Innovation and Catchup in Chinese Telecommunication industry

1
Innovation and Catch-up in Chinese
Telecommunication industry

• Xielin LIU professor
• School of Management
• Graduate University of Chinese Academy of Science
  (CAS)
• liuxielin_at_gucas.ac.cn

2
outline

• A review of theory of catch-up
• A new framework for understanding catch-up in
  China
• Catch-up in telecommunication industry of China
• conclusion

3
Theory of catch-up

• Gershenkron (1962) argued that targeting rapidly
  growing and advanced technologies is the
  advantage of catch-up countries.
• Using a window of opportunity that may arise
  in the evolution of a technology system to
  catch-up with appropriate social, industrial and
  technology policies, a country may catch-up.
  Otherwise, it will continue to lag behind (Perez
  and Soete,1988)

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Theory of technological regime

• A new approach argues that the technological
  regime affects the nature and success of
  innovative activities of those firms trying to
  catch-up (Breschi, Malerba and Orsenigo, 2000 ).
  Technological opportunity, appropriabiity of
  innovations and cumulativeness of technical
  advance and the property of knowledge base.
• In the case of Korea, Lee and Lim(2001) argue
  that regimes, in which innovation is more
  predictable and frequent will give latecomers
  more opportunity to catch up such as DRAM and
  automobile industries in Korea.
• In the opposite case, latecomers will have less
  opportunities to catch up the PC and consumer
  electronics industries in Korea also illustrate
  this situation.

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Case of China

• China has make great economic achievement in the
  last twenty years. How to understand the catch-up
  process in China.
• Different background and approach for catch up
  Japan and China
• in Japan, limited role of FDI, strong
  governmental role and social innovation. More
  shop-floor processing innovation.
• China strong role of FDI important, transition
  economy, more alliance and outsourcing strategy.
  
• In the Western literature, Chinese companies are
  still copy cats rather than innovators. China is
  country with huge manufacturing capability but
  poor in science and innovation. Kenny Chinese
  companies in NASDAQ, Multinational RD labs in
  India and China
• Less papers on catch-up in China.
• Our paper tries to illustrate how one Chinese
  industry makes a fast transition from an
  imitative stage to an innovative stage in the
  past 20 years.

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Why telecommunication industry ?

• The industry entered its fast track since 1980s.
• It is the fastest growing industry in China and
  in the world. Even in the dismal period after the
  bubble of .com collapsed in USA.
• Telecommunication industry in China keeps its
  high growing pace, makes itself the target market
  of global telecommunication equipment makers,
  such as Motorola, Nokia and Ericsson, etc.

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Outline of Chinese ICT industry
Source ????2006?????????????, 2006?12?3?.
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Catch-up in Telecommunication industry of China

• Mu and Lee(2005) found that the important factors
  in the catch-up are the strategy of trading
  market for technology, the knowledge diffusion
  from Shanghai Bell to RD consortium and Huawei,
  and the industrial promotion by government.
• The technological regime of telephone switches is
  featured by a more predictable technological
  trajectory and a lower cumulativeness.
• Question
• But why Chinese automobile and other
  industries with very similar of technological
  regime, industrial promotion and technological
  regime, do not show a similar strong trend to
  catch-up?

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Key factors for successful catch-up in China

• Existing or imported product or technologies are
  the starting points for companies in catch-up
  countries to make the innovation decision. if
  there is a large gap between the imported
  products with local demands, the domestic
  companies will get a strong incentive to
  innovate.
• The design of existing foreign product system can
  be lead or lock out the late innovator. Totally
  openness of the product system design can give
  latecomers more opportunity to make innovation
  based on the existing product system. Closeness
  means not easy for latecomers to learn and enter
  its future development.
• If the latecomer company can access to new
  technology by licensing, alliance or by making
  themselves, the opportunity of innovation will be
  more open. The availability can be technical
  problem. The new technology can come from other
  industry.

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Five key elements for successful catch-up

• Finding mismatch area innovation in low-end
  market
• Technological opportunity new technology from
  other industry or existing industry.
• Governmental support market for technology,
  stage-skipping.
• Licensing and outsourcing strategy role of FDI
  and university
• Innovation strategy path-following or
  stage-skipping

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Figure 3 A model of catch-up in Chinese
industry
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Path-following Catch-up in the digital phone
switches

• The boom of fixed phone market from 1978, there
  was a boom for fixed phone market and digital
  phone switches.
• The market was almost monopolized by imported or
  foreign joint venture products.

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Table Main indicator of telecommunication
industry in China
??????????????(19902005),?????????????????????
?????
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Digital phone switches were dominated by foreign
JV s products
Source Key Industry Innovation Project Team
Report of Ministry of Science and Technology,
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But there was mismatches of the products with the
market

• Most of imported or JVs products were used in
  the large city areas and their design were based
  on market needs in their own main market, did not
  care much about needs in Chinese market. For
  example, fixed phone users often access internet
  via fixed line, this made the phone line very
  busy, Huawei found that problem and introduced a
  solution for that.
• The prices of their products were usually high,
  the users in the small cities or rural areas
  could not afford.

