Yunshi Mao

Yunshi Mao
Transformation
and Upgrading
of Chinese
Enterprises
Transformation and Upgrading of Chinese
Enterprises
Yunshi Mao
Transformation
and Upgrading of Chinese
Enterprises
123
Higher
Education
Press
Yunshi Mao
Business School
Sun Yat-sen University
Guangzhou, China
Translated by Yangchun Liu and Sidan Wu
ISBN 978-981-13-1258-8 ISBN 978-981-13-1260-1 (eBook)

https://doi.org/10.1007/978-981-13-1260-1
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Contents
1 The Pressure of Chinese Enterprises’ Transformation and

Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
1.1 The Bankruptcy of Smart Union Factories and the Pressure
of Chinese Enterprises’ Transformation and Upgrading . . . . . . . .. 1
1.1.1 The Closedown of Smart Union Factories Indicates
the Importance of Transformation and Upgrading . . . . .. 1
1.1.2 Definition of Enterprise Transformation
and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4
1.1.3 The Pressure of Chinese Enterprises’ Transformation
and Upgrading Has Long Existed . . . . . . . . . . . . . . . . .. 5
1.2 The Financial Crisis Has Intensified the Pressure for Chinese
Enterprises to Transform and Upgrade . . . . . . . . . . . . . . . . . . . .. 10
1.2.1 China Has Been Affected by the Global Financial
Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10
1.2.2 The Financial Crisis Hit the Export-Oriented Economy
in the Pearl River Delta and Yangtze River Delta
Particularly Hard . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 10
1.3 Planning for Change in Time of Crisis . . . . . . . . . . . . . . . . . . . .. 13
1.3.1 In Front of Chinese Enterprises Are Three Ways:
Relocating, Upgrading, or Going Out of Business . . . . .. 13
1.3.2 Chinese Enterprises Should Bravely Break Through
in the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16
2 Experiences of Corporate Transformation and Upgrading in Asian
Emerging Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.1 High-Level Dedicated Foundry Road of Taiwan’s Semiconductor
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
v
vi Contents
2.1.1
Five Development Stages of Taiwan’s Semiconductor
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18
2.1.2 Sources of Competitiveness of Taiwan’s Semiconductor
Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 21
2.1.3 Transformation and Upgrading Process of Taiwanese
Enterprises from Dedicated Foundry to Industrial Chain
Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24
2.2 The Realization of Transformation and Upgrading by South
Korean Companies Through Technological Innovation—from
Small Workshops to Conglomerates . . . . . . . . . . . . . . . . . . . . .. 31
2.2.1 Five Phrases of Korean Enterprises’ Transformation
and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 33
2.2.2 The Leapfrogging Model of Technology Upgrading:
Introduction ! Imitation ! Improvement !
Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 35
2.2.3 The Growth Process of Korean Enterprises from Small
Workshops to Large Groups . . . . . . . . . . . . . . . . . . . . .. 36
2.3 Comparison of Enterprise Transformation and Upgrading
in Emerging Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 44
2.3.1 Enterprise Transformation and Upgrading in Taiwan
and South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 44
2.3.2 Enterprises Should Have the Right Positioning
in the Course of Their Transformation
and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 44
3 Enterprise Case Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 47
3.1 Independent Innovation Path of Guangdong Enterprises from
OEM to ODM to OBM: Comparison Between Donlim
and Jasic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 47
3.1.1 The OEM, ODM, OBM Status of Guangdong
Enterprises and Research on Their Transformation
and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 47
3.1.2 Definition of OEM and Concepts Related to Its
Transformation and Upgrading . . . . . . . . . . . . . . . . .... 50
3.1.3 Transformation and Upgrading Models of OEM
Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 52
3.1.4 Case Enterprises: Donlim Kichen Group Co., Ltd.
and Jasic Technology Co., Ltd. . . . . . . . . . . . . . . . . . . . . 57
3.1.5 Guangdong Donlim Kichen Group Co., Ltd. . . . . . . . . . . 58
3.1.6 Shenzhen Jasic Technology Co., Ltd. . . . . . . . . . . . . . . . 59
3.1.7 Comparison of Basic Information . . . . . . . . . . . . . . . . . . 60
Contents vii
3.1.8 Comparison of the Two Enterprises’ Transformation

and Upgrading Paths . . . . . . . . . . . . . . . . . . . . . . . .... 60
3.1.9 Comparison of the Factors Influencing the Two
Enterprises’ Transformation and Upgrading . . . . . . . .... 65
3.1.10 Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 90
3.2 Case Two Enterprise Upgrading in the Toy Industry:
Comparisons Between Lung Cheong Toys and
HaYiDai Toys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
3.2.1 Situation Analysis in the Toy Industry . . . . . . . . . . . . . . 93
3.2.2 Case Selection: LungCheong and HaYiDai . . . . . . . . . . . 98
3.2.3 Lung Cheong International Holdings Ltd. . . . . . . . . . . . . 99
3.2.4 HaYiDai Toys Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.2.5 Comparison of Basic Information . . . . . . . . . . . . . . . . . . 107
3.2.6 Comparison of Self-Innovation Capacity . . . . . . . . . . . . . 108
3.2.7 Influencing Factors of Self-Innovation of Lung
Cheong and HaYiDai . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
3.2.8 Facts and Discoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
3.3 Upgraded Enterprise in Lighting Industry: NationStar
Optoelectronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
3.3.1 Company Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
3.3.2 Upgrading Path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
3.3.3 Company Competence Supports NationStar’s
Upgrading Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
3.3.4 The Industrial Cluster of Enterprises Promotes
the Upgrading of NationStar . . . . . . . . . . . . . . . . . . . . . . 139
3.3.5 NationStar’s Upgrading in Response to the Change
of Market Environment . . . . . . . . . . . . . . . . . . . . . . . . . 142
3.3.6 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
3.4 Rapid Growth of Taiwan’s Atotech . . . . . . . . . . . . . . . . . . . . . . . 149
3.4.1 Brief Introduction of Atotech . . . . . . . . . . . . . . . . . . . . . 149
3.4.2 Atotech’s Path of Progressive Upgrading . . . . . . . . . . . . . 154
3.4.3 Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
4 Case Analysis of Industrial Regions, Clusters and Parks . . . . . . . . . 163
4.1 High-Tech Industries in Shenzhen Characterized by Independent
Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
4.1.1 Basic Situations and Characteristics of Shenzhen
High-Tech Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
4.1.2 Constraints on Shenzhen’s High-Tech Industry
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
4.2 Transformation and Upgrading of Furniture Industrial Cluster
in Dalingshan Town, Dongguan City . . . . . . . . . . . . . . . . . . . . . . 181
viii Contents
4.2.1 Brief Introduction of Dalingshan . . . . . . . . . . . . . . . . . . . 181

4.2.2 Current Situation of the Furniture Industry
in Dalingshan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
4.2.3 The Furniture Industry Is Facing Challenges
of Transformation and Upgrading . . . . . . . . . . . . . . . . . . 184
4.2.4 Transformation and Upgrading of the Dalingshan
Furniture Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
4.2.5 Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
5 Case Analysis of Public Technology Platforms . . . . . . . . . . . . . . . . . 197
5.1 High-Tech Industry Development by Taiwan ITRI . . . . . . . . . . . . 197
5.1.1 Background of ITRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
5.1.2 Objectives and Visions of ITRI . . . . . . . . . . . . . . . . . . . . 198
5.1.3 Organizational Structure of ITRI . . . . . . . . . . . . . . . . . . . 198
5.1.4 ITRI’s S&T Projects, Service Revenue, Talent
Cultivation and Patent Application . . . . . . . . . . . . . . . . . 201
5.2 The Operational Model and Characteristics of ITRI . . . . . . . . . . . 204
5.2.1 The Legislation and Commercialized Operation Jointly
Support the Development of ITRI . . . . . . . . . . . . . . . . . . 205
5.2.2 Integration Center Offers Powerful Capabilities
in Integrating Cross-Field Resources . . . . . . . . . . . . . . . . 206
5.2.3 The Open Research System Based on OpenLab
Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
5.2.4 Establishing a Flexible Inflow-and-Outflow Mechanism
for Talents to Cultivate More Innovative Sources . . . . . . . 208
5.3 Development of Taiwan’s Science Parks . . . . . . . . . . . . . . . . . . . 209
5.3.1 From Hsinchu Science Park to Tainan Science Park . . . . . 209
5.3.2 Transformation and Upgrading of Taiwan’s Science
Parks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
5.4 ITRI Supports the Development of Taiwan’s Science Parks . . . . . 220
5.4.1 ITRI Specialized Incubation Center Can Provide an
Effective Business Incubation Source . . . . . . . . . . . . . . . 220
5.4.2 Establishing Spin-off Companies and Cultivating
Large-Scale Enterprises Through an Intellectual
Property Rights Transfer System . . . . . . . . . . . . . . . . . . . 221
6 Factors that Influence Enterprise Transformation
and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
6.1 Theories About the Influence Factors of Enterprise
Transformation and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . 223
6.1.1 Enterprise Transformation and Upgrading Is Inseparable
from Independent Innovation . . . . . . . . . . . . . . . . . . . . . 223
6.1.2 Theoretical Research on the Factors that Influence
Independent Innovation of Enterprises . . . . . . . . . . . . . . . 224
Contents ix
6.1.3 Other Factors that Influence Enterprise Transformation

and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
6.1.4 Theoretical Framework for Analyzing Influence Factors
of Enterprise Transformation and Upgrading . . . . . . . . . . 227
6.2 Analysis of the Factors that Influence Enterprise Transformation
and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
6.2.1 Cost Comparative Advantage Is Gradually
Disappearing, and Profit Margins Are Shrinking . . . . . . . 227
6.2.2 In the Intense Competition at Home and Abroad,
OBM with Intellectual Property Rights Is the Major
Development Direction of the Transformation and
Upgrading of EEEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
6.2.3 The Benefits Are Extremely Unevenly Distributed
and Most of the Profits Go to the Firms at the Upper
Ends of the Industrial Chain . . . . . . . . . . . . . . . . . . . . . . 229
6.2.4 The Inherent Risks of Low-End Manufacturing Are
Becoming Prominent. Enterprises Urgently Need to
Upgrade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
6.3 Motivation for Enterprise Transformation and Upgrading . . . . . . . 231
6.3.1 Entrepreneurship and Brand Awareness Are the Major
Driving Force Behind Enterprise Transformation
and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
6.3.2 The Ownership of Key Resources and the Acquisition
of Key Capabilities Constitute the Foundation for
Enterprise Transformation and Upgrading . . . . . . . . . . . . 232
6.3.3 Increasing Consumer Demand at Home Has Provided
Market Support for Enterprises to Establish Their
Own Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
6.3.4 Government Policies Promote and Encourage
Enterprises to Upgrade . . . . . . . . . . . . . . . . . . . . . . . . . . 233
6.3.5 Good Relationship with Cooperative Partners Provides
Technical and Management Reference for Enterprises . . . 234
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
7 Measurement Standards and Paths of Enterprise
Transformation and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
7.1 Theoretical Research on Enterprise Transformation
and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
7.1.1 Studies on Enterprise Transformation and Upgrading
from the Perspective of Core Competence and Dynamic
Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
from the GVC Perspective . . . . . . . . . . . . . . . . . . . . . . . 238
x Contents
7.2 Measurement Standards of Enterprise Transformation

and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
7.2.1 Improved Product Technological Content and Increased
Value Added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
7.2.2 Enhanced Product Function . . . . . . . . . . . . . . . . . . . . . . 241
7.2.3 Developing from OEM to ODM and then to OBM . . . . . 244
7.2.4 Shifting from Single Products to Product Lines, from
Single Businesses to Business Solutions, Leading
to New Products, New Services and Even New
Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
7.2.5 Developing Strategic Assets and Creative Assets to
Enhance Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . 246
7.3 Paths of Enterprise Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . 246
7.3.1 Achieving Overall Transformation and Upgrading
by Recognizing New Features and New Demands
of Traditional Industries and Repositioning Them . . . . . . 247
7.3.2 Achieving Transformation and Upgrading
by Substituting First for Imported Products, then
for Multinational Companies’ Products in China
and in Foreign Markets . . . . . . . . . . . . . . . . . . . . . . . . . 249
7.3.3 Creating New Products and New Demands on the Basis
of Blurred Industrial Boundaries and Industry
Convergence, and Achieving Inter-sectoral
Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
7.3.4 Removing Barriers to Key Components and Achieving
Overall Upgrading Through Technological
Accumulation and Capability Evolution . . . . . . . . . . . . . . 253
7.3.5 Achieving Upgrading by Increasing Investment
in Production Services and Boosting Value Added . . . . . . 256
7.3.6 Achieving Enterprise Upgrading by Reducing Inputs
and Consumption, Lowering Costs, and Enhancing
Environmental Standards and Value Added . . . . . . . . . . . 256
7.3.7 Achieving Upgrading Through the Establishment
of Strategic Alliances Between Cluster Enterprises
and with Large Enterprises Promoting the Development
of Small Ones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
7.3.8 A Large Diversity of Upgrading Paths from OEM
to ODM and then to OBM . . . . . . . . . . . . . . . . . . . . . . . 260
Contents xi
7.3.9 Leapfrogging to Advanced Technological Levels

and Achieving Enterprise Upgrading by Acquiring
Strategic Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
7.3.10 Achieving Upgrading with the Facilitation of Industrial
Clusters and Parks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
8.1 Be a Prepared Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
8.1.1 Change Mindset and Actively Implement the Strategy
of Transformation and Upgrading . . . . . . . . . . . . . . . . . . 270
8.1.2 Use a Variety of Ways to Achieve Upgrading
from Manufacturing to R&D . . . . . . . . . . . . . . . . . . . . . 270
8.1.3 Expand Beyond the OEM Roots to ODM and then
to OBM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
8.1.4 Put a Premium on Entrepreneurship and Cultivate
the Entrepreneur’s Crisis Awareness and Foresight . . . . . 272
8.2 Be an Efficient Service-Oriented Government . . . . . . . . . . . . . . . . 272
8.2.1 Foster Enterprise Upgrading on the Basis of Value
Chain Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
8.2.2 Promote Industrial Upgrading by Taking the Modern
Service Industry as the Locomotive . . . . . . . . . . . . . . . . . 274
8.2.3 Promote Industrial Upgrading by Using Industrial
Clusters and Parks as the Platform for Fostering
Technological Development . . . . . . . . . . . . . . . . . . . . . . 275
8.2.4 Foster Enterprises’ Technological Strength by Creating
an Effective Platform for the Industrialization
of Scientific Research Achievements . . . . . . . . . . . . . . . . 278
Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Chapter 1
The Pressure of Chinese Enterprises’
Transformation and Upgrading
Chinese enterprises’ transformation and upgrading conspicuously started with the

outbreak of the 2008 financial crisis. However, the pressure for change has existed
long before 2008. And now the financial crisis has stepped up this pressure. Are
Chinese enterprises ready to change in face of such crucial situations?
1.1 The Bankruptcy of Smart Union Factories

and the Pressure of Chinese Enterprises’
1.1.1 The Closedown of Smart Union Factories Indicates

the Importance of Transformation and Upgrading
From the second half of 2007–2008, a number of economic factors were changing
quickly. The appreciation of Renminbi (RMB) led to a decrease in export profits;
the enforcement of the labor contract law provoked increased labor cost; and the
prices of raw materials kept rising. These economic changes put to a stern test the
economic growth mode in China’s Yangtze River Delta, Pearl River Delta, and
eastern coastal areas, which had relied on cluster economy as the main growth
engine and was characterized by original equipment manufacturing (OEM). With
low-cost advantages gradually disappearing, many companies are now in opera-
tional difficulties. Facing innate deficiencies (low value added products, lack of own
brand names and technological content) and external pressures (policies against
environmental pollution and currency appreciation), traditional exogenous indus-
trial clusters are badly in need of finding new ways of development.
The toy enterprises in Dongguan, Guanggong can be used as an example to
illustrate this situation. In 1980s, large numbers of foreign toy companies were
shifted to Dongguan, which soon made Dongguan an industrial hub with a huge
© Higher Education Press and Springer Nature Singapore Pte Ltd. 2019 1
Y. Mao, Transformation and Upgrading of Chinese Enterprises,
https://doi.org/10.1007/978-981-13-1260-1_1
2 1 The Pressure of Chinese Enterprises’ Transformation and Upgrading
cluster of toy manufacturers. Before the financial crisis, Dongguan had more than
5,000 toy manufacturing and supporting companies, employing over 300,000
workers, creating more than 13 billion Yuan worth of annual output, and grabbing
36% of the total foreign exchange China’s toy industry earned through exporting.
However, the outbreak of the global financial crisis in September 2008 and the
consequent economic slump in the US posed severe challenges to the
export-oriented manufacturers. On October 15, Smart Union Group (Holdings), one
of the world’s largest toy manufacturers, announced that its two factories located in
Zhangmutou, Dongguan went into bankruptcy. They were remarked as “China’s
first industrial entities closing down due to the strike of the global financial crisis”.
Founded in Hong Kong in 1996, Smart Union Group (Holdings) largely undertook
OEM manufacturing and manufactured toys for three of the world’s top five toy
brands. The group had in total 10,000 employees in its heyday. But the closedown
of its two factories left 6,500 workers unemployed.1
Smart Union Group (Holdings) is a typical manufacturer of the toy industry in
Dongguan. Dongguan toy manufacturers epitomize the multitudes of OEM man-
ufacturers in Dongguan. And all Dongguan OEM manufacturers are representative
of the manufacturing firms at the low segments of the value chain in the Pearl River
Delta, the Yangtze River Delta, the eastern coastal regions and even the whole
country. These manufacturers were once the primary impetus behind the rapid
economic development of China’s different regions. But the negative consequences
of this economic growth model are also obvious. Firstly, the majority of export
products are at the low end of the value chain. They do not have their own brand
names. And their profits are very thin. Secondly, the economic growth is obtained at
the expense of resources, energy, and environment, and through low labor price and
bad working conditions, thus, further widening the gap between the poor and the
rich. Thirdly, enterprises and industries do not boast key intellectual property rights
or independent innovation capability, thus leaving themselves to the mercy of
multinational companies in terms of core technology. Consequently, both aca-
demics and practitioners agree that to ensure long-term development, companies
must accomplish transformation and upgrading. The bankruptcy of Smart Union
factories indicates that unless companies really engage in transformation and
upgrading, they will not survive, let alone have sustained development.
Although several years have passed since the financial crisis, the overall situa-
tion of OEM manufacturers is not getting better. Instead, they face more complex
economic environment and more fierce competition. Many enterprises are still in
plight. On December 5, 2014, Suzhou-based United Win Technology Limited, a
well-known OEM manufacturer of mobile phone parts, went bankrupt. United Win
Technology Limited was a subsidiary of Wintek in Taiwan, employing over 20,000
people at its peak. But beginning from 2014, the subsidiary started deteriorating. By
the time of its closure, there were only about 3,000 workers left. It used to be an
1
Vide NetEase Finance (Survey upon “The First Case of the Financial Storm Impacting China’s
Industries”) http://money.163.com/special/002530E6/hejun.html.
1.1 The Bankruptcy of Smart Union Factories and the Pressure … 3
important component supplier for Apple and MIui, but got excluded from their list
of suppliers because of its obsolete technology, low rate of quality products, and
high costs.2 Almost at the same time as the closure of United Win Technology
Limited, Silitech, another mobile phone parts supplier situated in Xukou, Suzhou,
announced its closedown and laid off most of its employees. As a subsidiary of
Taiwan’s listed Liteon Group, it produced mobile phone keys for Nokia, with the
number of workers coming to more than 10,000 at its summit. A report says that the
asset impairment loss of the company accrued to 972 million New Taiwan
(NT) dollars in the first three quarters of 2014, with after-tax net loss reaching 1.265
billion NT dollars.3 Here again take Dongguan as an example. Statistics show that
in October 2014, over ten large-scale OEM factories, went bankrupt, including the
well-known Hing Hong Shoe Factory coming from Taiwan.
In fact, local governments and enterprises were aware of this problem and were
making efforts to pursue transformation and upgrading. For example, the above
mentioned Smart Union Group (Holdings) had tried hard to change the vulnerable
situation of depending only upon contract manufacturing. In 2004, it developed a
toy cat connected to the computer through a USB line. Starting from 2005, it had
annually invested 5 million yuan in design and own brand building. And it had
established a dedicated R&D department. But unfortunately, these efforts for
upgrading ended up in failure. Branded toy manufacturers in developed countries
were willing to have Smart Union Group (Holdings) supply products for them. But
they would not allow it to develop its own brands in the international market and
compete with them.4 The above-mentioned Wintek expanded the scale of its
production facilities given promising prospects of iPhone sales growth. But the
production facilities mainly served the purpose of producing iPhone models
introduced before iPhone 4S. However, since 2014, Apple has launched iPhone 5
and iPhone 6, which employ thinner screens. Wintek was not able to adapt,
eventually being excluded from Apple’s suppliers list.5 Therefore, the crucial
questions arise: “what approaches and paths should developing country manufac-
turers inserted in the lower parts of the global value chain (GVC) take to achieve
transformation and upgrading successfully?” “What factors should influence the
transformation and upgrading of cluster enterprises?”
2
Vide World Wide Web Finance (China’s OEM Manufacturers Suffer Cold Current, A Large
Enterprise in Suzhou with over 10,000 Employees Halted Production Waiting for Closure) http://
finance.huanqiu.com/hongguan/2015-01/5377426.html.
3
Vide Morning Post (A tidal wave of closedown became of China’s OEM enterprises) http://www.
zaobao.com/finance/comment/story20150112-434301.
4
Vide Sohu News (The Story of Smart Union Factories’ Closedown Continued: It Would Fail
Even Without the Financial Tsunami) http://news.sohu.com/20081018/n260100769.shtml.
5
Vide National Business Daily (Wintek Hurt Two Listed Firms. Its Subsidiary in Dongguan Had
Been Building Production Facilities Just Before its Shutdown, and http://www.nbd.com.cn/
articles/2014-12-16/883589.html).
1.1.2 Definition of Enterprise Transformation

and Upgrading
As a popular term, “transformation and upgrading” has frequently appeared in news

reports and government documents. There is no corresponding term in the English
literature for enterprise transformation and upgrading. However, in China’s
domestic research, enterprise transformation and upgrading is the most frequently
used term. And the term “transformation” or the term “upgrading” is also used quite
a lot. But some scholars do not make a clear distinction between “transformation”
and “upgrading” in academic research, which often results in the misuse or the
replacement of the two terms. Therefore, it is necessary for us to define these
concepts before further analysis.
The concept of enterprise upgrading was first put forward in the late 1990s,
when Gereffi (1999) introduced it into the global value chain (GVC) analysis
framework. He argues that enterprise upgrading refers to the process by which an
enterprise improves its ability to move towards more profitable and capital- and
technology-intensive economic niches. Poon (2004) also points out that enterprise
upgrading is an economic role transfer process which enables manufacturers to
successfully move from labor-intensive low-value products to higher-value capital-
and technology-intensive products. Kaplinsky and Morris (2001) believes that
enterprise upgrading means making better products, manufacturing products more
efficiently, or performing activities that require more skills. Humphrey and Schmitz
(2000) believe that upgrading represents that a company enhances its competi-
tiveness and engages in high value-added activities through the acquisition of
technological and marketing capabilities.
When faced with a bottleneck in development, a company can adopt a strategic
shift, return to the origin and rethink, and make radical changes in business strategy
and proactively probe the transformation direction. Some scholars analyze enter-
prise transformation from the micro level of industry. Porter suggests that the
success of the enterprise depends not only on the competitive position of the
enterprise in the industry, but also depends on whether it is in a profitable industry.6
So enterprises that pursue sustainable growth must be sensitive to their operating
environment. When the original industry is difficult to provide sufficient growth
space for them, timely transformation will become a wise choice for the enter-
prises.7 Some other scholars interpret enterprise transformation as organizational
change and reengineering, and emphasize that enterprise transformation is a com-
pletely new change in cognition, thinking and behavior. In order to survive and
develop, and break through the bottleneck of operation, enterprises change their
organizational structure through organizational adjustment or goal transformation,
and create new business models that meet the needs of the future. Obviously,
6
Porter M.E. Towards a dynamic theory of strategy, Strategic Management Journal, 1991(12).
7
Wang D.L., Zhang M.R., Zhou M. A Review of the Research on Technological Capabilities of
Transformative Enterprises in Industrial Transformation [J]. Journal of Management, 2006, 6.
enterprise transformation is one way to break the status quo when the enterprise
faces survival crisis. By way of constant reform, organization leaders are forced to
think about the direction of the future, inject new vitality into the organization,
make the enterprise more competitive and develop flexibility to respond to the
environmental change. On the other hand, as will be mentioned later in this book,
many companies are actively rather than passively implementing transformation
and upgrading.
Although they are frequently used in China, the three concepts—enterprise
upgrading, enterprise transformation, and transformation and upgrading have never
been defined and clarified. Therefore, there is confusion between transformation
and upgrading. This is mainly reflected in the confusion about organizational
transformation and business transformation. There is even a confusion over
upgrading and innovation (Bao et al. 2008). If we define enterprise transformation
at the business level without having to cover the organizational level, then an
enterprise’s transformation and upgrading are closely related. It is neither necessary
nor possible to separate the two from each other. In particular, transformation and
upgrading of enterprises is an important practice in emerging economies, and the
term “transformation and upgrading” has been widely used in China. We do not
need to avoid it only because there is no corresponding terms in the English
literature.
1.1.3 The Pressure of Chinese Enterprises’ Transformation

and Upgrading Has Long Existed
Since the reform and opening to the outside world, China has achieved a leap from
the initial stage to the mid stage of industrialization. The level of urbanization has
improved rapidly and urban infrastructure has been greatly strengthened. Private
enterprises have risen from nothing and obtained space for development. The
average annual growth of China’s economy by now has reached 9.67%. But after
more than thirty years of development since reform and opening, we should also
recognize the many problems existing in the current economic growth model. In
fact, the challenges for Chinese enterprises have existed for a long time, mainly
because of six factors.
1. Resource shortages, rising costs, and environmental protection have put pressure
on coastal areas
China, especially the Pearl River Delta region has achieved industrial take-off
through the development of “three-plus-one” trading-mix (custom manufacturing
with materials, designs or samples supplied by foreign buyers). As a result,
heavy-polluting labor-intensive electroplating, furniture, and other industries
account for a large proportion. Although in recent years, China is making a big push
to protect the environment, the “high input, high consumption, high pollution and
low output” extensive growth mode has not been fundamentally changed and it is
imposing a serious restriction on the sustainable development of China’s

enterprises. In 2012, China’s primary energy consumption was 3.62 billion tons of
standard coal and it consumed 20% of the world’s energy. Unit GDP energy
consumption was 2.5 times the world average, 3.3 times that of the United States,
7 times that of Japan, and higher than that of Brazil, Mexico and other developing
countries. Every ton of standard coal consumed in China only creates 14,000
Yuan GDP, while the global average is 25,000 Yuan. For every ton of standard coal
consumption, the United States generates 31,000 Yuan GDP, and Japan 50,000
Yuan GDP.8 Most segments of the Pearl River that run through the cities in the
Pearl River Delta and most streams in this area are badly contaminated. The range
and frequency of red tide have increased year by year. People’s petition letters and
direct complaints to the authorities caused by environmental problems keep
growing. And they emerge as the third major social concern after social and labor
security. Each year, the government’s environmental protection requirements for
enterprise production are increasingly strict. The deterioration of the environment
and resources and the government’s policy on energy conservation and environ-
mental protection are compelling enterprises to undertake transformation and
upgrading.
2. Policy adjustment in export tax rebate for processing trade impacts on the
structure of export commodities
In order to further balance the structure of China’s foreign trade export and optimize
the structure of export commodities, the state ministries and commissions jointly
issued notices stipulating that from July 1, 2007 on, export tax rebates would be
cancelled for 10 types of 553 high energy consumption, high pollution and
resource-intensive products and that the export rebate rates would be reduced for
15 types of 2268 products which are prone to cause trade frictions. From August 1,
2008 to June 2009, China had 7 times increased the value-added tax rebate rates of
the labor-intensive, high technological content and higher value-added textile,
clothing, electronics, mechanical and electrical export products. Among them, the
high technological content mechanical and electrical products got a full 17% tax
rebate. At the same time, as of 2014, a total of 1871 customs code products were
included in the prohibited catalogue of processing trade.9 Take Guangdong, a major
province of foreign trade, for example. The adjustment in the export tax rebate
policy has an important and far-reaching impact on the development of
Guangdong’s foreign trade and industrial restructuring. According to the statistics
from Guangzhou customs, from January to June 2007, the total value of exported
8
Vide Sina Finance (Per-Unit GDP Energy Consumption in China reaches 2.5 Times the World’s
Average, an Academician Suggests Developing Nuclear Power) http://finance.sina.com.cn/
chanjing/cyxw/20131130/014317485049.shtml; CNII (In 2012, China’s Primary Energy
Consumption was 3.62 Billion Tons of Standard Coal) http://www.chyxx.com/data/201312/
224566.html.
9
Vide Guangzhou Commerce Commission (Adjustment of Tax Rebate Policy Has Affected 3289
Enterprises in Guangzhou) http://www.gzboftec.gov.cn/article.jsp?id=22538.
goods involved in the policy adjustment in July 1 was $66.42 billion, accounting
for 40% of Guangdong’s total export value in the same period.10 In 2008, after the
country raised its export tax rebate rate for seven times in a row, Guangdong’s
average export tax rebate rate increased from 12.21 to 14.27%, a total increase of
2.06% points.11 According to the statistics of Guangdong provincial tax bureau, in
2009, Guangdong province handled 146.552 billion Yuan for export tax refund
(exemption), a year on year increase of 9.594 billion Yuan, and a yearly increase of
7%.12 The constant adjustment in processing trade policy will threaten the survival
of many low-end processing trade enterprises in the Pearl River Delta. Nearly 20%
of the processing trade enterprises will no longer enjoy preferential tax policies.
Of the tens of thousands of Hongkong-invested companies, over 4,000 are on the
verge of being shut down. Seen from another perspective, the introduction of these
policies is to strictly control the export of “high energy consumption, high pollu-
tion, resource-based” products as well as low value-added, low technological
content products, and at the same time to encourage the export of high techno-
logical content high value-added products, so as to optimize the industrial structure
and export commodity structure, and promote the transformation of foreign trade
growth mode. Therefore, enterprise transformation and upgrading is a matter of
great urgency.
3. RMB appreciation is increasing pressure on exporting
Since the appreciation of RMB against the U.S. dollar in 2005, the long-term trend
of RMB appreciation is obvious. From 2006 to 2012, the annual appreciation of
RMB against the US dollar was 6.804%, 6.882%, 3.349%, 0.09%, 3.09%, 5.11%
and 0.25% respectively.13 From the beginning of 2013 to October 16, 2013, RMB
appreciated by 2.1% against the US dollar. For companies that depend upon export,
RMB appreciation has brought enormous pressure on their profits. According to the
survey of Chinese Entrepreneurs, 82.4% of the enterprises believe that changes in
RMB exchange rate have a direct impact on the operating activities of enterprises.
In addition to the decline in export competitiveness brought about by the appre-
ciation, RMB appreciation against the US dollar has led to immediate exchange rate
loss. As for the Pearl River Delta and the Yangtze River Delta, which have
10
Vide Sina Finance (The Gross Value of Guangzhou’s Exported Goods in the First Half of the
Year Reached 17.92 Billion Dollars) http://finance.sina.com.cn/china/dfjj/20070806/
04043853077.shtml.
11
Vide China Export & Credit Insurance Corporation (The Impact of Export Tax Rebate
Adjustment on Guangdong Foreign Trade Export During the Financial Crisis) http://www.
sinosure.com.cn/sinosure/xwzx/rdzt/ckyj/ckfx/130973.html.
12
Vide Xinhua Net (Last Year, Guangdong Carried Out 146.5 Billion RMB of Export Tax Rebates
to support Enterprises’ Going Global) http://news.xinhuanet.com/fortune/2010-01/21/content_
12851641.htm.
13
Vide Xinhua Net (RMB Appreciated 0.25% in 2012 While is Expected to Appreciate 1.9% This
Year) http://news.xinhuanet.com/fortune/2013-01/02/c_124175472.htm.
numerous export-oriented enterprises, the rising exchange rate of RMB has exerted
pressure on the operating costs of many processing trade enterprises.
4. The rise of raw material prices and the enforcement of the new Labor Contract
Law have raised labor cost
On January 1, 2008, the new Labor Contract Law came into force, and provisions
for protecting laborers have been added to it. But in the short run, it has greatly
increased the labor cost of enterprises, for example, there is a rise in medical
insurance, overtime pay, and so on. In recent years, local governments in various
parts of China have also raised the minimum wage standards. In 2011, 24 provinces
in China adjusted the minimum wage, with an average increase of 22%; in 2012, 25
provinces adjusted the minimum wage, with an average increase of 20.2%; in 2013,
27 provinces and autonomous regions raised the minimum wage, with an average
increase of 17%. In 2014, the minimum wage in Shenzhen went up to 1808 Yuan,
taking the lead in the whole country. In February 2013, the State Council approved
the Opinions on Deepening the Reform of Income Distribution System, which
provide that by 2015 the minimum wage in most areas will reach above 40% of the
average wage of local urban employees.14 Because of the hard gap of domestic
resources and the rapid growth of investment, the pressure of raw materials will
become a new burden to enterprises, especially those in the textile industry. With
the prices of water, electricity, raw materials, fuel, transportation, etc. rising, pro-
duction and sales costs of enterprises are increasing rapidly. The foundation for the
survival of labor-intensive industries has been undermined. Chinese enterprises
urgently need to find a way out through transformation and upgrading.
5. Enterprises are at the bottom of the smiling curve and have low value added
In order to “reinvent Acer”, Taiwan’s Acer Group founder Mr. Stan Shih, proposed
the “smiling curve” in 1992 (see Fig. 1.1). This is actually a curve that illustrates
the added value of the industry and is used to explain the strategic direction of Acer.
The curve is like a smiling mouth, with both ends facing upwards. In the industrial
chain, value-added is more reflected in the two ends of design and sales, while in
the middle segment of manufacturing, the value added is the lowest. Stan Shih
believes that Acer should abandon its assembly in Taiwan and concentrate on
higher value areas of expertise. Many Chinese enterprises are still stuck at the
bottom of the industrial chain, barely having any capability to create value added.
Facing shrinking market and meager profit, they are in an increasingly difficult
situation. So in order to survive and develop, Chinese enterprises need to lift
themselves up to the higher sections of the value chain.
6. Enterprises are in a passive situation facing anti-dumping, quality and envi-
ronmental certifications, and other trade barriers
14
Vide Xinhua Net (the State Council Approved “Some Opinions on Deepening the Reform of
Income Distribution System”) http://news.xinhuanet.com/politics/2013-02/05/c_114625358.htm.
Fig. 1.1 The smiling curve.

Source Stan Shih, Acer’s
Century Change, Taiwan
World Culture Publishing
House, 1997
Most export-oriented enterprises in China are mainly small and medium-sized ones.
They are small in size and lack strength, and their ability to resist and avert risks is
very limited. In the process of development, these enterprises are vulnerable to
exogenous external factors like changes in the political and economic environment.
With the increasing expansion of China’s foreign trade, the number of
anti-dumping lawsuits suffered by export-oriented enterprises has also increased. In
addition, it is difficult for them to win the cases. And this further encourages foreign
companies to lodge more anti-dumping complaints against China’s export products,
resulting in a vicious circle. In 2006, the anti-dumping duties imposed by the
European Union (EU) on some China-made leather shoes were substantially
increased from 4.8 to 19.4%, which immediately threatened the survival of small
and medium-sized OEM shoe factories.15 Besides anti-dumping lawsuits, Chinese
enterprises have to face the international product quality certification and the
“green” barrier, which have virtually increased the non-material costs of enterprises.
For example, in the toy industry, the International Council of Toy Industry (ICTI)
launched “ICTI Code of Conduct” to safeguard the legality and safety of toys. This
has generated a rather big impact on Chinese toy manufacturers. As of March 2006,
a total of 195 toy brands, had signed to recognize ICTI certification, including the
world’s top brands like Mattel, Hasbro, Leap Frog, Mega, Lego, Toys “RU”s etc.,
purchasing altogether more than 65% of the toys in the world toy market They were
committed only to take products produced by ICTI certified factories after a certain
period of time. This means that if the domestic toy enterprises cannot obtain ICTI
certification in a certain period of time, they will be faced with the risk of losing a
large number of orders. The toys recall storm in 2007 caused a huge economic and
reputational blow to Chinese toy enterprises. Especially in Guangdong, a major toy
export province, orders reduced in varying degrees in most enterprises. In
Dongguan, the closedown of large numbers of toy manufacturers initiated by Smart
Union factories was related to the increasingly strict international quality and
security requirements.
15
Source: Foshan Daily, June 15, 2006.
1.2 The Financial Crisis Has Intensified the Pressure

for Chinese Enterprises to Transform and Upgrade
1.2.1 China Has Been Affected by the Global Financial

Crisis
The financial crisis triggered by the U.S. subprime crisis has intensified and it
quickly spread from the local place to the whole world. China, one of the major
holders of US securities, was also affected by the crisis (see Table 1.1). As of
September 2008, China’s foreign exchange reserves amounted to US $1.905585
trillion; of China’s foreign exchange reserves, 65% are US dollar assets, 25% Euro
assets, and 10% assets of the Yen and other currencies;In the dollar assets, 50% are
the U.S. government’s long-term bonds, 35% the U.S. institutional bonds, such as
those issued by Fannie Mae and Freddie Mac, 15% corporate bonds or other
short-term bonds.
The financial crisis has not only affected China’s financial markets, but also the
real economy. In the first three quarters of 2008, China’s GDP growth fell from
10.4% in 2007 to 9% in the third quarter of 2008, with the largest decline in the
secondary industry, down from 13.4% last year to 10.5% in the third quarter (see
Table 1.2). In November 2008, the whole country’s exports fell by 2.2% compared
with the same period of last year, and exports fell by 17.9%. In January to September
of 2008, industrial added value increased by 15.2% on a year on year basis, 3.3%
points lower than the same period of last year, and in September only increased by
11.4%. In January to September of 2008, power generation growth slipped to 9.9%,
with only 3% in September.16 Domestic enterprises have also been greatly affected.
The business climate index released by China’s National Bureau of Statistics
dropped from 146 in the second quarter of 2007 to 128.6 in the third quarter of 2008.
Entrepreneurs hold reservations about economic recovery. Among all sectors, the
industrial sector and the real estate sector are affected most (as shown in Table 1.3).
1.2.2 The Financial Crisis Hit the Export-Oriented

Economy in the Pearl River Delta and Yangtze River
Delta Particularly Hard
Most enterprises in the Pearl River Delta and Yangtze River Delta regions are small
and medium-sized manufacturers producing low-end products for the export mar-
ket. In recent years, because of a combination of domestic supply side constraints
(rising raw material prices, higher labor costs, tight electricity supply) and macro
economic changes (reduced export tax rebate, greatly increased environmental
16
Source: National Bureau of statistics, http://www.stats.gov.cn.
1.2 the Financial Crisis Has Intensified the Pressure … 11
Table 1.1 Asset composition of US securities held by foreign investors. Unit: US $1 billion.
Source US Treasury report, June 30, 2007
Country Total Equity Long-term Long-term Long-term Short-term
government institutional corporate bonds
bonds bonds bonds
Japan 1197 220 553 229 119 76
China 922 29 467 376 28 23
Uk 921 421 43 28 405 24
Cayman 740 279 23 52 347 38
islands
Middle 308 139 79 30 17 44
East
Total 9772 3130 1965 1305 2737 635
Table 1.2 China’s GDP growth rate. Source National Bureau of Statistics http://www.stats.gov.
cn
2007 2008 Q1 2008 Q1-2 2008 Q1-3
GDP year-on year growth rate (%) 11.9 10.6 10.4 9.9
The primary industry 3.7 2.8 3.5 4.5
The secondary industry 13.4 11.5 11.3 10.5
The tertiary industry 12.6 10.9 10.5 10.3
Table 1.3 China’s business climate index. Source National Bureau of Statistics http://www.stats.
gov.cn
2007 2007 2007 2007 2008 2008 2008
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Total 139.7 146 144.7 143.6 136.2 137.4 128.6
Manufacturing 140.1 146.9 144 143 133.3 135.7 125.8
Construction 127.7 142.4 143.2 146.4 136.7 144.2 135.3
Transportation, storage and postal 137.7 137.7 139.2 133.4 135.1 129 119.6
services
Wholesale and retailing 151.7 152.1 154.7 152.2 153.2 147.5 143.6
Real estate 138.8 141.1 140.3 140.3 132.2 131.8 118.9
Social service 128.1 136.9 139 135.5 132.2 124.8 127
Information transmission, computer 155.1 158.5 160 160.3 159 162.9 147.6
services and software industry
Accommodation and catering 125.1 131.4 130.2 129.5 123.3 121.3 119
services
protection costs, and RMB appreciation), the weaknesses inherent in the enterprises
manufacturing low value added products have gradually emerged. For the Pearl
River Delta region that has a large concentration of export-oriented enterprises,
the impact of the global financial crisis was especially hard. For example, in
Guangdong Province, as of November 2008, the export volume of processing trade

was US $21.108 billion, accounting for 62% of all exports. Because Guangdong
has a high degree of dependence on foreign trade, under the pressure of domestic
supply side constraints and macro economic changes, Guangdong’s export pro-
cessing enterprises are gradually approaching the critical line. The growth rate of
industrial added value in January to November of 2008 was lower than the national
average (shown in Table 1.4). In November 2008, Guangdong’s export delivery
value of industrial products increased by 11.1%, down 11.8% points year on year.
Among them, the export volume of processing trade in November grew by −14.3%,
down 27.5% compared with the same period of last year. By types of enterprises, in
November exports from state-owned enterprises and the three kinds of
foreign-invested enterprises (namely Sino-foreign joint ventures, cooperative
businesses and exclusively foreign-funded enterprises) fell by more than 10%
(shown in Table 1.5).
According to the survey of Guangdong’s enterprises by the National Bureau of
Statistics, the overall prosperity condition of enterprises in Guangdong province
declined significantly in the third quarter of 2008. The entrepreneur confidence
Table 1.4 The growth rate of industrial added value in China and Guangdong in 2008 (%)
Source National Bureau of Statistics http://www.stats.gov.cn
Month Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov.
National total 15.4 16.4 16.3 16.3 16.3 16.1 15.7 15.2 14.4 13.7
Guangdong 12.7 13.6 13.7 13.7 13.7 13.4 13.4 13.3 13 12.8
Table 1.5 Import and export volume of Guangdong province in Nov. 2008 (US$100 million).
Source http://www.gdstats.gov.cn
Indicator Nov. Year-on-year Cumulative Year-on-year increase
2008 increase (%) total of cumulative total (%)
Export volume 338.45 −5.1 3716.54 11.1
By types of trade
1. General trade 104.52 13.5 1055.87 11
2. Processing trade 211.08 −14.3 2417.11 8.3
2.1 Processing with 46.51 −11.9 532.57 12.2
supplied materials
2.2 Processing with 164.57 −14.9 1884.54 7.3
imported materials
By types of enterprise
1. State-owned enterprises 47.8 −10.7 562.84 8.8
2. Three kinds of 205.94 −10.9 2361.71 12.3
foreign-invested
enterprises
3. Collectively owned 13.7 14.3 142.64 20
enterprises
4. Private enterprises 70.22 20.3 637.24 8.2
1.2 the Financial Crisis Has Intensified the Pressure … 13
Table 1.6 Guangdong business climate index in 2008 Q3 Source National Bureau of Statistics
http://www.stats.gov.cn
Sector Q3 Increase Year-on-year Estimate
compared to increase for Q4
Q2
Overall condition 132.9 −4.6 −16.9 135.2
Manufacturing 133.8 −3.6 −16.0 137.3
Construction 129.2 −1.6 −8.8 131.6
Transportation, storage and postal 143.4 6.3 −4.9 139.2
service
Wholesale and retail 141.2 −2.4 −10.4 139.9
Real estate 110.9 −31.8 −34.0 111.6
Social service 127.2 5.6 −30.0 130.2
Information transmission, computer 153.8 −2.8 −14.0 156.1
services and software industry
Accommodation and catering service 118.3 −3.6 −20.3 122.9
index and business climate index had dropped to a new low since the third quarter
of 2003. The main classification climate indexes all declined in different degrees. In
the third quarter of 2008, Guangdong’s business climate index was 132.9, down
4.6 points compared with the second season and down 16.9 points compared with
the same period of the previous year. The climate index of the real estate industry
was the lowest in eight major sectors. And the manufacturing climate index went
down instead of up in peak seasons (see Table 1.6).
In the manufacturing sector, 23 major manufacturing sub-sectors showed dif-
ferent degrees of decline compared with the same period of the previous year.
Compared with the second quarter, 15 industries including the textile industry saw
declined business climate index; in three industries the index was basically the
same; only in five industries including the metal product industry the prosperity
index rose (shown in Table 1.7).
1.3 Planning for Change in Time of Crisis
1.3.1 In Front of Chinese Enterprises Are Three Ways:

Relocating, Upgrading, or Going Out of Business
Faced with the impact of the financial crisis, a number of enterprises have fallen
down, and large numbers of employees were unemployed. It is really worrisome
that enterprises at the low segments of global value chains (GVCs) showed little
ability to withstand risks when facing turbulence in the external environment.
According to the statistics released by Guangdong SME Bureau, the closure
of enterprises in the first three quarters of 2008 mainly concentrated in the Pearl
Table 1.7 Business climate indexes of some major manufacturing sectors in 2008 Q3 Source
National Bureau of Statistics http://www.stats.gov.cn
Sector Q3 Increase compared Year-on-year
to Q2 increase
Textile 100.1 −7.21 −14.69
Plastic products 103.36 −11.86 −7.69
Furniture 107.46 −17.96 −18.1
Melting and processing of ferrous metals 108 −7.81 −7.34
Textiles and garments, shoes, hat 108.03 −41.2 −46.48
manufacturing
Manufacturing of general equipment 111.49 −20.14 −36.56
Leather, fur, feather products 116.28 −13.63 −16.43
Paper making 117.83 −10.88 −45.32
Non-metallic mineral products 118.62 −6.68 −15.82
Agro-food processing 122.47 0.11 −21.54
Melting and processing of non- ferrous 126.86 −24 −36.88
metals
Metal products 130.83 14.36 −18.04
Food manufacturing 130.84 4.78 −20.32
Manufacturing of electrical machinery and 131.3 −16.97 −28.4
equipment
Printing, manufacturing of recorded media 132.14 −0.87 −0.24
Manufacturing of specialized equipment 134.65 10.81 −15.09
Chemical materials and chemical products 139.86 −4.53 −19.52
manufacturing
Pharmaceutical Manufacturing 141.41 −7.42 −23.13
Beverage 143.17 3.33 −30.34
Manufacturing of cultural, education and 144.17 1.52 −9.93
sporting goods
Communications equipment and computers 148.19 −4.42 −10.67
Manufacturing of instruments and office 152.69 −3.9 −9.67
equipment
Manufacturing of traffic, transportation 156.87 −0.61 −0.09
equipment
River Delta region. In this region, the cities where a significant number of enter-
prises were closed down are in turn Dongguan with 1464 failed enterprises,
Zhongshan 956, Zhuhai 709, Shenzhen 704, Shanwei 587, Foshan 526 and
Chaozhou 432. Examined from its distribution in different industries, the closure of
enterprises mainly concentrated in textile and clothing, hardware and plastics,
electronic products, ceramics and building materials and other low technology, high
energy consuming traditional industries.17 According to statistics from Guangdong
17
Source: Guangzhou Daily, November 17, 2008.
1.3 Planning for Change in Time of Crisis 15
Customs, in the first three quarters of this year, more than 6800 enterprises in
Guangdong withdrew from the export market due to a decrease in export orders.
And more than half of them are small and weak private enterprises.
A Dongguan-conducted survey reveals that, 30% of the city’s enterprises were in
the red; 20% profited slightly; only 50% remained profitable, while prior to the
crisis, 90% of the enterprises were profitable.
According to a Xinhua report, batches of export processing enterprises in the
Pearl River Delta and China’s coastal areas have closed down; many large and
medium-sized manufacturing enterprises have also rapidly slowed down the pace of
expansion, resulting in large numbers of rural migrant workers being laid off or
forced to take indefinite leave. Although it is not the end of the year (when rural
migrant workers usually go back home for the conventional Spring Festival),
beginning in October, Guangzhou Railway Station has ushered in an unusually
large stream of people and has a daily passenger volume of 90,000–130,000 people.
A rather large part of them are rural migrant workers working in Guangdong.
Because many factories stopped operating, they have to go home early or to find
another way to make a living.18 Similarly, in Wenzhou, one of the most eco-
nomically active areas in the Yangtze River Delta, 20% of the SMEs at present have
stopped working, or are operating on halftime, or even closed down. According to a
Ruian report “Analysis of the Industrial Economic Situation on the Implementation
of the Labor Contract Law in Ruan”, the great majority of the three leading
industries and six traditional industries are labor intensive industries. 20% of the
enterprises in these industries have stopped functioning or closed down. And one
third of the enterprises in the footwear industry are out of business.
Confronted with the rapidly changing economic situation in the world, Chinese
enterprises have three paths to take. The first is relocating. This means shifting
production bases to areas with lower labor costs and using cost advantages to make
profit, just as more than 10 years ago many Taiwanese companies chose to move
manufacturing plants to mainland China which had lower labor costs. The second
path is upgrading. This includes not only the upgrading of enterprise products in
order to obtain higher value added, but also the upgrading of the enterprise to both
ends of the value chain, that is, from simple manufacturing to upstream R&D and
downstream brand promotion and service. The third path is only to maintain the
status quo and eventually be eliminated by the market.
1.3.2 Chinese Enterprises Should Bravely Break Through

in the Crisis
Business competition is like car racing. It is difficult to tell the difference when the
drivers are speeding along a straight track. The best time to test the wisdom and
18
Source: Sina, http://www.sina.com.cn, November 7, 2008.
courage of the drivers and to judge the performance of the cars is while they are
taking a turn around the corner, for only good racing drivers and cars can win over
the opponents in turning the corner. Similarly it is the best time to test the man-
agement strength of an enterprise and the will of an entrepreneur when the enter-
prise undergoes changes and is in a turbulent environment with its rivals.
Companies that anticipate and have prepared for the crisis are usually able to seize
the opportunity and outstrip their rivals. According to the data compiled in the
October 29, 2008 issue of China News Weekly, 67,000 SMEs closed down in
China in the first half of 2008.
However, some high-tech enterprises in Shenzhen are relatively strong and have
the ability to withstand the financial turmoil. In the first three quarters of 2008, the
added value of high-tech products in Shenzhen was 177.190 billion Yuan, accounting
for more than 60% of the city’s industrial added value. Local high-tech enterprises
continue to maintain a high growth rate and become the backbone of Shenzhen’s
high-tech industries. For example, in the first three quarters of 2008, Huawei
Technology Co., Ltd. achieved output value of 81.70 billion Yuan, an increase of
50%; ZTE realized output value of 27 billion Yuan, an increase of 23%. In 2012, the
added value of hi-tech products in Shenzhen was 282 billion Yuan, increasing by
12.1%, accounting for 30.9% of the city’s GDP, down 3.9% points. The proportion of
high-tech manufacturing sector has risen. In the first three quarters of this year, the
added value of advanced and high-tech manufacturing sector was 259.377 billion
Yuan and 210.730 billion Yuan, rising by 4.6% and 7.9%, accounting for 71% and
57.7% of the added value of industrial enterprises above designated scale respectively
(at present, industrial enterprises above designated size in China refer to those
enterprises whose annual main business income is more than 20 million Yuan).
Shenzhen enterprises perform better in face of crisis because industrial upgrading
has long been carried out. Therefore, they have the preparation as well as the ability to
respond to the financial crisis. Facing changes in the global economic environment,
enterprises are under increasingly great pressure for transformation and upgrading. At
the moment of crisis, are Chinese companies ready? Can they break through?
References
Bao, J., Miao, Y., and Chen, F. Low Carbon Economy: Revolution in the Way of Human
Economic Development [J]. China Industrial Economics, 2008, 22(4): 153–160. (in Chinese)
Gereffi, G. International Trade and Industrial Upgrading in the Apparel Commodity Chains [J].
Journal of International Economics, 1999(48): 37–70.
Humphrey, J., and Schmitz, H. Governance and Upgrading: Linking Industrial Cluster and Global
Value Chain Research [C]. IDS Working Paper 120, Brighton: Institute of Development
Studies, 2000.
Kaplisnsky, R., and Morris, M. A Handbook for Value Chain Research. Prepared for the IDRC.
2001.
Poon, T. S. C. Beyond the Global Production Networks: A Case of Further Upgrading of Taiwan’s
Information Technology Industry [J]. Technology and Globalization, 2004, 1(1): 130–145.
Chapter 2
Experiences of Corporate
Transformation and Upgrading in Asian
Emerging Economies
2.1 High-Level Dedicated Foundry Road of Taiwan’s

