ACTIVITIES AND DEVELOPING STRATEGIES OF CHINA’S MOBILE INDUSTRY
Hypothesis 5 Testing Results:
5.2 R&D ACTIVITIES
After China Unicom and China Mobile became the largest CDMA and GSM operators in the world, MII promoted its domestic manufacturing industry aggressively. Because of industrial policy support, both domestic cellular phone and telecom equipment industries have grown rapidly. However, aside from gaining market share, China’s cellular phone and telecom equipment firms have different R&D activities in this period. Comparing with telecom equipment firms, China’s cellular phone industrial policy pushed domestic vendors to ignore enhancing their innovative capacities.
There has been a gap in R&D intensity between China’s and global major cellular phone firms in the past years. For example, TCL Communication and Ningbo Bird, the first two leaders of China’s domestic cellular phone industry, saw R&D expenses between 5.10% and 0.82% as a part of revenue. During the same time, major foreign cellular phone firms have been paying more attention to R&D. Nokia, Motorola, Samsung, and LG’s R&D intensity were about 5% to 10%.
Figure 9. The market share, manufacturing and technology ratios of China’s local vendors
Related to Western and South Korean products, some key weaknesses of China’s firms include a lack of innovative experience and low R&D investments. As a result, higher defect rates damaging brand perception have become domestic vendors’ Achilles heel. That
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Foreign Ratio Domestic Ratio Domestic Manu. Ratio Domestic Tech. Ratio
is why after 2004, foreign vendors saw advantages of technology, with Nokia, Motorola, and Samsung gaining market share quickly (Figures 9 and 10).
Figure 10. Market shares of China’s major cellular phone players (Source: Sino-MR; TRI)
From 2004, Nokia initiated an aggressive price war in China to secure a dominant market share. At the same time, Motorola, Samsung, and Sony-Ericsson launched new handset models with advanced technological features, such as camera phones with higher pixels, more resolution colour display, GPS, and Bluetooth. In the past year, around 500 new models have entered the Chinese market, but domestic handset vendors are slow in new product rollout and lack mobile phones with new applications. In fact, after hitting over 50% market share in 2003, the market share of local handset makers has started to trend down step by step.
In order to conquer their products’ defects, alliances between Chinese domestic handset vendors and global brand vendors have emerged as a very significant development, such as between TCL and Alcatel.
We also used different communications firms to compare the effects of industrial policy on innovative activities. Huawei and ZTE are the first two telecom equipment firms in China. Their product lines include base stations, switches, and routers. They were promoted by China’s telecom industrial policy, because of their central official equipment.
Huawei and ZTE’s R&D expenses of revenue were about 10%.
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Nokia Motorola Samsung Bird Amoi TCL Lenovo
Comparing with Huawei and ZTE, China’s major telecom equipment firms have higher R&D intensity than China’s major cellular phone firms. The development of China’s telecom equipment industry is highly related with China’s operators, such as China Unicom.
Huawei and ZTE have to enhance their innovative ability to compete with foreign firms in the telecom bidding market. Therefore, we can see firms’ different innovative activities with different backgrounds.
Table 2. The structure of China’s domestic TD-SCDMA industry
Standard IC Smart Antenna Device Infrastructure Testing Domestic
Table 3. The growth of China’s domestic communication IC vendors (Unit: Million USD) Communication IC Vendors 2002 2003 2004 2005 Startup Datang Microelectronics Technology 26 78 94 72 1998
Vimicro Microelectronics 5 20 53 96 1999
Beijing LHWT Microelectronics - 14 - - 2001
Spreadtrum Communications - - 13 25 2001
Domestic industrial market share 0.78% 2.14% 2.18% 2.22%
Source: CCID
Table 4. ANOVA test of industrial policy for reducing the level of industrial concentration and the usage fee of China’s cellular phone users
Mean of industrial concentration
P-level Means of the usage fee P-level
~1994 1.0000 0.0001*** 1.6600 0.0003***
1995~2000 0.9403 0.9800
2001~2005 0.7290 0.4280
Note: *** represents significance at 1% level
Table 5. ANOVA test of industrial policy for promoting sales and the market share of China’s local telecom equipment vendors (Unit: Thousand RMB)
Mean of China’s local telecom equipment
vendors’ sales
P-level Mean of China’s local telecom equipment vendors’ market share
P-level
~1998 60,937 0.0053*** 0.0403 0.0004***
1999~2001 222,537 0.0972
2002~2005 500,390 0.1738
Note: *** represents significance at 1% level
Table 6. The export and sales ability of China’s major local telecom equipment vendors (Unit:
Thousand RMB)
2000 2001 2002 2003 2004 2005
Huawei Sales 1,520,000 1,622,895 1,721,420 2,166,990 3,152,126 4,696,689 Huawei Export 70,000 99,873 225,014 371,205 855,300 1,733,430
Export Ratio 4.61% 6.15% 13.07% 17.13% 27.13% 36.91%
ZTE Sales 452,343 1,092,614 1,245,389 1,745,705 2,269,815 2,157,592 ZTE Export 24,144 35,314 37,891 216,864 637,632 926,443 Export Ratio 5.34% 3.23% 3.04% 12.42% 28.09% 42.94%
Source: MII; Financial statements and newsletters of these companies.