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Availability of knowledge

• Governments strategy market for technology to
  require the foreign JV to transfer some
  technology (Mu and Lee, 2005).
• The spillover of FDI demonstration, labor
  turnover and others, e.g.,Shanghai Bell had
  provided lot of training and maintenance work for
  the Chinese customers, that is one the important
  opportunity for Chinese to learn the technology.
• Private company heavy RD investment.

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The invention of HJD-04 domestic digital phone
switches

• Key engineer Mr. Wu had years of experience with
  Japan F-150 system, before that, he was a
  engineer for computer research.
• With government support (Ministry of Post and
  Telecommunication), the project team (a RD
  consortia of government research institute and
  SOEs) of domestic digital phone switches are
  familiar with Shanghai Bell technology.
• Computer technology had progressed much than the
  time of development of existing foreign
  technology engineers thought it was better to
  apply design structure to digital phone switches.
  
• The new product integrated the advantage of
  Fujitsus F-150(centralized control system),
  Shanghai Bells S1240(distributed control system)
  and computer design.
• The sale of the product firstly by SOE, great
  Dragon.
• This is a typical top-down catch up model in the
  earlier stage of the innovation.

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Open network system for fixed phone switches

• The Chinese network system is based on an open
  No.7 signal system and it opened a time for lots
  of foreign products to enter Chinese market
  widely
• It also paved the way for the late entrance of
  domestic companies with new technology.

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Late innovatorsHuawei and ZTE

• But the in digital switches market, coming late
  means got more. Huawei and ZTE, both late comers,
  but these two companies with an ownership
  structure of private companies, aimed the low end
  market with their own technology.
• In 1993, ZTE launched out digital product,
  ZXJ2000 for rural market in 1995, Huawei
  developed its own digital product CC08. Both
  ZTE and Huawei aimed at rural market (small towns
  and counties) which is neglected by
  multinationals.
• Both of them started earlier to develop product
  of accessing equipment which can make exchange
  among different system of digital switches
  possible.

20
The sales of telecommunication manufactures in
China in billion yuan
Table The sales of telecommunication
manufactures in China in billion yuen
Sources Top100 Chinese IT companies.
21
Huaweis market share in switches in
China(unit100 lines)
22
Path following in GSM and 3G

• From 1995 on, the market had undergone a sharp
  change mobile telecommunication became the hot
  products and experienced a fast growing stage.
  Motorola, Nokia and Eriksson became the main
  players in the new market.
• In GSM system, there is Abic interface between
  base station controller (BSC) to base transceiver
  station (BTS) that is not open.
• If in a regional system of mobile
  telecommunication is deployed, all mobile
  switches, BSC and bases have to be compatible.
  This makes locked in become possible.
• As all of the telecommunication infrastructures
  were built by foreign companies, it left no space
  for domestic companies for Huawei and ZTE.
  Besides, Motorola, Nokia and Eriksson have long
  experience in GSM than Chinese new comers.

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How domestic companies do

• To earn the new market, especially the CDMA
  market. CDMA is one of the technologies to break
  the GSM monopoly in China.
• To get some of GSM marginal market with lot of
  incremental innovation for Chinese market. Huawei
  constructed mobile intelligent network for China
  mobile for users to make prepay phone call
  possible.
• When text message becomes big market for value
  added service, Huawei quickly established their
  capability here and get two third of Chinese
  market for the equipment.
• To go global to access international low market.
  Chinese companies are good at innovation for
  low-end market.

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Stage-skipping in TD-SCDMA

• From 1990s on, government had supported research
  on CDMA in GRIs under MPT. MOST began to support
  research on CDMA in 1993 and 3G in 1997. But the
  research basically followed the path of Ericsson
  and Qualcomm, though had made some progress but
  no breakthrough. But the research in GRIs
  provided some basic knowledge for 3G technology.
• Chinese companies have already accessed necessary
  knowledge from Qualcomm via government help. In
  2000, in order to get Chinese market share,
  Qualcomm licensed its technology to Huawei, ZTE,
  Datang and other companies of base station,
  switches and handset. This is a action as a
  result of market for technology, but also the
  strategy of multinational to enter China?

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Role of overseas Chinese engineering and
international standard

• In 1994, overseas Chinese, one work for Motorola
  , the other in University of Texas, Austin
  developed a new wireless network technology to
  bypass Qualcomms technology. They set up a
  company called CWILL in the USA and at the same
  time, they set a Chinese joint venture called
  Xingwei between CWILL and Research Academy of
  Post and Telecommunication of MPT.
• Based their work, in 1995, a new technology was
  invented by those mixed research group a TDD
  model other than FDD model of WCDMA and CDMA2000.
  The new technology system is called TD-SCDMA
  (Time Division - Synchronous Code Division
  Multiple Access), with characteristic of
  synchronization, smart antenna and software
  defined radio, Joint detection, banton handover,
  high-speed transmission technology for downlink
  packet data. The main inventor is the overseas
  Chinese engineer.
• In 2000, TD-SCDMA, supported by government,
  became the third 3G standard in the world.

