 65(2), 163–187. Geppert, M., Becker-Ritterspach, F., & Mudambi, R. (2016). Politics and power in multinational companies: Integrating the international business and organization studies perspectives. Organization Studies, 37 (9), 1209–1225. Gereffi, G. (1994). The organization of buyer-driven global commodity chains: How US retailers shape overseas production networks. In G. Gereffi & M. Korzeniewicz (Eds.), Commodity Chains and Global Capitalism (pp. 95–122). Greenwood Press. Gereffi, G. (1999). International trade and industrial upgrading in the apparel commodity chains. Journal of International Economics, 48(1), 37–70. Gereffi, G. (2005). The global economy: Organization, governance, and development. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (pp. 160–182). Princeton University Press. Gereffi, G., & Frederick, S. (2010). The global apparel value chain, trade, and the crisis: Challenges and opportunities for developing countries. In O. Cattaneo, G. Gereffi, & C. Staritz (Eds.), Global value chains in a Postcrisis World: A development perspective (pp. 157–208). World Bank. Gereffi, G., Lim, H.-C., & Lee, J. (2021). Trade policies, firm strategies, and adaptive reconfigurations of global value chains. Journal of International Business Policy, 4(4), 506–522. Horner, R., & Nadvi, K. (2018). Global value chains and the rise of the Global South: Unpacking twenty-first century polycentric trade. Global Networks, 18(2), 207–237. Kern, P., Almond, P., Edwards, T., & Tregaskis, O. (2019). Multinational and transnational organizations. In A. Sturdy, S. Heusinkveld, T. Reay, & D. Strang (Eds.), The Oxford handbook of management ideas (pp. 176–194). Oxford University Press.

22

J. LEE ET AL.

Kraemer, K. L., Linden, G., & Dedrick, J. (2011). Capturing value in global networks: Apple’s iPad and iPhone. Personal Computing Industry Center, University of California, Irvine. Retrieved from http://pcic.merage.uci.edu/ papers/2011/Value_iPad_iPhone.pdf Kwon, H., Bae, J., & Kim, S. (2021a). Introduction: Emerging MNCs and socioeconomic dynamics in Asia. Journal of Asian Sociology, 50(1), 1–8. Kwon, H., Chung, S. W., & Lee, J. (2021b). South Korean first-tier suppliers in apparel global value chains: Upgrading and labour implications in the Asian context. International Labour Review, 160(4), 553–569. Lee, J. (2016). Global supply chain dynamics and labour governance: Implications for social upgrading. International Labour Office. Retrieved from http://www.ilo.org/wcmsp5/groups/public/---dgreports/---inst/doc uments/publication/wcms_480957.pdf Lee, J., & Gereffi, G. (2013). The co-evolution of concentration in mobile phone global value chains and its impact on social upgrading in developing countries. University of Manchester. Retrieved from http://www.capturingthe gains.org/publications/workingpapers/wp_201325.htm Lee, J., Gereffi, G., & Beauvais, J. (2012). Global value chains and agrifood standards: Challenges and possibilities for smallholders in developing countries. Proceedings of the National Academy of Sciences of the United States of America, 191(31), 12326–12331. Lee, J., Lee, S.-H., & Park, G. (2018). Revisiting the miracle: South Korea’s industrial upgrading from a global value chain perspective. In D. Nathan, M. Tewari, & S. Sarkar (Eds.), Development with global value chains: Upgrading and innovation in Asia (pp. 316–348). Cambridge University Press. Lee, J., & Lim, H.-C. (2018). Mobile Asia: Capitalisms, value chains and mobile telecommunication in Asia. Seoul National University Press. Lee, K., & Jung, M. (2015). Overseas factories, domestic employment, and technological hollowing out: A case study of Samsung’s mobile phone business. Review of World Economics, 151(3), 461–475. Locke, R. M., & Romis, M. (2010). The promise and perils of private voluntary regulation: Labor standards and work organization in two Mexican garment factories. Review of International Political Economy, 17 (1), 45–74. Lopez-Acevedo, G., & Robertson, R. (Eds.). (2012). Sewing success? Employment, wages, and poverty following the end of the multi-fibre arrangement. World Bank Publications. Merk, J. (2014). The rise of tier 1 firms in the global garment industry: Challenges for labour rights advocates. Oxford Development Studies, 42(2), 259–277. Park, M.-J., Kim, Y. B., Eom, E. E., Lee, J. L., & Jeon, J. S. J. (2020). Indoneshia nodongch’ejewa han’guk ki˘obui ˘ ch˘okunge ˘ kwanhan y˘on’gu [A study on the labor regime in Indonesia and Korean Firms’ adaptation]. Korea Labor Institute. Retrieved from https://www.kli.re.kr/downloadPblFile.do?atchmn flNo=22593

INTRODUCTION: GLOBALIZATION, VALUE CHAIN …

23

Raj-Reichert, G. (2019). The role of transnational first-tier suppliers in GVC governance. In S. Ponte, G. Gereffi, & G. Raj-Reichert (Eds.), Handbook on global value chains (pp. 354–369). Edward Elgar. Ramamurti, R., & Singh, J. V. (2009). Emerging multinationals in emerging markets. Cambridge University Press. Rodriguez-Garavito, C. A. (2005). Global governance and labor rights: Codes of conduct and anti-sweatshop struggles in global apparel factories in Mexico and Guatemala. Politics & Society, 33(2), 203–333. Scherer, A. G., & Palazzo, G. (2011). The new political role of business in a globalized world: A review of a new perspective on CSR and its implications for the firm, governance, and democracy. Journal of Management Studies, 48(4), 899–931. Shin, S. I. (2019). Transforming into fashion firms or multi-country suppliers? Accounting for varied firm trajectories in the deindustrialising Korean apparel industry. Journal of Development Studies, 55(1), 1–18. Smith, D. A. (1996). Going south: Global restructuring and garment production in three East Asian cases. Asian Perspective, 20(2), 211–241. Taplin, I. M. (2014). Who is to blame? A re-examination of fast fashion after the 2013 factory disaster in Bangladesh. Critical Perspectives on International Business, 10(1/2), 72–83. Tewari, M. (2008). Deepening intraregional trade and investment in South Asia: The case of the textiles and clothing industry. Indian Council for Research on International Economic Relations (ICRIER) Working Paper, Retrieved from https://eaber.org/wp-content/uploads/2011/05/ICRIER_ Tewari_2008.pdf. Tokatli, N. (2008). Global sourcing: Insights from the global clothing industry – The case of Zara, a fast fashion retailer. Journal of Economic Geography, 8(1), 21–38. Tran, N., Bailey, C., Wilson, N., & Phillips, M. (2013). Governance of global value chains in response to food safety and certification standards: The case of shrimp from Vietnam. World Development, 45, 325–336. Whitfield, L., Marslev, K., & Staritz, C. (2021). Can apparel export industries catalyse industrialisation? Combining GVC participation and localisation. Retrieved from https://www.uj.ac.za/wp-content/uploads/2021/10/sarchiwp-2021-01-whitfield-et-al-march2021-updated.pdf Wood, S., Coe, N. M., Watson, I., & Teller, C. (2019). Dynamic processes of territorial embeddedness in international online fashion retailing. Economic Geography, 95(5), 467–493. Zhu, S., & Pickles, J. (2014). Bring in, go up, go west, go out: Upgrading, regionalisation and delocalisation in China’s apparel production networks. Journal of Contemporary Asia, 44(1), 36–63.

Expanding Overseas, Becoming Multinational, and Moving Up the Value Chain: Three Waves of Globalization in the Korean Apparel Industry Joonkoo Lee

1

and Hyun-Chin Lim

Introduction

South Korea’s economy has significantly transformed since the Asian economic crisis of the late 1990s. A key development is the increasing presence of Korean business overseas. The country is the headquarters of many globally known brand giants like Samsung, LG, and Hyundai, exemplifying Korean prowess particularly in manufacturing. Less known is the important role of Korean firms in global apparel production. Such companies have increased exports through its tight integration of apparel global value chains (GVCs). Korea is considered one of the most successful cases of upgrading in buyer-driven GVCs (Gereffi, 1999; Lee

J. Lee (B) School of Business, Hanyang University, Seoul 04763, South Korea e-mail: [email protected] H.-C. Lim Department of Sociology, Asia Center, Seoul National University, Seoul 08826, South Korea e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. Lee et al. (eds.), Knitting Asia, Weaving Development, https://doi.org/10.1007/978-981-99-3764-6_2

25

26

J. LEE AND H.-C. LIM

et al., 2018). Similar to Taiwan and Hong Kong, Korea joined the international division of labor as an offshore apparel exporter in the 1960s and rapidly expanded its exports over the next three decades. Since the 1990s, many Korean apparel firms have increased their overseas investment, expanding into multinational suppliers for global buyers. The globalization of Korean apparel firms provides an interesting case to study on several fronts. First, Korean firms are generally latecomers of multinationalization compared to Western multinational enterprises (MNEs). Korean MNEs first engaged in outward foreign direct investment (FDI) in the early 1980s, initially in sales and production and later in research and development (R&D) and other advanced functions. Thus, they are often considered as emerging market MNEs (EMNEs), although they are not necessarily similar to MNEs from China, India, or Brazil in the multinationalization process (Ramamurti & Singh, 2009). Second, much attention in Korea has been paid to globalization of chaebol , a large Korean conglomerate, and their prominent affiliates, such as Samsung Electronics, Hyundai Motors, and LG Electronics. Less known is how small- and medium-sized enterprises (SMEs) like Korean apparel producers, with their limited resources, have grown to be multinational, what challenges they have confronted, and how they have responded to those challenges (Shin, 2019). Finally, Korean apparel firms play an important role in apparel GVCs and have grown through tight linkage to their Western retail buyers. Unlike chaebol firms, which mostly do business with their own brands, many apparel producers have focused on production and upgrading to upstream activities (e.g., textile, design) to better cater to branded buyers (Kwon et al., 2021).1 This chapter first discusses governance and upgrading in apparel GVCs, specifically in East Asia, and documents Korea’s integration into apparel GVCs since the 1960s. It then examines three waves of globalization of the Korean garment industry from the 1990s. The final section concludes with a discussion of the case in the context of globalization of Korea’s economy and industry, focusing on the dynamics in apparel GVCs since the global financial crisis of the late 2000s and the challenges posed to Korean apparel multinationals.

1 This chapter does not address domestic original brand manufacturing (OBM) trajectories of most chaebol companies or their globalization. See Shin (2019) for more.

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

27

2 Governance and Upgrading in Apparel GVCs: The Asian Context The apparel industry, while often considered labor-intensive, remains vital to the global economy. In 2021, the world’s garment exports amounted to US$549 billion, 4% of the world’s manufacturing exports when combined with textile exports (US$354 billion).2 In 2019, the textiles and garment sectors, taken together, employed globally about 91 million workers, and in garment manufacturing the percentage of women workers has been estimated to be about as high as 80% (Bárcia de Mattos et al., 2022). Garment manufacturing, thus, has long been considered an entry-level export industry for many developing countries, serving as a stepping stone to export-driven industrialization (Bonacich et al., 1994; Gereffi, 1999). Still, the majority of the world apparel production is conducted in the global South, and 73% of the world’s apparel exports in 2014 were from developing to developed countries (Lee, 2016). The link between the South as a production site and the Northern consumer market is buyer-driven GVCs, which are typical in the apparel industry. Global buyers, such as large retailers and brand merchandisers, are lead firms that determine who, when, what, and where to produce, using extensive networks of independent offshore suppliers for production (Gereffi, 1994, 1999). Buyers from the US and Western Europe, leveraging their accessibility to the large consumer markets, exercise power over supplier entry into their supply chains and value capture therein. Since the 1960s, Western buyers have expanded offshore outsourcing networks to the South, notably East Asia, in search for lower-cost production opportunities. By joining the buyer-driven chains, Asia has since played a key part in global apparel production (Appelbaum et al., 1994; Bonacich et al., 1994; Smith, 1996). Within Asia, the location of apparel production shifted significantly over time. The sector historically represented a “geese-flying” model of industrial development, exemplifying a pattern of sequential upgrading (Gereffi, 2005). Japan, Korea, Taiwan, and Hong Kong were all major garment exporters at some point from the 1960s to the 1980s. Later, labor-intensive operations like cut-make-trim (CMT) gradually moved away from these newly industrializing countries (NICs) in the face of 2 Compiled from The World Trade Organization’s STAT Dashboard (https://stats.wto. org/dashboard/merchandise_en.html) on March 18, 2023.

28

J. LEE AND H.-C. LIM

quota shortages and higher production costs. This led to the rise of China, Vietnam, Indonesia, India, Bangladesh, Cambodia, and, recently, Myanmar as the major sources of apparel exports and employment within the region, mostly based on foreign direct investment from East Asian NICs. Meanwhile, Japan and other East Asian NICs moved from original equipment manufacturing (OEM) to higher value-added activities, such as original design manufacturing (ODM) and textile and machinery production. These led to the rise of “triangle manufacturing,” whereby the US buyers placed their orders with NIC manufacturers, which were then forwarded to their offshore factories and their contractors in lowercost countries where final products are made with imported inputs from NICs and directly shipped to the buyers under the US quota allocated to the exporting countries (Gereffi, 1999). In 1980, Japan, Korea, Taiwan, and Hong Kong accounted for 65% of US imports. In 2019, the three leading Asian garment exporters of China, Bangladesh, and Vietnam represented 44% of the world’s total. The change indicates a significant locational shift in Asian apparel exports and the evolving role of the countries in global and regional division of labor. Over the last decade or so, particularly after the global financial crisis, important developments restructured the apparel GVCs. First, since the 1970s, the quotas of apparel exports to US and European markets were regulated by Multi-Fiber Arrangement (MFA), and its phase-out in 2005 reshaped the geography of apparel production (Lopez-Acevedo & Robertson, 2012). In post-MFA, apparel production further concentrated in China while garment producers continued to search for new lower-cost locations as production costs rose in coastal China (Zhu & Pickles, 2014). Locations like Vietnam and other ASEAN countries have emerged, and some firms have relocated to East African countries, such as Ethiopia (Whitfield et al., 2020). Still, international trade arrangements facilitating market access to key end markets with preferential tariffs play a persisting role in influencing the geography of production. At the same time, in response to fast-changing market demands, or “fast fashion,” shorter lead time and time-to-market (or order-to-delivery) have been emphasized along the supply chains (Tokatli, 2008). This has facilitated some demand-sensitive orders to be placed with producers closely located to the end markets (e.g., Central America for US buyers). Second, in response to the changing retail landscape, growing competition in the sector (Li et al., 2019; Wood et al., 2019), and the rise of fast fashion with a strong emphasis on quicker response to market

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

29

trends alongside greater variety and cost reduction (Tokatli, 2008), global apparel buyers have increasingly consolidated and rationalized their supplier base, working with a smaller set of established suppliers with multinational presence (Gereffi & Frederick, 2010). These multinational suppliers, or “first-tier suppliers” (FTSs), have greater flexibility by working across multiple offshore production locations, often across regions, product categories, and market segments. With greater financial and organizational capabilities, these mega-suppliers buffer environmental changes transferred from the buyers and handle more complex tasks such as R&D and logistics on behalf of the buyers. This helps them cut costs and invest in new domains like information technology (IT)-based market analytics. At the same time, global buyers increasingly move their buying offices closer to production locations (e.g., from Hong Kong and Seoul to Ho Chi Minh) to facilitate more direct and quicker communication with supplier factories along with closer oversight of production and compliance matters. This prompts internationalization of additional supplier functions beyond production (e.g., sales and marketing, production design, management) to accommodate buyer demands. Finally, an emphasis on labor and environmental standards, including building safety, has been significantly strengthened, particularly after the Rana Plaza tragedy in 2013, along all garment GVCs. Although compliance on such standards is much more important for accessing Western markets than Asian markets, the overall scrutiny from the buyers and civil society toward large multinational suppliers exporting to Western brands has been strengthened, as shown in the experience of Hansae, one of the leading Korean FTSs (Brown, 2017). Now the suppliers are well aware that social compliance has become critical for them to maintain their supply relationship with their buyers (Kwon et al., 2021). At the same time, with concern that any violations of standards by their suppliers (both first- and lower-tier) would negatively impact their brand image and undermine their corporate social responsibility (CSR) efforts, buyers prefer to work with a smaller set of established buyers that can accommodate compliance requirements. This has contributed to further supplier consolidation in favor of large established suppliers and highlights FTSs as an important intermediary for archiving supply chain transparency in the apparel GVCs. All these developments have facilitated the rise of first-tier suppliers in garment GVCs. In apparel, Asian multinational FTS have played a

