China - Telecom Equipment Innovation Leadership

8/10/2019 China - Telecom Equipment Innovation Leadership

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ChinaHow did China become a world leader in

the manufacture and exports of telecom

equipments?


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Objectives

1) Show that China is the leaderin thetelecommunication sector

2) Understand howChina became theindustry leader

3) Support our thesis with a case study:Hauwei


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ChinaIs China the leader in the

telecommunication equipment market?


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1st Part:

ChinaThe new leader in the

Telecommunication equipment sector

Brief recap of the chinese economic growth

Empirical evidence

Focus on the telecommunication equipment manufactures

Different ways to evaluate the leadership in thetelecomunication equipment sector:

R&D, Patents, Exports

Export data of

China vs WorldChina vs Brics (Brasil, Russia, India, South Africa)

China vs developed countries (i.e. U.S. )


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Chinese economic growthFroma very poor, stagnant, centrally controlled, vastly inefficient and isolated

economy

Toforeign trade, investment and the implementation of free market reforms (1979)

In recent years, China has emerged as a major global economic and trade power: it

is currently the worlds second-largest economy, largest merchandise exporter,

second-largest merchandise importer, largest manufacturer.With the global economic crisis that began in 2008 Chinas exports and imports

declined, GDP growth slowed, and unemployment increased.

But the government policies enabled to weather the effects of the sharp global fall in

demand for Chinese products, while several of the worlds leading economies

experienced negative or stagnant economic growth.

From 2008 to 2012, Chinas real GDP growth averaged 9.2%.

Some economists forecast that China will overtake the United States as the worlds

largest economy within a few years.


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China GDP


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Telecom Equipment Telecommunications Equipment is hardware used for the purposes

of telecommunications (telephone, data, radio and TV broadcast, andwirless communications networks.

In particular, the industry produces transmitters and receivers

(including satellites), signal boosters, signal processors, connecting

devices, power supplies, switches and phones Profitability for individual companies is linked to technical

innovation and the ability to secure high-volume contracts from large

customers.

There are large economies of scale in manufacturing standard

products, but many products are specialized and produced in small

manufacturing plants.

The industry is highly concentrated(i.e. in US, the 50 largest

companies generate about 80% of revenue)


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Measuring the Leadership Nowadays, the largest Telecommunication Equipment

Manufacturers (TEM) could be found in many different

countries, from the U.S. to Japan and South Korea, from

Europe to China.

In order to find out which country is the leader in

Telecommunications Equipment Manufacturing, it is possible

to consider different measuring indicators:

o R&D investmento Number of Patents

o Total Exports


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R&D investment

PROs CONs

Detailed subclassifications

that are available in many

countries

Data classified into sector of

performance

Long period over which datahas been collected

Good harmonization across

countries

May be difficult to measure,

since some of the innovation

activities are not reflected in

accounting procedures of firms

It is about inputonly

Often taken as aggregate data(no disaggregation process

take place)


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Number of Patents

PROs CONs

Detailed information about

new technologies

Public Record (continuous)

Data collected with a

detailed and slow-to-change

classification system

Very long history

Data is freely available

They permit the analysis of

spillovers of knowledge

and of patent values

Inventions are not always

innovations (no economical

success)

Some types of technologies

and innovations are not

patentable

Affected by strategic

behavior: using patents to

prevent competitors

patenting and using it


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Total Exports

PROs CONs

Exports are public and

industry-specific

Exports take into account

the global competitiveness

and, in general, theglobalization issue.

Is not easy to separate

assembling from actual

producers

For these reasons, total exports is considered the best indicator to measure the

World leadership in Telecommunications Equipment manufacturing.


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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

TRADEVALUE(BillionDollars)

CHINA

Exports: China vs World

PeriodTrade Value

(bln $)

1992 1,35

1997 5,63

2002 20,10

2007 102,79

2012 182,88


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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

TRADEV

ALUE(BillionDollars)

BRAZIL

RUSSIA

SOUTH AFRICA

INDIA

Exports: China vs Brics


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0.00

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

TRADEV

ALUE(BillionDollars)

BRAZIL

RUSSIA

SOUTH AFRICA

INDIA

Exports: China vs Brics

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100.00120.00

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1992

1994

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2002

2004

2006

2008

2010

2012

TRADEVALUE(BillionDollars)

CHINA

INDIA

BRAZIL

RUSSIA

SOUTHAFRICA


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Exports: China vs U.S.

