What is Fragmentation?

In economics, fragmentation is the use of different suppliers and component manufacturers in the production of a good. Fragmentation, also known as trade in Parts, Components, and Accessories (PCA), results in different companies producing component parts rather than the finished good, with the components assembled as a final product elsewhere. Suppliers do not have to be in the same geographical region. Oftentimes, less-developed nations (e.g., some Asian and Latin American countries), where labor is plentiful and inexpensive, produce components. The offshoring production typically occurs with affiliates or independent suppliers and manufacturers. Companies fragment to produce goods in a more cost-effective manner. Globalization and improved technology have paved the way for fragmentation, as it becomes increasingly cheaper and easier to source, ship, and track goods as they travel from place to place.

Understanding Fragmentation

Fragmentation is often associated with globalization as companies seek to use suppliers who are the most cost-effective, even if those companies are located abroad. Firms research the components needed to finish a good and the potential suppliers available; then, the cheapest places to source and assemble parts of the finished item are used. Fragmentation is common in the electronics, transportation (e.g., automotive and airplane manufacturing), and apparel industries. In 2016, the largest suppliers of intermediate goods to the US were Canada, China, Mexico, and Ireland. Logistically, Mexico and Canada are favorable choices as transportation costs are lower. In addition, their participation in the NAFTA grants them duty-free access.

According to the United States International Trade Commission (USITC), imports of intermediate goods (components) increased by 48% between 2009 and 2016.

Example of Fragmentation

For example, an airplane has parts that are sourced and assembled across many parts of the world. Not only does the metal have to be acquired, but larger items, such as electronic systems, also must be assembled. An airplane may have its wings manufactured in Germany with metals from Africa, its electronics created in Japan with chips made in China, glass in China, and seats assembled in Mexico with textiles and thread from India. Suppliers and manufacturers ship the components to the United States, put together, and sold as the final product.