Table 7. ANOVA test of industrial policy for promoting the shipment of China’s cellular phone industry (Unit: Thousands)
1999.1Q~1999.4Q 6,050 <0.0001*** 115 <0.0001*** 0.0166 <0.0001***
2000.1Q~2001.4Q 19,163 1,898 0.0874
2002.1Q~2004.4Q 42,446 10,079 0.2314
2005.1Q~2006.2Q 75,988 12,985 0.1762
Note: *** represents significance at 1% level
Table 8. ANOVA test of industrial policy for promoting assembly shipments by local vendors’ own SMT-Line (Unit: Thousands)
Shipment Mean of Self-assembly
P-value Self-owned SMT Ratio Mean
P-value 1999.1Q~1999.4Q 88 <0.0001*** 0.8557 <0.0001***
2000.1Q~2001.4Q 750 0.4532
2002.1Q~2004.4Q 5,771 0.5600
2005.1Q~2006.2Q 10,292 0.7970
Note: *** represents significance at 1% level
Table 9. ANOVA test of industrial policy for promoting the self-owned technology ratio and the technology source from local vendors (Unit: Thousands)
Mean of Tech.
Source From Local Vendors
P-value Mean of Self-owned Tech. Ratio
P-value
1999.1Q~1999.4Q 78 <0.0001*** 0.7670 <0.0001***
2000.1Q~2001.4Q 588 0.3326
2002.1Q~2004.4Q 4,100 0.4053
2005.1Q~2006.2Q 7,508 0.5824
Note: *** represents significance at 1% level
Table 10. ANOVA test of industrial policy for promoting local brand vendors’ shipments and market shares (Unit: Thousands)
Mean of local brand vendors’ shipments
P-value Mean of local brand vendors’ market shares
P-value 1999.1Q~1999.4Q 100 <0.0001*** 0.0163 <0.0001***
2000.1Q~2001.4Q 1,199 0.0953
2002.1Q~2004.4Q 6,700 0.4035
2005.1Q~2006.2Q 6,543 0.3233
Note: *** represents significance at 1% level
Table 11. ANOVA test of industrial policy for promoting the export shipments and the export shipment ratio of local vendors (Unit: Thousands)
Mean of local vendors’ export
shipments
P-value Mean of the local vendors’ export
shipment ratio
P-value
1999.1Q~1999.4Q 0 <0.0001*** 0.0000 <0.0001***
2000.1Q~2001.4Q 4 0.0005
2002.1Q~2004.4Q 403 0.0151
2005.1Q~2006.2Q 4,103 0.0747
Note: *** represents significance at 1% level
Table 12. F-test of the variation of two normal distributions for comparing with different ratios at different steps (1999.1Q~1999.4Q:; 2000.1Q~2001.4Q:; 2002.1Q~2004.4Q: Ⅲ ; 2005.1Q~2006.2Q: Ⅳ) Note: *** represents significance at 1% level; ** represents significance at 5% level
Table 13. t-test of the mean of two normal distributions for comparing with different ratios at different steps (1999.1Q~1999.4Q: Ⅰ ; 2000.1Q~2001.4Q: Ⅱ ; 2002.1Q~2004.4Q: Ⅲ ; 2005.1Q~2006.2Q: Ⅳ) Note: *** represents significance at 1% level; ** represents significance at 5% level
Table 14. Hypothesis testing results
Policy Target Hypothesis Results
To promote China’s cellular phone market
China’s industrial policy reduces the level of industrial concentration
+ China’s industrial policy reduces the usage fee of the
end user
+ To promote China’s local
telecom equipment industry
China’s industrial policy promotes local vendors’
shipments (by sales)
+ China’s industrial policy promotes local vendors’ own
brand shipments (by market share)