30

J. LEE AND H.-C. LIM

key role in the operation of garment GVCs, expanding their production networks beyond Asia to Central America and Sub-Saharan Africa. Notably, Li & Fung has grown in apparel from a simple trading firm or supplier to transnational mega-suppliers, linking Western buyers and lower-tier suppliers and providing extra services and functions for production (e.g., design, sourcing, and logistics). Outside of Korea, Taiwan- or Hong Kong-based major FTSs include Nien Hsing , Crystal Group, TAL Group, and Makalot Industrial Co. These suppliers operate in several countries within and outside Asia, employ over 20,000 workers worldwide, and earn over $1 billion of annual revenue (Azmeh & Nadvi, 2014).3 According to the literature (Azmeh & Nadvi, 2014; Merk, 2014), FTSs have many commonalities. In terms of value chain relationships, they maintain relatively stable commercial relations with global buyers and have upgraded to full-package production (and further ODM and service provision). They generally have multiple operations, domestic and overseas, and production sites. Production is conducted not only in their in-house factories, but also at third-party factories through outsourcing. Such locations play a buffering role for buyers by accommodating postponement strategy and providing diverse location options (far-shoring vs. near-shoring).4 However, FTSs generally have no brands and face limited access to global end markets beyond their home country, relying on the buyer’s channel for distribution, sales, and marketing. FTSs play a key role in employing and managing a large group of workers in the apparel sector, which is women centered and clustered in developing countries. Sub-standard working conditions in many apparel factories in developing countries have been the focus of criticism of the sector from NGOs and the media. Generally, working conditions at FTS factories are considered better than those at lower-tier suppliers, but most FTSs only pay workers the legal minimum. Many of their labor practices, including antilabor union practices, have been subject to social audits by buyers and 3 Increasing complexity in GVCs has prompted the rise of multinational mega-suppliers, consolidating supply chains at the first-tier level in many industries, with notable examples of Li & Fung (apparel), Yue Yuen (footwear), and Foxconn (electronics) (Appelbaum, 2008). 4 Postponement refers to a strategy of delaying certain activities (e.g., design, raw material sourcing, or manufacturing) until later in the production process when uncertainties become lower. It is widely used to save costs and minimize obsolescence in the apparel sector where market demand and trends change quickly.

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

31

third-party auditors. Even though public scrutiny on social compliance is increasing for suppliers of well-known brands, FTSs are still less likely to be subject to consumer boycotts than are their branded buyers because most consumers are unaware of their names and brands. However, labor compliance is critical for presence in the buyer’s supply chain, as explained above, so they take increasingly active approaches to maintain social compliance. As more FTSs upgrade functionally and expand geographically, as indicated in Fig. 1, there is a rising question about their role and position in garment GVCs, particularly vis-à-vis global buyers. Despite the expanded functions and roles, do they still have largely dependent and subordinate ties with global lead firms, subject to buyer strategies of squeezing middlemen and using them as buffers to maintain control and profitability? Or are they increasingly playing an important role as “giant transnational contractors” (Appelbaum, 2008) sufficient to be called “strategic and pivotal” firms, or “the instigators, or at the very least the managers, of organizational and geographical restructuring of the global garment value chain” (Azmeh & Nadvi, 2014, p. 709)? A further question is whether the rise of such multinational suppliers led to a shift of apparel GVC governance toward “bi-polar” governance between global buyers and their strategic mega-suppliers (Kwon et al., 2021). The answers to these questions allow us to rethink the power structure of apparel GVCs and upgrading strategies not only for economic, but also social and environmental upgrading.

3

Exporting Through Integration to Garment GVCs: 1960s–1980s

After the Korean War (1950–1953), Korea had to rebuild its textile and clothing industry. The war destroyed most of the existing textile factories in the southern part of the peninsula, many of which had served the Japanese market during the era of colonial rule by Japan (1910–1945) and laid the groundwork for the country’s modern clothing industry (Lee, 2012, p. 28). Throughout the 1950s, foreign aid played a part in the early period of rebuilding, with low-price raw cotton and foreign equipment flowing in, mainly from the US. The Korean government supported an import-substitution policy, focusing on fulfilling domestic consumer demand. However, as foreign aid began to dry up and nascent opportunities for exporting arose in the early 1960s, Korea shifted to export-driven

Fig. 1 Apparel global value chains and the expanding role of FTS (Source Adapted from Gereffi and Memedovic [2003])

32 J. LEE AND H.-C. LIM

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

33

industrialization. The shift characterized the industry in the next four decades (Lee et al., 2018). The shift to export-led industrialization in the 1960s was spurred by multiple new developments at home and abroad. Initial orders for exporting simple clothing items such as baby sets to the US and Western European markets arrived in Korea in the early 1960s, mainly through Japanese general trading companies (sogo shosha). Companies like Cheil, Kolon, and Bando, which later became chaebol through diversification, began to address such orders in-house or through subcontractors.5 These big firms were soon joined by smaller firms specializing in garment exportation (Shin, 2019). By the late 1960s, the linkages to foreign export markets had stabilized due to macro-political and economic changes. Basic diplomatic relations were re-established between Korea and Japan in 1965, which facilitated foreign investment inflows from Japan. In addition, the government constructed export-oriented industrial complexes in anticipation of foreign investment inflows. Notably, the Guro Industrial Complex (GIC) was established in Seoul in 1964 as the first of its kind and quickly emerged as the center of the country’s garment exports. In 1982, the textile and garment sector (SIC 17 & 18) accounted for 66 of 211 establishments in GIC, 31%, followed by electronics (18%) and electronic machinery (9%) (Ch˘ong, 1994). For many of their founding years, garment firms in the GIC mostly engaged in outward processing such as CMT, with raw materials supplied by buyers from Japan, the US, and Western Europe (Lee et al., 2018). Yet, by the late 1960s, some big OEM exporters had eliminated Japanese trading companies and worked directly with foreign buyers, indicating growing independence (Shin, 2019). By 1967, Korea’s textile and garment exports amounted to less than $100 million, but they increased dramatically in the next three decades. Korea passed a $1 billion mark in 1974, and in just two decades, it increased its textile and clothing (T&C) exports to more than $10 billion, recording $11.8 billion in 1988. As the country upgraded to higher valueadded segments of the apparel GVCs, such as textile and fiber production, exports continued to grow rapidly, reaching a peak in 2000 with $18.8 billion, as shown in Fig. 2. As the exports rapidly increased, the T&C sector became a major source of the country’s exports. In 1972, the 5 Cheil was part of the Samsung Group. Kolon became one of the few chaebols mainly based on textiles. Bando was a trading arm of the Lucky GoldStar Group (later renamed LG Group).

34

J. LEE AND H.-C. LIM 60%

Clothing & textile exports Share of Korea's total exports

18,000

50%

16,000 14,000

40%

12,000 10,000

30%

8,000 20%

6,000 4,000

10%

Share of Korea's total exports (%)

Clothing and textile exports (USD million)

20,000

2,000 0

0% 1965

1969

1974

1978

1982

1986

1990

1994

1998

Fig. 2 Korea’s apparel exports, 1965–2000 (Source Global Trade Statistics System, Korean International Trade Association [KITA])

Table 1 %) Year

1965 1970 1975 1980 1985 1990

East Asia countries’ share in US apparel imports, 1965–1990 (Unit:

Textile (SITC code 65)

Garment (SITC code 84)

Japan

Hong Kong

Taiwan

Korea

Japan

Hong Kong

27.5 26.6 22.0 15.4 15.1 9.0

3.1 3.9 5.7 5.0 3.5 3.2

0.9 1.1 3.0 4.5 7.9 6.9

0.8 1.2 2.3 4.7 6.6 7.6

25.9 21.8 6.0 3.1 3.2 0.6

21.1 20.9 23.3 25.6 21.8 15.7

Taiwan Korea 2.1 11.6 17.1 20.0 15.4 9.7

2.0 9.3 15.2 16.3 15.3 12.6

Note Imports from “Other Asia, nowhere else specified” were counted as imports from Taiwan Source Compiled from UN Comtrade

sector’s share soared to 54% of Korea’s total exports, although it quickly declined as the country expanded its export portfolio to a diverse set of products, including steel, shipbuilding, automobile, and electronics, in the ensuing decades. Garment exports reached a historical peak in 2000, and the sector’s share amounted to 11% of the country’s total exports (Lee et al., 2018).

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

35

This dramatic growth of exports was supported by continuing inflow of offshore outsourcing orders and it was primarily attributed to expanding outsourcing by US and European apparel buyers such as retailers like Kmart and branded merchandisers to developing country suppliers. In East Asia, Japan was the initial destination, but Japanese firms soon farmed out some of their production to suppliers in Hong Kong, Taiwan, and Korea (Appelbaum & Gereffi, 1994; Gereffi, 1999). These four East Asian countries’ textile and clothing exports to the US market in 1965– 1990 are presented in Fig. 3 and Table 1. In 1965, Japan accounted for 27% of the US’s total T&C imports and more than half of those from the four countries while Korea’s share was merely 1.3%. However, Japan lost its leading position in the early 1970s as more exports originated from its regional neighbors. Overtaking Japan, Hong Kong became the leading T&C exporter to the US in 1974, and Korea surpassed Japan in 1976. For Taiwan and Korea, much of this dramatic advancement was attributed to the rapid rise of garment exports. As shown in Table 1, both economies nearly doubled their share in the US garment import market in 1970–80, and the share of Japan plummeted from 22 to 3%. Yet Japan’s leading position maintained in textiles until the late 1980s. This shows the changing division of the labor structure among East Asia countries in T&C exports to the US market, with Japan moving up to the supply of textiles, the upstream node of the value chains, while the others focused on producing and exporting apparel products. At the same time, the continuing inflow of offshore outsourcing orders was facilitated by Korean firms’ efforts to upgrade and capture greater value on multiple fronts. Large producers increasingly worked directly with Western buyers, reducing their dependence on Japanese trading companies as middlemen. This helped to increase gains from outsourcing orders and learning about the market by directly accessing the buyer’s understanding of market situations and consumer trends (Appelbaum & Smith, 2002). The Japanese middleman was eliminated further as Western buyers began to establish their own purchase offices or use buying agents in Seoul (Lee & Oh, 2010). Furthermore, some suppliers moved up to cater to more prominent foreign buyers with higher value-added and/or higher volume orders or by working with “big players.” This required the suppliers to improve their skills and capabilities in production and management, build higher production capacity, and increase capital investment. In earlier years, many local producers relied on

Billions USD

36

J. LEE AND H.-C. LIM 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1965

1967

1969

1971

Japan

1973

1975

1977

Hong Kong

1979

1981

Taiwan

1983

1985

1987

1989

Korea

Fig. 3 East Asian countries’ apparel exports to the US, 1965–1990 (Source Compiled from UN Comtrade)

buyers and intermediaries to secure inputs and credits, but they increasingly became independent as they accumulated knowledge and skills in production and handled more complex or larger orders, advancing their demand-responsive ability (Hamilton & Gereffi, 2009). Finally, Korea made progress in domestically producing some key input materials, notably chemical and synthetic fibers (Korea Federation of Textile Industries, 2014). The progress was attributed to technology flows from Japan. In the midst of upgrading, Japanese clothing firms expanded exports of second-hand equipment and technology transfers to Korea (and Taiwan) through joint investment (Korea Institute for Industrial Economics & Trade, 1997, p. 579). Progress was also due to establishment of domestic petrochemical complexes as part of the state-led Heavy and Chemical Industry Promotion Initiative in the 1970s. The developments facilitated Korea’s upgrading to chemical fiber production, creating vertically integrated backward linkages from garment to fiber production. As a result, Korea emerged as one of the largest garment-exporting countries by the end of the 1980s and continued to show steady export growth in the ensuing decade. The Plaza Accord (1985), which led to a strong Japanese yen, particularly boosted Korean exporters’ price competitiveness in overseas markets. In 1985–1989, Korea’s T&C exports doubled from $7.1 billion to $15.2 billion (see Fig. 2), marking the golden era of the country’s apparel industry.

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

37

4 Three Waves of Globalization in the Korean Apparel Industry In 2000, when Korea was still reeling from the financial crisis in 1997– 98, its T&C exports reached a historical peak, at $18.7 billion, partly supported by the weak Korean won right after the crisis. The exports started to decline and continued to do so throughout the 2000s until 2009, when they hit their lowest since 1987, at $11.6 billion. While the decline was much more drastic in garments than in textiles, Fig. 4 shows that garment exports (upper in the chart) had begun to decline for much of the 1990s, in contrast to a steady growth in textiles (lower). In 1991, garment exports accounted for a slight majority of Korea’s T&C exports, but it decreased to only one-third in 2001. These contrasting trends were related. From the 1990s, overseas investments by garment producers increased, and more garment products were exported from offshore factories, reducing garment exports from Korea. Meanwhile, textile exports were boosted because many of these factories imported key input materials like textiles and fibers from Korea, forming a triangle pattern of trade among Korea, offshore production locations, and final export markets, although the pattern has evolved further as offshore factories increased input sourcing from China or other regional locations, as illustrated in Fig. 5. All these dramatic changes underline the structural change of the Korean apparel industry throughout the 1990s (i.e., rapid expansion of

Millions

Textile (SITC 65)

Apparel (SITC 84)

20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Fig. 4 Korea’s textile and garment exports, 1991–2014 (Source Compiled from UN Comtrade)

38

J. LEE AND H.-C. LIM

Fig. 5 Triangular manufacturing in apparel: US-Korea-Vietnam case (Source Author)

overseas investment and offshore garment production), and it has since redefined the mode of Korea’s integration into apparel GVCs. Korean apparel firms’ overseas expansion highlights their perennial pursuit for opportunities to lower production costs and facilitate access to Western, mainly US, markets through quota and preferential trade agreements. In this process, a group of firms emerged to eventually become multinational first-tier suppliers by successfully handling multi-country operations, vertically integrating upstream functions (e.g., textile mills), moving up the value chain to become an ODM supplier, and, most important, working closely with major global apparel brands and effectively meeting their demands. This new phase of global integration can be divided into three stages to highlight the shifting geography of Korea’s offshore garment production over time: (a) initial offshoring (late 1980s–early 1990s); (b) the China boom (early 1990s–mid-2000s); and (c) post-China searching (mid2000s–present). Figure 5 shows a historical trend of Korea’s outward direct investment (ODI) (per year, in value) in the textile and garment sector from 1991 to 2017. Overseas investment started in the late 1980s

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

39

in response to growing protectionism in the US and Europe and rising production costs in Korea. This investment peaked in 1996. While this rise of ODI in T&C experienced a sharp reversal from 1998 to 2000 in the face of the Asian economic crisis, overseas investment bounced back quickly and expanded until 2005. Similarly, it has largely recovered from the effect of the global economic crisis of the late 2000s, although annual fluctuation has become greater. 4.1

