Global Production Network of Sony PS4 - Case Study Example

Global Production Network (GPN) of Sony PS4. Name Class Unit Table of Contents Table of Contents 2 Introduction 2 What types of labour go into creating Sony PS4 at different points in the GPN 3 Hardware production for PS4 at different points in GPN 4 How hardware labour is globally distributed 4 Software production for PS4 at different points in GPN 5 How software labour is geographically distributed 5 Institutional arrangements best explaining the structure of this GPN 6 Distribution of capture of value throughout the GPN 8 Injecting capital into economies within GPN 9 Stimulation of local firms 10 Knowledge diffusion 10 Job creation 11 Conclusion 11 References 13 Introduction In the globalised economy, Global Production Networks (GPN) has played an important role in economic development. This is seen from sourcing of the inputs, imports of intermediate products and the global sourcing behaviour. Production has become internationally linked with multinationals using offshore production sites in low cost countries and linking them to the international market (Hess & Yeung, 2006). This has benefited from the market liberalisation and growth of information technology which has changed the global competitive dynamics. Sony is one of the MNCs that have been utilising GPN in manufacture of their PS4 gaming console (Sony Computer Entertainment, 2015c). In the manufacture of PS4, procurement of products is done from china and other Asian countries. The products are then assembled in different countries globally and released to the global market. The gaming industry in which Sony PS4 is highly dependent on outsourcing due to the various elements that are involved in the game development cycle (Davies et al., 2015). This includes concept development, pre-production, production, testing and distribution. This report will analyse GPN for Sony PS4 and determine who benefits most from the GPN structure. This will involve looking at the types of labour that goes into creating PS4 at different points in GPN and how this work is globally distributed. Next, the report will look at the institutional arrangements that best explains the structure of this GPN. Lastly, the report will determine whether the capture of value is evenly distributed throughout GPN and if not, who benefits most from its structure. What types of labour go into creating Sony PS4 at different points in the GPN Sony PS4 production network can be divided into two different parts which are interrelated. These are the hardware and software production and they determine the types of labour required. Each of the segments has its own type of labour and has distinct structure and geographical location (Johns, 2006). The hardware production for PS4 is carried out by console manufacturers. Console manufacturers are responsible for research and development, production and distribution to the final user. The hardware manufacturing requires high amount of labour in the supply chain hence human capital is required. The labour is divided into development of the product and launch (Fung & Ho, 2015). Hardware production for PS4 at different points in GPN While both hardware and software are highly interconnected, production of the console hardware has a different organisation type and geographical distribution as compared to hardware. To reduce the costs of console, Sony has been able to outsource the development of the hardware (Davies et al., 2015). The assembly of the hardware is given to third party manufacturers. The company have been outsourcing to Foxconn and Asutex which is located in Taiwan (Ashcraft, 2013). Despite this, it is important to note that the quantities produced vary with time. For Sony, only 45% of their hardware production is done in house. The rest is divided between Foxconn and Asutex. In Sony japan, there is manufacture of Emotion engine and Graphic chips (Davies et al., 2015). This is also done in a joint venture with Toshiba. The input output unit is made by a US firm L&I Logic located in China. Multichip, regulators, stereo converters are all made in china (Fung & Ho, 2015). The company hardware production network is complex since the firm is also involved in production. The firm have been able to create a strong relationship with the suppliers (Johns, 2006). How hardware labour is globally distributed It is clear that Sony PS4 is globally sourced with China mainland and Taiwan being the most important players (BBC, 2014). Large number of Sony PS4 components is manufactured in China and Taiwan. This is particularly the low costs items which include the voltage regulators and the semiconductors. The complex components that are used in Sony PS4 are manufactured in japan and this includes the NEC’s graphics engine and Sony’s ‘emotion engine’. The console Intel’s Pentium processor is made in the US. Taiwan has been able to emerge as one of the leading producer for the gaming consoles and other peripherals (Davies et al., 2015). It is clear that Sony have outsourced lower costs components in both Taiwan and China mainland while the high value inputs and Research and development is retained as Japan (Johns, 2006). Despite the global production of Sony PS4 hardware, the product is not uniform and is tailored based on the market or region (Davies et al., 2015). This is due to issues such as different television screen standards such as Pal and NTSC which have been adopted in different markets. This leads to the chips being produced to be specific to the market the machine is taken to (Fung & Ho, 2015). This technological divide has led to division of video games market based on regions. The markets that have been segmented based on technology are UK and France, Asia Pacific and North America (Johns, 2006). While the issue of territorial based market does not affect the production of the gaming hardware, it affects the organisation and geographies in production process especially software. Software production for PS4 at different points in GPN Software development is highly dependent on coordination between tangible and intangible inputs. It requires high level of creativity. The production for PS4 softwares are organised based on different geographical locations. This is the work