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
Menu