Initial Offshoring—Late 1980s to Early 1990s

The initial wave of overseas investment in textiles and clothing began in the late 1980s. In 1985, Korean T&C firms’ annual ODI was $1 million (reported amount-based), but it grew to $501 million in 1996, as shown in Fig. 6. In 1996, textile and apparel were Korea’s third-largest manufacturing sector in terms of ODI, after only electronics and automobiles. While textiles (upper in the chart) amounted to 66% of new T&C ODIs in value in 1996, garments (lower) represented the majority of new ODIs (63%) in terms of number of overseas establishments. This indicates that the average size of investment was smaller in garments than in textiles, which is expected given the higher degree of capital intensiveness of textile operation compared to garment production. A couple of factors contributed the rapid rise of offshore production by Korean T&C producers through ODI. First, as Korea’s exports to the US and European markets increased, pressure also increased

Millions

Garment

Textile

800 700 600 500 400 300 200 100 0 1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Fig. 6 Korea’s outward FDI in textiles and garments, 1991–2017 (Source The EXIM bank of Korea, Oversea Investment Statistics)

40

J. LEE AND H.-C. LIM

from these markets to curb imports from Korea out of concern for swelling trade deficits. A series of trade protection measures, including anti-dumping investigations, and subsequent trade negotiations eventually reduced Korean suppliers’ export opportunities, with decreasing import quotas assigned to Korea. Under the MFA system, which basically allowed developed countries to impose quotas on the textiles and garments a developing country could export, quota reduction resulted in failure to fulfill foreign buyer’s orders and losing business. Furthermore, rising costs for production at home, triggered by rising wages and labor disputes since the late 1980s, put additional pressure on local firms to search for and move to lower-cost locations abroad.6 In the initial phase, some firms established factories in such locations as Guam and Saipan to take advantage of the ease of access to the US market with the duty-free arrangements. Also, Central America was chosen to serve the geographically proximate US market. 4.2

The China Boom—Early 1990s to Mid-2000s

From the early 1990s to the mid-2000s, in a second stage of overseas investment, the most notable feature was the concentration of investment in Asia, specifically China. Table 2 shows the destination of new ODI in T&C production in each year by region. After a brief period of venturing into Pacific Islands and Central America, mainly for quota shopping, Asia quickly became the top destination for Korean textile and garment producers. In 1990–99, Asia represented more than 60% of new ODI (value-based) in textiles and garments each year. For much of the 1990s, China represented nearly half of the outward investment. China’s opening to foreign investors in the early 1990s and restoration of Korea– China diplomatic ties in 1992 fueled the boom of Korean investment and factory migration into China, particularly in labor-intensive, light manufacturing like garments. Korea’s Asian investment slowed in the midst of the Asian economic crisis of the late 1990s, but it rebounded, and Korean ODI inflows to China were rekindled by China’s accession to the World Trade Organization (WTO) in the early 2000s. In 2006, 95% of Korea’s new ODI in textiles and garments headed to Asia, and 42% of it 6 As discussed below, facilitating market access to the major Western market, and lowering production costs (e.g., wage, land, and regulation/compliance) remain the most important considerations for location of garment producers.

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

41

was destined for China, indicating the strong centrality of Asia in Korean T&C firms’ overseas expansion. In China, two-thirds of the Korea’s T&C investment was concentrated in three provinces: Shandong, Liaoning, and Jilin (Moon, 2003), as shown in Table 3. Shandong is one of the most geographically proximate provinces to Korea, and Liaoning and Jilin are located in the northeast region of China, where ethnic Koreans have been historically concentrated. These locations were preferred because of ease in logistics. Korean firms can easily relocate production facilities and import key input materials from Korea. Aiming at lowering production costs, including wages, firms were mostly engaged in exporting finished products to Western markets, directly or indirectly, or exporting back to Korea as the foreign subsidiaries of Korean-based apparel brands or their subcontractors, with less interest in selling to the Chinese market (Lee & Kim, 2010). Table 2 million)

Regional distribution of Korea’s OFDI in garments, 1985–2017 (USD

Period

Total

Asia

1985–1989

107 100.0% 558 100.0% 673 100.0% 931 100.0% 1271 100.0% 1708 100.0% 1036 100.0%

45 41.7% 415 74.4% 512 76.1% 732 78.6% 1126 88.5% 1276 74.7% 734 70.9%

1990–1994 1995–1999 2000–2004 2005–2009 2010–2014 2015–2017

Central/ Latin America 45 42.0% 93 16.7% 67 9.9% 97 10.4% 70 5.5% 62 3.6% 35 3.4%

North Europe America 8 7.5% 19 3.5% 56 8.3% 51 5.5% 62 4.9% 147 8.6% 99 9.6%

Source The EXIM bank of Korea, Oversea Investment Statistics

2 2.3% 4 0.8% 14 2.1% 21 2.3% 12 1.0% 221 12.9% 157 15.2%

Oceania Middle East/ Africa 6 5.5% 6 1.0% 24 3.5% 2 0.2% 1 0.1% 0 0.0% 0 0.0%

1 1.1% 20 3.5% 1 0.2% 28 3.0% 0 0.0% 3 0.2% 11 1.0%

42

J. LEE AND H.-C. LIM

Table 3

Korean textile and apparel ODI in China: Before and after 1998

Region

1992–1997

1998–2001

# of Investment

Share (%)

# of Investment

Share (%)

Northeast

217

36.3

231

41.9

North Coast East Coast

276

46.1

248

45.0

89

14.9

61

11.1

South Coast Central

12

2.0

7

1.3

2

0.3

5

0.9

Western

3

0.5

1

0.2

Province/Region/ Municipality

Liaoning, Jilin, Heilongjiang Beijing, Tianjin, Hebei, Shandong Shanghai, Jiangsu, Zhejiang Fujian, Guangdong, Hainan Shanxi, Shaanxi, Henan, Hubei, Hunan, Anhui, Jiangxi, Inner Mongolia Yunnan, Guizhou, Sichuan, Chongqing, Guangxi, Gansu, Qinghai, Ningxia, Xizang, Xinjiang

Source Ministry of Finance and Economy, The Current Status of Overseas Investment & Local Subsidiaries, 2003, cited in Moon (2003)

4.3

Post-China Search—Since the Mid-2000s

Despite the global economic crisis and the ensuring recessions in the US and Euro zone, Korean T&C producers’ overseas expansion recovered from the crisis and reached its historic peak in 2011 (see Fig. 5). However, there was a shift in the geography of Korean expansion. In 2005, China’s share in Korean garment firms’ FDI began to decline as additional investment was redirected to other regional destinations in the face of rising production costs in coastal China. In 2003, China accounted for 66% of Korea’s total garment ODI (in value) to Asia. The share dropped below 10% in 2013, as shown in Fig. 7. At the same time, Vietnam emerged as the largest investment destination for Korea’s garment firms. These events were driven by a growing exit from China in response to rising wages and labor shortages as well as the coastal region’s shift from labor-intensive manufacturing.7 Additionally, the possibility of a

7 This created variegated moves, or “fixes,” among Chinese apparel producers, as analyzed by Zhu and Pickles (2014).

EXPANDING OVERSEAS, BECOMING MULTINATIONAL … Vietnam

China

43

Indonesia

100%

80%

60%

40%

20%

0% 1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Fig. 7 Major Asian destinations of Korea’s outward FDI in garments, 1991– 2017 (Source The EXIM bank of Korea, Oversea Investment Statistics)

new multilateral free trade agreement, Trans-Pacific Partnership (TPP), attracted many Korean garment and textile firms to invest in Vietnam in anticipation of easier access to the world’s largest US import market.8 While the US withdrawal from TPP under the Trump Administration in January 2017 has slowed the investment boom started in 2011, Vietnam is still considered the primary location for garment production by Korean garment producers. Indonesia, one of the top three locations after Vietnam and China, is gaining attention as a possible alternative. At the same time, firms are increasingly testing out other established locations like Bangladesh and Cambodia as well as emerging locations like Myanmar, Haiti, and Ethiopia. Large first-tier suppliers increasingly are located strategically in multiple countries and locations to capitalize on the advantages of each location, trying to build a regional portfolio to effectively respond to diversifying market and buyer demands (Kwon et al., 2021). Also, as more inputs are supplied from offshore locations, a simple triangle structure has been evolving into a more complex form of production networks, although they are still bound by buyer requirements on sourcing locations.

8 The TPP negotiations started in 2008 with the US included, and the agreement was announced in 2015.

44

J. LEE AND H.-C. LIM

5 Conclusion: Post-crisis Dynamics and Challenges Since the late 1980s, Korea’s mode of integration to apparel GVCs has entered a new stage. In search of opportunities to lower production costs and facilitate access to Western markets through quotas and tariff reduction, Korean apparel producers actively engaged in overseas investment in the Pacific Islands, Central America, and, most important, Asia. For much of the 1990s and the early 2000s, China played a key role in this internationalization endeavor, but rising production costs and labor shortages prompted them to look for alternative locations. By the early 2010s, Vietnam emerged as the top choice for Korean firms as a post-China destination. However, in the face of diversifying market and buyer demands and need for flexibility, they had to manage operations in multiple regions and countries, striking a balance between quick delivery and customization in near-market locations (e.g., Central America to the US) and large-volume, mass production for basic items in Asia. This has led to the emergence of more complex offshore production networks as well as the rise of large, transnational first-tier suppliers. Korean apparel multinationals increasingly confront a host of challenges in the rapidly changing apparel GVCs in terms of market, technology, and regulation. Such challenges have been further complicated by a series of trade tensions and the COVID-19 pandemic, as discussed in other chapters. First, while rising production costs have always been a major driver for apparel producers to relocate their production, the question is what alternatives would be available when they confront the same pressure in such locations as Vietnam and Bangladesh. Moving away from China is a clear trend over the last decade (Berg et al., 2017). However, many producers are concerned about the rising trend of production costs in those locations. One option is, as before, moving to another greenfield location such as Myanmar or Ethiopia. While this may help reduce costs, many difficulties (e.g., limited infrastructure; a shortage of skilled workforce; uncertainty in political, economic, and social environments, as exhibited in Myanmar) must be addressed. Another option is staying in the current locations and optimizing operations within and across countries. Exploring domestic, mostly rural, locations with lower costs is an option, and effectively balancing production across regions (e.g., a mix of small-batch production locations closer to the US market and massvolume production in Asia [the “multi-speed model”]) is another. The

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

45

latter option might be realistic given a growing emphasis on re- or nearshoring to address strong demand for shorter lead times (Andersson et al., 2018, p. 30). Second, the market demand for regional markets has been on the rise since the global financial crisis as Asian countries fared better than Western economies. This demand was also driven by market growth in emerging and developing countries, which prompted interest in shifting end markets in post-crisis GVCs (Barrientos et al., 2016). Overall, apparel sales in Asia are expected to grow by 6% per annum and account for about 40% of global sales by 2025. More Chinese apparel brands and suppliers are likely to focus on domestic and regional markets to address such demands (Andersson et al., 2018). The rise of Chinese apparel firms at home and abroad was greatly facilitated by e-commerce, which is supported digital platform companies like Alibaba (Li et al., 2019). The growth of regional connections is reflected in the trade of textiles and garments within Asia (see Appendix). China has been an increasing center of textile exports to many garment-exporting nations, such as Bangladesh, Vietnam, and Cambodia. Also, Korea increased its textile exports to Indonesia and Vietnam while increasing its garment imports from those locations, creating bilateral linkages within Asia. Japan is a major import market for those exporting countries and for Bangladesh. This highlights a growing regional circuit of production and consumption that will shape the future choices of Korean apparel multinationals traditionally geared toward Western markets. Third, Korean apparel firms have to deal with the rise of e-commerce, digitalization, and automation in apparel GVCs. The demise of traditional offline retailing and the rise of online retailing supported by digital platforms represent a shift to small-batch, quick production, which might not be effectively supported by long-distance sourcing. This raises a possibility of reshoring of apparel manufacturing combined with just-in-time/ case smart manufacturing. Such processes are particularly likely for trendy items for which local production can increase their commercial value due to reduced lead times (Andersson et al., 2018). The introduction of automation (e.g., whole garment knitting) and smart factories, in addition to emphasis on lean production, is also changing the landscape of the apparel industry, which is traditionally considered a labor-intensive sector based on low technology. This poses a new challenge to many Korean apparel firms in terms of new technology and investment. Furthermore, they have to determine how to deal with small-batch production considering that their legacy production systems are mostly based on large-scale production.

46

J. LEE AND H.-C. LIM

Appendix This part shows shifting connections among Asian countries in the textile and garment trade in 2007–2020. Data were compiled from the UN Comtrade dataset. Standard International Trade Classification (SITC) Code 65 (“textile yarn, fabrics, made-up articles, nes, and related products”) and Code 84 (“articles of apparel and clothing accessories”) were used respectively for textiles and garments. Asia includes countries and territories in the regions of East Asia and Pacific and South Asia, based on the World Bank classification. The analysis used the sum of bilateral trade (nominal value in US dollars) reported by the importing country.9 For the sake of brevity, trade flows with more than 1% of Asia’s total internal trade value (in parenthesis) are only shown for each of the three years—2007, 2015, and 2020. A. Intra-Asian Trade Network: Textiles a. 2007 ($56.0 billion)

9 Note that Bangladesh’s import data were not available for 2020, which slightly inflates the share of all the other trade linkages in textiles. In 2015, the country’s textile imports accounted for 6.1% of the total Asian trade.

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

b. 2015 ($82.4 billion)

c. 2020 ($76.6 billion)

(Source compiled from UN Comtrade)

47

48

J. LEE AND H.-C. LIM

B. Intra-Asian Trade Network: Garments a. 2007 ($55.4 billion)

b. 2015 ($68.8 billion)

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

49

c. 2020 ($61.1 billion)

(Source compiled from UN Comtrade)

References Andersson, J., Berg, A., Hedrich, S., Ibanez, P., Janmark, J., & Magnus, K.-H. (2018). Is apparel manufacturing coming home? McKinsey Apparel, Fashion & Luxury Group. Retrieved from https://www.mckinsey.com/ind ustries/retail/our-insights/is-apparel-manufacturing-coming-home Appelbaum, R. P. (2008). Giant transnational contractors in East Asia: Emergent trends in global supply chains. Competition & Change, 12(1), 69–87. Appelbaum, R. P., & Gereffi, G. (1994). Power and profits in the apparel commodity chain. In E. Bonacich, L. Cheng, N. Chinchilla, N. Hamilton, & P. Ong (Eds.), Global production: The apparel industry in the Pacific Rim (pp. 42–62). Temple University Press. Appelbaum, R. P., & Smith, D. A. (2002). Governance and flexibility: The East Asian garment industry. In F. C. Deyo, R. F. Doner & E. Hershberg (Eds.), Economic governance and the challenge of flexibility in East Asia (pp. 76–106). Rowman & Littlefield Publishers. Appelbaum, R. P., Smith, D., & Christerson, B. (1994). Commodity chains and industrial restructuring in the Pacific Rim: Garment trade and manufacturing. In G. Gereffi & M. Korzeniewicz (Eds.), Commodity chains and global capitalism (pp. 187–204). Greenwood Press.