of both in house developers and outsourced developers. The main software production is based on Sony trusted developers (Sony Computer Entertainment, 2015c). How software labour is geographically distributed The main software producers for Sony PS4 are USA, Europe and Japan. The search for developers is based on economies of scale where developers merge or consolidate. To reduce costs, Sony ensures that they own most of the stages of software production through carrying them out in Japan (Fung & Ho, 2015). Also, the distribution of software development is based on the fact that they generate the most of revenue in PS4. This makes the manufacturer to have most of software development in their home companies. Through this, Sony has been able to retain better returns from software development. Also, the distribution is based on the ability to have quality control through licencing. In addition, the developers are supposed to work in close relationship with Sony. The developers are expected to come up with creative development of the game software (Davies et al., 2015). This is then passed to publishers who ensure that the rest of development runs smoothly. In most cases, the publishers retain the rights to the games although the idea and creative inputs originates from the developer. Sony have a preferred list of developers who are trusted in coming up with the game code. This involves linking up with publishers who have a reputation of coming up with great games (Johns, 2006). Japanese games industry is different from USA and Europe. This is due to the fact that game development in Japan has relied highly on their technical capabilities and expertise in the sector (Fung & Ho, 2015). The high experience in consumer electronic has made japan to have a competitive advantage over other producers. In addition, Japanese software industry has drawn on manga and animations industry to come up with creative inputs. The common labour pool used by the Japanese industries such as Sony comes from manga and the country’s popular culture (Fung & Ho, 2015). Once Sony has its software developed, it is published in Japan. For the PS4, Japan has domineered in software production (Johns, 2006). Institutional arrangements best explaining the structure of this GPN Matching the region capabilities and assets with the needs for GPN is based on institutional structures (Coe, Dicken & Hess, 2008). These are structures that promote a regional advantage and enhance its articulation into the GPN. Multi-scalar institutions such as regional institutions and extra local institutions acts together to tie Sony GPN into a particular locality (Fung & Ho, 2015). The institutional dimension shows the importance of variability in coupling within the GPN. Sony PS4 is manufactured in a complex governance network and a varied strategic coupling which is beyond the national boundaries (Johns, 2006). The nature and place of which parts of GPN are located determines how they behave in accordance with the prevailing power relationships in the system. For Sony GPN, different locations involved have their own identities, ways of doing things and thinking. The fact that production takes place in different laces makes it vital to confront and respond to the regional particularities (Yang & Coe, 2009). Despite this, japan which is the country of origin remains very important influence and determines how Sony operates across the network as whole as well as specific locations. In addition, the nature of the production networks has a great influence on the prospects of the communities in which they are located. Through a strategic coupling process, it is possible for the Sony PS4 GPN to interact with the regional development (Johns, 2006). Sony PS4 institutional arrangements links across its geographical scales (Fung & Ho, 2015). The GPN is regulated within a political structure on the unit national state (Coe, Dicken & Hess, 2008). This is through the international institutions such as WTO and the existing preferential trading agreements (PTAs) within the states GPN operates in. This has made it possible for Sony PS4 GPN to have different national spaces incorporated (Johns, 2006). The power is exercised using groups and institutions though it is not centred in them. Moreover, the regulatory frameworks that have been set by the states and government and other institutions have helped to configure GPN across the space (Kenji, 2009). It is important to look at the social and institutional factors that have underlined the standards setting for PS4. The impacts of non-firms institutions have been felt a lot (Coe, Dicken & Hess, 2008). This is especially in setting the PS4 game standards and the technological industry standards. This has led to standard setting through a regulatory framework based on the product market. It includes setting the certifications such as ISO 9000 and environmental standards. The standards set for PS4 and other technology products are set by a range of actors and institutions. It is important to note that standards setting have a great impact on the Sony PS4 value chain and GPN. The institutions actors that have an impact on production especially on standard settings are NGOs, trade unions and consumer groups (Fung & Ho, 2015). Distribution of capture of value throughout the GPN The use of GPN by Sony PS4 does not only integrate firms but also leads to blurring of national boundaries. Each node in the Sony GPN leads to value creation through a combined application of labour, technologies and expertise required in the complex production and logistical system used by PS4. Value in this case is the surplus above the costs incurred in coming up with the product (Neilson, Pritchard & Yeung, 2014). The aim of the production process is to enhance value creation, increase profits and reduce level of competition. This is through enhanced productivity and efficient logistical systems. The value capture for PS4 is complex and the highest value capture is at the end of the value chain. Although PS4 are manufactured mainly in china, the most value goes to japan (Johns, 2006). The most expensive components such as hard disks, main softwares and chips are all manufactured in japan. The configuration of power within the PS4 GPN plays a major