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

TRADE

VALUE(BillionDollars)

USA

CHINA


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Conclusion

As an evidence from the data collected,

the chinese exponential growth in telecom equipment

exports has established China as the world leaderfor the

industry, above the other developing countries andovercoming U.S.


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ChinaHow did this country become a world

leader in the manufacturing and export of

telecom equipment?


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2nd part

How did China become the leader?

Brief history of the telecommunication sector in China

SSI model

Three main actors in the market: Chinese government, MNCs,

Chinese companies and the relationship between them Xingwang Industrial Park cluster

Internal innovation

Hauwei case

brief history of the company

company data (e.g. revenues, market share)

company strategy


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Brief history of the telecommunication

sector in China (1)

the telecomunnication administration system wasestablished after the foundation of the Peoples Republicconsidered instrument of the government control andnational defence

1978 : the open door policy allowed China to open toforeign business even if telecommunication sector stillremained under the tight control of the government

until 1990 : telecom remained underdeveloped

BUT


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Brief history of the telecommunication

sector in China (2)

The Government started to approach activelymultinational suppliers for technology transfer and

JVs negotiations

1984 Shanghai Bell Telephone Equipment

manufacturing corporation

1988 JV between Siemens in Germany and afactory owned by the Ministry of Electronics Industryto establish a company called BISC


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As a result, the involvement of

FDI had transformed the

chinese market fromthe onedominated by direct

imported goodsto a JV

dominatedone


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Brief history of the telecommunication sector in

China (3)

1997 : China telecom was listed in Hong Kong to

capture foreign investment

1998 : new round of reform started by the StateCouncil in order to mantain discipline in the market

1999-2002 : Chinese telecom divided in 4 state-own

major players China Mobile, China Unicom, China

Telecom, China Netcom (nowadays privatized)


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2000s : China big-jump

thanks to the new policies, China startedto deploy the latest technology (fiber-

optic) instead of going step-by-step

through the previous ones

Leapfrogging strategy


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SSI Model

( sectoral system of innovation )

Revised by Malerba (2006)

He finds that the same success or failure factors ofcountries are also the base of the emergence and growth

of a sector in a country

these factors are the key building blocks of the

theoretical concept of the SSI


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SSI Model

3 main blocks

1. technologies and

arranging access to

foreign knowledge2. Demand conditions

3. Actors


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1. Technologies and arranging access to

foreign knowledge

Initial access was arranged via JVgovernment with strong

bargaining power.

3 organizations responsible for the indigenous development ofdigital switches: the Center for Information Technology (CIT), the

Post and Telecommunications Iindustrial Corporation (PTIC), the

Luoyang Telephone Equipment Factory (LTEF).

The later development obtained by knowledge diffusion via inter-firm mobility of skilled engineers.


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2. Demand condition

China is not only huge but is also segmented

Twodifferent market in China: one similar to

developed countries and the other more often found in

underdeveloped countries

Thus demand for telecommunication services from

inland districts or rural areas are different from

those of large cities.


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3. Actors

Expansion and upgrading in telecommunications

infrastructure and capabilities resulted from dynamic and

complex interactions between 3 players:

1. The Chinese government

2. Multinational corporations

3. Chinas

indigenous industry


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Chinese Government

Shift from a central-planned economy to a market one

Change of ideology

Understood that investment and technology from foreign

multinational corporations were critical in helping China

achieve its goals


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Multinational Corporations

Chinas enormous market size, low cost labour and some

R&D projects have attracted nearly all of the major

telecommunications manufacturers in the world

Multinational corp. brought theirs R&D centers in China

Entry decision in Chinese market was driven by profits

Forced to transfer technologies directly or indirectly by

Chinas government policies and market competition

from other global and local partners


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How did Knowledge GetTransferred?

MNCs were forced to comply if they wanted entrance

in the market Joint venture with local partners

Sale of licenses and know-how

Local sourcing

Set-up of local R&D

Set-up their sole-owned subsidiaries

Some could ignore Chinas request for technology transferthanks to absolute domination in the world market ex. Cisco


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Indigenous Manufacturers

They were all newly established after 1978

They spend a significant portion, often over 10%, of their

revenues on R&D activities

They are sponsored by Chinas research institutes

They were facilitated by market size and rapidly growing

demand


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Dynamic Adding-and-DroppingModel


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Catch-up

Imitation

Reverse Engineering

Internal R&D access to local talent, information and

connections to local markets

External R&D access to cutting-edge technology and

talent (ex. Huawei, in India, Silicon Valley, U.S.)