50

J. LEE AND H.-C. LIM

Azmeh, S., & Nadvi, K. (2014). Asian firms and the restructuring of global value chains. International Business Review, 23(4), 708–717. Bárcia de Mattos, F., Esquivel, V., Kucera, D., & Tejani, S. (2022). The state of the apparel and footwear industry: Employment, automation and their gender dimensions. International Labour Organization and European Commission. Retrieved from https://www.ilo.org/wcmsp5/groups/public/ ---ed_emp/documents/publication/wcms_835423.pdf Barrientos, S., Gereffi, G., & Pickles, J. (2016). New dynamics of upgrading in global value chains: Shifting terrain for suppliers and workers in the global south. Environment and Planning A: Economy and Space, 48(7), 1214–1219. Berg, A., Hedrich, S., Lange, T., Magnus, K.-H., & Mathews, B. (2017). Digitization: The apparel sourcing caravan’s next stop. McKinsey Apparel, Fashion & Luxury Group. Retrieved from https://www.mckinsey.com/industries/ret ail/our-insights/digitization-the-next-stop-for-the-apparel-sourcing-caravan Bonacich, E., Cheng, L., Chinchilla, N., Hamilton, N., & Ong, P. (Eds.). (1994). Global production: The apparel industry in the Pacific Rim. Temple University Press. Brown, G. (2017). Hansae Vietnam’s garment factory: Latest example of how corporate social responsibility has failed to protect workers. Journal of Occupational and Environmental Hygiene, 14(8), D130–D135. Ch˘ong, S.-H. (1994). The restructuring of industrial districts in Seoul—The case of Guro industrial complex [S˘oul-si san˘op chigu chaep’y˘on kwaj˘ong— Kuro kongdan u˘ l saryero]. Space and Environment [Konggan Kwa Sahoe], 4, 209–230. Gereffi, G. (1994). The organization of buyer-driven global commodity chains: How US retailers shape overseas production networks. In G. Gereffi & M. Korzeniewicz (Eds.), Commodity chains and global capitalism (pp. 95–122). Greenwood Press. Gereffi, G. (1999). International trade and industrial upgrading in the apparel commodity chains. Journal of International Economics, 48(1), 37–70. Gereffi, G. (2005). The global economy: Organization, governance, and development. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (pp. 160–182). Princeton University Press. Gereffi, G., & Frederick, S. (2010). The global apparel value chain, trade, and the crisis: Challenges and opportunities for developing countries. In O. Cattaneo, G. Gereffi, & C. Staritz (Eds.), Global value chains in a postcrisis world: A development perspective (pp. 157–208). World Bank. Gereffi, G., & Memedovic, O. (2003). The global apparel value chain: What prospects for upgrading by developing countries. United Nations Industrial Development Organization. Retrieved from https://www.unido.org/sites/ default/files/2009-12/Global_apparel_value_chain_0.pdf

EXPANDING OVERSEAS, BECOMING MULTINATIONAL …

51

Hamilton, G. G., & Gereffi, G. (2009). Global commodity chains, market makers, and the rise of demand-responsive economies. In J. Bair (Ed.), Frontiers of commodity chain research (pp. 136–161). Stanford University Press. Korea Federation of Textile Industries. (2014). History of textile industries. Retrieved from http://www.kofoti.or.kr/textile/history.asp Korea Institute for Industrial Economics and Trade. (1997). Industries in Korea: History of development and future visions [Han’gugui ˘ San˘op: Palch˘onny˘oksawa Mirae Pij˘on]. Korea Institute for Industrial Economics and Trade (KIET). Retrieved from https://nkis.re.kr/subject_view1.do?otpId=KIET00041150. Kwon, H., Bae, J., Lee, J., & Chung, S. W. (2021). Toward a bipolar apparel GVC? From the perspective of first-tier suppliers. Journal of Asian Sociology, 50(1), 9–32. Lee, J.-D. (2012). Economic development model of the development in skillintensive textile industry. Ministry of Strategy and Finance, Republic of Korea. Retrieved from https://www.ksp.go.kr/english/pageView/publication-eng/ 259 Lee, J. (2016). Global value chains and the changing pattern of North-South trade: Apparel, electronics and automotive sectors in 2005–2014. Journal of International Trade & Commerce, 12(6), 1–21. Lee, S.-C., & Kim, M.-S. (2010). Networks and embeddedness of foreign direct investment firms: The case of Korean textile and clothing FDI SMEs in Qingdao, China [haeoe chikch˘op t’uja ki˘op u˘ i net’˘uw˘ok’˘u wa ch’akk˘uns˘ong: tae chungguk han’guk s˘omyu u˘ iryu t’uja chungso ki˘op sarye y˘on’gu]. The Geographical Journal of Korea [Kukt’o chiri hakhoe chi], 44(4), 623–634. Lee, M., & Oh, K. (2010). Buying office as a catalyst in global apparel sourcing: A case study in Korea. Journal of Global Fashion Marketing, 1(4), 250–256. Lee, J., Lee, S.-H., & Park, G. (2018). Revisiting the miracle: South Korea’s industrial upgrading from a global value chain perspective. In D. Nathan, M. Tewari, & S. Sarkar (Eds.), Development with global value chains: Upgrading and innovation in Asia (pp. 316–348). Cambridge University Press. Li, F., Frederick, S., & Gereffi, G. (2019). E-commerce and industrial upgrading in the Chinese apparel value chain. Journal of Contemporary Asia, 49(1), 24–53. Lopez-Acevedo, G., & Robertson, R. (Eds.). (2012). Sewing success? Employment, wages, and poverty following the end of the multi-fibre arrangement. World Bank Publications. Merk, J. (2014). The rise of tier 1 firms in the global garment industry: Challenges for labour rights advocates. Oxford Development Studies, 42(2), 259–277. Moon, N.-C. (2003). Movement of foreign locations of the Korean textileclothing industry [han’guk s˘omyu u˘ iryu san˘op haeoe saengsan ipchi u˘ i

52

J. LEE AND H.-C. LIM

tongt’aes˘ong]. The Geographical Journal of Korea [kukt’o chiri hakhoe chi], 37 (4), 409–426. Ramamurti, R., & Singh, J. V. (2009). Emerging multinationals in emerging markets. Cambridge University Press. Shin, S. I. (2019). Transforming into fashion firms or multi-country suppliers? Accounting for varied firm trajectories in the deindustrialising Korean apparel industry. Journal of Development Studies, 55(1), 1–18. Smith, D. A. (1996). Going south: Global restructuring and garment production in three East Asian cases. Asian Perspective, 20(2), 211–241. Tokatli, N. (2008). Global sourcing: Insights from the global clothing industry— the case of Zara, a fast fashion retailer. Journal of Economic Geography, 8(1), 21–38. Whitfield, L., Staritz, C., & Morris, M. (2020). Global value chains, industrial policy and economic upgrading in Ethiopia’s apparel sector. Development and Change, 51(4), 1018–1043. Wood, S., Coe, N. M., Watson, I., & Teller, C. (2019). Dynamic processes of territorial embeddedness in international online fashion retailing. Economic Geography, 95(5), 467–493. Zhu, S., & Pickles, J. (2014). Bring in, go up, go west, go out: Upgrading, regionalisation and delocalisation in China’s apparel production networks. Journal of Contemporary Asia, 44(1), 36–63.

Korea’s Multinational Garment Suppliers: Growth Through Disintermediation Solee Shin

1

Introduction: Supplier Multinationalization

Garment manufacturing is considered a gateway to industrialization. Its low capital and knowledge requirements and its dispersed industry structure allow easy entry for new industrialists. However, increasing evidence points to a changing global industry structure in which a few dozen multinational supplier firms command a growing share of the garment manufacturing economy. Studies have documented that since 2000, the top garment suppliers from the Big 3 economies of Hong Kong, Taiwan, and South Korea (Appelbaum, 2008; Bonacich et al., 1994) drastically expanded in size and capabilities, growing into multinational megasuppliers with worldwide facilities. Appelbaum (2008) was among the first to note this phenomenon across garments, shoes, and hat manufacturing. Azmeh and Nadvi (2014) similarly observed that Greater Chinese and South Asian supplier firms were operating multiple overseas bases to spearhead the global value chain integration of new supplier markets in countries such as Jordan. Merk (2014) discussed the ramifications of supplier concentration on labor, and how the rise of large Tier 1 suppliers

S. Shin (B) Amazon Web Services, Seattle, Washington, USA e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. Lee et al. (eds.), Knitting Asia, Weaving Development, https://doi.org/10.1007/978-981-99-3764-6_3

53

54

S. SHIN

heightened possibilities of widespread labor abuse and unrest. Included in these case studies are multinational megasuppliers whose operations not only expanded outward from their home countries but also decoupled from trading firms like Li & Fung that had once been pivotal in orchestrating global sourcing networks through nonequity-based partnerships with factories (Appelbaum, 2008; Feng, 2012).1 Following this trend, researchers have asked whether changes in supply bases affect value chain governance (Fold, 2002; Gereffi et al., 2005; Kaplinsky, 2004; Ponte & Gibbon, 2005; Ponte & Sturgeon, 2014), for example, due to suppliers’ increasing ability to “co-lead” multipolar value chains (Azmeh & Nadvi, 2014; Lee & Gereffi, 2015) and their growing roles as strategic partners of lead firms (Yeung, 2016) who contest GVC governance (Lechner et al., 2020; Sako & Zylberberg, 2019). Additionally, growing evidence suggests that the current competitive environment is making it difficult for latecomer firms in Sub-Saharan Africa and other locations to replicate Asian suppliers’ early growth (Whitfield & Staritz, 2021). Relying on garments for development might have become less viable, exacerbating concerns of “immiserating growth” (Kaplinsky, 1998) and upgrading without value-capture (Schrank, 2004). Unlike earlier periods when buyers used financial and technical assistance to shape their supply bases (Gereffi, 1999), buyers are less likely to provide direct assistance for suppliers’ upgrading, with the exception of minor functions such as inspection, operating facilities, and supply chain management (Schmitz & Knorringa, 2000). This is not just because increased supply base capability has given buyers less of an incentive to invest in late-entering suppliers but also because decades of outsourcing production have hollowed out buyers’ own manufacturing capabilities (Lechner et al., 2020). Much of the discussion on suppliers’ capability development focuses on supplier upgrading along narrowly defined capabilities (e.g., product, process, and function) while overemphasizing buyers’ role in this process. This focus on buyers’ role creates two distinct gaps in the literature. First, studies have overlooked an important recent development observed

1 While pointing to the same phenomenon, the works utilize multiple terminologies to describe the supplier firms, including “giant transnational contractors (Appelbaum, 2008),” “tier 1 firms” (Merk, 2014), “trans-national manufacturers” (Azmeh & Nadvi, 2014)” and “multi-country suppliers” (Shin, 2019). In this chapter, I refer to them as multinational suppliers.

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

55

among megasuppliers: their growing emphasis on scale and scope through developing orchestration capabilities across multiple geographies. Although most megasuppliers operate as multinational factories today, GVC studies are paying woefully little attention to such organizational development. Particularly notable is the limited conceptualization and acknowledgment of multinationality as a rising competitive advantage for supplier firms. Second, the tendency to overemphasize buyers’ role in supplier development muddles the source of shifting power dynamics within the supplier market itself. In an industry where buyers have long foregone investment in in-house manufacturing, manufacturing suppliers have recently been less concerned with functional upgrading vis-à-vis buyers and more concerned with disintermediating other players within their broader industry ecosystem, such as Li & Fung. These recent transitions are best captured by attending to value chain dynamics within the supplier market. This chapter explores how suppliers have pursued multinationalization through the disintermediation of notable platforms. At first glance, supplier multinationalization and disintermediation might seem only loosely related, but they are in fact part of the same struggle among suppliers to gain control over value chain governance. The large Korean suppliers discussed in this chapter are both crucial drivers and beneficiaries of this trend. They have established multi-country and multi-regional production bases to enhance in-house complementarities between design, production, and other related services. Their growth and internal capacity development has accompanied internalizing processes that they had formerly coordinated via notable platforms such as Li & Fung’s. The chapter draws from the management literature on platforms and ecosystems to illustrate the industry’s trend of re-internalization based on scale and scope.

2

Methods

I conducted a qualitative case study (Eisenhardt, 1989) to capture the dynamics of the platform-substituting multinationalization of Korea’s garment suppliers. This complex multiphase phenomenon, composed of suppliers’ platform involvement, disintermediation, and standalone growth, is well suited for a longitudinal case study that allows investigation of firm-level processes alongside changing industry dynamics. To examine these dynamics, I combined the following data sources:

56

S. SHIN

Archival data. I conducted an extensive longitudinal investigation on supplier activities using information from annual reports and supplier websites. The result was a timeline of the top 3 suppliers’ multinational investments for 139 unique supplier investments in 15 countries between 1998 and 2020. I triangulated this information with several trade publications (Bobbin Journal, International textile news, and Business Herald) to identify the investment motivation and rationale. This exercise helped identify broader trends in suppliers’ growth strategies before and after disintermediation, such as scaling and scoping growth. Table 1 lists the data analyzed and Table 2 lists the coding scheme utilized for the archival sources. Interviews: Interviews were conducted as part of a broader examination of supply-chain technology-induced transformations in global supplier markets. For this larger project, more than 60 garment industry participants were interviewed in Hong Kong, Taiwan, Korea, and the United States between 2014 and 2019. I used a subset of 16 interviews to explore how disintermediation strategies pattern the dynamics of firm growth. In our subsetted sample [see Appendix A for participant profiles], all executives and senior managers (7) were based in Korea and had in-depth knowledge of suppliers’ multinationalization processes. All seven had participated in new market expansion decisions, and four had worked for several years in overseas subsidiaries, setting up facilities and Table 1

Profile of sample firms

Complementor firm Founding decade Subsidiaries Manufacturing-Assembly core Manufacturing-Assembly noncore Manufacturing-Input Sales and research Global employees Archival sources Industry magazines Webpage information Press release Annual reports

alpha

beta

gamma

1990s 8 countries 13 plants 2 2 5 35,000

1980s 7 countries 12 plants 0 3 3 35,000

1990s 5 countries 14 plants 3 4 2 24,000

455 articles 20 pages 81 releases 1999–2020 (4,599 pages)

357 articles 32 pages 79 releases NA

335 articles 21 pages 22 releases NA

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

Table 2

57

Coding scheme for archival sources

First-order categories

Second-order themes

Aggregate dimension

New factories for added production capacity, workforce, and new line establishment Capacity backup Labor availability Quota availability Automation of existing processes Speed, flexibility, lead time, and proximity to buyer Upstream: Textile manufacturing, dyeing, and processing facilities Downstream functions: Branding, marketing, research, innovation New product categories

Expansion: Replication

Scaling growth

Resource-seeking Refinement Locational diversification: complementarities Vertical integration and higher value capture

Scoping growth

Product diversification

improving operations. All respondents were knowledgeable about Li & Fung’s coordination activities and supplier efforts to disintermediate the platform. To examine the reasons behind the failure of Li & Fung’s platform, I conducted additional interviews with Li & Fung’s (5) and Korean suppliers’ design team and technical staff (4) members. All had at least 10 years of experience and could attest to declining platform competitiveness after 2000. Interviews lasted from one to three hours, were audio recorded, and immediately transcribed in the original language (Korean or English). Both archival and interview sources were coded and analyzed using MAXQDA.

3

Background Information: Li & Fung as a Platform Provider and Suppliers

The platform provider Li & Fung is a well-known Hong Kong-based trading firm which grew by offering supply chain solutions for retail buyers of garments, shoes, and furniture. Many of its most prominent client firms are Western general (e.g., Kohl’s and Marks and Spencer) and specialist (e.g., GAP, Gymboree, and Abercrombie & Fitch) retailers. In its garment operations, Li & Fung receives orders from buyers and

58

S. SHIN

provides custom supply chain solutions through orchestrating heterogeneous complementors. Building upon a traditional middleman operation (Feng, 2012), the company utilizes information on its complementors’ specialty, capacity, and capabilities to streamline the production and distribution of garments. Most of its more than 10,000 complementors are contract manufacturers, including first-tier suppliers that assemble garments, and second-tier suppliers that provide intermediate inputs such as fabrics, trims, and embellishments, or services and processes such as design, sample development, dyeing, printing, and cutting. While these manufacturing complementors operate plants in 50 countries, their capabilities vary. Some are simple low-cost labor providers that engage in simple cut-make-trim (CMT) operations; others are large multinational manufacturers from developed economies, operating plants worldwide. Plant capacities also vary dramatically, hiring between a few hundred to hundreds of thousands of workers, and processing from several thousand to over 20 million pieces of garments monthly. Besides these manufacturing complementors, there are IT solutions (providing general supply chain systems as well as specialized production, design, and stock management systems) and logistics-transport providers. Both the clients and complementors are heterogeneous in their capability, geographical presence, scale, and scope. Several sector-specific aspects characterize the complementarities generated through this coordinative process. Unlike platforms that organize around a single “focal offer” (Kapoor, 2018), Li & Fung coordinates supply chains of extremely varied products with short product cycles. Each client entrusts development or manufacturing of hundreds of unique items (or stock-keeping units, SKUs) each season (4–8 times a year), which require mobilizing in-house resources and complementors in unique ways. In each cycle, suppliers and designers are assigned dozens if not hundreds of unique items, each requiring 10–50 unique inputs. Order volumes range from a few thousand to upwards of a million pieces per SKU. For suppliers, especially smaller ones, access to Li & Fung platform could ensure a steady intake of orders despite minimal in-house marketing efforts and protect them against the volatility of the international market. The context under analysis points to a transformation within this ecosystem where both buyers and (larger, more component) suppliers have growingly contested the platform organizers’ role in coordinating products and disintermediated Li & Fung. [See Fig. 1 Li and Fung’s annual sales and profits]. After explosive growth between 1990 and 2005,

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

59

Fig. 1 Li & Fung’s annual sales and net profits (Source Annual reports, 2000– 2019)

the platform encountered challenges. Replacing Li & Fung’s platform are megasuppliers from a handful of Asian locations [see Table 3], increasingly operating as multinationals. Their increasing prominence has been highlighted in both the international business (Buckley, 2009, 2018) and GVC literature (Appelbaum, 2008; Gereffi et al., 2005; Merk, 2014).