Semiconductor Industry
Since 1950s, Taiwan has embarked on an export-oriented economic development

period, enabling itself to develop rapidly for over two decades. When Taiwanese
were expecting the golden time of “advanced economy”, however, the island’s
industrial development encountered a great setback. During the mid-and-late 1980s,
it almost lost the competitive advantages in resource-intensive industry and suffered
from the surging cost-pressure in land, labor and raw materials. Besides, the high
policy uncertainties and competition from latecomers in Southeast Asia and
mainland China put Taiwan enterprises into difficulties, which the mainland
Chinese enterprises now face and have to manage. At that time, a large number of
Taiwan entrepreneurs carried out strategic reactions. Some of them attempted to
transfer their business to mainland China to enjoy low labor-cost. Some, by
increasing their products’ added value and thus their competitiveness, strived to
upgrade so as to guarantee a new round of development. Some others, however,
were facing the bankrupt threat. Accordingly the Taiwanese government deter-
mined to, apart from the continued development of textile industry and heavy
chemical industry, prioritize the development of technology-intensive industries
including the electronics, communications, semiconductors, precision instruments
and health care. From then on Taiwan has entered a new era of industrial upgrading.
Most Taiwan companies followed the upgrading pattern often utilized by the
processing trade enterprises. Generally, late-movers, when selecting their expan-
sion strategy, would prioritize the upgrading of intra-industry OEM, followed by
the inter-industry OEM and finally OBM. But OBM, the highest level of upgrading,
requires a combination of production scale, R&D capabilities and managerial skills.
https://doi.org/10.1007/978-981-13-1260-1_2
18 2 Experiences of Corporate Transformation and Upgrading …
Hence, lots of enterprises attempted to upgrade their original OEM business for the
sake of survival, including Foxconn Technology Group, Taiwan Semiconductor
Manufacturing Company (TSMC) and United Microelectronics Corporation
(UMC). OEM companies as they were, though, they occupied the key positions in
the industrial chains, thanks to their considerably higher value-added technology.
Some other enterprises, in the industry with certain technological strength, have
achieved upgrading by transforming international OEM to OBM, such as Giant
Group in the bicycle industry and Acer Inc. and AsusTek Computer Inc. in the
computer industry. These brands have gained substantial recognition around the
world, thus becoming the representative enterprises in Taiwan’s industries. Some of
them, motivated by the entrepreneurship, carried out upgrading proactively and
created high-quality brands; while others were forced to upgrade their business due
to the limited potential of profits and growth. Particularly, Taiwan’s semiconductor
industry is a typical one which not only represents the characteristics of the global
value chain, but also provides a solid foundation to facilitate the economic trans-
formation of Taiwan in the past thirty years, during which the semiconductor
enterprises have upgraded towards advanced OEM.
2.1.1 Five Development Stages of Taiwan’s Semiconductor

Industry
Starting with the establishment of packaging factories by foreign investors,

Taiwan’s semiconductor industry has seen five stages of development, including
the emerging stage from 1966 to 1973, the introducing stage from 1974 to 1979, the
growing stage from 1980 to 1995, the expanding stage since 1996 and the mature
stage currently. Thanks to three decades of development, Taiwan has cultivated
independent technological capabilities in such fields as wafer materials, mask ser-
vice, circuit design, manufacturing, packaging and test.
2.1.1.1 Stage One: Emerging Stage of Taiwan’s IC Enterprises

(1966–1973)
In 1966 Kaohsiung Electronics Co. was set up by General Instrument Inc. (an
American company), engaging in the packaging business of transistors. It was the
first company to introduce integrated circuit (IC) packaging technology into
Taiwan, followed by the factories invested by Texas Instruments and Philips
Electronics Building Elements. These foreign companies brought about IC tech-
nologies such as packaging, test and quality control, laying down initial foundations
2.1 High-Level Dedicated Foundry Road of Taiwan’s Semiconductor … 19
for the development of Taiwan’s IC industry which at that time was constituted
mainly by the packaging firms. In 1964 the National Chiao Tung University
(NCTU), placing emphasis on the teaching of IC courses, set up an IC laboratory
which, as the only one at that time, possessed the IC producing capability and thus
contributed enormously to the cultivation of IC technicians in Taiwan. Up to now,
most top R&D talents of great importance in the IC industry have graduated from
NCTU, which is one of the key factors contributing to the smooth development of
Taiwan’s IC industry.
2.1.1.2 Stage Two: Introducing Stage (1974–1979)—Technology

Introduction and Innovation Derivation (Period of OEM
and ODM)
In 1974, the semiconductor industry witnessed a vigorous growth in the world and
played an increasingly important role on related industries, though the semicon-
ductor manufacturing industry has not come into being in Taiwan yet. During this
period, the industry development strategy, primarily under the direction of the
government, started with the introduction of advanced technologies from interna-
tional high-tech companies, followed by the derivative foundation of technological
companies that required the pass of market test, and finally the initial forming of
semiconductor industry. To guarantee the electronic industry’s relentless movement
toward technology-intensive segments, the Electronics Industry Research Center
was established in 1974 by the Industrial Technology Research Institute (ITRI).
ITRI is a nonprofit organization dedicated to the transferring of mature technologies
to the private sector. Shortly after its establishment, it signed an agreement with
Radio Corporation of America (RCA) to license two semiconductor process tech-
nologies in 1975 and set up the first IC demonstration foundry in 1977. Moreover,
this learning-and-imitation era of IC manufacturing technologies has seen the
organization of UMC, a spinoff of ITRI, which had to target the products at those
low value-added regional markets and keep away from the mainstream markets
originally occupied by the international leading companies.
2.1.1.3 Stage Three: Growing Stage (1980–1995)—Technological

Improvement and Strategic Alliance
After mastering the technologies transferred from RCA, ITRI successfully launched
products in the market and received acceptance. Then it continued with the Second
Development Plan of Electronic Industry (1979–1983), the Very Large Scale
Integration-Circuit (VLSI) program (1983–1988) and the Sub-Micron Plan (1990–
1994). These schemes gradually laid a solid foundation for the technology devel-
opment of Taiwan’s IC industry.
For the enterprises engaging in upgrading, frankly, it was an inevitable challenge

to improve their own technology and narrow the gap with the international
advanced companies. Hence, Taiwan’s OEM IC foundries has not only kept on
pursuing research cooperation with ITRI under the governmental commission and
seen the creation of Taiwan Semiconductor Manufacturing Corporation (TSMC) as
a spinoff of ITRI, but also maintained partnerships with those international man-
ufacturers for high-tech licensing and transferring which ensured their product sales
in the international mainstream markets. Under this circumstance, the joint ventures
of TSMC-Philips and Acer-Texas Instruments came into being. In a word, the
industrial development strategy in this stage was featured by the utilization of
government resources to promote technological innovation and by the establish-
ment of international strategic alliances to gain high-tech licensing, so as to get
access to the international mainstream market and speed up the enterprises’ inno-
vations. Therefore, it was the growing stage of Taiwan’s semiconductor companies.
2.1.1.4 Stage Four: Expanding Stage (1996)—Self R&D

and Industry-University—Research Collaboration
Before 1975, Taiwan’s semiconductor firms were still in its infancy, But after over
two decades of development, aggressively promoted by the government and the
industry-university-research cooperation, they gradually entered the expanding
stage of self-innovation Despite the recession in the global semiconductor market in
1996, Taiwan’s companies witnessed a considerable increase in output value thanks
to their balanced distribution of product structure. Particularly in the field of wafer
fabrication, TSMC and UMC as well as other companies accounted for over 60% of
the global market, thus driving the semiconductor industry to step into the era of
strategic alliances and dedicated division of labor. By 2005, a total of NT$2 trillion
had been invested to construct the wafer fabrication facilities (a.k.a. fabs), enabling
this island to grow into the most active district for developing semiconductor
industry in the world.
When these companies approached from behind the advanced manufacturers in
the technological level, however, technology introduction and licensing became
increasingly difficult. To maintain their competitiveness in the international market,
consequently, they must carry out independent R&D for more advanced tech-
nologies. Yet, the resources and risks involved in such independent R&D were too
hard to be afforded by a single manufacturer from the underdeveloped area. Hence,
the industry-university-research cooperation promoted by the government could
help enhance the R&D competitiveness of the whole industry. Thanks to this
industrial development strategy, Taiwan’s semiconductor industry in a stepwise
manner entered the market expansion stage.
2.1.1.5 Stage Five: Mature Stage—Resources Restructuring

and Integration
After decades of efforts, some of Taiwan’s semiconductor enterprises have been

technologically and sufficiently capable to compete with the advanced manufac-
turers. Then it was important for them to launch resource restructuring and inte-
gration from a globalization perspective so as to further promote the industrial
innovation. Hence, after developing into the mature stage and embedding them in
the global semiconductor industry, these enterprises must take into account how to
enhance their core competitiveness and collaborate with international advanced
manufacturers for global resources restructuring and integration. This constituted
the development strategy of semiconductor industry in this period.
Frankly speaking, Taiwan’s semiconductor industry structure was quite excep-
tional, compared to that in Europe, the United States, Japan and South Korea.
Semiconductor firms in the US were mostly led by the investment enterprises or
dedicated IC companies, while those in Japan were dominated by the conglomer-
ates (South Korea also belonged to this type). Such differences led to their dis-
tinctions in the industry development. By comparison, Taiwan’s semiconductor
companies were led by the investment enterprises in many sectors, which is similar
to the US type. But unlike the US companies whose technical R&D could be
supported by the military budget, Taiwanese firms developed their advanced
technology mainly through the international cooperation strategy.
2.1.2 Sources of Competitiveness of Taiwan’s

Semiconductor Companies
2.1.2.1 Vertical Disintegration and Professional Division-of-Labor

System in the Semiconductor Industry Contributed to Its
International Competitiveness
After decades of efforts, Taiwan’s semiconductor industry has gradually developed

into large scale with international competitiveness and formed a unique industrial
division-of-labor system called vertical disintegration. In fact, Taiwan’s semicon-
ductor industry is a sophisticated network consisting of firms specializing in some
specific phase in the semiconductor industrial chain, such as chip design, foundry,
test and packaging. These specialist firms constitute a vertically disintegrated
semiconductor supply chain in Taiwan, which is quite different from the vertical
integration often deployed in Japan, Europe, U.S. and other advanced industrial
countries, wherein a firm would perform all of the above activities as well as
marketing and system development. By comparison, Taiwanese firms were sig-
nificantly smaller than those in the above competing counties and these small or
medium-sized firms lacked adequate resources, such as sufficient capital, skilled
technicians and established international connections. Hence, they could only select
some strategic areas and consistently improved the technology, product quality and
manufacturing process so as to enhance their competitiveness. Since the early
1980s, the semiconductor industry has been programmed as one of the strategic
industries heavily supported by Taiwan’s government and regarded as the most
successful case during the development of Taiwan’s emerging technology industry.
2.1.2.2 Good Cluster Supporting Environment and Appropriate

Business Strategy Were the Key Factors for the Upgrading
of IC Enterprises in Taiwan
In the fiercely competitive industry, the establishment of industrial clusters and

science-based industrial parks has played a vital role in the development of
enterprises. Set up in 1980, Hsinchu Science Park has provided IC firms with
attractive infrastructure and easy access to administrative procedures and services
so that these firms can concentrate on product and technology development. The
mutual support and friendly competition among these geographically clustering
companies has ensured their technological innovation and attempt at self-brand
establishment after completing the primary accumulation of capital. Later, Tainan
Science Park was set up based on Hsinchu Science Park and followed the same
pattern, thus driving the development of science and technology industry in
southern Taiwan.
2.1.2.3 ITRI Was the Innovation Source of Semiconductor Firms
For several decades, ITRI has provided great leadership and strong technical sup-
port to Taiwan’s semiconductor industry and many of the renowned Taiwanese
semiconductor enterprises can be traced back to ITRI. In September 1974, ITRI set
up the Electronic Industry Research Center to carry out “The Plan of Setting IC
Demonstration Plant”, introducing and transferring the semiconductor manufac-
turing technology to the private sector. In 1979, the Electronic Industry Research
Center was renamed as the Institute of Electronics Industry, enabling the Taiwan IC
foundry industry to equip itself initially with complete manufacturing technology
capability. Afterwards, ITRI successfully completed the First Phase of IC
Demonstration Program (1975–1979), the Second Phase of Electronics
Development Program (1979–1983), the Very Large Scale Integration-Circuit
(VLSI) Program (1983–1988) and the Sub-Micron Plan (1990–1994). These
schemes have gradually laid down a solid foundation to support the rapid devel-
opment of Taiwan’s semiconductor technology.
As a nonprofit organization, ITRI carried out technology projects aiming to
cultivate the local semiconductor industry by established technology. Hence, a large
number of research achievements have been transferred to the private sectors under
the government’s guidance and ITRI’s cooperation. ITRI has facilitated the
establishment of those spinoff companies, such as UMC, TSMC, Taiwan Mask
Corp. and Vanguard International Semiconductor Corp., which stepped up the

technological innovation and promoted the upgrading of Taiwan’s semiconductor
industry in the long term.
2.1.2.4 Entrepreneurship in Taiwan
Taiwanese entrepreneurs have relied heavily on personal networks to launch

business activities. The corporate upgrading and self-brand establishment has been
accelerated by continued improvement in areas such as production process, product
quality, management capabilities and technical R&D. In particular, the self-brand
awareness of Taiwanese companies reflects the innovation and positive spirit of
their entrepreneurs.
Taiwan is one of the most active areas with regard to entrepreneurship, which
could be best manifested by the semiconductor industry due to its rapid updates and
short cycles of technology. In fact, Taiwan’s contract manufacturing model is a
relational structure between the consignor and small-scale manufacturers (the
so-called laoban in Taiwan), which has not only promoted Taiwan’s export-oriented
industrial development, but also provided Taiwanese with lots of opportunities to
start their own businesses. Besides, the majority of Taiwan’s laoban are indepen-
dent SME owners, chairmen and general managers, who can skillfully use personal
networks for business purposes. The complex personal networks of Taiwan society
have provided laoban a social context that suits their partnership-oriented and
guanxi-oriented business activities. The mutual communication could facilitate the
exchange among companies and bring about business opportunities. With regard to
these semiconductor enterprises, the entrepreneurial network ranges from domes-
tical National Chiao Tung University (NCTU) to advanced enterprises in Silicon
Valley such as Hewlett Packard Enterprise, Intel Corporation and so on. During this
export-oriented period, Taiwanese entrepreneurs have strived to seize the oppor-
tunity to enhance their learning and absorbing of overseas technologies for capital
accumulation, which laid down a solid foundation for their self-brand
establishment.
Entrepreneurs of underdeveloped areas should have adaptive entrepreneurship. As
indicated by Joseph A. Schumpeter, the Austrian economist, the task of entrepreneurs
is “creative destruction” and innovation is the essence of entrepreneurship.
Nevertheless, with regard to entrepreneurs in latecomer economies in particular,
“adaptive entrepreneurship” is more likely than overall innovation to serve the pur-
pose of business upgrading. For instance, they can increase product functions and
improve quality to boost market sales, or provide new commodities that have been
inadequate in the market, or provide better services for existing market segments.
Such “adaptive entrepreneurship”, quite different from the so-called “creative
destruction” entrepreneurship, is an updating and improvement to the existing cir-
cumstances, which would be more essential to latecomer countries or regions.
Generally, Taiwanese entrepreneurs have a sense of mission, concerned about
the island’s industrial development. This could be illustrated by Stan Shih, the
founder of Acer Inc., who is known as Taiwan’s IT godfather. His smiling curve
theory and meritocracy thought have influenced a large number of entrepreneurs.
After retiring from Acer, he continues to pay attention to his company. Meanwhile,
he is committed to Taiwan’s industrial development, remaining active in the
“Branding Taiwan” Plan to help local brands step to the international market. Mr.
Shih also founded a virtual college, dedicated to cultivating brand awareness and
international perspective of Taiwan’s youth.
In Taiwan, many entrepreneurs like Shih have emerged. As an example, in
November 2008 the author’s research team visited the China Information
Development Co., Ltd., located in Nanzih Export Processing Zone (north of
Kaohsiung city, Twaiwan), wherein the impressive business-introduction by General
Manager Wang Jinqi showed his great concerns about Taiwan’s future development.
To sum up, the success of Taiwan’s semiconductor industry can be attributed to
the following factors. First, the five years of preferential tax treatments implemented
by the Hsinchu Science Park provided a healthy investment environment and
lowered investment risks. Second, the relatively strong manufacturing capacity
ensured the quality and cost advantages in global competition. Third, compared to
international manufacturers, Taiwan’s semiconductor firms can response to changes
in market demand flexibly thanks to the cost-efficiency in fixed assets, overhead
charges and R&D, the relatively complete vertical disintegration of supporting
industries, the effective and efficient decision-making process and the
entrepreneurship. Fourth, the companies can make full and real-time use of inter-
national resources, including overseas talents, technologies of international manu-
facturers, overseas market information and international strategic alliances. Fifth,
the diversification of product structure and technology sources and rapid market
responsiveness significantly reduced the risk of market changes. Sixth, the world’s
3rd-ranking IT industry created about 6% of the global semiconductor demand, thus
laying a solid foundation for the development of the semiconductor industry.
Seventh, the unique and excellent entrepreneurship and sense of industrial mission
of Taiwanese entrepreneurs guaranteed the sustainable development of the semi-
conductor industry.
2.1.3 Transformation and Upgrading Process of Taiwanese

Enterprises from Dedicated Foundry to Industrial
Chain Integration
2.1.3.1 The Establishment of TSMC
When South Korea’s three conglomerates began competing for the global semi-
conductor market in the early 1980s, the electronics industry in Taiwan, despite of
the earlier introduction of IC technology under the government’s strong support,

did not emerge yet, except for UMC’s production of consumer chips.
To compete with the South Korean enterprises, Taiwan’s government decided
accordingly to set up a large-scale IC experiment plant in ITRI, which became the
predecessor of TSMC.
Thanks to the government support and the effort of Morris Chang who is known
as the semiconductor industry founder of Taiwan, TSMC successfully raised capital
by floating shares and was incorporated in February 1987. When planning to go
public in 1991, Chang negotiated several times with Philips’ chairman in
Netherlands with the final result of Philips’ agreement of giving up some privilege
terms, which contributed to TSMC’s being listed. And the implementation of
Employee Stock Ownership (ESOPs) has further developed TSMC into the most
desirable company to Taiwanese graduates.
After embarking on the independence-oriented road, TSMC has gradually
become a Taiwan-based dedicated IC foundry (OEM manufacturer). The two
companies which once gave each other tit for tat now established close
partnership. Philips became the customer, shareholder and technical collaborator of
TSMC who, in return, was the most profitable client in Philips’s global investment.
As an example, in 1997 Philips’ headquarters determined to sell out its shares of
TSMC which was estimated as high as NT $100 million.
TSMC is the world’s largest dedicated independent (pure-play) semiconductor
foundry, with its headquarters and main operations located in the Hsinchu Science
Park. TSMC’s first 12-in. wafer fab (Fabs 12), also the first 12-in. fab in Taiwan,
began volume production for customers’ products in January 2002. Currently it
operates three 12-in. (300 mm) wafer fabs, 48-in. (200 mm) wafer fabs and one
6-in. (150 mm) wafer fab in Taiwan. TSMC also has substantial capacity com-
mitments at its wholly-owned subsidiary: WaferTech in the United States and
TSMC China Company Limited, and at its joint venture fab: SSMC (Systems on
Silicon Manufacturing Company, cooperated with NXP Semiconductors in
Singapore). The annual capacity of the manufacturing facilities managed by TSMC
and its subsidiaries reach above 8 million 8-inch equivalent wafers in 2007 and 10
million 12-in. equivalent wafers in 2016, with the annual operating income
exceeding half of that of the dedicated IC foundry services. Moreover, as the first
dedicated IC foundry entering the “Top 10 Semiconductor Sales Leaders” in 2002,
TSMC has witnessed its increasingly high ranks in this list, jumping to the 6th in
2007 and 3rd in 2017, according to the reports launched by Insights’ Strategic
Reviews Database. Besides, TSMC has long been the leading company in wafer
foundry, closely followed by UMC, according to the statistics released by Gartner,
Inc., an American research and advisory firm.
2.1.3.2 Main Features of TSMC’s Dedicated Foundry
Stringent and Innovative Corporate Culture
As the Chairman of TSMC, Morris Chang has always warned colleagues that the
implementation of corporate culture is the first priority; and integrity, customer-
oriented partnership and innovation should be realized in every corner of the
enterprise and every item of regulations.
TSMC’s senior management never denies that reengineering comes from the top
and needs to be conducted more thoroughly. Stringent in behavior, Chang admits
that TSMC is highly disciplined and demanding. That is, not only senior managers
would be strictly questioned by the chairman and CEO in the meetings, but those
middle and first-line managers would face rigorous introspection if they could not
explain to their subordinates in details. Chang believes the future business model
should be shifted from technology-driven to customer-oriented so as to better serve
its clients.
Strong R&D Competence and Technology Leading Strategy
Unlike Taiwan’s traditional business model, TSMC attaches great importance to

strategic planning and scientific management. Usually it would thoroughly collect
the global market information, evaluate its rivals’ strategies and their advantages
and disadvantages, and then formulate the business plan and competitive strategy.
While expanding its business, TSMC also endeavored to build up the system of
a large international enterprise by establishing a series of rules and regulations.
Even if the turnover reached NT $1.2 billion, 10 billion and even 30 billion, TSMC
has never been lax or lowered its expectations. Even if the profit rate reached above
50% of its total wafer revenue, Chang still put forward a variety of targets and set
up a number of business indicators, in an effort to stimulate the employees to keep
in line with Intel. Believing that financial figures could simply reflect the results but
not the corporate competitiveness, he always urged his colleagues that, regardless
of the economic situation and profits rate, the responsibility of mangers is to
establish a competitive advantage so as to maintain TSMC’s leading position in the
global wafer foundry and leave its counterparts far behind.
The advanced manufacturing technology is among the important reasons that
TSMC could maintain its industrial leadership. Mastering the cutting-edge tech-
nology enables it to consistently develop the manufacturing technology so as to
keep up with the advanced enterprises globally. It has joined in the US IC I300I
alliance, equipping itself with 12-in. wafer technology.
TSMC became the world’s first dedicated IC foundry introducing 45-nm hi-tech
into volume production. Even facing a heightened challenge from existing rivals
and newcomers, TSMC’s market share in the total semiconductor foundry segment
rose successfully, from 47% in 2007 to 56% in 2016, more than double the
R&D expenditure (NT S1000)

Fig. 2.1 TSMC’s R&D
expenditure
2008 (Q1)
2007
2006
percentage of the closest competitor. Such performance could be practically illus-

trated by its sustainable R&D input which, as an example shown in Fig. 2.1,
amounted to about NT$9.9 billion with a 14.5% growth in research team in 2007.
Changing Marketing Approach and Establishing Partnerships with

Customers
TSMC redefined marketing as not about selling goods but establishing partnerships
with customers. That is, from the chairman to the engineers, every employee must
listen to customers’ needs, through both traditional approaches and modern infor-
mation technology. Accordingly, TSMC has a large number of staff collecting
industrial dynamics, the latest technology, and they hold technical seminars
annually to share information with customers. TSMC has developed a compre-
hensive system so that customers can quickly complete the design which would
help the early launch of the product. Marketing staff not only have to study the
needs of customers now but also to collect customer needs in the future, so that all
departments can respond to the needs, just like they had an antenna to access to the
signal in the very beginning.
As indicated by a TSMC manager, the more critical the customers are getting,
the more difficult it is to do with technology, which, however, spurs the corporate
competitiveness. For example, shortly after its foundation, rather than outsourcing
the mask service to Taiwan Mask Corporation, the island’s sole specialist, TSMC
set up its mask unit with support from ITRI’s research personnel so as to help
customers save time, regardless of its profit scarifying. Internationally competitive
as it is currently, the mask unit simply serves for its customers without cooperating
with or leasing to other firms, despite of the collaborating invitation by DuPont. The
successful establishment of customer-oriented partnership has thus become
TSMC’s new competitiveness.
Recruiting First-Class Talents
Striving to attract top personnel from home and abroad, TSMC has ranked first in
Taiwan’s enterprises in talent reserve, including more than 100 doctorates and 800
masters. The majority of senior managers are doctorates with a great breadth of
experience as world-class business leaders in such US enterprises as HP, IBM and

Intel. Morris Chang said that TSMC has persisted to recruit the locals as leaders
when establishing branches around the world, as a result of which WaferTech in the
USA has been led and managed by the Americans from the very beginning.
Coming from different major semiconductor companies originally, WaferTech’s
400 employees are distinctive in nationality, race and culture, contributing to
TSMC’s first-class talents. Besides, to expand the marketing team substantially,
TSMC has selected and cultivated the staff with technical background and mar-
keting potential, who could provide suggestions for the company’s decision-making
in their global perspective.
Low-Cost Competitive Advantage
When customers complained about its high prices, TSMC would sit down and
discuss with them to find out cost-saving approaches. For example, originally
customers had to ship the products to Southeast Asia for testing, which, with the
assistant from TSMC, could be finished by the specialist firms in Taiwan. TSMC’s
engineers have strived to help customers save money. According to the Vice
General Manger of Adaptec, Inc., one of TSMC’s clients, the frequent contact and
cooperation with TSMC’s diligent engineers enabled them to develop a set of
information system, by which the design could be flowed and modified so much
faster that the time length was shortened from 58 to 32 days. Given the enormous
investment on a wafer factory, this cost-efficient system has been popularized to
other customers.
Speed Being the Secret of Success
Standing in the high-tech industry filled with high risk, TSMC’s customers are very
likely to be hit hard or even confronted with bankruptcy, as a result of which TSMC
would inevitably be affected and thus need to retain the old customers and develop
new clients simultaneously. The key point is, by listening to the customers’ needs,
to create customer values in areas such as good quality, high efficiency and new
technology. To achieve this goal, multinationals would extend the working hours
from 8 h to 12 or even 24 h, with the efficiency increasing exponentially. Take
Motorola which has two groups of engineers in US and India respectively as an
example. Thanks to the time difference, when US engineers finish their design
before duty off, they would send it to their Indian colleagues who continue with the
work so as to realize a 24-consecutive-hour working day. Similarly, when TSMC’s
American customers convey problems to TSMC’s subsidiary in US, the staff would
continue with the second-round work positively, even when it is dark outside and
most people go off work. Maintaining close contact with corporate headquarters in
Hsinchu, Taiwan, the American staff help customers to hasten their chip products,
convey their needs, jointly solve their problems, and shorten their waiting time.
Providing Diversified Services
To maintain a sustainable and close partnership, TSMC provides customers with

both cutting-edge manufacturing technologies and innovative services which, in the
company’s perspective, should be both diversified and differentiated from the
competitors. As wafer foundry, though, TSMC has collaborated with clients from
the beginning, far beyond the manufacturing service. To cope with the increasingly
sophisticated design of semiconductor, for instance, its electronic library offers a
general design module for specific customers who accordingly have no need to
design from the beginning. This not only shortens the designing time and thus
speeds up the products’ market entry, but saves more on design payment. Further,
TSMC’s electronic network provides patent services for its customers who could
utilize the patents developed and purchased by TSMC, which accordingly solves
the troublesome problems of patent violating in semiconductor designing.
In line with the increase of market share, companies must provide diversified
services. In Taiwan, in Silicon Valley or in Europe, TSMC, known for being tough
and rigorous, has been pretty flexible in satisfying customers’ needs. For example,
the daily production-capacity rate, which to achieve maximum benefit in the past
must reach 100% or even 120%, is now reduced to 85 or 90%. This could provide
customers with a little more flexibility in modifying their production process and
with surplus production-capacity in meeting their urgent product-launching needs.
In 2007, TSMC carried out the Multi-Layer Mask (MLM) service, which provided
customers with the greatest flexibility in trial manufacturing and verification or
small-volume production on the single-chip and multi-chip. In the same year, it
launched the new generation of Reference FlowTM 8.0, in an effort to further
reduce the defective rate and operating risks and improve the design margins.
Establishing Cost-Efficient and Time-Saving “Virtual Wafer Fab” for

Customers
In the decade after 1997, the fierce competition emerged in the semiconductor
industry that witnessed the wafer foundry step into the 12-in.-wafer and
0.13-l-wafer era. To develop a new wafer product, the required capital investments
are measured by ten more millions of US dollars. Establishing the capital- and
time-saving fabs become increasingly important to customers. Taking the cus-
tomers’ needs as its own responsibility, TSMC began to extend its manufacturing
business to the higher value-added service industry. The concept of “Virtual Wafer
Fabs” (VWF) was put forward, expecting to provide customers with high-quality
products at the fastest speed and lowest cost. VWF refer to those pure-play foun-
dries, which by restructuring the surrounding and downstream resources, provide a
full range of integrated semiconductor foundry services for the sake of high cus-
tomer satisfaction. After surfing VWF’s information platform, customers can access
to TSMC’s internal network and conduct real-time tracking of the production
schedule and defective rate of chips, thereby reducing the production costs and
shortening the time to market.1
VWF has two advantages. First, with regard to the customers, after the com-
mission of processing business to TSMC, they can still obtain sufficient information
about the complete manufacturing process, tracking the schedule of their orders and
production. Second, in terms of TSMC, the strategic alliance or cooperative
investment with clients can help share the investment risk and enjoy the economic
benefits mutually. TSMC has strived for the response time, confidentiality,
volume-production flexibility, packaging and testing services, intellectual property
rights, product technologies and technical information offering, so that customers
would feel so convenient that it seems VWF were their own.
Establishing a Wide Range of Strategic Alliances
TSMC announced in March 1997 that it would establish a strategic alliance with
Taiwan’s ASE Group, cooperating in areas such as marketing, R&D, production
and customer service. This was the collaboration between the world’s largest
dedicated wafer foundry and the world’s second largest provider of semiconductor
manufacturing services in packaging and test, putting the VWF concept into
practice. Such cooperation enabled the customers of both sides could enjoy the
overall service in IC manufacturing.
2.1.3.3 Transforming from Dedicated Foundry to Industrial Chain

Integration
In the face of the financial crisis, foundry leader TSMC was also hit hard from the
decrease of customer orders in 2008, resulting in a 34.0% decline in sales revenue
compared with the previous year. To get through the Crisis, TSMC deployed
retrenchment strategy to enhance cost control and reduce capital expenditure. But
that didn’t mean it would play down the layout of production and R&D. In fact, this
crisis was regarded as a good opportunity to widen the gap with opponents,
according to TSMC’s top management at that time, including Morris Chang, Lora
Ho (CFO and spokesman), Jason Chen (Senior Vice President of Worldwide Sales
and Marketing) and Rick Tsai (President and CEO). Thanks to their efforts, the
12-in. wafer fab has begun with volume production in 2009 with a monthly pro-
duction capacity of over 60,000 wafers. It would also undertake the R&D on 32-,
22-and 15-nm wafers, as a crucial sector of TSMC long-term strategy. Further,
TSMC has witnessed the enhancement of manufacturing layout in Fab 6 (located in
the Tainan Science Park) and the significant increase of production capacity in Fab
10 (located in Shanghai, China) after its acquition of secondhand equipment.
See Jiang Yizhi, TSMC “Virtual Fab”, Vision, February 2004 issue.
1
Since 2007 TSMC has transferred its focus from pure-play foundry to overall
operation. According to J. H. Tzeng, TSMC spokesman, the global semiconductor
industry has undergone a transition from high-speed growth to steady growth,
causing foundry companies to change from production-oriented to industrial chain
integration. Striving for the layout of segments around production-in these years,
TSMC has not only become competent in integrating the design, production and
service, but also reached the stage of formulating standards, very similar to the
primary IDM (integrated device manufacturer) model of Intel. Moreover, the
joining of Jason Chen, known as a master in “integrating Intel’s semiconductor
industry chain” responsible for chip design, foundry, packaging and test, was
generally considered as TSMC’s preparation in “transforming from a pure-play
semiconductor foundry to the integration of semiconductor industrial chain”.
Taiwan’s foundry companies have changed from the diligent and low-cost
producers to innovative manufacturers providing customers with intellectual and
diversified services. In contrast, the majority of OEM firms in mainland China,
simply specializing in processing materials, have been hit hard by the overseas
economic fluctuation and thus vulnerable to the crisis. With the increasing com-
petition globally, the industrial overcapacity has resulted in the intensified price
competition among OEM firms, some of which would even reduce price up to 50%
to retain customers. Consequently, it is crucial for those without independent brands
to transform from pure-play semiconductor foundry to dedicated and advanced
foundry, in which respect TSMC and UMC offers outstanding examples. Their
success in dedicated foundry can be0 attributed to their efforts in areas such as
self-developed technologies, excellent talents, services in fulfilling customers’
needs, systematic solutions, international pioneering quality, rapid response to
change and consistent innovative thinking. Therefore, only adapting to the dynamic
situations could OEM firms achieve survival and sustainable development in this
fiercely competitive industry.
2.2 The Realization of Transformation and Upgrading

by South Korean Companies Through Technological
Innovation—from Small Workshops
to Conglomerates
Over the past three decades of development, South Korea has transformed
from a traditional and poor agricultural country to a newly industrialized
country with dozens of large well-known international corporate groups,
commonly known as “chaebols”. It was in this period that it completed
the industrialization and urbanization that the Western developed countries
needed more than a century to achieve, creating a world-renowned economic

miracle commonly known as the “Miracle on the Han River”. Since the 1960s
and 1970s, the nation has witnessed a substantial and rapid growth in
chaebols and large and medium-sized enterprises, which played a significant
role in and contributed greatly to the domestic economy development.2
South Korea’s semiconductor and automotive industries have a pivotal
position in the international market. Korean enterprises met a great deal of
obstacles in the course of development, yet some of them survived the crises
and grew from mall workshops to giant international conglomerates, inte-
grating the production, trading, investment, management and human
resource. South Korea, once among the world’s poorest countries, had five
large corporate groups on the world’s Top 100-Consortium list in 1993,
namely, Samsung, Hyundai, Daewoo, LG and SK.3
To cope with the 2008 Financial Crisis, these business groups took positive
responsiveness, mainly by increasing investment and reforming operations.
Consequently, Samsung Group saw its market share of DRAM semiconductor
exceeding over 30% in the second quarter of 2008 and 35% in the fourth quarter. Its
top management was reported to have actively visited overseas market, inspecting
the underestimated technology and business and contemplating acquisitions. In
terms of LG Group, regardless the continued decline in LCD prices from June
2008, LG Display has newly set up the 8th and 7th generation of production line in
the of Paju factory and Gumi factory respectively. Siltron, another subsidiary of LG
specializing in wafer production, has increased production equipment and facilities
in Gumi Fab 3, thereby raising the annual production capacity of 12-in. wafers from
250,000 to 350,000. Hyundai Kia Motors, to achieve the 21.1% increase of sales
volume (4.85 million cars) and 14.6% increase of sales income (118 trillion won)
than 2007, has input 3.5 trillion won (up by 35.1% year on year) to technological
R&D, attaching great importance to quality improvement and high-class brand
creating. POSCO (Pohang Iron and Steel Co. Ltd) has increased the annual pro-
duction capacity in Pohang and Gwangyang Iron and Steel to about 10 million tons
in 2012 and invested substantially in iron ore minerals in Ukraine and Madagascar.
Lotte Group and Shinsegae have expanded the domestic and foreign department
stores and supermarket networks in 2008. Thanks to the above positive reactions,
“the Korean semiconductor industry became the first one to invest globally in the
2
Chen Xiao-xiao, Wang Chang-ping, South Korea's Enterprise Group's Characteristics and
Development Trends, International Trade Issues, 1998 No. 2.
3
Wang Hui, Yang Zirui editor, the World 100 Consortium List, China Economic Publishing
House.
2.2 The Realization of Transformation and Upgrading … 33
recession and those large enterprises would speed up their investment in this year,
regardless of the uncertainty of the world’s economy,” said Lee Seung-cheol, the
Managing Director of the Federation of Korean Industries (FKI).4
The rapid rise and growth of South Korea and its corporations gain great
attention from a number of economists and scholars, who observed and analyzed
the nation from their own specialized field and published their research works and
put forward their theories.5 Since China today is in the initial stage of industrial-
ization and urbanization, an environment similar to the Korean enterprises’ in the
1970s, Chinese companies could learn substantially from the upgrading path of
Korean enterprises, especially their growth process from small workshops to large
business groups.
2.2.1 Five Phrases of Korean Enterprises’ Transformation

and Upgrading
2.2.1.1 Import-Substitution Phrase (Before the 1960s)
\Before the 1960s, South Korea, a country that had just undergone the baptism of
three years of war, was considered one of the poorest countries in the world.
POSCO, a Korean enterprise on the Fortune 500 list nowadays, experienced loan
rejection by the World Bank which recognized it as a company with low practi-
cality.6 The severe shortage of resources, capital and technology due to the postwar
economic recession forced the government then to implement the import-
substitution strategy. It focused on the development of consumer goods industry
and accumulated substantial foreign currency by selling the U.S. aided commodi-
ties, thereby meeting the domestic consumption needs and thus stabilizing the
economy. This policy played an effective role in rejuvenating the economy at that
time.
2.2.1.2 Labor-Intensive Export-Oriented Phrase (During the 1960s)
The long-term import-oriented economic development with the reliance on the

imported raw materials for production has subsequently led to the country’s
unfavorable balance of payment deficit. The government then redirected the eco-
nomic development towards export-oriented mode, stimulating and nurturing the
4
See The Korean Journal, 2008-10-07.
5
Cui Songhu, Jin Fuzi, From Imitation to Innovation—A Study of Korea’s Technology Tracing
and Productivity, Evolution of Dade, 2008.
6
Zhu Naixin, the perspective of changing the mode of economic development—Taking the
transformation and upgrading of Korea as an example. Masses, 2008(6): 55–57.
industry with developing potential, in an effort to promote the country’s industri-

alization and urbanization process. Accordingly, the textile industry was given the
priority to develop during 1962–1971 and companies were encouraged to engage in
this low labor-cost industry for the exports of textile products. Such economic
development trend was captured acutely by some entrepreneurs who responded
positively to this national policy, contributing to the flourish of a number of textile
workshops in this stage.
2.2.1.3 Development Phrase of Capital-Intensive Heavy Chemical

Enterprises (During the 1970s)
Export-oriented industrial policy not only boosted the rapid development of the
Korean economy, but also brought rich capital accumulation for the Korean
enterprises. Nevertheless, the government no longer satisfied with the economic
growth brought by the textile-related light industry, but actively adjusted the
industrial policy and explicitly stated to develop the capital-intensive heavy
industry. The Heavy Chemical Industry Development Plan was issued in 1973 to
support the growth of those industries such as shipbuilding, steel, automobile,
electronics and petrochemicals, as a result of which the domestic urbanization
process started to speed up. The development of heavy chemical industry has
predominantly facilitated the sustained and rapid growth of Korean economy,
promoting the optimization of industrial structure and thus realizing the industrial
upgrading. The scale expansion of related industries has subsequently led to the
significant changes in market structure.
2.2.1.4 Development Phrase of Technology-Intensive Enterprises

(After the 1980s)
Since 1980s, in line with changes in the global economic and technological envi-
ronment and the rise of scientific and technological revolution, South Korea put
forward national strategy of advancing science and technology, revealing the nation
would focus on the development of technology-intensive industries since then.
Enterprises were encouraged to raise technological capability by increasing the
input in R&D. Subsequently, technological transformation and upgrading were
carried out in the traditional industries such as textile, cement, petrochemical, steel,
home appliances, automobiles and shipbuilding. Simultaneously, the government
attached great importance and provided financial support to the development of
high-tech industries including precision chemistry, precision instruments, comput-
ers and aerospace, stimulating large enterprises to carry out high-tech research. And
the government’s concern for the new industries involving the information, new
materials and bioengineering, and the enterprises’ positive innovation in technol-
ogy, both facilitated the subsequent growth of Korean conglomerates and
enterprises.
2.2.1.5 High-Tech Phrase (After the 1990s)
Having stood the test of 1997 Asian financial crisis, South Korean conglomerates
were aware of the enormous risks led by excessive diversification and expansion.
This forced them to “cut back” and carry out business restructuring, under the
direction the government, so as to response more flexibly to the rapid changes in the
global market. South Korean government, in accordance with the world’s infor-
mational tide, confirmed the industrial structure would develop towards high
technology. Not only would it take the chaebols as the major target of restructuring,
but it would also strengthen SMEs’ independent R&D and further cultivate their
innovation capability, offering positive supports and preferential treatment in areas
such as capital, tax, land and technical guidance. And thanks to the promotion of
the Industry-University- Research Institutions cooperation, a sound technological
innovation atmosphere came into being, greatly enhancing the technical compe-
tence of the domestic industry.7
2.2.2 The Leapfrogging Model of Technology Upgrading:

Introduction ! Imitation ! Improvement !
Innovation
The key in importing foreign technology is to absorb advanced technology and new
knowledge, on the basis of which companies carry out independent innovation and
subsequently step into the advanced technological stage, thereby leapfrogging some
stages of technological development. Such innovative pattern enables companies to
learn from the developed countries’ technological pioneers, particularly their
advanced technology experience, which would decrease or avoid unnecessary
twists and turns and help R&D input more targeted. This approach, having suc-
cessfully enabling Japan’s automobile industry and South Korea’s semiconductor
industry to realize their technological leapfrogging, is relatively cost- and
time-saving and thus apt to companies from developing countries.
The development of the Korean automobile industry began from the assembly of
imported parts by utilizing foreign technology (1962–1966) to localization of auto
parts by technological improvement (1967–1976). The large-scale localization
contributed to the substantial enhancement of manufacturing capability of Korean
automobile enterprises and the exploration of domestic market. Thanks to the initial
accumulation of capitals and technology, these enterprises increased investment
with a certain degree of independent development capacity (1977–1982). Since
then, Korean automobile enterprises, determined to develop the national-brand cars,
7
Xu Dongqing. 2007. Japan and Korea Industrial Structure Evolution and Experience:
Enlightenment to the Economic Development in Southern. World Economic and Political Forum,
6: 100–105.
have consistently improved the car appearance and functions and subsequently
stepped into the independent R&D phrase facilitated by the government. Hyundai
and Daewoo, as the typical representatives then, employed R&D personnel of 2000
and 500 respectively. Both of them spent 4% of their sales revenue to R&D in
1886, reaching the level of those automobile enterprises (3–5%) in the advanced
countries at that time.8 Such technological improvement enabled Korean automo-
bile enterprises to launch foreign direct investment and establish production bases
in Europe, America, Asia and Oceania, thereby establishing the overseas manu-
facturing system and global marketing network (Table 2.1).
Similar to the development path of automobile industry, the technology
upgrading of semiconductor industry also started from technology importing, then
imitation and improvement, and finally leapfrogging.9 As Table 2.2 shows, South
Korea, although four years later than the US and Japan in developing DRAM
(dynamic random-access memory), persistently ran after the technology pioneers
and launched the world’s first 256 Mb DRAM in 1994 by Samsung Electronics.
Such technological breakthrough could attribute to the high-speed and effective
imitation process based on the “reverse engineering” model, that is, by thoroughly
studying the internal structure and logic of some importing commodity so as to seek
out the possibility for further improvement and innovation.10 This imitation pro-
cess, quite similar to Japan in the technological development path, was criticized as
technology “stealing” from developed countries, which, however, played a sig-
nificant role in realizing the technological leapfrogging of Korean enterprises.
2.2.3 The Growth Process of Korean Enterprises from Small

Workshops to Large Groups
After several decades of leapfrogging development, a group of Korean enterprises

have grown from the original small workshops into large conglomerates, leading
the rapid development of domestic economy. Samsung Group, the largest South
Korean chaebol and the 6th highest global brand value, hosts a great number of
affiliates in the world which produce around a fifth of South Korea’s total exports.
Hyundai Motor Group, the largest vehicle manufacturer in South Korea and the 2nd
largest chaebol, has an output value accounting for about 20% of Korea’s GDP. LG
Group is the 3rd largest chaebol. YAKULT Group is among the world’s largest
producers of lactic acid bacteria. And Lotte Group is the largest food and distri-
bution company in South Korean.
8
Liu Xisong, Deng Lizhi, Li Guo. Japan, South Korea, the independent innovation of enterprises in
China, China’s revelation, Economic Aspect, 2006 the second period.
9
Chen Dezhi, Chen Xiangtang, South Korea semiconductor industry technology leap research,
Science and Technology Management Research, 2006 the second period.
10
Xu slightly, “Samsung rely on what goes beyond Sony”, Chinese and foreign management,
2004 the seventh period.
Table 2.1 Characteristics comparison of the IC Industry among the US, Japan and Taiwan.
Source Nomura Union Research Institute, quoted from Liu Changyong, 1993, “study on industrial
science and technology projects as the very transfer model”, the National Science Council special
program research report
Characteristics
US type • The establishment of semiconductor industry was led by the investment
enterprises whose advanced technology was mainly achieved by military
development
• They have established the highly efficient IC/CASE and other IC design
mechanisms, advantageous in the high value-added logic IC products
Japanese • The establishment of semiconductor industry was led by the conglomerates,
type laying the foundation for the industry through large governmental projects
• Conglomerates involved those sectors adopting IC and proficient in IC
applications. Due to the large size and abundant capital, the conglomerates
were able to carry out large-scale R&D and investment and thus
advantageous in the mass production of IC memory
Taiwanese • The establishment of semiconductor industry was led by the investment
type enterprises which obtained advanced technologies through international
strategic cooperation
• Enterprises were advantageous in the cost control and management
• Products were properly distributed in the IC memory, ASIC chip, foundry
service and other businesses; the entire industry was evenly developed and
stable
Table 2.2 Changes in technology gap of DRAM. Source Jin Linzhu. “From imitation to
innovation”. Beijing: Xinhua Publishing House, 1997: 175
64 Kb 256 Kb 1 Mb 4 Mb 16 Mb 64 Mb 256 Mb
Development 1979 1982 1985 Late Early Late 1992 Middle
time in US and 1987 1990 1994
Japan
Development 1983 1984 1986 Early Middle Late 1992 Early
time in Korea 1988 1990 1994
Technology 4 years 2 years 1 year 6 months 3 months Simultaneous In the
gap lead
2.2.3.1 Samsung Group: An Ever-Changing Conglomerate
Founded in 1938, Samsung Group grew from a small workshop-style company of

electronic assembly products into a world-renowned multinational conglomerate.
Currently, the group has more than 400 affiliated companies in over 80 countries
and diversifies into areas such as electronics, petrochemical, heavy industry,
shipbuilding and so on. Highly recognized in the Chinese market, Samsung has
ranked top among the most valuable consumer brands in China by the Peking
University Business Review. As the flagship company of the group, Samsung
Electronics’ total sales stood at US $216.7 billion and net profit US $28.9 billion in
2013, ranking 13th in the Fortune Global 500 list in 2014. Since its establishment in
1969, it determined to develop the home appliances and electronics products, two
of the greatest potential industries. The lack of key technologies in the initial stage,
however, forced it to explore the market by assembling 12-in. black-and-white
televisions and low-class DRAM for customers from the developed countries.
In line with the technology dismantling and learning from the assembling
products, Samsung Electronics gradually mastered the key technology of
black-and-white TV and thus developed an improved economical TV for the
domestic market, representing the corporation embarked on a technological path
from then on. The increasingly heavy investment in R&D enabled it to improve the
technical content of products and speed up the launch of high value-added elec-
tronic products so as to seize market opportunities, which contributed to Samsung’s
speedy and competitive advantages in its sustainable development. Thanks to the
success of the economical TV, Samsung Electronics continued with the develop-
ment of 14-in. color TV (in 1976), microwave (1979), home-video recorders
(1984), 1 Mb DRAM (1986) and portable video recording machine (1989). These
achievements were attributed to the annually heavy input in R&D input for the
development of new technology and new commodities such as mobile phones,
iPad, computer, processor and camera. Samsung also set up R&D centers at home
and abroad including one in Finland (in 2012) and another in Silicon Valley (in
2013). Samsung’s R&D input in 2014 reached about US $13.4 billion, accounting
for 6.4% of its total fiscal revenue.
As a consequence of the 1997 Asian financial crisis, South Korean enterprises
suffered a heavy blow and chaebols such as Samsung and Hyundai were confronted
with survival crisis. Until 1998, 7 out of 30 biggest enterprises (taking up 80% of
Korean economy) declared bankruptcy, including Kia Group (ranking the 7th
domestically), Halla Group (13th), Hanbo Group (14th) and Jinro Group (19th). In
the year 2000, Daewoo Group filed for bankruptcy protection and Hyundai Group
was forced to accept public funds for survival. Such giants suffered severely in that
financial crisis, as a result of which the decline of big enterprises gained great
attention. To people’s surprise, however, Samsung survived the crisis relatively
unharmed, compared to other major Korean companies and became even stronger
after the crisis. In 1999 when the crisis was over, statistics showed that the market
value of its total asset amounts to the sum of the other three conglomerates, namely,
Hyundai, LG and SK. Such achievement was attributed to the New Management
Movement led by Lee Kun-hee, the CEO of Samsung Group. This movement,
focusing on the “Changes” in the corporate culture, aimed at stimulating innovation
and independent decision-making of the management team and reducing bureau-
cracy. Lee strived to cultivate an atmosphere where ticklish staff can step forward to
break the rigid corporate regulations. He believed Samsung needs ticklish staff to
help the corporation compete with counterparts at home and abroad. Samsung
should nurture the initiative and creativity of employees and encourage the inde-
pendent decision-making of managers. Such change-oriented value revealed the
corporation, for the sake of breaking the rigid bureaucracy of hierarchy, set up a
New Samsung Culture characterized by the flattening of organization structure and
organizational creativity. As Lee pointed out, crisis gives the company a chance to
renovate, the only way for Samsung to survive. In his viewpoint, the challenge was
not the implementation of one-time change but a long-term reform, in pursuit of
quality rather than quantity. Lee brought up a vision that Samsung strives to be a
world-class conglomerate at the start of 21st century, which was achieved today.
Samsung, an ever-changing business group, has continuously met the challenging
changes so as to survive the crisis and even explore new opportunities. According to
the media reports, 2014 would be the most devastating time for Samsung due to the
dramatically decline of its market value, operating revenue, operating profit and
sales volume. Nevertheless, a strong recovery was shown in the past 3 months,
according to the financial report released in July 2015, despite of the 8% decrease of
total sales and 4.2% drop of operating income than the previous year.
2.2.3.2 SK Group: Following the Economic Growth Path of South

Korea
From 1970s on, the development of Korean economy has been predominated by the
conglomerates. Driven by the government, a number of small companies in related
industries joined together to form large enterprise groups so as to realize resources
integration and thus meet the challenges of international competition. Take SK
Group, which changed its name from Sunkyong Group in 1997, as an example.
Founded in 1953, it is one of the largest conglomerates (chaebol) in South Korea
and ranked 57th in the 2015 Fortune Global 500, with its large businesses involved
in energy and chemical, information and communication, international trade,
shipping and financial securities. Starting from Sunkyong Textile with merely 20
machines originally, it established Sunkyong Fibers Ltd. in July 1969 with Japanese
companies, starting to produce polyester fiber and export original yarn. This
facilitated the development of Korean fiber industry. In 1973, SK then established
Sunkyong Oil, forming a long-term operating strategy which integrated the petro-
chemical, refining and crude oil exploitation. In line with the gradual maturity of
vertical integration strategy, SK began to enter the newly telecommunication
business from the mid-1980s. SK Telecom, after becoming Korea Mobile
Telecommunication Service’s largest shareholder in 1994, launched the world’s
first CDMA (Code Division Multiple Access) commercial service in 1996 in
Incheon and Bucheon, two of Korean cities. This not only enabled SK itself to
become the domestically largest mobile communications operator, but laid a solid
foundation for the nation to become strong in telecommunication. Moreover, SK
Corporation, observing the great potential in the life science field, set up the first life
science research center as early as in 1989 and developed YKP1358, a new drug
candidate for schizophrenia, in 2003, with the goal of developing SK Chemicals
into one of the world’s leading biomedical enterprises,
Apart from its diversified business development mode to expand the business
scope, SK, from the early establishment of the affiliate in Los Angeles in 1976,
never stopped the pace of internationalization. Not only was the first Korean cor-
poration that set up a subsidiary in China, it hosts more than a hundred offices
Fig. 2.2 Total Revenue of

SK Group. Source SK Group
Official Website
worldwide including Europe, the Middle East, Asia, America and Africa.11 As an
international conglomerate nowadays with total revenue reaching 157 trillion won
in 2013 (see Fig. 2.2), its growth path was oriented towards diversification, inter-
nationalization, dedication and conglomeration, which represents the country’s
economic growth history. That is, it first engaged in textile industry and became a
polyester fiber manufacturer, then entered the energy and chemical industry by
establishing a refinery factory, and finally stepped into the telecommunication
industry after long-term preparations.12Such process was nearly the same as that of
the country’s economic development, pointed out by SK’s Chairman in 2002 in the
Republic of Korean-China Economic Symposium. In fact, before each leapfrogging
upgrading, SK had been well prepared and sought for the appropriate timing to
enter a new field.
The reasons that SK could obtain such remarkable achievement and rank among
the world’s Top-100 consortium attributes to not only the technologically
pioneering spirit and appropriate business strategy, but also the entrepreneurs’
long-term vision and pursuit of excellence towards sustainable development. Since
1976, SK has stuck to the study of corporate growth strategy in the long run and
established the development goal of becoming a world-class conglomerate. Its
continuous improvement of corporate culture has brought itself growth momentum
incessantly. It is also the first Korean corporation that expatriated employees to
countries such as China, Japan, US and Southeast Asia to carry out overseas circuit
training. These expatriates are expected to be trained as team leaders to guide SK to
embark on a sustainable path in the future.13
11
(see the official website of the Beijing Group http://www.sk.com.cn/).
12
(see http://www.people.com.cn/GB/jinji/222/7776/7782/20020327/695906.html).
13
(Hongjiang, to the world of Korean fresh Beijing Group, Chinese and foreign science and
technology policy and management, 1999 the sixth period).
2.2.3.3 Growth, Transformation and Upgrading of Conglomerates:

