CATCHING UP THROUGH A MORE INTERACTIVE AND COMPETITIVE ECOSYSTEM

South Korea’s cellular phone industrial ecosystem has also created a better innovative environment. Figure 15 shows the cellular phone distribution channels in South Korea.

These manufacturers supply cellular phones to the mobile communications carriers as well as selling them via their own electronics retail shops. There are more than 9500 dealers that sell as retail stores tied to mobile communications carriers in Korea (Choi, Lee and Chung 2001).

South Korean carriers give dealers mobile cellular phone subsidies and commissions for each subscriber, but there is some difference among South Korean, Japanese, and western carriers. Japanese carriers, such as NTT DoCoMo and KDDI, are paternalistic operators.

They have great influence and control over the whole industry chain, from cellular phone marketing research, product design, production schedule, sales, after-market, and even to brand promotion. In the Japanese market the brand of operators is shown on the cellular phones, and so cellular phone providers, such as NEC or Sharp, play a subordinate role.

However, because of the close relationship with operators, Japanese cellular phones are often innovative and creative.

Figure 15. Distribution channels of mobile cellular phones in South Korea

Composers

Composers Content AggregatorsContent Aggregators Digital ComposersDigital Composers Content Providers

Japanese Firms Europe and U.S. Firms South Korean Firms

Composers

Composers Content AggregatorsContent Aggregators Digital ComposersDigital Composers Content Providers

Japanese Firms Europe and U.S. Firms South Korean Firms

such as Nokia and Motorola. Europe and the U.S. carriers such as Vodafone are not like Japanese carriers, as Japan’s business development is mainly decided by promotions and influenced by operators. In Europe and the U.S. carriers focus on mobile services and maintain their own base stations. Europe and U.S. cellular phone vendors are different from Japanese cellular phone providers. Nokia and Motorola designed and promoted their cellular phones around the world and had much know-how about brand management. Because of the lack of interaction with carriers, European and US innovative products and applications often to face the problem of a common standard.

South Korea’s cellular phone ecosystem is quite eclectic. South Korean mobile carriers combine Japanese advantages with Europe and U.S. strengths. In South Korea’s market, because CDMA cellular phones do not have SIM cards, when end users want to change mobile phone carriers, they usually have to change cellular phones. Hence, cellular phone vendors have to maintain cooperation with operators. For example, SKT has vertical integration capability and can control and influence its product distribution channels. The relationship is through guidance and management instead of control. Both sides are like cooperating partners. Therefore, although cellular phone makers have to gain support from operators, brand cellular phone companies still have the most power, such as product development, decision-making, channel management, pricing, and promotion (Kim, Byun and Park 2004; Berra 2003; Song and Kim 2001).

Compared with Japanese and western cellular phone makers, South Korean vendors interact with operators and manage their own brands at the same time. In the domestic market, South Korean cellular phone makers are like Japanese firms, but in foreign markets, they have become like Nokia or Motorola.

South Korea’s cellular phone ecosystem is also full of internal and external competition.

Through spin-offs, alliances and investments, business groups have similar products or functions even at different subsidiaries, such as cellular phone design houses, camera modules, and displays. Together with ambient small companies, cellular phone firms like Samsung or LG can purchase competitive and creative components due to internal and external competition. Domestic R&D engineers and ID (Industrial Design) designers in South Korean cellular phone firms also face competitive projects that come from similar internal and external units.

South Korean cellular phone firms, through external alliances and a global layout, have more chances for innovation. We note the important business cooperation in South Korea’s cellular phone industry in Table 20. It has concentrated its attention on building up partnerships with chip vendors, operation system software vendors, and base station makers.

All of these fields are where South Korean firms are weak and lack a supply chain. Of course, South Korean firms took support from their government to negotiate with these technology sources.

The partnership targets of South Korean mobile manufacturers also include foreign operators, such as Verizon Wireless (CDMA2000 1x EV-DO), China Union (CDMA2000 1x), and Vodafone (WCDMA), especially as 3G has started to develop in the U.S. and Europe.

We also see the global layout of Samsung and LG in Table 29. The localisation of design and R&D is an important strategy of Samsung and LG. Exports of EV-DO and WCDMA phones serve to improve their margins and constant strong sales growth can be attributed to a significant increase in sales to China, the U.S., and Europe from new models launched after 2003.

Table 29. The worldwide layout of Samsung and LG Samsung Electronics Cellular Phone

R&D Centre Manufactures World Design Centre Sao Paulo, Brazil Sao Paulo, Brazil Shanghai, China

Beijing, China Shenzhun, China Tokyo, Japan Tel Aviv, Israel Tianjin, China Seoul, South Korea Seoul, South Korea Gumi, South Korea London, UK

London, UK Tijunan, Mexico Los Angeles, U.S.

Dallas, U.S. San Francisco, US

LG Electronics Cellular Phone

R&D Centre Manufactures World Design Centre Yantai, China Sao Paulo, Brazil Beijing, China Dublin, Ireland Guangzhou, China Dublin, Ireland

Milano, Italy Yantai, China Milano, Italy Seoul, South Korea Seoul, South Korea Tokyo, Japan

New Jersey, U.S. Monterrey, Mexico Seoul, South Korea New Jersey, U.S.

Source: Samsung Electronics and LG Electronics.

7.5 SOUTH KOREA’S CELLULAR PHONE INDUSTRIAL INNOVATION