4 Findings: Suppliers’ Multinational Growth Through Platform Disintermediation 4.1

Platform-Supplementing Growth (1990–2005)

Before 2005, Li & Fung provided a crucial platform that mobilized the growth of networked complementor firms. The company’s role as an intermediary transaction facilitator was particularly prominent due to the extreme fragmentation in the global supplier market landscape under the Multi-Fiber Arrangement (MFA, 1974–2004) where developed countries restricted the importation of developing countries’ garment and textile products beyond an annually imposed quota. The MFA constrained

60

S. SHIN

Table 3

Notable Asian garment suppliers

Supplier

Headquarters

Founding

2017 Revenue (in U.S. billions)

Youngone

Korea

1974

1.9

Crystal Group SAE-A

Hong Kong

1970

1.7

Korea

1986

1.6

Hanse

Korea

1972

1.6

Hansoll

Korea

1992

1.3

Esquel group Pan Pacific

Hong Kong

1978

1.3

Korea

1972

0.9

TAL Apparel Luen Thai

Hong Kong

1947

0.9

Hong Kong

1983

0.8

Makalot

Taiwan

1990

0.7

Roo Hsing/JD United Nien Hsing

Taiwan/ Hong Kong

1977

0.6

Taiwan

1986

0.3

Overseas production bases

10 countries including Bangladesh, Uzbekistan, China, Vietnam, El Salvador China, Vietnam, Bangladesh, Cambodia, and Sri Lanka 7 countries including Vietnam, Indonesia, Guatemala, Nicaragua, Costa Rica, Haiti 8 countries including Vietnam, Myanmar, Indonesia, Guatemala, Nicaragua, Haiti Vietnam, Cambodia, Guatemala, Philippines, Nicaragua, Indonesia China, Malaysia, Mauritius, Sri Lanka, Vietnam Korea, Indonesia, Myanmar, Vietnam, China Hong Kong, China, Indonesia, Malaysia, Thailand, Vietnam China, Philippines, Cambodia, Vietnam, Indonesia Indonesia, Cambodia, Vietnam, Philippines, China, and Taiwan El Salvador, Nicaragua, Tanzania, Cambodia, Myanmar, China Taiwan, Vietnam, Cambodia, Lesotho, Mexico, Nicaragua

the annual growth of developing country exports and suppliers’ growth opportunities. This resulted in a proliferation of small suppliers and a hyperspecialized and fragmented market (Scott, 2006). To stay afloat, suppliers engaged in frequent “quota-hopping” throughout the 1990s, moving plants to areas that were not quota restricted (Frederick & Staritz, 2012). At the same time, global buyers struggled to locate capable producers with access to sufficient production quota. It was not uncommon for buyers to source from hundreds or even thousands of suppliers to ensure sufficient volume and product variety. During this

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

61

time, Li & Fung, capable of mobilizing network ties and information on Asian supplier markets, served as an important broker mediating between buyers and manufacturers. Over time, the brokerage model evolved into a digitized platform linking tens of thousands of global buyers, complementors, and agents. Despite many other industry platforms, Li & Fung’s was by 1990 the largest and most important. Our early buyers were American brands like J.C. Penney and Sears… But soon we received fashion orders through Li & Fung. They brought us [large American brands] ‘g’ and ‘j’, and ‘v’ ….Their orders accounted for almost half of our business at one point. (a1)

In their earlier days, Li & Fung’s and other agents’ brokerage model involved setting up local offices in production locations to recruit supplier firms. Most supplier firms retained production facilities in Korea until the 1990s. In the 90s, we, vendors (contract manufacturers) were not extensive in our roles. Most orders came from agents or buying offices. MAST, sourcing arm of The Limited, was pretty large. Wal-Mart sourced through PREL prior to opening their own global sourcing office in Shenzhen. Hong Kong-based E Connor was also pretty big. We worked with all of them but the largest was Li & Fung. Li & Fung gave us the largest orders. (a1)

Gamma formed what the GVC framework would label a “captive relationship” with buyers (Gereffi, 1999; Gereffi et al., 2005), where small suppliers depended upon much larger buyers that serve as a crucial source of knowledge and resources. Its main line of business came from joining Li & Fung’s platform which helped secure orders from a childrenswear firm. Until recently, factories involved agents… including us. Our staff didn’t speak English and we didn’t have to communicate with customers. The agents set things up and received commission from the brand and …factories. Initially, we worked for a Hong Kong agent [Li & Fung] to supply brand ‘j’. ‘j’ quickly became our largest buyer... though we had some other deals. (g3)

62

S. SHIN

Li & Fung’s global platform systems allowed rapid and early growth for its small suppliers. Supplier firms were narrowly specialized in categories such as “dresses,” “casual sweaters,” and “knitted childrenswear” and operated as specialized complementors to networked firms. As clients placed orders with Li & Fung, at times designating the firm as their main sourcing agent, Li & Fung broke down the associated tasks and allocated those orders to complementors, based on their heterogeneous cost and competencies. In return, complementors competed for Li & Fung’s orders while collaborating with others to fulfill orders. This system of vertical specialization (Feenstra, 1998), or what Li & Fung’s Victor Fung calls “dispersed manufacturing” (Magretta, 1998), enabled these contract manufacturers to operate as “CMT (cut-make-trim) suppliers,” denoting the simple assembly of garments that had designed, developed, and sourced inputs by an external entity. Despite hyperspecialization, the platform system enabled rapid complementor growth prior to 2005. Three had annualized growth hovering around 30% between 1995 and 2000, and two others grew 20–30% annually between 1997 and 2001 [see Fig. 2]. This kind of growth happened within the international market context and followed clear dynamics of exploitation and replication of their business model overseas through offshoring (Winter & Szulanski, 2001). In the archival sources documenting 143 total investments of the three supplier firms, all but six of the 89 investments made by the three suppliers between 1988 and 2003 involved “scaling growth.” Minor exceptions to this pattern of scaling growth are noted where firms (1)

Fig. 2 Growth trajectories of three supplier firms

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

63

established buyer-facing sales offices in the United States and elsewhere to handle marketing and communications; and (2) where they engaged in rare instances of product diversification into related lines of business (e.g., quilting). In scaling, complementor firms engaged in clear resource-seeking internationalization to locations where low-cost labor and export quota were available. The limited number of available candidate locations led suppliers to converge on a handful of sites. The U.S. territory of Saipan was a popular candidate for production offshoring due to “the lack of quota restrictions” and the additional benefit of being “duty-free for U.S. exports.” Latin American locations such as Guatemala, Nicaragua, and Honduras that had no quota restrictions were also considered. As local industry was nonexistent in those locations, suppliers engaged in greenfield investment, transplanting their original model setup in Korea and building most factories themselves. In these new host countries, businesses scaled by expanding their production capacity. As an industry template (Chliova & Ringov, 2017), the “line system” was invoked to plan, account for, and strategize capacity. Beta’s press conference directly attributes its threefold increase in sales between 1996 and 2000 to its continual addition of capacity in two overseas bases. Alpha’s 2000 annual report notes “the recent addition of 2 production lines in Saipan and 9 additional lines in Nicaragua” not fully able to meet rapidly increased demand which increased “by upwards of 30% annually.” This led Alpha to evaluate Mexico, Honduras, and Guatemala as candidates for new entry as “the situation with quotas in Korea only worsened.” The next year, they announced the acquisition of a woven production facility with eight production lines in addition to a second factory in Latin America. This will make available “37 assembly lines” in this country, with “plans to add 35% in production capacity the next year.” Rapid scaling was only possible thanks to the network effect observed in Li & Fung’s platform, whose complementors increased from 7500 in 1998 to 12,000 in 2008, and then to 15,000 in 2015. Li & Fung’s orders increased more than tenfold during this period. As one interviewee stated, We invested every year because we were confident that we could get those orders. It was a straightforward model of adding capacity and getting more orders, and we grew very fast. (b1)

64

S. SHIN

The phasing out of MFA only accelerated scaling growth as suppliers could expand into previously quota-restricted territories, such as Vietnam and China, without concern for quota availability. Replication facilitated drastic scaling across East and Southeast Asia, and many megafactories emerged, especially in China. Accumulated experience expedited subsequent projects. From 2002 (when the MFA phaseout became known), Alpha located a site and “invested $6 million to build a factory with 60 lines,” and went through investment to operation in mere 11 months. By comparison, it took over three years to open its first overseas factory in 1992. Beta invested $10 million for 48 lines, launched operations within a year and planned another 50 production lines, as it immediately reached production capacity. Gamma also expanded into two Southeast Asian bases within three years. Interviews provided in-depth insight into the dynamics of rapid scaling. Beta’s general manager, who oversaw building several factories, recounted the dynamic. After three years in location ‘a’ [Pacific Island location], and a few more in ‘b’ [Central America], I became an expert in building factories. When I returned to Korea, the company wanted me to work in buyer relations. I wasn’t very good. To remain competitive, I kept volunteering to build factories. I carried my passport to work. They sent me to ‘c’ [Southeast Asia] for a year and then ‘d’ [Middle East], where we tried for a year and a half to expand, but failed. Then, later I went to ‘e’ [Southeast Asia]. (b3)

He notes that the basics of factory building “is all the same. Once you figure out how to set up a system that works, it is easy to repeat it elsewhere much faster.” (b3). Gamma illustrated a similar trajectory. We continued to deal with Li & Fung… Our CEO had a good friend there, started with nothing, just a small factory. But after a decade of working with them, we grew into factories in ‘a’ and ‘b’ [both Southeast Asia]… All because of the Li and Fung orders…

The sales manager noted that the key was to “maintain a good relationship and this led to guaranteed orders” (g1). In sum, supplier multinationalization initially followed platformsupplementing patterns of investment where growth happened through

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

65

replication and repeat resource-seeking investment in locations where conditions were right. Conditions included low-cost and plentiful labor, lack of quota restrictions, and friendly regulatory conditions. Drivers of multinational growth were soon transformed as there was rising contention within the ecosystem. 4.2

Antecedents of Disintermediation: Contestation in the Ecosystem (2000 to Present)

Despite growth through Li & Fung’s platform, contestation between clients (buyers) and complementors (suppliers) soon fueled disintermediation motives within the ecosystem around 2000. The sources of these contestations broadly align with the literature (Adner, 2017; Cennamo & Santaló, 2019; Jacobides et al., 2006; Wareham et al., 2014), as suppliers’ and buyers’ incentives and perspectives no longer aligned with broader platform goals. Broader advancements in information technology facilitated such discontent as it drastically lowered search costs for buyers and suppliers. Respondents additionally pointed to the gradual failure of Li & Fung’s generativity. The platform failed to generate sufficiently differentiated, fashion-sensitive products, even though differentiation formed the backbone of many buyers’ product strategy. An important area involved product design. Due to rising cost concerns, buyers were outsourcing a significant chunk of design operations to Asian suppliers since the 1990s, including to Li & Fung. Li & Fung has responded to this demand through utilizing both in-house technical staff and nearby design and sampling rooms. Internally, the company adopted a cellular structure where design and creative and technical personnel (designers, product developers, and merchandisers) were allocated to teams that exclusively catered to different brand customers (Magretta, 1998). Such an organizational design was intended to limit information sharing between teams so that the designs presented to different clients would be sufficiently distinct. Respondents, however, noted significant limits to this method. The heavily networked ecosystem, despite the brand teams’ clear separation, created a situation where knowledge on novel designs and trends easily spread through the system. Designers and product developers regularly

66

S. SHIN

traveled to networked complementors’ factories to supervise production and access competitors’ designs since the same factories assemble for numerous brands. Most designers and product developers explained that their work involved fast modification of existing styles based on trend reports and market research, instead of generating genuinely novel designs each season. The sheer number of products they were asked to design only exacerbated this tendency. As a complementor’s designer who worked with Li & Fung noted: One problem that arose was how often designs overlapped. Li & Fung’s designers …they are… all in Hong Kong…and all use the same factories. It is easy to get overlapping designs. (b4) Li & Fung makes it easy for buyers… Li & Fung designers will present several development samples and tell buyers to pick what they like…. But this makes it too easy for buyers to end up with products that look too similar to competitors. (g2)

The density and geographical concentration of Hong Kong also contributed to fast-traveling information among designers, most of whom are graduates of Hong Kong Polytechnic University and have overlapping networks. While the platform and the ecosystem literature suggest that failures of generativity could be rectified through proper platform design and governance (Wareham et al., 2014), apparel industry’s characteristics where ideas and trends are routinely imitated and copyright protections are nonexistent make quality control extremely difficult. In addition, respondents noted that Li & Fung’s compliance checks only slowed production in an industry in which speed constitutes a significant competitive priority. Their global team, located in Hong Kong, somehow makes things more complicated… They have lots of policies, lots of rules, lots of forms and paper works that they impose on buyers and suppliers, so, no… it’s not fast. (g1)

Li & Fung’s designers and technical workers do not necessarily disagree with these assertions. Several reaffirmed the ease in design access through factory supervision trips (p2, p4, p5), and the platform’s focus on increasing SKUs using modular technologies have made designers and product developers focus on throughput rather than actual creativity (p3,

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

67

p4). Designers’ short tenure and frequent job switching only accelerated the spread of generic designs. In an industry where much technology is considered “generic” (Sturgeon, 2009) and cutthroat competition regularly triggers downward price pressures and “immiserating growth”, a potentially more serious issue concerned value allocation and capture between the ecosystem participants. As margins became thinner industry-wide, significant dissatisfaction over the platform’s value proposition surfaced fueling platform participants’ disintermediation intentions. Complementors started to see Li & Fung’s involvement as chipping away at their already low margins. Vendors ship on FOB (free on board) terms… prices include inland freight plus product cost. Buyers pay on LDP (landed duty paid) terms to Li & Fung. Li & Fung then coordinates the transaction, pays suppliers, and takes the difference as profit… Buyers’ price includes Li & Fung’s commission which amounts at the minimum 5% …sometimes up to 13% of product cost. The problem is that buyers are pretty strapped these days… 13% is too much. So, to facilitate the trade, Li & Fung sometimes requests that the vendor cover the rest. So the question arises, not just for the buyer but also for the vendor….what expenses are we going to cut to cover the 5% fees and still profit? (a3)

Other respondents reiterated this sentiment. For a $3 garment, vendors’ margins are 60 cents after fabric and input. After factoring in other admin and indirect costs, you will leave one or two cents per piece. This is the basic structure of the garment manufacturing industry…. Profiting through an intermediary like Li & Fung has become really difficult. (b2)

However, several respondents noted buyers’ dissatisfaction with Li & Fung’s value proposition. American brands wanted to save costs with the down economy and poor consumer spending … They wanted to keep the five to ten percent fees for themselves [by] working directly with factories. (g1) The problem with the model is cost. Involving an agent will naturally be expensive. But most buyers in this industry are mid-tier and low-cost players.

