ACHIEVING INNOVATIVE CAPABILITY THROUGH CUSTOMIZED R&D ACTIVITIES

How have the cellular phone firms in the lately industrialized economies achieved success?

One of the answers may be in their innovation ability. Fan (2006) studies the innovation capability development of four domestic Chinese firms - Huawei, ZTE, DTT, and GDT.

Innovation capability and self-developed technologies are the key areas for Chinese firms to catch up with multinational corporations. It is found that domestic firms should focus on in-house R&D development in order to build their innovation capability, supplemented by external alliances.

How does a firm enhance innovation ability or which way should it put forth effort?

Resource dependency theory suggests that no organization can survive alone. It must constantly interact with its environment either to purchase resources such as labor, supplies, or equipment, or distribute its finished products (Pfeffer and Salancik 1978). According to the experience of Taiwan’s cellular phone makers, they put up R&D resources to satisfy their OEM clients’ demand. They have captured innovative capability through customized R&D activities

Why do cellular phone OEMs use outsourcing strategies? A company adapts to rising competition and variations in consumer preferences in different regions. Short cell phone product cycles drive cellular phone OEMs to outsource. Therefore, in the cellular phone industry, EMS/ODMs need not only have manufacturing capacity, but also hardware, mechanical, and software design ability. The above is the basic requirement if EMS/ODMs want to receive OEM orders.

A cellular phone ODM focuses on designing lower to mid-end phones, while much of the mid-to higher-end phones continue to be designed in-houses at OEMs. In the Go-Shopping approach, OEMs select products previously designed by ODMs. These products are typically ready for manufacturing and distribution under an OEM brand. OEMs can use ODMs’ R&D ability to fill the gaps in their existing product portfolio.

Time to market is another important factor for OEMs to increase their usage of ODMs.

Due to the design and test process, the cellular phone launch time may range from six to eight

and test time will need more than one year. If a firm uses the outsourcing approach and re-uses the design platform, then the developing time will only range from three to five months. As a result, OEMs will pay more attention on developing hardware/software platforms.

Cellular phone EMS/ODMs can enhance their product roadmap and product lifecycle management to support OEMs. OEMs can effectively deploy their resources by developing new products and re-allocating design resources. Tables 31 and 32 show that Taiwanese cellular phone firms’ R&D intensities are higher than that of NB/PC firms. They have to enhance their innovative ability to survive in cellular phone industries.

Table 31. R&D spending of revenue of major Taiwanese PCs and cellular phones’ ODM/EMS 2001 2002 2003 2004 2005 HTC R&D Spending of Revenue (Handset) 3.86% 3.39% 4.80% 5.48% 3.94%

CCL R&D Spending of Revenue (Handset) 11.89% 7.37% 4.33% 4.72% 2.19%

Arima R&D Spending of Revenue (Handset) 9.62% 4.14% 2.47% 2.60% 2.43%

DBTEL Spending of Revenue (Handset) 3.31% 7.99% 7.93% 8.00% 6.23%

Hon Hai R&D Spending of Revenue (PC/NB) 1.41% 0.91% 0.84% 0.96% 0.64%

Compal R&D Spending of Revenue (PC/NB) 1.33% 1.33% 1.30% 1.10% 1.10%

Quanta R&D Spending of Revenue (PC/NB) 1.19% 1.33% 0.86% 0.90% 0.83%

Inventec R&D Spending of Revenue (PC/NB) 1.42% 1.39% 1.64% 1.07% 0.98%

Source: Financial statements and newsletters of these companies.

Table 32. The P-values of the Mann-Whitney U test of Taiwanese cellular phone firms’ R&D intensities higher than NB/PC firms

Hon Hai Compal Quanta Inventec

HTC 0.0090*** 0.0090*** 0.0090*** 0.0090***

CCL 0.0090*** 0.0090*** 0.0090*** 0.0090***

Arima 0.0090*** 0.0090*** 0.0090*** 0.0090***

DBTEL 0.0090*** 0.0090*** 0.0090*** 0.0090***

Note: *** represents significance at the 1% level.

Under this industrial environment, the relationship between an EMS/ODM and an OEM looks like a one-by-one infrastructure. Tables 33 and 34 show that Taiwanese cellular phone firms’ customer concentration ratios are higher than that of NB/PC firms, because they need more trust and interaction with each other. CCI is Motorola’s major ODM supplier after 2004, and this customer accounted for 97% of 2005 total sales, respectively. The long-run relationship is difficult to start, but is easy to maintain in the cellular phone industry.

Table 33. The customer concentration ratio of Taiwanese PCs and cellular phones’ ODM/EMS ODM/EMS Main Clients 2001 2002 2003 2004 2005

Arima Sony Ericsson 58% 63% 73% 66% 69%

CCI Motorola 58% 38% 48% 71% 97%

FIH Nokia, Motorola 64% 58% 56% 59% 52%

Quanta Dell, HP, Apple, Sony, Acer, Toshiba 27% 29% 40% 22% 27%

Compal HP, Apple, Dell, Acer, Fujitsu, Toshiba 23% 29% 26% 32% 35%

Inventec HP, Toshiba, BenQ, Acer 46% 30% 46% 45% 54%

Source: Financial statements and newsletters of these companies.

Table 34. The P-values of the Mann-Whitney U test of Taiwanese cellular phone firms’ customer concentration ratio higher than NB/PC firms

Quanta Compal Inventec

Arima 0.0090*** 0.0090*** 0.0090***

CCL 0.0163** 0.0090*** 0.1172

FIH 0.0090*** 0.0090*** 0.0163**

Note: *** represents significance at the 1% level; ** represents significance at the 5% level.

Figure 19 shows the development trend of the cellular phone manufacturing industry.

More and more OEMs are cooperating with IC designers and EMS/ODMs to develop their full product lines. For instance, in CDMA and Clam Shell cellular phones, especially for the China market, Nokia needs FIH’s resources to capture market share. Due to its superior R&D capability and high manufacturing capacity, CCI has become an important partner of Motorola, especially in low-end phones’ development.

Figure 19. The development trend of the cellular phone manufacturing industry

Semiconductor

PCB Architecture System DesignSystem Design S/W Design App. Layer/MMI

S/W Design

App. Layer/MMI ID/MD DesignID/MD Design ManufacturingManufacturing

~95

Brand Name Companies’ R&D Value

IC and Platform’ R&D Value ODM/EMS’s R&D Value

Chipset Solution

9.2 CATCHING UP AND DEVELOPING THROUGH A MARKET AND