DC Velocity - June 2017

BY MARK B. SOLOMON, EXECUTIVE EDITOR – NEWS

AIR FREIGHT
Transportation

EACH DAY, SEMICONDUCTORS MADE IN JAPAN ARE flown to Taiwan. There, integrated circuit manufacturers ply their trade. The fabricated circuit boards are then air-shipped to China, where they are assembled to make finished computers. Those are then rushed to end markets in the U.S., Europe, and elsewhere for distribution and sale.

Logistics symphonies such as this, part of what is known as the “global value chain” (GVC), are conducted millions of times each year. The orchestras are composed of thousands of suppliers and manufacturers. According to the World Trade Organization (WTO), about $20 trillion in global trade, or 49 percent of the world total, was moved using a GVC model during 2011, the most recent year for which the group had verifiable data. That compared with 36 percent in 1995, WTO said at the time.

The GVC approach eschews the model of centralized development, production, and assembly in one country in favor of specifically defined tasks assigned to different countries, whose companies add value as the product moves through each step of the process. This enables multinational companies to source work to countries with labor forces specializing in a specific skill, such as hard-drive manufacturers in Thailand.

By leveraging each trading partner’s unique strengths, the
theory goes, the process can yield better quality at a com-
petitive overall cost. That’s why multinational companies
favor the GVC model even though they will bear higher
shipping costs and could incur some logistical and bureau-
cratic headaches. As time in transit is crucial to a GVC’s
success, many parts must be shipped by air, the only mode
capable of covering long distances in short timeframes. If a
GVC is properly executed, higher transport charges will be
offset by the speed with which goods hurtle between far-
flung locales, eliminating the need to maintain costly buffer
inventory.

BRINGING IN THE DATA

GVCs have been around since the 1980s, albeit under different names. Then, as now, the goods moved by air. However, there has never been a concerted effort to quantify the connection between the model and the mode. That was until the International Air Transport Association (IATA), the global airline trade group, published a study last December that, for the first time, put numbers behind air’s importance in making GVCs work and how the mode’s involvement elevates trade activity throughout the world.