Government-Driven Corporate Restructuring
The majority of South Korean corporations have grown in accordance with the
changes in the governmental policies. Since the 1970s, the government issued the
Heavy Chemical Industry Development Plan, mapping out the high value-added
heavy chemical industry as the development direction. A series of preferential
treatments relevant to financing and exports were implemented in the fields such as
shipbuilding, steel, electronics and petrochemical, from which both SK Group and
LG Group benefited substantially. Then in the 1980s the government put forward
the policy of “developing a nation via science and technology”, shifting priority to
the development of technology-intensive industries from heavy chemical industry.
It is such governmental policy support that boosted semiconductor and telecom-
munication enterprises, represented by Samsung Electronics and SK Telecom
respectively. Korean companies recognized that technology was the key factor for
the development of enterprises, for which they spared no effort to invest in science
and technology. The number of institutes launched by South Korea Enterprises
soared from 47 by the early 1980s to nearly 4000 now, and the number of business
researchers rose from several thousands to nearly 40,000, and there were 45.1
researchers among every one thousand workers, which had reached the level of the
counterparts in Britain and France. The total investment in R&D of the enterprises
increased from about US $2.8 billion in 1989 to US $15 billion. Since the 1990s,
this index has exceeded that of the total investment in national research and
development, and it ranked first in the world, exceeding America, Japan and
Germany. Korea has formed technical support of enterprise development and
product competition, accelerating the transformation of scientific and technological
achievements to actual productivity, and improving the ability of enterprises to
digest and improve foreign technologies. As a result, the industry quickly got close
to the level of developed countries. At present, Korea has become one of the
world’s top ten producers and exporters of steel, automobile, shipbuilding, elec-
tronics, and semiconductor industries.14
Just as the high-speed expansion of Korean conglomerates is achieved with the
government support, their corporate restructuring is facilitated by the government.
After the 1997 Asian financial crisis, the government not only carried out a strong
rectification to the financial market, but conducted a drastic reform to the con-
glomerates, gaining remarkable results.
First of all, the government established the “5 Plus 3” Corporate Reform
Principles for chaebol groups, which, due to their sophisticated relationship with the
politicians in the past, was very difficult to launch structural adjustment. Hence, the
government enacted what is known as the “Five Principles of Corporate
14
(see http://www.zjsme.gov.cn/newzjsme/list3.asp?id=15079).
Governance”. These were the enhancement of management transparency,

strengthening owner-manager accountability, elimination of cross-debt guarantees
among chaebol affiliates, improvement of capital structures, and consolidation of
core business areas. Afterwards, the government pushed for even more extensive
reform through the “Three Additional Principles”, which consisted of improving
corporate governance of non-bank financial institutions, reducing circuitous equity
ownership and unfair transaction among affiliated companies, and preventing
irregular wealth succession among chaebols. Based on the “5 Plus 3” Corporate
Reform Principles, laws and regulations were passed to limit the expansion of
chaebol. At present, the vast majority of enterprises have introduced the
“Professional Managers” and “Outside Director” system, thereby improving
objectivity on their board of directors and the business transparency. Rather than
having the decision-makers be insiders, affiliates or family members, the chaebol
were expected to hold representation who reflected the interests of investors,
especially minority shareholders who gained a significant amount of rights. Thanks
to the government-led industrial restructuring, the majority of conglomerates wit-
nessed the relative centralization of their business scopes and the decline of
debt-to-equity ratios to below 200%, revealing an enhancement of their
risk-resisting capability.
Further, the myth that Korean conglomerates were “too big to fail” was dis-
pelled. Over the past years, financial institutions, directed by the Korean govern-
ment, carried out rectification by setting deadlines for a number of large enterprises,
adopting the division or auction approaches to those enterprises unlikely to
recovery. Subsidiaries of chaebol that were debt-laden or on the verge of bank-
ruptcy were instructed to be liquidated, sold or merged so that they were more
manageable. These reforms ensured the quick recovery and competitiveness
upgrading of the chaebol. By 1999, Daewoo, the second largest conglomerate in
South Korea with interests in about 100 countries, went bankrupt, with debts of
about 80 trillion won (US $84.3 billion). The group was reorganized and its 12
subsidiaries experienced divestiture, auction or bankruptcy, ringing the siren for
existing chaebol companies.
Since 1997, the financial crisis in South Korea was mostly raised by problems in
big companies. Therefore, restructuring is essential to the Big Five Groups:
Samsung, Hyundai, LG, SK and Daewoo. According to the “5 Plus 3” Corporate
Reform Principles, subsequently, the Big Five Groups made decisions of restruc-
turing to avoid excessive expansion in different industries. That is, a large enterprise
group can only get involved in three to five industries, and the rest of the business
should be carried out asset replacement, merger, sale or closure.
On October 7th, 1998, the five conglomerates reached an agreement on the
structural adjustment in the core sectors such as petrochemical, semiconductor and
aircraft manufacturing. In the petrochemical and aircraft manufacturing sector, a
single incorporated company was founded by these five conglomerates with the
same amount of shares. In the railway vehicle sector, three corporations (Hyundai,
Daewoo and Hanjin) were merged into two (Hyundai and Hanjin), where corporate
restructuring was carried out. In the semiconductor sector, the merge of LG and
Hyundai was evaluated by specialized business assessment agencies and the better
one would become the major shareholder with 70% of share. In the power gen-
eration equipment sector, Samsung’s power generation equipment was transferred
to Hanjung, which subsequently negotiated with Hyundai Heavy Industries on the
integration of the power equipment sector. Further, the marine engine sector of
Samsung Group was transferred to Hanjung. Hyundai Group would partly merge
the refining sector of the Hanwha Group. Such restructuring was designed to
eliminate serious duplication and excess investment, as a result of which large
corporations could concentrate on their core and advantageous sectors so as to
improve their competitiveness. After acquisition, the debt-to-equity ratios of
companies in petrochemical and aircraft manufacturing was reduced to below
300%, and railway vehicle sector below 200%. In addition, foreign investors were
permitted to become the major shareholders and business entities.
Urged by the government, large conglomerates developed their restructuring
schemes. From 1999, Hyundai Group carried out business spin-off, reducing the
number of companies from 83 to 31. In August 2000, to get rid of the disputes
caused by the family management rights, Chung Mong-koo, the second son of
Chung Ju-yung (founder of Hyundai Group), integrated 8 affiliated companies
related to vehicles into an independent corporation. The heavy industry department,
controlled by Chung Mong-joon, the sixth son of Chung Ju-yung, underwent
break-up from Hyundai Group in 2001. In line with the independence of Hyundai
Electronics, some financial enterprises (including Hyundai Securities, Hyundai
Trust and Hyundai Life) were sold by the Korean government in 2003 to Prudential
Financial, Inc., an American multinational insurance corporation.15
Among the five chaebols, although Daewoo finally failed to survive the crisis,
Samsung and Hyundai rejuvenated through restructuring, revealing several char-
acteristics about their future reform. First, substantial changes would be seen in
chaebols which would decrease the infinite expansion and downsize the business
structure, as a result of which the conglomerates might be transformed into inde-
pendent enterprise-unions formed by a number of firms with independent
accounting function. Second, the emergence of new corporations in such industries
as semiconductor and automotive through the business/asset replacement and
mergers could improve their international competitiveness and expand their prod-
ucts’ international market share. Third, the competition among enterprise groups
would transform from scale to quality, advancing the overall operating efficiency.
15
(see the International Financial Times, 2003-11-25).
Fourth, along with a gradual separation of ownership and management rights,

business operation was further improved and became more board-centered.16
2.3 Comparison of Enterprise Transformation

and Upgrading in Emerging Economies
2.3.1 Enterprise Transformation and Upgrading in Taiwan

and South Korea
It is the common goal of all emerging industrial countries (or regions) that helps
enterprises cultivate their self-innovation capability and promotes their upgrading
so as to catch up with those technology leaders in the developed countries. Their
upgrading path, however, is not likely to follow the pattern of those leaders which
command the cutting-edge technology. In fact, enterprises in emerging economies
have neither necessity nor possibility to engage in the development of original
technology. Although both Taiwan and South Korea are emerging economies, their
upgrading roads are not likely to be the same, due to the distinctions in the
development stage and market environment. Table 2.3 shows the comparison of
corporate transformation and upgrading between Taiwan and South Korea.
2.3.2 Enterprises Should Have the Right Positioning

in the Course of Their Transformation and Upgrading
Taiwan’s companies recognized their positions in the global value chain very early.
They first performed simple processing and manufacturing activities, then increased
input in R&D and integrated the global resources, and finally developed towards the
high-level dedicated foundry. Such upgrading, from the bottom of the “smiling
curve”, brings about more value-added for enterprises which have become the key part
of the global semiconductor industry chain. By comparison, South Korea’s enter-
prises, starting from scratch, achieved the technological leapfrog through the path of
technology importing ! imitation ! improvement ! innovation. Supported by
the government, these enterprises realized rapid expansion and developed into
globally-known corporate groups and chaebols. China, as one of the most dynamic
emerging economies nowadays, has a large domestic market and abundant human
(See “People’s Political Consultative Conference”, 1999-07-12).

16
2.3 Comparison of Enterprise Transformation and Upgrading in Emerging Economies 45
Table 2.3 Comparison of enterprise transformation and upgrading between Taiwan and South
Korea
Comparison Taiwan South Korea
Achievement of • The semiconductor industry obtained Achieved the “Miracle on the Han
transformation high value-added and achieved River” in three decades
and upgrading upgrading through high-level • A large number of small private
dedicated foundry workshops grew
• A number of self-brand enterprises into large international conglomerates
emerged in IT industry • The industries of automotive and
semiconductor
have strong international
competitiveness
Direction of Advanced foundry enterprises Large enterprise groups or chaebols
transformation
and upgrading
Phases of Semiconductor enterprises: Emerging Import substitution ! labor-intensive
transformation ! technology importing and spinoff export-oriented industry !
and upgrading ! technological improvement and capital-intensive heavy chemical
strategic alliance ! self R&D and industry ! technology-intensive
industry-university-research industry !
collaboration ! global resources advanced technology industry
restructuring and integration
Acquisition of Semiconductor enterprises: • The leapfrogging model of
competitiveness • high-level vertical disintegration; technology upgrading: importing !
• industrial clusters and industrial parks imitation ! improvement !
as innovation carriers; innovation;
• ITRI as technological innovation • Restructuring of large enterprise
source groups
Typical • Enterprises with self-brand: Giant Samsung Group, Hyundai Group, LG
corporations Global Group, Acer Inc., AsusTek Group,
Computer Inc.; SK Group, YAKULT Group, Hanjin
• Dedicated semiconductor foundry: Group,
TSMC, UMC Lotte Group
Role of • Establishing ITRI to support the In the early stages of development, the
government technology development of Taiwan’s government supported the merger of
enterprises; small businesses into large enterprise
• Focus on the development of key groups to cope with the international
industries with adequate support competition, and then advanced the
restructuring
of large enterprise groups to survive the
crisis
Entrepreneur- • Strong personal networks; Continuous innovation and changes
ship • Adaptive entrepreneurship in the
latecomer countries (or regions);
• A sense of mission that values the
island’s industrial development
resources. It should learn from the upgrading experiences of other countries

(or regions) and identify the right positioning in the process of upgrading and
exploring an appropriate and sustainable upgrading road for the domestic enterprises.
Chapter 3
Enterprise Case Analysis
Enterprise transformation and upgrading is not only the micro level of the industry
development, but also it is an ultimate foothold. This chapter aims to provide a
reference to other enterprises facing the confusion of transformation and upgrading
and selects six typical enterprises from different industries with different types.
After a number of respective field visits and research, the typical case analysis and
comparative case studies are combined together. What is more, the book deeply
analyses their upgrading path, model, influencing factors and so on.
3.1 Independent Innovation Path of Guangdong

Enterprises from OEM to ODM to OBM: Comparison
Between Donlim and Jasic
3.1.1 The OEM, ODM, OBM Status of Guangdong

Enterprises and Research on Their Transformation
and Upgrading
Since the 1980s, due to the gradual slowdown of economic development and rise of
domestic labor-costs, developed countries have changed their economic develop-
ment patterns, mainly by reinforcing their scientific and applied research. The
continuous technological innovation activities have not only maintained their
leading position in the science and technology, but helped transfer their core
business towards the downstream of industrial value chain, a new profit growth
point. Such downstream business not only consist of traditional product warranty,
after-sales service and system maintenance, but also a full range of value-added
production activities such as financing, leasing, consulting and training (Liu and Hu
2002). Simultaneously, foreign developed countries gradually shifted their manu-
facturing industries to developing countries which enjoyed low labor-costs and
https://doi.org/10.1007/978-981-13-1260-1_3
48 3 Enterprise Case Analysis
preferential industry-policy. The implementation of OEM production mode could

help developed countries protect their natural environment and reduce their pro-
duction costs, thus achieving sustainable economic development. In such a macro
environment, enterprises in East Asia, Eastern Europe, South America and other
emerging industrial countries successfully integrated into the outsourcing system of
the global value chain and thus shared the industrial profits. Leveraging their
comparative advantages in labor force and raw materials, these countries and
regions have developed OEM business vigorously and achieved rapid growth in
their economy. At present, OEM is very common in China. It is mainly concen-
trated in the industries with higher universalization and standardization, such as
clothing, home appliances, IT, toys, daily consumer goods, electronic communi-
cation. Comparatively, OEM production is most prominent in the home appliance
industry, in which 90% of enterprises have engaged in this business, according to
related statistics. Since OEM companies in Japan, South Korea and Taiwan grad-
ually achieve their transformation towards ODM and OBM, China has gradually
replaced these countries and regions as the most important OEM production base in
the world. During this period, a large number of well-developed domestic OEM
industries and enterprises have emerged (see Table 3.1).
As one of the first batch of the regions to implement the opening policy,
Guangdong actively developed the “three plus one” trading mix (“three” refers to
custom manufacturing with materials, designs and samples supplied by foreign
companies; and “one” refers to compensation trade), making full use of interna-
tional and domestic markets and resources. Therefore, it has achieved rapid eco-
nomic development. In 2007, the GDP of Guangdong exceeded 3.07 trillion yuan,
accounting for 12.4% of that in China (24.67 trillion yuan); and the total trade (sum
of imports and exports) of Guangdong was valued at $634.05 billion, accounting
for over 29.2% of that in China and ranking top domestically for 22 consecutive
years. In particular, the value of imports and exports of processing trade amounted
to $403.4 billion, an increase of 16.5% than the previous year, accounting for
63.6% of Guangdong’s total trade and 40.9% of China’s total imports and exports
of processing trade. However, we should be soberly aware that, although
Guangdong has developed into an export processing base, its economy was pre-
dominated by the lower value-added OEM business, which is less likely to drive the
industrial structure upgrading. In 2007, for example, Guangdong’s general trade
totaled $105.5 billion, accounting for 28.4% of the total exports. The export of
processing raw materials supplied by foreign companies was $528.3 billion and that
of processing raw materials imported from foreign companies was $193.34 billion,
totally accounting for 67% of the domestic exports.1 In 2006, the exports of
Guangdong’s high-tech products was $104.45 billion, among which 80.4% was
contributed by foreign-invested enterprises and the remaining 20% was by local
firms, reflecting the lower competitiveness of domestic companies in the global
1
According to the statistics in Guangdong Statistics Information Website (http://www.gdstats.gov.
cn).
3.1 Independent Innovation Path of Guangdong Enterprises … 49
Table 3.1 China’s well-developed OEM industries and representative enterprises

Representative Major OEM Representatives of brand
OEM products owners
enterprises
Traditional Galanz Microwave oven Delong (Italy), GE (US),
home Sanyo (Japan)
appliances Shenzhen DVD and related TCL, Kim Jung, Hisense
Kingstarit products
Skyworth, Color TV, Sanyo, Hitachi, Mitsubishi,
Konka, TCL multimedia NEC, Thomson
products
IT Shenzhen Laptop HP, Apple computer
manufacturing Foxconn
Taiwan Hon Hai PC and its IBM, Apple Computer, Sony
Precision components
Communication Eastcom, Mobile phones and Motorola, Philips, Alcatel
Inventec, TCL spare parts
Clothing and Guangdong Clothing CK, Nike, Boss, Polo, Jeans,
footwear Esquel Hugo
Taiwan Sports shoes Nike, Adidas, Reebok, Li
Pouchen Ning, Anta
(Dongguan
base)
Daily chemical Canton Dame Cosmetic Polo
products Kiss
NICE Washing products P&G (US), Henkel (German)
Small home Donlim Western-style small Philips, Kenwood, Morphy
appliances household Richard, Breville, Russell
appliances Hobbs
Source (1) www.21co.com.cn
(2) Chen Xuan. Discussion on the Development Strategy of OEM Enterprises in China. Dongbei
University of Finance and Economics. 2006
(3) Hu Yi. Decision Research on Enterprise Strategic Transformation Changsha University of
Science and Technology. 2007
industrial chain. Besides, key technologies and equipment such as CPU, integrated
circuits and general software mainly depended on imports and 70% of manufac-
turing industries still engaged in low-tech and traditional industries. Only a small
amount of high-tech products enjoyed independent intellectual property rights in
processing trade. For example, Whenever a Guangdong OEM company exported a
DVD valued at $39, $19.7 was paid to foreign companies as royalty fee and 70% of
cost went to the imports of key devices such as chips and decoders.2 These
2
Yunshi Mao. From OEM to ODM and then to OBM—processing enterprises realize transfor-
mation and upgrading. March 3rd, 2007. (http://www.nanfangdaily.com.cn)
enterprises, relying on orders from multinational companies, lacked strong R&D

capability and independent brands.
After nearly 3 decades of industrial development, the economic growth model of
Guangdong has resulted in a lot of problems. Firstly, the long-term extensive
economic growth model is at the price of cheap labor force, poor working condi-
tions, waste of abundant resources and energy, and environmental destroying.
Secondly, most of the export products are in the low-end of value chain. Many
industries and enterprises are less capable to develop key intellectual property
rights, self-innovation capability and self-brands, as a result of which they could
earn an extremely meager profits. Since the second half of 2007, a number of major
changes in the economic environment have brought about great pressure to
Guangdong’s industrial development, and the transformation and upgrading of its
enterprises.
3.1.2 Definition of OEM and Concepts Related to Its

OEM is the abbreviation of Original Equipment Manufacturing or Original

Equipment Manufacturer, the former of which stands for a method of production,
while the latter refers to the enterprises using this mode of production. Originated
from the western clothing industry in Europe and the United States mainly for
cost-reduction considerations, OEM is an outsourcing model. That is, an entrusted
manufacturer produces goods according to the designs, drawings and technical
equipment provided by its brand owners (entrusters) and then uses the brand name
or trademark designated by these brand owners on the manufactured goods, which
is accordingly known as “OEM production” or “foundry production” (Xu and Qu
2005). In the industrial society, for the sake of production-costs reduction and
transport convenience and so on, well-known brand owners would find other
manufacturers to produce some parts and components. These entrusted companies
were then referred to as OEMs (Original Equipment Manufacturers) and their
products were called OEM goods.
In China, OEM is often called “Tiepai” or translated into “Outsourcing
Production” by some scholars, which is regarded as an entrusted production and
processing relationship. In other words, brand owners, taking advantage of their
brand names, core technologies, creative designs and marketing channels, do not
carry out production directly but entrust to some professional OEM manufacturers,
and then market these products under their own brands.3
Generally speaking, OEM entrusters design their own products, then commis-
sion the production to other manufacturers, and eventually sell the products under
3
Zhang Yabin. OEM: An important way for Chinese companies to enter the international market.
International Economic Cooperation. 2000 (11). (in Chinese)
their own brands. These entrusters are advantageous in product designing and brand
marketing, but less favorable in manufacturing. Entrustees, instead, are less capable
in product designing and brand marketing, but comparatively advantageous in
controlling production cost and responding to market changes. It is such comple-
mentary needs that stimulate the emergence of OEM production model, as shown in
Fig. 3.1.
From this figure, we can discover that entrusters predominate during the coop-
erative relationship, because they master a large amount of information related to
market demand and thus can allocate the production orders to other entrustees.
Therefore, the influence of entrusters on entrustees is much larger than that of the
latter on the former. For this reason, in the figure the arrow from the entrusters to
the entrustees is a solid line, while that from the latter to the former is a dotted one.
Besides, since the entrusted enterprises carry out production based on the
requirements of orders, they are also responsible for the monitor of market
feedback.
ODM (Original Design Manufacturing) refers to a cooperative pattern, in which
many renowned companies (i.e. some Taiwan-funded electronic firms), for the sake
of time-saving in R&D, fully or partially leverage the product designs of other
manufacturers who manufacture products under the designated brands. These
Controlling Capability of Production Cost

Brand Popularity
Mass-Production Capability
R&D Capability
Rapid Market-Response Capability
Marketing Channels
Advantages in Procuring Raw Materials
Entruster Entrustee
Linked by products, both sides establish cooperative

relationship and carry out operational activities
according to their advantages.
Market
Feedbacks End-products manufactured by the entrustee are under
entruster’s brand
The entruster-branded products enter sales channels
Fig. 3.1 OEM business model

enterprises, responsible for both production and design, are also called ODM
manufacturers. Usually, brand owners simply put forward their own requirements,
but commission the designing and processing activities completely to ODM man-
ufacturers, who will design and develop products meeting requirements and then
deliver them to brand owners for the subsequent marketing. Consequently, brand
owners can decrease their input in developing new products, but concentrate their
energy and resources on the construction of brand and channels as well as market
development. Simultaneously, since ODM manufacturers not only cope with the
original production and assembly but carry out research and designing service, the
additional value of ODM products is higher than that of OEM ones. To realize this
purpose, an excellent ODM manufacturer must not only possess an industry-leading
scale to efficiently reducing manufacturing costs, but also strong R&D and
designing capability to continuously provide customers with new products meeting
market demands. Quanta Computer, a Taiwan-funded company, is a typical ODM
case. Nine of the global top-10 notebook manufacturers, including Dell and IBM,
depend on Quanta’s design and manufacturing. According to IDC data, in 2004 the
overall income of global ODM enterprises reached US $4.37 billion, 24% of which
was generated by Quanta, making it the biggest ODM manufacturer in the world.
OBM (Original Brand Manufacturing) means that manufacturers produce and
sell products under their own brands and often represents the other party relative to
OEM or ODM companies. OBM companies not only master core technologies or
leading R&D capability, but possess strong brands, market channels and
end-consumers, which contribute to their higher value-added products. With the
aim of setting up intermediate-product brands, OBM strategy enables companies to
conduct sustainable technology upgrading and product development, and launch
self-brands ultimately. A number of intermediate-product manufacturers in the IT
manufacturing industry have set up their own brands, such as Intel and AMD in
CPU, ASUS and Giga-Byte in main board, Hitachi and Samsung in hard disk, and
Kingston and Smart in internal storage, and even the cheapest accessory of PC, the
mouse is sold under brands. For example, though produced by OEM manufacturers,
Logitech optical mouse, has witnessed a rise in market price by more than ten times
once labeled with “Logitech”.
3.1.3 Transformation and Upgrading Models of OEM

Enterprises
3.1.3.1 Establishing an Operational Standard for Identifying

the Development Stages of OEM Enterprises
In view of the relevant literature at home and abroad, nowadays, it still lack an
operational standard to define the OEM, ODM and OBM stage of enterprises.
Existing research determined in general the development phases of enterprises
according to the original definition of OEM, ODM and OBM, which causes
ambiguity to researchers.
In order to better study the transformation and upgrading of OEM enterprises, it
is necessary to set up an operational standard in advance so that we can clearly
identify the development stages at a specific time in the process of transformation
and upgrading.
Most scholars agree the most direct index that can reflect the development stage
of an enterprise is the profit contribution rate (R) of these three businesses (OEM,
ODM and OBM) in an enterprise. For the convenience of description, we mark the
rate of each type of business as ROEM, RODM and ROBM respectively.
Generally speaking, ROEM + RODM + ROBM = 100%.
This book stipulates that, if the profit rate of OEM business is no less than 2/3
that is, ROEM 2/3, the enterprise is obviously in the OEM stage. Similarly, the
necessary and sufficient conditions for an enterprise to be apparently in the ODM or
OBM stage would be RODM 2/3 or ROBM 2/3 respectively (see in
Table 3.2).
However, the development of OEM enterprises at home and abroad also show
that their transformation and upgrading are not confined to a single path, but a
mixture of paths combining several modes as well. For example, when an OEM
company transform to ODM, it can also carry out OBM business or OEM diver-
sified development. Moreover, in the process of upgrading from OEM to ODM and
OBM, there are many transitional phases, in which mixed modes such as OEM/
Table 3.2 Operational standards for identifying OEM enterprises’ development stages
Phase of Annotation Conditions
OEM
firms
Phase led by a OEM OEM-leading phase 1 ROEM 2/3
single-mode ODM ODM-leading phase 1 RODM 2/3
OBM OBM-leading phase 1 ROBM 2/3
Phase Mixed OEM-leading 2/3 > ROEM 1/2
predominated by a (OEM*) mixed-phase
mixed-mode Mixed ODM-leading 2/3 > RODM 1/2
(ODM*) mixed-phase
Mixed OBM-leading 2/3 > ROBM 1/2
(OBM*) mixed-phase
Mixed OEM-predominating ROEM < 1/2 and
(OEM) mixed-phase ROEM > RODM and
ROEM > ROBM
Mixed ODM-predominating RODM < 1/2 and
(ODM) mixed-phase RODM > ROEM and
RODM > ROBM
Mixed OBM-predominating ROBM < 1/2 and
(OBM) mixed-phase ROBM > ROEM and
ROBM > RODM
ODM, OEM/OBM, or OEM/ODM/OBM may exist. And some companies may

adopt OEM, ODM and OBM simultaneously. These phases are defined as
mixed-mode phases in this book. By comparing the relative strengths of OEM,
ODM and OBM, we list nine major development stages and define the operational
standards to identify the stages of OEM enterprises (see Table 3.2).
Of course, the ratio of R&D input in sales revenue, the scale of staff engaged in
R&D and designs, and the ownership of self-brands are also important indicators
that can reflect the development stages of enterprises. Hence, these indicators will
also be adopted when determining the development stage of case enterprises.
3.1.3.2 Establishing Description Models for OEM Enterprises’

Obviously, with other conditions unchanged, the larger the ROBM is, the higher
level the enterprise’ stage is at. In terms of the single-mode predominant phases, the
highest degree is OBM, followed by ODM and OEM. With regard to the former
three mixed-mode phases, the highest degree is mixed (OBM*), followed by mixed
(ODM*) and mixed (OEM*). Regarding the latter three mixed-mode phases, the
highest degree is mixed (OBM), followed by mixed (ODM) and mixed (OEM).
However, if merely based on the conditions listed in the above table, we cannot
accurately rank the nine major stages of development by levels from high to low.
But provided that we further refine the conditions, it would greatly increase the
complexity of our studies.
Inspired by the advantages of the simple form and clear expression of geometry
in mathematics, the author strives to use such method to create a visual description
model for OEM companies’ transformation and upgrading so as to simplify the
analysis process.
According to the above division standards, the author has drawn the
“Description Model of OEM Enterprises’ Transformation and Upgrading”, as
shown in Fig. 3.2.
In accordance with the proportion of three production modes in different
development stages of OEM enterprises, we can demonstrate their development
track through the description model. For the convenience of analysis and expres-
sion, it only considers the starting point and terminal point of the enterprise. Thus,
this development track is a vector (for the convenience of presentation, hereinafter
referred to as the path vector). In this way, we can make use of the direction and the
slope of the vector to directly make an adverse judgment of whether the enterprise
has actually been transformed and upgraded, or whether it has attained the effect of
transformation and upgrading.
When judging whether an enterprise has actually undergone a transformation
and upgrading, we set the following criteria (see Fig. 3.3).
Combining the conditions in the Recession to a lower-level stage or failing to
achieve upgrading above table with the geometric properties of vectors, we can
(Contribution Rate of OEM Business)
Mixed
Mixed
Mixed
Mixed
(Contribution Rate of ODM Business)
Fig. 3.2 Description model of OEM enterprises’ transformation and upgrading
Fig. 3.3 Example of

transformation and upgrading
path of OEM enterprises
Sample Path
Mixed
Mixed
Mixed
Mixed
Mixed
obtain the judgment criteria that can be directly used for the description model, as
shown in Table 3.4.
By this way, we can utilize the description model to easily interpret the trans-
formation and upgrading path of OEM enterprises.
Table 3.3 Evaluation criteria for the transformation and upgrading effect of OEM enterprises
Transformation and upgrading effect Judgment criteria
Achieving upgrading effect ROBM "
ROBM ! and RODM "
Recession to a lower-level stage or failing to achieve upgrading ROBM #
ROBM ! and RODM #
The polygonal lines in Fig. 3.3 show the path illustration. We can find that the
specific evolution process of the illustration path, that is, OEM ! Mixed
(OEM*) ! Mixed (OEM) ! Mixed (OBM) ! Mixed (OBM*) ! OBM. If we
merely observe the starting point A and the terminal point F, due to the vector AF’s
slope K < −1 and the direction being oblique downward, we can find that the OEM
enterprise has attained the upgrading effect along the illustrating path, according to
the judgment criteria in Table 3.4. However, when we carefully look at the specific
path, it can be found that upgrading is not realized in every part of the illustrating
path. For example, vector BC meets the condition of 0 > K > −1 and its direction is
oblique downward, which means the enterprises suffer a recession or fail to achieve
the upgrading effect, according to Table 3.4. Therefore, although such enterprises
eventually realize transformation and upgrading, temporary regression, due to
various factors, may still happen in the entire transformation and upgrading process.
Besides, the specific evolution process of the illustrating path reveals a fact that,
during the upgrading road from OEM to ODM and to OBM, there are many
coexisting realities such as OEM/ODM, OEM/OBM and even OEM/ODM/OBM.
The above results are in line with our objective experience.
Thus, we can base the above analysis to give an operational definition for the
transformation and upgrading of OEM enterprises. That is, substantial changes
emerge in the production patterns of OEM enterprises, which, according to
Table 3.3, enables them to achieve upgrading effect (Table 3.4).
Table 3.4 Judgment criteria for description model of OEM enterprises’ transformation and
upgrading
Judgment criteria
K>0 K=0 0 > K > −1 K −1
Achieving upgrading effect Diagonal Left Diagonal Diagonal
downward upward downward
Recession to a lower-level stage or Diagonal Right Diagonal Diagonal
failing to achieve upgrading upward downward upward
Note K refers to slope
3.1.4 Case Enterprises: Donlim Kichen Group Co., Ltd.

and Jasic Technology Co., Ltd.
3.1.4.1 Reasons for Case Selection
In this chapter, we select Guangdong Donlim Kichen Group Co., Ltd. and
Shenzhen Jasic Technology Co., Ltd. for case study, from the large number of
Guangdong enterprises that successfully achieved transformation and upgrading
from OEM to ODM to OBM. The rationale for choosing them can be attributed to
the following reasons.
First of all, with regard to the corporate strength, Donlim is called the “Hidden
Champion” in the domestic small-appliance industry, and Jasic is the leading
enterprise in the domestic welding industry. Furthermore, Donlim was classified by
Guangdong Economic and Trade Commission as the typical case which turned
from “Made in Guangdong” to “Designed in Guangdong”. The two companies’
success in transformation and upgrading is very representative.
Secondly, regarding the industry nature, Donlim is labor-intensive and Jasic
technology-intensive. In terms of the scale, the sales revenue and staff of Donlim
was over 4 billion yuan and 20,000 employees in 2006, while that of Jasic was only
250 million yuan and 730 employees. In terms of the business location, Donlim is
located in Leliu Town (Shunde City) and aims at both domestic and foreign mar-
kets, though more emphasis was on the foreign market, while Jasic is located in
Bao’an District, (Shenzhen Municipality) and attaches almost equal importance to
both domestic and overseas markets. The comparative study of these two enter-
prises, which are different in the industry nature, enterprise scale and operational
location, makes the conclusions more general.
3.1.4.2 Data Source and Collection
The data collection methods used in this study are shown in Table 3.5.
Owing to various objective and subjective factors, the representatives on behalf
of the enterprises might have some subjective opinions in the process of data
Table 3.5 Data source and collection

First-hand • Several deep semi-structured interviews with managers of production, R&D
data and marketing departments of case companies
• Telephone interviews and e-mail surveys
• Internal documents provided by case enterprises, including publications and
annual summaries, and brochures of products and enterprises
Second-hand • Browsing websites of case enterprises
data • Searching university databases
• Reviewing statistical yearbooks
• Consulting relevant newspapers and magazines
collection. To avoid this problem, the author tried to use a variety of measures, such
as asking the respondents for facts and data in addition to the general information
offered and confirming the first-hand data and second-hand data by comparing them
with each other so that the collected material can reflect the real situation of the
research objects to the greatest extent.
3.1.5 Guangdong Donlim Kichen Group Co., Ltd.
Guangdong Donlim Kichen Group Co., Ltd. (hereinafter referred to as Donlim) was
founded in 1998 in Leliu Town, Shunde District, Foshan City, a production base of
small household appliances in China. The group has invested and held a controlling
interest in two core companies: Guangdong Xinbao Electrical Appliances Co., Ltd.
and Zhongshan Donlim Electric Power Co., Ltd., which specialize in producing
small appliances (i.e. electric kettles, coffeemakers, bread makers, microwave
ovens, toasters, electric irons) and large appliances (i.e. washing machines and
refrigerators) respectively. Over 95% of these products are exported to some
developed markets in Europe, US and Australia. Donlim is a well-known manu-
facturing enterprise in the kitchen appliances market in over 100 countries and
regions.
In recent years, Donlim has rapidly grown into one of the strongest 200 national
industrial companies. Guo Jiangang, Chairman of the group, was designated
“Outstanding Private Entrepreneur of 2002” by the government of Guangdong
province. In 2004, the group was identified by the ministry of information industry
as one of the Top 100 Enterprises. Its holding company, Guangdong Xinbao
Electrical Appliances Holdings Co., Ltd. (Xinbao) is China’s largest exporter of
electric kettles, coffee makers and mixers. Its global market share of the electric
kettle had ranked first for four consecutive years. From 2004 to 2006, its electric
iron and microwave oven products were awarded the “National Inspection-free
Qualification”, the electric kettle and steam iron won the honor of “Guangdong
Famous Brand Product” and the electric kettle was granted the title of “China
Famous Brand Product”. In 2005, Xinbao’s sales reached over 3.1 billion yuan and
thus became the “export champion” among domestic private enterprises. Besides,
the annual tax payment of over 100 million yuan made it one of the top 10
taxpayers in Shunde. It was also granted the green card of the procurement supplier
by the United Nations.
At present, Donlim has set up a relatively independent and complete sales
system including 4 sales regions, 18 provincial-level branches, over 300 customers
and more than 1000 terminal stores, an efficient and transparent financial operation
and management system supported by K3 software and the after-sales service
network has covered all sales areas nationwide. The company has more than 20,000
employees. More than 3000 of them are professional and technical personnel. And
the production site covers more than 400,000 m2.
The group owns excellent R&D capabilities, with more than 200 engineers, of
which nearly 100 people specializing in product development. It has a number of
advanced R&D institutions, including the engineering and technology development
center for electric and thermal home appliances with support from the provincial,
municipal and district governments, the innovation and design center which is the
executive director unit of Guangdong Industrial Design Association, the product
R&D center, the industrial innovation center, and national laboratories which was
accredited by UL, GS and other authoritative international certification companies
and laboratories.
“Developing based on OEM and growing based on self-brand” is the core
development strategy of Donlim. Thanks to the advantages in its brand, technology,
talents, capitals and management, Donlim has achieved its magnificent goal of
reaching 10 billion yuan of global sales within 5 years and realizing benign
expansion of its businesses and appreciation of its own brand.
3.1.6 Shenzhen Jasic Technology Co., Ltd.
Originated from Shenzhen’s Ruiling Power Source Technology Co., Ltd., Jasic
Technology Co., Ltd. was founded in 1993 and was successfully restructured into
Shenzhen Ruiling Electric Appliance Co., Ltd., which was renamed to Jasic
Technology Co., Ltd. (hereinafter referred to as Jasic) in July 2003.
Jasic was the first high-tech enterprise in China’s early development period that
combined independent R&D, production, and sales. Sticking to the principle of
“being founded on technology and growing through continuous innovation”, Jasic
has been committed to the R&D and production of the inverter welding machine,
reaching the internationally advanced level in technologies. Adopting unique
inverter technology, it substantially reduced the cost, size and weight of products in
China, and achieved satisfaction from numerous customers at home and abroad,
thanks to its excellent quality, lower price, elegant appearance and high-quality
service. Products are exported to Southeast Asia, Hong Kong, Macao, Taiwan,
Africa, Europe and America, Middle East and other countries and regions, showing
an optimistic market potential. The “JASIC” brand has become a symbol of stable
quality, outstanding performance and high performance-to-price ratio.
At present, the annual production capacity of Jasic has reached over 200,000
pieces and its sales volume has continually hit new highs. In 2007, Jasic saw its
sales income standing at 250 million yuan with an annual average sales growth rate
of 64%. The years of effort enable Jasic to set up a sound sales network at home and
abroad. Domestically, it has adopted the full-agent operational mode, including 5
branches, 10 offices, over 120 agents and 300 distributors. Internationally, it has
established good relationship with approximately 80 customers in more than 50
countries and regions.
Jasic, equipped with excellent R&D capability, has already constructed an R&D
team with strong technology, innovation, efficiency and experience, and two R&D
centers in Shenzhen and Taiyuan respectively. It has advanced production and

testing equipment, including several globally advanced automated production lines
that meet the EU ROHS lead-free environmental standards, as well as many
automatic plug-in lines and digital electronic detection systems. Besides, all the
products have passed ISO9001-2000 international certification of quality manage-
ment system and reached 3C, CE, ROHS standards. Its product ranges cover almost
all industries including shipbuilding, boilers, chemicals, petroleum, railways, con-
struction, electricity and steel. And it also involves dozens of new products in six
series, such as digital manual arc welding machine, digital full-function pulse argon
arc welding machine, digital pulse DC square wave argon arc welding machine,
digital MIG/CO2 welding machine, digital pulse MIG welder and inverter sub-
merged arc welding machine.
Currently, Jasic is becoming the leader in its industry for its unique business
strategies, sophisticated technology and stable quality. What Jasic’s staff always
pursuing and sparing no efforts to is “to achieve best quality, best performance and
highest performance-to-price ratio so as to create value for customers”. Thanks to
its continuous improvement in innovation and scientific management, Jasic is
making a large step towards the international top-brand in the welding industry.
3.1.7 Comparison of Basic Information
Table 3.6 shows the comparison between Donlim and Jasic in terms of basic
information.
3.1.8 Comparison of the Two Enterprises’ Transformation

and Upgrading Paths
3.1.8.1 Changes in OEM, ODM and OBM Because of Enterprise

Table 3.7 shows the changes in OEM, ODM and OBM in Donlim and Jasic in
recent years.
Based on Fig. 3.7, we can draw the OEM ! ODM ! OBM upgrading path of
Donlim and Jasic, as illustrated in Fig. 3.4 and Fig. 3.5 respectively.
As indicated in the above figures, the export sales of OEM products has pre-
dominated the total sales of Donlim. Since the company didn’t adopt OBM model
in the overseas markets, the total contribution of OBM business to the foreign and
domestic market is slightly lower. However, it operates OBM business in the
domestic market from the very beginning, which can be called as “Born OBM”.
Therefore, Donlim follows an “OEM ! ODM” path abroad but sticks to “Born
Table 3.6 Comparison between Donlim and Jasic. Source According to the author’s investigation
Donlim Jasic
Founding time 1998 1993
Company type Private Enterprise Foreign-owned Enterprise
Location Leliu Town, Shunde District, Bao’an District, Shenzhen
Foshan City, Guangdong City, Guangdong Province
Province
Industry Small household appliances Welding (Inverter welding
(Small household appliances in machine)
western style)
OEM/ODM/OBM • Operating OBM Business in • Operating OBM Business
business operation China in China
• Operating OEM and OBM • Operating OEM, ODM
simultaneously in foreign and OBM simultaneously
countries in foreign countries
Corporate Enterprise • Over 20,000 employees • Over 730 employees
strength scale • 400,000 m2 of workshop • 12,000 m2 of workshop
Sales Approximately 4 billion yuan of Over 0.51 billion yuan of
volume sales income in 2007 sales income in 2010
Awards of The export champion of small Leading company in the
enterprise household appliances among inverter welding machine
China’s private enterprises industry in China
Table 3.7 Changes in the Donlim Jasic

strength of OEM, ODM and
OEM (%) ODM OBM OEM ODM OBM
OBM of Donlim and Jasic.
Source According to the 1999 100 / / / / /
author’s investigation 2000 95 5% / / / /
2001 87 13% / / / /
2002 76 24% / 100% / /
2003 66 33% 1% 70% 20% 10%
2004 50 47% 3% 50% 30% 20%
2005 40 54% 6% 30% 28% 42%
2006 32 60% 8% 25% 25% 50%
2007 27 64% 9% 15% 15% 70%
2008 32 60% 8% 17% 17% 66%
2009 30 61% 9% 22% 15% 63%
2010 30 60% 10% 23% 15% 62%
2011 29 59% 12% 23% 17% 60%
2012 27 64% 10% 28% 7% 65%
2013 26 63% 11% 24% 9% 67%
2014 26 63% 11% 25% 9% 66%
Fig. 3.4 OEM-ODM-OBM upgrading path of Donlim
Fig. 3.5 OEM ! ODM ! OBM upgrading path of Jasic
OBM” at home. And when it comes to the whole market scope, it follows the
“OEM ! ODM ! OBM” path.
Similar to Donlim, Jasic was also a “Born OBM” company in domestic market.
Their difference lies in the overseas market, where Jasic carried out brand trans-
formation in 2007 and strategically replaced the original brand with its own brand
for its overseas products, which has achieved great success. Accordingly, its
upgrading path in overseas market is “OEM ! ODM ! OBM”.
3.1.8.2 Analysis of Donlim’s Transformation and Upgrading Paths
Firstly, according to Fig. 3.2, the transformation and upgrading path of Donlim can
be drawn in Fig. 3.6.
Fig. 3.6 Transformation and

upgrading path of Donlim.
Note (1998: 100, 0, 0) in the
figure means that the
proportion of Donlim’s OEM,
ODM and OBM in the total
business in 1998 is 100, 0 and
0%. (The same below) Transformation
and Upgrading
Route of Donlim
Mixed
Mixed
Mixed
Mixed
In Fig. 3.6, the dotted line is the specific trajectory of the transformation and
upgrading of Donlim, and the real line is the path vector, namely AI. We can clearly
see the specific evolution process of Donlim’s transformation and upgrading, that
is, OEM ! Mixed (OEM*) ! Mixed (OEM) ! Mixed (ODM*) ! ODM.
Regarding the path vector AG, we can see its slope is K < -1 and its direction is
oblique-downward, which indicates an effective upgrading, according to the
upgrading criteria in Table 3.3. If looking at the specific path, we can also find that
Donlim has been upgrading sustainably in its whole development process.
According to the description model in the previous section, we find that the most
advanced stage of Donlim is ODM, namely the ODM dominant stage. In other
words, Donlim has not achieved upgrading to OBM or reached any OBM domi-
nating stage. In fact,.it has not put much emphasis on moving to OBM. As a result,
the effect of upgrading to OBM is not obvious. In the figure, the slope of vector
AG’s absolute value is close to 1, which explains the situation. This is in line with
what we learned in the investigation process about the effect of the enterprise’s
transformation and upgrading from the management of Donlim.
In addition, the specific evolution process of Donlim’s transformation and
upgrading path indicates that there are transitional phases in which many mixed
modes such as OEM/ODM and OEM/ODM/OBM may exist in the process of
upgrading from OEM to ODM.
3.1.8.3 Analysis of Jasic’s Upgrading Path
Firstly, according to Fig. 3.2, the transformation and upgrading path of Jasic can be
drawn in Fig. 3.7.
In Fig. 3.7, the dotted line is the specific trajectory of the transformation and
upgrading of Jasic, and the real line is the path vector, namely AI. We can clearly
see the specific evolution process of Donlim’s transformation and upgrading, that
is, OEM ! Mixed (OEM*) ! Mixed (OEM) ! Mixed (OBM) ! Mixed
(OBM*) ! OBM. Regarding the path vector AG, we can see its slope is K < −1
and its direction is oblique-downward, which indicates an effective upgrading,
according to the upgrading criteria in Table 3.3. Moreover, the slope’s absolute
value of AF is very large, indicating the transformation effect of Jasic is extremely
outstanding. If looking at the specific path, we can also find that Jasic has been
upgrading sustainably in its whole development process.
In particular, Jasic achieved high-speed development in transformation and
upgrading from 2005 to 2007, which can be attributed to two key reasons. Firstly,
Jasic entered the domestic market with OBM in 2003 and gradually established a
comprehensive sales and service network in China in the next year. Subsequently,
the company witnessed brilliant achievements in the domestic market, as its pro-
portion of OBM business rapidly increased to 42% in 2005 and reached 50% in
2006. Secondly, Jasic carried out brand conversion in 2007 and systematically
replaced the original brand with its own brand for its overseas products, which
achieved remarkable success and drove its proportion of OBM business to 70%.
Fig. 3.7 Transforming and

upgrading path of Jasic
Transformation
and Upgrading
Route of Jasic
Mixed
Mixed
Mixed
Mixed
Additionally, the specific evolution process of Jasic’s transformation and

upgrading path also indicates that, during the upgrading process from OEM to
ODM and to OBM, there are a lot of transitional phases, in which may exist various
mixed-modes such as OEM/ODM, OEM/OBM or even OEM/ODM/OBM.
3.1.9 Comparison of the Factors Influencing the Two

Enterprises’ Transformation and Upgrading
3.1.9.1 The Background of Case Enterprises’ Transformation

and Upgrading
Cost Comparative Advantage Is Gradually Losing and OEM Profit Margins

Continues to Shrink
When talking about the economic factors that affect the transformation and
upgrading of enterprises, the views the respondents of the two companies expressed
are very similar. They considered the rising price of raw material, increasing labor
costs, tight energy supplies and the appreciation of RMB are the significant factors.
First of all, in domestic and foreign markets, the costs of crude oil, coal, elec-
tricity and other resources and raw materials keep rising. The negative impact on
the corporate profit margins is direct and obvious. According to this survey, in
recent years, the rise in raw material prices in Donlim and Jasic is about 20%.
Secondly, due to the economic development, the improvement of people’s living
standards and formal effect of the new “Labor Contract Law”, China’s labor costs
have been rising. It is reported that the average salary in Donlim has increased by
13% over the same period last year (excluding the increase in insurance costs), and
the salary in Jasic has gone up by about 15%. In addition, “recruitment difficulty”
has further increased the labor costs of enterprises. As the overseas sales manager in
Donlim Kitchen revealed that since 2007, the “recruitment difficulty” has preyed on
the company. Fortunately, in 2008, due to the withdrawal of some Taiwanese and
Korean companies from China, the labor shortage problem was partially resolved.
At the same time, the reduction on export tax rebate rate increases the burden on
enterprises, and further reduces their profit margins. Through in-depth research, it
can be learned that in 2007, export tax rebate rate of small household appliances
decreased from 17 to 13%, down by nearly 24%. But the overseas sales specialist of
Jasic said that in recent years, the export tax rebate rate of the welding machine has
not been reduced by the state. Therefore, the reduction of export tax rebate rate did
not have a substantial impact on Jasic.
In addition, pollution caused by excessive processing and production has
brought about the increase of environmental protection costs, which is nibbling the
profits of China’s OEM business.
Under the influence of rising raw material prices, increasing labor costs, tight
energy supply, appreciation of RMB, continuously declining export tax rebate rate
and rising environmental protection costs, Donlim and Jasic have suffered contin-
uous declines in profit margins. According to the representative of Donlim, the
profit margin of the group was only 5–6% in 2010.
Fierce Competition at Home and Abroad Forces OEM Companies to

Transform and Upgrade to OBM with Independent Intellectual Property
Rights
It is reported that small household appliance industry where Donlim lies is very
competitive. According to the statistics from the China Media Monitoring in 2006,
in the competitive small household appliances market, food cooking machine
market had a high-degree of brand concentration, hence market competition is
fierce. Three brands, namely, Joyoung, Philips and Xibele, accounted for about
60% of the market share, among which Joyoung accounted for 30% while Ouke,
Leeper, Haomami and Supor competed fiercely for the remaining 20%. In the juicer
products market, Philips ranked top with the accumulated retail sales volume of
22% in 2006,followed by Supor (9.3%), Joyong (7.0%) and Leeper (6.0%). In the
blender market, Philips and Leki were evenly matched and their share of retail sales
in 2006 was 24.1% and 22% respectively, followed by Joyoung (17%). These three
brands shared a total of 63.1% of market share. In soymilk products market,
Joyoung came out on top of the series of the product market with the retail share of
81.4%, attributed to advantages in capital, technology and local brand.
Compared with the small household appliance market, the competition in the
welding industry is relatively less intense, and the market concentration is not so
high. According to Pan Lei, Jasic’s General Manager, as the market share of the top
10 enterprises in the current domestic and foreign welding industry accounts for less
than 20% of the overall market share, market monopoly has not really formed.
Nevertheless, there are a large number of well-known strong enterprises in the
domestic welding industry, such as the United States Lincoln Electric Company,
Shanghai General Electric Welding Co. Ltd., Panasonic Welding Machine Company
and Beijing Times Group, and Hangzhou Kelda Welding Machine Co. Ltd.
Donlim and Jasic are unlikely to break out of such fierce competition by simply
carrying out OEM. Currently, independent intellectual property plays a critical role
in developing the core competitiveness in an industry. With the improvement and
perfection of the intellectual property protection system in the world, an authorized
patent spells a market niche, as a result of which controlling patents means con-
trolling the market. Without independent intellectual property rights, a firm will
only position at the purely OEM stage of low level, earning slender processing fees.
In contrast, enterprises originated from developed countries predominate both ends
of the value chain, which enables them to enjoy the vast majority of profits and
higher added-value thank to their core technologies and global brands.
Consequently, to outperform in such industrial competition and surpass advanced
enterprises, the only way for domestic OEM companies is to cultivate their own
core-technology and R&D capability through sustainable learning and innovation,
based on which to foster their independent global brands.
International Trade Friction Is Increasing, and Export Trade of OEM

Enterprises Suffers Multiple Barriers
In line with the increasingly strained international trade relations, European coun-
ties and the United States, for the sake of protecting their own interests, have
constantly restrain the exports of China’s products by the means of Anti-dumping,
Product-specific Safeguard Measure, Technical Barriers to Trade (TBT), Social
Accountability 8000 International Standard (SA 8000) and so on. As regards the
impact of anti-dumping on the small household appliance industry, we can take
Argentina as an example. Its Deputy State Secretariat for the trade management and
policy of the Economic Production Ministry announced to levy 59.35–69.26%
anti-dumping duties on China’s exports of microwave oven on a five-year basis
since 2007. Besides, a four-month minimum price control to the electric iron
originated from China was carried out since March 5th, 2008, that is, the FOB price
of dry iron and steam iron should not be lower than $3.92 and $5.53 per set
respectively. According to the vice-general manager of Jasic, what Jasic mainly
encountered in the international trade was technical barrier, while commercial
barriers mpact little on them. Usually taking environmental protection, safety,
health and social progress as excuses, developed countries leverage technical bar-
riers to weaken the low-cost competitiveness of Chinese enterprises, thereby
completing the transition from simple tariff barriers to sophisticated technical
barriers. To pass these technical barriers requires high testing fees, which greatly
slows the pace of Chinese enterprises to enter the overseas market.
The Profit Distribution Is Highly Unbalanced and Most of the Profits Go to

Brand Owners in Developed Countries
In terms of industrial division, OEM enterprises are dedicated in processing and

manufacturing, but less competent in independent R&D, core-component produc-
tion, market development and brand management, which lead to lower value-added
products. Besides, positioned at the bottom of global industrial value chain, these
OEM companies face great profit pressure and are squeezed heavily by entrusting
enterprises in the upstream and downstream, which results in narrow profit margin
and the least profit share in the international market. Take the electronic information
industry as an example. Of the overall profits, at least 60% go to American com-
panies (in upstream) that manufacture high value-added chips and software and
about 20% to Korean and Japanese enterprises (in middle-stream) that produce
computers and key components of electronic products, while the rest 10% leave to
Chinese companies that assemble and produce goods for the above foreign cus-
tomers and thus are at the bottom of the industrial chain.
In fact, “95% of profits go to transnational supermarkets, wherein some products
are sold ten times the price of their costs,” said Mr. Shen, head of the domestic
marketing department in Donlim. The vice-general manager of Jasic also said:
“Some products that price at $100 in China can climb up to $300 in India.” These
reveal that the vast majority of profits are swept away by brand purchasers, and the
remaining are left to the large number of OEM companies, indicating an extremely
unreasonable input-to-output ratio.
The Inherent Risks of OEM Production Are Increasingly Prominent and