68

S. SHIN

Many are struggling already with the rise of online retailing and shrinking apparel market. So, there were questions…[regarding] whether buyers will really continue paying that much to Li & Fung. … (a3)

4.3

Disintermediation Avenues and Processes

Disintermediation requires organizing an alternative method of transaction outside of the platform (Baldwin, 2020). The easiest option is to join a competitor’s platform (Cennamo & Santaló, 2019), but garment industry participants preferred to embrace bilateral value chain governance and forego the middleman model (Gereffi et al., 2005) through direct transaction. In particular, buyers often approached larger suppliers with whom they already had working relationships. All those apparel brands from America, some Europeans, started to build own buying offices here in Asia. Hong Kong, Shanghai, now in Ho Chi Minh, Vietnam.... (g2) They’ve [buyers] expanded sourcing operations for… five to ten years. Previously, brands worked through agents. Many now work directly through sourcing offices in Asia… (b1)

Suppliers that prioritized existing relationships with agents often took losses. In early 2010, one brand asked us to decide …to work directly with them through their Hong Kong office. But we decided to stick with Li & Fung…. because our history. When we first worked with Li & Fung, we were only a small factory... but now we have factories in three countries. But soon, the brand….took away all orders. 20 million in revenue .disappeared. (g3)

In place of the platform, buyers set up novel supply chain programs and placed direct orders with suppliers to rectify the inefficiencies of platform coordination. Before, agents set up complex supply chains. Linking hundreds of suppliers to buyers at a time. Some buyers had over 100 to 150 knit suppliers alone. They selected suppliers style-by-style… asking at least three factories to produce samples and price lists, and ordered with the factory that provided the cheapest bid. … But buyers got stuck with cheap, low quality products that won’t sell

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

69

and after a while, became skeptical about the advantages of having that many suppliers. Because… focus on cost, suppliers provided neither good service nor quality performance. So, buyers bypassed agents and simplified things…(b3).

Buyers consolidated their vendors to impose stricter quality standards, prioritizing more competent suppliers that were vertically equipped (Merk, 2014). Vendor awards and buyers’ supply chain programs set the new codes for suppliers. Around 2008, buyers initiated new SCM programs. They developed vendor awards …Platinum, Gold, Silver vendor statuses… Top five, Top ten vendor awards. … Kohl’s only counted their top ten vendors as “premium.” For Gap, only the top five became their first-tier vendors. Those top suppliers got guaranteed orders. (b1) Everyone wants a vendor award now. That’s what suppliers compete for now. Things changed. (g1) Becoming a top five vendor for big buyers… became crucial. What is interesting is, the largest buyers … Gap, JCPenney, Kohl’s, Wal-Mart…would select the same five vendors… Because buyers are looking for similar capabilities that not all suppliers have. Premium vendors scaled fast during this period to win the competition and to get those vendor awards. They got big quick. But things are bad for the smaller guys. (a2) I think it worked for buyers… They could easily secure 70-80% of inventory through partnering with top vendors. Products might immediately cost more this way, but… it’s ultimately smarter. Reduced errors, better quality, and service. But even when companies like Wal-Mart was reducing their overall volume, they ordered more with top suppliers. We had to [to become a top supplier] increase our production volume 10-15% annually. (a4)

As direct engagement deepened, complementors no longer perceived Li & Fung as merely a collaborator but also as a competitor. Interviews illustrate how contention over value capture within mature ecosystems would motivate firms to draw up alternative models of organization. Li & Fung has become both our buyer and our competitor. They are still a large LDP operator, so we still receive orders and sell through them. But we also compete against Li & Fung and receive direct orders from buyers. … The large orders now directly come to vendors. That’s not how it used to be.

70

S. SHIN

AEO and Under Armor...and many others… all previous Li & Fung clients expanded direct dealings with vendors…. (b3) We had to continue to invest. 10%, 15%, 20% annually because of rapid increase due to this [disintermediation]. Right now, we have about 900 production lines… It’s became massive…. requires continued investment. (b1)

5

Platform-Substituting Multinational Growth

My archival coding supports the claim that supplier growth strategies and motivations drastically changed from 2005. Suppliers’ multinationalization involving platform-substitution is distinct from platform-complementing multinationalization illustrated above. Previously, suppliers multinationalized through entering similarly endowed low-cost and quota-hopping foreign locations for rapid and standardized replication of existing templates. After 2005, disintermediation transformed suppliers’ multinational focus. Consistent with Adner and Kapoor’s (2014) argument that firms are more likely to vertically integrate key components to manage interdependencies when technology is mature, suppliers started internalizing their platform functions. The archival contents illustrate this transformation in three ways. 1. Multinationalization: The number of countries suppliers operated in has increased from 2.2 in 2000 to 6.7 in 2016. Furthermore, suppliers not only increased the number of countries but also diversified the regions out of which they operate. For example, the multiregional strategy of operating out of Asia and Latin America has gained traction. 2. Vertical Integration: All supplier firms have recorded verticalityincreasing operations. Most notable are investments in the following areas: ● Upstream: Textile manufacture (spinning), and research. Textile and garment processing: Dyeing, washing, printing, and graphic production. ● Downstream: Branding and retailing, buyer-facing marketing, design, research, and development offices. These activities have transformed suppliers from simple assemblers to vertically integrated producers and at times,

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

71

retailers, while allowing suppliers to internalize functions that they previously accessed through Li & Fung. 3. Product diversification: Further straying from previous specialization, many have pursued related and unrelated diversification across product lines. More typical has been related diversification (from knitted to woven, from single to multiple categories), but some have invested in non-garment operations (packing material, shoes, gas, and oil refining). Respondents noted the importance of such scoping growth. They also noted that as they grew, Li & Fung’s platform activities narrowed: the agent firm became known as the specialized handler of “small lot” orders, a type of small batch order buyers seek out last-minute additions of trendy items in their lineup. For high-margin responsive supply chain operations, agent fees are not as cost-prohibitive. The extreme diversity of products in today’s garment economy requires brands to optimize supply chains at the item-demand level along requirements of volume, cost, speed, and flexibility (Shin, 2021). With this change, suppliers have strived to internalize the ability to accommodate those diverse needs and provide a one-stop alternative to Li & Fung’s platform [see Table 4 for these requisites and necessary capabilities]. Multinational and multiregional growth has been integral to suppliers’ ability to satisfy these multiple and conflicting supply chain demands. However, ability to process a variety of garments along supply chain priorities involves multinationalization not merely around replication and scaling but also in the internal establishment of scope. Since 2005, our goal has been to establish a multi-country base. Not many suppliers had that those days. Chinese megafactories all stayed in China, and maybe Vietnam. But buyers…, some want to produce cheaply in Asia, others want quick response…Many want to mix strategies for different products. You need to accommodate those demands. (b3)

In an industry where volume (cost) and speed (flexibility) constitute important tradeoffs for buyers, respondents understood the multiregional production base as a crucial way to imitate a platform’s complementarities. Multiregional production bases allowed suppliers to streamline

72

S. SHIN

Table 4

Competitive priorities and required supplier resources and capabilities

Supply chain priority

What

Necessary supplier resources and capabilities

Volume

Fulfill large volume orders

Cost-Efficiency

Low per-unit cost

Speed

Short lead time (time required to fulfill order)

Flexibility and responsivity

Scale up and down production along changing demand Responding to changing customers’ product needs

Large capacity factories in labor rich locations Siting in low labor cost locations Processes to raise cost-efficiency, including efficiency-maximizing distribution and production technology Server plants close to end-market Premium logistics and distribution networks Co-location of intermediate input suppliers Maintaining excess factory capacity and reserve workers to optimize operation Vertical integration of related operations (textile, processing, dyeing) allows for centralized and flexible control of resources Modular product design Agile manufacturing and postponement techniques

production along buyers’ competing priorities of volume, costs, speed, and flexibility and to draw on divergent locational advantages. As a production manager at Alpha notes: From the Caribbean to the US, it takes exactly 5 days to get the goods to the Port. From Asia to Long Beach, about 4 weeks. If we move goods through rail to the East Coast or Midwest to Chicago or Arkansas…. it would take 5 to 6 weeks. This might be too long for fashion-sensitive items. Lead time is significant. Some buyers would want Central America. (a4)

As another states: … The industry is complex. Different categories are subject to different tariff rates in the U.S. 18% for CAT338.9 (cotton-knit), 34% for CAT638.9 (synthetics). So, it might not be as beneficial to move cotton-based garment

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

73

production to a tax-advantaged location as it is for synthetics. For some products, buyers prioritize speed over costs or vice versa. For those fast-track orders…fashion-heavy products, they might want to locate production in Central America for speed advantages. If high quality is important, they might want to produce in Vietnam where standards are higher… (a3) Some buyers want R&R… “read and react” programs…and ask to relocate their volume from [low-cost Asian country] ‘a’ or ‘b’ to Central America to increase flexibility and responsivity. The thing is each factory has different costs…and cost can change based on style and volume. We can produce some styles cheaply in Latin America, others in Asia. Our pricing is usually based on the lowest-cost location. If buyers want to shift volume to other locations, they cover the increased costs. (a1)

Vertical integration of upstream inputs provides the advantage of speed. Because buyers …respond to market changes, see how the product sells, they tend to chase orders last minute. Production lead time is usually 120 to 150 days…. But buyers demanded that we cut that to two to three months, maximum. We need to act fast, coordinate with the mill…so now, all the biggest garment factories in the world, all of them have in common their own mill. (g1)

Whereas Li & Fung’s platform system’s generativity involved mobilizing suppliers to accommodate those diverse demands, buyers have found it more advantageous to directly partner up with a smaller number of competent suppliers to reduce various quality issues that stemmed from complex coordination in a loosely coupled system. Suppliers have in response developed the ability to mobilize complementary assets to cater to a diverse group of buyers with varied supply chain priorities. Back in the days, brands sent packages to Li & Fung and Li & Fung contracted with vendors and assigned work. Like textiles, sample development, following up with the different suppliers, but now our functions expanded… so we do it ourselves. (b2) Quite a lot of discussion among the executives about the new profit structure. I personally wanted to expand development and textiles by developing new

74

S. SHIN

partnerships with input suppliers, but other executives wanted to continue relying on Li &Fung-network and their management since they take care of so much more. We were split because brands often ask us to expand our functions, like AEO, American Eagle… wanted to bypass Li & Fung but without compensating us for our added work. They wanted to pocket the 5% or 7% commission rather than giving it to us. So, there was a lot of conflict…. (b2).

6

Conclusion

The chapter examined transformations in suppliers’ multinational strategies in relation to broader shifts in the global garment economy from approximately 2005. By doing so, it hoped to eliminate multinational strategy as a key dimension in recent supplier upgrading, and a missing piece in the literature on global production. The transformation I discussed in Korean suppliers’ multinational strategies—from platform complementors, engaging in and contributing to a fragmented supply landscape, to vertically integrated multinational suppliers, emphasizing both economies of scope and scale—is in some ways illustrative of the dynamic inherent in any global production, or business landscape. There is nothing new to the insight that market participants oscillate between cooperation and competition, or between hierarchy and network strategies as they respond to changes in their external competitive landscape and technological advancements (Chandler, 1977; Feenstra, 1998; Powell, 1990). Business actors need to respond continuously to shifting market opportunities by routinely and dynamically reconfiguring their internal and external competencies or risk extinction (Teece, 2009). What is perhaps new about the current transformation to reverticalization is the extent to which it is led by firms once at the periphery of global production as suppliers, and how it is affecting the continued viability of development through garments. Organization is not only a vehicle for firms to navigate and respond to changing technology, demand, and competitive environments to gain control of their situation, but also, to the extent the choice of organization of top firms concentrates the overall industry architecture, a key determinant that structures the opportunities for less resource-endowed players. While not all firms survive such periodic shifts, Korean megasuppliers, once heavily dependent on buyers and intermediaries to hand down

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

75

production expertise and techniques, have learned to leverage their capabilities and take on a much more substantial role in setting the supplier landscape. The result has been the rising concentration of the global garment economy led by a handful of supplier firms whose worldwide plants process an ever-growing number of garments in a more concentrated manner, in conjunction with big retailers’ growth and consolidation of the buying landscape (Hamilton & Shin, 2015; Shin, 2020; Shin & Kim, 2020).

Appendix A. List of Respondents

Location

Firm

Interviewee ID

Title

Korea

Alpha

A1 A2 A3 A4

Beta

B1 B2 B3 B4 G1 G2 G3 P1 P2 P3 P4 P5

Senior executive director Deputy general manager Senior vice president Team manager, production and operations Senior executive director Executive director of sales Deputy general manager R&D designer Team manager, sales Managing director, technology Senior executive director Design team lead Senior merchandiser Product developer Product developer Sourcing manager

Gamma

Hong Kong

Li & Fung

76

S. SHIN

B. Coding of Archival Sources: Examples

Source

Example

Type

Supplier webpage

“We expanded production capacity in Indonesia to take advantage of the rich assembly infrastructure in print and embroidery. As a result, we are effective in dealing with buyers who require fashion-heavy products.” “Our newly established New York design office plays an important value creating role for us. The office links the Seoul headquarters’ R&D team to this leading global fashion city, to improve our design capabilities and communication with buyers. It provides important synergies with our current operations and allows us to establish ourselves as a leading ODM company.” ….“cost competitiveness of Haiti as labor costs only half of Vietnam.” “Previously we imported our fabric from China, but the newly built Indonesian fabric plant allows us to insource. We now have a vertical system in Indonesia where we weave, dye, process, assemble.” “In May 2001, we entered Vietnam given the high skilled and inexpensive labor present there. We built additional assembly facilities in 2005 and 2010. Larger orders from buyers have led us to add 100 new production lines in facility number 3 this year. In facility 3, we currently operate 169 knit and woven production lines that annually produce 56 million pieces of garments.” “In 2011, we invested in a fabric manufacturing facility near our Vietnam plant. We continued to invest and strengthen its print, dyeing, and coloring capabilities to support our Vietnam facility and improve our competitiveness in fabric. With our newly established vertical capabilities, we are able to respond more effectively to buyers’ demand.”

Scaling

Press release and industry publications

Annual report

Scoping

Scaling Scoping

Scaling

Scoping

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

77

C. Scaling and Scoping Growth as Coded in the Archival Sources

References Adner, R. (2017). Ecosystem as structure: An actionable construct for strategy. Journal of Management, 43(1), 39–58. https://journals.sagepub.com/doi/ pdf/10.1177/0149206316678451 Adner, R., & Kapoor, R. (2014). Value creation in innovation ecosystems: How the structure of technological interdependence affects firm performance in new technology generations. Strategic Management Journal, 31(3), 306–333. https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.821 Appelbaum, R. P. (2008). Giant transnational contractors in East Asia: Emergent trends in global supply chains. Competition & Change, 12(1), 69–87. https:/ /doi.org/10.1179/102452908X264539 Azmeh, S., & Nadvi, K. (2014). Asian firms and the restructuring of global value chains. International Business Review, 23(4), 708–717. https://doi.org/10. 1016/j.ibusrev.2014.03.007 Baldwin, C. Y. (2020). Ecosystems and complimentary (Harvard Business School Working Paper). https://www.hbs.edu/ris/Publication%20Files/21-033_159 1883e-62f8-44aa-b571-fadcb2384120.pdf Bonacich, E., Cheng, L., Chinchilla, N., Hamilton, N., & Ong, P. (1994). Global production: The apparel industry in the Pacific Rim. Temple University Press.

