1. Improving connectivity throughout the value chain; constructing a framework to understand the complexity and value of services Tony Nowell – ABAC New Zealand Chairman – Regional Economic Integration Working Group APEC Business Advisory Council with acknowledgements to Jane Drake-Brockman Australian Services Roundtable Partners in Growth: Services Trade in South East Asia Wellington – 3 June 2011

2. Copyright © 2010 APEC Secretariat. Embedded and Embodied services Services play an intrinsic and increasingly important role in the goods supply chain The traditional goods chain both starts and ends with a series of pure services activities Embodied services are involved throughout the processing and manufacturing steps in the chain e.g. product design, factory plant controlling software etc. Embedded services are often supplied with the good e.g. maintenance and repair, product insurance, leasing the product, recall and waste services In Australia embedded and embodied services are estimated to account for around 1/3 of the value of all goods exports Modern economies have high services proportions of GDP; merchandise suppliers cannot function without the intermediate services

3. Copyright © 2010 APEC Secretariat. Integrated Regional Supply Chains The application of enabling services such as telecommunications and IT has driven segmentation of the supply chain into production units which are geographically dispersed, yet constantly connected “supply” and ”production” and “chains” emphasize goods; “supply chains” tend to look upstream from the buying firm, while “value chains” covering goods and services resonates better with services stakeholders Value chain activity or business functions and processes can become a core competence, or be outsourced – leading to new competitive opportunities for country and firm level specialization Firms need to become more flexible as they seek core competence The policy challenge is to give firms the space in which to be more flexible i.e. to free up barriers to inter-operability with other business functions in the value chain The other challenge is to move up the value chain into higher value-added services

4. Copyright © 2010 APEC Secretariat. “Smiley Face”: a conceptual model of the shift to a high value added, globally integrated, services economy The objective is to engage in value-adding process, such as design, innovation, R&D and standardisation and to shift from manufacture and assembly into logistics, marketing and brand. The model is known as the ‘Smiley Face’, as drawn by ACER Computer’s CEO Stan Chih “Hollowing out of tangible things is not critical; hollowing out of intangible things is really critical”

5. Copyright © 2010 APEC Secretariat. Example of Business Transformation to Services R&D/Innovation Centre Source: IBM Financial Reports Hardware Services Software Other 57% 16% 64% 19% 14% 21% 6% 3% Services & software accounted for 78% of IBM’s revenue in 2008 Software revenue exceeded hardware revenue for the first time in 2008

6. Copyright © 2010 APEC Secretariat. What about services chains? Although more recent, globalisation is bringing about a similar transformation in services as has taken place in manufacturing; the transformation is affecting SMEs as well as creating globally integrated service firms The problem in services relates to the inability to capture, store and possess the value of an intangible. There is no step by step “pathway” as services tend to be delivered and consumed simultaneously This results in a constant quest in the services sector to segment out any business function in which knowledge can be commoditised and packaged as a “product”, ownership can be established, production can be scaled up and trade can take place separately from production Because this is not possible for all services, it might be more accurate to think in terms of services being “nested” in wider services “networks”

7. Copyright © 2010 APEC Secretariat. How do services firms engage internationally? Cross-border supply of services; e.g. digital services capable of being delivered via the internet Cross-border movement of services provider or services client Commercial presence/investment in the target market Most services firms, in all services sectors, increasingly use a flexible combination of all these ways of engaging For services industries where value can be “captured” and production separated from consumption, the growth of cross- border digital trade has enabled development of services supply chains

8. Copyright © 2010 APEC Secretariat. What obstacles do services firms face? Border barriers to the movement of services providers and clients Border barriers to commercial presence / investment Behind-the-border regulatory barriers which e.g. limit the scope of business for which a licence is granted to foreign firms Absence of sufficient intellectual property protection which operates as an obstacle to the flow of ideas Barriers to the flow of information (“traditionally”, these barriers have not received much focus, but with growth in cross-border trade now very rapid, these barriers are being recognised as critical to the services supply chain)

