COMPARISON OF DIFFERENT DEVELOPING MODELS OF EAST ASIAN ECONOMIES

10.1 CHINA: PROMOTING THE DOMETIC MANUFACTURER THROUGH THE DOMESTIC MARKET

According to our data, the three industrial policy targets were achieved roughly. On the demand side, from 1998 to 2004, China has emerged as the largest mobile subscriber market in the world. According to an In-Stat report (Gartner Dataquest 2004), mobile subscribers in China have grown to more than 300 million in 2004, representing a hefty CAGR of over 50%

for the period. The burgeoning growth of China’s mobile subscribers has resulted in a rapid rise in mobile phone shipments. Therefore, on the supply side, China became the largest cellular phone making country in the world from 1999 to 2004. Both foreign and local vendors’ shipments in China have grown rapidly in recent years. The total shipments have grown to 210 million in 2004.

This paper analyses the influence of China’s communications industrial policy on its domestic cellular phone manufacturing industry. Generally speaking, the influence is still positive, including that own brand shipments and export ability have grown rapidly in recent years. During the same time, several large firms such as TCL and Ningbo Bird have been established. They are already well-known brand names in the world.

In order to develop its domestic cellular phone industry, China’s government handed down No. 5 Document in 1999, restricting foreign vendors from establishing factories and also restricting cellular phone production and sales. Domestic brand vendors emerged this protected environment. Many domestic vendors used outsourcing, controlled sales channels and price wars in order to gain market share more quickly, but neglected research, technology and manufacturing ability.

Domestic vendors, such as TCL, Ningbo Bird, and Konka, have cooperated with South Korean and Taiwanese ODMs to create new handset models. After China joined the WTO in December 2001, its cellular phone industrial policy turned its eye toward the domestic market share of domestic brand names. During the time, the overall market share of foreign handset makers dropped down starting in 2002. By limiting the proportion of import/export freight and number of licenses, and by controlling the purchases of domestic components, purchased, Chinese domestic cellular phone vendors have taken over 50% of China’s cellular phone market.

However, after successful experiences in innovative products for the domestic market, China’s cellular phone makers had to build up their long-term competitions in innovative ability. This empirical result proves that China’s government encouraged domestic companies to grab market share from brand names, but domestic companies usually selected and adopted outsourcing strategies to entrust foreign companies to design and manufacture their products. China’s communications industrial policy has significantly helped to capture market share, but has not significantly promoted domestic vendors’ R&D ability.

China’s mobile industrial policy effects the development of its mobile industry as a whole including service providers, telecom equipment vendors, IC vendors, and cellular phone firms.

First, China’s mobile industrial policy would like to have the most mobile subscribers in the world by encouraging competition. Therefore, the mobile service industry was restructured and China Unicom was carried by Chinese government. With an enormous population and a more competitive environment, the amount of China’s cellular phone users has been growing quickly and has become the largest market in the world. Moreover, China Unicom and China Mobile are the largest CDMA and GSM operators in the world. Having an enormous market base and powerful operators, MII could establish its own standard and promote its domestic manufacturing industry.

Because of JV encouragement and promoting domestic suppliers, China’s telecom equipment vendors such as Huawei and ZTE have become the major players in the world.

Aside from the growth of sales and equipment exports, they also pay attention to R&D ability.

By contrast, although several of China’s large cellular phone companies such as TCL and Ningbo Bird have been established as well-known brand names in the world, local makers’

technology and manufacturing ability are relatively low due to local vendors heavily depending on strategies of design outsourcing or ODM.

We find that there has been a gap in R&D intensity between China’s cellular phone firms and telecom equipment firms in the past years, because of different effects of industrial policy.

Comparing with Huawei and ZTE, which are also Chinese firms, latecomers to the telecom equipment industry, but have a strong innovative ability to catch up to the leaders of the industry, because of the telecom bidding market.

It is a successful development strategy in China in first building up a domestic industry via using its huge domestic market size, promoting competition, forming joint ventures, and encouraging domestic suppliers. For latecomers in a developing economy, paying more attention on R&D activity is also a key point for catching up to the leaders and continuing to develop.

10.2 SOUTH KOREA: CATCHING UP THROUGH R&D EFFICIENCY AND COOPERATION WITH DOMESTIC OPERATERS

By acquiring IP licenses from Qualcomm and referring to Qualcomm’s design solutions, South Korean firms have added more functions and applications to cellular phones’

capabilities. South Korean cellular phone manufacturers as latecomers in this market have already caught up and even leapfrogged past others in global market share, export value, and company image. Related examples are Samsung and LG, which are major CDMA2000 and GSM/WCDMA cellular phone vendors worldwide and are able to compete with Nokia and Motorola. The strategic position of Samsung’s cellular phones is on the high-end market, while LG is also a leader in 3G gaming due to its high R&D capacity.

