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Journal of Economic Geography 8 (2008) pp.

519544 Advance Access Published on 18 April 2008

doi:10.1093/jeg/lbn014

The flea on the tail of the dog: power in global production networks and the restructuring of Canadian automotive clusters
Tod Rutherford* and John Holmes**
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Abstract
Recently, studies of industrial clusters and global production networks (GPNs) between large transnational corporations (TNCs) and smaller firms have focused on how power differentials shape, and sometimes undermine cluster innovation and governance. Such studies raise issues of how to conceptualize TNCs power within GPNs and some economic geographers have adopted approaches that seek to integrate the post-structural insights of actor network theory (ANT) with heterodox and Marxian value theory. Based on a case study of the Canadian automotive industry, we engage in a sympathetic critique of this perspective via a realist position that distinguishes between structural and actual power. We argue that differences in structural position derived from financial size matter, although do not necessarily determine actor network relations. Yet, TNC Original Equipment Manufacturers (OEMs) have a tendential actual or power over smaller automotive suppliers due to superior financial resources, their strategic position within GPNs and especially their relationship with state accumulation projects designed to capture those segments of GPNs, which offer the greatest potential for the creation and enhancement of value. We show that such projects were critical to the development of the Canadian automotive industry and the Kitchener and Windsor, Ontario automotive clusters. Although large firms were generally favoured by such policies, suppliers and SMEs were able to partially offset power asymmetries through innovation, often by accessing informal local networks in clusters. More recently, however, smaller component firms and the coherence of these clusters are being threatened by neo-liberal Schumpterian Competition State policies that privilege OEMs and larger firms and by the restructuring of automotive GPNs in response to overcapacity and falling profits. Keywords: power, automotive industry, global production networks, state accumulation projects, clusters JEL classifications: D21, L62, P16 Date submitted: 24 August 2006 Date accepted: 17 March 2008

1. Introduction
Power relationships shape, and sometimes undermine, the dynamics of cluster innovation and governance. An increasing range of studies explore these relations, raising the question of how best to conceptualize the power of transnational

Department of Geography, The Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, NY 13244-1020, USA. email 5trutherf@maxwell.syr.edu4 Department of Geography, Queens University, Kingston, Ontario, Canada K7L 3N6. email 5holmesj@post.queensu.ca4

The Author (2008). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

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corporations (TNCs) and small and medium sized enterprises (SMEs) within global production networks (GPNs) and localized industrial clusters (Lorenzen and Mahnke, 2002; Martin and Sunley, 2003; Bathelt et al., 2004; Coe et al., 2004; Coe and Hess, 2006; Christopherson and Clark, 2007). Political and economic geographers have integrated the post-structural insights of actor network theory (ANT) with heterodox and Marxian value theory (Castree, 2002; Smith et al., 2002; Smith, 2003; Allen, 2004; Yeung, 2005). In ANT, power is viewed as performative and network-based rather than due to any inherent structural capacities for one actor to have power over another. In value oriented approaches, a weak version of ANT recognizes that networks may be structured by the process of commodity production and value appropriation although network relations are contingent (Castree, 2002; Smith, 2003, p. 19). We concur with many of these insights and those scholars who stress the role of local institutional capacity and networks in supporting cluster development that can embed TNCs (Wolfe and Gertler 2003; Asheim and Coenen, 2004). These institutions and the increased reliance of TNCs on the innovative capacity of SME suppliers (Schamp et al., 2004) can potentially reduce power asymmetries within GPNs and clusters. In this article, we begin by offering a sympathetic critique of, and an alternative to, weak ANT conceptualizations of power. In discussing how power is exercised, and despite recognizing the centrality of commodity production, these weak ANT accounts still privilege networks over accumulation and financial size. This is followed by a case study of the restructuring of automotive components clusters in southern Ontario, in which power imbalances between TNCs and cluster-based suppliers and SMEs are growing. This accords with growing skepticism in both North America and Western Europe regarding the ability of regional governance institutions to cope with current restructuring pressures (Herrigel, 2004; Whitford and Zeitlin, 2004; Pike, 2006; Rutherford and Holmes, 2007a). These power asymmetries stem from the Original Equipment Manufacturers (OEMs) control of the key assembly and retailing segments of the value chain and their immense accumulated financial assets. Over the last several years, the growing imperative to stem financial losses and reverse declining share values has caused the OEMs to reassert and exercise their power over suppliers. Drawing on the realist perspective of Sayer (2004) and Marques (2007) that distinguishes between structural and actual power, we stress that TNCs are privileged within GPNs by what Jessop (2002) terms state accumulation projects, which shape strategies to create, enhance and capture value at a regional level (Coe et al., 2004). Place-specific institutions and the contingent nature of power within networks are critical in mediating restructuring (Pike, 2006). Currently, in the North American automobile industry, however, radical restructuring is underway in an effort to restore profitability. Especially, for smaller suppliers profit/price pressures coupled with state policies are negatively impacting on innovation and inter-firm relations. Empirically, our article focuses on the southern Ontario region where over 90% of employment in Canadas automotive industry is concentrated. The industry accounts for nearly 20% of the provinces manufacturing gross domestic product (GDP), with about 45,000 workers in the vehicle assembly industry and a further 90,000 in the automotive parts manufacturing industry.1 Ontario is the most important vehicle
1 At the time of writing the industry is suffering significant job losses. By November 2007 there were almost 11,000 fewer jobs in the automotive parts industry in 2001 as compared with 100,000 in 2001.

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producing jurisdiction in North America and the eighth largest producer of motor vehicles in the world (MEOI, 2006). We focus on two distinct subregional automotive clusters within southern Ontario: Windsor and Kitchener. These clusters were largely created by a series of federal and provincial state accumulation projects that attracted to Ontario significant segments of the value chains within an increasingly integrated North American automotive production and marketing system. Both clusters feature informal networks that constitute the economies of scale and scope on which smaller suppliers draw for innovation (Coe et al., 2004). The state continues to be vital in attracting investment linked to automotive GPNs, but its role is shifting towards Schumpeterian Competition State (SCS) strategies (Jessop, 2002) focused on fostering innovation including developing stronger university-firm research networks. However, these strategies have mainly favoured OEMs and large TNC component producers over SMEs. Cluster coherence is being undermined, not only by these policy shifts, but also by the far-reaching restructuring of the Detroit-based OEMs (GM, Ford, Chrysler), which is intensifying the pressure on profit margins and reshaping innovation strategies and inter-firm relations.

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2. Power in clusters, GPNs and state accumulation projects


Previous clusters research has focused almost exclusively on collaborative inter-firm networks (McLeod, 2001b; Grabher, 2006). Recently, however, institutionalist, heterodox and Marxian value perspectives have drawn attention to the role of power asymmetries in shaping both cluster performance and GPNs (Lorenzen and Mahnke, 2002; Smith et al., 2002; Bathelt et al., 2004; Coe and Hess, 2006; Christopherson and Clark, 2007).2 Within economic geography, researchers such as Hughes (2000); Dicken et al. (2001) and Smith (2003) have adopted variants of ANT. Drawing on Castree (2002), Smith (2003, p. 19) contrasts strong versions of ANT that emphasize the diffuse heterarchical understanding of power and reject the alleged structural determination of Marxian political economy, with a weak version, which combines the insights of both Marxism and ANT. Thus, whilst Smith, Hughes and others recognize the fundamental influence of commodity production they also emphasize how power and the exercise of power is influenced by the knowledges of a variety of actors beyond TNCs. These include SMEs, consumer groups, workers organizations and other institutional actors and provide a more nuanced, fluid and territorialized understanding of the distribution of power. As such, power is both structural and relational. It is based not solely on the predetermined ability of actors to have power over other actors, since the capacity to translate power effectively between here and there is rarely unproblematic (Allen, 2004, p. 22). Instead, stress is placed on an active power to that is derived from the strength of association between actors and their ability to mobilize resources across scales. Thus, for example, Smiths (2003, pp. 3536) research on the Slovak clothing industry, found that relations between locally owned firms and workers in the outsourcing networks of large Western European clothing TNCs are differentiated and not necessarily pre-given.
2 Within human geography, more generally, there is growing interest in how power itself is conceptualized (Castree, 2002; Smith et al., 2002; Smith, 2003; Allen, 2004; Sayer, 2004).

