The Importance of Network in the Sub Prime Crisis
The recent sub prime crisis in the financial market proves the importance of network chain in surviving the onslaught of crisis or cycles. While the global production network has been professed and the concept is not new, the recent episode of the crisis enhances the awareness of its vitality for a firm's success. Decades ago, the influx of foreign direct investment which was mainly pioneered by North America, Western European countries and also Japan, helped the countries in the Asia Pacific region, Taiwan, South Korea, Malaysia, Singapore and others, to establish industrial bases, which are now still exist. The main reason is to take advantage of the low cost and the government protection accorded by the local governments. Some shifted because of the infrastructure, and access to market. Throughout 1970s, 1980s and early 1990s, the bases provided vital intermediate goods to the assemblers, and to the flagship companies. However, the market for vertical integration was not well established, and most of the foreign investors were mainly the sole designers, conducted their own R&Ds, and joint ventures and local partners were rare. There were many who tried to break out the monopoly or the controlling status of the flagships by joining effort to create own property, and many have succeeded. Today they produce global branded PCs and notebooks and export worldwide. The adoption, therefore, among the local industries was strong, and many now become critical partner to the flagship companies. The success stories of these local industries are replicated and have been helping to create strong linkages among local industries. Many newly established companies tried hard to insert oneself into the linkage or network, forming a vast networks which are vital to the country's growth, turned this industry to a generative sector. Although dot.com bubble bust in 2000 and 2001 dented the sentiment, it was mainly a small hiccup and proved to be short term business cycle. Much over capacity has been cleared and the tech business in the region is now back to normal. The strong foundation and the linkages established prove itself to be useful in cushioning the impact of the financial crisis originated in US. One indicator that tells us the importance of the emerging markets is the growth and the ability to survive unscathed the recent crisis of companies which are exposed to the emerging markets, be it production, sourcing or assembling. Although the relocation decision in the global network context seldom rests on the cost factor now, instead the decision depends on shorter product life cycle, high capital outlays on machinery and research and its short life span, constant new innovations and etc, firms exposed to these operation management strategies prove to be more sustainable and able to compete. While the crisis dampens the demand and creates worries of potential recession, firms which have lower cost of production, possess vast network of markets and sources, create many joint venture efforts, through outsourcing and global production network, have remained modestly affected. The notion of total decoupling of Asian markets and US will be short-lived, at least not in the near future, but the many emerging markets which prove to be more potential have reshaped the business horizon. In the not very long ago, two Asian markets, China and India created large tremor among business communities of their ability to innovate and absorb excess demands. However, the race is now joined by Eastern European ex-communist countries. While the elephants and the dragon help to cushion whatever excesses in Asia and propel the region, the Eastern European countries have proven to be more resilient. Most of the manufacturing from Western European developed countries outsourced and relocated to the areas. This is due to the similar culture and the geographical proximity of these countries. Thus, the race for foreign direct investments has increased in its intensity, which in turns, explain the more importance of firms to climb up the global chain. The recent financial episode in US has soared the price of commodities, gold has become a safe heaven to hedge in view of the decreasing greenback, the flow of money to equities in the Asian Pacific region to escape the uncertainty in US, have created large upside potential for many countries to jockey for more direct funds. These paint a picture that diversification and networking in production chain are becoming more important, and firms which are more exposed to the concept will be more successful. As long as tech industries and demand are robust, Asian markets will present themselves as hub of innovations, demands, to the networking equipments, data processing systems and etc. The foundation built in the markets, have created vast linkages which prove to be vital for the evolution of the industry. Thus, US firms which successfully inserted oneself into the network enjoy mainly lower cost of production, proximity to intermediate goods and manufacturers, which helped them to escape the crisis in the previous years. However, if the dependence on US market is unchanged, potential in the years ahead will look gloomy. This suggests an urgent need to further slim the production and operation process to remain competitive. Similarly, countries in the Pacific region have to further prove themselves useful in the network. Overall, the crisis tells the manufacturers which depend on US market to upgrade and cut the fat to become resilient in years ahead as it will become more competitive. |