9. Copyright © 2010 APEC Secretariat. Primary Resources AN INTEGRATED REGIONAL GOODS SUPPLY CHAIN The Pathway to Market Markets and Consumers Land Water Oceans Minerals Forests etc Automotive Chemicals Electronics Pharmaceutical Food etc SUPPORTED BY AN INTEGRATED REGIONAL ACTION AGENDA Quality Assurance Frameworks and Regimes (Food Standards, PSP, Mutual recognition of qualifications) Innovation Development Frameworks (Science, R&D, Commercialisation, multidisciplinary collaboration and collective intelligence) Business & Capability Devlpt Frameworks (Education, Human Resource Development) Enabling knowledge economy infrastructure Human resources (Availability, Mobility, Standards, Immigration, Social Security, human capital teams, centres of excellence) “Border” Flows (Customs, Tax, profit repatriation, Biosecurity, visas, licences and their scope of business) Funding and Investment (Venture / Private / Merchant / Public / Sovereign), Capital flows Market Access (WTO, Regional and Bilateral Trade and investment Agreements, FTAAP, Visas, commercial presence, IP) Overarching Frameworks (Regulatory Coherence, Transparency and efficiency, cross-border interoperability, recognition, convergence) Discovery and Innovation Primary Production Primary Processing Secondary Processing Finished Product Manufacture Storage and Handling Freight and Logistics Marketing and Distribution Inputs AN INTEGRATED REGIONAL SERVICES NETWORK/VALUE CHAIN The Pathway to Market Markets and Clients Talent Skills Ideas Core Competencies Planning Business model Design Evaluation and Selection team formation Sourcing People movement fly-in / fly out Outsourcing to Back Office?/ Quality control Re-engineering Office Establishment Innovation Execution Performance After sales service Diagnostics I magination Innovation Contracting Middle Office? Breeders Extracters Producers Manufacturers Transporters Retailers

10. Copyright © 2010 APEC Secretariat. A sample value chain for software, IT services and hardware Source: CGGC (http://www.cggc.duke.edu), More Information: Global Value Chains (www.globalvaluechains.org )

11. Copyright © 2010 APEC Secretariat. 11

12. Copyright © 2010 APEC Secretariat. 12

13. Copyright © 2010 APEC Secretariat. 13 Human Resources Manila, Philippines Accounts Payable Shanghai, China Procurement Operations Shenzhen, China Japan Help Desk and Customer Service Brisbane, Australia Accounting Kuala Lumpur, Malaysia Back Office Services Dalian, China IBM Japan harnesses its global integration capabilities

14. Copyright © 2010 APEC Secretariat. Services Competitiveness Services are more skills intensive than other sectors, so talent, skills and ideas are critical ingredients. Services export success depends on innovation and services competitiveness is a function of; – Multi- and cross-disciplinary education and training, languages – Knowledge economy infrastructure – Innovation policy which recognises services needs – Services activities tend to be project based; firms need flexibility to be able to move people and ideas around quickly; virtual teamwork and collaboration is very important – Connectivity across the border; telecommunications, aviation, global standards, openness at the border, technical interoperability – An enabling business environment behind-the-border and an efficient, transparent, domestic regulatory framework – For services companies (where human capital costs are often 70-80 % of total cost) everything to do with recruiting, training and deploying people can be critical Work for the global market flows to wherever the skill set resides

15. Copyright © 2010 APEC Secretariat. Priority 21st century issues for the regions’ services firms Ease of cross-border transfer of information, without which the digital economy (e-financial services, e-health, e-tourism etc) is underdeveloped Ease of cross-border movement of people, without which the services talent pool does not reach excellence Restrictions on visas for foreign personnel and emerging local content requirements for domestic personnel Facilitation of Business Model Innovation via outsourcing and off-shoring Choke points in services value chains Facilitating international engagement of SMEs; most services firms are SME Regulatory Coherence Internal and external coherence; transparency, impartiality, independence, efficiency, best practice, mutual recognition, stakeholder consultation Domestic subsidies to services Competition policy issues Discrimination against foreign services providers in government procurement

16. Copyright © 2010 APEC Secretariat. How much progress has been made? The services sector (more than 50% of global and regional GDP) is still by far the world’s and the region’s most trade restricted sector All modeling results show that the bulk of the gains from global, regional and bilateral trade and investment liberalisation will derive from services trade reform All APEC economies made an initial services offer in the Doha Round In the WTO, there have been no new services offers in the last 3 years since the Services Signalling Conference i.e. there has been no progress in the last 3 years There is an emerging gap in the governance of services trade at the global and bilateral level but it is still fairly limited across the APEC region Meanwhile, business is facing new competitive challenges. The “traditional” services agenda is morphing…….

17. Improving connectivity throughout the value chain; constructing a framework to understand the complexity and value of services Thank you Partners in Growth: Services Trade in South East Asia Wellington – 3 June 2011