78

S. SHIN

Buckley, P. J. (2009). Internalisation thinking: From the multinational enterprise to the global factory. International Business Review, 18(3), 224–235. https:/ /doi.org/10.1016/j.ibusrev.2009.01.006 Buckley, P. J. (2018). The global factory: Networked multinational enterprises in the modern global economy. Edward Elgar Publishing. Cennamo, C., & Santaló, J. (2019). Generativity tension and value creation in platform ecosystems. Organization Science, 30(3), 617–641. https://doi.org/ 10.1287/orsc.2018.1270 Chandler, A. (1977). The visible hand: The managerial revolution in American business. Harvard University Press. Chliova, M., & Ringov, D. (2017). Scaling impact: Template development and replication at the base of the pyramid. The Academy of Management Perspectives, 31(1), 44–62. https://doi.org/10.5465/amp.2015.0010 Eisenhardt, K. M. (1989). Building theories from case study research. Academy of Management Review, 14(4), 532–550. https://doi.org/10.5465/amr.1989. 4308385 Feenstra, R. (1998). Integration of trade and disintegration of production in the global economy. Journal of Economic Perspectives, 12(4), 31–50. https://doi. org/10.1257/jep.12.4.31 Feng, Bang-yan. (2012). A hundred years of Li & Fung: Supply network orchestrator for Asia and beyond. Cengage Asia. Fold, N. (2002). Lead firms and competition in ‘bi-polar’ commodity chains: Grinders and branders in the global cocoa-chocolate industry. Journal of Agrarian Change, 2(2), 228–247. https://doi.org/10.1111/1471-0366. 00032 Frederick, S., & Staritz, C. (2012). Developments in the global apparel industry after the MFA phaseout. In G. Lopez-Acevedo & R. Robertson (Eds.), Sewing success? Employment, wages, and poverty following the end of multi-fiber arrangement (pp. 41–86). World Bank Group. Gereffi, G. (1999). International trade and industrial upgrading in the apparel commodity chain. Journal of International Economics, 48(1), 37–70. https:/ /doi.org/10.1016/S0022-1996(98)00075-0 Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78–104. https://doi.org/10.1080/09692290500049805 Hamilton, G. G., & Shin, S. I. (2015). Demand-responsive industrialization in East Asia: A new critique of political economy. European Journal of Social Theory, 18(4), 390–412. https://doi.org/10.1177/1368431014568425 Jacobides, M. G., Knudsen, T., & Augier, M. (2006). Benefiting from innovation: Value creation, value appropriation and the role of industry architectures. Research Policy, 35(8), 1200–1221. https://doi.org/10.1016/j.respol.2006. 09.005

KOREA’S MULTINATIONAL GARMENT SUPPLIERS …

79

Kaplinsky, R. (1998). Globalisation, industrialisation and sustainable growth: The pursuit of the Nth rent. Institute of Development Studies. Kaplinsky, R. (2004). Competitions policy and the global coffee and cocoa value chains (Institute of Development Studies, Sussex, Brighton, UK). Kapoor, R. (2018). Ecosystems: Broadening the locus of value creation. Journal of Organization Design, 7 (1), 1–16. https://doi.org/10.1186/s41469-0180035-4 Lee, J., & Gereffi, G. (2015). Global value chains, rising power firms and economic and social upgrading. Critical Perspectives on International Business, 11(3/4), 319–339. https://doi.org/10.1108/cpoib-03-2014-0018 Lechner, C., Lorenzoni, G., Guercini, S., & Gueguen, G. (2020). Supplier evolution in global value chains and the new brand game from an attention-based view. Global Strategy Journal, 10(3), 520–555. https://doi.org/10.1002/gsj. 1381 Magretta, J. (1998). Li & Fung: Fast, global, and entrepreneurial—Supply chain management Hong Kong style. Harvard Business Review. https://hbr.org/ 1998/09/fast-global-and-entrepreneurial-supply-chain-management-hongkong-style Merk, J. (2014). The rise of tier 1 firms in the global garment industry: Challenges for labour rights advocates. Oxford Development Studies, 42(2), 259–277. https://doi.org/10.1080/13600818.2014.908177 Ponte, S., & Gibbon, P. (2005). Quality standards, conventions and the governance of global value chains. Economy and Society, 34(1), 1–31. https://doi. org/10.1080/0308514042000329315 Ponte, S., & Sturgeon, T. (2014). Explaining governance in global value chains: A modular theory-building effort. Review of International Political Economy, 21(1), 195–223. https://doi.org/10.1080/09692290.2013.809596 Powell, W. (1990). Neither market nor hierarchy: Network forms of organization. Research in Organizational Behavior, 12, 295–336. Sako, M., & Zylberberg, E. (2019). Supplier strategy in global value chains: Shaping governance and profiting from upgrading. Socio-Economic Review, 17 (3), 687–707. https://doi.org/10.1093/ser/mwx049 Schrank, A. (2004). Ready-to-wear development? Foreign investment, technology transfer, and learning by watching in the apparel trade. Social Forces, 83(1), 123–156. https://doi.org/10.1353/sof.2004.0126 Schmitz, H., & Knorringa, P. (2000). Learning from global buyers. Journal of Development Studies, 37 (2), 177–205. https://doi.org/10.1080/713600073 Scott, A. J. (2006). The changing global geography of low-technology, laborintensive industry: Clothing, footwear, and furniture. World Development, 34(9), 1517–1536. Shin, S. (2019). Transforming into fashion firms or multi-country suppliers? Accounting for varied firm trajectories in the deindustrializing Korean apparel

80

S. SHIN

industry. The Journal of Development Studies, 55(1), 1–18. https://doi.org/ 10.1080/00220388.2017.1404032 Shin, S. (2020). East Asia’s retail revolution: Diffusion of organized retailing and varieties of market development in Korea and Taiwan. Competition & Change, 24(3–4), 358–387. https://doi.org/10.1177/1024529420919362 Shin, S. (2021). Implementing agility in a big firm-driven economy: Digital disruption and Korea’s retail chaebol. In The Routledge companion to asian family business (pp. 298–312). Routledge. https://doi.org/10.4324/978042 9342813 Shin, S., & Kim, L. (2020). Chaebol and the turn to services: The rise of a Korean service economy and the dynamics of self-employment and wage work. Journal of Contemporary Asia, 50(3), 433–456. https://doi.org/10.1080/ 00472336.2019.1565130 Sturgeon, T. (2009). From commodity chains to value chains: Interdisciplinary theory building in an age of globalization. In J. Bair (Ed.), Frontiers of commodity chain research (pp. 110–135). Stanford University Press. Teece, D. J. (2009). Dynamic capabilities and strategic management: Organizing for innovation and growth. Oxford University Press on Demand. Wareham, J., Fox, P. B., & Cano Giner, J. L. (2014). Technology ecosystem governance. Organization Science, 25(4), 1195–1215. https://doi.org/10. 1287/orsc.2014.0895 Whitfield, L., & Staritz, C. (2021). The learning trap in late industrialisation: Local firms and capability building in Ethiopia’s apparel export industry. The Journal of Development Studies, 57 (6), 980–1000. https://doi.org/10.1080/ 00220388.2020.1841169 Winter, S. G., & Szulanski, G. (2001). Replication as strategy. Organization Science, 12(6), 730–743. https://doi.org/10.1287/orsc.12.6.730.10084 Yeung, H. (2016). Strategic coupling: East Asian industrial transformation in the new global economy. Cornell University Press.

Toward a Bipolar Apparel GVC? From the Perspective of First-Tier Suppliers Hyunji Kwon, Jinsun Bae , Joonkoo Lee , and Sun Wook Chung

1

Introduction

Multinational corporations originating from emerging economies (from hereon, emerging MNCs) have made their mark globally over the past few decades (Coe & Yeung, 2014; Gereffi, 2014). What is notable is that not only lead firms in each industry but also first-tier suppliers (FTSs) are becoming more visible as emerging MNCs. This paper investigates an emerging FTS MNC that has successfully stepped up and is currently playing a strategic partner role in the apparel global value chain (GVC), a strong foothold of buyers with unipolar dominance. We aim to see if this company’s upgrading as a strategic FTS also suggests the withering unipolar governance structure of the GVC. The rise of emerging MNCs as strategic suppliers is not a rare phenomenon, as it has been found to be occurring in many GVCs,

This is a reprint of Kwon, Hyunji, Jinsun Bae, Joonkoo Lee and Sun Wook Chung. (2021). “Toward a Bipolar Apparel GVC? From the Perspective of First-Tier Suppliers.” Journal of Asian Sociology 50(1): 9–32. H. Kwon (B) Department of Sociology, Seoul National University, Seoul, South Korea e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. Lee et al. (eds.), Knitting Asia, Weaving Development, https://doi.org/10.1007/978-981-99-3764-6_4

81

82

H. KWON ET AL.

including electronics (Tabata, 2021), mining (Chen, 2021), and car manufacturing (Alvstam et al., 2020) chains. However, this phenomenon is particularly noteworthy in value chains known to be buyer-driven and unipolar, where lead firms have traditionally been a driving force behind chain configuration and coordination (Ponte & Sturgeon, 2014). The apparel value chain is a flagship example (Appelbaum & Gereffi, 1994; Gereffi, 1999). Scholars (e.g., Azmeh & Nadvi, 2014; Merk, 2014) note that some suppliers from emerging economies have been taking responsibility for a large share of their lead firms’ production orders and offering them high value-adding services such as research and development (R&D) and logistics. Suppose strategic suppliers are highly capable and becoming indispensable to their lead firms’ success and survival. In that case, one could put the premise of the apparel chain’s unipolarity to the test. To our knowledge, the potential emergence of bipolarity in the apparel value chain has not been documented in the GVC literature, and we aim to contribute to filling this gap. Our case study using one of the largest Korea-based first-tier apparel suppliers could help us hypothesize emergent bipolarization in apparel GVC governance. This study can make the following contributions. First, a detailed look at strategic suppliers’ operations contributes to the current GVC literature that focuses mainly on lead firm roles. It also extends the conceptual room to anticipate the evolution of chain polarity in apparel GVCs. Second, it is a multilevel inquiry investigating how global- and chain-level dynamics interact with within-organizational practices at the supplier level. We argue that this inquiry complements existing macrolevel studies of chain polarities (Coe & Yeung, 2014). Finally, this study also

J. Bae Sprott School of Business, Carleton University, Ottawa, ON, Canada e-mail: [email protected] J. Lee School of Business, Hanyang University, Seoul, South Korea e-mail: [email protected] S. W. Chung School of Business, Sogang University, Seoul, South Korea e-mail: [email protected]

TOWARD A BIPOLAR APPAREL GVC? FROM …

83

offers practical insights for emerging MNCs pursuing upgrading strategies. Existing literature on upgrading tends to focus on supplier strategies to enhance the scale and the efficiency of production or acquire new value chain functions (Dindial et al., 2020), with little regard to managerial initiatives that supported such upgrading strategies. This study can make a unique contribution by detailing the case company’s managerial initiatives, shedding light on the conditions that help sustain their status as a strategic supplier. Specifically, we explain organizational changes linked to the case company to stay cost-competitive while gaining new value chain functions.

2

Literature Review

Emerging MNCs have become increasingly prominent and visible in the global marketplace. So is the scholarly interest to understand how they operate and whether they function differently from more established MNCs from Western economies (Cuervo-Cazurra, 2012; Gereffi, 2014). On the one hand, a growing number of emerging MNCs have become new lead firms in various industries such as the mobile phone, telecom, and wind turbine industries, threatening the market dominance of existing lead firms from North America or Europe (BloombergNEF, 2020; Dell’Oro group, n.d.; Mourdoukoutas, 2018). Less noticeable to the public’s attention is emerging MNCs’ prominence as suppliers of Western lead firms. Many suppliers from emerging economies have been upgraded to become strategic partners to their lead firms over time. Many of these suppliers have also gone global, not merely following in the footsteps of their lead firms, but in making strategic locational choices. we refer to this sort of supplier as a strategic supplier. As an empirically driven concept, a precise definition of strategic suppliers is still in the making. Azmeh and Nadvi (2014) adopted this term early on to refer to suppliers that fulfill a broader set of value chain functions beyond original equipment manufacturing (OEM), taking over higher value- added roles that used to be within the exclusive domain of lead firms, such as R&D and logistics. Coordinating a large portion of value chain functions devolved from their lead firms means that these suppliers can “orchestrate the flows of goods, components, capital, labor, and information throughout the circuits of the chain,” which renders them as almost “co-leads” or “strategic and pivotal firms” (ibid., p. 709).

84

H. KWON ET AL.

This term resonates with “contract manufacturers” in electronics GVCs examined in Raj-Reichert (2020). Similarly, the consolidation of supplier bases and shedding of supply chain functions by lead firms allowed these manufacturers to grow and command their own global networks of second-tier manufacturing and component suppliers. In their study, the lead firms reportedly outsourced up to 80% of their production to a few key contract manufacturers, which enables their oligarchic presence in electronics GVCs (ibid.). Another related concept is tier-one suppliers, as discussed in Merk (2014) in the context of apparel GVCs. They note that in addition to their shared labor practice characteristics (e.g., substandard working conditions, anti-union attitudes, etc.), these suppliers have relatively stable sourcing relations with lead firms. They also operate production sites in multiple countries and achieve an advanced level of industrial upgrading to the point of being “total-service providers” (ibid., p. 265). Based on the existing studies, we identify the following characteristics of typical strategic suppliers: (1) time-tested business relationships with major lead firms in respective GVCs, (2) increased control over upstream (sourcing of production inputs) and downstream (supply chain management) activities, and (3) signs of growing influence and leverage vis-à-vis lead firms. We reckon that the least likely and challenging environment, a buyer-driven and unipolar GVC, offers us the confirmation and the best understanding of the presence and the characteristics of strategic suppliers. In this chain, production activities are highly fragmented and distributed across many suppliers and geographies, which enable lead firms to play a dominant role in the chain configuration and maintain buyer-drivenness (Gereffi & Frederick, 2010; Pananond et al., 2020; Ponte & Sturgeon, 2014). The apparel value chain is a flagship example (Appelbaum & Gereffi, 1994; Gereffi, 1999). It exhibits high power asymmetries between lead firms and their suppliers. In a typical relationship, the lead firms, namely buyers, monopolize high value-adding functions (e.g., the design, branding, and marketing of products), and suppliers fiercely compete for manufacturing outsourced by these lead firms (Gereffi & Frederick, 2010). Buyers often form captive linkages with their suppliers (Gereffi et al., 2005), whereby the suppliers are confined to simple assembly activities and have to rely on their buyers for complementary inputs, ranging from raw material sourcing to product design. Also, lead firms have dominated the access to Western consumer markets with their branding and marketing power, and suppliers have

TOWARD A BIPOLAR APPAREL GVC? FROM …

85

not been successful in breaking into these markets on their own (Merk, 2014). Thus, this captive linkage by and large does not amount to a reciprocal relationship. Rather, buyers are known to be free to depart the relationship when the suppliers fail to meet buyers’ economic and social standards. So far, governing apparel GVCs has been conceptualized as lead firms’ driving or linking with suppliers. The latest theoretical update focuses on the “normalizing” aspect of GVC governance (Gibbon et al., 2008; Ponte & Sturgeon, 2014). Normalizing refers to “re-aligning a given practice to be compatible with a standard or norm” (Ponte & Sturgeon, 2014, p. 206), and this type of governance is undoubtedly happening in apparel GVCs. Lead firms have increasingly turned to private regulation of labor and environmental practices at the supplier level (Lund-Thomsen, 2020; Nadvi, 2008). The vast majority of lead firms create codes of conduct and specify desirable labor and environmental practices that suppliers must adhere to. Alternatively, lead firms adopt sustainability standards developed by multi-stakeholder initiatives and require their suppliers to comply with these standards to access the firms’ supply chains. Suppliers cannot negotiate the contents of these codes which are aligned with comparable international standards (e.g., International Labour Organization’s core conventions) (Bae et al., 2021). When suppliers repeatedly fail to show compliance or violate critical requirements (e.g., no child labor), lead firms may sever sourcing ties with them (Amengual et al., 2020). The rise of strategic apparel suppliers requires us to revisit the assumption of the unipolar and buyer-driven nature of the apparel value chain. If these strategic suppliers have amassed sufficient capability and power to influence buyer-driven chain governance, the chain is perhaps becoming bipolar. In a bipolar chain, two actors, generally lead firms and their first-tier suppliers, are responsible for shaping the chain dynamics and governance (Ponte & Sturgeon, 2014). For example, Fold (2002) details the bipolar structure of the chocolate industry led by cacao grinders and chocolate manufacturers. Consolidation among cacao grinders and manufacturers’ outsourcing of additional chain functions to these grinders meant that this market segment is now dominated by a few large international cacao grinders such as ADM and Cargill. The manufacturers have been seeking a new relationship with medium-sized cacao grinders and international traders, intending to alleviate their dependence on the mega