Enterprises Urgently Need to Transform and Upgrade
The operational mechanism of OEM production mode is doom to have many

inevitable risks.
Above all, constrained by the OEM production mode, a large number of
domestic entrusted companies could only carry out production relying on those
orders assigned by a handful of large purchasers. Once the buyers stop cooperation,
these OEM companies are most likely to encounter bankruptcy crisis. According to
the “investment portfolio” view of Markowitz, one of the important principles in
finance is that “do not put all your eggs in one basket” so as to spread the
investment risk (Zhu and Qiu 2002). For instance, years ago Taiwan Giant Group
was almost bankrupt due to the heavy reliance on simply one US bicycle
brand-owner, whose orders accounted for 75% of Giant’s total output. Once
problems emerge in the sales channels, OEM enterprise will completely collapse.
Scholars believed that an OEM enterprise must be vigilant if over 20% of its output
goes to a single purchaser. Otherwise, it could only bear the oppression from this
buyer, for the sake of survival. In brief, OEM enterprises are inherently passive in
the trading process.
Moreover, merely engaging in production activity, the lowest value-added end
in the production chain, OEM enterprises are difficult to raise their profitability. The
meager profits, accordingly, are difficult to afford them to stand at the drastic
fluctuations of raw material prices and the impact of sharp market changes. As a
result, this immensely increases the operational risks of OEM enterprises.
Thirdly, the OEM production mode itself consists of inevitable financial and
legal risks. Under the OEM mode, outsourcing companies control the brands and
distribution channels, while OEM enterprises can only conduct production.
However, their technologies are imported from overseas and their products are
exported to foreign market through buyers. Such profit mode, which simply aims at
economies of scale, is unsafe and would increase the risk of OEM enterprise. And
the will be the first to bear the brunt, once the turbulence arises internationally. For
example, the 1997 Asian financial crisis seriously affected the regular production of
a large number of OEM enterprises.
3.1.9.2 The Motivation of Case Enterprises’ Transformation

and Upgrading
Entrepreneurship and Brand Awareness Are the Main Driving Forces for
Enterprise Transformation and Upgrading
The innovative, proactive, passionate and perseverant entrepreneurship can accel-

erate the transformation and upgrading process of OEM firms. Besides, the brand
awareness of entrepreneurs also plays an important role during such process.
Influenced by the entrepreneurship and strong brand awareness of Chairman
Guo Jiangang, since the establishment of Donlim, it has been determined to be the
“high quality of life supplier”. Being aware of the importance of brand building, the
company quickly formulated a development strategy of “developing through OEM
and taking off by branding” and set the ambitious target of attaining a global selling
scale of 10 billion yuan within 5 years and benignly expanding the industry and
boosting the brand value. Committed to the pursuit of innovation and excellence,
Dolim has been making giant efforts to become the top brand of the domestic
electrical appliance sector.
In the process of the rapid development of Jasic, general manager Pan Lei has
played a very important role. This is because Pan always has excellent leadership
and rich marketing experience in the welding industry. On the other hand, it’s
because he has the courage to innovate, the entrepreneurial spirits of being
proactive, passionate and persevering, the strong sense of responsibility towards his
country and staff and the strong awareness of intellectual property rights protection
and brand. Under the leadership of General Manager Pan, since the inception, Jasic
has adhered to the business principles of “technological foundation and continuous
innovation”. Thanks to the years of development and accumulation, the company
has cultivated a strong corporate culture which advocates “people orientation,
pragmaticism and efficiency, learning and innovation, and creating an open,
democratic, harmonious corporate atmosphere”. At the same time, from the inter-
view with Mr. Pan, the author knew that Jasic was almost acquired by Lincoln
Electric, an American multinational and a global manufacturer of welding products
and equipment. After nearly six months’ negotiations, the purchasing price was so
high that Jasic was unlikely to earn within the next decade. Facing such tempting
conditions, many shareholders expressed their consent while Pan, as the top leader,
clearly understood what would be the result after the acquisition. As a result, he
tried his utmost to turn around the situation and attain the support from shareholders
and board of directors, leading the company to embark on the self- innovation road.
Frankly speaking, without the insistence of general manager Pan, China would lose
an excellent national brand, and Jasic’s partners (mainly agents) and employees
may fall into difficulty. Besides, Pan has attached great importance to the protection
of intellectual property rights and the establishment of self-brand. Until 2010, Jasic
has successfully registered its trademark “JASIC” in over 28 countries and regions
and would register its own patents overseas. In addition, Pan also has the precious
spirit of continuous learning.
Looking back on the development processes of Donlim and Jasic, we can find
that entrepreneurship and brand awareness have actually played a critical role since
the corporate establishment to the success of transformation. The sustainable
high-speed growth of both companies can be attributed to the innovative, proactive,
passionate and perseverant entrepreneurship, strong sense of responsibility for the
nation and employees, and strong awareness in protecting intellectual property and
establishing self-brand.
Acquisition of Key Resources Laid the Foundation for Enterprises’

Capital Accumulation
When carrying out transformation and upgrading, no matter what strategy and path
do OEM enterprises adopt, they must base on the corresponding economic strength.
Despite the larger potential profitability of ODM model, both the R&D and
designing cost and risk are extremely high. Similarly, implementing OBM business
requires a huge sum of cost for market development and brand construction. Only
those financially strong enough enterprises can afford to the transformation and
upgrading sustainably.
To study the influence of capital accumulation on the transformation and
upgrading of OEM enterprises, we can analyze the sales income, profit scale and
financing ability (e.g. attracting foreign capital and listing in the stock market).
From the data in Table 3.8, we can see that in this study, the two companies
which have successfully achieved transformation and upgrading boast good
financial resources. With abundant capital accumulation, Donlim and Jasic made
massive investments in R&D, design, promotion and so on, which has enhanced the
level of technological innovation, promoted the brand image of corporate product,
and ultimately achieved transformation and upgrading.
It is worth mentioning that, from the perspective of absolute value, Donlim has
outperformed than Jasic in sales revenue and profit scale. However, the size of the
welding industry is comparatively smaller than that of the small home appliance
industry. For example, in 2007, the sales income of Donlim and Jasic was 4 billion
yuan and 250 million yuan respectively. Although simply accounting for only
6.25% of Donlim’s sales income, Jasic was much larger than other domestic
counterparts. It is known that the 50-million sales income is a threshold for the
manufacturing enterprises in the welding industry, wherein most welding-machine
manufacturers still hovered around 20–30 million and very few could reach 50
million. Therefore, when observing the capital and resource situations of OEM
enterprises, we should take into account the industrial nature as well.
Table 3.8 Capital accumulation of Donlim and Jasic

Donlim Jasic
Sales In 2006, the total sales revenue In 2007, the total sales revenue
exceeded 4 billion yuan, increased by exceeded 250 million yuan, increased
25% than the previous year. Its by 69% than the previous year and
average growth rate in recent years is ranking the fifth domestically. Its
more than 30% average growth rate in recent years is
64%
Profit The average profit margin of the The average profit margin of entire
level entire industry is about 15% the industry is 10.73%
Financing In the early period, it was mainly run In the early period, it was mainly run
capacity on its own funds. Its affiliate, on its own funds. But it introduced the
Guangdong Xinbao Electrical China Merchants Technology Group
Appliances Co., Ltd., was listed in and other strategic investments into
China’s stock market in 2014 the company in 2007. It was listed in
China’s stock market in 2011
Human Resources
The transformation and upgrading of OEM enterprises have high requirements for
the quantity and quality of human resources. For example, OEM requires a lot of
technicians and skilled labors, ODM requires large numbers of professional and
experienced R&D personnel and designers, and OBM need many marketing and
planning talents who are professional and proficient in market. A lot of studies
found that during the period of transformation and upgrading, almost all OEM
enterprises are suffered from talent shortages, especially those senior managerial
talents who can lead the enterprises to continue with development in new areas.
They ensure OEM enterprises that have realized upgrades to accomplish their
strategic planning and maintain their competitiveness.
Donlim is quite clear that talented people are important to innovation. Thanks to
great attention and financial investment from the top management as well as the
support of the whole staff, Donlim College, a training and management institute
belonged to all Donlim employees, was set up in 2004. It has now become a
training and teaching place and internship base of some universities. Apart from
taking advantage of the corporate resources, Donlim College not only rationally
introduces external talents, courses and advanced operational systems to improve its
internal management, but also cooperates with external training institutions.
Consequently, a training and education system with Donlim characteristics came
into being, which has fostered a large amount of technical and management per-
sonnel with strong practical skills for the company and community. In addition, the
cooperation with Sun Yat-sen University and Jilin University enabled Donlim to
launch MBA on-job seminars and MEM (Master of Engineering Management)
seminars, and set up a variety of talent pipelines including “talent echelon con-
struction”, “qualification identification”, and “internal training supplemented by
external recruitment”. These efforts have cultivated a number of high-level
technical and managerial talents for Donlim. Until 2009, the company hosted over
20,000 employees, including about 2,000 professional technicians.
Currently, although Jasic still lags behind Donlim in terms of the input intensity
and effects of personnel training, it has attached great importance to the introduction
of external talents, especially those management and technical personnel.
According to the author’s research, Jasic has introduced more than 10 senior
engineers, who had years of experience in developing welding machines, to
specifically participate in the R&D and design of products. Besides, it not only
recruited two professors as the company’s financial counselors, but paid higher
salary to hire a senior professional with 8 years of research experience in Beijing
Times Group to handle Jasic’s R&D work. To help product R&D meet the market
demands better, Jasic has introduced a handful of senior technicians from ship-
building and other industries to participate in the development of new products. In
addition, Jasic has set up business schools in the company, which can provide a
systematic and pertinent training system so as to improve the overall quality of
employees. Until year 2009, Jasic hosted 730 employees, of which 7% are man-
agers, 8% are R&D personnel, 12% are marketing staff, and 8% are technical
engineers. In other words, of the total employees, around 35% (over 250 people)
engage in professional technical work.
The Growth of Key Capabilities Will Promote the Transformation and

Upgrading Process of Enterprises
Independent Innovation Capability

Enhancing OEM enterprises’ self-innovation capability is of great significance to
thee optimization and upgrading of traditional manufacturing industry. Judging
from the new-round global economic restructuring, we can find that if one company
grasps the core technologies in the leading and strategic industries, it will capture
the competitive advantages and predominate in the higher end of industrial chain,
thus obtaining excessive profits. Otherwise, it will only stay in the lower end of
industrial chain, serving as the “assembly workshop” or “processing base” of other
companies and earning poor processing fees. Therefore, from the viewpoint of
China, we must vigorously reinforce the self-innovation capability of OEM
enterprises, for the sake of speeding up the adjustment of industrial structure and
raising the status of traditional manufacturing industry in the international
labor-division.
With regard to the enterprises themselves, enhancing the self-innovation capa-
bility can change OEM enterprises from heavily relying on the large input of
production factors such as capital, labor, energy, resources, thereby realizing the
transformation of production mode from factor-driven to innovation-driven. This is
in accordance with the survival and growing requirement of OEM enterprises. In
addition, raising self-innovation capability is urgent for these companies to
effectively avoid many risks resulted from OEM model and to enhance their
international competitiveness.
The self-innovation capability is a key factor in determining whether OEM
companies can successfully achieve transformation and upgrading. During the
development from OEM to ODM and then to OBM, it is critical for companies to
continuously carry out technological innovation and thus consistently upgrade their
products and techniques, thereby achieving ODM technologically and eventually
transforming to OBM enterprises. Therefore, the improvement of independent
innovation capability is not only important in driving enterprises to transform from
OEM to ODM and then to OBM, but also among the most direct ways in reflecting
their upgrades.
Based on the comparison and analysis of typical case enterprises, such as Acer
Computer, Samsung, Galanz, Mao and Dai (2006) summarized the characteristics
of innovation in OEM, ODM and OBM and other developing phases (see Fig. 3.8).
All these can vividly reflect the close connection between technical innovation and
developing phases of OEM enterprises.
In this case, the analysis of innovation capability of case enterprises mainly
focuses on the following aspects, including the achievements of independent
innovations, the managerial capability to innovations, the input of science and
technology, the R&D institutions and personnel, and the development of
industry-university-research.
ODM (independent design) or

ODM (product concepts comes from Buyers)
OBM → Innovations on Proprietary Technology
Microwave-oven business of Samsung Group
Product
Hewlett-Packard Company (Singapore) after 1980

before 1990
ZTE Corporation after 1993
Acer Inc.in the late 1980s
Guangdong Galanz Group Co., Ltd.after 1997
Guangdong Galanz Group Co., Ltd. during
Admiral Oversea Corporation (AOC) after 2004
1995-1997
Guangdong Donlim Kichen Group Co., Ltd. after
Hewlett-Packard Company (Singapore) in 1977
2004
OEM Deepening of OEM → Innovations on Techniques
Microwave-oven business of Samsung Group

Technology
before1980
Hewlett-Packard (Singapore) in 1970 Taiwan Semiconductor Manufacturing Company
Guangdong Galanz Group before 1995 (TSMC) in 1990s
Guangdong Donlim Kichen Group Co., Ltd. United Microelectronics Corporation (UMC) in the
during 1988-2004 late 1980s
Zhongxing Semiconductor Co., Ltd in 1985 Reliance Petrochemical Co., Ltd.
Top Victory Electronics (Fujian) Co., Ltd. Ispat Steel (India) Co., Ltd.
Non-Proprietary Technology Proprietary Technology
Fig. 3.8 Innovative characteristics of typical enterprises at different phases. Source The frame-
work of this diagram refers to the coordinate system technology-product-proprietary technology,
which was proposed by Nashid Forbes (2001)
As it shown in Table 3.9, these two companies have cultivated strong

self-innovation capability. Indeed, it is the continuous innovation in R&D and
design and consistent enhancement in technical content and brand image that enable
Table 3.9 Independent innovation capability of Donlim and Jasic

Donlim Jasic
Achievements of The company developed over The average number of products
self-innovation 200 new products annually, developed and put into the
which has exceeded 1000 kinds market reaches 5–10 every year
since its foundation. and now it has more than 20
A standardized management kinds of domestic patents. In
system for intellectual property October 2006, it was appraised
rights has been set up, with 4 as Shenzhen High-tech
invention patents, 8 international Enterprise by Shenzhen
patents and over 500 domestic Municipal Government. From
patents. It took on many national 2006 to May 2007, Jasic became
and provincial technical projects, a member of National Welding
including the Development of Standardization Technical
Thermal Insulation Protection Committee, China Electrical
Device, one of the National Equipment Industry Association,
Torch Programs. The company and China Welding Branch,
has been selected as one of the respectively. Meanwhile,
typical cases of transforming Ruiling Star welding machine
from “Made in Guangdong” to has become a general standard of
“Designed in Guangdong”. In the domestic V-MOS Pipe
2007, it became the leader of welding machine and civil
setting the national standards welding machine
about the “Performance
Requirements and Test Methods
of Electric Kettle”
Innovation management A standardized intellectual In the early stage, the company
capability property management system did not pay much attention to the
was set up, leading to a protection of intellectual
high-degree industrialization of property rights and trademarks,
scientific research and resulting that the “Ruiling”
innovation achievements. To brand was counterfeited by some
encourage innovation, a variety illegal manufacturers, and the
of incentives have been brand image was severely
established, such as quarterly damaged
selection of technological The current situation has been
innovation and rewards to greatly improved. The comapny
reasonable suggestions has attached great importance to
the protection of intellectual
property rights and the
establishment of self-brand.
Until 2010, Jasic has
successfully registered its
trademark “JASIC” in over 28
countries and regions and would
register its own patents overseas
(continued)
Table 3.9 (continued)

Donlim Jasic
R&D input Each year substantial funds The investment in R&D is
would be input to the mainly shown in project fees.
technological innovation and Each year the company would
development. The percentage of develop different R&D projects,
enterprise’s R&D expenses according to the market demand,
account for sales revenue also with the cost from 50,000 to
rose from 2.91% in 2000 to 100,000 yuan
5.18% in 2005, an increase of 16
times, reaching 170 million yuan
in 2005
R&D institutes and personnel (1) The enterprise has a number (1) Currently it owns two main
of advanced R&D institutions, R&D institutions, one of which
including three-level (provincial, is in Shenzhen and the other is in
municipal and district) Taiyuan city
engineering technology R&D (2) The company hosts more
centers for electrothermal and than 730 employees, 16% of
dynamoelectric small household which engage in R&D and
appliances, Innovative Design design (116 people). With high
Center, Product R&D Center, salary, Jasic has introduced more
Industrial Innovation Center as than 10 senior engineers, who
well as the national laboratory had years of experience in
which was authorized by the UL, developing welding machines,
GS and other authoritative and set up four project teams to
international certification carry out R&D work
companies and laboratories simultaneously. To help product
(2) The group has more than 200 R&D meet the market demands
engineers, accounting for 1% of better, Jasic has introduced a
the whole staff, of which nearly handful of senior technicians
100 are specialized in product from shipbuilding and other
R&D industries
Industry-University-Research In 2006, a postdoctoral Up to now, a number of
activities programme was established to technical cooperation projects
build an innovative have been carried out with
Industry-University-Research universities such as Tsinghua
platform. Several technical University and South China
cooperation projects were also Institute of Technology, and the
carried out with universities such relevant supporting enterprises at
as Jilin University and HeFei home and aboard
University of Technology
Donlim and Jasic to get round the brutal cost and price competition, and thus realize
the gradual achievement of transformation and upgrading from OEM to ODM and
then to OBM. It corresponds to the opinions expressed by Donlim’s representatives
during our investigation.
Manufacturing Capability
Manufacturing capability is the comparative advantage that OEM enterprises rely
on for survival. The outstanding manufacturing capability could help OEM com-
panies to gain more orders, facilitating their OEM business and laying a solid
financial foundation for their transformation and upgrading. Moreover, during the
process of enterprise transformation and upgrading, brand building is a long and
costly process and OBM business is less likely to make profits from the beginning.
As a result, enterprises should retain a certain proportion of OEM business, the
profit of which could support the subsequent development of OBM business and
promote the process of transformation and upgrading.
According to our survey, Donlim hosts over 20,000 employees and more than
400,000 m2 of production area, and Jasic has over 730 employees and more than
12,000 m2 of production area. According to their output value as shown in
Table 3.9, both two companies have a considerable scale of manufacturing capa-
bility. Although the output value of Jasic is less than 300 million, its scale was still
larger than its domestic peers.
In the research, the OEM business of both two enterprises still takes up a certain
proportion (e.g. Donlim is 25% and Jasic is 15%) and the absolute sales volume has
been increasing, revealing that OEM business is still one of the important sources of
their operational revenue. Thanks to its enhance of manufacturing capacity, Donlim
has witnessed the increasingly large share of its OEM products in the overseas
market. This not only enables Donlim to powerful bargaining power in the nego-
tiation with foreign brand purchasers, but ensures it to receive sufficient revenue to
support its subsequent implementation of higher value-added business (e.g. ODM
and OBM). This is in accordance with our previous analysis. As for Jasic, its
brilliant performance on OEM business over the past years has not only realized its
capital accumulation, but also created good reputation for its product quality. On
this basis, its brand switch, a task officially starting in 2007, has received notable
effects and its proportion of OEM business of the whole company has quickly
reduced to nearly 15%.
Therefore, the excellent manufacturing capacity not only benefits the expansion
of OEM business, but drive OEM enterprises to transform and upgrade towards
ODM and OBM.
Marketing Service Capability

Enterprise marketing service capability refers to the capability of an enterprise to
meet the market demand, to actively guide the consumption and to create com-
petitive advantage so as to achieve its business objectives. It is a comprehensive
embodiment of the decision-making ability, adaptability, competitiveness and sales
ability of an enterprise. It is the strength of marketing ability that determines the
size of business achievement of an enterprise and the key to its success. It is also
important to the transformation and upgrading of OEM enterprises, especially in the
transition to OBM. The process from OEM to OBM is actually a process of
enterprises transforming from production-oriented to brand marketing-oriented. The

key to success is whether enterprises can quickly develop and establish marketing
capabilities necessary for market competition.
The analysis of marketing service capabilities can be proceeded from the fol-
lowing aspects: the construction of corporate marketing service network, the scale
of sales force and the promotional activities.
As is shown in Table 3.10, the two companies have made great efforts to
improve their marketing services capability with positive effects. Donlim focused
more on the domestic market but have fewer promotions in the overseas markets,
only participating in various exhibitions. By comparison, Jasic attached equal
importance to both domestic and foreign markets. This reflects the difference in the
corporate strategy of these two companies.
Besides, concerning the input difference of marketing service in the domestic
and overseas market, it is the substantial investment in the domestic marketing and
promotion that enables Donlim achieved rapid development in ts OBM business.
As Donlim’s overseas market is not involved in the OBM business, what it needs to
do mostly is stabilize the partnership with those large foreign brand purchasers by
the means of improving its product quality, reducing costs and shortening delivery
cycle. Thus, it has no necessity to spend too much to promote its brand image to
attract end-consumers. According to the general manager of its domestic company,
“It is more difficult for small household appliance producers to promote business in
Table 3.10 Donlim’s and Jasic’s marketing service capabilities

Donlim Jasic
Construction of (1) Overseas: Overseas branches have (1) Overseas: Good cooperation
marketing all been evacuated except one in Hong relationship has been established with
service network Kong nearly 80 customers in over 50
(2) Domestically: An independent and countries and regions
complete sales system has been set up all (2) Domestically: It owns 5 branches
over the country, with 4 sales districts, in Beijing, Shanghai, Chongqing,
18 provincial branches, more than 300 Guangzhou and Dongguan, 10 offices,
customers and more than 1000 terminal 114 agents (A-level) and more than
stores. An efficient and overt financial 300 distributors (B-level). It has
operation and management system has implemented a full-agent operation
also been built, with the K3 software mode. The service network has been
information supporting. After-sales perfected. Three levels of national
service network are also provided UNPROFOR programs have been
covering all sales areas nationwide. implemented across the country. It
Besides, a number of innovations have promised that technical support would
been made in marketing mode, such as be responded within two hours and
the Membership in Beijing in 2003 and arriving at the scene for door-to-door
the direct sales on television in Shanghai service within 24 h
Marketing About 200 marketing employees, About 90 marketing employees,
personnel accounting for about 1% of the total accounting for about 12% of the total
number of staff number of staff
(continued)

Donlim Jasic
Promotion (1) Oversea market: The forms of It has always been very active in
activities marketing activities are relatively various exhibitions at home and board.
limited, mainly concentrating in It has attended a variety of important
attending various exhibitions and exhibitions, includes “Beijing-Essen
sending a small number of staff to seek Welding and Cutting Exposition”a,
for cooperation with well-known buyers “International Welding Exhibitions”,
(2) Domestic market: The promotion “American Manufacturing Technology
ways are more diversified and the scale and American Welding Society
is also relatively strong. To vigorously welding Exhibition”b. These
promote its brand image, it has exhibitions have greatly promoted its
participated in various exhibitions and popularity in markets at home and
platforms, and welcoming some abroad, and seized the opportunities to
celebrities to make advertisements cooperate with overseas customers
from India, Germany, Israel, Russia
and other countries. In addition, to
enhance its brand visibility, it also
captures opportunity to hold dealer
meetings and commendation
conferences
a
Beijing-Essen Welding and Cutting Expo, a large-scale international welding and cutting exhibition,
also known as the world’s Olympic Games of the welding industry, is sponsored by China Mechanical
Engineering Society and its welding branch, China Welding Association, China Electrical Equipment
Industry Association Welding Machine Branch, German Welding Society and German Essen Exhibition
Company
b
The exhibition is co-organized by American Manufacturing Technology and the American Welding
Society Welding Exhibition, the American Welding Society (AWS), the American Society of
Manufacturing Engineers (SME) and the American Association of Manufacturers (FMA). The
welding exhibition is the largest welding exhibition in North America and the third largest welding
exhibition in the world except the German Essen and Beijing-Essen welding exhibitions
the domestic market than in the overseas market, where all you need to do is find
the right selling partners.” Unlike Dolim, Jasic aims to build “Jasic” into an
internationally famous brand with competitiveness. Therefore, it must lay out its
overseas sales network and carry out a series of marketing campaigns in overseas
markets, in an effort to promote the “JASIC” brand image. From the above com-
parison, we can summarize that the marketing service capability is a significant
factor that influences the successful transformation of Donlim and Jasic.
At the same time, from Table 3.10, obvious differences can be found in their
promotional activities. According to the manager of Jasic’s International Trade
Department, the company spent a few in market promotions, except for the
expenses for participating in a variety of exhibitions. By comparison, the methods
of Donlim input substantially in the domestic marketing with more promotion
channels, such as participated in various exhibitions and platforms, and welcoming
some celebrities to make advertisements. According to our research, we believe that
such difference could be attributed to the characteristics of their products. The major
products of Donlim are small household appliances, the end-customers of which are
the large number of consumers, thus the company must strive to improve the
product recognition among consumers so as to achieve good sales performance.
However, the products of Jasic are welding products, designed mainly for industrial
users, hence participating in professional exhibitions could receive better promotion
effect compared with launching advertisements.
Management Ability
The enterprise management capability refers to the way how the enterprise makes
use of resources effectively and efficiently to achieve its pre-set objectives and
strategies. Such capability consists of a variety of functions (e.g. planning, strategy
formation, execution, control, and coordination) and elements (e.g. organizational
structure, information transformation, corporate culture and incentive mechanism).
From the perspective of strategy transformation, to leverage the management
capability, a company should base their existing resources and capabilities to
effectively integrate the corporate transformation strategy with resources and
capacities, and subsequently make full use of such integration. Therefore, the level
of management capability determines the effect and efficiency of transformation and
upgrading of OEM companies.
Frankly speaking, the transformation and upgrading of OEM companies indi-
cates that the companies will not only face new customers and competitors, but will
carry out changes in the entire management system, ranging from the production
process to organizational structure, and from the internal and external supply chain
to the corporate culture. All these changes will test their management capability.
Thus, in the process of transformation and upgrading, it is important for OEM
enterprises to solve two problems simultaneously, that is, how to allocate various
production resources and elements so as to realize maximum effects, and how to
adapt to the significant changes in the operational and management system led by
strategic transformation.
Owing to the huge trade surplus between China and western countries, devel-
oped countries have been attempting to restrict the exports of Chinese products
through trade barriers such as technology and environmental protection, which led
to the constant trade frictions between China and other countries. For instance, in
June 2007, RC2 company, headquartered in New York, has recalled 1.5 million
toys produced in Guangdong. On August 2007, Mattel, the biggest toy maker in the
US, announced to recall nearly 18.2 million toys made in China from worldwide
stores. These two recalls could be attributed to magnets that would be easily
swallowed by kids and the excessive amount of lead paint. Since then, many
international organizations, media and governments questioned the quality of
Chinese products, resulting in a linear decrease in overseas sales and even some
awful events such as business failures and entrepreneurs’ suicide. Thus, it can be
seen that the quality is the life of enterprises. Based on the above considerations, the
capability of quality management is to be focused on when studying OEM’s
management ability in this case.
Besides, scholars also has analyzed the transformation and upgrading of OEM
companies from the perspective of strategic planning capability (Zhang 2004) and
organizational efficiency (Burgelman 2004). In addition, this study will consider
that whether enterprises have introduced professional manager system and staff’s
overall quality, which will influence the enterprise management capability.
When it comes to the quality management, both enterprises have made an
endeavor and achieved excellent performance. Taking “the quality overwhelms
everything” as the management tenet, Donlim has positively carried out
high-quality product strategy. “The company prefers to give up the profit, rather
than the quality, of an order,” the company’s representative expressed confidently.
Thanks to the efforts of the whole staff, the company has achieved great success in
quality management. In December, 2006, Donlim stood out from 93 companies and
became the leader of setting the national standards about the “Performance
Requirements and Test Methods of Electric Kettle”. In June 2007, Xinbao
Electrical Appliances Co., Ltd was awarded Quality Management Prices of
Guangdong Province. Products such as electric irons, microwaves and juicers have
been consecutively granted with the National Inspection-Free Qualification. Donlim
has won the top-ten brands of national household appliance, and grasped the first
export inspection-free project in Shunde City. The sub-brand Weili was granted the
title of “Top-Ten of Customers’ Most Trusted Household Appliance”. Besides, with
the development of projects like CPK and IE, Donlim has cultivated many QA
engineers that enable the company to possess the capability of supervising and
analyzing self-quality management.
Jasic has insisted on strengthening internal quality management, combining the
software and the hardware and thus embarking on the road of normalization,
institutionalization and standardization. It has established the first and most
advanced lead-free production workshop in China so far. And it possessed several
globally advanced automated production lines that meet the EU ROHS lead-free
environmental standards, as well as many automatic plug-in lines and digital
electronic detection systems. Not only did the company pass the ISO9001-2000
international quality management system, but its products met a number of stan-
dards such as Chinese 3C, EU’s CE, Australian C-TICK, US’s UL and lead-free
ROHS. And
In spite of the excellent performance in the quality management, the product
manager of Donlim said, “What we always attach most importance to is quality. In
recent years, the sustained and rapid growth of sales volume indicates that the
low-cost expansion policy has achieved great success. However, despite the ly large
increase of market share, substantial distance still exist in the product’s technology,
appearance and quality, compared to those world-class companies.” Since the
quality of small household appliances is directly related to customers’ health and
safety, ant minor negligence might incur serious consequences. Returns, claims and
even recalls caused by quality problems would undoubtedly deal a fatal blow to
enterprises and the brands that the companies spared great effort to build would
probably be wiped out. Therefore, only if paying attention to quality first and
foremost can these enterprises truly realize transformation and upgrading from
OEM to OBM.
The Expansion of Domestic Appliances and Welder Machine Demand

Market Has Confidently Supported the Enterprises to Establish Their Own
Brand
The consumers’ mentality has recently changed from the basic life needs to the
nutritional health tastes of life due to the influence of western culture and the
change of living condition, and consumers increasingly choose products that are
closely related to the diet of European and American countries such as electric
coffee pot, toaster and food cooking machine, which provides opportunities to
develop the market of western-style small household appliances. Along with the
development of economy and the change in living concept, the structure of Chinese
family has begun to become smaller and the number of households has been
increasing, which causes the increasing demand of household appliances and the
change in product demand. Consequently, the miniaturized, simplistic and per-
sonalized goods have shown huge market potential.
Currently, the market prospect of small home appliances is very enormous and
the development space is quite huge. In terms of market demand, the average
number of small household appliances owned by each family is over 30 in Europe
but only 3–4 in China. The overall market size of small home appliances in China
reached 85.31 billion yuan in 2006, an increase of 14.1% than the previous year,
which would grow at about 8% within the next five years, according to the research
made by CCID. And according to the data from the research group of China’s home
appliance market, in recent years, China’s small home appliance market has been
growing at a rapid rate of 10–14% per year, with huge market potential. In addition,
the service life of small home appliance products generally is about 5–6 years,
indicating a number of these products will be replaced by new product.
In recent years, China has witnessed the sustained and rapid development in the
domestic economy, the constant growth of population and the continuous
improvement of urbanization, which have provided huge market space for welding
products. Research shows that in 2006, 48 domestic electric welding machine
enterprises saw their major business income stood at about 4.04 billion yuan, a
year-on-year increase of 24.38%, and their exports reached 578.5496 million yuan
(excluding that of auxiliary machinery accessories and components) with 640,250
sets of export volume, a significant increase than the previous year. Meanwhile,
since residents pay an increasing concern to environmental protection, the main
products of Jasic, the inverter welding machine, owing to its well performance in
raw-material reduction and energy-saving compared to traditional welding machine,
has gained high popularity from consumers.
The broad prospects of small household appliances and welding machine pro-
vide a huge development space for these two companies. In recent years, the sales
growth rate of Donlim and Jasic is 25% and 64% respectively, attributed to the
rapid expansion of market demand at home and abroad.
Meanwhile, with the improvement of living standards, residents are increasingly
mature in the consumption psychology and stronger in brand consciousness. They
are more likely to purchase higher-price and better-quality goods. Under this sit-
uation, enterprises can no longer drive sales performance simply by the means of
price reduction, but need to improve product quality and cultivate self-brands to
expand market share. Along with the growth of market demand, the consistent
maturity of consumer psychology has created a good environment for OEM
enterprises, including Donlim and Jasic, to realize transformation and upgrading
through technological innovation.
Furthermore, the introduction of relevant industry standards has standardized the
competition order of the industry and eliminated “inferior” enterprises, creating a
fair competition environment for the development of enterprises. The author learned
from the representatives of Donlim and Jasic that these two enterprises are both
beneficiaries and framers of the industry standards. In December, 2006, Donlim
stood out from 93 companies and became the leader of setting the national stan-
dards about the “Performance Requirements and Test Methods of Electric Kettle”,
which greatly contributed to the standardization of China’s small household
appliances industry and promoted its integration with the world. Similarly, from
2006 to May 2007, Jasic became a member of National Welding Standardization
Technical Committee, China Electrical Equipment Industry Association, and China
Welding Branch. It also participated in the standard formulation of the domestic
electric welding machine, playing a pivotal role in standardizing the competition
order of electric welding machine (Table 3.11).
Government Policy Support Encourages Enterprise Transformation and

Upgrading
Supported by the local government, the technological innovation environment of

Leliu Town and Shenzhen Municipality can be shown in Table 3.12.
As shown in Table 3.12, supported and driven by the local government, both
Leliu town (where Donlim is located) and Shenzhen city (where Jasic is located)
have established outstanding environments for industrial innovation, which become
a significant impetus for these two companies to implement the independent
technological innovation and ultimately succeed in transforming from OEM to
ODM and then to OBM.
Simultaneously, the author found that, owing to its more efficient and advanced
financing market, Shenzhen outperforms Leliu in the construction of financing
environment. To solve the financing difficulties of enterprises (especially the
high-tech enterprises with higher start-up risk), the government has made various
efforts. First, it has managed to develop small and medium-sized financial institu-
tions. Second, adopting market-oriented way, it has distributed fiscal funds to
support the development of high-tech enterprises, such as establishing High-tech
Table 3.11 Management capability of Donlim and Jasic

Donlim Jasic
Quality Taking the concept “quality Based on the concept of “quality is
management overwhelms everything” as the the blood of the enterprise”, Jasic
capability guiding principle and giving great has insisted on strengthening
impetus to high-quality product internal quality management,
strategy, Donlim has implemented combining the software and the
the quality reform and set up a hardware. It has embarked on the
full-time quality management team road of normalization,
represented by vice-president. It has institutionalization and
established an excellent ISO9000 standardization. Not only did the
quality management system, company pass the ISO9001-2000
introduced six sigma, started CPKa international quality management
and IEb project, and cultivated system, but its products met a
several quality engineers number of standards such as
Besides, it has signed the Chinese 3C, EU’s CE, Australian
Memorandum of Global Strategic C-TICK, US’s UL and lead-free
Partners with Intertek, a reputable ROHS. And it has also established
company specialized in product the first and most advanced
quality and safety service lead-free production workshop in
China so far, which has reached the
international advanced level
Strategic Donlim has been advantageous in Jasic has a very clear development
planning establishing strategies according to plan. Since the successful
capability specific circumstance of domestic restructuring in 2003, it has carried
and foreign markets, which out two three-year plans based on
achieved good performance its internal and external conditions
In the domestic market, it has set up Thanks to its first three-year plan
its network widely and energetically from 2003 to 2005, it achieved the
carried out OBM business sales target of reaching a hundred
In the foreign market, it has million and made the brand of
maintained a good partnership with “Jasic” known at home and abroad
other brand owners. At the time of From 2006 to 2008, the company
further expanding its OBM underwent its second three-year
business, it has captured plan: 2006 was the year of “quality
opportunities to step into ODM service” of Jasic, and 2007 was the
business year of “brand shaping”, a key year
for the company to become larger
and stronger and grow towards
higher goals. And 2008 was the
year of “international development”
organizational (1) The organizational structure is (1) Small organization scale with
efficiency relatively flat flat structure
(2) Departments have greater (2) Intensive office location with
autonomy with independent low communication costs
operation and accounting (3) Introduce a number of software
(3) Establish efficient and and systems to help company
transparent financial operation and improve the efficiency in handling
management system, which is information
supported by K3 software
(continued)

Donlim Jasic
Overall quality It has owned a thorough training Over these years, Jasic has recruited
of staff system and has established Donlim lots of technicians with years of
Institute, a special training R&D experience in the field of
institution, to train the whole staff welding machine industry. The
comprehensively proportion of professionals has
Moreover, cooperated with been up to 35% in the staff. Besides,
Sun-Yatsun University and Jilin it plans to build up a corporate
University respectively, it has set up institute to raise the overall quality
such as on-job MBA classes and of employees by targeted training
Master of Engineering classes. The
professionals has accounted for
more than 10% in staff
a
CPK is the abbreviation of Complex Process Capability Index, an indicator used to represent the
manufacturing capability of a modern enterprise
b
IE(Industrial Engineering) originated in the United States. It is an applied engineering and
technology discipline with the emphasis comprehensively placed on improving productivity,
reducing production costs and ensuring product quality, so that the system is in the best operation
state and achieves huge overall benefits
Table 3.12 Technological innovation of Domlim and Jasic

Domlim kitchen (Leliu town) Jasic (Shenzhen municipality)
Basic situation (1) Leliu has been renowned as a In 2006 the city’s high-tech
“Science and Technology products had created 629.4 billion
Demonstration Town of yuan and the high-tech products
Guangdong Province”, with independent intellectual
“International Standardized property accounted for 58.9% of
Town”, and “The First Batch of the total output value of high-tech
Industry-University-Research products, both of which ranked
Demonstration Town of first in the country
Guangdong Province and R&D investment in the whole
Ministry of Education” society accounted for 3.4% of
(2) Up to April 2007, 35 GDP. The number of patent
Industry-University-Research applications increased by 42% to
collaboration projects have been 29,728, ranking second in the
signed, a total of 5,189 patents country. The number of
have been applied, and 4,667 applications for invention patents
patents have been authorized rose by 75.3%, ranking the first in
the country. PCT international
patent application volume
remained the most in China
Innovation system An enterprise-based independent innovation system has been set up in
both Leliu and Shenzhen, but the latter outperforms than the former.
Shenzhen enterprises are not only home to over 90% of R&D
institutions, which host 90% of the total research personnel, but also 38
engineering development centers and 21 postdoctoral centers
(continued)

The supportive and (1) Sparing great efforts to (1) Stepping up effort to promote
incentive policies develop the technical standard the scientific and technological
of the government service, the local government has innovation of enterprises, the
established standardized system municipal government has
for enterprises, which takes promulgated a number of
corporate manufacturing regulations and rules, with regard
management standards as basis, to the protection of technical
product quality standards as secrets, the appraisal of intangible
keynote, and inspection standard assets, the protection of
as guarantee. The government computer-software copyright, the
also strengthens the supportive extraction and utilization of
measure to the key field and the enterprises’ technological
establishment of industry development funds, the
technical standards. Enterprises technology equity and the
have been stimulated to rewards to corporate technicians
participate in the formulation and (2) It also builds up a good legal
reformulation of the industrial, environment to protect the
national and even international intellectual property rights, for the
standards, the keynote of which sake of promoting the healthy
is intellectual property rights. development of the regional
And these companies are innovation system. The layout of
encouraged to adopt the regional independent-innovation
international standards and the system has been set up step by
advanced foreign standards step, and 11.5 km2 of high-tech
(2) A Standardized Service industrial parks and 150 km2 of
Platform was set up in Leliu high-tech industrial belts have
town, organized by the domestic been planned and constructed
Commerce Chamber of successively. More than 240
Hardware and Household innovative enterprise incubators
Appliance and SGS-CSTC have been set up, solving the lack
Standard Technical Services Ltd. of development space of
(an International Certification industrial clusters. Besides, a
Agency in Geneva, Switzerland). group of university scientific
This platform aims to improve research and innovation systems
the efficiency and quality of the have been established, including
administrative work, which the Advanced Technology
enabled Leliu to be renowned as Institute (Shenzhen) of Chinese
the “International Standardized Academy of Sciences, the Virtual
Town” in 2006 Park of University and the
(3) The local government has University Town. Eight sessions
also put forward two policies, of the High-Tech Fair and the first
Opinions on Speeding up the session of High Tech Expo have
Implementation of Independent been held successfully, greatly
Innovation Strategy and improving the basic research and
Promoting the Core increasing the technology source
Competitiveness of Leliu’s in Shenzhen
Industry and the Notice on (3) Furthermore, the government
speeding up the implementation has implemented the roadmap
of Independent Innovation scheme for high-tech enterprises,
(continued)

Strategy and Promoting the Core that is, “share
Competitiveness. According to reform + trusteeship + private
these two policies, since 2007 the equity ! growth + public
local government was required to offering + listing in stock
spend no less than 2% of its fiscal market”, guiding their financing
revenue, as special funds, to activity
scientific and technological
research every year, for the sake
of supporting the technical
innovation of leliu town
Financing The financing environment is (1) The financing market is
environment relatively poor. Except financing efficient and developed. The
in the stock market by qualified government has established a
enterprises with standardized relatively complete entry and
management, other companies recession mechanism for
are limited in financing sources venture-capital investments
but relied on their owned funds and developed small and
medium-sized financial
institutions, in an effort to
solve the financing difficulties
of enterprises (especially the
high-tech enterprises with
higher start-up risk)
(2) Thanks to the above efforts,
the amount of Shenzhen’s
venture capitals has been in
the forefront domestically. In
2006, the Science and
Technology Group of China
Merchants Steamship
Company invested 60 million
yuan to 6 projects. Tsinghua
Leaguer invested 70 million
to 7 projects. Shenzhen
Capital Group invested 240
million yuan to 16 projects.
Until 2010, Shenzhen was
home to over 133 venture
capital institutions with
capitals exceeding 10 billion
yuan, accounting for one third
of the domestic venture
capitals
(3) The government has adopted
market-oriented way for a
long time to distribute fiscal
funds to support the
development of high-tech
enterprises, such as
(continued)

establishing High-tech
Industry Investment Service
Co., Ltd., offering special
loans for high-tech enterprises
to carry out R&D activities,
and providing working-capital
loan guarantees for high-tech
companies of different
ownership
Talent cultivation (1) In 2005, Leliu Productivity (1) In the talent policy, Shenzhen
mechanism Promotion Center helped has adhered to the policy of
Donlim launch the 321 internal cultivation and
engineering and external introduction. The
school-enterprise cooperation municipal government has
signing agreement. An issued a variety of preferential
effective communication and policies, established talent
interaction platform was set market, improved talent flow
up for both sides to solve the mechanism, which
student training and substantially raised the
employment issue, which can efficiency of talent allocation
promote the common and thus attracted a large
development of enterprises number of talents
and schools (2) To further ensure the source of
(2) Besides, Leliu town is home talents and technology for the
to the Postgraduate Teaching development of high-tech
Practice Base (Shunde) of industry, the municipal
Jilin University, MBA government has established a
Teaching Practice Base sci-tech industrial park in
(Shunde) of Sun Yat-sen cooperation with the Chinese
University, Donlim Research Academy of Sciences, the
Institute of HeFei University Research Institute (Shenzhen)
of Technology, and Dolim of Tsinghua University,
Postdoctoral Progromme. Shenzhen
They play an important role Industry-University-Research
in helping enterprise attract Base with Beijing University
and cultivate talents and Hong Kong University of
(3) In addition, since the majority Science and Technology, and
of SMEs were short of Shenzhen International
technical talents, a training Institute of technology
base was established to foster Innovation with Harbin
professional talents by Leliu Institute of Technology.
vocational schools. The Thanks to the above efforts,
courses, with the industrial free office space and all sorts
characteristics of Leliu, have of support have been provided
strengthened the training of for the industrialization of
secondary technical personnel scientific and technological
and skilled technical workers, achievements and cultivation
thereby continuously of advanced talents
providing technical and
personnel support for
enterprises in Leliu
(continued)

Supporting service (1) The town is home to 1 Relevant supporting service
system national-class laboratory, 3 system is sound and a whole set
enterprise technology centers of science and technology
of Guangdong province, 2 intermediary service system has
engineering technology come into being, including a
centers of Foshan city, 2 number of professional
engineering technology institutions and agents in terms of
centers of Shunde city, and 1 technological innovation service,
industrial technology science and technology
research institute of Leliu evaluation, certification testing
town agency, technical brokerage,
(2) Meanwhile, two Leliu information technology
Technological Innovation consulting services, high-tech
Centers of Foshan Research development, startup centers in
Institute were set up university science park, industry
respectively by South China associations, accounting firms,
University of Technology financial institutions, asset
and China University of assessment, venture investment
Geosciences in 2007. And companies and so on
Leliu Intellectual Property
Research Association also
hung out in 2007
(3) In addition, the town built
three technology industrial
parks, including the
intelligent household
electronic information
industrial park, precision
metal products industrial park
and modern transport
machinery industrial park.
(continued)
Industry Investment Service Co., Ltd., offering special loans for high-tech enter-
prises to carry out R&D activities, and providing working-capital loan guarantees
for high-tech companies of different ownership. Third, a comprehensive entry and
recession mechanism has been set up for venture-capital investments so as to attract
the inflow of venture capitals.
With regard to the supporting service system, the author discovered that the
amount of R&D institutions established by Leliu town government was large than
those established by Shenzhen government. In fact, Shenzhen government input
less in R&D and simply set up five R&D institutions hosting 88 scientific and
technological personnel. And Shenzhen enterprises are not only home to over 90%
of R&D institutions, which host 90% of the total research personnel, but also 38
engineering development centers and 21 postdoctoral centers. Furthermore, the
scientific and technological expenditure from enterprises is 600 times more than
that from the municipal government. It is such a small amount of governmental
expenditure but enormous corporate input that generated such an amazing output
value of high-tech products. In 2006, the sales revenue of high-tech products
reached 143.3 billion yuan, ranking the first in Guangdong province. Hence, when
promoting the enterprises to carry out technological innovation, the key measure
taken by the government is not simply increasing the spending on research, but
driving it through institutional innovation. In other words, the government should
assist companies to establish and improve the technological development system,
ensuring them to become the main body in technological progress, technical
innovation and research input.
However, during the author’s research, the technical director of Jasic indicated
that the company suffered a heavy blow in the enthusiasm of technical innovation,
since the government didn’t make enough efforts to supervise the intellectual
property infringement, and the cost of stealing intellectual property was too low for
competitors. Hence, the large number of hi-tech enterprises always worry about
how to retain employees who have rich R&D experience and master core tech-
nology, so that these experts would not be poached by their rivals’ higher salary or
stock option incentive. For this reason, governments should strengthen their
monitor and management in this respect.
The Stable Relationship with the Cooperative Parthers Provides a Reference

for the Enterprises in Terms of Technology and Management
The self-innovation capability is key to the transformation and upgrading of OEM

enterprises, but the cultivation of technical capability has a long way to go.
Enterprises in late-development countries (or regions) can take the advantage of
OEM pattern to introduce, digest and assimilate advanced technology of developed
countries (or regions), and then take OEM as a springboard to transform themselves
into ODM or even create their own brands through continuous technological
innovation, and finally transform into OBM. Therefore, the partnership between
OEM enterprises and entrusting enterprises, in areas such as the realization of
resource sharing and the breadth and depth of technology exchange, will accelerate
the formation process of OEM’s independent technological innovation capability,
and then promote its transformation and upgrading process. Jonney Shih, Chairman
of ASUS, has publicly expressed that one of the benefits of cooperating with
first-class international manufacturers was that ASUS could steal their management
mode during frequent exchanges, which could facilitate ASUS’s further
improvement.
As regards “the relationship with partner enterprises”, Donlim has established
relatively stable long-term cooperative relationships with numerous well-known
enterprises. During such cooperation, these partners would dispatch quality con-
trollers to provide technical guidance and quality supervision, which strengthens the
mutual technology and talent exchanges. By comparison, the collaboration of Jasic
with many globally professional manufacturers enables the company to accumulate
a large number of managerial and technological experiences through many ways
such as “learning by doing” and “learning by using”. These efforts drive its
products to reach international level in terms of technology, manufacturing tech-
nique, and quality control. Moreover, Jasic has set up close technical and personnel
exchanges with its partners. For example, Jasic’s domestic workshop can regularly
receive QC instruction from its overseas partners, according to Jasic’s manager of
International Trade Department,
In a word, both Donlim and Jasic have established sustained partnerships with
their cooperative enterprises, which not only bring them stable orders but set up
communication platform. This enables them to learn from their partners the
advanced technology and managerial experience, thus facilitating their transfor-
mation and upgrading significantly.
3.1.10 Implications
Whether seen from the transformation effects or the upgrading speed, both Donglim
and Jasic are typical OEM enterprises that successfully achieve transformation and
upgrading in Guangdong and even in China. Their experience from OEM to ODM
and to OBM has valuable and practical significance to general OEM enterprises.
By comparing the transformation and upgrading paths of Donglim and Jasic in a
longitudinal and widespread perspective, we can discover the following facts.
3.1.10.1 OEM Is an Effective Approach for Enterprises

in Late-Development Countries (or Regions) to Integrate
into the Global Industrial Chain, Keep Pace
with the Technology and Even Become OBM Firms
Above all, OEM is an effective approach for enterprises in late-development

countries (or regions) to integrate into the global industrial chain and partially share
the industrial profits. Under the OEM production mode, companies can simply
focus on production without carrying out complex marketing research or setting up
channels. It helps to save marketing costs and achieve economies of scale in pro-
duction, which greatly reduce production costs and thus gain more profit. Besides,
these companies can base their lower production costs to carry out OEM business,
thereby integrating into the global industrial chain and sharing industrial profits.
Secondary, OEM is an effective way for enterprises in late-development coun-
tries (or regions) to realize technological follow-up. Frankly speaking, these firms
are less unlikely to surpass those in developed countries in manufacturing technique
in a short time. The process of “OEM ! ODM ! OBM”, instead, enables them to
gradual learn advanced know-hows and periodically accumulate technology and
experience. Such process can not only help enterprises avoid deviating from the
correct course in product and technology innovation in the early stage, but enables
them to effectively lower development cost and reinforce technology foundation. In
this comparative case study, we also found that it is the “learning by doing” and
“leaning by using” with internationally well-known enterprises that contribute to
the accumulation of their advanced managerial experience and the subsequent
improvement of their operation and research.
Finally, OEM is also an effective way for firms in late-development countries (or
regions) to set up self-brands and realize OBM. The implementation of brand
strategy requires strong financial strength and technology accumulation.
Accordingly, if companies determine to carry out OBM strategy, they need to invest
and manage both their brands and manufacture. They will not only disperse their
energy and resources but have to bear dual risks in brand-construction and man-
ufacturing, while the mode of “OEM ! OBM ! ODM” can serve as a smooth
transition. Jasic, since its entry of overseas market in 2002, realized its capital and
technology accumulation after five years of effort, which laid a solid foundation for
its subsequent launch of OBM strategy in 2007 and great success within one year.
Suppose Jasic implemented the OBM strategy abroad in the early 2002, it is more
likely to fall into trouble and hard to enter the overseas market.
3.1.10.2 The General Upgrading Path of OEM Enterprises Is

“OEM ! ODM ! OBM”
The shrinking profit margin of OEM enterprises can be attributed to a variety of

factors such as the increase cost of raw material and labor force, shortage of energy
supply, valuation of RMB, continuous decline of export tax rebate rate, and rising
cost of environmental protection. To maintain their survival and development,
OEM enterprises must implement transformation and upgrading in time.
Concerning the fierce competition at home and abroad, enterprises in emerging
economies must carry out independent innovation and OBM strategy with the aim
of possessing intellectual property rights. Furthermore, other factors including the
escalation of trade conflicts, increase of trade barriers and uneven distribution of
benefits also forced OEM enterprises to enforce transformation and upgrades.
In addition, along with the growing scale of OEM enterprises, the inherent risks
of OEM mode become increasingly apparent. Only by transforming and upgrading,
setting up own brands and controlling distribution channels can OEM enterprises
paly a positive role in the processing trade, especially the export trade, and thus
effectively avoid the inherent risks of OEM mode.
There are two ways for OEM enterprises to change the continuously shrunken
profit margin and take an active part in fierce competition in domestic and inter-
national market. Firstly, the continuous self-technology innovation and increase of
technical content of products can raise the competiveness of OEM enterprises and
their products’ added value. Secondly, competent OEM enterprises should actively
establish and promote self-owned brands to raise profit margin. As OEM enterprises
extend their business from the lowest value-added part of the smiling curve
(manufacturing in the bottom) to its both ends (R&D in the left high-end and brand
marketing the right high-end), they will transform their business modes form OEM
to OBM and even to ODM.
Donlim entered the overseas market by carrying out OEM business in 1998 and
then ODM in 2000, while Jasic explored the foreign market by the implementation
of both OEM and ODM from 2002 and then OBM through the
brand-transformation work since 2007. In other word, in overseas market, the
transformation path of Donlim is “OEM ! ODM” while that of Jasic is
“OEM ! ODM ! OBM”. Despite the apparent difference in such path, the
general upgrading direction of OEM enterprises is from OEM to ODM and then to
OBM.
3.1.10.3 Multiple Modes Are Implemented Simultaneously According

to OEM Enterprises’ Own Circumstances: Donlim Was
Predominated by ODM While Jasic by OBM
Although most firms adopt the general upgrading path mentioned above, they will
carry out various operational strategies during the practical transformation and
upgrading in accordance with their own conditions (Amsden 1989).
The development courses of these two case enterprises sufficiently illustrate the
diversity of approaches towards transformation and upgrading. Donlim entered the
domestic market in 2003 with “Born OBM” mode and started to carry out ODM
business in the overseas market from 2000, but had no OBM business till 2010.
Hence, its developing path is “OEM ! ODM”. Similarly, Jasic was also a “Born
OBM” company in domestic market. Their difference lies in the overseas market,
where Jasic carried out brand transformation in 2007 and strategically replaced the
original brand with its own brand for its overseas products, which has achieved
great success. Accordingly, its upgrading path in overseas market is
“OEM ! ODM ! OBM”.
From the above comparison, we can find although both companies has realized
transformation and upgrading at different levels, they took different operating
strategies according to their own resources, capabilities and other factors.
Furthermore, the author also discovered that Jasic not only adopt different
transformation and upgrading paths in domestic and overseas markets, but also
carry out a variety of upgrading modes in overseas market simultaneously. For
example, the first mode is providing purely-OEM service, that is, Jasic strictly
based on the whole set of product design drawings, from the external appearance to
internal parts, provided by the buyers. The second mode is that, after receiving
buyers’ design drawings about the external appearance and internal parts, Jasic
engaged in the production of internal parts and outsourced the external parts to
other OEM firms. The third mode is providing ODM service, that is, buyers would
raise their requirements but without the offering of design drawing, then Jasic
would design the external appearance, manufactured components, and possessed all
the intellectual properties except brands. The fourth mode is providing OBM
service.
Moreover, Jasic adopted different packing methods, including no Jasic-relative

tags would be stuck on the OEM or ODM products, and “Jasic” trademark would
only be stuck on the back of OEM or ODM products. Thanks to such combination
of various development strategies in parallel under different circumstances, Jasic
has not only continuously reinforced and expanded its OEM and ODM business,
but rapidly embarked on the self-brand road, expressed confidently by its manager
of International Trade Department.
3.2 Case Two Enterprise Upgrading in the Toy Industry:

Comparisons Between Lung Cheong Toys
and HaYiDai Toys
3.2.1 Situation Analysis in the Toy Industry
3.2.1.1 The Global Toy Industry Has Entered the Era of Scientific
and Technological Innovation and Multi-industry
Convergence
Human civilization has witnessed the advancements of toys, which have developed
from ancient humble stone or wooden ones to modern vivid mechanic and elec-
tronic ones, Such evolution represents the increasingly higher level of human
knowledge. Despite the long history of toys, the toy industry is still new compared
with other traditional ones. It came into being in the early 20th century in the United
States, and even later in China. Before its liberation in 1949, there existed some toy
firms in Shanghai, Tianjin and other places, and they were renewed after the
foundation of the new China. Though severely damaged during the Great Cultural
Revolution (1966–1976), they rejuvenated in the mid-1970s and developed until
today to a certain scale. Its continuous progress was characterized by changes in
materials employed. For instance, toys were mainly made of wood and wool in
1940s and from plastics after the World War II. And the substantial growth of
science and technology since 1970s drove the development of electronic and
intelligent toys, which captured market share rapidly.
Nowadays, the toy industry has turned into a comprehensive industry, which
integrates R&D, manufacture and marketing together and merges with multiple
industries such as aesthetics, sports, education, media and IT. Technical advance-
ments continuously instill new vitality, leading to the faster and more complicated
updates of toys and thus imposing increasingly great pressure on enterprises’
innovation.
Confronted with such burden, though, these enterprises have strong incentives to
carry out innovation. The global toy market has seen a tremendous growth potential
in the Middle East and Asia, especially in China. China has about 360 million
children under the age of 16, accounting for 20% roughly of the total population. At
present, the consumption of Chinese children takes up 30% of the total household
expenditure and the monthly spending of 0–12 year-old children exceeds $3.5
billion. But the annual toy consumption per kid under 14 is only 20 to 30 yuan
(about $2.4–$3.6) in China, far below the average level of Asia ($13) and the world
($34). If Chinese consumption reaches the Asian average, the market scale is
expected to exceed 30 billion yuan and the annual growth rate of domestic toy
market will reach 40% in the near future. Besides, along with the economic
development, consumers of different age groups demand not only plush, plastic and
electronic toys that children often play with, but also intelligent, electromechanical
and high-tech toys. However, the development of China’s toy industry lack a broad
perspective. By comparison, the western countries market toys suitable for people
aging from 0 to 100 years old, with the increasingly large proportion for adults and
the old. International toy manufacturers have introduced a wide range of toys not
only for the intellectual development of infants and children, but also for the young,
the middle-aged and the old. For instance, the young favor “pet toys” such as robot
cats and robot dogs, while elderly people like to have “clone” toys that can mimic
reasonably well the image, voice and tone of a particular person and can com-
municate with them and accompany them. Some toys such as superman and cartoon
characters are designed for “parenting consumption” (e.g. played between father
and son). In the mature markets like Europe and North America, adult toys account
for 50% of the total market share. In Asia, especially in China, children toys take up
nearly 100% market share while the adult-toy market remains blank. According to
some questionnaire survey conducted in China, 64% of consumers indicated that, if
affordable, they would consider buying their own toys; and among these con-
sumers, 33% are adults, who had interest and willingness to purchase toys. Such
results reveal huge market potential for adult toys.
3.2.1.2 Dongguan, as a Toy Manufacturing Base, Faces Pressure

and Challenge in Transformation and Upgrading for Lack
of Innovations and Self-Brands
In 1980, Lung Cheong of Hong Kong established factories in Dongguan, the first
toy manufacturing enterprise investing in this city, followed by VTECH, Silverlit
and other companies. The growth of Dongguan toy industry can be attributed to the
investments and industrial transfer of Hong Kong enterprises.
Toys are the epitome of Dongguan’s economy. As the first open coastal area in
the initial stage of China’s reform and opening up, it attracted the transfer of
international capitals, technologies and processing industries, which contributed to
its primarily strong and rapid development. Thanks to the implementation of reform
and opening up in the coastal cities of Guangdon Province in the early 1980s and
lower costs in land and labor, large numbers of Hong Kong enterprises gradually
transferred their labor-intensive production to the mainland to conduct processing
with supplied materials. As a result, Dongguan and Hong Kong were linked
together with the former engaging in manufacturing while the latter focusing on
3.2 Case Two Enterprise Upgrading in the Toy Industry … 95
sales. Around year 1990, the toy industrial cluster in Dongguan were emerging,
which at present hosts about 3000 manufacturing enterprises and 2000 supporting
companies. Such relatively complete supply-chain systems advances the entire toy
industry in Dongguan. According to the statistics released by China Market
Inspection Center, among the top 50 Chinese toy manufacturing enterprises,
Dongguan’s enterprises account for one fifth; and among the top 10 Chinese toy
manufacturing enterprises, three are from Dongguan. Dongguang has overwhelm-
ing advantages with respect to number of enterprises which have received the
export quality license. Statistics show that in China over 3000 toy manufacturing
enterprises have obtained a quality license, among which 1300 are located in
Guangdong Province and over 700 in Dongguan.
According to the statistics in 2004 released by the Dongguan government, 10
enterprises saw a gross output value of over 100 million yuan and 8 enterprises had
a sales revenue of over 100 million yuan. Plastic toys, electric toys, stuffed toys and
mechanical toys produced by Dongguan enterprises were exported to the United
States, EU, Hong Kong, Japan, etc.
And some incomplete statistics also showed that, nearly 75% of toys in the
world were made in China and Chinese toy enterprises especially predominated the
market of plush stuffed handmade toys. Currently, China accounts for 70% the
global t toy manufacturing, and Guangdong accounts for 70% of China’s manu-
facturing and Dongguan 60% of Guangdong’s manufacturing. This reveals the
significant role Dongguan toy enterprises have played in China and even in the
world.
As regards the export value of toys, Guangdong was $4.54 billion and
Dongguan $1.213 billion in 2005. Then in 2006, the exports of China climbed up to
$7.055 billion and that of Guangdong $4.805 billion. From January to October in
2007, Dongguan accounted for 26.1% ($1.29 billion) of Guangdong’s total export
value ($4.94 billion).
However, three recalls of toys occurred from June to August of 2007, which
gave a heavy blow on the exports of Dongguan and even the whole Guangdong
Province. In September, Guangdong showed a negative growth in export for the
first time. Although September was the “selling season” for exporting Christmas
toys, Guangzhou Customs showed Guangdong’s exports of toys was simply $710
million, $5.776 million less than that of August, which was the first negative growth
month on month. But this impact lasted a short period of time, a strong recovery
occurred in October. Consequently, the total exports of Guangdong toys during
January to October in that year reached $4.94 billion, an increase of 22.9% and a
growth rate of 18.6% than the same period of the previous year. The export value of
Dongguan, in particular, was $1.29 billion, increased by 23% than the previous
year, which shows the important role of the Dongguan toy industry in Guangdong
province and even in the world. Currently, Dongguan is home to a number of
well-known toy brands, including Disney, Barbie, Snoopy, Blue cat and Teenie
Weenie. And a lot of foreign enterprises take Dongguan as their toy manufacturing
base.
In spite of the advantages of the Dongguan toy industry, we should also concern
the disadvantages that will affect the industrial development in the future. Although
Dongguan hosts over 4000 toy manufacturing enterprises, 95% of them are
foreign-invested enterprises of three kinds (including Sino-foreign joint ventures,
enterprises with Sino-foreign cooperation, and wholly-owned foreign enterprises)
and nearly two-thirds engage in processing and compensation trade with little
independent R&D, resulting that their design and sales are controlled by foreign
clients. Less capable in technical development, a number of OEM companies are
less independent in production and marketing, and have to process materials sup-
plied by or imported from foreign companies or manufacture goods under desig-
nated brands. And some other firms survive by imitation and thus always suffer
from infringement complaints, which could only make profits from the lower
production costs or meager processing and overcharge fee. In a word, most com-
panies, depending on export-oriented production, spend little in R&D and have no
self-brands or designing capability, as a result of which they have no core com-
petence but low cost advantage. Although the majority of “made in Dongguan” toys
are sold in overseas markets under foreign brands, the processing fees earned by
Dongguan manufacturers merely account for a tiny proportion of the total product
price. In recent years, 95% of the toys produced in Dongguan are for the export
market, and the majority of orders come from well-known brands such as Disney
and Bluecat. Statistics show that toy processing trade accounts for 99% of the gross
export value of Dongguan and OEM is still the major business of local companies,
few of which carry out ODM or OBM business. Even among the top 10 enterprises
whose output value exceeds $100 million, only several have independent R&D
capability and self-brands.
In recent years, the Dongguan toys industry is confronted with increasingly more
difficulties. A large number of enterprises are satisfied with the profit earned by the
OEM business and reluctant to carry out self-innovation transformation, which is
caused by the shortage of labor resources, insufficient energy supply, sharply
raising price of imported raw materials (i.e. plastic, chemical fiber, copper wire),
increased testing and marketing costs (caused by various international standards),
low-degree market standardization, and insufficient protection of intellectual
property rights. Due to the predominance of processing business in these OEM
companies, technical personnel have few opportunities to contact markets and thus
find it hard to judge the market trend, leading to the absence of self-innovation
trigger. Besides, the innovation environment and external intellectual support in
Dongguan are far from perfect, since there are few agencies or companies spe-
cialized in toy designs.
Moreover, along with the increasing concern about the safety and quality of toys
in the world, Chinese toy enterprises have encountered substantial challenges in the
processing trade. In 2007, to ensure the legality and safety of toys, the International
Council of Toy Industries (ICTI) released the ICTI Behavior Code, bringing a great
shock to China’s toy industry. According to this code, if domestic toy processing
enterprises could not raise the product quality and technology to the ICTI standard
within the allotted time, they would run the risk of losing a large number of orders.
Consequently, in that year a series of toy recalls were imposed by the product safety
institutions of US, EU and other countries against toys manufactured in and
exported from the mainland China because of numerous alleged consumer safety
issues.
The above difficulty in toy industry also represents the predicament of the whole
manufacturing industry in Dongguan in recent years. On one hand, most companies
still engage in low-tech and low value-added processing trade, positioning mar-
ginally in the global production networks. On the other hand, the room for
industrial development has been squeezed and the city lags behind in the
self-technology upgrading and self-brand establishment, resulting in the marginal
place in the domestic production system. Frankly speaking, The Dongguan toy
industry, as a whole, has suffered from the lack of independent intellectual property
rights, the lower value-added technologies and the larger proportion of traditional
toys. The rise of production costs and a series of quality-related recalls in 2007
impacted considerably on Dongguan’s manufacturing industry. And the labor-cost
advantage of mainland China has been surpassed gradually by neighboring coun-
tries. Therefore, whether it can acquire the self-innovation capability quickly and
thus innovate and upgrade both the industry and products so as to capture favorable
markets have become the highest priority of Dongguan’s toy manufacturing
industry.
The Dongguan government should strongly stimulate enterprises to improve
their comprehension and assimilation of internationally new standards and new
technologies, carrying out long-term accumulation of professional knowledge.
Based on this, companies can realize independent innovation and thus facilitate the
Dongguan toy manufacturing industry to transform from OEM to ODM and even
OBM.
In spite of the different opinions of domestic scholars in how to improve
self-innovation capability, they believe that China should stick to the upgrading path
of “introduction ! comprehension ! assimilation ! integrated innovation !
self-innovation”. According to such study results, Dongguan’s toy manufacturing
enterprises should first focus on the comprehension and assimilation of foreign
manufacturing techniques and cutting-edge designs, based on which they should
then carry out integrated innovation under the intellectual property system, so as to
continuously improve their capabilities in R&D, design and innovation, and even-
tually embark on the self-innovation road.
During the current growing stage, Dongguan’s toy-manufacturing industry still
needs to upgrade its innovation capability gradually. Technology innovation will
not only bring enterprises new growth space and enhance their independence and
growth, but also generate competitive edges and raise their international competi-
tiveness. The whole industry also requires self-innovation to instill new incentives
for industrial upgrading. Accordingly, it is necessary to strengthen the corporate
self-innovation awareness, enhance the leading role of entrepreneurs in the
self-innovation process, and emphasize the advancement of corporate R&D capa-
bility. These are significant to the improvement of self-innovation capability of
Dongguan’s enterprises. Furthermore, the local government should leverage its
guidance. For instance, supporting policies were issued in Dongguan City Famous
Brands Development Planning (2006–2010) to facilitate toy manufacturing com-
panies to establish their own brands. To help private enterprises cope with the
problems in deficient quantity, small scale and poor technology, the Planning aims
to, apart from encouraging and leading the localization of foreign-funded enter-
prises, strategically support lots of domestic companies, which are mature enough
to create known brands and which possess good foundations, new technologies,
excellent management and large domestic sales. The government has been striving
for a breakthrough in building famous toy brands from zero in the short term and
improving the market exploring capability of companies in China, in pursuit of
cultivating at least two ministry-level brands and five provincial famous brands.
3.2.2 Case Selection: LungCheong and HaYiDai
3.2.2.1 Gist for Case Enterprise Selection
The purpose of this case study is to explore the feasible independent innovation
path and influence factors of Dongguan’s toy manufacturing enterprises. Among
them, 95% are foreign-invested enterprises of three kinds (including Sino-foreign
joint ventures, enterprises with Sino-foreign cooperation, and wholly
foreign-owned enterprises), the majority of which are Hong Kong-funded while the
remaining are private-owned. Hong Kong-funded enterprises, as the leading force
of Dongguan’s toy industry, have consistently raised their self-innovation capa-
bility, which is crucial to the transformation and upgrading of Dongguan’s toy
industry. Therefore, exploring their self-innovation path has a profound and prac-
tical meaning. Private-owned enterprises, as a new force of economic development
in China, are playing an increasingly important role in the domestic economy after
the reform of state-owned enterprises. The research on private enterprises’
self-innovation path would contribute greatly to both Dongguan’s toy industry and
domestic economic development.
As the first Hong Kong-funded enterprise in Dongguan, LungCheong Toys Co.,
Ltd. now is one of the biggest toy enterprises in this city. It is a miniature of
Dongguan’s toy industry development. Since the end of 20th century, it gradually
transformed from OEM business originally to ODM business in 1994 and then to
OBM business in 2002. Its self-innovation activities and process is relatively typical
and has substantial implications to other Hong Kong-funded enterprises.
HaYiDai Toys Co., Ltd., a private enterprise set up in Dongguan in 1996, is
among the few private toy enterprises that embarked on the self-innovation road in
China. Its developing process is meaningful to other private toy manufacturers.
Therefore, we choose these two enterprises for comparative case-study, trying to
find out some know-hows from their outstanding performance.
3.2.2.2 Data Source and Collection
In this case, we base the conclusion on a lot of data, focusing on firsthand materials
as well as secondary sources. Firsthand materials mainly come from our
face-to-face interviews with senior managements, company files, telephone inter-
views and E-mail surveys. Secondhand data mainly come from documentation,
including reports released by known website, newspapers and periodicals, as well
as relevant company webpages and individual biographies. We carefully examined
the data validity and reliability by repeatedly consulting internal employees of case
enterprises. In the process of case writing, we carried out two times of research. The
first one was a field study, an interview with the senior management of the case
enterprises. And a second survey was conducted by telephone interviews and
E-mail questions during the subsequent writing, which provided valuable firsthand
materials.
3.2.3 Lung Cheong International Holdings Ltd.
3.2.3.1 Brief Introduction of Lung Cheong
Lung Cheong International Holdings Ltd. (hereinafter referred to as Lung Cheong)

was founded in 1963 by Mr. Liang Lin. After 40 years of development, Lung
Cheong has not only become a toy manufacturer for many famous brand owners
and consumer-goods producers, but also developed into a multinational corporation
widely recognized at home and abroad. From producing single toys in 1980 to
diversified entertainment products now, Lung Cheong has been capable in pro-
viding “one-stop” toy manufacturing service. Its products include remote-control
toys, electronic and plastic toys, consumer goods and electronic products, which are
exported to over 100 countries and regions around the world. It not merely produces
toys for brand owners such as Taiyokogyo, Tomy Company, Mattel, Little Tikes,
Bandal, but also engages in R&D, production and sales for its self-brand goods.
The wireless remote-control toy is the core business of Lung Cheong. Thanks to
its professional wireless technology and designing and engineering competence,
Lung Cheong invests its resources in wireless non-toy business of higher profit
margins. In addition to the wireless remote-control cars and plastic toys, Lung
Cheong expands its product categories to advanced and competitive non-toy
electronic products, in an effort to increase its income sources. Of the turnover,
consumer electronic products account for 17%, radio-controlled toys 57% and
electronic and plastic toys 26%. Lung Cheong not only produces toys for its
self-brands such as Bendos series and Robert X series, but also accepts processing
orders from Japanese cartoon brands including “Mado King Granzort”, “Armored
Swat”, “Hikarian” and “Sonic Youth”, as well as a domestic cartoon brand “Legend
of Nezha”.
Consequently, the group’s revenue reached 750 million yuan in 2006 and 704
million yuan in 2007. In 2010, it host over 7,000 employees, most of which are in
Donguan. Headquartered in Hong Kong, it set up affiliates and factories in mainland
China and Indonesia and offices in the United States. Listed in Hong Kong in 1997,
Lung Cheong becomes one of the few listed companies in the toy industry. As a
Hong Kong-listed company with solid foundation, it has gained substantial supports
from strategic investors. And its strong production base and energetic marketing
staff enhance its industrial competitiveness. Data from 2006 to 2007 show that
mainland China and Hong Kong accounted for 23% of the group’s turnover, US
39%, Japan 14%, Europe 15% and other regions 9%. Lung Cheong is known as the
“Quality Trusted Organization” by the China’s Customs. And Chairman Liang won
the World’s Outstanding Chinese Award in 2005 and has been elected as the
Honorary Citizen of Dongguan city for many times. Lung Cheong was awarded as
the “Intellectual Property Pilot Enterprises” of Dongguan city and “Advanced
Intellectual Property Enterprise” of Guangdong province in 2003. Subsequently, the
“Research Center of Engineering Technology for Intelligent Educational Digital
electronics” was set up in Dongguan in 2005, based on which its remote-control toy
car ranked second in the Patent Prize of Dongguan in 2006. Thanks to the above
performances, Lung Cheong was selected as a case for studying industrial devel-
opment process by the Asian Faculty of Hong Kong University and Harvard
Business School.
Dongguan Lung Cheong Toys Co., Ltd. is a subsidiary of the group. Taking
advantage of advanced engineering capabilities in Dongguan and high cost-benefits
achieved by Indonesian factories, the group manufactures a series of electronic,
plastic toys and interactive products. Such all-round competitiveness enables Lung
Cheong to become the best partner of the world’s famous toy companies. Its
successes can be attributed to the unified production standards and excellent pro-
duction technology. Besides, Lung Cheong continuously enriches its production
equipment to meet the customers’ ever-growing needs and strictly controls costs
under the vertical integration of production facilities. Giving first priority to quality
in every manufacturing procedure, its comprehensive quality assurance team and
strict quality-control ensure the prestige of Lung Cheong and position in its clients.
In 2007, Dongguan LungCheong Toys Co., Ltd., was elected as one of the domestic
Top-10 toy manufacturers by China Market Inspection Center.
Led by the group’s top management, Lung Cheong has formed a corporate
culture of continuous learning and innovation, keeping a close eye on market trends
and acting proactively. At the same time of conducting transformation from OEM
to ODM and then to OBM, it actively set up its own brands. Also, it strives to seize
emerging business opportunities of electronic products, begins to get involved in
entertainment products industry, and engage in comprehensive entertainment
industry.
3.2.3.2 Growth of Lung Cheong
As early as 1963, group Chairman Liang Lin first established Lung Cheong
Industrial Co., Ltd., beginning to produce remote-control toy cars in December
1980, when Lung Cheong was just a company with a single product, low tech-
nology content and weak competitiveness. Lung Cheong Electronics Co., Ltd. and
Lung Cheong Toys Co., Ltd. was established in 1988 and 1989 respectively, with
the latter replacing the business of Lung Cheong Industrial Co., Ltd. in 1990. Then
in 1993 Indonesia branch was established. Dongguan Lung Cheong Co., Ltd. was
founded in 1994, which replaced the business of Lung Cheong Electronics Co., Ltd.
In the same year, Lung Cheong Technology Co., Ltd. was established, starting to
produce consumer electronics products from the next year. Subsequently, the group
purchased Chuangyi Precise Machine Co., Ltd. (hereinafter referred to as Chuangyi
Precise Machine) in 2000, in an effort to strengthen its R&D capability. In 2002, the
acquisition of Kid Galaxy, a North American toy company, enabled Lung Cheong
to gain a famous brand “Bendos” and the widespread sales network. In 2004, a new
factory, located in Changping County, Dongguan city, began construction. Thanks
to its strategic position, in the center of railway network, this factory can serve as
the centers of design, production, sales and logistics in China, enabling the group to
focus on developing high-end electronic products and high value-added products.
Figure 3.9 shows the organizational structure of Lung Cheong.
3.2.3.3 Self-Innovation of Lung Cheong
In the early time, Lung Cheong was a processing company, which received orders
from other manufacturers or manufactured products that other factories had no
interest. In other words, it suffered double exploitation from toy buyers and inter-
mediaries, pushing the company to engage in OEM business since November 1979.
Adhering to the “Customer-friendliness” business philosophy, it strives to improve
its service quality and lower its price to attract customers. Consequently, it estab-
lishes long-term cooperation with customers such as Taiyokogyo, TOMY, Mattel
and Little Tikes. The annual turnover of OEM business became the main source of
Lung Cheong International Holdings Ltd
Lung Lung Cheong Lung Cheong Chuangyi Lung Cheong Lung Cheong
Kid Galaxy
Cheong Toys Entertainment Resource Precise Machine Overseas (BVI) Holding
Corporation
Co., Ltd. Ltd. Management Co., Ltd. Co., Ltd. corporation Limited
PT.Lung Dongguan Lung Dongguan Dongguan Dongmei

Lung Cheong
Cheong Cheong Digital Lung Lung Cheong Chuangyi Kid Galaxy Kid Galaxy
Technology
Brother Technology Co., Cheong Toys Plastics Co., Precise Machine Inc Limited
Co., Ltd.
Industrial Ltd. Co., Ltd. Ltd. Co., Ltd
Fig. 3.9 Organizational structure of Lung Cheong International Holdings Ltd.

its profit margin and accounted for 82% of the group’s turnover, according to the
statistics in March 31st 2000. Nevertheless, the low value-added processing busi-
ness could simply bring Lung Cheong a small amount of processing fees, while the
majority of profit goes to external enterprises dedicated in design and sales. And the
heavy reliance on clients’ orders led to Lung Cheong’s poor bargain power.
Eventually, such passive situation stimulated Chairman Liang to advance corporate
transformation and embark on the self-innovation road.
Enhancing R&D and Designing Capability so as to Upgrade from OEM to

ODM
Driven by Chairman Liang, Lung Cheong started with transformation, getting

involved in ODM business. Although they still take orders before producing
products, the specific program is designed by Lung Cheong itself, which promotes
their own profit margins. Its ODM business, officially carrying out from November
1994, attaches great importance to the design of remote-control cars, electronic
games, video game controllers, electronic toys and consumer electronics, which are
then sold to overseas markets under its customers’ brands.
In order to strengthen its designing and product developing capabilities, Lung
Cheong actively introduced talents by establishing R&D Center for Hhigh-tech
Products (in 1998) and R&D Center for High-tech Intelligent Products (in 2000). It
also acquired Chuangyi Precise Machine, a Taiwan-funded company in Dongguan,
at the price of HK $18 million. Chuangyi Precise Machine is not only competent in
designing, producing and distributing mold and related equipment, but also has
established sustainable partnership with manufacturers of toy and other consumer
products in Taiwan and Japan. Such an acquisition raised Lung Cheong’s R&D
capabilities to a higher level. For example, Chuangyi Precise Machine, with only 60
employees before acquisition, now developed into an engineering and design
department of Lung Cheong with over 300 employees. Now it can provide a
complete set of design services (ODM) for commissioned customers and also
design new products for its self-brand by a specialized department. The advanced
technology for making models and the talented design and engineering teams of
Chuangyi Precise Machine have laid a solid foundation for Lung Cheong to become
a “one-stop” manufacturer. Its diversified design, development and manufacturing
services all contribute to Lung Cheong’s international reputation and the subse-
quent improvement of mainstream toys and molds as well as model products.
In order to have independent intellectual property rights, Lung Cheong has
gradually increased R&D input. An annual 20 million yuan has been invested in
equipment updating, talents introduction and scientific research activities. An R&D
team has been organized with over 200 technical staff, of which more than 20 have
senior engineer certificate and are specialized in developing products and tech-
niques. Lung Cheong is thus capable to developed about 250 new products
annually over these years.
In addition, Lung Cheong has established an open mechanism of government-

business-university-research cooperation. For instance, the cooperation with
Chinese University of Hong Kong helped it obtain “remote tumbler technology”.
And the intellectual research conducted jointly with Tsinghua University, Harbin
Institute of Technology and Wuhan University of Technology enabled Lung
Cheong to make technical achievements and realize industrialization. Lung Cheong
also established strategic partnership with a number of software design companies.
These efforts enhance the company’s R&D capabilities in high-tech sector.
Embarking on the Self-Brand Road and Upgrading Towards OBM
Liang Zhongming, son of Chairman Liang Lin and General Manager of Lung
Cheong, gradually realized that “Excellent products also need a good brand and
good channels”, which led the company to step on the self-brand road from 2002. It
first acquired the brand “Bendos” of Kid Galaxy and then introduced it into Hong
Kong market, which became the group’s first self-brand. Kid Galaxy is a North
America company and famous for producing a kind of humanlike toys, under its
own brand “Bendos”, whose limbs can flex and extend. When acquired by Lung
Cheong, the company was home to a sales network of 2,800 gift stores in the
United States. Its brand and sales channels could serve for Lung Cheong’s OBM
business subsequently. In recent years, Kid Galaxy has set up over 3,000 sales
points globally with more than 200 toy characters under its brand Bendos, enabling
Lung Cheong to distribute its Bendos-branded products in Asia and Europe. Thanks
to the growth of Kid Galaxy, Lung Cheong managed to set up its affiliates in US
and further expanded Bendos’s distribution network to sporting goods and home
gardening shops. Bendos-branded toys obtained franchise right from three major
professional sports leagues in US, including ice hockey, baseball and football. In
addition, since its first entry of the Beijing market in March 2004, Bendos has set up
a number of sales stores in the major cities of eastern and central China.
Besides, Lung Cheong has also gradually developed a series of product brands
such as KG Races, Elite Fleet, Mad Dog Motors and GoGo, for the sake of
increasing its proportion of self-brand products. Branding sales enable enterprises
to contact with the market directly and thus better master demand changes.
Moreover, Lung Cheong is well versed in the innovative path of toy production,
attaching great importance to the information about market changes and global
high-tech trends. After the acquisition of Kid Galaxy, Lung Cheong hired 12 local
employees in US, who are responsible for both local sales and local
toy-consumption statistics collecting. These statistics would then be sent to
Dongguan R&D center for conducting video conferences, so as to discuss the new
concept of toy development. Through the deployment of the sales network, Lung
Cheong extends its innovation throughout the market, ensuring it can gain sus-
tainable innovative ideas. Simultaneously, it always maintains sensitivity to the
world’s advanced technology, specifies the labor-division of R&D department,
concerns much about the updates of global production techniques, and maintains
knowledge interaction with the outside world, in an effort to ensure Lung Cheong
can keep up with the world’s technology trends.
In 2002, of Lung Cheong’s total business, OEM products accounted for about
76%, while ODM and OBM together accounted for the remaining 24%. The
marginal profit of OBM was up to 50%, ODM 20% and OEM 15–25%. In the
recent years, OEM, ODM and OBM coexist in Lung Cheong. The income ratio of
OEM business decreased from 95% in 1998 to 50% in 2010, while that of ODM
business rose from 10% in 2000 to 35% in 2010, thanks to its acquisition of
research companies. And the income ratio of OBM increased from zero originally
to 15% in 2010.
3.2.4 HaYiDai Toys Co., Ltd.
3.2.4.1 Brief Introduction of HaYiDai
Dongguan HaYiDai Toys Industrial Co., Ltd. (hereinafter referred to as HaYiDai)

was established in 1999. A plush toys business with its self-brand, it combines
professional development, design, production and sales together. Currently, it hosts
over 800 employees, among which about 200 are in Dongguan. Its vision is to
become China’s top-brand of plush toys, leading the domestic trend and growth of
environmental-friendly plush toys. It is committed to developing a high-quality and
environmental-protection toy brand. In 2004, a branch was set up in Shangcai
County Industrial Zone (Zhumadian City, Henan Province) with independent
development and production capabilities nowadays.
In the early days, HaYiDai mainly engaged in processing plush toys for brand
owners such as McDonald’s and Disney. This enabled it to accumulate sufficient
production experience and to raise its product quality, which developed into its core
competence and laid a solid foundation for its subsequent OBM business.
Currently, HaYiDai has transferred its business direction from production-oriented
to marketing-oriented and managed to get rid of the passive situation wherein it had
to compete in the bottom level of market. Driven by markets, it fully integrates
internal and external resources, improves functional and image management, and
eventually establishes an effective external communication mechanism.
At present, the company has its own toy-brand “HaYiDai”, covering over 1,000
varieties of products of more than 30 series such as plush toys, holiday gifts, car
accessories, stationery, mobile phone accessories, bedding, children gifts and some
other areas. These products, featured by fashion and utility, are not only distributed
to hundreds of chain stores in China, but also exported to Europe, US, Japan,
Taiwan and other countries and regions. Accordingly, the annual production
capacity reaches to 10 million toys.
Thanks to such excellent performance, HaYiDai was awarded as “China’s
Famous Brand” by China International Association of the Promotion and Protection
of Consumer Rights and Interests, China Institute of Management Science Brand
and Market Strategy Expert Committee. Besides, it was also awarded as “Excellent
Independent Brand” and “Quality Trust Units” by Dongguan Toy Industry
Association. All of its products are made under CE, EN71, ASTM, CPSIA stan-
dards. As a plush-toy brand, HaYiDai participated in the public investigation of
“China’s most Reputable Consumer Brands”, which was jointly organized by the
China Consumer Satisfaction Survey Organizing Committee, China Survey and
Statistics Industry Association, China Quality Association, and World Consumer
Report (Chinese version). The company won the “Chinese famous brand” honorary
title in 2007. It was also honored as “Favorite Brand of Chinese consumer” in the
large-scale polls of “My Favorite Brand in China” and “A study of the effect index
of Chinese consumers’ favorite brand” in 2006, which was co-sponsored by some
world-renowned financial media such as World Quality Weekly (Chinese version),
World Economist Weekly (Chinese version), and World Consumer Report (Chinese
version), and co-organized by Chinese Market Consumer Index Research Office,
Chinese Olympic Industry Economic Research Center, Chinese Quality
Supervision and Quarantine Promotion Association and Chinese Survey and
Statistics Industry Association. In 2011, HaYiDai won the “Top Ten Chinese Toy
Brands” and other glorious titles.
3.2.4.2 Growth of HaYiDai
Established in 1999, HaYiDai, was originally a purely processing company

receiving commissioned orders. Taking quality as its first concern, it mainly
engaged in processing materials supplied by or imported from foreign companies,
which led to its heavy reliance on these clients’ orders. As a result, the increase of
labor costs and shortage of labor resources in Guangdong province forced HaYiDai
to set up a branch in 2004 in Shangcai County Industrial Park, Henan Province.
Afterwards, it started to carry out self-marketing and self-built channels in 2006,
forming the organizational structure as shown in Fig. 3.10.
3.2.4.3 The Road to Independent Invention of HaYiDai
In 1990s, nearly 2 million jobs were created by toy industry in Dongguan City.
Simultaneously, the perfect combination of low labor-cost and handicraft manu-
facturing industry substantially facilitated the development of Dongguan toy
industry. However, in recent years, China witnessed an all-round development of
domestic economy, rapid growth in Yangtze River Delta, large-scale development
in west China, preferential treatments in agricultural industry, and the arrival of
only-child working age. These factors results in the labor shortage in Pearl River
Delta, a situation that will go on in the future years. Besides, the toy industry also
experienced the falling price of products, lack of energy, sharp rise in water charges
and labor costs in Dongguan, and various international technical standards that
increased product testing cost. Consequently, the profit margins of toys declined
Quality Department
Marketing Department
Accounting Department
Dongguan Administrative Department

HaYiDai International Business Department
Trading Co., Ltd.
Engineering Department
Developing Department
Designing Department
Legal Department
Administrative Department
Dongguan Dongguan Product Control Department
Board of General
HaYiDai Toys HaYiDai Toys Quality Department
Director Manager
Industrial Co., Ltd. Factory
Outsourcing Department
Machine-sewing Department
Business Department
Hand-sewing Department
Manufacturing Department
Cutting-table Department
Packaging Department
HaYiDai Administrative Department

(Henan) branch Quality Department Machine-sewing Department
Manufacturing Department Hand-sewing Department
Source: www.hayidai.com Cutting-table Department
Fig. 3.10 Organizational structure of HaYiDai. Source www.hayidai.com
sharply and processing enterprises were pushed to the crossroads of transformation.

The transformation of HaYiDai was carried out in such a situation.
Since its establishment to 2006, the company mainly engaged in receiving
customers’ orders and then processing plush toys. Without self-brand, it was a
purely production-oriented processing company. The serious labor shortage in
Guangdong in 2005 resulted that OEM companies had to bear the increasingly
higher labor-costs. And the gradual higher quality-demand led to the rise of product
inspection costs in international markets, which directly increased the operational
costs. Coupled with the volatility of international orders, the business environment
was increasingly difficult for OEM companies. Under this circumstance, Xiao
Senlin, HaYiDai’s Chairman, realized that, to achieve long-term development, the
company must set up its sales-channels and self-brand and carry out independent
marketing. Subsequently, he led the company to launch corporate transformation.
From 2006, the company got involved in self-brand business, creating its own toy
brand “HaYiDai”. When choosing this way, the whole staff realized that building
self-brand was not a slogan, but needed sustained efforts of all employees. And,
based on mutual benefit, the company also strives to establish strategic partnership
with various enterprises, actively exploring a variety of external cooperation.
Depending on its excellent quality, HaYiDai successfully entered lots of
supermarket chains, including those foreign-funded ones such as Armik
(Russia-funded), Lotte (South Korea-funded), Wal-Mart, Carrefour, and some
Chinese ones such as Tian He (in Dongguan city), Dennis (in Henan province),
Century Ginwa (in Xi’an city) and Haiya (in Shenzhen city), which made its sales
outlets spread across many provinces and cities. In addition, HaYiDai established
mutually beneficial partnership with a number of domestic enterprises, including
Faw-Volkswagen, Brilliance Auto, China Construction Bank, China Mobile,
Shenzhen Happy Valley, Dalian Laohutan Ocean Park, Sichuan Wolong Panda
Base, Taiwan Dicos, Ashley, Hsu Fu Chi and so forth. Serving as their designated
supplier, HaYiDai provides them with plush toys products. Besides, in 2007
HaYiDai was the exclusive manufacturer producing mascots for several events,
including the Tenth China Paralympic Games (in Yunnan province), the Eighth
China Art Festival (in Wuhan city), and the Sixth China Municipal Athletics Meet
(in Wuhan).
Simultaneously, HaYiDai strives to construct its channels, planning to establish
a distribution network in the country and open chain stores with a unified image.
The in-depth promotion and marketing could help it establish long-term terminal
channels. Since its first holding of franchisee fair in December 2006 to showcase the
advantages of its products, HaYiDai has set up lots of franchised stores in over 20
provinces across the country. It is the first Chinese toy brand that operates
domestically in chain stores domestically and the only plush-toy brand enterprise
that integrates design, development, production and sales. In September 2007,
HaYiDai held a winter product-ordering fair in Dongguan and took the opportunity
to promote its newly developed and designed products. By this way, it could
communicate with customers, grasp market dynamics, and respond to such trends
quickly.
Since its establishment, HaYiDai not only carries out OEM business for many
world brands such as McDonald’s, Hasbro and Disney, but also promotes its own
toy brand HaYiDai. There are more than 30 series and 1,000 varieties under its
brand, most of which are plush toys. As products are upgrading, production tech-
nologies like shadow control, recording, electric toy are integrated into products.
The company has created its own competitiveness through continuous innovation
and updating of new products. In 2010, its OEM and OBM business accounted for
40% and 60%, respectively, of the turnover. Chairman Xiao said that he expected to
expand the proportion of OBM business continually and make “HaYiDai” become
a well-known brand domestically in the subsequent five years. For this purpose,
HaYiDai has drawn up a long-term strategic plan and will go further on the OBM
road.
3.2.5 Comparison of Basic Information
According to the background introduction of Lung Cheong and HaYiDai,

Table 3.13 shows the comparisons of their founding time, ownership nature,
business status and scale.
Table 3.13 Comparison of basic information between the two enterprises

Company name Lung Cheong HaYiDai
Foundation time The group was established in The company was established in
1963. As its subsidiary 1999, its main body is
company, Lung Cheong Toys Dongguan HaYiDai Toys
Co., Ltd. was established in Factory
1989 and its main body is
Dongguan Lung Cheong Toys
Co., Ltd.
Enterprise ownership Hong Kong-funded enterprise Private enterprise
Business segment Carrying out OEM business, it It not only produces and
produces remote-control toys, processes plush toys for some
electronic and plastic toys, well-known enterprises (OEM),
consumer goods and electronic but engages in the design,
products for brand owners such production and distribution of
as Sun Industry, Takara Tomy plush toys under its own brand
toys, Mattel toys, Little Tikes, “HaYiDai” (OBM)
Bandai. It also engages in R&D,
production and distribution of
self-brand products under its
own brand “Bendos” (OBM)
Scale Staff Up to March 31st, 2007, it In 2010, it hosted over 800
hosted 6,053 employees, of employees, of which over 200
which 5,771 are in Dongguan people in Dongguan factory
with the rest in Hong Kong, with the rest in Henan branch
Indonesia and US
Turnover Its turnover reached HK $750 Annual turnover reached tens of
million in 2006 and HK $704 millions Hong Kong dollars
million in 2007
Production The annual output value is over The annual production capacity
capacity HK $100 million was 10 million toys when
engaging in OEM business.
Despite the decrease of output
after conducting OBM business,
the added-value of products
increased
Market Its markets consist of mainland It carries out self-brand business
China and more than 100 mainly in domestic market and
overseas countries and regions, started business in Russia from
including Japan, US and Europe 2010
3.2.6 Comparison of Self-Innovation Capacity
From the growth process of Lung Cheong and HaYiDai, we can find that these two
companies have gone through different transformation paths. Lung Cheong started
from OEM and then gradually stepped into ODM business, adopting these forms
simultaneously in several years. On such basis, it got involved in OBM business
and then carried out these three forms of businesses simultaneously, thus realizing
semi-transformation. HaYiDai, by comparison, also began from OEM but then

transformed towards OBM business. Table 3.14 shows the differences in their
transformation processes and development of self-innovation capability.
The comparative analysis above reflects the distinctions in these two enterprises,
in different scale and business ownership, before and after their self-innovation. It
compares their different practices when raising self-innovation competence and
conducting transformation and upgrading, during which their external situation and
internal conditions, however, are distinctive.
Table 3.15 compares the promotion of self-innovation capability of Lung
Cheong and HaYiDai in the course of transformation and upgrading, wherein the
necessities and contingencies of their path selection and competence raising are
significant to other enterprises.
Table 3.14 Comparisons of transformation process between Lung Cheong and HaYiDai
Contrast item Lung Cheong HaYiDai
First stage of Second stage of
transformation transformation
Beginning year It started from OEM and It possessed self-brand It owned its brand
of transformation then gradually stepped “Bendos” in 2002 “HaYiDai” in 2006
into ODM business from
1994
Transformation The gradual engaging in Thanks to the acquisition Based on its its original
mode ODM business enhanced of Kid Galaxy, a North technology and
its R&D capabilities, American toys company, management
which was further Lung Cheong possessed foundation, It gradually
reinforced after its its brand Bendos and created new brands and
acquisition of Chuangyi could distribute its toys built channels, and
Precise Machine, a under this brand eventually took the
professional research and self-brand road
designing company
Previous services Mainly OEM business. OEM and ODM business Good quality is the main
the added value of the coexisted with strong competitiveness of the
product was relatively R&D capabilities. commissioned
low, the space of profit Mainly produced processing business of
margins was small, the remote-controlled car, plush toy
market fell into a passive video games consoles,
position video game controller,
electronic toys, consumer
electronics design and so
on
Business after When conducting OEM After conducting OEM While operating OEM
transformation business, it had strong and ODM business, it business, it has its own
R&D capabilities. ODM has owned several series brand “HaYiDai”. There
business mainly focused of self-brands such as are more than 30 series
on the design of such Bendos, KG Races, Elite and 1,000 varieties
products as Fleet, Mad Dog Motors, under its brand,
remote-controlled car, and GoGo. It has formed covering plush toys,
video games consoles, a wide range of holiday gifts,
(continued)

Contrast item Lung Cheong HaYiDai
First stage of Second stage of
transformation transformation
video game controller, marketing network at automotive supplies,
electronic toys and home and in North stationery, mobile phone
consumer electronics. America accessories, bedding,
OEM and ODM children gifts and other
accounted for 80% and products. And it has
20% respectively built a marketing
network throughout the
country. OBM accounts
for 60% of the total
business
The ability gap (1) Lung Cheong (1) Kid Galaxy not only (1) HaYiDai established
and the remedy actively introduced helped Lung Cheong mutually beneficial
way before and talents by establishing establish its strongholds partnership with a
after the R&D Center for in US, but further number of domestic
transformation High-tech Products (in expanded Bendos’s enterprises, such as
1998) and R&D distribution network to Faw-Volkswagen,
department for High-tech sporting goods and home Brilliance Auto, China
Intelligent Products (in gardening shops. Bendos Construction Bank,
2000). It also acquired has obtained toy China Mobile. HaYiDai
Chuangyi Precise franchise right of three served as their
Machine, a major professional sports designated supplier
Taiwan-funded company leagues in US, including (2) It took full advantage
in Dongguan, at HK $18 ice hockey, baseball and of chain retail terminals,
million football and successfully entered
(2) It collaborated with (2) Bendos has set up a lots of chain
external research number of sales-stores in supermarkets
institutions and the major cities of eastern (3) It manufactured
universities for the sake and central China mascots for several
of developing technology (3) To expand market events
and new products. share, it obtained (4) It held franchisee fair
(3) The listing in Hong franchise right of many to invite cooperators
Kong Stock Market in toy brands, including
1997 provided financial Granzort, Armor Swat,
support for the Hikarian, Sonic Boy, and
transformation Legend of Nezha
According to the above comparison, substantial experiences can be summarized

from the transformation, upgrading and self-innovation of Lung Cheong and
HaYiDai.
Table 3.15 Comparison of self-innovation capability

Influencing factors of enterprises’ Lung Cheong toys HaYiDai toys
independent innovation ability
Entrepreneurship Chairman Liang’s strong Chairman Xiao has played a
sense of urgency and firm leading role in the
determination of innovation company’s self-innovation
enables the whole group to road
operate towards the
self-innovation goal
Innovation Independent Lung Cheong has a keen HaYiDai emphasizes
concepts intellectual property sense of owning and product designs for plush
ideas protecting its intellectual and stuffed toys, the major
property products of the company.
But the idea of intellectual
property needs to be further
enhanced
Brand consciousness Lung Cheong possesses its HaYiDai transitioned from
self-brand through OEM to ODM directly and
acquisition. It also places aims to establish Chinese
more emphasis on R&D people’s toy brand. Brand
capability and intellectual awareness is its important
property motivation
R&D Capability (1) Emphasizing the input in (1) Emphasizing product
R&D design
(2) Setting up professional (2) Encourage whole-staff
R&D department design and innovation
(3) Attracting R&D talents
Resources Acquisition and Well-preparation for talent Cultivate talents appropriate
status employment of introduction and provide for corporate development
talents talents with favorable R&D by external recruitment and
environment internal training
Acquisition and External financing Internal capital accumulation
utilization of capitals and some small loans
The acquisition, (1) Encouraging innovation (1) Encouraging all internal
accumulation and and improving itself staff to provide fresh
application of through internal ideas and new designs
technology and technology accumulation for the company
knowledge (2) Emphasizing the (2) Raising designing
introduction and capability of staff
assimilation of external through higher education
technology and (3) Cooperating with
knowledge external companies
Management Strategic planning Formulating strategic Establishing strategic
capability competency planning in accordance with positioning according to its
time and implementing competitiveness and
strategic adjustment and consistently adjusting
based on clear objectives branding strategy and
competitive strategy
(continued)

Influencing factors of enterprises’ Lung Cheong toys HaYiDai toys
independent innovation ability
Organization Adjusting organization Adjusting organization
adjustment and continuously, rapidly and continuously, rapidly and
adaptation flexibly according to flexibly according to
strategic deployment strategic deployment
Knowledge (1) Perfecting the Resistance to imitation
management department of behavior through continuous
professional intellectual product renewal and quality
property assurance. At present, the
(2) Formulating the main independent
management system for intellectual property is its
company’s intellectual brand. The infringement of
property brand will be firmly against
(3) Generalizing the IP8001 and there will be no worry
Intellectual Property about the imitation of
Management System product appearance
Industry characteristics High technology content and Low technology content and
long cycle of products fast product cycle enable it
determine the key point to to leapfrog the ODM phase
innovation is maintaining and conduct OBM business
continuous innovation directly. It focuses on
capability. Hence it embarks product designing,
on a road from OEM to development of channels
ODM and gradually to and brand building and
OBM. It focuses on the expansion
continuous improvement of
R&D and designing
capabilities, gradually
completing the
transformation of
independent innovation.
Intermediate transitions are
indispensable
External Competition At present, Lung Cheong Very few homogeneous
environment environment possesses strong competitive competitors in the market
advantages with few direct
competitors in the market. It
is at the high-end of the
whole industry with high
value-added products
Market environment Lung Cheong’s R&D and The demand of domestic toy
manufacturing capabilities is growing 40% per year,
continue to maintain indicating great market
forefront in the global potential
remote-control toy market.
Domestic market demand is
full of potential
Government impetus Dongguan government formulates a number of incentive
policies
3.2.6.1 Innovative Spirit of Entrepreneurs
The success of Lung Cheong’s independent innovation has close relationship with
Chairman Liang who stresses on the innovative and cooperative entrepreneur-
ship. His strong sense of hardship and self-innovation belief enables the corporation
to operate consistently towards the target. Besides, the creativity and cooperation
among the top management ensures the continuous improvement of its innovative
capacity and smooth implementation of transformation. This can also be reflected in
HaYiDai, which could hardly go further on its self-brand road without the inno-
vation determination of Chairman Xiao.
3.2.6.2 The Key to Self-Innovation Is Realizing Independent

Intellectual Property Rights and Forming Self-Brands
Although both Lung Cheong and HaYiDai embark on the self-innovation path, they
have different understanding in how to realize this aim. Lung Cheong has a strong
desire to attain independent intellectual property rights, the key of which, from the
company’s perspective, is the sustainable upgrading of R&D capability. Hence, an
increasingly large input goes to R&D activities. For instance, an annual 20 million
yuan has been invested in equipment updating, talents introduction and scientific
research activities. An R&D team has been organized with over 200 technical staff,
of which more than 20 experts have senior engineer certificate and are specialized
in developing products and techniques. Then an R&D Center for High-Tech
Intelligent Products was set up in 2000. Afterwards, Chuangyi Precise Machine, a
Taiwan-funded enterprise, was acquired in 2002 for its outstanding technologies
and designs. And then Kid Galaxy was also purchased in 2002, owing to its famous
brand and marketing network. Next, the “Research Center of Engineering
Technology for Intelligent Educational Digital Electronics” was set up in Dongguan
in 2005. In addition, a system that encourages internal research and creativity has
been developed to reward those employees who make research achievements. In a
word, the above efforts have greatly facilitated the company’s R&D competence.
HaYiDai, based on its product quality, managed to establish its channels and
brand, for the sake of creating a toy brand of Chinese people. Due to the lower
technological content of plush toys, the company has positioned its competitiveness
accurately without taking the intellectual property rights as its main target. It invests
substantially on the product design to guarantee its rapid renewal of products and
maintain its competitive advantages. A nice innovation-oriented atmosphere has
come into being gradually, stimulating each employee to provide innovative
designs or elements for product development and facilitating the generation of good
designs. Consequently, a large sum of capital was not spent on R&D, but on the
channel construction and brand promotion, for the sake of building the self-brand.
Hence, such innovation path is quite appropriate for HaYiDai whose products are
lower in technological content.
3.2.6.3 Corporate Self-Innovation Cannot Be Separated

from Resources
In terms of acquiring resources needed for innovation, the two enterprises share
many common features. Lung Cheong takes proactive measures in talent intro-
duction to enhance the company’s core competence. Apart from hiring professional
technicians by paying higher salary, Lung Cheong carries out effective strategies in
employees’ training, retention and assignment, hence providing a nice environment
for R&D. Besides, the company plays an active role in technical accumulation and
research, stimulating internal innovation. It also lays great emphasis on the intro-
duction and assimilation of external technology and knowledge. For example, it not
only mastered the remote-controlled tumbler technology by cooperating with
Chinese University of Hong Kong, but attained relevant technical achievements of
intelligent research by collaborating with Wuhan University of Technology,
Tsinghua University and Harbin Institute of Technology. Subsequently, these
technologies and technical achievements have been productized and industrialized
by Lung Cheong after its comprehensive assimilation. In addition, it has established
strategic partnerships with a number of software designing companies to develop
game accessories. Lung Cheong makes full use of all the resources available around
for the sake of sustained development. Its successful listing in Hong Kong stock
market provided it with sufficient financial support for its subsequent transformation
and self-innovation. In 1999, the increased capitals from its original shareholder,
Citigroup Everbright Fund Management Co. Ltd., and the equity participation of
many clients ensured Lung Cheong to continue with its ODM business, strengthen
OEM production equipment, expand customer group, and strive for the licensing
and sales rights of domestic television cartoon toys.
HaYiDai, by comparison, carries out external recruitment, internal training and
further education to gradually foster a large number of talents appropriate to its
development. Although the company relied on production quality to explore market
and satisfy customers’ demands in the early days. The transformation in these
recent years has enabled it to attach more importance on the market expansion.
Regarding technology, it adopts market-follower strategy and appoints professional
information collectors to track down the progress of processing techniques. It
encourages all employees to actively provide innovative materials and new designs
for the company. Furthermore, HaYiDai, to maintain the sensitivity to the outside
resources, dispatch the staff to universities for further study to enhance their
research and designing capabilities. In addition, by establishing and enhancing the
cooperation with external companies, HaYiDai makes good use of their appearance
designs to develop corresponding products and then promotes these own products
through self-channels, which facilitates HaYiDai’s transformation. Different from
Lung Cheong, the majority of HaYiDai’s capitals used for self-innovation trans-
formation come from internal accumulation and the rest from external loans, since
small private firms are quite difficult to receive many financial services.
3.2.6.4 Corporate Transformation and Upgrading Needs Certain

