Lecture EXTRA CREDIT_Clustering_shortversion for Website_001

8/6/2019 Lecture EXTRA CREDIT_Clustering_shortversion for Website_001

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Pump Clusters in China:Explaining the Organization of

the Industry

Lecture 14


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C h i n

Ind ia

T h e G r e e n R e v o lu t io n c h a n g e d t h e

f o o d s u p p l y in d e m a n d in m a n y d e v

W h e n fe r t i l iz e r w a s a d d e d t o n ev a r ie i t ie s , p r o d u c t io n in c o u n t r ie s l ik

In d ia r o s e r a p id l y , s t a r t in g in t h e e a

C h i n a

C h i n a

I n d i a


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But, the Green Revolution did not affect all

countries the same?


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F or exam p le : In B ang la p ro d u c tio n g re w s lo

du r ing the 1960s and 1


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W h a t h a pp e n e d in t h e

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A fter grow ing a t a fa i r lyra te du r ing the 1 960s a

197 0s , p roduc t ion sud d

ac ce le ra ted in the e ar ly

m i d -1 9 8 0 s?


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One explanation

Perhaps the most important development in parts of theAsian rice economy during the past 15 years [that isduring the 1980s and early 1990s] has been thewidespread adoption of cheap pumping technology

(Pingali, Hossein, and Gerpacio, 1997).


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IWMI agrees

In the 1980s, trade policy in many South/Southeast Asian countries(including Bangladesh) opened up their markets including themarket for pumps and engines.

That is not to say that there were not pumps available in the 1960s

and 1970s in the case of Bangladesh there were pumps fromboth India and Japan

But, they were not always appropriate for use in the poor,undeveloped countryside of nations such as Bangladesh India pumps were heavy, awkward to move around and unreliable

Japanese pumps were lighter and more reliable, but when they didbreakdown and need repair, often the only place to fix them was back inJapan this would obviously take months and was very costly in fact,Japanese pumps were expensive themselves to buy in the first place


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So what changed in the 1980s? In fact, the beginning of the upward trend in rice

production in Bangladesh coincides almost preciselywith the emergence of China as manufacturer andexporter of light manufactured goods (CNBS).

The rise in production in Bangladesh also coincideswith the appearance of pumps and engines fromChina in the fields of farmers in South Asia.

Randy Barker (and colleagues), in fact, argue thatone of the main determinants of the BangladeshsGR takeoff is the access of farmers to the relativelyinexpensive, fairly reliable, easy-to-repair pumps and

engines from China


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From Questions to Search for Answers

Economists and observers of the GR in Asia began to ask:Where exactly did these pumps and engines come from?

Who makes them?

How can they produce such a reasonably reliable product at such a reasonable price?

When IWMI asked us these questions initially, none of us onCCAP/UCDavis water team had any idea

There was literally nothing known about this topic


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The overall goal is to increase ourunderstanding of the pump industry in Chinaand find out who helped create the GR inlarge parts of the developing world

Specific objectives:Describe the pump industry and its structure in

China

Offer an explanation of why it is organized theway it is (and why it was able to emerge in theway that it did)

Think about where it is going


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Data

So how did we find where these pumps

were being made?

Tried many sources Review the literature [NOTHING]

Ask people in agricultural economics [NOTHING]

Ask people in water engineering fields [NOTHING]

Finally turned to where we are increasingly

turning to these days [GOOGLE IT]


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Two of the largest pump industry clusters

Fujian

Province

Zhejiang

province

Daxi Town,Wenling City

Fuan


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The next step

Just went

Went through the TVE Management Bureau of

each of the counties in which Daxi and Fuan werelocated

Interviews

Designed survey (that we have never run $ )[both our questions during the interviews and the

unused survey draft are based a lot on the surveys

used by Keijiro Otsuka and colleagues]


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Characteristics of the pump industry


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Clustered


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Small factory


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Father

Son

Mother

Daughter-in-law

Home business


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Technology simple and easily copied

A factory for developing mouldsthat are used for casting the key

parts of the pumps


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High degree of specialization: For every

part of a pump, there are suppliers

Pump

(Engine and

pump

in the same

machine)( )

Engine

Stator (

)

Rotor (

)

Enamel-insulated wire (

)

Capacitor ( )

Pump

Pump case ( )

Pump impeller ( )

Bearing ( )

Seal ( )

Other non-

essential

parts

Valve ( )

Screw ( )

Inspection

Assembling

Readytosell


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Bearings


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Summary:

The nature of the pump industry

Hundreds of small factories

All next to each other [clustered!]