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The emphasis on the contingency and differentiation of power within networks is useful, but is too narrowly focused on a given network structure (Yeung, 2005, p. 45; Grabher, 2006) and under-estimates how power as capacity and potential are critical to how networks actually work (Sayer, 2004, p. 261). For example, in Smiths research, structural power capacity seems to be taken as a given and greater emphasis is placed on associative and network effects, yet it is hard to see how the outcomes he identifies are not at least partially derived from capacities possessed by the individual actors. Whilst power to in associational networks is not simply determined by power over, the latter remains critical in shaping the former. The relative power of TNCs is in large part derived from their strategic position within GPNs (Gereffi et al., 2005). Whether in producer- or buyer-led value chains, TNCs are usually the critical agents in organizing and coordinating such GPNs (Dicken, 2003). As Coe and Hess (2006, p. 12) argue, we must not lose sight of the corporate actors in GPNs, their varying strategies and organizational forms and how this empowers them within networks. Yet, this begs the question of how TNCs can occupy such a pivotal role in GPNs. We argue that this largely stems from their ability to collect power and condense it (Castree, 2002, p. 141). Significant accumulated financial assets and corporate strategies to sustain and increase profit rates, confer on TNCs a certain power over suppliers in GPNs and especially SMEs. This is not simply an essentialist argument in which such capacities unproblematically translate into given outcomes. As Allen (2004, pp. 2021) argues, TNC capacities can run afoul of technological change, ill-conceived managerial strategies, or simply an inability to manage their networks effectively. Moreover, TNCs contain within them diverse and sometimes conflicting goals and strategies (Schoenberger, 1997; ONeill and GibsonGraham, 1999), and price and profit movements may have only an indirect impact on their strategies (Gertler, 2001). Nonetheless, the large accumulated assets of TNCs, and this is especially the case with global automakers, often mean that even with suboptimal economic performances they can still outlast smaller firms (Harrison, 1997). As competition intensifies within an increasingly globally unified system of value production and exchange (Webber, 2000), pressure increases on publicly traded companies to protect share-holder value (Pike, 2006). In turn, this imposes significant constraints on firms. We view TNC power from Sayers (2004) realist position (see also Marques, 2007), in which rather than power being immanent as post-structuralists argue, it is both causal in that it derives from structures and actual in that it only exists when active. From this perspective, power can indeed be possessed, but the exercise of power is both spatially and temporally contingent, since it depends not only on an objects causal powers but also on the powers of those with which it interacts. In other words, TNCs can possess structural power due to their ability to accumulate capital, but whether or not they exercise that power depends on their relationships to other actors, and especially, in our view, their relationships with the national and regional state. Some ANT influenced theorists (Allen, 2004) stress the more performative, network aspects of the state-capital relationship but the latter also rests on a necessary and internal relationship, since capital cannot be reproduced via market means alone (Jessop, 2002, p. 18). Moreover, besides the state relying on revenues derived from capital, the ideological and discursive resources of the state and capital are often symbiotic. Despite globalization and economic integration into regional blocs such as the EU and NAFTA, both Smith et al. (2002, p. 58) and Coe et al. (2004) maintain that national and regional state policies

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remain critical in attracting and sustaining TNC and GPN investment. Even as GPNs cut through and across nationstates and regions, they remain dependent on regulatory institutions and local socio-cultural conditions (see also Whitford and Zeitlin, 2004). Yet, as Jessop (2002, p. 279) argues, state policies towards TNCs and GPNs are part of larger accumulation strategies or models of economic growth, and the latter also need to garner the support of other interests and classes such as labour. As such, the state has autonomy from capital and is both strategically and spatially selective in ways that may not always favour TNCs. Yet, because state strategies and revenues depend on capital accumulation, there is a tendency for the state to provide support for larger business and TNCs. The latter also have a greater capacity to lobby the state for policies that will further their interests (Christopherson and Clark, 2007). This tendency for the state to favour TNCs has been strengthened by globalization and what Glassman (1999, p. 673) terms the internationalization of the state: a process in which the state apparatus becomes increasingly oriented towards facilitating capital accumulation for the most internationalized investors regardless of their nationality. The rise of the SCS has seen a re-scaling of statehood and a move away from equity and redistributive focused forms of nationstate intervention favoured by the Keynesian Welfare State (KWS) towards multi-scalar strategies promoting continual innovation (Jessop, 2002; Brenner, 2004). The increased importance and rising real costs of innovation are occurring precisely at a time when there is a secular decline in basic research performed by firms due to depressed profit rates (Chesnais and Serfati, 1997). Thus, the SCS becomes critical in financing pre-competitive research (Weiss, 2005), engaging in technological intelligence gathering, facilitating technology transfer, increasing incentives for universities to engage in research consortiums and developing entrepreneurship. The nationstate is also still significant in setting the rules under which jurisdictions compete for investment and providing subsidies to TNC operations by underwriting the costs of training and infrastructure. In sum, states still retain power to negotiate their incorporation into GPNs (Smith et al., 2002, p. 48; see also Webber, 2001) but do so in ways that are unpredictable (Perraton, 2001). The rise of competition states has involved the development of new organizational forms (Jessop, 2002; Brenner, 2004). The nationstate has devolved responsibilities to regions and is increasingly involved in establishing and managing networks to facilitate innovation. It also remains central in overcoming market and governance failures via its role in metagovernance or boundary spanning, designing institutions [and] providing mechanisms for collective feedback and learning with key stakeholders (Jessop, 2002, p. 242). SCS innovation strategies involve managing certain contradictions (Jessop, 2002, pp. 130131). Internationalization means that nationstates will both facilitate capital mobility and attempt to capture and retain TNCs and key segments of GPNs within their national space. The nationstate also needs to balance promoting an intellectual commons with protecting intellectual property to capture technological rents (David, 2001). At a regional scale, both large and small firms in GPNs rely on localized economies of scale (via highly localized concentrations of specific knowledge and expertise) and economies of scope (intangible assets of learning and cooperative behaviour) in part created by the state. Thus, regions may attract GPNs by providing conditions for the creation, enhancement and capture of value that are not easily replicable elsewhere (Coe et al., 2004). Training, cooperative learning and positive labour relations may all play an important role in the value creation strategies of GPNs,