Management Capabilities
Strategic Planning Capability
On the path to self-innovation, Lung Cheong and HaYiDai have presented out-
standing strategic planning capability, which provides an important guarantee for
their successful transformation. In the early days, Lung Cheong attempted to get rid
of the passive situation through establishing its distribution channels. Lung Cheong
Electronics Co., Ltd. was set up accordingly in 1988 by the group and Dongguan
Supply and Marketing Cooperatives, expecting to establish its supply and mar-
keting system and subsequently expand the domestic market. But this trial failed
because of the non-standardized domestic markets. Afterwards, Lung Cheong put
forward another strategic layout. It first improved the independent R&D by
acquisition and then gradually built up is R&D and designing advantages, based on
which it strategically purchased a brand company and thus possessed its own brand.
Consequently, it realized the consistent raising of self-innovation capability. So far,
Lung Cheong has gradually formed its own development strategy, that is, sus-
tainably enhancing and developing the corporate research strength, attaching
importance to the development of intellectual property and independent brand,
motivated by the deepening of reform and the innovating of enterprise system, so as
to thoroughly improve the comprehensive strength of Lung Cheong and strive to
develop itself into the first-class and advanced enterprise in the industry.
HaYiDai, based on its advantages in the specialized production and high quality,
aims to establish a plush-toy brand of Chinese customers. Considering the rising
costs resulted from the labor shortage in Guangdong province, HaYiDai decidedly
laid out the research and designing sectors in Dongguan city and manufacturing
sector in Henan province, spreading its markets across the country. And brand
promotion has been conducted consistently for further exploration of domestic
market. Positioned itself in the high and medium-end market for many years, it has
developed towards the high-end. With years of efforts, HaYiDai has set up a
development strategy, namely, developing its brand by raising quality consistently
and enhancing its brand value by carrying out media publicity, participating
exhibitions and so on. Progress towards the goal of building a well renowned brand
is afoot. Meanwhile, HaYiDai has composed its unique brand strategy. That is, after
inviting a large number of brand franchisees, HaYiDai collaborates with chain
stores and different-sized distributors and agents, thereby steadily developing its
own brand.
Organizational Adjustment and Adaptive Capability
The organizational structure of Lung Cheong has changed rapidly and sustainably,
along with its adjustment of strategic deployment. It first established the R&D
Center for High-tech Products in 1998 and then the R&D Center for High-tech
Intelligent Products in 2000. It also acquired Chuangyi Precise Machine in 2000

and then Kid Galaxy in 2002, during which time it set up the management system
for overseas affiliates. In 2007, it began to gradually move its Dongguan factory
from the original Zhouwu County to Changping County, which not only improved
its productivity but saved costs. And its flexible structural adjustment capability
ensures the implementation of transformation strategy.
Compared to Lung Cheong, HaYiDai is a small-sized private enterprise, but also
presents excellent flexibility during its launch of transformation strategy.
Considering the resource shortage in Guangdong province would hinder its
development, the company was decisive to choose inland as its new manufacturing
base and formed a new organizational structure, which not only solved the
labor-shortage problem but reduced operational costs.
Knowledge Management Ability
Lung Cheong protects its intellectual property rights through the establishment and
improvement of specialized intellectual property department. At the end of 2003, it
established its intellectual property department, formulating guideline and relevant
targets of intellectual property work. It not only appointed some professional staff
and was equipped with relevant facilities, but also formulated and improved a series
of regulations and rules, such as “Regulations on Lung Cheong Intellectual
Property Registration”, “Lung Cheong Patent Management System”, “Lung
Cheong Trademark Management System”, “Process of Lung Cheong Product R&D
Protection “and “Lung Cheong Confidentiality Agreement”. To regulate the overall
management of intellectual property rights, IP8001 Intellectual Property
Management System has been implemented in the company. This can not only
protect the intellectual property rights of its own and clients, but prevent the
unknowing infringement of intellectual property rights of other companies.
HaYiDai, whose products mainly lie in plush and stuff toys, has adopted unique
brand protection strategy for its self-brand. It is not long since the company began
to build its own brand, so that the brand value is not very significant. One strategy
HaYiDai has pursued to fight bogus imitations is to speed up product replacement
and and to ensure product quality. And because the brand of HaYiDai is not so
prominent, the profit margin of the imitations is small even under the condition of
the same quality as the branded products. This makes imitations less perplexing a
problem. At present, the company’s major effort is aimed at combatting brand
infringement since the brand is its main independent intellectual property right.
3.2.6.5 Several External Factors Influence the Paths of Corporate

Transformation and Upgrading and Self-Innovation
Industrial Characteristics Affect Corporate Choice of Self-Innovation Path
As special entertainment products, toys can be roughly divided into high-tech and
low-tech types. The majority of Lung Cheong’s products are wireless
remote-controlled products and electronic products, featured by high-tech and long
R&D cycle, while the whole toy industry is characterized by rapid product
upgrading. Therefore, Lung Cheong understands that maintaining continuous
research and innovation capabilities plays a critical role in the self-innovation road.
Accordingly, during its transformation from OEM to ODM and then to OBM, it
always focused on the sustained improvement of R&D and designing capabilities,
which contributed to its subsequent realization of independent innovation. Such
emphasis on innovation is a necessity for Lung Cheong.
By comparison, HaYiDai concentrates on the production of plush toys, which
are not only featured by lower technological content and faster upgrading cycles,
but also easily integrated with other technological products. Based on its own
characteristics, the company accurately positions its self-innovation path, wherein it
leapfrogged the ODM stage and directly conducted OBM business. That is, while
focusing on the novelty, practicality and innovativeness of designs, it spared no
effort on the development of channels and the construction and expansion of
brands. In a word, both companies have captured the key in how to enhance
self-innovation capability.
External Environment Affects Enterprises
Both companies are facing relatively good competitive environment and market
environment. In terms of the competitive environment, Lung Cheong is at the
high-end of industrial competition and owns strong competitive edge, owing to its
relatively high value-added products and the lack of market rivals. This also enables
Lung Cheong to promptly adjust strategies according to its development.
Manufacturers of counterfeit and shoddy products are mainly the abnormal com-
petitors. To crack down them administrative and judicial measures must be taken.
These efforts, to a large extent, contribute to its knowledge management system,
With regard to market environment, not only does its research and manufacturing
capabilities maintain forefront in the global remote-control toy market, but
increasingly large efforts have been taken consistently to the research and pro-
duction of intelligent robot series. The company enjoys technological superiority in
the international market with huge market capacity. And it also attaches great
importance to the expansion of domestic market, the enormous demand potential of
which also motivates it to carry out transformation.
HaYiDai, one of a handful of plush-toys companies in China, has carried out
independent research and design and promoted its self-brand products. Therefore, it
has few homogeneous competitors. Although there are some plush-toy brands in
China, many of them are brand operators, who outsource its toy manufacturing to a
single producer. But such cooperative relationship is fragile, which is different from
HaYiDai who integrates branding operation and production together. Next,
HaYiDai sticks to the development and expansion in the domestic market.
According to the statistics of Ministry of Commerce, the market demand of toys in
China maintains an annual growth of 40%, indicating a favorable market envi-
ronment. Nevertheless, due to the lower technological content of plush toys,
HaYiDai is less likely to benefit from government supports.
Government Affects the Transformation and Upgrading of Both Enterprises
In recent years, the Dongguan government has introduced a series of policies and
measures to motivate corporate innovation. An annual specific-fund of 1 billion
yuan, named “Technological Dongguan”, has been established to support compa-
nies in terms of technological research, patent services and intellectual-property
protection. With regard to private enterprises, the government will optimize the
financing environment, guide them to purchase R&D institutions, R&D team and
research achievements at home and abroad, for the sake of raising their innovative
capability. As regards foreign-invested enterprises, the government will motivate
and support them to build localized research teams and institutions, transforming
themselves from “Three-plus-one” trading-mix enterprises to joint ventures or
cooperative enterprises. Meanwhile, the government actively engages itself in
building public technology platform, industrial technology platform, and corporate
R&D institutions. Besides, some public innovation centers have been set up,
including the Wool-Textile Technology Innovation Center as well as the Dongguan
Experimental Center of Key the National Key Mould Laboratory.
To attract more talents, the municipal government has set up a broader-coverage
household registration system and improved the services and supporting policies.
Subsequently, a variety of Science Parks for Startups and Innovation have been set
up for returned overseas graduates, doctors and SMEs. Relying on innovative
projects and excellent enterprises in these parks, the government can proactively
introduce more high-quality talents for the long-term independent innovation.
3.2.7 Influencing Factors of Self-Innovation of Lung

Cheong and HaYiDai
From the above comparison in terms of R&D capability, resources status, man-
agement ability, external environment and government functions, it is shown that
during the transformation process towards self-innovation, both companies have
been influenced and promoted by their internal and external factors. Taking the road
of independent innovation is not a whim and whether the transformation could

achieve success is related to many factors. Shown from the development process of
the above two enterprises, they have embarked on the self-innovation road under a
particular historical background. Different in the transformation mode and process,
though, they share something in common.
3.2.7.1 Influencing Factors of Lung Cheong’s Independent Innovation
External Pressure of Lung Cheong’s Transformation
The transformation of Lung Cheong is mainly attributed to the passive market

position and cost pressures. Since OEM business is positioned in the middle stream
of the industrial chain, companies simply engaging in this business would be easily
affected by brand owners. These OEM companies, lacking contact with markets, are
not only difficult in building sustained competitiveness, but very likely to become
the victim of brand owners in terms of cost-shifting. This is because the brand
owners could turn the saved manufacturing costs into their own profits, but put the
blame on the processing party when problems appear. The 2007 Recall is the best
evidence. Chairman Liang once said that if Lung Cheong had not started with the
establishment of self-channels and self-brands ten years ago, it would have been
difficult for the company to escape from the 2007 crisis. For consumers, they
usually make a purchasing decision based on brands instead of place-of-origin.
Even if the processing party manufactures high-quality products, all of the benefits
and rewards would be taken away by the brand owners. It is such foresight that
enables Lung Cheong to embark on the self-innovation road.
Besides, the increased prices of raw materials (i.e. rubber and oil) and labor force
in Guangdong Province have led to the rise of manufacturing costs and decrease of
profit margins, which directly drove the transformation of Lung Cheong. For a long
time, the profit margins of OEM business have been squeezed heavily by fierce
market competition, clients’ price-cutting and huge cost pressure. This situation
forced OEM companies to expand ODM and OBM business to maintain higher
profit margins. Chairman Liang once expressed that the gross profit rate of OEM
could reach 30–40% in 1980, which decreased by 50% in 2010. Nevertheless, Lung
Cheong still maintains the profit margin of about 30%, thanks to the launch of
ODM and OBM business of high value-added and high profit. Moreover, Lung
Cheong has taken proactive measures to expand non-toy product business, such as
educational wireless robots and Bluetooth headphones, against the intensified price
competition in the toy industry.
Internal Factors of Lung Cheong’s Successful Transformation
First of all, the subjective consciousness of the top management plays a significant
role in advancing the transformation of Lung Cheong. Its development enjoyed a
relaxing and smooth decade from 1985 to 1995, heavily relying on the amount of
clients’ orders. Yet it had to pay a high price for that. Once the clients cancelled
orders, the factory would become unsustainable. During the many years of OEM
business, Lung Cheong had been suffering from the exploitation of brand owners
and Chairman Liang always hoped to have more initiative. For this reason, he
determined to carry out transformation and establish its own distribution channels.
Consequently, Lung Cheong Electronics Co., Ltd. was set up in 1988 by the group
and Dongguan Supply and Marketing Cooperatives, expecting to establish its
supply and marketing system and subsequently expand the domestic market.
However, due to the large amount of counterfeit products in Chinese market at that
time, consumers could not identify the authenticity of products, while the pro-
duction and circulation costs of fakes were relatively low, both of which resulted in
Lung Cheong’s difficulty in building its own channels. To survive this predicament,
Chairman Liang and his brother strategically conducted the acquisition of Chuangyi
Precise Machine in 2000 and Kid Galaxy in 2002. The former acquisition has
substantially promoted Lung Cheong’s R&D and design capability, and the latter
has enabled the company to establish independent brand. Consequently, Lung
Cheong has successfully transformed from a pure processing company to a com-
prehensive toy enterprise with self-brand, self-R&D and self-marketing. Such
transformation is driven by its entrepreneurs within the company.
Moreover, the capabilities in effectively integrating resources and taking
advantage of opportunities guaranteed the smooth transformation of Lung Cheong.
It started with transformation in the late 20th century and went public in 1997. This
successful financing in the key time of transformation provided favorable financial
support for the subsequent transformation of Lung Cheong. And its long-term
exceptional commitment and input to the research and designing section contributes
to the fostering and upgrading of its R&D and designing capabilities, while also
plays an essential role for its subsequent self-brand development. The rapid growth
of Lung Cheong is also attributed to the accurate insight into the surrounding
opportunities and resources, the selection of Chuangyi Precise Machine, the
cooperation with universities to obtain high-tech franchise right, the attention to the
entertainment dynamics and the procurement of brand agents.
Furthermore, the heavy input in R&D and technology-oriented and
market-driven concept also contribute to Lung Cheong’s outstanding performance.
The consistent R&D investment ensures the continuous improvement of R&D
capability. And the sufficient manufacturing experiences accumulated from the
many years of OEM business guarantee its product quality. Such combination
brings about regular customers for the company and thus ensures its business
volume. Besides, innovative awareness was perfectly shaped in the company.
Employees are encouraged for positive innovation, which would be rewarded for
new ideas (after corporate evaluation) and technical achievements. Accordingly, a
positive and innovative atmosphere comes into being in the company. After
engaging in ODM business, Lung Cheong, assisted by the increasingly strong
design and engineering department, makes full use of its sophisticated radio
technology to develop a variety of `remote-controlled toys of vehicles, ships and

aircraft.
Apart from increasing R&D input internally, Lung Cheong enhances its part-
nership with external scientific research institutes and higher educations, such as
Tsinghua University, Harbin Institute of Technology and Wuhan University of
Technology. Such cooperation enables Lung Cheong to obtain information and
projects of intellectual products, then industrialize some intellectual research pro-
jects that have market benefits and potential, so as to increase the company’s
proportion of OBM products. Meanwhile, it collaborates with domestic mass media
and organizations and takes advantage of various programs, in an effort to develop
potential products and strengthen its brand image. These activities can help rein-
force the company’s tangible and intangible assets, generating new momentum for
the company’s sustainable development. Thanks to the above principles and
guidance, Lung Cheong successfully develops robots, home robots and smart
educational robots through the launch of cooperative projects with Hong Kong
Polytechnic University, Tsinghua University, Harbin Institute of Technology and
Wuhan University of Technology. Some of the projects have been completed and
introduced into the market while some are still on the way. These projects not only
accelerate the company’s R&D strength but facilitate the upgrading of its brand.
In addition, to reinforce the Group’s professional competence, the executive
level has planned to restructure its management and processing procedure so as to
rationalize the utilization of resources used in production and operation. It will also
integrate manufacturing facilities and equipment to improve the overall profit
margins of the Group.
3.2.7.2 Influencing Factors of HaYiDai’s Independent Innovation
The successful transformation of HaYiDai can be attributed to the following

factors.
The Entrepreneurship of Chairman Xiao Plays a Significant Role in

Promoting Transformation
The precarious situation prompted Chairman Xiao to lead his company to start
transforming its business mode and to build its own brand. The consciousness of
entrepreneurial leadership always has a great influence on the development of
Chinese private enterprises and, to a certain extent, determines its direction. From
the previous accepting orders for processing to the subsequent self-research,
self-designing, self-production and self-sales, companies must bear the rise of costs
and decline of business volume in the early stage. Meanwhile, companies are
required to put new efforts into R&D and marketing, which they did not need to pay
any attention to before, and to grow up through continuous exploration. Whether
entrepreneurs can firmly insist on the self-innovation road will determine the
success or failure of the transformation. Chairman Xiao, together with his staff, has
formulated and steadfastly implemented its long-term development plans, enabling
HaYiDai to go further on the self-brand path.
HaYiDai Has Accumulated Substantial Processing Experience in OEM

Business. International Norms Were Used to Standardize Products, Which
Facilitated the Company to Focus on the Continuous Improvement of
Product Quality in the Early Days
Quality is one of the key factors in the success of HaYiDai’s transformation. The
shortage of capitals resulted in its difficulty in carrying out massive market pro-
motion, as a result of which product quality has become one of its competitiveness.
Adhering to the business philosophy of “high quality first, scientific management
foremost, reputation for market, quality for development”, HaYiDai managed to
produce highly qualified products and provide outstanding services for its clients,
laying a solid foundation for its self-brand construction. At present, HaYiDai is
hardly afraid of being forged or counterfeited. Relying on a wide range of product
series, short product upgrading cycle, prominent product quality as well as accurate
medium-market pricing, the company leaves few profit margins for counterfeiters
and highlights itself in the protection of product intellectual property rights.
HaYiDai Devotes Itself to the Manufacturing of Plush Toys Which Are

Different from Electronic Toys and Mechanic Toys
Plush toys, thanks to the wide range of forms, can be easily intermingled with
various festivals at home and abroad. The higher flexibility, lower technological
content and faster upgrading cycle contribute to its difficulty in applying designing
patents. Consequently, HaYiDai worries little about being counterfeited, but can
develop and launch new designs and new products with confidence.
Meanwhile, HaYiDai attaches great importance to the continuous innovation and
upgrading of its R&D capability. An R&D team consisting of more than 20
members makes use of the market information collected by the marketing depart-
ment to understand the changes in consumer demand and introduces new designs,
in an effort to shape its competitive edge with continuous innovation. According to
Chairman Xiao, HaYiDai lays significant emphasis on the input in R&D, which
accounts for 20% of the business income. Moreover, a number of staff will be
arranged for further study in universities to raise their research capability. In
addition, the cooperation with external institutes helps HaYiDai to enrich its
designing resources and thus promote its products’ added value. And thanks to the
collaboration with companies producing electronic toys and battery-operated toys,
HaYiDai can take advantage of their advanced technology and enrich its own
product lines.
3.2.8 Facts and Discoveries
From the above analysis, we find that the development processes of Lung Cheong
and HaYiDai are instructive to Dongguan’s toys enterprises. The transformation of
these two enterprises, to a great extent, was passively driven by historical envi-
ronment but actively led by their entrepreneurs in practice. The management plight,
as the external pressure, forced companies that originally engaged in low
value-added processing business to conduct transformation for greater profit mar-
gins. Although the success of Lung Cheong and HaYiDai differs in kind, it implies
some common features behind their growth process and patterns.
Above all, the comparison and contrast above show that, despite the differences
in the external environment during their transformation, both enterprises have
accurately captured the market potential and the key point of future competition.
And this is the prerequisite when they determine to carry out independent
innovation.
Moreover, the entrepreneurship of their leaders plays an important role in the
initial stage of corporate innovation. Among the number of self-innovation cases,
some are successful while many have failed. The main reason that they failed to
develop self-innovation capability is that their leaders lack the willingness to
innovate and do not have the influencial entrepreneurship to direct corporate
innovation. This is particularly evident in private companies.
Furthermore, when entrepreneurs have strong entrepreneurship and firm deter-
mination to lead transformation, their management capability and corporate
resources play a more significant role on their innovation path. Independent
innovation is not a short-term activity, but requires the companies to formulate
long-run strategic plans, get resources and improve capability sustainably. Besides,
they should pay attention to knowledge management, protect independent intel-
lectual property rights, and carry out organizational adjustment, thereby ensuring
the smooth growth of enterprises. Since Lung Cheong’s main products have higher
degree of scientific and technological content, its R&D capacity is indispensable
during its long-term development. Therefore, in the whole process of transforma-
tion, Lung Cheong is concerned about R&D investment and talent introduction,
remaining sensitive to the surrounding knowledge resources. By comparison,
HaYiDai’s main products are plush toys with lower technology content, thus
constructing channels and brands of its own are essential to its continuous devel-
opment. Hence, after ensuring product quality, HaYiDai is committed to the con-
struction of channels and brand, personnel training and organizational adjustment,
in an effort to ensure the smooth generation of self-innovation achievements.
Undoubtedly, every company has its own particularities. Exploring the
self-innovation path does not mean to find out a bright avenue suitable for all
enterprises. Lung Cheong has transformed from OEM to ODM and then to OBM. It
is a gradual innovation process. HaYiDai directly transformed from OEM to OBM
and launched its own brand. They base their path selection on their strengths and
product characteristics. Therefore, regarding the choice of self-innovation path there

is no absolutely right or wrong ones, but fitness or unfitness.
Finally, in spite of the large amount of research on how companies improve their
self-innovation capability, domestic scholars focus too much on the governmental
role. The development of Lung Cheong may have been facilitated by the govern-
ment to some extent, but HaYiDai, comparatively, mainly relied on itself for the
growth of innovative capability.
Therefore, we can summarize that, to promote the independent innovation of toy
enterprises in Dongguan, it’s necessary to conduct feasibility analysis of market
environment, stimulate innovation awareness of entrepreneurs, and raise corporate
capabilities in internal management and key-resource access, After the formulation
of detailed strategic planning, it’s necessary to select an appropriate self-innovation
path, improve key capabilities for innovation, carry out organizational adjustment
and intellectual property rights protection, in an effort to promote self-innovation
steadily and sustainably.
3.3 Upgraded Enterprise in Lighting Industry: NationStar

Optoelectronics
3.3.1 Company Profile
Founded in 1969 in Guangdong province of China, Foshan NationStar Co. Ltd

(hereinafter referred to as NationStar) is specialized in the development, production
and sales of LED chips and LED lighting products. As an outstanding high-tech
enterprise in Guangdong province, it is also one of the key high-tech enterprises of
the National Torch Plan. Currently, its production bases are located in the city of
Foshan (in Guangdong province) and Wuxi (in Jiangsu province). With expertise in
LED packaging field and advantages on capital, distribution channels, R&D, and
management, it has been ranked as one of the largest LED packaging enterprises
widely recognized in LED industry. On 16th July, 2010, it launched its initial
public offering and was listed in Shenzhen Stock Exchange.
Having been attaching great importance to technical development and innova-
tion, the company is equipped with the post-doctoral science workstation, the
enterprise technology center of Guangdong province, the optoelectronics research
center of Guangdong province, and the research office of Academician Qiang Su. In
recent years, the company has undertaken various research projects supported by
national and local governments, such as the National “863” Plan Project, the
Science and Technology Project of the National “Tenth Five-Year-Plan”, National
Electronic Information Industry Development Fund, and other provincial and
municipal major R&D special projects. Furthermore, NationStar’s products have
been granted with a lot of national and provincial key product titles as well as
provincial and municipal scientific progress awards. The company has passed the
3.3 Upgraded Enterprise in Lighting Industry: NationStar … 125
Table 3.16 Basic information of NationStar

Founding time 1969
Company property From state-owned to private-owned
industry of company Semiconductor optoelectronic device manufacturing industry
(engages in the R&D, manufacturing and marketing of LED
devices and components; and the products are widely applied
to the fields of consumer electronics, home appliances,
computers, communicating, flat panel and lighting
engineering)
Business condition Conducing OBM business domestically, and ODM as well as
OBM business abroad. Adopting OEM in processing part
Enterprise scale (up to Staff number: 1617
December 31st, 2013) Sales revenue: yuan 1.142376 billion
Total assets: yuan 3.400881 billion
Listing situation Being listed on Shenzhen Stock Exchange on July 16th, 2010
Industry ranking One of the greatest LED packaging enterprises, industry
leader
Enterprise honor Semiconductor Lighting Technology Standard Working
Group Member Unit, Scientific and Technological Innovation
Fund for Outstanding Small and Medium—sized Enterprises
of Guangdong Province, Key Hi-tech Enterprise of the
National Torch Program Hi-tech Enterprise of Guangdong
Province, IPR Demonstration Enterprise of Guangdong
Province, AAA Grade Credit Enterprise, Integrity
Demonstration Enterprise in Guangdong Province, and the
Top 500 Enterprises in Guangdong Province in 2010, etc
international certifications of ISO9001 quality management system, ISO14001

environmental management system, ISO/TS16949 quality management system and
OHSAS18001 security management system. Table 3.16 shows the basic informa-
tion of this company.
3.3.2 Upgrading Path
3.3.2.1 Being Supported by Packaging, and Developing Core

Competencies Through Technology Accumulation
LED packaging is in the middle-stream and downstream of the industrial value

chain. Its upgrading path seemed to be limited when compared with some upstream
parts like chips and epitaxial slices manufacturing. However, thanks to the support
of packaging and technology accumulation in LED packaging, NationStar has
developed core competencies and achieved upgrading successfully.
Since the foundation, NationStar has engaged in OEM business with meager
profit for over ten years. Since 1981, it has begun to cooperate with Japan’s Sanyo
Electric Co. Ltd in processing LED display panels and introduced its advanced
Lamp LED product line in 1991. This cooperation brought the internationally
advanced LED packaging technology to NationStar, which greatly enhanced its
technical skills and manufacturing ability. Furthermore, NationStar introduced
Japanese advanced management systems and ideas which are still having profound
influence on itself today. After this event, developing for over three decades,
NationStar gradually becomes the leading company in the LED packaging industry.
According to the research of CCID Consulting, among the 10 top enterprises in
Chinese LED market sales in China in 2008, 7 were respectively occupied by
Taiwanese manufacturers, the US company Cree and the Japanese company Nichia;
while the 8th one was NationStar, which means it ranked 1st in mainland China.
LED packaging is different from integrated circuit packaging. Large high-end
LED packaging companies can foster core competitive advantages in terms of the
technical reserves, talent pool and economies of scale. As the reliability of LED
products depends on the LED packaging technology, excellent packaging and heat
dissipation technology that can lengthen the longevity of LED products. Moreover,
different application fields—from cellphone screens to outdoor all-color display
screens, from indoor lights to outdoor road lamps—have diverse requirements to
packaging technology. For example, the packaging devices from LED backlight for
Liquid Crystal Display Television need a high degree of high power lighting, which
has higher requirement on heat dissipation and service life; and the devices of
outdoor display screens should be waterproof and ultraviolet-proof besides good
luminous performance. Attaching great importance to the technological accumu-
lation in such aspects, NationStar has developed its core technology in this field.
Relying on the technology advantage in led packaging field and utilizing the
printed-circuit board (PCB), it further developed a new kind of high-power LED
devices and manufacturing technology in 2011. The devices have great competitive
advantages in term of heat dissipating property, optical property and production
costs.
LED packaging is NationStar’s major source of profits. From 2007 to 2009, the
sales revenue of LED products accounted for 85.98%, 81.60% and 84.28%
respectively; and compared with the same industry, the gross margin was much
higher than the industry’s average level (see Fig. 3.11) and another three famous
Taiwanese LED packaging enterprises (see Fig. 3.12), from which the obvious
advantage of core competence can be seen.
Thanks to its core competitive advantage in this field, NationStar is getting more
recognition from the society. It has become IBM’s qualified supplier since 2010. In
January of the same year, it won the bid for the hall’s energy-saving lighting project
of China Mobile Company with its bid-winning LED spotlights accounting for as
much as 31% in the whole project.
Average gross margin of electric component industry

Gross margin of NationStar
Gross margin of NationStar’s LED business
Resources: Prospectus of NationStar and Guizot Jun’an Securities Research
Fig. 3.11 Gross margin comparison between NationStar and the industry (2007–2009).
Resources Prospectus of NationStar and Guizot Jun’an Securities Research
NationStar Co. Ltd. Everlight Electronics., Ltd.

Bright Led Electronics Corp. Harvatek Corp.
Resources: Prospectus of NationStar and Guizot Jun’an Securities Research
Fig. 3.12 Gross margin comparison between NationStar and three Taiwanese LED packaging
enterprises (2007–2009). Resources Prospectus of NationStar and Guizot Jun’an Securities
Research
3.3.2.2 Starting from OEM and Coordinating Both Domestic

and Foreign Markets with OEM/ODM/OBM Coexisting
NationStar was just a state-owned small factory at the very beginning after its
establishment, manufacturing silicon and semiconductors only. Having maintained
such OEM business for more than ten years, it gradually went on the road of ODM/
OBM by introducing the advanced LED packaging technology of Japan’s Sanyo
Electric Co. Ltd. So far, it has developed OBM business domestically and simul-
taneously undertaken ODM and OBM and OEM business abroad. Table 3.17
shows the specific sales revenue.
In the domestic market, the production of LED is in the top three nationwide and
NationStar is also the biggest supplier of (SMD) LED in China. In foreign markets,
it promotes its products mainly by fairs and brand influence with the sales scope
spreading over the world and has lots of customers in many areas, including
America, Europe, Asia, Africa and so on. In particular, the volume of business with
the USA, Britain, Germany, Spain, Australia, Korea, Japan, India and Russia has
accounted for the major part in the company’s sales revenue. This indicates
NationStar has achieved outstanding effect in the globalization progress. Table 3.18
shows the company’s revenue of main business in different areas.
3.3.2.3 Adopting the Innovation Pattern from Technology

Introduction to Digestion and Absorption and then
to Independent R&D
The technological innovation of NationStar mainly follows the procedure of

introduction, digestion and absorption, imitation, and independent innovation.
Since 1981, it has manufactured LED display boards cooperating with Sanyo
Electric Co., Ltd., Thanks to Sanyo’s introduction of Lamp LED (Direct plug-in
led) production line, NationStar has mastered LED packaging technique by
digesting and absorbing the advanced technology. It has also built up a relatively
well-developed system of process control, production management and quality
Table 3.17 Business composition of NationStar (2007–2009). Resources: Investigations on the

company and Prospectus
2009 2008 2007
Sales Ratio Sales Ratio Sales Ratio
(10,000 ¥) (%) (10,000 ¥) (%) (10,000 ¥) (%)
OBM 52,104.32 82.98 45,336.21 80.00 38,008.60 85.63
ODM 1,148.85 1.83 1,125.14 1.99 295.74 0.67
OEM 9,537.93 15.19 10,211.04 18.02 6,082.23 13.70
Total 62,791.09 100.00 56,672.39 100.00 44,386.57 100.00
Table 3.18 Revenue of main business in different areas (2007–2013). Resources: Investigations
on the company, prospectus and annual reports
Region 2013 2012 2011 2010
Revenue Ratio Revenue Ratio Revenue Ratio Revenue Ratio
(10,000 ¥) (%) (10,000 (%) (10,000 (%) (10,000 (%)
¥) ¥) ¥)
Internal 916,12.1 80.6 711,28.7 75.4 82256.0 76.8 68369.0 78.2
area
External 220,04.6 19.4 232,35.9 24.6 24889.2 23.2 19073.3 21.8
area
Total 1,136,16.6 100.0 94364.6 100.0 107145.3 100.0 87442.3 100.0
Region 2009 2008 2007
Revenue Ratio Revenue Ratio Revenue Ratio
(10,000 ¥) (%) (10,000 (%) (10,000 (%)
¥) ¥)
Internal 45252.0 72.5 38923.5 69.0 32082.7 72.5
area
External 17207.9 27.6 17527.8 31.1 12164.9 27.5
area
Total 62459.9 100.0 56453.3 100.0 44247.6 100.0
management. By continual learning and practice, it has possessed the capability of

independent R&D (see Fig. 3.13).
The achievements mentioned above benefit from NationStar’s great devotion to
independent innovation. It has set up a provincial enterprise technology center and a
provincial optoelectronic engineering technology research center. Up to December
31st, 2009, it had invested a total of ¥50 million in the new products’ technological
R&D and transformation. Until October, 2011, it had applied for 180 patents and
achieved 135 authorized ones including 10 authorized patents for invention, which
was really remarkable.
In addition, as the executive director unit of China Solid State Lighting Alliance,
the deputy director unit of Optoelectronic Devices Branch of COEMA (China
Optics and Optoelectronics Manufactures Association), and the annual member unit
of Working Group on Technology Standard of Semiconductor Lighting from 2005
to 2009, the company has participated in setting many national standards.
Nowadays, NationStar has transformed from a previous labor-intensive com-
pany processed with supplied materials to a self-innovated company with inde-
pendent manufacturing and marketing. It has become one of the top three biggest
LED packaging companies and the biggest SMD LED packaging enterprise in
China.
Fig. 3.13 Independent R&D process of NationStar. Resources Investigations on the company,
official website, annual report and other secondary sources
3.3.2.4 Taking SMD LED as a Strategic Foothold to Develop Products

and Customers of New Domain
Among LED packaging, SMD LED packaging is the most difficult one in terms of
technology and has high added value, which makes its profitability much higher
than lamp products. Hence, NationStar carries out a steadfast development strategy
that emphasizes on SMD LED as well as stabilizes the traditional lamp LED. The
company’ s present product structure, according to the product classification, can be

classified as Lamp LED, SMD LED and LED lighting products; according to the
customer classification, can be classified as display products, household appliances
products and lighting products. Among these products, display products and
household appliances products are the traditional ones of the company and display
products enjoy rapid growth. (Table 3.19).
Accordingly, the company regards SMD LED as its strategic point and adjusts
its product structure. In 2010, the capacity of its SMD products expanded largely. In
particular, the output of the product Top View expanded from 130 million yuan in
2009 to 1 billion yuan in 2010, thus driving 32% growth in the company’ s revenue.
Meanwhile, reinforcing the investment of the lighting product’s R&D and sales
increased 60 million yuan of the sales income of lighting SMD modules, and
contributed to the company’s 10% revenue growth.
High value-added SMD LED products have a wide range of applications with
lots of profit growth points. Currently, the company has vigorously expanded new
customer base, including IBM, Sandisk (the world’ s largest flash data memory card
supplier), Huawei Technologies, BOE (manufacturing LCD TVs with LED back-
light), Nanjing Lopu Co., Ltd, Shanghai Sansi Technology Development Co., Ltd
and other famous LED display screen manufacturers in China. In addition, by right
of self-innovation and technology advantage, the company introduced high-tech
products promptly to the market because they were featured by wide application.
This move has successfully developed new customers in the field of display screen,
helping the company create a new profit growth point and remain a high gross profit
rate during the reported period. At present, following the customers of home
appliances, those of display screen have become the company’ s major ones, with
the display screen sales income accounting for 28.40% of the company’ s total
revenue in 2009.
Table 3.19 NationStar’s product structure and applications. Resource: Company announcements
and Northeast Securities
Lamp Household appliances, outdoor display, automobile lighting and so on
LED
SMD Chip LED Household appliances, indoor whole– colored display screen and so
LED on
PLCC LED Top both outdoor and indoor whole-colored display
Emission screen, small and medium size backlight, indoor
lighting and so on
Side-view Small size backlight and so on
Emission
High-power GE lighting, large-size backlight and so on
LED
3.3.2.5 Vertically Integrating the Industry Chain by Mergers

and Acquisitions, Enterprise-University-Research Cooperation
to Enhance Competitiveness
The chain of LED industry is relatively long. Upstream chip and other technologies
play key roles in this chain and possess the highest added value, while the appli-
cations in downstream are scattered with diverse application characteristics. The
vertical integration of industry chain can provide products and solutions with
technology and cost competitiveness, which can enhance the company’ s
risk-resisting capability. Therefore, apart from the company itself taking measures
to develop both upstream and downstream, NationStar’s mergers and acquisitions
are of great significance to its vertical integration strategy of industrial chain.
Based on packaging, NationStar’s specific movement to extend the downstream
and upstream are as follows:
Downstream expansion. To expand itself to lighting applications of LED, Lighting
Division of NationStar was established at the end of 2009 and engaged in the R&D
of downstream LED product applications such as LED and light modules. This
division was upgraded to Foshan NationStar Optoeletronics Co., Ltd. in June 2011.
A marketing center, which was formally established in Sichuan in October 2011,
was NationStar’s first domestic provincial marketing center of LED lighting
products. Langyue Photoelectric Technology Co. Ltd. was also established as the
only legal Sole Distributor of NationStar’s LED lighting products in Sichuan
province, which is the important start of NationStar’s new-channel strategy. In the
future construction of LED lighting channel, NationSatr will pay continuous
attention to the development of market segmentation.
Upstream expansion. In 2009, with 15% shares, NationStar set up Xurui
Optoelectronics jointly with SemiLEDs (the U.S. Chip maker) and other compa-
nies. This company engaged in LED epitaxy and chip production. In August 2010,
NationStar decided to spend the over-raised funds of 17.17 million yuan in pur-
chasing the right to use a piece of land, which covers an area of 16.80523 square
meter, in Chancheng (in Foshan city) and spend 132 million yuan in building a new
plant on it. In the new plant, NationStar will invest 224 million yuan in imple-
menting the new TOPLED manufacturing technology and industrialization projects.
As the world’s pioneering technology, new products of TOPLED project are a new
kind of TOPLED holder which are made by PCB materials and have independent
intellectual property rights made by PCB materials with independent intellectual
property rights. The new TOPLED model, designed and packaged based on this
new substrate material, has high-thermal conductivity so that the device has better
heat dissipation performance. In March 2011, cooperated with Chengxin Venture
Capital, GF Xinde Investment Management Company and so forth, NationStar
spent 40 million yuan from the over-raised fund setting up a joint venture named
NationStar Semiconductor with a stake of 66.67%, in order to carry on LED epi-
taxial chip research, development and manufacture. This project planned to invest
2.5 billion yuan to construct the workshop and supporting houses of 50,000 m2. In
addition, the project planned to introduce 20 MOCVD product lines and corre-
sponding chip production equipment in 2011. Another 2.5 billion yuan was
invested to introduce 50 MOVCD wafer production lines and corresponding epi-
taxial production equipment. Having entering the construction phase of the plant,
NationStar Semiconductor will continue to promote the packaging business of
NationStar and provide support for large-scale production of LED.
In the LED industry chain, R&D and manufacturing of epitaxial chip is crucial
for the company to take initiative in the industry chain and market development.
Based on the concept of “Overseas Talent Introduction, Independent R&D and
Collaborative Innovation among Enterprise-University-Research institutions and
Industry Chain”, NationStar will strive to improve the epitaxial chip technology
and promote the industry chain’s vertical integration. On the whole, a company of
vertical structure is expected to outperform a specialized company especially in
terms of internal motivation, cost control and operational stability.
3.3.3 Company Competence Supports NationStar’s

Upgrading Process
3.3.3.1 Insights into the Industrial Environment
As a domestic LED packaging giant, NationStar has been in this industry for over
30 years. It has grown step by step with its deeper insights into the changes of the
market. NationStar is also a forerunner of the LED industry and has perceived the
trends and potentials of the market as it consolidated its packaging business,
extending the industrial chain and promoting the vertical integration. When the
LED illumination industry developed at an extraordinarily fast speed with the
cutting-edge technology that cut down the costs, NationStar acutely noticed an
enormous market in LED illumination and hence invested more capital in building
brand, expanding the market, and setting up the LED illumination department. All
these measures effectively accelerated the company’s upgrading process.
3.3.3.2 Technological Innovation
NationStar attaches great importance to R&D investment. More than 4% on average

of the annual turnover is put into the R&D section every year, where a team of
well-educated staffs, of which the R&D personnel with bachelor’s degree or above
take up 76%, is working for innovation. All of this investment will guarantee that
NationStar can keep up with the trends of the development of LED industry, as well
as speed up the technological innovation and product upgrading process as well as
better meet the needs and adapt to the trends of LED industry. Table 3.20 shows the
R&D expenditure, strength and patents.
Table 3.20 R&D statistics of NationStar (2008–2013). Resource: Field research in the company,
prospectuses and annual reports
2008 2009 2010 2011 2012 2013
R&D 2,677.34 2,898.24 3,572.16 3817.73 4109.68 4467.19
expenditure
(10,000 ¥)
Revenue 56,672.39 62791.09 87,746.55 10,3994.91 92190.07 114,237.63
(10,000 ¥)
Proportion 4.72 4.62 4.07 3.68 4.48 3.91
of R&D (%)
R&D 136 601 583
Personnel
(person)
Percentage 7.2 39.41 36.05
(%)
Patents 70 Applied for 36 new 46 new By the end of
(item) licensed 33 new licensed patent 2013, totally
patents patents and patents application applied for 286
gained 29 patents and
licensed gained 218
patents licensed patents
The core technology with independent research and development capability

helps enterprises to realize the accumulation of technology and upgrade the product.
NationStar has established strong independent R&D institutes including the State
and Regional Laboratory of Semiconductor Lighting Materials and Devices,
Post-doctoral Science Workstation, the Optoelectronics Engineering R&D Center
of Guangdong Province, the Enterprise Technology Center of Guangdong
Province, and the research office of Academics Qiang Su (a famous Chinese
scholar). It is currently in preparation for NationStar power center institute of
research and development which also has a strong ability of independent research
and development.
To further improve its R&D capability, NationStar has built multilevel and
multimodal cooperative relationship, IUR (industry-university-research), with uni-
versities and research institutions, including Sun Yat-sen University, South China
University of Technology, Xi’an Jiaotong University, Xiamen University, Zhejiang
University, Huazhong University of Science and Technology, Wuhan University of
Technology, Shenzhen University, Guangzhou Research Institute of Electronic
Technology of Chinese Academy of Sciences (CAS), Semiconductor Research
Institute of CAS and the 13th CEC of Ministry of Industry and Information
Technology.
3.3.3.3 Manufacturing Capacity
As the key capability of production enterprises, manufacturing capacity is reflected

by the advanced manufacturing process and technology, sufficient capacity and
high production efficiency. Outstanding manufacturing capacity plays an active role
in the enterprises’ upgrading process and product upgrading.
NationStar majors in LED widgets and gadgets production. And it has set up
four manufacturing bases in Foshan, Wuxi and other cities, as showed in
Table 3.21.
Based on the encapsulation of LED, widgets and gadgets of Lamp LED and
SMD LED are the main sources of NationStar’s operating revenue, in which the
SMD LED accounts for over 70%. From 2004 to 2006, in the total LED production
in China, NationStar’s LED production respectively accounted for 2.28%, 2.8%
and 4.10%, which was among the top three domestically. In particular, SMD LED
production respectively accounted for 17.86, 22.27% and 34.00% in the total
domestic SMD LED production, which was bigger than any other enterprises in
China. These achievements have benefited from the strong manufacturing capacity
which in turn gradually improves its productivity. Table 3.22 shows the capacity
increase of Lamp LED and SMD LED from 2007 to 2009.
Table 3.21 NationStar’s four manufacturing bases. Resource Official websites

Production range Base
area
(m2)
Foshan Huabao Plant LED widgets, LED gadgets 139000
Foshan Fengjiang Plant LED lighting products manufacturing Base 20000
Wuxi NationStar Processing trade of electronic circuit boards, PCB 9000
Technology Limited and LED components and application products
Foshan NationStar LED R&D 60000
Semiconductor Technology
Limited
Table 3.22 Capacity change of NationStar (2007–2009). Resource : Prospectus

Annual output capacity (million) 2007 2008 2009
SMD components
Capacity 1800.00 2400.00 2570.00
Output 1686.72 2012.31 2107.08
Sales volume 1574.73 1953.34 2177.99
Lamp components
Capacity 260.00 360.00 360.00
Output 359.58 252.12 261.32
Sales volume 349.97 257.58 267.32
Currently, the company’s capacity of Lamp LED maintains stable while that of
SMS LED increases rapidly. In particular, the productivity of Top View rise from
130 million in 2009 to 1billion in 2010, leading to a 32% increase of company
revenues. Meanwhile, NationStar input more to R&D and marketing on lighting
products. As a result, the sales revenue of lighting SMD components increased 60
million yuan, leading to a 10% increase to the company’s revenues.
Taking its outstanding advantages of economies of scale and production process
management, NationStar improved its products quality which is much higher than
the average industrial level. These reduced the production cost effectively and
expanded the production.
By integrating its vertical industrial chain, NationStar expanded to the upstream
application field and improved its productivity. For a long time, NationStar had to
purchase the LED chips from foreign and domestic epitaxial wafer producer,
especially the high-end products high-brightness and high-powered chips are
imported from Japanese and Taiwanese companies. Concerning that the core
materials are controlled by others to some extent, in March 2011 NationStar set a
joint venture (NationStar Semiconductor) to carry on LED epitaxial chip devel-
opment and manufacturing. It invested 2.5 billion yuan for introducing 50 MOVCD
wafer production lines and extension of corresponding production equipment. After
entering the LED upstream epitaxial wafer field. NationStar greatly improved its
productivity and market competiveness.
3.3.3.4 Marketing Capability
With the expansion of business and the need for upgrading, NationStar has con-
stantly spared no efforts to construct stronger marketing capacities. The company’s
marketing department takes charge of the domestic sales, using its own brand and
adopting the direct-selling mode. The Overseas Department is in charge of the
oversea sales, adopting OBM/ODM through local sales agents while OEM for
processing business. According to the concrete sales process of the issuer product,
NationStar divides its business into two main modes, independent sales and sales
through dealers/agents. Among large household appliance customers, such as Gree
and Midea, NationStar adopts direct-selling which belongs to independent sales.
Besides, its processing business is directly offered to Japanese customers without
any agencies. Dealers/agents sales model are mainly applicable to North America.
Virginia Optoelectronics Inc., as the exclusive agent in North America, is
responsible for the local business promotion. Through this agency, NationStar can
sell its products by using its customers’ brands according to relevant licensing
contract, which is a kind of ODM business mode.
As the selling points of NationStar’s domestic market, LED devices and light-
ings and lighting products contribute most to the sales revenues. Table 3.23 shows
the market segment and component of corresponding products in 2013.
NationStar has placed much emphasis on building up versatile channels. In
2011, the company spent 90.231 million yuan raised funds on implementing brand
Table 3.23 NationStar sales districts and markets in 2013. Resource: NationStar Annual Report
Market segment Domestic: 80.63%; overseas: 19.37%
Market component (Revenue proportion) Epitaxial Chips: 0.26%; LED Devices: 62.54%;
LED Component: 17.06%; Lighting and others: 20.14%
and channel’s construction, including 60 million yuan in developing 20

direct-selling channels, 20 million yuan in 10 cooperated channels and the rest 10
million yuan in brand building. With the project implementation, NationStar will
obtain better oversights towards the existing market, improve the equality of cus-
tomer service, and expand in market share with new market development.
With the economic development in West China, NationStar has made Chengdu
city a gateway to open LED lighting markets in Southwest China. On Oct 30th,
2011, NationStar LED Lightings Sichuan Marketing Center, the company’s first
domestic provincial marketing center, was established. As the sole authorized
distributor of NationStar LED Lightings in Sichuan, the establishment of Langyue
Photoelectric Technology Co. Ltd marked the significant start of NationStar’s new
channel strategy. In the future construction of the channels of LED Lightings,
NationStar continues to focus on the development of regional market and market
segmentation, with the hope of having a breakthrough in channel building.
On the basis of over 40 years’ technology foundation, NationStar has set up its
reliable brand and corporate image, receiving wide market recognition. Many
products have been prized “Guangdong Top Brand” and the enterprise itself has
been awarded many times as “The Most Potential Enterprise in China’s LED
Industry”, “The Key Enterprise of Strategic Emerging Industry in Guangdong”, and
“The Most Influential Enterprise of the Inspiring Decade”. In 2013, it was rated
“Golden Globe Award of Advanced Engineer LED lighting brands on Top Ten
Circulation Channels and Top Ten Engineering Channels”.
3.3.3.5 Capital Capability
Strong capital capacity can provide a solid foundation for a company’s upgrading.
By accumulating internal capital, listing and financing, operating capital reasonably
and so on, a strong capital capacity plays a significant role in a company’s
upgrading. As shown in Table 3.24, NationStar has a strong profitability and
internal capital accumulation.
In recent years the company performs well in the current ratio, quick ratio, asset
liability ratio, interest cover ratio, indicating a strong solvency. Such a good
financial situation guarantees the sound operation and development of the company.
Financing from the market is essential in funds raising, increasing and renewing
of technical equipment, and scale expansion of the company and market. NationStar
raised over 1.54 billion by listing on Shenzhen Stock Exchange. It has used the five
hundred million in1.54 billion for four projects: the project of new technical
Table 3.24 Capital accumulation of NationStar (2007–2013). Resource: According to the

company’s annual report
2007 2008 2009 2010 2011 2012 2013
Operating 44,386 56,672 62,791 87,746 107,563 94,797 114,237
income
(10,000 ¥)
Net profit 6,501 10,967 11,804 14,773 12,050 3,760 10,338
(10,000 ¥)
Profit margin 14.65 19.35 18.80 16.84 11.20 3.97 9.05
(%)
innovation of surface-mount light-emitting diode, the project of technical trans-

formation of high power LED and LED light source module, the project of LED
back light technology reform, and the project of key technology and industrial-
ization of semiconductor lighting lamps. These projects will increase Chip LED 200
million per month, 40 million PLCC LEDs per month, an annual output of 120
million high power LEDs and 12 million light source modules for the company.
These sharply improved the advancement and quality of products. In August 2010,
using the rest of the fund which was 17.17 million yuan, NationStar purchased the
using right of an area in Chancheng, Foshan City, which covered a total area of
16805.23 m2. And 132 million yuan will be spent in building a new plant area there.
In the new plant, NationStar will invest 2.24 million yuan to implement the new
TOP LED manufacturing technology and industrialization projects. The raising and
proper using of funds provided a crucial material security for enterprise upgrading.
The development of NationStar has had no funds from international capital yet.
But in 2011, NationStar cooperated with Nanyang Xichen science and Technology
Co, Ltd and these two companies jointly established the Baoli Vanadium Science
and Technology Ltd. The current exploitation of Henan province’s largest vana-
dium ore will bring greater impact on the performance. Furthermore, in order to
supplement cash flow, the company plans to issue less than 500 million yuan bonds
and borrow from the bank for a loan of 1.3 billion yuan. Thanks to the partner’s
technical patents, mineral resources, local government support and other advan-
tages, this investment can exert good effects on the company’s capital operation.
3.3.3.6 Management Capability
As a leading enterprise, NationStar has gradually fostered excellent management

skills. It introduced Japan’s advanced process management system and quality
management methods. Thanks to its information system, it has created an advanced
management system. In addition, NationStar also focuses on the management of
talents, suppliers, and partners, ensuring its normal operation.
Perfect management is the quality guarantee of hyperfine and large-scale

SMD LED packaging. Having been cooperating with Japan Sanyo Electric Co.,
Ltd. for more than 20 years, NationStar has not only mastered the advanced LED
package technology, but also set up a complete process management system and
quality management methods that are in line with international criterion. The
company has set up perfect enterprise management system which has independent
system of production, supply and marketing. A series of effective rules and regu-
lations have been formed according to the accumulated management experience.
The company has passed a number of international certifications and established
ERP management system.
For the management of talents, NationStar has its own unique advantages. At
present, the R&D center has a technology development team of more than 200
talents, including 6 doctors, 12 senior engineers (3 with professor level) and more
than 30 masters. In addition, the company has more than 300 professional tech-
nicians with bachelor degree or above (with famous college graduates accounting
for over 60%) in many units such as equipment technology, quality technology,
process technology and computer technology. The company has also taken a series
of measures to strengthen the construction of talents team, such as scientific human
resource allocation with extensive recruitment and training, flexible salary policy by
taking performance evaluation mechanism, professional and technical employment
system, construction of “second channels” for professions with a professional
technical duty appointment system, cultivation of all-round talents by strengthening
the construction of R&D, establishing Post-Doctoral Research Center, and gener-
ating harmonious corporate culture to retain talents.
It is worth noting that, NationStar, an originally state-owned enterprise founded
in 1969, has successfully transformed into a private-owned joint-stock company.
The smooth Management Buy-Outs (MPOs) reflects the outstanding operational
capabilities of top managers. After restructuring the corporate system, withdrawing
state-owned shares, inviting the rich to join in, and cleaning up employee shares,
Wang Yaohao and the other two top-managers have developed NationStar into
China’s first listed enterprise in LED packaging field.
3.3.4 The Industrial Cluster of Enterprises Promotes

the Upgrading of NationStar
Foshan city, wherein NationStar is located, is an important base for producing and
developing traditional lighting sources in our country, which has formed a complete
industry chain of LED manufacturing equipment, chip, package, application
products production and so on. In 2009, the gross industrial output value of
industrial cluster in Foshan was over 10 billion, and the number of related upstream,
midstream and downstream enterprises was over 400. High-tech enterprises in the
electric light resource industry reached 45, taking up 9.5% of the city’s total
high-tech enterprises. Foshan has built 5 provincial technology research centers in

the field of Electric Light Resource. NationStar, Foshan Electrical and Lighting Co
Ltd, Asahi Optoelectronics, Yusheng photoelectric are the local champions of the
industry of LED in Foshan.
3.3.4.1 Innovation Network Developed Within the Cluster Promotes

Enterprise Upgrading
In Foshan, to fully maintain the advantages of former electric lighting resource

industry, Nanhai district has gone ahead and built several bases including
Guangdong Financial High-tech Service Area, Nahai Economic Development
Zone, Luocun New lighting resource industrial base and so on for the development
of semiconductor lighting industry. Besides, it has established the whole semi-
conductor lighting industry chain from chip researching, equipment manufacturing,
LED epitaxial wafer and chip manufacturing, high-power package, application
product developing, testing and producing, product testing to market circulating. In
Chancheng district of Foshan, the amount of patent applications in the first three
season were 2037, 50% higher than last year. The amount of the patent applications
of invention were 336, 40% higher than last year. The number of patent autho-
rizations was 178, 30% higher than last year.
Foshan also actively promotes the combination of industry, academy and
research. For example, it helped to locate the Guangdong Research Institute of
Xi’an JIAOTONG University in Foshan Chancheng district, making full use of the
opportunity of international science and technology cooperation between Provincial
Science and Technology Department and CIS countries and actively undertaking
and configuring the international resources to organize some new public innovation
platforms. In terms of intellectual property alliance strategy, Chancheng district has
constituted a complete organism of intellectual property alliance system and has
formed regionally industrial innovation chain with the “Five-in-One” model of
organization, technology, patent, criterion and market, five major leagues.
Besides, Nahai district has introduced the cutting-edge semiconductor lighting
technology team at home and provincial semiconductor lighting industry-academy-
research innovation league, including ten national key research institutions like Sun
Yat-sen University, Peking University, Tsinghua University and Semiconductor
Research Institute of Chinese Academy of Science. In 2007, 19 colleges and
enterprises jointed together to establish “Digital Manufacturing Equipment
Industry-Academy-Research Innovation League”, promoting the integration of
innovative resources and systems and pushing forward the equipment manufac-
turing industry of Guangdong province into a higher level by promoting the ability
of innovation During the process of upgrading semiconductor lighting industry,
Nanhai district of Foshan city assembles has many leading enterprises like Asahi
Optoelectronics, NationStar, Qili Electronics. It has established strong industry-
academy-research relationship in LED with many universities such as Sun Yat-sen
University, Huazhong University of Science and Technology, The Hong Kong
University of Science and Technology and so on. Now, it has dozens of LED
related enterprises and service institutes, and its output value of 2009 was over 2
billion. In September, 2011, United Innovation Center for Semiconductor Lighting
Industry of Guangdong province was established, which has further promoted the
progress of development of Technology Innovation Platform for LED industry of
Foshan.
3.3.4.2 Cooperation Between Cluster Enterprises Promotes Common