All family businesses

Highly specialized

Undifferentiated product based on simple

technology


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Key I-O question

So, why is Chinas pump industry (and

so many of its other industries) organizedlike this

To answer, we need to consider the benefitsand costs of this organization

B fit f th i ti f


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Benefits of the organization of

Chinas pump industry Strong incentives to work hard and invest intelligently (family

firms) Low initial capital investment needed (since all firms of small,

labor intensive and since all the parts can be purchased andassembled from the parts important in developing economies)

Low transaction costs (because neighbors are doing business withneighbors and sometimes among family members reputationenforces contracts NO LAWYERS)

Competition among parts suppliers drive the prices of parts lowproduction costs lower (small firms producing undifferentiatedproducts that are clustered)

Technological changes easily adopted (simple technology andclustering)

Market information easily spread (clustering) Pool of skilled labor (clustering)

Easily recognized by outside buyers. Compete as a whole withpump producers in other places


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Costs of this industrial structure

Disincentive to invest in R&D (simple technology /all parts manufactured by others)

Competition drives down price, less profitable can lead to poor quality (small firms usingundifferentiated technology easy entry)

Difficult to brand and create a high-value added

product (clustering and imitation easy due to simple,undifferentiated technology)

Poor/no after-sales services to customers


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And, this incredibly competitive

industrial structure produces a product

with a particular set of characteristics:

Standardized product (almost a commodity)

Un-branded Inexpensive (competitive on world markets) Relatively reliable No warranty Easy to repair

Exactly the pump that was so much needed by

small, cash constrained farmers in Bangladesh


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And, the form of the organization of

industry has also been successful In just these two clusters. Nearly 1000 pump assembly enterprises and more than

2,000 parts suppliers.

Accounts for almost all of the market share in the domesticmarket. Export to many southeast/south Asian countries. The value

of all products exported reached 1 billion yuan in 2000 andhas been about 1.6-2.4 billion yuan per year since then,

accounting for a large share of the total number of pumpsexported. Daxi was given the name Hometown of Chinas small

water pumps in December 2002 Fuan thinks theydeserve this name since they are the largest exporter


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So will Chinas pump industry be like

this 20 years from now?

Almost certainly not:

From the experience of the rest of the world, we knowthat as industries mature they do not look like this

From the work of others (e.g., Otsuka and colleagues)

things evolve fast in China (in fact, they are alreadychanging)


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Appearance of larger firms


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Large scale production

Productioncapacity(1000 pumps/year)

Numberofworkers

LargeFactory

500 500 ~1,000

SmallFactory

2 20 ~ 50

Perhaps the initial capital constraints are becoming less binding


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Propensity to begin to vertically integrate and produce more of its

own parts especially key parts that can improve quality

[in the original clustered-type organization, hard to protect

technology and difficulty to monitor quality]


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Conclusion

We apologize for not having more quantitative, surveybased data [funding anyone?]

But, using the information available to us, we tried to show

who and how pumps used in world markets have be madeand sold

The key element of the industrial organization structure is: Clusters of small, family run businesses using simple, labor-

intensive technology to manufacture an inexpensive, fairly reliable,

but undifferentiated product We have tried to show that this is a rational industrial

organizational response to the physical and materialenvironment in which China and its customers wereoperating in during the past 20 years


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Role of policy? We also have shown how things are beginning to change

and change in a way that might be expected from theexperience in other industries in China and elsewhere inthe world

Does the government have a role to play in pushingforward the structural evolution of the industry? On one hand there is a need for more capital better technology

However, the government should only be involved in the thingsthat governments are supposed to do they should not try to pickwinners or make strategic decisions (obviously the market has

done well note: in our discussions, the government is almostcompletely absent these are self-forming clusters)

But, making the market environment better through actions suchas courts to providing better property rights support for brandprotection etc. might be needed

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Lecture EXTRA CREDIT_Clustering_shortversion for Website_001