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while technology transfer, knowledge and upgrading firm capacities are critical to value enhancement. As TNCs outsource more and more activities including RD and design, state policies designed to upgrade the innovative capacity of SME suppliers may result in a lessening of power asymmetries (Humphrey and Schmitz, 2002; Whitford and Zeitlin 2004). Yet, within regions there can be significant conflicts between TNCs and SMEs over state innovation policy. In their study of the optical devices cluster in Rochester, New York, Christopherson and Clark (2007) argue that publicly traded TNCs responding to share-holder pressure to reap short term profits, are less interested in innovation per se than in sustaining their competitive advantage. Such firms seek to minimize the risk of disruptive innovation and competitors entering their markets, whereas SME strategies are more likely to aim at developing disruptive technologies. Also, within clusters TNCs and SMEs compete for skilled labour and may engage in conflicts over intellectual property, especially where SME suppliers have design and innovation relationships with TNCs. TNCs are more sensitive to sunk costs than SMEs and with investments and excess capacities in different regions, they will attempt to hold down costs via inter-regional competition (Christopherson and Clark, 2007, p. 25). Thus, even after downsizing, the greater overall financial and employment size of TNCs makes it likely that state regional policy will tend to favour them. Thus, the size and power of TNCs results in asymmetrical power relationships within networks (Belzowski et al., 2003; Whitford and Zeitlin, 2004). Coe et al. (2004, p. 476) caution that localized conventions and norms may become too binding and that institutional path dependencies may breakdown due to GPN crises stemming from technological change, overcapacity and the TNCs ability to de-localize production. Along with Smith (2003) they argue that value capture is ultimately about power and regions simply may be unable to negotiate anything approaching symmetrical relations with GPNs. In summary, TNCs use their control of GPNs to harness innovation developed by suppliers in SME networks and to capture regional economies of scale and scope fostered by state policies. Network power relations are contingent, but we contend that structural factors such as financial size, overall position in the value chain, global reach and favourable state policies tend to give TNCs power over suppliers and especially over more regionally based SMEs within GPNs. However, the capacity of TNCs for power over may not be fully realized in such networksespecially if SMEs can utilize their local networks to innovate. Of course, how power in such networks develops is GPN specific (Gereffi et al., 2005), but, as we demonstrate in our case study of the automotive industry, even innovative suppliers may not be privileged in networks when faced with firms (customers), which command significantly greater financial and other resources.

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3. Supply-chain governance and restructuring in the automobile industry


The power of automotive OEMs and large transnational component producers within GPNs has been enhanced by the significant restructuring the industry has undergone in the last 20 years (Dicken, 2003). In North America, the once highly vertically integrated industry has been reconstituted into a series of networks that include strategic alliances, joint-ventures and in some cases mergers. The structure of the global automotive

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Table 1. Top global automotive original equipment manufacturers and components firms by financial turnover (in billions of US dollars) 2006 Automotive OEMs General motors Toyota Ford Daimler-Chrysler Volkswagen Honda 207.3 179.1 160.1 151.6 104.9 84.3 Components suppliers Bosch Johnsons controls Denso Delphi Magnaa TRW automotive

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43.4 32.2 28.2 26.3 24.1 13.1

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a Canadian-owned supplier. Source: Corporate annual reports; The Globe and Mail 12th May 2007.

components industry is in many ways more complex than that for vehicle manufacture, and offers a number of different strategic options for supplier companies (Herrigel, 2004; Maxton and Wormald, 2004; ILO, 2005). OEM outsourcing has increased but the restructuring of the supply chain has led to a consolidation of the supply base including a decline in the number of suppliers (the number of first tier suppliers globally is predicted to fall from 8,000 in 2002 to around 2,000 by 2010). Surviving first tier suppliers now bear greater responsibility for research and development, delivery of modular subsystems and managing the overall supply chain. In certain ways, GPN relations have become less hierarchical due to the growth of some large global suppliers such as Bosch whose annual sales rival those of some of the smaller OEMs (Table 1). Indeed, as OEM outsourcing and supplier consolidation continues to increase, some commentators argue this will lead to the eventual emergence of 610 globally dominant first-tier systems integrators (SIs). Researchers such as Helper et al. (2000) see a shift towards more collaborative relations between first tier suppliers and OEMs. The former are often located in close proximity to vehicle assembly plants and with increased outsourcing OEMs become more reliant on the specialized skills and technology of their suppliers (Whitford and Zeitlin, 2004, pp. 1314). However, Whitford and Zeitlin and Herrigel do not see new forms of supply chain governance springing directly from competitive forces and . . . hence it is not surprising that public authorities at various territorial scales are experimenting with institutional solutions intended to ease the transition to a more decentralized production regime. (Whitford and Zeitlin, 2004, p. 52). The state has always played an important role in the automotive industry (Dicken, 2003). Although the SCS state is less able to directly protect domestic producers, its focus now includes pre-competitive technology development such as the ATEAM initiative involving the United States federal government, GM, Ford and DaimlerChrysler3 and programmes designed to attract and retain key elements of GPNs. Regionally, the state has assumed new roles not only in supplier upgrading, but also with regard to governance. Whitford and Zeitlin (2004), for example, point to the initiatives undertaken by state and local officials in Wisconsin. Coe et al.
3 Commerce, Big 3 US Auto Makers Form New Partnership to Improve Competitiveness of US Automotive Industry Technology Administration 9 December 2004. Available online at: http:// www.technology.gove [Accessed 19 November 2006].

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(2004, pp. 477478) cite federal and state incentives in attracting BMWs initial investment near Regensburg, Bavaria, and the companys subsequent strategy of inviting key first tier suppliers to the region and negotiating greater work time flexibility with IG Metall, the German metalworkers union. Developing collaborative and symmetrical networks between automotive OEMs and suppliers has proven problematic due to intensifying competition, significant excess capacity (estimated at 30% in Europe and 25% in North America), falling profit margins,4 and fragmenting, highly cyclical markets (Dicken, 2003, p. 362). To cope, many North American and European OEMs are engaging in opportunistic practices towards their suppliers (Holweg and Pil, 2004; Whitford and Zeitlin, 2004; ILO, 2005). OEM outsourcing forces suppliers to take on increased risk and favours those suppliers that can not only innovate and deliver quality, but can also access inexpensive capital markets since cost pressures often lead to small returns on capital invested (Conference Board of Canada, 2006, p. iv). Many large suppliers have had problems in achieving the necessary level of component integration to become fully fledged SIs and, since vehicle manufacturers represent their primary, if not exclusive, customer base, enormous economic power differentials remain between the OEMs and most of their suppliers. Despite the OEMs public rhetoric about developing collaborative partnerships with key suppliers, information exchange and power relationships remain highly asymmetric. This is because as aggregators of value-added the vehicle manufacturers are and always have been the principal arbiters of the investment requirements, production locations and, in large measure, aftermarket access of their components suppliers. (ILO, 2005, p. 35). Thus, many OEMs require their suppliers to submit to audits of operations, while the suppliers have no comparable right of scrutiny of their customers. Indeed, OEMs and Tier-1 suppliers often rank their suppliers according to their ability to deliver goods of the desired quality and price and publicly grant favoured firms preferred supplier status, whereas suppliers dare only rank their customers in the anonymity assured by independent third-party agencies. (ILO, 2005, p. 71). Suppliers, who collectively account for 75% of the total manufactured cost of the vehicle, represent the OEMs biggest target for cost reduction (ILO, 2005, p. 71). The pressure to reduce costs has led to pathological behaviour across the supply chain (Herrigel, 2004, p. 76), including OEMs shifting cost and risk to suppliers, sharing supplier proprietary information with competitor and the unilateral implementation of cost-reduction targets (Whitford and Zeitlin, 2004). North American buyersupplier relations have long been adversarial and price-based (Helper, 1993) but are becoming even more so. Currently, more than a dozen large US-based transnational suppliers have been forced to seek court-ordered bankruptcy protection in the United States due to price squeezing by their customers and significant price increases in key raw materials such as steel and resin. Even European-based producers in regions such as BadenWurttemberg with highly embedded governance institutions are having difficulty coping with these pressures. As Herrigel recently admitted:
none of the governance arrangements surveyed seems to be in a position to battle perhaps the most severe problem confronting component producers in the current severely recessionary

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This is especially severe for North American OEMs. In 2004 while Toyotas operating margin was just under 10%, Daimler-Chrysler was at 4% and GM and Ford were both under 1% (The Economist, 2005).