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Alliance with Siemens to develop the product
based on the concept

• Datang and Siemens signed the contract. The
  development project is consisted with two parts,
  base station and end product.
• Siemens almost finished the joint development in
  base station, as for a long time the market is
  not clear, so Siemens stopped the further
  development of end products. It is just because
  this complex joint process, there is a wide
  distribution of patents in this technology.

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Further support by government

• In 2002, the government supported the new
  technology. State Development and Reform
  Committee, MOST and MII jointly made a strong
  support for the industrialization of TD-SCDMA.
• They supported a TD-SCDMA Alliance so that more
  companies can join and share the benefits of new
  technology. Just by a GRI-transformed company is
  not enough for the hard task. The members of
  companies in the alliance included Huawei, ZTE,
  China Putien, Lenove and others. Secondly, the
  government invested 0.7 billion for further
  testing and other purposes.
• They gave TD-SCDMA a 155m wireless frequency for
  its future uses. All these methods emitted a
  strong signal that TD-SCDMA technology is now an
  authorized technology for future 3G markets.

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The paradox of stage-skipping catch-up in
TD-SCDMA financial and technical issues

• The technology is still undergoing small scale of
  testing for further improving. Datang has already
  spent about two billions Yuan for RD of
  TD-SCDMA.
• Most of the money came from bank loan. Who will
  spend more money to finish the testing and
  improving before the final use is still unclear.
  The operators and government can not fully decide
  before all the tests finished.
• TD-SCDMA is not compatible with that of WCDMA and
  CDMA2000. another important issue for its future.

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SOE

• How can Datang as an SOE push that further to the
  actual uses. This can explain why Datang has
  difficulty to find the financer.
• Former experience of digital fixed phone switches
  is a good example. Though the SOE Great Dragon is
  the main innovator, but the poor management
  capability could not guarantee them to spend more
  money on RD for further innovation. They just
  watched how Huawei, ZTE and others took over the
  market.
• Datang may not be the final winner of the
  TD-SCDMA, even if the government will issue the
  certification for that.

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• Loose alliance though there are many local and
  foreign companies joining the alliance, this
  makes future transaction costs very high. It is
  not easy to coordinate all players and push the
  technology forward.
• Partners of TD-SCDMA.
• System equipment Datang, Siemens, UT Starcom.
• Network equipment Siemens, Huawei, ZTE.
• End product chip TI, Philips, STmicroelectronics
  
• End product Samsung, LG, Hauli, Lenovo,etc.
• At the same time, lot of so called alliance
  partner are watching and standing by to see the
  governments further action. TD-SCDMA is just one
  of their technology options.

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Market issues

• How big is 3G market will be also a critical for
  its future. Some optimistic said that the market
  value of TD-SCDMA will be about 400 billion. But
  some researchers pointed out that 3G made no
  money in other countries. Can Chinese make be an
  exception?
• Even if the government will issue the 3G
  certification soon, it may not Datang win the
  market. Other domestic and foreign companies with
  better marketing and technology power than Datang
  are ready to supply their production system.
• In futures bidding process, nobody know who will
  get the most. In digital switches, Great Dragon
  is the innovator, but Huawei and ZTE won the
  competition.

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Public purchase or market purchase?

• Should government or operators decide use of 3G
  technology for the market.
• To adapt strategy for indigenous innovation, it
  seems that is rational to purchase TD-SCDMA as a
  main 3G technology provider.
• But as a member of WTO, China is also cautious as
  to favors TD-SCDMA against WCDMA and CDMA2000.
  So, MII just announced that in order to match the
  WTO, it is the operators (market ),not the
  Chinese government, has the power to decide what
  kind of technology and standards should be used
  in Chinese market.
• Purchase good technology or low technology which
  one is good for indigenous innovation in China?

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The gap between new foreign product and local
market needs incentive to innovate, private
company via SOE,
Availability of new technology and learning
capability capability to innovate FDI,
Alliance, open innovation
Open or close of the new foreign product system
design opportunity to innovate technology
opportunity.
A framework for bottom-up catch-up in China
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conclusion

• I tried to expand technological regime to look at
  the catch-up experience in China with large
  market size and open economy.
• The mismatch of existing (foreign) product with
  Chinese market needs, the openness of the product
  design and the availability of the knowledge
  (FDI, public research institutes and companys
  own RD) are the most important interactive
  factors for industry in a developing country to
  catch-up.
• In China, path-following catch-up has proven to
  be a more appropriate strategy than
  stage-skipping in progressive industry.
• Stages-skipping approach means more risky and
  need better government-industry-academic
  cooperation for its final success. It has to play
  the game with the leading multinationals.

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Limitation and next

• I did a research on Chinese information
  processing innovation
• Now, telecommunication industry
• next, automobile industry, biology industry etc.
  
• Then I can have a better theory to understand the
  catch-up in Chinese industries.