If firms want to take advantage of their domestic innovative experiences for the global market, then domestic 3C makers should be use customised designs and foreign R&D centres to localise their design and modifications to meet foreign market demand. By enhancing vertical integration from key components to design and assembly, cooperating with local carriers, and receiving market feedback, 3C firms will find it easier to create innovative ideas and new applications.

10.3 TAIWAN: CUSTOMIZED R&D ACTIVITIES TO ATTRACT THEIR OEM CLIENTS

The first key driver for global OEMs using an outsourcing strategy is the cost factor, as EMS/ODMs have transferred manufacturing facilities to low-cost areas like China to reduce manufacturing costs and maintain high quality at the same time. In the PC industry, Taiwanese ODMs dominate the industry, while Taiwan’s NB/PC make up shipments over 80% of global shipments. However, for cellular phones, Taiwanese companies were latecomers while South Korean ODMs were first. Most of Taiwan’s cellular phone makers have only matured in the recent years. Therefore, many Taiwanese manufacturing firms have high market shares in many ICT products except for cellular phones.

Because the cellular phone is a consumer product without a common standard, Taiwan’s cellular phone makers have to use different approaches to attract OEM outsourcing aside from cost down. For instance, more and more OEMs will cooperate with IC designers and EMS/ODMs to develop full product lines. Therefore, in the cellular phone industry, EMS/ODMs not only have manufacturing capacity, but also build up hardware, mechanical, and software design abilities.

and variations in consumer preferences in different regions, such as CCI and Motorola, and Arima and Sony Ericsson. Moreover, in order to target new emerging markets, Taiwan’s EMS/ODM can help OEMs to build up production factories in the target market. Due to the limitation of the manpower and capital resources, only less Taiwan’s EMS/ODMs can have the global logistic management ability, such as FIH and Nokia. In addition, some of Taiwan’s makers focus on mobile operators’ markets. They enhance their design ability of the customized software to fix different mobile operators’ demand.

Although Taiwan’s cellular phone companies were latecomers and most foreign firms are leading ahead, they allocate their limited resources well and pay attention to different places that depend on their OEM clients’ demand. Taiwan’s cellular phone makers pay more attention on R&D activities to attract their OEM clients by developing relatively complete product lines. The experience of Taiwan’s cellular phone makers as latecomers shows how to use R&D resources more effectively in addition to cost down and time to market in an industry of non-standardized products. Taiwan’s cellular phone makers provide OEMs with an enhanced product roadmap support and product lifecycle management. At the same time, global OEMs can better manage overhead costs and leverage internal resources more effectively.

10.4 COMPARISON OF DIFFERENT DEVELOPING MODELS

In the ICT industry, due to globalisation and the trend in world trade, cellular phones have become the popular product sold around the world. In order to compete with foreign leading companies, domestic firms of developing economies catch up with leades through different ways such economy of scale or market niche expect policy protection.

Table 35 shows the comparison of developing strategies of the cellular phone industry in East Asian developing economies. Based on the ODM/EMS business model, Taiwan’s cellular phone makers maintaine their cost advantage through economy of scale. They also have used different approaches to attract global OEM outsourcing orders in addition to cost down.

China’s cellular phone makers advance to utilize the advantage of ODM/EMS partners to reduce their BOM cost. By combining the industry policy and sales channel, domestic brand names of the cellular phone industry captured the market share quickly. By contrast, South Korean firms use their R&D efficiency to build up comparative advantage. Furthermore, in order to break the market similarity, they use customised design with foreign mobile operators and their foreign R&D centres to localise design and modifications. By creating the market niche, South Korean firms met foreign market demand and became well-known brand names in the world.

Moreover, based oon the trend of absence of regulatory restraints, China still uses limitation of licenses to protect its domestic industry In the interim of joining in WTO. However, South Korean cellular phone vendors have to maintain cooperation with operators, and creats the similar result as regulatory restraints in the domestic market. Finally, this paper finds that the developing and innovation strategies of firms related to the domestic market background and industry ecosystem. Firms of China, Korea, and Taiwan chooce their strategies in terms of the enormous market base, vertically integrational structure, and outsourced experience, respectively.

Table 35. Developing models of the cellular phone industry in East Asian developing economies Characteristics of the

international industry

China

(Enormous market base)

Korea (Vertical integration)

Taiwan

(Outsourced experience) Economy of scale Corporate with

ODM/EMS

- Extend the ODM/EMS business model Market similarity - Customised and

localised design

- Comparative advantage Distribution channel and

price

R&D efficiency Cost and customised ODM/EMS service Absence of regulatory

restraints

Limitation of licenses Interaction with operators

-