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environment in North American and European manufacturing: the constant pressure on component producer margins driven by unremitting OEM demands for cost reduction (Herrigel, 2004, p. 75).

Such pressures by OEMs have a direct impact on supplier innovation strategies. In response to stagnating markets and over capacity, OEMs are offering new models and increasing design intensiveness as suppliers and engineering service firms take on more responsibilities for design (Schamp et al., 2004, p. 615; The Economist, 2005). However, even as design intensity increases, cost is now a prerequisite: getting a new technology heard requires a cost advantage first (Dupont, Automotive News, 27 March 2006). Thus, knowledge development within North American and many European OEMs and suppliers is inflected and narrowly focused such that most companies are making tactical knowledge investments based solely on cost reduction potential. (Belzowski et al., 2003, p. 19). Many independent observers have concluded that the unrelenting price reduction pressures on suppliers will yield declining returns to both parties, in part by compromising the innovation ability of suppliers on whom OEMs increasingly rely (Herrigel, 2004).

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4. Power, Canadian state policy and cluster development in Windsor and Kitchener Ontario
The states role in the re-shaping of actor networks in GPNs and clusters is illustrated by the Canadian case. Despite lacking a domestically owned OEM, by 1999 the Canadian auto industry was the fourth largest producer of motor vehicles in the world, and featured a group of globally competitive Canadian-owned automotive component companies such as Magna, Linamar and Woodbridge. The industry is very heavily concentrated in southern Ontario (Figure 1). This region that includes the Windsor and Kitchener clusters owes much of its development to proximity to the US automotive industry centred around the lower Great Lakes. This is especially the case for Windsor directly across the border from Detroit. By 2000, the automotive industry in Windsor had over 500 plants employing approximately 50,000 employees. These included OEM assembly plants, plants manufacturing automotive components, and an important automotive machine tool and mould (MTM) industry (Table 2). Indeed, by the 1990s, with over 300 firms, Windsor had 20% of Canadas tool and die makers, and 50% of industrial mould manufacturers, was one of the leading MTM clusters in North America (DesRosiers, 2003), and enjoyed a world class reputation for the design sophistication and quality of its automotive moulds. The Kitchener region5 is more diversified economically than Windsor (Table 2) with rapidly developing information and communication technology (ICT) industries (Nelles et al., 2005). Automotive parts and MTM are not as significant in Kitchener as in Windsor, but with over 10,000 employed in the sector they are the largest single employer in the regions manufacturing economy. Proximity to the United States has been important (Figure 1), but the federal and provincial state have played a critical role in negotiating southern Ontarios relationship
5 For purposes of this study the Kitchener region includes the Kitchener Census Metropolitan Area (CMA) including the cities of Waterloo, Kitchener, Cambridge and Guelph.

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Figure 1.

All automotive parts plants, 2002, Southwestern Ontario.

Table 2.

Comparative profiles of the Windsor and Kitchener clusters Windsor Kitchener Automation systems, tool and die components Strong at the level of the general economy Weak Important link to OEMs, WATCAR, some to parts Important for skills development in workforce Mix of transplants and Big Three Developing in ITlinks to automation systems Overall, local linkages not strong

Leading sectors Support for entrepreneurship Role of unions Role of universities Role of community colleges Final markets New economy linkages? Cluster?

Mould making, tool and die, components Strong in mould making Strong Links to OEMs, few to parts and MTM Important for skills development Dominated by Big Three Not significant MTM-especially in mould making Not in components

Source: Authors survey.

with GPNs and developing economies of scale and scope. Like other late industrializers (see Dicken, 2003) the Canadian federal state under Sir John A. Macdonalds 1879 National Policy used import substitution and high tariff barriers to protect domestic producers that favoured a labour-capital alliance in the rapidly industrializing regions of Southern Ontario and Quebec (Brodie, 1990). Yet, this strategy also captured value by attracting American-owned branch plants of companies seeking to circumvent tariffs. By the 1920s, American automobile OEMs dominated a Canadian automobile

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industry expanding rapidly due to its close economic and technological connections with the United States and preferential access to certain British Empire markets (Holmes, 2004). Thus, the initial development of the Windsor and Kitchener automotive clusters resulted from US investment by OEMs such as Ford in Windsor and rubber and tire producers in Kitchener (Walker, 1987). Despite attracting US automotive investment, central problems for the industry and Canadian state policy were relatively small firm size and short production runs (Howlett and Ramesh, 1992). A growing competitive crisis in the Canadian industry was resolved by the 1965 Auto Pact with the United States. Until the Auto Pact was struck down by the WTO in 2001, it remained the cornerstone of Canadian automotive trade policy and integrated the United States and Canada automotive industry by permitting duty free trade in new vehicles and original equipment (OE) parts (Holmes, 2004). The Auto Pact also contained safeguards to ensure a specified minimum level of automotive production in Canada and thus represented a significant shift from the accumulation project of value capture via tariff protection under the National Policy towards the continentalism of Canadas permeable Fordism (Jenson, 1989, Brodie, 1990). It also represented a compromise between complete free trade with the United States, favoured by the US government and major US OEMs and a protected Canadian industry advocated by more nationalist elements of the Canadian federal state and some Canadian sections of the United Auto Workers (UAW) union (Anastakis, 2005). The Auto Pact production safeguards ensured a significant expansion of both the assembly and parts industry in Canada in the late 1960s and early 1970s (Holmes 1983) favouring investments by large OEMs and US-based multinational parts producers, which were often subsidized under Canadian regional economic development incentive programmes. Many new plants including large US parts suppliers such as Budd and Lear Seating in Kitchener were located close to the publicly financed Highway 401 between Windsor and Toronto and along the QEW Highway between Toronto and Fort Erie. As one Windsor-based respondent stated, this area benefited tremendously from the Auto Pact in 1965, and with all the plants that had to be built here and the 401 was in place, all you had to do was open a stamping shop and that was a license to print money. (University-Industry Liaison Officer, Windsor, 11 August, 2003). Throughout the 1980s and the 1990s the Canadian industry flourished based on a significant labour cost advantage over the United States. Through various state incentives Canada was successful in attracting a significant share of new OEM investment, despite increasingly intense competition between North American jurisdictions for such investment (Thomas, 1997; Holmes, 2004; Molot, 2005).6 In the mid-1980s, trade limitations on Japanese vehicle imports forced the Japanese OEMs to build assembly plants in North America and the Canadian government secured investment from Toyota, Honda and Hyundai by offering specifically designed duty drawbacks and duty remission incentives that it viewed as consistent with the Auto Pact (Macdonald, 1989, p. 13). This led to the arrival in the Kitchener region of a Toyota assembly plant in 1986 and a number of Japanese parts suppliers such as Denso.
6 While Canadas share of the total North American market for vehicles remained at around 89%, by the end of the 1980s its share of total North American vehicle production and industry employment had both risen to around 15% and remained in the 1516% range through the 1990s.