Upgrading
Joint action among cluster enterprises can transform the situation that each enter-
prise is fighting alone into a concerted force, and reach advanced resource com-
plementary in a greater degree and improve the cluster effect. Industry association is
the primary manifestation of enterprise joint action. To promote corporate
upgrading, it provides advanced technology and management innovation ideas and
information by organizing and learning from outstanding domestic and overseas
counterparts, participating in professional product exhibition and so on. On May
20th, 2009, Nanhai Electric Lighting Industry Association (in Foshan) was formally
established. At present, this association has more than 100 enterprises, covering
from the electric lighting and lighting accessories from upstream to downstream
industrial chain in all aspects, coordinating and promoting the development of the
entire industry. This association has organized 57 activities to create regional brand
in this two years. At The 16th Guangzhou International Lighting Exhibition held in
Guangzhou Pazhou Convention and Exhibition Center, Nanhai electric lighting
industry association organized 22 member companies to participate in this exhi-
bition and display their products in Nanhai brand museum, attracting the attention
of a large number of domestic and foreign merchants, which was conducive to the
international market expansion of the member companies. On March 13th, 2012,
the first domestic LED enterprise alliance standard, the Packaging Logo standards
for LED Lighting Product in Foshan Union, was set by the Foshan Institute of
Technical Standards, Foshan Lighting Association, Shunde Lighting Association,
the United Nations Star LED and other leading enterprises. This standard aims at
the common development of LED packaging identification standards, accelerating
the upgrading of enterprises and industry by the establishment and enforcement of
the standardized alliance.
These joint actions also enhance the confidence of enterprises. When enterprises
get the support for the industry from cluster and government, they can make better
use of their advantages and find better partners, which benefit the acceleration of
enterprise upgrading a lot.
3.3.4.3 Institutional Environment Provides Good Conditions

for Upgrading of Cluster Enterprises
Foshan government provides good institutional environment for the development of

cluster enterprises. In February, 2010, the establishment of LED Industrial
Development Joint Conference System in Foshan completed the institutional
environment of LED industry. Foshan government released many encouragement
policies, which greatly promoted the development of LED industry. In February
2012, to improve the resilience of Nanhai LED industry, Nanhai Entry - Exit
Inspection and Quarantine Bureau assisted electric lighting enterprises in building
up LED industry alliance by organizing “Enterprise Service Year” activity and
continued setting up a green channel for enterprises which have high credit rating
and improving the releasing speed by technical means to shorten demurrage time.
As the leading enterprise of LED package, NationStar also benefits from a number
of subsidy policies and gains strong supports from government and related insti-
tutions, which are conducive to the development of original industry and accelerate
the expansion of international market.
3.3.5 NationStar’s Upgrading in Response to the Change

of Market Environment
3.3.5.1 The Introduction of Energy Conservation and Emission

Reduction Policy Promotes the Development of Global
Energy-Saving Lamps and LED Products Market
Low carbon economy has become the trend of global economic development. Since
the conception of low carbon economy was put forward in 2003, many countries
around the world have joined the ranks of energy conservation and emission
reduction, improving resource utilization efficiency by means of energy technology
innovation and so forth to achieve low energy consumption, low pollution, low
emission and high efficiency. Under such general background, lots of countries
announced the ban on selling filament lamp, showed as Table 3.25.
China also released the road map of disusing filament lamps officially in
November 2011 and planned to obsolete filament lamps gradually in 5 years.
Behind the disuse of filament lamps is that government’s policy support of
energy-saving lamps and LED products which greatly drove the market-oriented of
these energy-saving products. In February 2013, 6 ministries and commissions,
such as National Development and Reform Commission, Ministry of Science and
Technology, Ministry of Industry and Information Technology, Ministry of
Finance, Ministry of Housing and Urban-Rural Development, and General
Administration for Quality Supervision and Inspection and Quarantine, jointly
established Semiconductor Lighting Energy-Saving Industry Planning, accelerating
Table 3.25 Time of the ban of filament lamps in countries. Resource: Sorted by secondary data
Year Country Concrete actions
(region)
2010 Australia Prohibit producing filament lamps from 2009 and prohibit using
traditional filament lamps preliminarily at the latest by 2010
2012 European Ban the sale of filament lamps of all wattages from Sept. 2009, in 4
Union stages till 2012
France Ban the sale of filament lamps over 100w from 2009 and filament
lamps of all wattages from 2012
Taiwan, Carry out filament lamps cutoff policy and ban the production since
China 2010
Canada Prohibit the use of filament lamps from 2012
Japan Prohibit producing and selling filament lamps of high energy
consumption by 2012
America Carry out the policy of prohibiting the sale of most filament lamps
from 2012 till 2014
2013 Korea Prohibit the use of filament lamps by the end of 2013
2016 China Ban the sale of filament lamps of all wattages from Nov. 2011,
progressing in 5 stages till 2016
the speed of domestic environmental protection, energy conservation and emission

reduction from the aspect of policy. As shown in Fig. 3.14, government policies
dramatically stimulate the consumer demand for LED application market in dif-
ferent periods.
2008
2002
Promotion plan
Constant government
for compact
procurement of compact
fluorescent lamp
fluorescent lamp (CFL).
0.15-0.2billion
100% lamps every year.
1996
Permeability
Green 30% penetration rate in 70% penetration rate in 2002
Lighting 2002
Program was Increase the penetration
initiated. 3% penetration rate of CFL in domestic
rate in 1996 market.
1995 2000 2005 2010
Fig. 3.14 CFL permeating process in domestic market under policy promotion. Resource Gaohua
Securities Research
In order to promote fluorescent lamp and environmental protection, the national

government has intensified subsidies to the LED industry. Subsidies are not only
given to upstream companies when procuring MOVCD equipment, but also to
downstream companies engaging in the “Ten City Lights” project. According to the
technology development scheme in the 11th Five-Year Plan, semiconductor
lighting products development are prioritized, which were supported by 3.5 million
yuan as R&D budget for solid-state lighting. In March 2012, the national gov-
ernment has announced a new policy of subsidizing LED, with the product amount
reaching 4 million as an initial step. In the next 3–5 years, subsidies towards LED
industry will reach 8–10 trillion yuan, subsidy rate for end-product price will be 30–
50%, and total subsidy will be as high as 16–20 trillion. These subsidy policies
mentioned above have greatly driven the development of LED industry (Figs. 3.15
and 3.16).
In 2011, NationStar Semiconductor Technology Co., Ltd, NationStar’s sub-
sidiary, has received 60 million subsidies for LED epitaxial chips project. In the
same year, it has also received a batch of 863 special funds of total 3.5 million
released by Ministry of Science and Technology, which were 2.5 and 0.996 million
respectively. The former was used in Large LED epitaxial wafer, tube core and
encapsulation technology, while the latter in industrialized preparation technology
research of in high efficiency white LED’s epitaxial wafer based on vertical
structure. In February 2012, “Research and Industrialization on New High Thermal
Conductive LED Substrate and Modular Light Source”, one of the NationStar’s
Fig. 3.15 Average prices of a sapphire and a LED chip from 2009 to 2011. Resource LEDinside,
gg-LED, research of ghsl
Fig. 3.16 Growth and prediction of global LED scale. Resource IEK, R&D department of Ri Xin
Securities
projects, was awarded a special fund of 10 million yuan to promote the R&D of
relevant projects.
3.3.5.2 Rising Prices of Raw Materials Lead to the Increasing Costs

of Traditional Energy-Saving Lamps, Thus Stimulating
the Production of LED Lighting Products
In the manufacturing process of traditional energy-saving lamps, trichromatic

phosphors and rare earth are the main raw materials in the fittings tubular billets,
among which rare earth accounts for 75%. As the raw material costs were all the
way up in 2011, the share of phosphor powder in the costs of energy saving lamps
shot up to around 60% after the increase of trichromatic phosphor cost, while it only
occupied 10% before the increase. Within half of the year, the prices of rare earth
and phosphor powder rose almost ten-fold, making the cost of traditional
energy-saving lamps increase sharply.
In order to cope with the great pressure of sharp rise in raw material prices, many
traditional energy-saving lamp enterprises began to accelerate their transformation
to LED illuminating enterprises, thus promoting the development of LED industry.
3.3.5.3 Overcapacity of Domestic LED Chips Stimulates

the Application Market in the Downstream of the Industrial
Chain
With a series of preferential policies issued by the government, such as a MOCVD

device able to receive a subsidy of more than 300 yuan from the government, many
enterprises purchased a lot of MOCVD devices and invested heavily in chip pro-
jects for the sake of commanding point, only to cause the overcapacity of LED
chips in the industry. According to the research of Gaogong LED, more than 80
enterprises in China ordered about 3,000 MOCVD devices in early 2011, and
altogether 327 MOCVD devices were installed at the end of 2010, but one after
another reduced their orders and shipments later. Besides, more than 40 Chinese
enterprises planned to develop the sapphire production capacity of 330 million TIE
which equal to two inch equivalent, while the Gold Sun Global LED Team pre-
dicted that the global demand of sapphire would not reach 70 million TIEs in 2011,
so the sapphires and LED chips will be oversupplied. According to Figs. 3.17 and
3.18, the average prices of a sapphire and a LED chip from the 3rd quarter of 2009
to the 2nd quarter of 2011 further reflected the situation of industrial oversupply.
In the meantime, the application of LED market has a broad developing pro-
spect. In 2007, global LED industrial scale reached 6.85 billion dollars, and some
agencies predicted that global LED industrial scale would reach 12.5 billion dollars
in 2011, with the industrial compound growth rate up to 16%. And at the end of
2009, NationStar established its LED lighting division which specialized in
downstream LED application products, such as LED, light source module, and
extended to LED lighting application. What’s more, the LED lighting division was
upgraded to the branch company of Foshan NationStar Co. Ltd in June, 2011,
responding to the LED lighting application market.
R&D cost R&D contribution income
Fig. 3.17 R&D cost and operating income in 2007–2010 (in million NT dollars)
Annual revenue (unit: NT $1 million)
Fig. 3.18 Atotech’s annnual revenue (2001–2011)
3.3.6 Findings
3.3.6.1 The Enterprise Determines Its Upgrading Direction According

to the Market Environment Changes
Environmental factors such as rising costs, policy guidance, changes in industry

demand, etc. have an effect on the enterprise upgrading direction. NationStar
observed and analyzed the environmental change, grasped the upgrading oppor-
tunity, and adopted the proper upgrading pattern and method. With the change of
market demand and policy guidance, LED illumination application has gradually
become a new growth point of the industry development. NationStar has also
extended to LED chips and illumination application and taken it as the upgrading
direction.
3.3.6.2 Manufacturing Capability and Technological Innovative

Ability Are Critically Important in Enterprise Upgrading
For a manufacturing enterprise, manufacturing capacity is the foundation of the

enterprise development while the technological innovative ability is the key for the
enterprise to form core competitiveness in the dynamic environment.
The leading manufacturing capacity and technological innovative ability enable
the enterprise to manufacture competitive products and provide competitive ser-
vices. That is to say, when facing fierce competition, the stronger the manufacturing
capacity and technological innovation ability are and the solider the foundation is,
the stronger the enterprise’s ability to defeat the competitors and achieve sustain-
able development.
With excellent manufacturing capacity and technological innovative ability,
NationStar has its core of competitiveness. Decades of industrial experience con-
tributes to its strong production capacity in the field of LED packaging. The sales
volume of hi-tech SMD LED product occupies the maximum proportion among all
the enterprise businesses. Many products have reached international advanced level,
filled a domestic gap in this field. All these capabilities lead to NationStar’s
dominant status in the LED packaging industry.
3.3.6.3 Marketing Capabilities and Capital Capacity Play

an Increasingly Important Role in Promoting Enterprise
Upgrading
With the intensification of market competition, marketing capability plays an

increasingly important role in the development and upgrading of enterprises. As the
NationStar focused on LED packaging and many other manufacturing technologies
in the early stage, it lacked marketing capability. But in recent years, the Nationstar
has paid more attention to cultivating this ability.
Self-capital accumulation ability reflects the level of profitability, solvency,
liquidity and any other aspects of the enterprises in the process of business oper-
ating. While external financing capacity will help enterprises win more financial
support, which can help the enterprises more smoothly upgrade. For the LED
industry and other emerging high-tech industries, the sound capital input is
becoming increasingly important because enterprises often need to purchase a large
number of high-valued equipment to carry out production, and further expand to
achieve economies of scale and thus reduce costs. NationStar in recent years has
had impressive profitability and was successfully listed in 2010. These provided the
company with financial support from the capital market and venture capital sector,
thus tiding it over the cash flow difficulties, supporting it to expand production,
R&D, sales and other areas of investment, and finally promoting its upgrading.
3.3.6.4 The Improvement of Industrial Cluster Environment

and the Promotion of Enterprise Transformation
and Upgrading Are Mutually Reinforcing Each Other, Which
Is an Interactive Process
Some of the industrial cluster characteristics, such as location advantages, cultural

traditions, convenience, resource sharing, innovation platform and other factors, are
extremely important for enterprise and cluster upgrading.
The enterprise in the case is in Foshan LED industrial cluster. The enterprises,
government agencies and related institutions in the cluster are committed to creating
a positive innovation network, in which enterprises can get the best platform for
innovation and stimulation of the entire cluster. In these initiatives and policies
related to innovation, business upgrading has been significantly promoted. The
cluster enterprises enhance innovation, and it in turn further promotes the sharing of
innovative resources within the cluster to further improve the innovation platform,
as well as the introduction of more innovative policies and performance opti-
mization, which can form benign interaction. The formation of enterprise alliance in
the cluster is also very important. Joint action can often have better effect than
separate action, and can drive the performance of the entire industrial cluster,
enhance the overall strength, and form the influence of regional brand. The
favorable institutional environment will not only stimulate innovation of companies
in the cluster, but also upgrade corporate competence, facilitating them rapidly to
embed in the global value chain and get higher value-added.
3.4 Rapid Growth of Taiwan’s Atotech
Since 2007, global economy has suffered a heavy blow from the financial crisis.
A number of enterprises underwent business gloom and even bankruptcy as well as
closure due to the market depression and capital-chain rupture. People are shocked
by the bankruptcy of many large toy processing enterprises, represented by the
Smart Union Group Holding Ltd. in Dongguan city, Guangdong province. And
people are much concerned about the low tolerance for risks of these low-end
manufacturers in the global value chain in the turbulent economic environment.
In contrast to enterprises like Smart Union, Atotech Taiwan Ltd. (hereafter
referred as Atotech) increased investment heavily in R&D even in the financial
crisis, leading to a 10.5% increase of annual revenue than 2006. Its technological
competitiveness and sustainable development in the depressed market, according to
the author’s research, is mainly attributed to the independent innovation as well as
corporate transformation and upgrading in manufacturing, R&D and branding.
3.4.1 Brief Introduction of Atotech
The author’s research team carried out surveys and interviews on Atotech May17th,
May 18th, 2006, November 17th, 2008 and November 30th, 2011. The team has
interviewed Dr. Huang Shenglang, general manager, Mr. Luo, director of R&D,
and Mr. Wu, deputy manager of quality assurance. The company is a subsidiary of
Atotech Technology Group, part of TOTAL S.A, a French multinational company
and the fourth-largest international oil and gas major. Atotech is the global leader in
plating chemicals, equipment and services that provides specialty chemical pro-
cesses and equipment for the printed circuit board (PCB), IC-substrate and semi-
conductor industries as well as the decorative and functional surface finishing
industries. Headquartered in Berlin, Germany, the Group operates in more than 40
countries in Asia, America and Europe, with 40 regional service centers, 16 fac-
tories and 2 equipment factories. With main office in Taipei, Atotech Twaiwan Ltd.
(hereafter referred as Atotech) hosts two branches in Taoyuan city and Tainan city,
one production plant in Guanyin district, Taoyuan city and one technological center
(TechCenter) in Kaohsiung city.
Moreover, Atotech offers a series of solutions, including new equipment plan,
software upgrading and systematic training of the client side knowledge. The
company provides such technical services as system maintenance, calculation of
operation cost and the budget price, investment and financial consultancy,
cost-benefit analysis, environmental and ecological assessment, waste water
redemption, process optimization plan and efficiency analysis of operational cost.
3.4.1.1 Management Philosophy
Prospective and Globalized Management Philosophy Enhancing Industrial

Image Globally
Thanks to its prospective and globalization-oriented business philosophy, Atotech,

based on its TechCenter, consistently develops and introduces globally cutting-edge
circuit board and wafer packaging technology to its end-customers. Such
co-development helps customers upgrade their international competitiveness and
thus receive the certification from the international OEMs. Over the past years,
Taiwan PCB Association has enhanced the overall image of the island’s PCB and
wafer packaging industry since its establishement.
Furthermore, the great achievement generated by the first TechCenter pushed
Atotech to set up another TechCenter in Kaohsiung city in 2008 with an investment
of two million Euros. Cooperating with Taiwan’s screws and fasteners industry, it
was supposed to advance the future industrial development of Taiwan.
Five Philosophies Committed to Providing Customers with Quality Services
The first philosophy is to provide diversified products. The sales of the newly
introduced product must account for over one fourth of the annual turnover. It
means that the life cycle of each product lasts for only 4 years. Therefore, the
company has to constantly develop new products and new technologies to enrich
the product lines and open up new markets. The company tailors its diversified
product mix to the customer’s production technology to meet the demands of the
market.
The second philosophy is to maintain superior quality. The products manufac-
tured by Atotech must pass a variety of strict quality inspection with the highest
production standards, which drives all employees to engage in the continuous
improvement process to guarantee the product quality. The demand-meeting and
3.4 Rapid Growth of Taiwan’s Atotech 151
scheduled delivery of products and services help customers reduce production costs
and thus enhance market competitiveness.
The third philosophy is to provide punctual delivery. The globalization of
production, delivery systems and regionalization of transport jointly contribute to
Atotech’s punctual delivery of products to its end-customers. It also collaborates
with customers to realize flexible manufacturing and speed up the transaction
process to save costs in circulation and inventory and to realize speed economies.
The fourth philosophy is to improve services. Decades of manufacturing
know-hows accumulated in the specialized field and the professional technical team
of engineers enable Atotech to provide all-round services for its customers,
ensuring that products can be manufactured under the best condition.
The fifth philosophy is to realize environmental protection. The products and
technologies of Atotech not only meet the quality standards, but also conform to the
environmental protection requirements. Facing the increasing global demands for
resources reservation and environmental protection, Atotech not only understands
the environmental standards and trends around the world, but also integrates with
the direction of product R&D, providing not only green environmental products to
customers, but also transferring environmental protection technology to customers
so as to help customers realize clean production and reduce environmental pro-
tection costs and social costs.
3.4.1.2 Business Strategy
Integrated Marketing Strategy
In order to promote the company’s ideas, products and technology, Atotech attaches
great importance to the depth (connotation) and breadth (variety) of product
advertising, and regularly follows up the effect of advertising for further adjust-
ments. The company not only publishes product advertisement, academic articles
and technical information on printed media such as professional magazines,
newspapers and news reports, but also regularly mails printed DM to existing and
potential customers so as to facilitate information communication and improve
corporate image.
Furthermore, Atotech organizes regular seminars, touring customer visits,
technical symposium, regional distributor meetings and customer strategy alliances
activities, new product launches and promotion of industry associations. It also
participates in various exhibitions and community exchanges at home and abroad.
Besides, it positively collaborates with customers in strategic alliance to enhance
R&D capabilities and jointly develop new products as well as new technologies.
The number of technical papers published by Atotech, written by itself or jointly
with its partners, ranks top in the industry every year. In addition, it holds weekly
technical seminar lasting for three months every year and invites customers, R&D
staff and marketing personnel to exchange technology information.
Whole-Staff Marketing to Raise Customer Satisfaction
In recent years, the global information market has been affected by the economic
downturn and subsequently the majority of customers reduced their orders. Atotech
then implemented the “Whole-staff Marketing Campaign”, encouraging all
employees to increase interactions with customers, strengthen mutual communi-
cation and improve services so as to retain customers.
E-Commerce and Partnership Management for Customers
Atotech has established a broad marketing network and a long-term cooperative

relationship with Taiwan’s top-30 PCB manufacturers and overseas clients in
Europe, America, Oceania and Asia. Atotech has been regarded as one of the three
strategic-alliance partners of Compeq Manufacturing Co. Ltd., the leader in
Taiwan’s PCB industry.
3.4.1.3 R&D Capabilities
Basic Features
Founded in 2000 in Taiwan, the company has set up a production base the next year
and realized volume production at the end of 2002. In 2004, it invested 6 million
euros (about NT $180 million) in setting up a semiconductor TechCenter in
Guanyin district, Taoyuan city. This TechCenter strived for independent R&D and
committed to technology upgrading of Taiwan’s electronics industry. The second
TechCenter metal surface was established in 2008, with an input of 2 million euros,
in Environmental Science and Technology Park in Southern Kaohsiung, thereby
serving customers in the south area and enhancing the international competitiveness
of Taiwan’s automotive, screws and electronics industry. The third TechCenter was
constructed with around 4.5 million euros to serve the semiconductor industry, in
an effort to constantly develop and introduce global cutting-edge technologies
including the green technology.
Atotech allocates over 7.5% of its annual turnover every year to support
TechCenters, which enables the company to receive an annual R&D tax rebate of
30% from the government. The annual R&D contribution remains at a high level.
For instance, R&D cost in 2010 reached NT $17 million and R&D contribution was
as high as NT $235 million, accounting for 7.8% of its operating income (see
Table 3.26 and Fig. 3.17).
Table 3.26 Taiwan’s R&D costs and R&D contributions 2007–2010 (in million NT dollars)
Project 2007 2008 2009 2010
R&D cost 64 12 56 17
R&D cost as a proportion of operating income (%) 2.2 0.4 2.1 0.6
R&D contribution 140 150 201 235
R&D contribution as a proportion of operating income 4.8 5.4 7.4 7.8
(%)
Major Tasks
The positioning of TechCenters in Taiwan is different from those in other regions.

In terms of the task division between headquarter and subsidiaries, the former is to
carry out fundamental researches (e.g. nanotechnology) and the latter is to transfer
the fundamental research results into market products and complete the back-end
development work according to customer needs. In terms of region, TechCenters in
Germany, U.S. and Japan focus majorly on the development of cutting-edge for-
mula while those in Taiwan strive to introduce overseas foresighted technology,
develop high-tech products suitable for local demand, and then carry out sustained
R&D for volume production. TechCenters in Seoul, Guangzhou and Shanghai aim
mainly at providing technical services and process improvement.
3.4.1.4 Operational Performance
Atotech’s turnover increased dramatically from NT$ 90 million in 1995 to NT$ 300
million at the end of 1997 and over NT$ 800 million in 1998. Such growth rate was
far higher than other global affiliates of Atotech Group and thus received actual
encouragement from the Group’s head office, including an increase of invested
capital from NT $5 million originally to NT $60 million and a new establishment of
production plant in Taiwan in 2000 with an total investment of more than 38
million francs.
From 2003 to 2007, Atotech witnessed a 56% annual increase of employees and
a NT $35 per share of annual pre-tax surplus (EPS). From 2004 to 2007, its
return-on-equity (ROE) surpassed 55% each year, with an annual tax increase of
over 69%. From 2001 to 2007, the annual compound growth rate reached 8.1%.
Despite of the slight decrease of operating income in 2008 and 2009 due to the
financial crisis, Atotech realized a V-shaped recovery in 2010 (NT $30 million) and
2011 (NT $34 million), up by 13% year on year and 10 more times than the
previous decade (see Fig. 3.18).
3.4.2 Atotech’s Path of Progressive Upgrading
3.4.2.1 The First Upgrading: From a Pure-Play Seller

to an Independent Manufacturer
Upgrading Background
As a consequence of the 1997 financial crisis, the global economy suffered a

downturn. Taiwan’s economy was deeply affected then, leading to a −1.9% of
economic growth in 2001, down to the lowest level since 1997. The PCB industry
dropped so dramatically that its gross output value in the world in 2001 was simply
US $33.9 billion (down by 22.5% year on year) and that in Taiwan was only US
$390 million (down by 15% year on year). Such decline intensified the competition
in chemical industry, and as a result, cost leadership and customer responsiveness
became the key elements of rivalry.
Upgrading Process
In 2001, Atotech invested 38 million francs in the construction of production base

in Guanyin district (Taoyuan City, Taiwan), and the production base was positioned
as the supplier of equipment and chemical materials for Taiwan’s PCB manufac-
turers. Accordingly the company’s business achieved upgrading in the following
four aspects. Firstly, the close collaboration with customers in production tech-
nology enabled it to provide diversified products to meet customer demands pre-
cisely. Secondly, encouraging the whole staff to participate in the continuous
process improvement for product quality ensured the highest production standard of
manufacturing. Thirdly, the adoption of global production networks, delivery
systems and regional transport contributed to Atotech’s punctual delivery and
improvement of customer responsiveness. Fourthly, the development of higher
value-added foundry business provided OEM services for customers.
3.4.2.2 The Second Upgrading: From a Pure-Play Manufacturer

to a Technology Leader
As the increase of labor cost in Taiwan leading to a gradual decline of cost

advantage, some industries then transferred to the surrounding countries or regions,
leading to the industrial hollowing in Taiwan. And the remaining companies were
struggling to survive in such difficult situation. This forced the government to

enhance its policy support in R&D since the 1990s.4
Consequently, Atotech has also underwent some changes, with the first being
strategic adjustment. Atotech Group has adjusted the development strategy of the
Greater China Region. Mainland China would continue to undertake manufacturing
business with low labor-cost, Hong Kong would take the advantage of international
marketing and financing, and Taiwan would develop as a high-tech base. The
second change was the customers’ increasing demand for product quality, perfor-
mance and personal designs, which required more rapid and effective technology
and R&D services. Finally, Atotech was aware that Taiwan could no longer
maintain its competitiveness as a “volume-production foundry” and only continu-
ous development of new critical technologies could guarantee high value-added
commodities.
Upgrading Process
In 2004, Atotech invested 6 million euros in constructing the first TechCenter

dedicated to PCB technology, in Guanyin district, Taiwan. The investment projects
included land acquisition, instrumentation, expansion of plant, production of
experimental lines and environmental equipment. It was Atotech Technology
Group’s fourth global TechCenter, following those in Germany, US and Japan.
After its establishment, Atotech not only proactively introduced foreign experts, but
also attached great importance to establishing technological alliances with other
enterprises and customers. For instance, it signed technical cooperation programs
with 15 PCB companies such as Compeq Manufacturing Co. Ltd., WUS Printed
Circuit Co. Ltd., Asia Pacific Circuits Co. Ltd., and Unimicron Technology
Corporation. Its co-development of lead-free fabrication technology with Asia
Pacific Circuits Co. Ltd. successfully replaced Japanese IC-substrate processing
technology. Cooperative relationship has also been set up with Taiwan’s Academic
Research Institutes to develop various processes, chemicals, materials and
equipment.
Table 3.27 shows Atotech’s subsequent upgrading and establishment of
TechCenters after 2008, which has contributed to the increase of cumulative
income. In 2008, the contribution income from R&D reached NT $2 million,
accounting for 7.1% of total sales revenue (see Fig. 3.19).
4
For example, Taiwan’s Minister of Economic Affairs implemented the Scheme of “Incubation
Center for Taiwan Small and Medium-sized Companies” in 1997 and “Small Business Innovation
Research” in 1999.
Table 3.27 Information on TechCenter of Atotech

TechCenter Time of Time of Investment Main services
location investment establishment total
Guanyin 2004 2004 6 million PCB TechCenter
district euros
Kaohsiung 2008 2009 2 million Surface Treatment
euros TechCenter, applying to
automobile, aviation,
machinery and other
industries
Guanyin 2011 2012 4.5 million Semiconductor TechCenter
district euros
Fig. 3.19 Sales revenue of TechCenters (10,000 in NT $)
3.4.2.3 The Third Upgrading: From a Pure-Play Manufacturer

to a Service Provider of Systematic Solution
With the continuous improvement of technology, chemicals industry competition

becomes increasingly fierce. At the same time, customers have diversified needs,
extending their concerns from product price and quality to services.
Upgrading Process
From 2007, Atotech equipped its high-quality and stable chemicals with sophisti-
cated control equipment and provided customers with system solutions, including
system maintenance, calculation of operation cost and the budget price, investment
and financial consultancy, cost-benefit analysis, environmental and ecological
assessment, process optimization plan and efficiency analysis of operational cost.
Moreover, customers could receive all-round services in their plants from Atotech’s
professional technical team of engineers. Furthermore, Atotech collected
customers’ problems when using processing equipment and their suggestions in

improving chemicals, thereby carrying out technical promotions in such areas as
material specifications, surface treatment technology, new product R&D and
environmental process. In addition, in-depth communication and exchange was
launched with customers in automotive industry with appropriate system solutions.
Thanks to the above efforts, Atotech upgraded from a chemicals manufacturer to a
service provider which provides designed systematic solutions to users with tech-
nology R&D.
3.4.2.4 The Fourth Upgrading: From a System Service Provider

to a Low-Carbon Operation Enterprise
In line with the rise of international green awareness, the chemical industry was
facing the pressure of green transformation. Taiwan government then promulgated
the Sustainable Energy Policy Program in 2008 and began to study the mechanism
of carbon-footprint labels in 2009, requiring local companies to label the amount of
carbon emissions. the European Union sequentially implemented a series of
instructions such as ELV, WEEE/RoHS, REACH and EuP/ErP, indicating a
increasingly higher environmental protection requirements for products.
Furthermore, the improvement of people’s living standards and the media’s
extensive publicity boosted spontaneous environmental activities in communities,
gradually affecting people’s environmental awareness.
Upgrading Process
Since 2009, staring with low-carbon operation, Atotech has comprehensively

improved product and internal operating process. The company issued the
“Environmental Responsibility and Sustainable Development Strategy” report in
2011 and implemented the 5R environmental policy namely, reduce, reuse, recycle,
research and responsibility. The company’s low-carbon operating system is shown
in Fig. 3.20.
In terms of products, Atotech developed a variety of environmentally friendly
products, including energy-saving equipment, equipment that can reduce or replace
the use of hazardous chemicals, pollution-free products, and chemical regeneration
equipment. These products and services effectively reduce wasted water and pol-
lution, save water, energy, equipment and chemicals, reduce scrap rates, thereby
achieving cost saving and quality improvements. For example, the company’s
Horizon series of energy-saving equipment can help customers reduce 54% of
water consumption, 6% of electricity consumption, 67% of tankage dirt than tra-
ditional equipment, and 67% of chemicals, as a result of which the total processing
efficiency increased from 84 to 88%.
The world’s leading

technology
Green technology
Leading the industry to take the lead in the pracƟce of green

technological revoluƟon
Green Cost savings, green technology and Make peripheral

chemistry quality improvement equipment clean
Water conservaƟon Waste water reducing PolluƟon abatement Energy saving
Lowering reject rate Economizing raw materials Equipment saving Chemicals saving
Fig. 3.20 Low-carbon operating system of Atotech
With regard to the internal management, Atotech introduced the “green design,
green production, green service, green life” concept. The company prioritizes the
procurement of raw materials of green packaging, green design, recycling, low
pollution and energy saving. It regards environmental protection, safety, perfor-
mance, product quality as equally important as profit when evaluating the new
product development, product manufacturing, marketing, transport, utilization,
rehabilitation and other parts. It also improves operating procedures and perfor-
mance, decrease energy and waste, and carries out integrated recycling and reuse of
wasted energy resources. Finally, it takes regular detection of groundwater, waste
water, rejected material, air pollution and noise, as well as implements management
systems such as “paperless office”, “green environmental-protection day” and
energy-saving uniforms.
Thanks to the enormous environmental-protection benefits generated by
Atotech’s green products, it was rewarded in 2008 with “the Excellent Performance
in cleaning wastes and renewable resources, and saving and recycling resources” by
the Environmental Protection Agency of Taiwan Executive Yuan. The company
has realized pollution-free in its processing technology and chemical products, such
as lead-free and nickel-free cars and environmental-protection bathroom products.
Currently, 50 UNIPLATE-code production lines have been utilized in the island,
each of which can reduce water consumption by 5200 tons per year. Calculating by
NT $10 per ton of water costs and NT $30 per ton of waste water treatment, these
production lines can save NT $10.4 million each year.
Figure 3.20 shows Atotech’s low-carbon operating system.
Figure 3.21 shows Atotech’s upgrading route.

Consequently, Atotech witnesses its continuous expanding of market influence
in Taiwan and ranks among the leading brands in its industry. For example, its
black oxidation alternative process accounted for 50% of Taiwan’s market share. In
2011, the company’s revenue reached NT $3.4 billion (as shown in Fig. 3.22), 37
times that of 1995, with an average annual compound growth rate of 23.7%.
Simultaneously, Atotech also witnesses the continuous rising of its international
competitiveness. It successfully passed the international certification of ISO9001
quality management system and ISO14001 environmental management system in
2002, and OHSAS18001 security management system in 2004. Subsequently,
Atotech integrated these three international certifications of management system, as
a result of which its Material Science Laboratory conformed to the international
standards of IEC/ISO 17025 in 2005 and TAF/ISO 17025 in 2006. And its
Analytical Laboratory also passed the IEC/ISO 17025 international standards in
2007. In Taiwan, among the tens of thousands of enterprises that passed the
ISO9001international certification, thousands of them conformed to ISO14001,
hundreds of them received OHSAS18001, and only several possessed all these
certifications simultaneously. Atotech is the first Taiwan-funded enterprise
Low carbon
role operaƟon
definition System service
R&D
Independent innovaƟon
Subsidiary producƟon
corporaƟon
Agency
1994 1997 2001 2004 2007 2009
Fig. 3.21 Atotech’s upgrading route
Fig. 3.22 Atotech’s

operating revenue (in NT $0.1
billion)
operating revenue
successfully passing all these certifications, which enables it to gain substantial

international competitiveness.
3.4.3 Implications
3.4.3.1 Three Options of Taiwanese Enterprises
During the author’s interview, Dr. Huang, Atotech’s general manager, pointed out
that under the fierce changes in the economy, technology and enterprise competi-
tions, Taiwan’s enterprises have three options. The first one is to shift production
plants to developing regions with lower labor-cost, so as to enjoy cost advantages
and obtain profits. At present, most Taiwan-funded enterprises adopted this strategy
and removed their plants to mainland China. The second choice is corporate
upgrading. This consists of not only product upgrading for higher value-added, but
also upgrading towards both ends of the value chain, that is, from simple manu-
facturing to R&D (upstream) and brand promotion (downstream). Thanks to the
substantial R&D talent reserves and rapid development of several scientific parks,
Taiwan has created perfect R&D environment and thus enjoyed potentials and
advantages in technological upgrading. By comparison, due to the island’s limited
market capacity, enterprises perform worse in brand promotion towards Taiwan
consumers, but better towards overseas markets. This is different from mainland
China. The third option is to remain unchanged, though eventually be eliminated
from the market.
Therefore, for enterprises that determined to develop continuously in Taiwan,
they must realize that Taiwan could no longer maintain its competitiveness as a
“volume-production foundry” and only continuous development of new critical
technologies could guarantee high value-added commodities. Atotech is among the
successful practitioners adopting this strategy.
3.4.3.2 To Achieve Continuous Upgrading by Avoiding or Even

Transcending Competition Rather Than Engaging in Input
and Cost Competition
Since the office establishment in Taiwan in 1994, Atotech Technology Group has
constantly improved the corporate management by reorganizing internal structure,
human resources management, financial planning and information construction. In
1997, its subsidiary, Atotech Taiwan Ltd., was established and obtained operational
autonomy, which enabled it to participate in market expansion, product sales and
competition. In 2002, Atotech set up a production plant in Guanyin district to
achieve self-production and cost competition. In 2004, a TechCenter was estab-
lished also in Guanyin district, indicating that the company embarked on an
innovation and R&D road and strived to get rid of competition. From 2009, shifting
its focus to green technology, green services and green living, the company started
to lead the industrial development in Taiwan to go beyond competition, from the
perspective of community development and human survival.
To improve competitiveness and realize enterprise upgrading through
low-carbon operation and environmental protection Atotech’s low-carbon operation
is not only reflected in the management philosophy but also implemented in all
aspects of the enterprise, ranging from green design, green production, green ser-
vice to green life. Every place reflects the company’s low carbon culture. Such
prospective environmental awareness also affected the customers successfully. At
present, Atotech’s products can effectively assist customers in energy saving and
emission reduction, provide alternatives to hazardous chemicals, and offer
non-polluting products and chemical regeneration equipment. By launching a series
of green products, Atotech enables its customers to reduce production costs and
pass international environmental certifications so as to sell products successfully
overseas. And this low-carbon environmental protection strategy ensures Atotech to
surpass its competitors sustainably.
3.4.3.3 “Car-Racing Theory” and Crisis Awareness
As a consequence of financial crisis, lots of companies underwent cash-strand

breaks. Atotech, instead, adopted effective approaches in time thanks to the oper-
ation of its risk control department and thus grew steadily in a downward market,
which attributes to the strong crisis awareness of its entrepreneurs. Dr. Huang,
general manager of Atotech, proposed the “Car Racing Theory” for corporate
competition. He believes business competition is just like car racing. Operating an
enterprise in a stable environment is just like competing with your rivals in a
straight track and it’s extremely difficult to overtake even just one parking space
distance. Curve overtaking is the only choice for you to get ahead of your rivals. It
is the same for business operation. Only when an enterprise is undergoing changes
and being placed in a turbulent market altogether with its rivals, can it take the
chance and get ahead of its rivals. Therefore, companies should have a sense of
crisis and recognize that a “calamity” is also an “opportunity” to surpass their
competitors. Only by adhering to this strategy can enterprises avoid risks in normal
management and response positively in crisis and seize opportunity.
3.4.3.4 Entrepreneurship
Driven by the entrepreneurship, Atotech captures information about changes in

industry and policy much faster than its counterparts, thereby taking upgrading
actions earlier and securing its upgrading results more effectively. Such
entrepreneurship can be found in two aspects including the top management team
(led by general manager Dr. Huang) and the innovation-oriented strategy of the
enterprise. It is mentioned by Joseph A. Schumpeter, the Austrian economist, in
The Theory of Economic Development that entrepreneurs should have visions to

find potential profits, keen insights to identify and seize opportunities, courage to
take risks, and capability to organize and allocate the company’s internal and
external resources. These four entrepreneurial characteristics can be found in Dr.
Huang who has substantial professional knowledge and domestic and international
management experience.
References
Mao, Y.-S., and Dai, Y. From OEM, ODM to OBM: A Study on Business Self-Innovation Path
under Emerging Economy [J]. Economic Management, 2006(20): 10–15. (in Chinese)
Zhang, H. Global Value Chain Theory and China’s Industry Development Research [J]. Chinese
Industrial Economy. 2004(5): 38. (in Chinese)
Chapter 4
Case Analysis of Industrial Regions,
Clusters and Parks
4.1 High-Tech Industries in Shenzhen Characterized

by Independent Innovation1
In 2008 Forbes ranked cities that had experienced substantial changes in China.
The accompanying article illustrated that this country has been undergoing the
largest scale of industrialization process in human history. This ranking was based
on the gross domestic product (GDP), the market size and the changing degree of
the city. The top-10 cities involved Shenzhen, Guangzhou, Hong Kong, Shanghai,
Beijing, Dalian, Nanjing, Xiamen, Tianjin and Chongqing.2
Shenzhen has shown a sustainable development trend in recent years. Data of
2015 indicated that Nanshan District, one of this city’s districts, achieved the local
GDP of 346.41 billion yuan in 2014 (up 9% than the previous year) and the per
capita GDP of 308.7 thousand yuan (up 8.5%). Such per capita GDP was 2.1 times
than that of the city’s average level, surpassing that of Hong Kong and close to that
of Singapore. With outstanding high-tech industries in Shenzhen, Nanshan district
has been well-known as the strongest rival of Silicon Valley. Statistics revealed that
its research and development (R&D) input in 2014 exceeded 20 billion yuan,
accounting for 5.8% in the local GDP. This has contributed over 75% to the
scientific and technological (S&T) upgrading of this city, close to the level of
developed countries. In the future the local government will continue to attach great
importance to setting up the international maker center, gathering high-end inno-
vative resources, and speeding up the construction of international knowledge
innovation community. To attract more overseas graduates and talents returned to
carry out innovations and startups in Nanshan district, for instance, the International
Maker School was established in 2014 jointly by the Chinese Academy of Science
and Steinbeis-Hochschule Berlin.
1
According to the May 23, 2007 in Shenzhen research and public data collation.
2
Source: December 17, 2008, Yangtze Evening News.
https://doi.org/10.1007/978-981-13-1260-1_4
164 4 Case Analysis of Industrial Regions, Clusters and Parks
4.1.1 Basic Situations and Characteristics of Shenzhen

High-Tech Industries
4.1.1.1 Rapid Development, Outstanding Economic Contributions

and Strong Competitiveness of Shenzhen’s High-Tech
Industries
Since 1992 Shenzhen government has endeavored to transform the processing and
manufacturing industry to the high-tech industry. It has achieved satisfied perfor-
mances with an average developing speed of 20% roughly over the past 22 years.
Take the data in 2012 as an example. The output value of high-tech products was
1.29 trillion yuan, increased by 8.9% year on year. Of this output value, the
high-tech products with independent intellectual property rights was 788.84 billion
yuan, accounting for 61.0% and 0.2 percentage points higher than the previous year
(see Table 4.1). Exports of high-tech products rose to US $141.22 billion (see
Table 4.2), accounting for 52.04% of the city’s total exports (US $271.37 billion).
The above outstanding economic achievements indicated the high-tech industry has
become the major force of economic development of Shenzhen.3
As shown in Table 4.2, the high-tech industry in Shenzhen has enjoyed sus-
tainable rapid development. In 2010, its output value exceeded 1 trillion yuan for
the first time, up 19.61% compared with the previous year. The output value of
electronic information (E-information) products takes up 80% of that of high-tech
industries; and the new energy, new materials and other strategically emerging
industries grew rapidly, increased by over 20% year on year.
High-tech industries in Shenzhen has enjoyed highlighted advantages in China.
By the end of 2013, over 2,900 state-approved high-tech enterprises settled in this
city. Among them, 70% have been engaging in the information technology
(IT) industry and 15 have been placed inside the top-100 E-information enterprises
in China. The applications of international patents under the Patent Cooperation
Treaty (PCT) in 2013 exceeded ten thousand for the first time, accounting for
48.1% of the total domestic applications. Such applications have ranked first among
the country’s large and medium-sized cities for 10 consecutive years, 3.4 times and
11.3 times more than that of Beijing and Shanghai respectively. In 2013, Shenzhen
had six enterprises on the top 10 list of enterprises in terms of the number of PCT
patents, with three high-tech companies ranking the leading positions, each owning
over one thousand applications. They are Huawei Technologies Co. Ltd. (here-
inafter referred to as “Huawei”), Zhongxing Telecommunication Equipment
Corporation (hereinafter referred to as “ZTE”) and Shenzhen city Tencent
Computer System Co. Ltd. (hereinafter referred to as “Tencent”).
3
Source: “Shenzhen 2007 National Economic and Social Development Statistics Bulletin”,
Shenzhen Municipal Bureau of Statistics.
4.1 High-Tech Industries in Shenzhen Characterized … 165
Table 4.1 Output value of high-tech products with independent intellectual property rights in
Shenzhen (1999–2012). Source Shenzhen Bureau of Statistics
Year Output value of high-tech products with Year-on-year Proportion in the output
independent intellectual property rights growth (%) value of all high-tech
(billion yuan) products (%)
1999 38.336 46.8
2000 53.454 39.37 50.2
2001 74.563 39.49 53.7
2002 95.448 31.00 55.8
2003 1 38.664 45.28 55.9
2004 1 85.309 33.35 56.7
2005 2 82.417 33.35 57.8
2006 3 65.329 29.40 57.9
2007 4 45.439 21.90 58.6
2008 5 14.817 15.60 59.1
2009 5 06.210 −1.70 59.5
2010 6 11.589 20.82 60.1
2011 7 22.036 18.05 60.8
2012 7 88.841 9.25 61.0
Table 4.2 Imports and exports of high-tech products in Shenzhen (2001–2012). Source
Shenzhen Bureau of Statistics
Year Total imports and exports of high-tech Imports (billion Exports (billion
products (billion US dollars) US dollars) US dollars)
2001 23.35 757 11.98 796 11.36 961
2002 33.44 119 17.75 195 15.68 924
2003 51.58 146 26.43 846 25.14 300
2004 69.28 262 34.22 565 35.05 697
2005 88.68 653 41.59 435 47.09 218
2006 115.36 580 54.01 421 61.35 159
2007 134.63 800 62.09 300 72.54 500
2008 140.99 495 61.62 273 79.37 222
2009 153.45 520 68.43 409 85.02 111
2010 197.70 075 88.97 407 108.72 668
2011 224.16 000 99.36 000 124.80 000
2012 252.06 532 11 0.84 532 141.22 000
4.1.1.2 Private Enterprises Have Become the Main Force

in the Development of Shenzhen’s High-Tech Industries
As a booming city, Shenzhen lacks prestigious universities recognized by the

nation’s Ministry of Education and famed research institutes supported by the
Ministry of Science and Technology. The growth of its high-tech industry has been
relied mainly on private enterprises rather than foreign multinationals. In other
words, the R&D expenditure, with a small portion from the municipal fiscal
investment in S&T, mainly comes from the enterprises’ sales revenue. Statistics
revealed that in 2012, 43.898 billion yuan was spent on the R&D of high-tech
products, 2.81 times more than that in 2007. And by the end of 2013, a total of
63 registered patent agencies had been approved by the State Intellectual Property
Bureau in Shenzhen, an increase of 12 than the previous year.
Figure 4.1 shows the relatively large-scale high-tech enterprises in Shenzhen,
including 1 enterprise with the output over 100 billion yuan, 3 over 50 billion yuan,
11 over 10 billion yuan, 59 over 1 billion yuan, and 393 over 100 million yuan. The
top three involve Huawei, ZTE and Tencent, followed by Shenzhen Kingdom
Sci-Tech Co., Ltd. and Shenzhen Coship Electronics Co., Ltd.
According to the Research Report on Industrial Transformation and Upgrading
of Listed companies (2014) released by the Shenzhen Securities Regulatory
Commission, Shenzhen, as one of the special economic zones, has witnessed three
decades of development, during which both the pillar industries and large-scale
leading enterprises have expanded through market competition. This has fostered a
favorable market environment and culture, leading to an extensive social consensus
that industrial transformation and upgrading could be facilitated by market
approaches. On one side, private firms have predominated the transformation
process of listed companies. In fact, among the current 89 listed companies in
emerging industries, 74 belong to private holding companies or companies without
actual controllers in disclosure, with the remaining the state-owned holding com-
panies. On the other side, very few corporate transformations in Shenzhen got
governmental fiscal support, implicit guarantees or even direct administrative pol-
icy, which often occurred in some other cities in China yet. For instance, the total
1 enterprise
>100 billion RMB
59 enterprises > 1 billion RMB

393 enterprises > 100 million RMB
Fig. 4.1 Output value of Shenzhen’s emerging high-tech enterprises

investment of the 251 strategic projects in emerging industries launched by the

above listed companies rose to 56.205 billion yuan, with simply 2.674 billion
yuan (accounting for 4.76%) coming from the governmental fiscal funding; and
97 projects by 31 companies, receiving no governmental subsidies, raised their
funds by market means. Furthermore, the government has offered inclusive finan-
cial support at the grass-roots level, without excessive privilege towards particular
companies or those of specific ownership.
4.1.1.3 By Utilizing Location Advantages, the High-Tech Industry

Has Integrated the Transformation and Upgrading Closely
with Internationalization
Thanks to the location advantage of being close to Hong Kong and Macao,
Shenzhen has witnessed decades of domestic reform and opening up to the overseas
market. The transformation and upgrading of its high-tech industries is thus
featured by export-orientation, interwoven with internationalization.
This can be seen from the global sales of Shenzhen’s high-tech products. For
instance, the boarding bridges in Paris Charles de Gaulle Airport have been man-
ufactured by CIMC-TianDa. And those “Made in Shenzhen” medical products are
used by nearly 80% of the 1,700 French hospitals. According to the Research
Report on Industrial Transformation and Upgrading of Listed companies (2014),
from 2010 to 2012, the overseas sales income by Shenzhen listed companies in
emerging industries were maintained over 40% of their total income; in particular,
this percentage of ZTE exceeded 50%.
In addition to product globalization, a certain number of Shenzhen enterprises
have started to internationalize their structure, assets, personnel and management.
The Research Report on Industrial Transformation and Upgrading of Listed
companies (2014) reported that the overseas subsidiaries set up by Shenzhen listed
companies increased so fast that the number was 17, 20 and 31 in year 2010, 2011
and 2012, respectively. From 2008 to 2012, 27 overseas mergers and acquisitions
(M&A) were carried out by Shenzhen listed companies with a total transaction
value of 40.509 billion yuan; the annual transaction value of overseas M&A was
over 8 billion yuan, accounting for 35% of that by the total listed companies in
China.
4.1.1.4 Complete Industrial Chain System and Extensive R&D

Investment Drove the Rapid Growth of Shenzhen’s IT
Industry
Of all the Shenzhen high-tech industries, IT industry is the one that has experienced
the fastest development and made the largest economic contributions. According to
the Report on Shenzhen IT Industry Development, the output value generated by
Shenzhen IT products in 2013 jumped to 1.243 trillion yuan, accounting for 88.7%
of that of Shenzhen’s high-tech products and equal to one-tenth of that of the

domestic E-information manufacturing industry; and the exports of IT products
accounted for 19.2% of that of the domestic E-information products. Statistics also
showed that among the 2,900 state-certified high-tech companies in Shenzhen, 70%
of which engaged in IT industry, 15 were selected as one of the top 100 Chinese
E-information enterprises in 2012. And two thirds of the city’s companies listed at
home and abroad are in E-information industry (a total of 200).
Specifically, Shenzhen has developed a complete industrial chain in the IT field
from integrated circuit design, manufacturing, packaging to software. The manu-
facturing and R&D of its communications equipment ranked second in the world
and the shipments of its mobile terminal accounted for 40% in the global market.
In 2013 the shipments of its smartphones stood at over 200 million, of which the
4th Generation cellphones were over 4 million; the scale of internet industry stood
at 210 trillion yuan with over 70 leading enterprises springing up in the internet
subdivided industries. So rapidly was E-commerce developed that the transaction
value and online-shopping sales climbed to 951 billion yuan and 89 billion yuan
respectively, accounting for 20.1% of the total retail sales of consumer goods.
Results in the Report on Shenzhen IT Industry Development also revealed that
Shenzhen’s software industry has maintained a growth rate of over 20% in recent
years. In line with the manufacturing and R&D of telecommunications ranking
second globally, a large number of world-class enterprises, such as Huawei and
ZTE, have kept on strengthening and expanding. The number of patents per ten
thousand people in Shenzhen has reached 50, making the city rank first
domestically.
All these outstanding achievements could be attributed to the persistent
upgrading of technological innovation capability by Shenzhen’s software compa-
nies whose R&D input increased from 54.79 billion yuan in 2011 to 64.64 billion
yuan in 2012, a growth of 18% (see Fig. 4.2).
4.1.1.5 Utilization of the Capital Market

and Industry-University-Research Institutions Cooperation
Facilitated the Transformation and Upgrading of Shenzhen’s
High-Tech Industries
The strong S&T innovation capability in Shenzhen has spurred its high-tech
industries and the booming financial services industry has provided diversified
financial support for its industrial upgrading. Accelerated by such dual engines of
“technology innovation plus financial support”, Shenzhen has embarked on a fast
track of transformation and upgrading. By the end of 2014, among the
185 Shenzhen listed companies, 89 engaged in emerging industries such as the new
generation of information technology, biological medicine, new energy and new
materials, according to the statistics from Shenzhen Securities Regulatory
Commission,.
Revenue Growth rate
R&D input (100 million yuan) Growth rate
Fig. 4.2 R&D investment in software in Shenzhen (2007–2012). Data source Report on
Shenzhen Software Industry
In recent years, near 70% of Shenzhen’s listed companies have established

subsidiaries in other places, 90% of which engaged in the above strategic emerging
industries. Their performance was above the national average level with a strong
developing momentum. Reported from Securities Times, a Chinese newspaper, in
2013 the net profit realized by the domestic A-shares listed companies was 2.249
trillion yuan, increased by 14.43% from one year earlier; while that by the
184 Shenzhen listed companies was 167.794 billion yuan, an increase of 30%
which was twice more than the national average level. In the first quarter of 2014,
the growth rate of net profit of A-shares listed companies and Shenzhen listed
companies was 8.7% and 22.66% respectively, with the latter much higher than the
former.
Besides, the Industry-University-Research Institutions cooperation in Shenzhen
has stepped up the industrialization and commercialization of S&T achievements,
thus facilitating the transformation and upgrading of high-tech industries. Currently,
a considerable number of universities and state-class research institutes have
established the S&T firms incubator, a model featured by “industry plus technology
plus capital plus talents”. In recent years, Shenzhen Tsinghua University Research
Institute has industrialized over 150 scientific research achievements, fostered more
than 600 high-tech companies, and supported about 10 listed companies. Up to
June 2010, 23 provincial industry-university-research institution demonstration
bases were set up in Shenzhen, ranking second in Guangdong province, which
cover the fields of integrated circuit, medical equipment, advanced manufacturing,
digital television and biological medicine. Moreover, 355 technological specialists
were selected to settle in 296 enterprises in 3 batches by the Shenzhen government.
Consequently, from 2006 to 2010, a total of 5,648 industry-university-research
institution cooperation projects of different types were carried out in Shenzhen,

financially supported by the enterprises (80.4 billion yuan) and local government
(1.91 billion yuan) and participated by 4,918 enterprises and 537 universities and
research institutes. Outstanding performances could be seen from the 7,925 patent
applications, 3,000 commercialized achievements, 825.5 billion yuan of output
value, 76 billion yuan of export sales, 143.7 billion yuan of taxation and
130 thousand newly talents.
4.1.1.6 The Manufacturing Industry of E-Information Products Based

on OEM Are Changing from OEM Towards ODM and OBM
Shenzhen’s manufacturing industry of E-information products is composed of three

parts, including the consigned processing and OEM, self-brand whole device
production, and equipment manufacturing with independent property rights. Under
the current circumstances, however, OEM is still the major business of most
E-information manufacturers. Of the total output value in this industry, Foxconn
Technology Group accounts for over a half, thus becoming the city’s main source
of foreign exchange; and other domestic whole device production enterprises,
represented by the Great Wall and Konka, account for another 30%. The remaining
20% of output value is created by those companies with independent property
rights, represented by Huawei and ZTE. Their core technology and main profit have
been derived from the self-developed embedded software, thus helping them take
up the medium and high-end segments in the value chain. In recent years, in line
with the increasing input in S&T by the Shenzhen government and companies,
the manufacturing industry of E-information products has gradually transformed
and upgraded from traditional single OEM towards ODM and OBM.
4.1.1.7 The Software Industry Mainly Comprising of Local Brands Is