86

H. KWON ET AL.

grinders’ oligopolistic power. Some other sectoral chains, including electronics (cf. laptops in Kawakami, 2011) and food sectors (cf. sustainable shrimp in Islam, 2008; cashews in Tessmann, 2018) have witnessed similar dynamics of bipolarity. As Ponte and Sturgeon (2014) observes, the GVC literature can benefit from more empirical studies that understand how chain polarity evolves. The aforementioned studies and the study of multipolar biofuel chains (Ponte, 2014) examine this change at the industry level. To complement this macro-level understanding, a small but growing number of scholars have been trying to document the evolution of chain polarity from the perspective of GVC actors (Lechner et al., 2020; Pananond, 2016; Pananond et al., 2020). They focus on how these individual actors propelled, resisted, or adapted to changing power dynamics and the division of labor between lead firms and first-tier suppliers. For example, Pananond (2016) tracks the evolution of the Thai Union Group from a local tuna cannery to the world’s third-largest seafood company by focusing on its organizational strategies that led to improved power positioning vis-à-vis lead firms. Lechner et al. (2020) analyze the emergence of a possible bipolar chain in the sports footwear industry from a lead firm perspective. The study argues that lead firms’ myopic attention on downstream activities is to blame for them being blindsided by the rise of powerful suppliers (that resemble strategic suppliers), some of them becoming lead firms and thus direct competitors to established lead firms (Navas Aléman). The conceptual paper by Pananond et al. (2020) proposes four types of global strategies (two lead firm-centric and two supplier-centric) that concern governing value chains within and outside the firm. These studies are a part of a welcome endeavor to unpack how chain polarity informs the roles and strategic actions of GVC actors and how these actions have been shaking and perhaps reorganizing the governance structure of a traditionally unipolar GVC (Coe & Yeung, 2014; Lee & Gereffi, 2021). Yet, there are only a few studies, all of which undertake retrospective analyses. As a result, company strategies and organizational initiatives are often portrayed as having been implemented as planned and generated expected outcomes, and organizational-level struggles and the messy processes of implementation are hidden or underplayed. Taking stock of this literature review, we address how strategic suppliers in the apparel value chain have emerged and whether this development signals emergent bipolarity of the chain. We intend to distinguish our study by

TOWARD A BIPOLAR APPAREL GVC? FROM …

87

shedding light on the “ongoing” efforts and struggles from a strategic supplier perspective, in addition to a retrospective analysis on the rise of strategic suppliers and changes in the governance of apparel GVCs.

3

Data and Methodology

In pursuing this question, we opted for a single-case study of a Korean first-tier apparel manufacturer. Company K (anonymized by authors) is one of the larger Korean apparel manufacturers, with more than 500 employees in its headquarters and over 35,000 employees worldwide. It started its supplier business in 1982 and its growth hit its stride over the last two decades. According to their annual reports, its annual sales revenue surged almost tenfold over 15 years. Also, Company K has been active in expanding its footsteps globally during the same period. It runs 12 offshore Cut-Make-Trim (CMT) operations in six countries in Asia and Central America and three sales offices in the United States. Knitted women’s apparel is vital to their business, accounting for 4/5 of annual production in 2014. Clients (i.e., buyers) consist of US-based specialty store brands, mass merchants, and department stores, including Gap, Walmart, JC Penny, Kohls, etc. Information on Company K’s share of production for each major buyer is not available and may vary year to year, but other information sources suggest a few things. First, more than 90% of their revenue came from the United States, indicating a heavy reliance on American buyers. Second, the supply for specialty store brands and fast fashion brands accounted for 60% of its revenue in 2014. We chose this case company for its representative and unique values (Yin, 2003). We posit that its organizational capability and the scale and duration of working relationships with major buyers are representative of strategic suppliers in the apparel GVC. At the same time, the company is unique in that instead of having a centralized sales function, each sales team is organized to support a particular buyer, offering comprehensive service. Each team is responsible for communicating with its buyer, finding factories, and organizing garment production. Accounting is team-based, and when a team loses a buyer, it is disbanded and absorbed into other teams. This decentralized team-based organizational arrangement has facilitated speedy and tailored support to each buyer, while undercutting the company’s ability to foster collaboration and pool resources across teams. From an academic standpoint, this company’s

88

H. KWON ET AL.

internal organization makes it easier to track changing dynamics with buyers. Our data consists of 16 interviews with Company K’s senior and middle managers. We conducted these interviews at Korean headquarters, Vietnam subsidiaries, and an office in the United States between 2018 and 2020. Table 1 provides anonymized interviewee profiles. We chose this set of managers because their routine work involves coordinating work and communicating with colleagues and partners across borders. In doing so, they participate in and support the company’s global operation as a strategic supplier in the apparel GVC. All interviews were conducted in Korean, a native language of authors and interviewees, and their lengths ranged from 45 minutes to 2 hours (on average, one and a half hours in length). All except one group interview was tape-recorded after seeking consent from interviewees and transcribed verbatim for our analyses. We complemented this interview data with various secondary information, such as the company website, apparel industry reports, and news articles concerning the case company, supply chain issues of its major buyers, and the global apparel industry. The data were pooled and organized using a qualitative data analysis software, NVivo 12. The purpose of data analysis was to understand the current state of chain polarity in the apparel value chain through the experience of a strategic supplier, Company K, and to qualify whether the chain has become more bipolar. We undertook the constructive approach to coding (Charmaz, 2006) characterized by constant comparison between prior knowledge and data-driven insights. Firstly, we engaged in open coding to identify emergent themes and patterns in the data. Then, informed and guided by our prior knowledge of the apparel value chain and unipolarity, we developed axial codes and higher conceptual categories by merging and reorganizing open codes we had previously created. At this stage, it became clearer to us that the lens of unipolarity could not fully explain Company K’s experience as a strategic supplier as well as the buyer– supplier dynamics of the value chain in which it participated. In the next stage of axial coding, we focused on signs of emergent bipolarization in this chain as manifested in the changes and recent practices at the global (or industry) and organizational levels. Taking stock of these analyses, we articulated how bipolarity has emerged in a traditionally unipolar chain and shaped the organizational practices of the strategic supplier.

TOWARD A BIPOLAR APPAREL GVC? FROM …

89

Anonymized interviewee profiles

Table 1 I.D

Interview date

Location

Job title

1 2 3 4 5

January 2018

Vietnam

March 2018

Headquarters (Seoul)

Vice managing director Deputy general manager Deputy general manager Team manager Managing director, Management support Vice managing director, Production innovation Managing director, Compliance Team manager, Human resources Team manager, Sales A Team manager, Sales B Team manager, Overseas unit support Team manager, Compliance and sustainability Deputy general manager, Research & development Managing director, Sales

6 7 8 9 10 11

August 2018

12 13 14 15 16

January and July 2019 April and July 2019

United States

Team manager, Sales Assistant team manager, Sales

4 4.1

Findings

Foundations of a Buyer-Driven and Unipolar Chain

Our case study confirmed that the apparel value chain in which Company K was embedded showed certain characteristics of a unipolar and buyerdriven chain. Firstly, interviewees noted the structural factor of buyerdrivenness, whereby a large number of suppliers competed with each other to work with lucrative buyers who were much fewer in number. Major North American and European buyers were highly coveted because they had access to promising export markets in advanced economies. The volume of their orders was sizable, allowing these suppliers to reap

90

H. KWON ET AL.

more significant profits and higher production efficiency.1 According to interviewees, the upgrading of suppliers in other Asian countries (such as Bangladesh and India) intensified the competition at the supplier level. Not only could they produce more efficiently than before (process upgrading), but they have also amassed the organizational and operational capacity to fulfill higher value-added functions. Suppose these competitors operate in countries offering cheaper labor costs. In that case, all things being equal, that could still undermine the cost competitiveness of Company K. Thus, the pressure for cost reduction posed by lead firms firmly remains. Let us say our company is a Sri Lankan company. At a fraction of the cost, that company can hire top talents, Seoul National University graduate equivalents of Sri Lanka, and operate with such workforce. No matter where you operate, buyers pay you the same. That means profit margin is better in countries like Sri Lanka. (Interviewee 11, August 2018)

We also learned that until recently, US buyers employed agents as middlemen between first-tier suppliers and themselves. Interviewees mentioned that in their earlier days, people working at the supplier company were not as fluent in English, hindering seamless communication with buyers. The buyers then hired intermediary agents whose employees were Korean to help resolve language and cultural issues when communicating and coordinating were required. Suppliers’ insufficient experience in working directly with these US buyers delayed their capacity building, including coordination skills, and prolonged their power asymmetry. However, as the case company gained experience and know-how by working with key buyers and more suppliers became skilled in English communication, the intermediary agents became less useful, and their roles gradually withered away. Some felt that these agents at times acted like gatekeepers to buyers by sharing information only selectively. Agents [in Hong Kong] need to justify their work, so they do not completely open their communications with buyers to us. [When I was working with an agent], it was difficult to execute certain things without seeing a big picture

1 Worker productivity at the factory increases over time and decreases when production items change frequently. Therefore, suppliers prefer receiving large orders from buyers that enable higher production efficiency.

TOWARD A BIPOLAR APPAREL GVC? FROM …

91

or understanding why we should do this. It was also difficult to undertake a nuanced price negotiation with buyers through agents. The agents wanted to hear from the buyers that “the agents lowered the price,” so they tended to be pushy with us on price. … Now that I work directly with my buyers, the process including setting a price is transparent. (Interviewee 15, April 2019)

Over the years, interviewees claimed that buyers required suppliers to comply with buyer-provided codes of conduct which impose desirable labor and environmental conditions for the production facilities. Compliance with these codes has been a non-negotiable requirement for the suppliers to gain and maintain their access to the supply chains. This topdown enforcement of ethical production practices has stemmed from and accentuated the chain’s unipolar and buyer-driven nature. The premise of this enforcement is that buyers are relatively free to grant or withdraw chain access to suppliers based on ethical terms set by the buyers (LundThomsen, 2020; Nadvi, 2008). When suppliers failed to comply with the code of conduct, their status in the chain became vulnerable, although they were often given another chance to rectify the identified problems and receive a follow-up audit. 4.2

Evolving from the Unipolar Foundations

While confirming the unipolar foundation of mass-market apparel value chains that Company K was a part of, our study also identified an evolving dynamic of the chain that allowed the company to amass capability and rise as a “strategic” supplier. First, we found enabling conditions at the global industry level. Consumer demands in the North American and European markets dropped significantly after the 2008 global financial crisis and have not fully recovered, with greater uncertainty and fluctuations since then (Thomas & Hirsh, 2018). Interviewees said that while competition has become fierce at the supplier level, their buyers have been up against steep competition amongst themselves as well. Buyers also started competing with online brands and retailers operating with much lower costs and greater flexibility by not owning brick-and-mortar stores (e.g., Amazon, US-based Everlane). These changes together put buyers under extreme pressure to cut costs. As these buyers are actively looking for cheaper ways of working, a lot has also changed at the supplier level. These buyer behaviors were directly linked to the cost pressure felt by Company K. However, buyers’ attempts to make their organization as

92

H. KWON ET AL.

lean as possible through further functional disintegration indirectly and unconsciously gave suppliers opportunities to upgrade, should they be capable. Meanwhile, there have been increasing demands from civil society and consumers in advanced economies that these buyers source ethically made garments. Western governments have legislated their national firms to disclose working conditions in their supply chains, with examples such as the United Kingdom’s Modern Slavery Act and France’s Corporate Duty of Vigilance Law (Knudsen, 2018). This governmental move made it clear to international buyers selling their goods in these countries that holding their suppliers up to certain ethical standards has become non-negotiable. This global market condition spurred organizational changes at the buyer level, as mentioned earlier. According to our interviewees, many buyers have been making their organizations leaner by cutting down on employee numbers (see the quote below). Consequently, they outsourced more functions to their suppliers, which allowed the case company to pick up higher value-adding ones—in particular, design and R&D—that used to be handled internally by lead firms. As another effort to make their organization lean, buyers began to bypass agents and work directly with suppliers. This led to the demise of agents in the chain and offered suppliers more room to negotiate contract details, not only prices but also production processes, including R&D. American buyers have been laying off their employees… Previously, my buyer counterpart used to have ten staff, but now there would be only five left. Seniors are no longer there, or the number of seniors has gone down to save cost. When there was a layoff at GBG (a group that manages multiple fashion brands), they laid off people whose salaries were the highest… Paradoxically, downsizing these experienced people has increased their level of reliance on us. (Interviewee 14, July 2019)

The increasing emphasis on decent working conditions in global supply chains has also encouraged global lead firms to revisit their relationships with suppliers. Buyers, especially those with a worldwide presence, came to see the potential ethical risks of working with newer, cheaper suppliers. It takes time and much trial and error for suppliers, including Company K, to get it right in terms of complying with buyers’ labor and environmental demands. From a buyer’s perspective, less information about how well newer suppliers would live up to their ethical expectations means greater

TOWARD A BIPOLAR APPAREL GVC? FROM …

93

business risks. This has increased the incentive to work with the timetested suppliers they have worked with for a longer time and verified their ability and commitment to ethical compliance, even if it may cost a little more. 4.3

Becoming a “Strategic” Supplier

These global- and buyer-level changes have loosened the existing unipolar foundations of the chain, allowing Company K to establish itself as a supplier with strategic values to its major buyers. First, the locational decisions that Company K has been making demonstrate an aspect of a strategic supplier. Buyers’ pressure for cost reduction is one of the essential determinants of suppliers’ location selection, but that is not the only factor (Table 2). It appears obvious that Company K’s locational diversification is also driven primarily by cost-cutting strategies, but this does not offer a satisfactory account for the company maintaining its Guatemalan operation as Nicaragua and Haiti should be much more attractive locations cost-wise. In the same vein, given the fact that labor costs have been rapidly increasing in Vietnam, it might be more sensible to relocate their factories to Asia’s last resorts, such as Myanmar and Cambodia. Yet, Company K has neither stopped investing in Vietnam nor closed its Guatemalan factory. The latter case infers that a range of line workers’ skills that facilitates order diversification can be an important consideration for this mass-market oriented, cost-sensitive business. For example, workers in Guatemala with a longer history of manufacturing sewn products can handle more complex products with details quickly and accurately. This might be associated with the fact that the factory runs a sample room. In addition, buyers’ post-crisis strategy of supplier consolidation requires stability and certainty in supplier production to a greater degree. In this vein, the site portfolio in Vietnam implies that the company has built up a stronghold for both the scale and the scope of production. Second, this company has accrued more diverse value chain roles other than simple manufacturing. Interviews and the company website confirm that the company was capable of product design, R&D, and fabric dyeing and processing; on its website, Company K states that “we have strived to go beyond OEM and enhanced its ODM (original design manufacturing) capability.” In addition to this functional upgrading, the company has also invested in process upgrading. A new production management system was

94

H. KWON ET AL.

Table 2

Diversification of offshore production locations Initial Lines Entry (2018)

% Export value (2016)

Employment (2014)

Other facilities

Vietnam

2001

299

61%

19,800

dyeing, washing, finishing/ sample rooms/CAD function

Indonesia Myanmar Nicaragua Guatemala

2005 2013 1998 2006

49 16 68 30

18%