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The Auto Pact and related policies resulted in the development of a world-class and competitive Canadian auto industry. However, power between OEMs and suppliers, was highly asymmetrical in that many of the suppliers were owned or captive producers for the OEMs or relatively small and highly dependent Canadian parts suppliers who were lacking in substantive formal RD capacity. After the mid-1970s, Canadian and Ontario state policies adopted value creation and enhancement strategiesespecially directed towards the development of a more RD intensive and Canadian-owned supply base. These policies were part of a broader state strategy aimed at Canadianizing key economic sectors by facilitating the growth of threshold SMEs (Britton et al., 1996). The expansion of vehicle assembly capacity in Ontario during the 1980s and 1990s provided a growing market for the automotive components industry including automotive tooling. The federal Industrial Research Assistance Program (IRAP) was critical in assisting Canadian-owned suppliers such as Magna and Linamar upgrade their technology and finance new investment. Magnas exceptionally rapid growth during the 1980s relied heavily on IRAP assistance.7 An equally important policy was the federal Scientific Research and Experimental Development (SR&ED) Tax Credit incentive program.8 Introduced in the early 1980s, it is one of the most generous R&D tax credit programs in the world (especially when combined with similar provincial programmes). By the early 1990s, the programme was delivering more than twice the amount of direct government grants to RD and innovation activities (Baldwin and Hamel, 2003, p. 334). The SR&ED program is especially critical, since it is well-suited to the incremental nature of innovation in the automotive parts and MTM sectors. While 510% of the automotive parts firms in the Windsor region perform pure R&D, between 80% and 85% have availed themselves of the R&D tax credit (Senior Partner, Tax Consultancy, Windsor, 11 August 2003). Furthermore, in an industry that traditionally has not attracted venture capital, provincial agencies such as the Ontario Development Corporation (ODC) were important in financing start-ups especially in the Windsor MTM sector during the 1980s and early 1990s (Ontario Government Official, Windsor, 13 August 2003). The industry has also benefited indirectly from federal and provincial social programmes. Thus, under the publicly funded health care system in Ontario, employee health care costs per vehicle in Canada are approximately $ (US) 30 compared with between $1000 and $1400 for North American OEMs in the US (Stanford, 2005). Ontario workers also have a higher level of educational attainment with 43% having completed post-secondary education as compared with 27% of their counterparts in the US (MEDT, 2001). Since few firms in the Canadian industry adopt a strategic perspective towards investment in worker training (Canada Consulting Cresap, 1991; Paget Consulting Group, 1996), skill development has tended to rely on knowledge

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Magna International, which began as a one-man operation in the owners garage in the 1960s, is today the second largest automotive supplier company in North America with annual worldwide revenue close to $US 24 billion. During the 1980s the company was opening a new plant every few weeks (Anderson and Holmes, 1995). The SR&ED program is designed . . . to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada that will lead to new, improved, or technologically advanced products or processes . . . . Claimants can apply for SR&ED investment tax credits for expenditures such as wages, materials, machinery, equipment, some overhead, and SR&ED contracts (http://www.cra-arc.gc.ca/taxcredit/sred/aboutus-e.html).

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provided through the public secondary and post-secondary education system such as community colleges. State policies for value capture, creation and enhancement were critical to the development of the Canadian automotive industry and power relations within evolving supply chain networks and clusters. Moreover, policy initiatives reflected power differentials within the state and between the state and capital. Until late in the Fordist KWS period, when provinces such as Ontario and Quebec began to assert themselves, these initiatives were led principally by the federal state that enjoyed a high degree of autonomy in policy development (Wolfe, 1989; Brodie, 1990). This autonomy was reflected in the relatively unorganized nature of Canadian business (Wolfe, 1997) and the dominant role of US-owned auto assemblers and suppliers. As noted earlier, policies implemented during the 1970s aimed at Canadianization stimulated the development of large transnational component producers such as Magna, Linamar and the ABC Group. Whilst RD tax credits have been used by SMEs, they have been applied most intensively by larger firms (Baldwin and Hanel, 2003, p. 348). However, these policies have not significantly improved the relatively poor RD performance of Canadian suppliers, nor the power asymmetries favouring OEMs. By the late 1990s, only 2% of automotive parts firms had a proprietary product technology strategy and overall research and development expenditures were less than half of the Canadian manufacturing average (Industry Canada, 1998). First-tier supplier plants in southern Ontario are part of GPNs situated in what Wolfe and Gertler (2003, p. 28) term entrepot clusters in which most knowledge, especially design engineering and formal RD, is acquired through market and often global sources. Like other synthetic knowledge industries (Asheim and Coenen, 2004), the automotive parts industry relies heavily on incremental process innovation based on workforce tacit knowledge. The almost exclusive focus on incremental innovation reflects power asymmetries within the North American supply chain, in particular, how OEMs control intellectual property and value price reduction:
The car companies ultimately determine successful intellectual property, which is evident to the extent that it is incorporated into vehicle designs. Relatively few companies are rewarded for a strategy of original product development. In contrast a company being perceived as being a low cost, high quality build-to-print supplier is always valued products at a lower price is the prime competitive requirement in the industry. Consequently most Canadian parts manufacturers are necessarily more concerned with developing process productivity improvements, rather than speculative product development or applied R D (National Forum on Automotive Innovation and Investment, 2002, p. 5).

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As one large Canadian supplier argued these power asymmetries are directly linked to differentials in financial size:
I frequently call us the flea on the tail of the dog. Even though we are 1.5 billion dollar in sales which seems quite large, we have to picture that our tier one customers are in the 15 to 18 billion dollar range and their customers are the OEMs who are in the 100 billion range (Canadian automotive parts producer, 15 February 2004)

Power asymmetries are also reflected in the relative representational weakness of Canadian parts supplier organizations such as the Automotive Parts Manufacturers Association (APMA) that tends to have arms length, non-collaborative relations with

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its members. This is particularly notable at the local cluster scale where one Windsor respondent stressed, The APMA is the key player and the parts guys dont see themselves as purely Windsor based . . . . They may have their roots in Windsor, but they see the APMA (Senior Partner, Tax Consultancy, 11 August 2003). Moreover, there is relatively little cooperation between parts manufacturers and the MTM sector.
Ive had talks with APMA members saying that you guys should be talking with the mold makers, the tool makers, and incorporate them into your group . . . They [APMA] think were parts; we dont care about the tool makers. They make so much money there is always a reluctance to join up with local politics and power sharing issues (Senior Partner, Tax Consultancy, Windsor, 11 August 2003).

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Even within similar sectors relationships between firms tend to be highly competitive (Ontario Government Official, Windsor, August 2003; Tool and Die Manufacturer, Kitchener, June 2004). In Windsor, most of the output from the MTM firms goes to OEMs in Michigan and to global markets. There are relatively few linkages between component suppliers who are mostly part of GPNs, although first tier suppliers have strong linkages and knowledge flows with local OEMs. In both regions, some Canadian-owned firms have policies to source tooling locally, but purchasing authority for the Ontario plants of TNCs is often located outside of Canada. Despite co-location, some automotive OEMs were not aware of the presence or capabilities of even globally successful, locally based firms (Auto Parts Supplier, Kitchener, 27 July 2004). Yet, formal linkages and associations between actors play only a partial role in how power is developed. Smith (2003, p. 33) notes how informal and often highly localized actor networks in Slovakia at least partially offset TNC power and there is similar evidence from both Windsor and Kitchener. Largely informal networks provide a milieu for the development of cluster economies of scope and scale and represent a critical basis for innovation and power for both parts suppliers and MTM producers when negotiating with TNCs. Indeed, the very weakness of formal representation is both a cause and consequence of the relative strength of such networks in the Kitchener and Windsor clusters. During the 1980s and 1990s, the growth of the Windsor MTM sector was generated by spinoffs from a couple of key anchor firms. Learning and incremental innovation was fostered as skilled workers moved between firms that served as learning sites for the acquisition of tacit knowledge. This provided a pool of technical expertise in SMEs that allowed them to win design contracts even over large TNCs such as Siemens (Tooling Manufacturer, Windsor, 8 October 2003). Despite the fact that MTM producers are fiercely competitive, collaborative networks also exist. Several respondents noted what some outsiders considered a remarkable level of capital equipment sharing among competitors.
If I wanted a job done, - - - we dont have a molding machine here, but there are different places that can shoot certain jobs for you and get parts to customers. So all these little factories develop around somebody else, you take the spin-off here. We recognize them because they helped us out along the way through good years and lean years (Mould Maker, Windsor, 11 August 2003).