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Catch-up: advantages

By conducting overall system design and assembly,

marketing and sales while outsourcing some coretechnologies (ex. ASICs) to multinational corporations,indigenous manufacturers are able to roll out their own

products at afast pacecomparable to multinationalcompetitors.

Many components may be manufactured by other MNCsthat arent necessarily direct competitors

Political environment favorable towards tech transferbetween China and other nations


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Xingwang Industrial Park

Nokia-Capitel formed this cluster in 2005

Beijing Capitel Nokia Mobile Telecommunications Ltd.(Nokia-Capitel), is a 5050 joint venture company

established in 1995 between Nokia and the China PutianBeijing Capitel Co. Ltd.

Built within the Beijing Economic and TechnologicalDevelopment Area (BDA)

Example of collaboration between MNCs and Chinesegovernment


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How did the Government Help?

Grant of tax privileges to members of the cluster

For example, they did not have to pay the acquisition and

rent costs related to the land they were using.

Privileged access to BDAs troubleshooting services

Faster procedures in the import of parts and materials and

exports of the finished product

Closeness of the cluster to the capital meant it received

more attention from state officials

Guaranteed more transparency to application of laws


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Results Nokia-Capitelscluster became the most important within

the BDA

Accounted for 38% of the areas total sales.

Nokia-Capitelbecame Beijings leading exporter (one-fifth of the total export by foreign firms in Beijing in

2003) and top tax contributor (about RMB1.08 billion or

US$0.13 billion in 2004)

The fact that this was a joint venture meant that a lot oftechnology transfer occurred in favor of the Chinese


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Huawei case


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Huawei

Huawei is a Chinese multinational networking andtelecommunications equipment and services company

It was founded in 1987, headquartered in Shenzen, China

Huawei is the largest telecommunications equipmentmaker in the world


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Huawei data


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Huawei data

0

50000

100000

150000

200000

250000

2008 2009 2010 2011 2012

CNYmln

Period

HUAWEI Revenue

REVENUE


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Huawei & innovation

Huawei has over 140,000 employees, 46% of whom are

engaged in R&D

It has 20 R&D institutes in countries all over the world

(including China, US, Germany, India, Sweden)

2012: Huawei's R&D expenses accounting for 13.7% of

the company's annual revenue = US$ 4.94 billion

Over the last decade, R&D expenditure was more than

US$ 21.34 billion


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Huawei & innovation

As of December 31, 2012, Huawei had filed

41,948patent applications in China,

12,453 under the Patent Cooperation Treaty (PCT),

and 14,494 outside China.

Among these applications,

30,240 patents have been granted.


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Huawei strategy

How did Huawei manage to gain the leadership?

According to Xudong Gao and Weiqing Gao Innovation

capabilities and the rise of telecom equipment firms in

China, the key factors consist in developing innovation

capability and proprietary technologies.

Four main action


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Huawei strategy

First action: taking the risk to invest in R&D

Ren Zhengfei, Huawei CEO: There are risks in innovation,

but you should not stop doing innovation because of risks. If

you do not take risks, you would have to follow the leaders,

and have to be a second class or third class firm.

Huawei goal is not profit maximization but it is improving the

firm's core competency


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Huawei strategy

Third action: concentrating R&D in limited areas

Huawei used all its resources in the development of oneproduct or technology at one time to make sure that it will be

successful in this product or technology

Huawei invested almost all its profit in the early days of its

operation and developed HJD48, a PBX switch, in 1992

Following the same principle, in 1995, Huawei developed the

C&C08, a large-scale office switch that was a breakthrough

product


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Huawei strategy

Fourth action: hiring and keeping a lot of talented people

Huawei belives that human capital is much more important

than financial capital

Policies and practices to keep talented people:

1)Capability-based fast promotion

2)Create an attractive work environment for the employees

3)Offer high salary and stock options


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Thank you for your attention!

Documents

China - Telecom Equipment Innovation Leadership