+ To promote China’s local
cellular phone industry
China’s industrial policy promotes local vendors’ own brand shipments (by volume)
+ China’s industrial policy promotes local vendors’ own
brand shipments (by ratio)
+ To raise China’s cellular
phone industry from development and
production of technology
China’s industrial policy promotes local vendors’
manufacturing ability (by volume)
+ China’s industrial policy promotes local vendors’
manufacturing ability (by ratio)
_ China’s industrial policy promotes local vendors’
technical ability (by volume)
+ China’s industrial policy promotes local vendors’
technical ability (by ratio)
_ To enhance the export
strength of China’s cellular phones
China’s industrial policy promotes local vendors’
exporting ability (by volume)
+ China’s industrial policy promotes local vendors’
exporting ability (by ratio)
+
Table 15. R&D spending of revenue of major cellular phone vendors in the world
2000 2001 2002 2003 2004 2005 Nokia R&D Spending of Revenue 5.97% 6.89% 8.14% 8.44% 8.49% 9.38%
Motorola R&D Spending of Revenue 8.28% 9.69% 9.27% 10.13% 9.52% 10.41%
Samsung R&D Spending of Revenue 5.86% 5.88% 5.83% 6.00% 8.37% 10.08%
LG R&D Spending of Revenue 4.76% 4.47% 4.03% 3.91% 5.04% 6.02%
TCL R&D Spending of Revenue 2.51% 2.58% 1.08% 1.27% 2.99% 4.87%
Bird R&D Spending of Revenue 0.82% 1.24% 1.73% 2.88% 5.10% 1.66%
Source: MII; Financial statements and newsletters of these companies.
Table 16. The P-values of Mann-Whitney test of R&D intensities between Chinese and other foreign firms
Nokia Motorola Samsung LG
TCL 0.0039*** 0.00394*** 0.00394*** 0.0250**
Bird 0.0039*** 0.00394*** 0.00394*** 0.0374**
Note: *** represents significance at 1% level; ** represents significance at 5% level.
Table 17. R&D spending of revenue of major telecom equipment vendors in the world 2000 2001 2002 2003 2004 2005 Ericsson R&D Spending of Revenue 15.77% 19.09% 20.12% 24.25% 17.75% 16.11%
Nokia R&D Spending of Revenue 13.10% 15.10% 15.20% 27.40% 18.57% 17.84%
Motorola R&D Spending of Revenue 11.95% 14.00% 13.90% 13.95% 11.90% 10.50%
Lucent R&D Spending of Revenue 10.99% 16.53% 18.75% 17.57% 14.04% 12.47%
Siemens R&D Spending of Revenue 10.20% 10.60% 11.50% 11.40% 11.30% 10.30%
Huawei R&D Spending of Revenue 13.62% 18.79% 17.75% 14.69% 12.60% 10.10%
ZTE R&D Spending of Revenue 11.96% 10.34% 9.49% 7.63% 9.92% 9.08%
Source: MII; CSFB; Unstrung Insider; Financial statements and newsletters of these companies.
Table 18. The P-values of Mann-Whitney test of R&D intensities between Chinese and other foreign firms
Ericsson Nokia Motorola Lucent Siemens Huaw
ei
0.0453** 0.2002 0.3367 1.0000 0.0547
ZTE 0.0039*** 0.0039*** 0.0163** 0.0065*** 0.1093 Note: *** represents significance at 1% level; ** represents significance at 5% level.
Table 19. The P-values of Mann-Whitney test of R&D intensities between Chinese telecom equipment and cellular phone firms
Huawei ZTE
TCL 0.0039*** 0.0039***
Bird 0.0039*** 0.0039***
Note: *** represents significance at 1% level.