In Kitchener, informal relationships centred on the German and Mennonite communities. In the initial post-war period trust-based relationships developed between firms (in some cases based on inter-marriage between families) and between labour and

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managementespecially at locally owned firms (English and McLaughlin, 1996). Indeed, the German heritage of the region is a continuing source of attraction for new German-based investment. Interviewed respondents commented on continued good labour relations and the unique levels of informal networks for business and entrepreneurial mentoring present in the region (Federal Government Official, Kitchener, 9 July 2004; Chamber of Commerce Official, Kitchener, 27 July 2004). In both Windsor and Kitchener, public secondary and post-secondary education institutions play a significant role in skill and social capital development. In Windsor, local technical high schools were critical in fostering the acquisition of technical skills by tool makers who went on to become successful entrepreneurs in the MTM sector. Importantly, common schooling and the tight knit community laid the foundation for strong social bonds, not only between entrepreneurs but also between the parties involved in industrial relations. Canadian labour relations are based on an adversarial system (Drache and Glasbeek, 1992) and the Canadian Auto Workers Union (CAW) has staunchly resisted developing partnerships with management (Kumar, 1995). However, a number of our respondents, especially in Windsor, stressed how common schooling became the basis for informal networks between labour and management. The CAW is an important workplace and civic institution in Windsor, representing over 50% of the automotive related workforce (although mostly in OEMs and parts rather than MTM). Even by non-union MTM entrepreneurs, the union is recognized as important in fostering cluster coherence and for some unionized firms serves as an important source of competitive information and innovation (Auto Parts Manufacturer, Windsor, 12 August 2003; Mould Maker, Windsor, 8 October 2003)a role also noted in Kitchener (Automotive Stampings Manufacturer, Kitchener, 23 June 2004). The CAW is an important force in Windsor local politics and overall community and economic development. It also plays a critical role in regulating wages and working conditions in the local labour market for both unionized and non-unionized establishments (Rutherford and Holmes, 2007b).

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5. Restructuring, state policy and cluster crisis


Despite their past success, firms in the Windsor and Kitchener clusters are currently experiencing intense pressure, especially from the North American OEMs, to cut costs. Together with shifts in state policy, such pressure is undermining the coherence and innovative capacity of the clusters. During the 1990s, automotive producers in Ontario retained a significant competitive cost advantage over US-based producers, in large part because of the low value of the Canadian dollar. However, since 2002 the appreciation of the Canadian dollar against the US currency has severely eroded this advantage.9 Canada is a member of several regional free trade agreements and global trade institutions such as the WTO that have a neo-liberal bias. Tariffs on automobiles and parts imported into North America are significantly lower than similar tariffs for automotive products entering either the European Union or Japan, making North America uniquely open to direct global competition (Dicken, 2003; Stanford, 2005).
9 The advantage was further reduced as a result of the cost-cutting in US plants that OEMs achieved in their 2007 round of collective bargaining with the UAW. The cost savings came from a radical restructuring of health care and retiree benefits and the UAWs acceptance of a two-tier wage structure.

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In 2001, the Auto Pact was struck down by the WTO eliminating Canadas ability to tie investment to market access. These changes coincided with a downturn in employment in the North American auto industry, a shift in market share from the Detroit Big Three to Asian and European-owned OEMs and a concentration of investment in new assembly capacity into the American South. Between 2000 and 2003 Ontario lost 10 and 5% of its assembly and parts production employment, respectively (DesRosiers, 2004), as Canada fell from fourth to eighth largest global auto producer. Between 2003 and 2007 parts employment fell by another 11,000 to just over 92,000 (Keenan, 2008). Yet, Ontario has withstood the shift of automotive production towards the southern United States much better than neighbouring Michigan (Klier, 2003). With an annual production of 2.7 million vehicles in 2004, Ontario for the first time surpassed Michigan as the top auto-producing jurisdiction in North America. The Canadian operations of the Detroit-based OEMs continue to have quality, productivity and capacity utilization levels that match those of Japanese transplants such as Toyota and Honda (Stanford, 2005). Yet despite this, over-capacity and profit declines being experienced by GM, Ford and Daimler Chrysler in North America have impacted negatively on Southern Ontario where three assembly plants have closed since 2003 (Stanford, 2005). Southern US states such as Alabama, Mississippi and South Carolina have offered large financial incentive packages to attract the bulk of new OEM investment and with it suppliers. Although Ontarios annual automotive capital investment remains steady at $$3 billion year (Murnighan, 2003), the province has attracted only two of the 17 new assembly plants opened within the NAFTA region since 1990. These threats to the Canadian industry have led the state to reformulate its automotive policies. Drawing on Jessop, Clarkson (2001, p. 501) sees the Canadian state shifting towards a more multi-scalar form of governance as its functions are redistributed upwards to the international level, downwards to the subnational scale and laterally to the private sector and other stakeholders. Since 1980 federal autonomy in policy making has been challenged not only by Canadas involvement in NAFTA and the WTO, but also by provinces such as Ontario, which played a key role in subsidizing R D and training and increasingly asserted themselves in developing automotive and other policies (Brodie, 1990; Courchene and Telmer, 1998). State re-scaling has coincided with trade and investment agreements becoming more socially intrusive (Britton, 1998) and policy formation becoming more congested with increasing civil society representation (Clarkson, 2001, p. 508). By the 1980s, federal and provincial government automotive industry task forces and commissions included direct representation from labour and business interests (see Yates, 1993 on labours involvement). Committed to a neo-liberal accumulation project, the state also became involved in stakeholder institutions such as the Canadian Automotive Partnership Council (CAPC) created in 2002. CAPC includes representatives from the federal, Ontario and Quebec governments, OEMs, suppliers, the CAW, academia and other institutions. Providing a framework for more on-going policy formation than earlier task forces, CAPC features what Jessop refers to as Schumpeterian competition state (SCS) meta-governance strategies. CAPC is driven by concerns that relative to competitor jurisdictions, the investment process in Canada is perceived as disjointed/inconsistent with various levels of government (and only government)

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involved (CAPC, 2004, p. 9). Rather than the state being the sole arbiter of GPN investment, CAPC aims to synthesize and coordinate the knowledge of key stakeholders to make Canada the location of choice for automotive manufacturing within North America, driven by globally competitive innovation [and] enhancing investments and capabilities in innovation (CAPC, 2004, p. 1). With heightened federal and provincial interest in cluster development (Wolfe and Gertler, 2003), CAPC also aims to develop such synergies by establishing supplier parks (CAPC, 2004, p. 17). CAPC has been acknowledged as instrumental in attracting and co-coordinating new automotive investments in Canada (The Globe and Mail, 12 May 2006), through the revived use of locational investment incentives by the Ontario and federal governments. In 2004, the newly elected Liberal government in Ontario announced a $500 million assistance programme for the automotive sector. This programme is credited with leveraging $7 billion in new investments including the modernization of the Ford Oakville and GM Oshawa assembly plants, Toyotas investment in a second assembly plant in Ontario and assistance to a number of component makers including Linamar and Nemak (The Globe and Mail 14 April 2004). Efforts to enhance innovation capabilities are also reflected in state policy promoting universityindustry research networks to capture, create and enhance segments of the value chain that are more knowledge intensive and foster the growth of intellectual capital (The Globe and Mail, 7 October 2004; DesRosiers, 2007). Through the federal Networks of Centres of Excellence (NCE) program, the Ontario Centres of Excellence (OCE) program10 and the Ontario Research Fund11 both the federal and provincial state have placed greater emphasis on university researchers, and especially engineering faculty, developing research collaborations with automotive manufacturers. This coincides with the North American OEMs expanding activity in their Canadianbased research and design facilities such as GMs $2 billion Project Beacon to which the Canadian federal government is contributing $200 million. Such relationships have become increasingly critical as automakers become more R D and design intensive, and yet due to cost pressures must outsource more of the R D work. Ontario universities have become significantly involved in this process. The Kitchener cluster includes the University of Waterloos automotive engineering research consortium WATCAR, while the University of Windsor has several direct research links to OEMs including the University of Windsor/Chrysler Canada Inc. Automotive Research and Development Centre. The latter reflects federal government initiatives to develop greater cluster synergies in locales such as Windsor, in particular, by enhancing knowledge flows between the Universitys engineering school and the auto industry (University-Industry Liaison Official, Windsor, 11 August 2003). Indeed, building on these developments Windsor has been proclaimed the automotive intellectual capital of Canada. Yet, it is clear that these developing networks favour and

