The East Asian newly industrialized countries (NICs) have been uniquely successful in using export-ori- ented industrialization as a route to continuous industri- al upgrading and integrated national development. A major reason for this positive outcome is that exports in East Asia have been spearheaded by local private firms, who have used their linkages with foreign buyers to pio- neer original equipment manufacturing and original brand-named manufacturing export roles. 1 East Asian government policy-which limited foreign investment and worked assiduously to cultivate a local capital base-has been critical in this process. Original equipment manufacturing (OEM) refers to a type of contract manufacturing with the following fea- tures: the supplying firm makes a product according to the design specified by the buyer; the product is sold under the buyer's brand name; the supplier and buyer are separate firms; and the supplier lacks control over distribution. The East Asian NICs have excelled at this type of production. East Asian firms have become full- range "package suppliers" for foreign buyers, creating and managing elaborate production networks. The main advantage of the OEM export role is that it enhances the scope for local entrepreneurs not only to learn how to make internationally competitive finished consumer goods, but also to generate substantial back- ward linkages to the domestic economy. Moreover, expertise in OEM production increases over time, and it can lead to important forms of organizational innovation. East Asian producers, however, confront intense com- petition from lower-cost exporters in various parts of the Third World. Furthermore, they have discovered that it can be advantageous to establish forward linkages to their developed-country markets, where the biggest profits are made in buyer-driven commodity chains. Thus, a number of the firms in the East Asian NICs that pioneered OEM are now pushing beyond it to original brand-named manufacturing by integrating their manu- facturing expertise with the design and sale of their own brand-named merchandise. The establishment of proprietary brand names gives Third World exporters a more visible presence in both local and developed-country retail networks. South Korea is the most advanced of the East Asian countries in this regard, with Korean brands of automobiles (Hyundai), computers (Leading Edge), and household appliances (Samsung and Goldstar), among other items, being sold in North America, Europe and Japan. Taiwan also sells its own brands of Acer and Mitac computers, Giant bicycles, Pro-Kennex tennis rackets, and Travel Fox shoes in overseas markets. Hyundai is the most prominent example of a Third World firm that decided to move beyond manufacturing to the marketing end of a producer-driven commodity chain. Hyundai entered the North American market for cars in the late 1980s by building an independent mar- keting network. By contrast, Daewoo and Kia, South Korea's other two major auto companies, relied on their OEM networks with General Motors (GM) and Ford, respectively, to market and sell GM and Ford models made in Korea. This was a risky strategy by Hyundai because it only had 183 dealers in the U.S. market in 1987, compared with 3,000 dealers in GM's Pontiac Division and 5,700 dealers for Ford. But the strategy proved profitable. Hyundai obtained a 3.7% profit mar- gin from production and a 7% margin from its market- ing subsidiary, Hyundai Motor America. Daewoo earned a 3.6% profit for OEM production, while GM appropri- ated an 8-9% yield from the marketing process. Many Hong Kong apparel manufacturers have embarked on an ambitious program of forward integra- tion into retailing, using their own brand names and retail chains for the clothing they make. These retail out- lets began by selling in the Hong Kong market, but now there are Hong Kong-owned stores throughout East Asia (including China), North America and Europe. A good example of this is the Fang Brothers, one of the principal Hong Kong suppliers for Liz Claiborne, who now have several different private-label retail chains (Episode, Excursion, Jessica and Jean Pierre) in a variety of countries including the United States. Hong Kong suppliers thus have upgraded their position from con- tract manufacturers to integrated retailers in the buyer- driven apparel commodity chain. The difficulties of original brand-named manufactur- ing should not be underestimated, however, and some East Asian companies are shifting back to original equip- ment manufacturing work. In 1990, for example, Mitac Corporation, the main competitor to Acer in Taiwan's personal computer market, made 70% of its computers under its own brand name and 30% for OEM clients. By 1993, the OEM ratio was back up to 60%. The reason, according to Mitac's president C.S. Ho, is that the firm was more profitable when it concentrated on its core strengths. "We asked ourselves: What functions are we best at? Our strengths are in research and develop- ment, design, and manufacturing," says Ho. "We are now focusing on designing and supplying products and key components for major OEM customers, whose brands are better-known but which have withdrawn from fully integrated manufacturing." The original brand-named manufacturing option, while still remote even for the relatively advanced nations in Latin America and Southeast Asia, establishes a new benchmark against which the most ambitious export firms will be measured. -GG & LH 1. This discussion is adapted from Gary Gereffi, "Global Production Systems and Third World Development," in Barbara Stallings, ed., Global Change, Regional Response: The New International