role in determining who gets the most value. Sony has asymmetrical configuration of power which is also subject to bargaining process. The relationship between capital and labour is also important in this aspect (Coe, Dicken & Hess, 2008). Over the past decades, capital has been able to gain while labour has not. There is also unevenness in the way developed countries distributes their income (Lüthje, 2004). Also, another area is the existing relationship between Sony and its multilayered suppliers. To determine who benefits most from the value creation in GPN, it is important to look at ways in which the value captured benefits the areas in which manufacturing of the product (Neilson, Pritchard & Yeung, 2014). From analysis, the capture of value is not evenly distributed throughout the Sony GPN. The areas which benefit from the capture of value in the GPN are listed and explained below. Injecting capital into economies within GPN GPN is based on foreign direct investments. The network is expected to lead to increase in the country capital (Benkler, 2006). In this case, the inflow of capital is possible since Sony utilises the firms in their countries of operations. China has benefited a lot from the inflow of capital in Taiwan. Despite this, the actual transfer of capital is based on a reverse flow in some cases (Henderson et al., 2002). This is where local firms are expected to remit earnings to the parent company. China has been able to ensure that the outflow of capital from Sony investments in China do not exceed the inflow. Also, the trading practices in China ensure that the host balance of payments is improved. China has been able to benefit from the GPN since they have pushed for a fair tax yield from the Sony controlled operations. There have also been low manipulations and malpractices in Sony transactions. This has ensured that China which is a main outsourcing partner in the GPN gets its fair share of value and lowered the level of transfer pricing and tax avoidance (Lüthje, 2004). Stimulation of local firms GPN are expected to stimulate the local firms and strengthen the industrial sector hence creating value (Lüthje, 2004). The involvement of Sony GPN in the manufacture of PS4 has led to stimulation of the local firms. Sony has been able to create positive linkages in the economies they are operating in. local firms and experts are given priorities in the supply network. In most cases, the local firms act as the first and second tier suppliers and in high technology and skills levels. According to Ernst (2002), GPNs are able to use inter-firm linkages to transmit technological changes. Most of the materials used for Sony PS4 peripherals require stringent specifications hence high technical expertise. This has made the local firms in areas such as Taiwan to gain experience in new technologies and also compete in the global market. Most of the materials used in Taiwan factories are sourced locally leading to creation of new domestic firms. China has policies which have made it easier for Sony to interlink with the local firms hence stimulating them (Kenji, 2009). Knowledge diffusion Knowledge diffusion is another way in which value is captured in a GPN network. It involves ability to disseminate knowledge to the local firms (Lüthje, 2004). In their operations to produce PS4, Sony GPN has been able to disseminate vital knowledge to the local suppliers. This has helped in catalysing the local capacity formation in their areas of operations. Sony has been engaging on geographical knowledge transfer through specific training and techniques. Despite this, there is protection of critical technology through use of patents and trade secrets. For example, Sony has an extensive internship program in their outsourcing factories in china and Taiwan (Johns, 2006). Technologies are not lightly handed over to other firms and there is guarding of critical technology. In most cases, the results of innovation are transferred and not the innovative capabilities (Poon, 2004). There have been locations of Research and Development facilities in the countries of operation. This has enhanced the gaming industry and added value to the countries involved in the GPN. Job creation GPN are ideally expected to create jobs especially in the developing countries (Ernst, 2002). Sony has been able to create a lot of jobs in the creation of PS4 through its GPN. The GPN has been able to create jobs whose emphasis is on quality and skills. Despite this, the GPN firms that Sony has contracted in the creation of PS4 have been accused of low wages and poor labour conditions. The firm has been able to create jobs directly and indirectly in its areas of operation. The overwhelming majority of jobs created by GPNs are production based (Ernst, 2002). Despite this, the weak labour relations that have been evidenced in Taiwan have led to a lot of criticisms. For example, there were complaints at Foxconn that interns were used during the production process working in poor conditions. Most of the interns were forced to work overtime in order for Foxconn to keep meeting their production quotas. The reports of forced internships with poor working conditions show that the GPN has not been able to adopt the best labour relations (Ashcraft, 2013). Conclusion To sum up, Sony GPN is made up of diverse actors and institutions. PS4 is manufactured in different countries with diversified labour. The labour that goes into creating PS4 can be divided into hardware and software development related tasks. The labour is distributed in Asian countries and USA with most of the work being done by Foxconn which is located in Taiwan. Sony carries out 45% of their labour in house to save costs. Thus, almost half of the work is done in japan while the rest is distributed in the GPN. The main hardware producers are located in Asia where console parts are made by different firms. Main software producers for Sony PS4 are USA, Europe and Japan. Sony PS4 institutional arrangement links across its geographical scales. On the other hand, capture of value in the GPN is not evenly distributed through the GPN. For PS4 GPN, value capture is complex and the highest value capture is at the end of the value chain. 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