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11

The OCE Mission Statement reads as follows: We take ideas to income. Created in response to Ontarios most critical competitive challenges, we facilitate economic growth through support for industrially relevant R&D, the opening of new market opportunities and the commercialization of leading edge discovery. We build strong industry and academic relationships. And, we stimulate knowledge transfer through the development of bright minds, moving their skills to the market. (Available online at: http://www.oce-ontario.org/default.aspx?mabout; Accessed 28 June 2007) In March 2007 the Ontario government announced $15million from the Ontario Research Fund to support the Hamilton Initiative for Automotive Manufacturing Innovation at McMaster University.

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augment the power of OEMs and large parts supplier over SMEs. As one university research officer argued:
Smaller suppliers of course, have a major problem. They have no real resources to apply to research projects, so would have very, very limited resources to discuss possibilities with us, whereas a Magna of course, [can] scope out possibilities, but the small company doesnt quite have the same capability (University Research Officer, Waterloo, 6 July 2004) While a manager of a major Windsor tool maker stated flatly:
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The university . . . . has done absolutely nothing for the tool, die, and mold industry. They are . . . . working with the Bendix, and the Nemaks [tier one suppliers] and the Fords of this world, but for TDM . . . nothing (Tool Manufacturer, Windsor, 14 August 2003).

Many smaller suppliers are largely excluded from such emerging research networks and increasingly aggressive and cost-reduction focused supply chain management practices by the North American OEMs are eroding their financial and innovation capabilities. Besides unilateral demands by the OEMs for annual price reductions and financial givebacks, changes in payment scheduling mean that many suppliers now face long delays in receiving payment for their products. In effect, smaller innovative suppliers are financing OEM and Tier One product development (House of Commons, Standing Committee on Industry, Science and Technology, 2006, p. 6). Given over-capacity in the industry, automotive tooling and parts firms are not in a strong bargaining position to resist OEM demands. As one tool maker stated:
We went to a meeting with one of our largest customers in Detroit, 15 tool shops in the room, and the buyer said Well the industry has matured to the point that were not going to be putting dates on our purchase orders for PPAP [Production Part Approval Process]. You guys understand that? Do you know how many people complained? Nobody. With over-capacity and such a competitive situation in the industry right now, nobody would dare bring it up (Mould Maker, Windsor, 14 August 2003).

New purchasing technologies (such as EDI technologies and internet bidding systems) used by North American OEMs allows them to access lower cost suppliers globally. A Windsor-based stamper stressed how much of the tacit nature of negotiation with OEMs has been eliminated in favour of price:
. . . . this e-bid now makes it more global. Its not who you know anymore. Its difficult. Theyve down sized a lot. . . . [T]hey said, give us cost improvements and one company might give them more than they had expected but they didnt get the business because its still even. It doesnt matter how much money you give us back, its still going to go to the lowest price. (Stamping Manufacturer, Windsor, 13 August 2003).

A Windsor mould maker emphasized that customers are increasingly measuring supplier price quotes against world prices (usually meaning China) for an equivalent product:
Price is the almighty thing in quoting today. Forgetting that you got thirty years of service on your last job [for them], price seems to be the deciding factor that purchasing agents are

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going for today. Im talking about a world price. Its a world price that we have to match. (Mould Maker, Windsor, 13 August 2003).

Similarly, North American OEMs expect engineering intensive domestic suppliers to match the prices of off-shore producers without such expertise.
They want you to have all the engineering expertise to invent and to keep technology moving forward [but] at the end of the day, it comes down, who is going to supply it at the cheapest price irrespective of what they have in engineering skills. So we are put against very small shops in Asia and expected to compete with them . . . (Kitchener Auto Parts Manufacturer, 27 July 2004).

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Global pricing reflects the enhanced ability of OEMs to extend their global networks such that Southern Ontario suppliers now must compete directly with China and other developing nations. Furthermore, off-shoring is often a direct demand of the OEMs: The Big Three are demanding you move jobs to Asia the motivation is cost (Kitchener Auto Parts Manufacturer, 27 July 2004). However, while Chinese competition is a growing concernespecially in the low to medium technology segments of MTM (USITC, 2002), there is also pressure at the more sophisticated technological level from countries such as Japan, Germany and Portugal. Competitive pressure is being felt in the Windsor and Kitchener clusters where some parts producers have either closed or been forced to make significant layoffs. OEM practices have significantly reduced profit margins with overall rates of profit for Canadian automotive parts manufacturers falling from over 5% in the late 1990s to 3.5% in 2004 (Conference Board of Canada, 2004). Indeed, one of our respondents stated that Suppliers are being squeezed to the brink of extinction (Stampings Manufacturer, Kitchener, 23 June 2004). In Windsor, MTM profit margins have fallen from 30% to 40% in the 1990s to 20% and less (Corporate Banker, Windsor, 17 March 2005).12 New firm formation among MTM firms in Windsor, a critical element in cluster dynamics, declined significantly after 2000, and since completing our interviews in 2005 the number of bankruptcies in the sector has increased significantly. Surviving firms are more capital intensive and focused on increasing scale economies, but there are now fewer firms to serve as key learning sites for tacit skills and potential spinoffs which in the past spurred innovation in the cluster (Mould Makers, Windsor, 16 March 2005; 18 March 2005). The OEM focus on cost reduction has led many suppliers to rely more heavily on the federal SR&ED program, both to support innovation and sustain financial viability. Yet, some OEMs are squeezing suppliers to appropriate a portion of tax credit rebates:
. . . our R&D programs are a little better than what you can get in Michigan. [and] its almost like blackmail that is going on. Letters have been sent saying, Weve heard that you are getting R&D tax rebates and theyre now saying to others If you get the rebate, we want 50% back. This type of thing is taking place. Ive seen it in black and white and it just amazes me (Ontario Government Official, Windsor, 13 August 2003).

12

Profit margins in the MTM sector were extremely high in the 1980s and 1990s due to the rapid growth in the demand for plastic moulds as OEMs switched from metal to plastic components in order to reduce vehicle weight and improve vehicle fuel efficiency.

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Potentially, more problematic is the impact of OEM practices on supplier innovation, with OEMs increasingly giving supplier proprietary information to other firms who can produce components more cheaply. As one supplier noted there is always an IP threat from the OEMs they multiple source and will give your ideas to competitors (Plastic Component Supplier, Kitchener, 25 June 2004). This is a problem especially in the Windsor MTM cluster. Michigan-based North American OEMs still rely on their proximity to commission mould designs from the Windsor cluster. However, some have broken contracts with MTM shops once the initial complicated design work is complete and then have the actual production of the mould undertaken in China or another offshore location. A number of Windsor and Kitchener suppliers complained that such a trend might erode the important cluster synergies of design and production co-location:
. . . Do they [the Big Three] want you to dispose of all your manufacturing capacity and just provide them with the design experience which is a direct result of that manufacturing experience? . . . Eventually your design logic would no longer have a manufacturing focus . . . Even our original ideas would slow down-because original ideas are driven from the needs of manufacturing. (Mould Maker, Windsor, 8 October 2003) The pricing pressures that are being demanded of us, we have no choices other than to move our manufacturing to lower cost countries . . . . [but] if we were only doing design, it would be difficult to have the feedback mechanism, as to how do you improve your design for manufacturing if youre not doing manufacturing? (Automotive Parts Supplier, Kitchener, 27 July 2004).

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Thus, innovation practices are inflected by OEM emphasis on price reduction and some suppliers have moved from incremental process innovation to adding greater value to their products:
. . . if you are a commodity supplier, you are dead - - there is nothing you can do. So smarter firms have tried to provide more value-added elements. Ive one plastic company that rather than just shooting and shipping parts for entry systems now assemble the entire system . . . they now have some flexibility, and say this is something more, some value (Senior Partner Tax Consultancy, Windsor, 11 August 2003).

The state has also tried to adopt policies to assist suppliers. For example, because of endemic payment delays by OEMs, the state of Michigan has enacted a lien law so that components and tooling remain the property of suppliers until they are paid for in full. In Canada, suppliers can insure their components for their full value through a federal agencyExport Development Canada (EDC). These are largely defensive responses to the problems confronting the auto parts industry, since they effectively accommodate and perpetuate low trust OEM-supplier relationships. Individual suppliers, especially in the MTM sector, are simply too small to challenge OEMs over payment and IP conflicts. Another strategy to counter the predatory IP practices of OEMs is the Initiative for Automotive Innovation (IAI) led by local tool, die and mould makers in the Windsor region with financial support from the provincial government. IAI is designed to protect the individual IP of supplier firms through a collaborative project to design new mould related technologies. The IAI is significant, since it is the first attempt to develop

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a collective response by hitherto highly individualistic MTM entrepreneurs. As one participating mould maker stated:
We are hoping that it [the IAI] would create an environment of trust and reputation where, if I have an idea, rather than worry about the corporate world stealing it from me and abusing me and leaving me with nothing. I can bring it here and it can be assessed and developed and I can have a stake in it a piece of the action (Mould Maker, Windsor, 8 October 2003).
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Yet, one of the lead firms in the IAI recently declared bankruptcy because, despite its nearly 40-year record of innovation, it could not secure the long-term financing needed to withstand the price pressures of the OEMs (Hall, 18 December 2006). Thus, although the IAI may at least partially offset supply chain asymmetries with OEMs, in the short run it does not compensate for the OEMs superior financial resources, relentless downward price pressures on suppliers and global reach that enables them to outsource to lower cost producers overseas.

6. Discussion and conclusions


We began this article with a re-assessment of the role of power in shaping supply chain relations within GPNs and a sympathetic critique of weak versions of ANT. Such versions recognize both commodity production and the contingent nature of power within networks by distinguishing between power to and power over in the relationships between different actors. We find such insights useful, but based on our empirical research on the Canadian automotive industry, we believe that these weak versions of ANT underestimate the degree to which large TNCs can exercise power over suppliers, and especially over SMEs in industrial clusters. Following the realist distinction between causal and active power, we view TNC power as deriving from their superior ability to accumulate capital and especially their relationship with state accumulation projects, which in turn facilitates their strategic role in networks. Drawing on Jessop (2002), Smith et al. (2002) and Coe et al. (2004) we stressed the critical role of nationstate accumulation projects in capturing, creating and enhancing value. Thus, the southern Ontario automotive industry benefited not only from its location vis a vis the traditional Midwest heartland of US automotive production but also significantly from federal and provincial policies. Since the early 20th century, state policies enabled southern Ontario to capture, enhance and create value from US-based and, more recently Japanese-based OEMs and as such, favoured large transnational firms. The development of automotive-related industrial clusters in places such as Windsor and Kitchener resulted directly from such proximity and policies and, in turn, facilitated the development of economies of scale and scope based on tacit knowledge exchange and local socialization. While OEM size and state accumulation projects potentially conferred power over their suppliers to the OEMs, during the 1980s and 1990s such power was partially offset by how responsibility for R D was increasingly downloaded from OEMs to suppliers. The financial and power advantages of OEMs could be mitigated by the capacity of SMEs to utilize often informal local networks and economies of scale and scope to engage in innovation. But recent auto industry restructuring triggered by

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over-capacity and declining profitability on North American OEMs has reasserted power asymmetries and made relationships between firms within GPNs, including around innovation, increasingly cost-based and conflictual. The financial advantages enjoyed by OEMs, combined with their strategic position within GPNs and their ability to access low cost suppliers globally, is eroding the cluster-based advantages of suppliers, and, in particular, SMEs. Some recent Canadian state policies have sought to offset the pressures on domestic SMEs. However, the states principal focus has been on capturing and enhancing knowledge aspects of GPNs, and developing more multiscalar SCS strategies, through stakeholder organizations such as CAPC. Furthermore, these strategies, including stronger firm-university networks for innovation, continue to have an inherent bias towards larger firms and especially OEMs and transnational automotive component producers. The above narrative represents a strong case for the structural advantages that confer power over their suppliers to North American OEMs. However, such power is neither absolute nor linear. Suppliers could respond reflexively to declining price and profit signals by enhancing innovation and institutional collaboration and other strategies. Like Pike (2006, p. 217), we see evidence that macro-pressures on automotive GPNs such as financialization are necessarily shaped by specific and particular geographic institutional arrangements. North American OEMs are not alone in their ability to access global networks. There is evidence that surviving suppliers may seek advantage by developing alternative networks with Japanese producers such as Toyota and Honda who, overall, have a better record with regard to their treatment of suppliers (Rutherford, 2000; ILO, 2005). The problems confronting the Detroit-based OEMs and their suppliers lie not only in the OEMs declining financial position, but also in how their management of networks is threatening to decimate the very suppliers they depend upon for innovation (Herrigel, 2004). In contrast, Japanese producers have long been able to develop more collaborative and effective networks with suppliers (Sako, 1992). Yet, such networks also rest on Toyota and Hondas superior profitability, accumulated financial resources and high rates of capacity utilization (Williams et al., 1992). When other Japanese producers, such as Nissan, have faced declining profitability their supply network practices have become notably less collaborative. Similar to weak ANT perspectives, our evidence suggests that the way power works through networks in GPNs can be contingent and not simply based on initial differences in accumulated capital or resources. Yet, more critical is how the causal power derived from TNC financial size translates into active power and confers to TNCs power over smaller and cluster-based suppliers. Indeed, our findings correspond with a recent US study of automotive OEM-supplier relations, which showed that even where suppliers have potential power derived from OEM dependence on their capabilities, the financial size of the OEM means that suppliers have neither the desire nor resources to convert their structural power advantage into coercion against manufacturers (Gulati and Sytch, 2007, p. 60). In contrast, North American automotive OEMs in southern Ontario with their financial size advantages have not hesitated to use coercive practices even at the cost of undermining longer term embedded relations with often highly innovative suppliers. Thus, even if such outcomes may seem irrational, our study points to a particular logic of how causal and active power within automotive GPNs stems directly from the dynamics of value creation, enhancement and capture.

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Acknowledgements
The authors gratefully acknowledge the funding of Auto 21 NCE and the Social Sciences and Humanities Research Council (SSHRC) of Canada project, Innovation Systems and Economic Development: The Role of Local and Regional Clusters co-ordinated by Meric Gertler and David Wolfe at the University of Toronto. We also greatly appreciate the insightful comments of three anonymous referees and Neil Wrigley. Any errors remain the responsibility of the authors.

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