Becoming the Major Force of Self-Innovation
Currently, Shenzhen’ssoftware and IT service industries take the lead domestically

both in industry scale and enterprise strength. The revenue of its software rose from
56 billion yuan in 2005 to 189.14 billion yuan in 2010, an annual growth rate of
27.6%. By the end of 2011, a total of 3,287 software firms were certified by the
state. Among them, 50 enterprises were successfully listed in the stock market, 27
became the key software companies under the national planning, and 9 entered the
list of China’s Top 100 software enterprises with their business revenue accounting
for 40% of the total revenue of these 100 enterprises. In 2013, Shenzhen’s software
industry posted the output value of 602.9 billion yuan, registered software products
of 3,787 (21,913 cumulatively), registered software enterprises 320 (4,116 cumu-
latively), and software exports of 18.4 billion yuan (a 14.1% year-on-year growth).
The software industry has become the leading force of Shenzhen’s
self-innovation. Take the statistics in 2012 as an example. First, the amount
of international patent applications filed under PCT reached 8,024, accounting for
40.3% of the total national applications and ranking first among all other cities for
9 consecutive years. In particular, Huawei ranked the top in licensed invention
patents (2,734), followed by ZTE (2,727). Second, Shenzhen’s software enterprises
reported investment of 64.64 billion yuan on software R&D, up 18% than the
previous year, accounting for 23.5% of their software revenue and thus ranking the
top domestically. Third, it was the first time that the number of software copyright
registrations exceeded ten thousand (12,374) with a 29.85% increase year on year,
only second to Beijing.
A group of strong enterprises have engaged in the formulation of industrial
standards. Shenzhen TYDIC Information Technology Co., Ltd. has been designated
one of “China’s Top 20 Software Companies in Terms of Innovative Capability” in
the “Selection of Chinese Software Innovative Enterprises”. The programs that ZTE
and Huawei participated in have won the first prize of “State Technology Invention
Award” and “State Scientific and Technological Progress Award” respectively. Six
projects carried out by firms such as Tranzda Group and Arkmiro Technologies Inc.
have won the funds of 290 million yuan from the “Nuclear Takamoto Significant
Special”, part of the Major National Science and Technology Special Projects.
From 2009 to 2012, such national special projects launched in Shenzhen reached a
number of nearly 100, ranking first in China, including the “Nuclear Takamoto
Significant Special” and “A New Generation of Broadband Wireless Mobile
Communication network”. Thanks to the ownership of the core technologies with
independent intellectual property rights, a number of enterprises have gradually
become the benchmark in some fields and the providers of overall solutions,
resulting in their positive participation in the formulation of national and interna-
tional standards. Huawei, for instance, has joined in 123 international industrial
standards institutes and forums, assuming more than 180 key leadership positions
and summiting over 2,300 papers in such fields as optical transmission, access
network and cyber security. Similarly, ZTE has striven for the integration between
proprietary technology and standards, becoming members of more than 70 inter-
national industrial standards institutes and forums.
4.1.1.8 The Increase in Government Fiscal Support Has Effectively

Promoted the Development of High-Tech Industries
In 2001, Shenzhen’s government implemented a number of policies to stimulate

software development. Since 2009, the government carried out, initially in the
country, the development plans and supporting policies of the internet industry with
an annual extra support of 500 million yuan for a succession of 7 years.
The municipal government has consecutively introduced development schemes
and policies to cultural creative industry, new-generation IT industry and other
strategically software-related emerging industries. It has also constantly optimized
the financial and technology service environment to support the industry devel-
opment. In 2010, the city witnessed the number of Initial Public Offerings (IPO)
Total amount of fiscal input
Total amount of three items of expenditures
Input from Shenzhen Bureau of Science

& Technology and Information
Fig. 4.3 Fiscal investment in science and technology in Shenzhen (from 2001 to 2005) (Unit:
10,000 yuan). Source Shenzhen Bureau of Science and Technology and Information
in Shenzhen Stock Exchange rank the top in the world and the venture capitals
(VC) rise to 200 billion yuan.
In recent years, the municipal government has continuously enhanced its fiscal
support for the S&T development. As shown in Fig. 4.3, during the five years from
2001 to 2005, the total fiscal investment increased nearly 2 times, from 1.098
billion yuan to 3 billion yuan roughly. This led to an outstanding performance in the
software industry, for instance, which reported 3 times growth of output value, from
13.8 billion yuan to 56 billion yuan.
Such enormous expenditures on S&T development, comparatively, was equal to
the total R&D expenditure of several medium-sized provinces in mainland China.
Since then, the fiscal investment in high-tech industries was reported 3.2 billion
yuan in 2006 and that in scientific research and experiment was 22.187 billion yuan
(a year-on-year growth of 16.3%) in 2007. And the implemented R&D funds on
S&T in 2007 reached 719 million yuan, supporting 1,208 S&T projects. Briefly
speaking, the vigorous investment on S&T has effectively accelerated the devel-
opment of high-tech industries.
4.1.1.9 The Government Has Taken Various Measures to Support

the Development of High-Tech Industries and Formed
a Complete Industrial Supporting System
To further facilitate the development of high-tech industries, Shenzhen’s municipal

government has constructed an all-round mechanism through such approaches as
building public platforms, improving supporting industries, financing enterprises,
formulating growth roadmap and instructing social capital investment. It has
attempted to form a complete industrial supporting system from the upstream,
middle stream and downstream, for the sake of integrating the innovation chain
with the capital chain.
Fig. 4.4 Shenzhen High-tech industry supporting system. Source Shenzhen Bureau of Science
and Technology and Information
As shown in Fig. 4.4, an integrated industrial supporting system has already

been established in Shenzhen. The upstream mainly involves the original innova-
tion bodies, including key labs and scientific research institutes (engaging in basic
and applied research) and other innovative institutes (engaging in non-consensus
projects, civil inventions and civil technological innovations). The middle stream
mainly refers to those bodies engaging in S&T innovations, projects development
and maintenance, which can enjoy a series of subsidizing schemes, including
subsidy scheme for developing firms’ research, technology and experiment, sup-
porting grants for state and province-class S&T projects, technical standards
development scheme and the certification scheme of Capability Maturity Model
(CMM) for software enterprises. The downstream primarily refers to the industri-
alization of S&T innovative projects, which can enjoy supporting schemes such as
interest discount/exemption scheme on technology loans, matchmaking scheme for
startup firms through VC, growth-roadmap subsidy scheme for innovative firms,
and growth scheme for leading S&T enterprises in segmenting industries.
4.1.1.10 The Government Has Been Vigorously Promoting

the Development of High-Tech Enterprises by Improving
the VC Investment and Entrepreneurship Environment
In order to improve the investment environment of startup firms, the Government

and Committee of Shenzhen Municipality unified the filing system of VC com-
panies and implemented related management regulations. It also stipulated that the
VC was in charge by the municipal S&T department, specifying the functions of
related institutions. It regulated clearly the VC firms applied for the record could not
engage in real estate, financial bonds and other businesses, which were beneficial in
promoting the VC firms and thus the city’s VC environment. Until 2014, 16 VC
companies successfully passed the verification and registration.
In order to better direct and improve the VC environment, the Government and
Committee of Shenzhen Municipality carried out the following measures.
Constructing and Promoting the Transaction Market of Technology Property

Rights
Speeding up the development of market-oriented transaction market of technology

property rights has been an important issue in Shenzhen. It can help promote the
sustainable and rapid development of high-tech industries, construct and improve
the regional innovation system, and set up the multi-level capital market system.
On November 30, 2005 the International Trading Center for Technology Property
Rights in China (South China) (hereinafter referred to as the “South China Trading
Center”) was officially established in Shenzhen. Apart from helping VC funds solve
the enter-and-exit problems, it would be the most important approach for the small
and medium-sized enterprises (SMEs) in Shenzhen and South China to ease the
financing difficulty and thus carry out the public equity trading. As the main
operation body of the South China Trading Center, Shenzhen International
High-tech Equity Exchange (hereinafter referred to as “High-tech Equity
Exchange”), was the first domestic joint-stock agency specialized in the transaction
of technology property rights, featured by the process of “share reform + trustee-
ship + private equity ! grow to be listed”.
Specifically, South China Trading Center, adopting an innovative mode of
“government guidance plus enterprise operation”, has served the S&T SMEs in
Shenzhen and South China in the following six fields. First, it offers the transaction
platform for enterprises to carry out equity financing and property-rights flowing.
Second, it offers the platform for S&T SMEs to reform their corporate governance
structure towards shareholding system. Third, it provided the service platform for
non-listed joint-stock companies to help them complete the registration, trusteeship
and swap of equity. Fourth, it provides the centralized platform for listed companies
and state-owned enterprises to launch M&A. Fifth, it provides VC with the entry
opportunity and exit channel. Sixth, it can transmit excellent listing resources for
domestic and foreign securities market. Statistics showed that in 2006 it offered
equity trading and comprehensive services for more than 1000 S&T enterprises
with a trading volume of nearly 20 billion yuan.
Implementing Roadmap Scheme for Innovative Enterprises
Helping enterprises develop their independent innovation capability is critical in

taking the nation on an innovation-oriented path. SMEs, especially those
technology-based SMEs, are the main carriers of independent innovation which
depend largely on the effective support of the capital market. To broaden the
financing channels for the innovative SMEs, the Government and Committee of
Shenzhen Municipality has taken full advantage of the capital market to accelerate
these SMEs’ rapid development. Accordingly the “Roadmap Scheme for Growth of
Innovation-oriented Enterprises in Shenzhen” has been implemented proactively by
the South China Trading Center, assisting companies to carry out stock reform for
their growth and expansion. Property rights solutions have been provided with
multiple services, such as the standardized operation, non-public offering of
financing, introduction of strategic investment, and arrangements for government
innovation funds. The roadmap scheme is the “green channel” for Shenzhen’s
high-tech enterprises to grow and go public, as each candidate can enjoy the
subsidy as high as 3.1 million yuan if selected into the scheme.
Statistics on the China High-tech Fair website showed that in 2006 a total of 38
projects with the subsidy of 20.5 million yuan were arranged for the roadmap
scheme by the municipal S&T R&D funds, vigorously stepping up the growth of
innovative SMEs.
4.1.1.11 The Government Has Clear Plans and Development

Guidelines for High-Tech Industries
To effectively speed up the development of high-tech industries, the Government

and Committee of Shenzhen Municipality has formulated clear planning and
development guidelines, combined with supporting and funding policies. During
the period covered by the 10th Five-Year Plan, the government implemented “the
10th Five-Year Plan and 2015 Vision of Shenzhen High-tech Industry
Development”, which proactively facilitated the rapid growth of high-tech indus-
tries and optimized its growth environment. And “The Outlines of the 11th
Five-Year Plan of Shenzhen Science and Technology Development” and
“The Outlines of the 11th Five-Year Plan of Shenzhen High-tech Industry
Development” both revealed that great importance will be attached to the opti-
mization of industrial structure and upgrading of the high-tech Industries.
When optimizing the structure of high-tech industries and advanced manufac-
turing industry, Shenzhen has vigorously developed independent innovation-
oriented high-tech industry, accelerated the adoption of high-tech and advanced
applicable technologies to restructure the traditional industries. It has set up

agglomeration bases for the traditional industries with advantages, so as to establish
manufacturing clusters for three industries including electronic communications,
digital equipment and household consumer goods. To advance the high-tech
industry, the local government has strengthened the advantageous sectors of
high-tech industries and continued to reinforce the competitiveness of high-tech
leading sectors, thus further improving the regional innovation system. It would
speed up the platform construction in such fields as capital, intelligence, knowl-
edge, intermediary and technology, striving to make breakthroughs in technological
innovation. It would also expand and enhance the advantageous high-tech industrial
clusters, intensify the core competitiveness of high-tech industries, strengthen the
regional cluster advantages in such competitive industries as computer and exterior
equipment, digital audio and visual equipment, communication equipment,
microelectronics and basic components, software, electromechanical integration of
machinery equipment and instruments, and medical apparatus and instruments.
The Major Plans for Shenzhen’s High-Tech Industries
According to the research by Shenzhen Municipal Science and Technology

Information Bureau, the city would mainly concentrated on four major areas,
including the personal computers (PC), consumer electronics, communications, and
automotive electronics (see Fig. 4.5).
Specifically, the PC field would mainly carry out the plan of promoting indi-
vidual mobile computing platform. The consumer electronics field would imple-
ment various plans in such sectors as digital TV development, digital home
development, medical electronic development and IC card application. The
PC field
Consumer electronics field Communications field
Automotive electronics field
Fig. 4.5 Main direction of Shenzhen’s information industry development. Source Shenzhen
Bureau of Science and Technology and Information
communications field would focus on the product development plan of smart

phones. And the automotive electronics field would consist of vehicular electronics
programs and intelligent navigation systems.
Development Goals of Shenzhen’s High-Tech Industries
Shenzhen’s municipal government has set up the goal of implementing

self-innovation strategy and building into an independent innovation-oriented city,
that is, “we should not only make use of our advantages in the environment, market,
entrepreneurs and technological innovation system, but exploit the advantages in
the relatively complete industrial chain, innovative culture as well as the testing
ground of reform and opening up, so as to seize the commanding heights of
independent innovation and become the spearhead of self-innovation.”
To become an independent innovation-oriented city, the municipal government
has determined to spend 15–20 years in improving such areas as the innovation
system, innovative talents and firms, venture capitals, comprehensive environment
and high-tech industry. It will strive to bring about outstanding contributions in a
variety of S&T fields, upgrade its self-innovation capability to be active in regional
competition, and transfer the growth pattern from extensive to intensive. These
efforts will help accomplish the overall coordination, sustainability and harmo-
nization between mankind and nature, as a result of which the residents will take
pride in the city’s innovation capability.
Development Measures of Shenzhen’s High-Tech Industries
First is to foster the innovative culture, stimulating companies to carry out inno-
vation for the prosperity of the community and nation.
Second is to build innovative facilities based on the public technology platform.
Third is to establish S&T incubators, industrial bases and other physical space as
the innovation carriers.
Fourth is to set up innovative capitals, with VC companies and institutions as the
main bodies, and technology property rights trading as well as the Growth
Enterprises Market (GEM) as the financing channels.
Fifth is to develop the entrepreneurs into innovation pioneers with
entrepreneurship.
Sixth is to construct an innovative environment by facilitating the development
of knowledge service industry.
Seventh is to establish the innovative system of applied fundamental research
with key laboratories as the main bodies and university-enterprise cooperation as
the support.
Eighth is to generate the innovative sources with the creation, management,
protection and utilization of intellectual property as the core.
Thanks to the above approaches, the government would develop Shenzhen into
an independent innovation-oriented city, featured by the perfect innovation system,
abundant innovative talents, numerous innovative enterprises, active entrepre-
neurial investment, excellent comprehensive environment and advanced high-tech
industries.
4.1.2 Constraints on Shenzhen’s High-Tech Industry

Development
4.1.2.1 VC Environment Needs to Be Improved
In general, VC has close relationship with the number of universities and research
institutes. Like the Silicon Valley which is adjacent to Stanford University, Beijing
houses Zhongguan Village and lots of research institutes and universities. By
comparison, Beijing and Shanghai are strong in scientific research resources and
competitive startup firms while Shenzhen is deficient in the educational field. Yet,
as one of Special Economic Zones, Shenzhen enjoys the location and policy
advantages and numerous firms of higher marketization degree, with its venture
capitals and startup investments in the forefront domestically.
However, the development history of China’s VC market is quite short, com-
pared with that in the United States and other developed countries. Shenzhen still
needs to be committed to the market cultivation, system innovation and improve-
ment, market regulation and supervision, and credit construction. For example, it
should work out how to deal with the high capital liquidity and enhance the con-
fidence of venture capitalists, as well as how to cope with the problems caused by
existing offline transactions. Innovative SMEs are the main source of future inno-
vation in China, especially in Shenzhen. Listing on the stock market is a very
effective and promising way for SMEs to raise capital, but many domestic SMEs
have completed the offline transactions before listing. Hence, to avoid disputes
arising from offline transactions and other issues, VC firms should cope with the
funding problem before going public.
4.1.2.2 Resource Scarcity, Environmental Pollution and Rising

Operational Costs Are Block Industrial Upgrading
At present, Shenzhen suffers mainly from land and water shortage, population
expansion and environmental pressures. These problems have caused some
industries, especially those of manufacturing, to transfer to the undeveloped areas of
the country and the export-oriented firms face the bankruptcy threat. This, to a
certain extent, would bring about the “hollowing-out” problem in Shenzhen. To
realize the sustainable development, the government has thus, on one side,
encouraged these industries to shift to the northern, eastern and western cities of
Guangdong province which could also benefit from this industrial transfer. On the
other side, the government is not only adjusting the industrial structure to help solve
the large floating population problem, but also promoting the further development
of high-tech industry to alleviate the environmental pressure caused by the tradi-
tional processing industries.
4.1.2.3 Public R&D Strength and Original Innovation Capability Call

for Enhancement
SMEs take up the majority of high-tech companies in Shenzhen, 95% of which are
small and medium-sized technological enterprises that are uncompetitive in R&D
due to the following reasons. First, the lack of capital, R&D capability, information
and talents cause many SMEs unable to participate in research and technological
innovation. Second, the heavy investment, long payback period and higher risks
required by R&D directly affect enterprises’ enthusiasm for R&D. Third, since each
company has carried out the R&D individually, it is quite difficult to realize the
economies of scale from technological innovation and the synergies from resource
optimization.
According to the authors’ investigation into Shenzhen’s high-tech industries, for
many years over 55% of output value has been created by the high-tech products
with independent intellectual property rights, but the ratio created by the products
with the core technology was still very low. In fact, the majority of key and core
technologies has come from the introduction from foreign multinationals. In
accordance with the frequent updating of product technology and the huge demand
for new products, new technologies and new techniques, the city should take the
synergy effect between the “visible hand” of the government and the “invisible
hand” of the market, that is, jointly exploiting the public technical resources and
establishing the public technology platform for all high-tech enterprises.
At present, the public service platform of high-tech industries in Shenzhen is far
from perfect, and the applicable resources of high-tech public R&D institutions are
limited. Besides, the independent innovation capability in high-tech companies is
far from strong, due to the poor project development capability, ownership of few
intellectual property rights, low application rate of achievements and insufficient
cooperation with enterprises. Accordingly, it is necessary for the city to further
accelerate the construction of public technology platforms so as to help high-tech
enterprises, especially SMEs, solve the technical difficulties. The government
should also direct the coordination between scientific research institutions and
enterprises to develop generic and key technologies.
4.1.2.4 Regulatory Barriers Hinder the Degree of Internationalization
Shenzhen Securities Regulatory Bureau has issued “The Research Report on the
Industrial Transformation and Upgrading of Listed Companies (2015)”, based on
the investigation on the current 89 companies in the emerging industries in
Shenzhen. Among them, only 11 companies has ever engaged in overseas business
such as raising capitals, establishing R&D centers and regional management
branches, and purchasing technologies and core businesses; only ZTE and other
two have enjoyed some degree of international brand awareness, according to the
data released by the World Brand Laboratory and the World Executive Group; and
simply two listed companies have hired over 100 foreign employees, the number of
which is another indicator representing the degree of internationalization.
According to this report, 60 of the above 89 companies pointed out two
important factors influencing their internationalization, that is, the complex
requirements of government review for various matters and the excessive admin-
istration regulation. In particular, lots of prior reports and governmental approvals
involved in the overseas M&A have led to the difficulty in controlling the pur-
chasing costs. In addition, many companies indicated that, under the strict foreign
exchange control, they found it inflexible to carry out overseas transactions by
adopting the equity as payment instrument and quite difficult to attract foreign top
technical talents through the equity incentive mechanism.
4.1.2.5 The Capital Market Is not Fully Used for Industrial

The capital market has played an important role in facilitating the transformation
and upgrading of the high-tech industry in Shenzhen, which could be further
improved given the far-from-perfect resource allocation mechanisms and capital
market development in China. Detailed illustration can be found in “The Research
Report on the Industrial Transformation and Upgrading of Listed Companies
(2015)”. First, in terms of capital market services and supports, the current listing
system of capital market in China is mainly designed for the traditional industrial
enterprises, emphasizing more on the mature operation and stable revenue but less
on the new technology and new business patterns. It follows that the emerging
industries could only receive service from the capital market in the mature phrase.
Second, concerning the supporting depth to the innovation, currently the devel-
opment of emerging industries has mainly relied on the three traditional functions
of the capital market—financing, M&A and equity incentive, rarely receiving
capital support from the innovative financing instruments in the capital market.
Third, as regards the policy supports to M&A and restructuring, the existing
national policies have given priority to the industries with overcapacity while less to
the emerging industries. Fourth, with regard to the professional services of market
institutions, the immaturity of the domestic capital market has resulted in the
deficiencies of Private Equity (PE), Venture Capital (VC) and securities companies
when supporting the emerging industries.
4.2 Transformation and Upgrading of Furniture

Industrial Cluster in Dalingshan Town, Dongguan
City
4.2.1 Brief Introduction of Dalingshan
Dalingshan is a town under the jurisdiction of Dongguan prefecture-level city in

Guangdong province. Across an area of 95 km2, 23 village committees (commu-
nities) subordinate themselves to this town with a population of over 300,000
including 47,000 registered permanent residents in 2014. It has been awarded with
“the First Town for Exporting Furniture in China”, “Key Furniture Exporting Town
in China”, “National Sanitary Town”, “China Green Town”, “National Ecological
Town”, “Guangdong Powerful Town in Education”, “Guangdong Sanitary Town”,
“Guangdong Green Town” and “Guangdong Ecological Demonstration Town”.
Moreover, Dalingshan town (hereinafter referred to as “Dalingshan”) enjoys
superior location advantages, since it is near Hongkong and Macau and located in
the center of “three-in-one urban area” (the combination of central city area,
Songshan lake and ecological park) of Dongugang city which is part of the
developed Pearl River Delta. Further, it has outstanding industrial advantages,
featured by a number of high-class industrial zones and parks—such as Science and
Technology Industrial Zone, Lake-Side Industrial Zone and Panshan Industrial
Park, and over 2,400 industrial enterprises including 3 on the Fortune 500 list.
Hence a diversified industrial system has been formed in Dalingshan involving the
electronics, furniture, electromechanical and equipment manufacturing and chem-
ical engineering.
Take the fiscal achievements of Dalingshan in 2014 as an example. Its GDP
increased to 16.7 billion yuan, up 8.2% than the previous year. The value-added of
industrial enterprises with annual revenue of 20 million yuan (about 3.02 million
US dollars) rose to 8.4 billion yuan (up 8.8%). The total tax revenue was 2.78
billion yuan (up 13.7%). The disposable financial resources of the local government
hit 1.18 billion yuan (up 1.7%). The total amount of import and export in foreign
trade totaled 4.69 billion US dollars (up 9.9%), of which the export was 2.72 billion
US dollars (up 15.6%). In that same year the town carried out five major con-
struction projects and a major preparatory project with a total investment of
2.55 billion yuan; and the accumulated number of investment rose to 460 million,
accounting for 110% of the annual plan.
4.2.2 Current Situation of the Furniture Industry

in Dalingshan
In 2004, Dalingshan was awarded the honorary titles of “the First Town for
Exporting Furniture in China”, “Key Furniture Exporting Town in China” and
“the Largest Furniture Production Base in Asia Pacific”, respectively, by the
National Light Industry Council, National Furniture Association and Council of
Asia Pacific Furniture Associations (CAPFA). In 2006, Dalinshan town was rated
as the Gunagdong second batch of “Upgrading Demonstration Zone of Industrial
Cluster”. Then in 2009 its furniture industrial cluster was entitled the “key devel-
oping industrial cluster supported by the Dongguan government”. In 2013, it was
awarded the “Excellent Industrial Cluster in China Furniture Industry” by the
National Furniture Association. Consequently, a “furniture kingdom” came into
being rapidly, thanks to the unique location advantages, advanced furniture pro-
duction line, improved industrial supporting services, abundant labor resources and
unimpeded export channels.
4.2.2.1 A Large Number of Well-Known Furniture Brands

and Enterprises Have Emerged
Until September 2014, a total of more than 530 furniture enterprises have settled
down in Dalingshan, 350 of which enjoyed an annual revenue of 20 million yuan.
These companies possessed over 160 furniture brands, two were awarded with the
“Famous Trademarks in China”, one with the “Chinese Top Brand”, six with the
“Guangdong Top Brand” and four with the “Guangdong Famous Trademark”.
Besides, furniture-related patents reached to nearly 3,500 items. From 2008 to
2014, the amount of furniture enterprises with over 100 brand stores in the country
increased from 10 to 35, and those with over 300 brand stores increased from 2 to 8.
In 2013, the output value of Dalingshan furniture industry reached to 10.9 billion
yuan and the tax payment by the furniture production and supporting enterprises
accounted for 30% of the town’s total tax income.
Nowadays over one hundred world famous brands have gathered in Dalingshan,
including those of the US, Europe, Hong Kong, Taiwan and Mainland China.
Products range from wooden furniture to iron furniture, and from bedroom series to
office series. Some international brands consist of Universal Furniture (the second
largest furniture retail chain stores in the U.S.), the Restonic (U.S.), Musterring
(Germany), Isabella (France) and HOPO.DIMOLA. The domestically known
brands include Frandiss, Monte Carlo and Edinburgh. Dalingshan furniture has
become the largest exhibitor in the large-scale furniture exhibitions held in
Shanghai, Guangzhou and Dongguan.
4.2 Transformation and Upgrading of Furniture Industrial Cluster … 183
4.2.2.2 The Furniture Industry Has Become the Pillar Industry

of Dalingshan
The furniture enterprises in Dalingshan are mostly export-oriented. Over 90% of

their products are sold globally with over 200 containers every day. In 2006, its
gross industrial output value and total taxes accounted for 65% and 33% of that of
the town, respectively. The export value was more than US $2.15 billion,
accounting for 12.4% of the total value of furniture exports in the country (see
Fig. 4.6).
In 2007, the furniture industry witnessed a gross industrial output value of
12.168 billion yuan, accounting for 65% of the total gross industrial output value of
the town; the tax payment of 310 million yuan, accounting for 33% of the total tax
revenue of the town; the revenue of overhead charges of 21 million yuan; and the
settlement of foreign exchange from processing and compensation trades of
2.5 million yuan. They have substantially helped promote the economic develop-
ment and the growth of economic revenue in Dalingshan.4
4.2.2.3 Furniture Industrial Cluster and Its Supporting Industries

Have Been Established
Over the past two decades, Dalingshan has always adhered to the road of devel-
oping industrial clusters, forming furniture economy with its own distinctive
characteristic. Based on the domestically largest furniture industrial cluster, a
complete furniture production chain has come into being, supported by a large
number of high-quality processing companies engaging in sheet metal, hardware
fittings, leather-ware, chemical, hardware and timber. They include not only those
subsidiaries established by the multinationals such as the largest DIY paint man-
ufacturer (in Japan), Akzonobel (in Netherland, one of the world’s Fortune
500 enterprises) and Valspar Corporation (in U.S.), but also the domestic trading
centers such as Jilong Timber Market (the largest timber distribution center in South
China) and Dacheng Hardware Trading Market (featured by the large scale and
great variety of goods).
In these recent years, Dalingshan’s furniture production has replaced the tradi-
tional manual production mode with modern production technologies. The automatic
edge banding machines, laser engraving machines, laser cutting machines and other
series of the advanced furniture production machinery have been widely applied in
the factories, forming the world-class production lines, namely, “veneering ! white
wood ! careful crafting ! oil painting ! drying ! packaging”. Hence, it is the
advanced machinery, excellent professionals and high-class production line that have
generated the strong manufacturing capability of Dalingshan’s furniture industrial
4
According to Dongguan City, Dalingshan Town People's Government internal information
obtained from the order.
Total exports of Total exports of

domestic furniture Dalingshan furniture
Fig. 4.6 Dalingshan furniture export amount. Source Dalingshan People’s Government (http://
www.dalingshan.gov.cn/)
cluster. According to the research in 2014, the annual productivity of Lacquer Craft
Manufacturing Corporation and Fu Bao (Sofa) Manufacturing Corporation rose to
200 million units (sets) and 8000 sets of high-quality sofas, respectively. And the
town has seen the utilized amount of furniture automation equipment increased from
458 units in 2008 to 832 units in 2014.
4.2.3 The Furniture Industry Is Facing Challenges

of Transformation and Upgrading
Currently Dalingshan’s furniture industry has been undergoing not only homoge-
neous competitions against other domestic furniture clusters due to the medium and
low end of their majority commodities, but also the upgrading pressure exerted by
the state policy. Lacking self-own brands, these furniture enterprises, especially
those engaging in the processing-trade exports, could only offer OEM service for
customers simply from the European and U.S. markets. After the global financial
crisis, consequently, the stagnant overseas market and competitive domestic market
forced these furniture enterprises to carry out upgrading for the long-term effective
development.
4.2.3.1 The Government Has Introduced Restrictive Policies in Order

to Direct Enterprises to Extend to the High Value-Added
Sectors
Restrictions on Furniture Exports
On July 23, 2007, the “Prohibited Commodity Catalogue for Processing Trading in
2007” was issued jointly by the Ministry of Commerce, the General Administration
of Customs and the State Environmental Protection Administration. Further
restrictions had been set up on the furniture exports, bringing more troubles to the
export enterprises. In accordance with the requirements, the furniture enterprises,
when importing the materials to processing trade, were required to guarantee a
certain number of deposits in the custom-designated accounts and could only
withdraw this deposit after export verification. Further, they were prohibited to
export sheet metal and furniture that used domestic wood as raw materials, resulting
that most of the furniture enterprises had to pay extra costs to import lumber for
further processing. Thus increasing the value-added of wooden processing products
has become an inevitable tendency.
Continuous Reduction of Export Tax Rebate Rate
In 2006 five ministries of the Chinese Government, namely the Ministry of Finance,
the National Development and Reform Committee, the Ministry of Commerce, the
State Administration of Customs and the State Administration of Taxation, jointly
issued a circular, “Concerning the Adjustment of the Export Refund Rate for
Certain Commodities and Expansion of the Prohibited Commodity Catalogue
for Processing Trading”. In this Circular, the export tax rebate was canceled for raw
materials such as coal and charcoal and reduced for products such as steel and
textile with the change in rates ranging from 2 to 5%; in particular, the export
rebates for furniture products dropped from 13 to 11%. In contrast, the export
rebates for the following products increased from 13 to 17%, including the major
key technical equipment, IT products, biological and medical products, high-tech
products encouraged by the national industrial policies.
On June 18th, 2007, the above five ministries again jointly issued the “Notice
Regarding the Adjustment in Export Rebate Rate for Certain Commodities”, stip-
ulating that since July 1st, 2007, the export rebates of furniture products made from
wood, metal, plastic and other materials would be reduced by 2–9%. Concerning
the impact of global financial crisis on the majority of export enterprises, though,
the five ministries readjusted the export rebate tax rate from 9 to 11% for most of
the domestic wood furniture since November 1st, 2008. Such policy changes
revealed that commodities of low technical-content and resource overconsumption
would continue to face the deduction of export tax rebate.
4.2.3.2 Consumer Demands for Furniture Are Decreasing

and Enterprise Operating Costs Are Increasing
Reduction of Furniture Export Demands
The global financial crisis occurred in the second half of 2007 has led to a slow-
down of economic growth in the U.S. and other developed counties, which in turn
resulted in their decrease of domestic consumption demands and transfer of
consumption pattern to commercial investment and conservative financial man-
agement. Heavily relying on the overseas market, China’s dollar-denominated
exports in 2005 accounted for 37.3% of the GDP, much higher than the global
average (27%), according to the statistics from World Bank. This percentage rose to
historically high level in 2007 (37.5%), simply lower than that of Germany (40.7%)
and Canada (37.9%) among the world’s ten largest economies but higher than that
of Russia (35.2%), India (19.9%) and Brazil (15.1%) among the emerging market
economies.5 The depression of foreign consumption directly led to China’s negative
growth in exports, the slowdown in foreign investment and even the depreciation or
loss of foreign exchange assets. The development of Dalingshan’s furniture industry
has been stalled accordingly, owing to its heavy dependence on the foreign market.
Those export-oriented furniture enterprises that suffered severely from the declining
orders, in particular, had to retrench the production and reduce the operating time to
tide over the financial crisis.
Rise in the Operating Costs of Furniture Businesses
First, raw material prices increased. Statistics showed that in 2006 the prices of
sheet metal and hardware required in furniture production rose by more than 20%
and 30% respectively.6 Second, labor prices rose. The implementation of the new
Labor Contract Law has increased the labor cost while the labor shortages caused
most enterprises to raise wages to attract labor. Third, the appreciation of RMB
further weakened the price advantages. On July 21st, 2005, China’s authorities
announced that “the yuan will be no longer pegged to the US dollar” and that
“China will reform the exchange rate regime by moving into a managed floating
exchange rate regime based on market supply and demand with reference to a
basket of currencies”. And the Chinese Central Bank revalued the yuan from 8.11
per US dollar on July 21, 2005 to 6.81 per US dollar on July 16th, 2008. The large
revaluation (over 15%) in the past three years caused the export-oriented furniture
industry Dalingshan endured serious challenges, such as the upward pressure in
export prices and the weakened competitiveness in prices.
5
Shen Minggao, China: the test has just begun, Finance Magazine, No. 227(2008-12-22).
6
First Financial Daily, 2007-12-13.
A survey conducted in 2008 on the Dalingshan’s furniture industry revealed the

ratio of different costs in the company’s total costs. Each of the following reasons—
the revaluation of yuan, the growth of wages and the reduction of the export tax
rebates—has led to a 3% increase in the total costs, totally resulting in the profit
decrease of 12% roughly in 2007.7 Consequently, such rise in the operating costs
has forced furniture companies to transform and upgrade.
4.2.3.3 Furniture Industry Is Facing Higher Quality Requirements

and in Need of Technological Upgrading
Trade Barriers Are Posing Higher Quality and Environmental Protection

Requirements on Furniture Products
Dalingshan’s furniture industry has undergone a series of trade barriers. First is the
tariff barrier. In November 2005, the furniture industry in Canada has submitted the
application to launch safeguard investigation against the furniture products from
China, requiring to impose high export surcharge for 3 years. Second is the
anti-dumping trade barrier. In January 2005, the U.S. Commerce Department levied
anti-dumping duties on a large number of wood bedroom furniture from China,
ranging from 49 to 198%. In the second half of 2006, the European Union
(EU) applied for an anti-dumping investigation on a lot of furniture originated or
imported from China, covering the majority of exported varieties. Third is the green
trade barrier, including the green tariff system, market access system and green
technology standards system, which required the application of advanced tech-
nology on furniture products. Since June 2007, the implementation of “Regulations
on Registration, Evaluation, Authorization and Restriction of Chemicals” by the EU
has brought great impact on the furniture industry since it is one of the downstream
industries of chemical products. Further, a number of European countries have
demanded the wood furniture imported from China should have a Forest
Stewardship Council (FSC) certificate. FSC certificate is currently the most widely
recognized forest certification program globally, setting a higher environmental
requirement on the furniture raw materials.8
Extensive Operation Mode and Low Labor Productivity
In terms of the gross national product (GNP) of furniture industry, the per capita
annual output value of domestic companies was 120,000 yuan and that of the
enterprises above state-designed scale was 178,000 yuan, while that in the devel-
oped countries exceeded 1 million yuan.
7
People’s Network, 2008-06-23 (www.people.com.cn).
8
www.jiancai.cc, August 8, 2007.
Fig. 4.7 Annual changes in

licensed patents of
Dalingshan furniture industry
(until 2007). Source
According to the patent
information database of the
National Intellectual Property
Office
Table 4.3 Total amount of licensed patents in the major furniture production district (as of 2007).
Source According to the patent information database of the National Intellectual Property Office
DongGuan Dalingshan in Lecong town Houjie town Yuhuan county in
city Dongguan in Shunde in Dongguan Zhejiang
city city city province
Invention 25 1 1 1 20
patents
Utility 729 50 85 61 150
model
patents
Design 3972 264 1597 1381 384
patents
Total 4726 315 1683 1443 554
Frankly, the intellectual property of Dalingshan’s furniture industry was not

sufficient enough. By the end of 2007, the items of licensed patents were up to
1,056, including 22 invention patents, 236 utility model patents and 798 appearance
design patents. As the pillar industry in the town, furniture industry has witnessed a
growth trend in the number of authorized patents (Fig. 4.7), only accounting for one
third of the town’s total number. The amount of invention patents, utility model
patents and appearance design patents were 1, 50 and 264 respectively, simply
accounting for 7% of the city’s total furniture patents.
Besides, as shown in Table 4.3, most of the licensed patents in Dalingshan were
relevant to product design with only one invention patent that involved higher
technical content. This indicated that Dalingshan’s furniture industry has less
technological advantages, especially compared with other major furniture produc-
tion districts such as Lecong town in Shunde city, Houjie town in Dongguan city
and Yuhuan county in Zhejiang province.
4.2.3.4 Fierce Competition in the Domestic Furniture Industry

Is Forcing Furniture Clusters to Look for Development
with Characteristics
In recent years, China has witnessed a speed-up agglomeration effect in the

furniture manufacturing industry. As a consequence, four major districts came into
being, including the northeast furniture industrial district with Shenyang city and
Dalian city as the center; the Beijing-Tianjin-Tangshan furniture industrial district
with Beijing municipality, Tianjin municipality and Shandong province as the
center; the Yangtze River Delta furniture industrial district with Shanghai munic-
ipality, Jiangsu province and Zhejiang province as the center; and the Pearl River
Delta furniture industrial district with Guangzhou municipality and its surrounding
cities such as Foshan, Zhongshan, Shenzhen and Dongguan as the center (see
Fig. 4.4). Yet the majority of domestic furniture commodities are of middle and
low-class, leading to the fierce homogeneous competition and thus the overcapacity
of some sorts of products. In addition, large number of export-oriented enterprises’
transformation to domestic sales has further resulted in the intense rivalry in the
domestic furniture market.
Such product homogeneity and competitive situation also occurred in the fur-
niture industry in Guangdong province. Located in Dongguan city and Shenzhen
city (which is near Guangzhou in the east), the large factories invested by Taiwan
and Hong Kong enterprises have mainly targeted the international markets. By
comparison, most of the companies in Lecong town and Longjiang town (both in
Shunde district, Foshan city which is near Guangzhou in the west) are small,
medium-sized and domestic privately-owned, focusing more on the domestic
market and less on the overseas (Table 4.4).
So far, four towns in Guangdong province have won the titles of state-class
distinctive districts with six gilded signboards, including the Lecong town with the
“Furniture Trading Center in China”; Longjiang town, the “Key Furniture
Manufacturing Town in China” and the “Certer of Furniture Materials in China”;
Dalingshan, the “Key Furniture Exporting Town in China” and the “First Town for
Exporting Furniture in China”; and Tai Chung town (in Zhongshan city), the
“Mahogany Furniture Production Town in China”. Besides, Houjie town
(in Dongguan City) was awarded with the “Famous Exhibition Town in China” in
2007 by the China Convention and Exhibition Society (CCES). These achieve-
ments revealed that large furniture industrial clusters have emerged in Guangdong
province with different specialties, but the products are still easy to be substituted.
Hence, how to solve the problem of product homogeneity has become a critical
issue for Dalingshan’s furniture industry during its industrial transformation
process.
Table 4.4 Major furniture manufacturing regions. Source arranged according to Characteristic
District Economy of China’s Furniture Industry (Chen Baoguang, Liu Xiaohong. Chinese
wood-based panel, 2006(7):6–10)
Furniture industrial district in the Pearl Furniture industrial district in the Yangtze
River Delta River Delta
It is the earliest and largest furniture industrial It has good manufacture industry base,
district and the largest furniture export concentrated talents, convenient traffic, and
agglomeration area in China developed information industry
It has complete production system, The furniture market is of high capacity and
well-developed sales market, sound high grade, with flexible, diverse and mature
supporting industries (including woodworking marketing model
machinery, hardware fittings, paint and In recent years, the furniture industry in
coatings, timber, leather, fabric art and other Zhejiang has developed rapidly, including the
raw materials), and improved industrial chain office chair industrial cluster in Anji County of
It includes the export-oriented furniture Zhejiang Province, the European classical
industrial cluster in Dalingshan Town, the furniture of Yuhuan County and the panel
software, office furniture and furniture raw furniture industrial cluster in Wenzhou
materials industrial cluster in Longjiang
Town, Shunde district of Foshan, the furniture
and exhibition industrial cluster in Houjie
Town of Dongguan and the padauk furniture
industrial cluster in Dayong Town of
Zhongshan
Furniture industrial district in the Furniture industrial district in the
northeast China Beijing-Tianjin-Tangshan region
It relies on the strength of the northeast It enjoys an advantageous location with huge
industry base, self-produced timber and timber furniture consumption groups, large furniture
imported from Russia marketing and a great number of furniture
The solid wood furniture in Zhuanghe of selling enterprises. It also has a long history of
Dalian and Yichun of Heilongjiang is the main furniture manufacturing
type of the region. Its scale and strength are of It includes the metal glass furniture industrial
leading place throughout the country cluster in Shengfang Town, Langfang of
Hebei, the wooden dining table and chair
industrial cluster in Ningjin County of
Shandong, the paulownia furniture industrial
cluster in Zhuang Zhai Town
4.2.4 Transformation and Upgrading of the Dalingshan

Furniture Industry
As mentioned above, difficulties such as the dynamic adjustment of policies, the

rising production costs and the higher requirements for product technology and
quality, have further compressed the profit margins of Dalingshan’s furniture
industry, making its development prospects uncertain. Since 2008, particularly,
a large number of furniture companies were severely impacted, simply relying on
meager profits to maintain their daily operations. Those less competent SMEs even
got a loss and closed down or relocated. Statistics showed that during the first four
months in 2008, merely two companies expanded their business with an increased
capital of 3.15 million US dollars, while five furniture companies closed down or
relocated, and no new companies were established., and. In order to promote the
sustainable development of the furniture industry, accordingly, Dalingshan pro-
posed that it would strive to develop itself from the “the First Town for Exporting
Furniture in China” to “the First Town for Furniture in China”. To realize this
vision, it has aimed to enhance and enlarge the furniture industry, promote the
regional brand of Dalingshan, and activate the furniture enterprises, so as to jointly
facilitate the industrial transformation and upgrading.
4.2.4.1 Furniture Enterprises Are Actively Engaging

in Transformation and Upgrading
Positively Carrying Out Product Development and Promoting Consumer

Demand
Located in Dalingshan, Fu Bao (sofa) Manufacturing Corporation is a private

enterprise specializing in manufacturing sofa and its supporting products. In recent
years, the company started to develop and introduce new products, such as tables,
chairs and beds, and the office, living room, bedroom series except for the classical
sofa. This company has attempted to transform its manufacturing from simply sofa
to diversified furniture products.
Improving Production Process and Reducing Costs
Investigation results show that Lacquer Craft Manufacturing Corporation, also

located in Dalingshan, has arranged several production lines to stitch leftover
timber material which would be burned up in the past. Despite the cost in glue and
labor, this approach raised the utilization rate of timber by 5–10%. Other compa-
nies, after satisfying the safety testing and the relative foreign standards, have
redesigned their commodities to save the cost of raw materials, for example, using
hollow wood to make bedposts and table legs.
Upgrading Functions to Increase Profits
A number of outstanding enterprises have not only carried out approaches such as
strengthening R&D and exploring new markets to address the current difficulties,
but also launched M&A to successfully enlarge their business. For instance,
Lacquer Craft Manufacturing Corporation, after acquiring a mature brand in the
United States, began to layout its retail business in China by establishing its own
marketing network and cultivating its marketing capability. Practitioners in the
furniture industry indicated that, if a company could set up its own branches and
realize self-production and self-sale in the overseas market, it could bear a 30%
reduction in the retail price and thus enhance the pricing advantage in the furniture
industry.
Launching Self-Brands to Transform from OEM to OMB
Different from the traditional OEM enterprises, some of the outstanding furniture
enterprises not only engaged in OEM service for foreign brands, but also stuck to
developing their own brands by adopting the raw materials, design and production
of their own. Frandiss, a well-known brand introduced by Fu Bao (Sofa)
Manufacturing Corporation in 1994, has been awarded with the “National
Inspection-Free Product”, “Guangdong Top Brand” and “China Top Brand”.
Adhering to developing more self-brands, the company in these recent years has
witnessed the successful introduction of six brands, including Bofity, Romanes,
Leotoni, Saddlersy and Cristin.9
4.2.4.2 The Local Government Is Actively Facilitating Enterprise

Upgrading
Upgrading the Furniture Cluster and Integrating It into the Town’s Industrial
Development
In the seminar “Craft the First Town for Furniture in China and facilitate the
upgrading of furniture industrial cluster” held in Dalingshan, Huang Qinghui, the
town mayor, declared that the town would constantly extend the furniture industrial
chain by establishing the platform involving R&D, production and display, so as to
transfer itself from “the First Town for Exporting Furniture in China” to “the First
Town for Furniture in China” and thus create the regional brand for the furniture
industry. He also showed that industrial upgrading is the top priority of the gov-
ernment work and the upgrading of the furniture industry would become the core
issue of the town.10
Setting Up a Dedicated Office to Direct the Industrial Upgrading
On December 8, 2008, the “Industrial Upgrading Office in Dalingshan” was for-

mally established by the local government. It would be responsible for organizing
and facilitating the planning, adjustment and upgrading of the town’s industry and
implementing the policies and solutions relevant to the development of industrial
9
Source: Fu Po Sofa Company Website, www.frandiss.com.cn.
10
Source: Dongguan Daily News, 2008-12-05.
clusters in Dongguan city. The main function of this office was planning, adjusting
and upgrading the whole town’s industries; and formulating industrial upgrading
plans in areas such as the comprehensive coordination, industry research, project
construction, event planning and public promotion.11
Implementing the Export-Driven Strategy to Promote the Upgrading of the

Furniture Industrial Cluster
Firstly, the government selectively introduced 200 large furniture enterprises

originated from Hong Kong, Taiwan and overseas to set up affiliates in this town.
They have generated a strong aggregation effect and attracted a large number of
supporting firms, both upstream and downstream, to carry out local investment and
set up factories. Secondly, the town has witnessed the introduction of outstanding
entrepreneurs, technological talents, excellent furniture designers and manufactur-
ing personnel as well as a large number of furniture enterprises from Taiwan, Hong
Kong and the Mainland.
Cultivating a Sound Industrial Chain and Facilitating Its Upgrading
Dalingshan not only attracted the upstream and downstream enterprises of the
furniture industry as the main actors of investment, but also directed private
enterprises to actively engage in the supporting industries and thus promoted the
development of timber and paint businesses.
Encouraging Furniture Enterprises to Enhance Learning Ability and

Technical Advantages
Major measures are as follows.

First is promoting the continuous learning of furniture companies. The local
government and relevant departments have launched a series of seminars, lectures
and training for furniture entrepreneurs, encouraging them to further study business
management and marketing approaches.
Second is helping furniture enterprises grasp industry development trends.
Coordinated by the Furniture Association, the local government has helped
Dalingshan furniture enterprises enhance the communication and exchange with
other domestic and overseas furniture enterprises, so as to promptly identify the
industrial development trend and consistently improve the comprehensive quality
of their personnel.
11
Source: Nanfang Daily, 2008-12-08.
Third is optimizing the technology constantly. The design and production

technology of Dalingshan’s furniture industry has been at the forefront of the world.
Not only first-class production lines have been adopted in companies such as
Fortune Furniture Co. Ltd, Yeo Long Timber Co. LTD, Lacquer Craft
Manufacturing Corporation, Stylution Group, but the world’s most advanced pro-
duction machinery has also been used in Decca Company and Hopo-Bright
Furniture Group, Ltd.
Setting up a Public Service Platform for Dalingshan’s Furniture Industry
Cooperated with the scientific research institutes, the town government established
a public service platform for the furniture industry, which could benefit from the
synergy of the government functions and the scientific research and technology.
This platform has been managed by another partner, the Industrial Design Institute
of the Guangzhou University, who designed the operational programs consisting of
the following three aspects.
First, it is to jointly construct a public service platform for the furniture R&D.
This platform, to be operated by scientific research institutions and supported by the
town government, would provide services for the enterprises and society directly.
As a nonprofit organization, it would receive fiscal support annually from the town
government.
Second, it is to cooperatively establish a creative center for furniture design. This
creative center, also to be operated by scientific research institutions and directed by
the town government, would provide enterprises with services such as design, R&D
creativity, marketing and brand promotion. As a management agency, it would
receive funds from the government and adopt the joint-stock system composed by
the input of scientific intellectual property.
Third, it is to jointly set up a furniture marketing company. Introduced by the
town government and initiated by several leading enterprises, this marketing
company would integrate the resources of some furniture companies and launch
joint-stock system, supported by the scientific research institutes engaging in
management.
Constructing a Furniture Industrial Zone
A furniture industry zone has been founded in Dalingshan with convenient trans-
portation. It is located between the Yanglang Road (in Dongguan city) and
Longhua-Dalingshan Highway, and near the Songshan Lake Science and
Technology Park in Dongguan City. Covering an area of 2.67 km2, it consists of
different functional areas, designed for the furniture businesses to carry out sheet
metal processing, furniture manufacturing, logistics distribution and staff accom-
modation. To create a qualified environment, a management center has been set up
in the zone to deal with the water and electricity supply, waste disposal and other
issues of enterprises. Moreover, the local government has planned to build another
high-standard and comprehensive furniture industry park (2 km2) and provide a
series of preferential treatments so as to attract those internationally and domesti-
cally well-known furniture enterprises and their upstream-and-downstream sup-
porting companies. Enhancing such centralized management can thus help achieve
resource sharing, reduce the operational costs and create enormous benefits for the
entire furniture industry.12
4.2.5 Implications
4.2.5.1 Industrial Upgrading Is the Joint Effort of Enterprises

and the Government
The industrial upgrading could only be achieved through the transformation and
upgrading of enterprises relying on the joint efforts of enterprises and the gov-
ernment. On one side, the government has strived to create a sound environment
and optimize the industrial structure, thus realizing the transformation of the eco-
nomic growth pattern. On the other side, the companies have positively pursued the
upgrading and made good use of the opportunities and challenges, hence improving
their status in the value chain.
4.2.5.2 Industrial Upgrading Requires Full Integration of Resources
When promoting the furniture industrial upgrading, various approaches have been
adopted to fully integrate resources. First, Dalingshan government has implemented
the foreign investment-driven strategy to facilitate the development of local furni-
ture enterprises and their supporting industries. Second, the government has
integrated the furniture industry by directing the furniture companies to take the
intensive development path, while cleaning out labor-dependent, small-scaled,
uncompetitive and environmentally unfriendly ones. This could strengthen the
centralized management of the industry and realize resource sharing. Thirdly, the
furniture companies have enhanced their learning through a variety of channels so
as to raise their learning capability and master more market information. Fourthly,
the government has organized various intermediaries to create a favorable service
environment.
12
According to Dongguan City, Da Lingshan Town People’s Government internal data obtained
from the order.
4.2.5.3 A Complete Industrial Cluster Needs to Be Fostered to Achieve

Industrial Upgrading
Dalingshan possesses leading global paint and coating companies, the largest
timber distribution center in Southeast Asia as well as a large number of supporting
companies related to furniture production, accordingly forming a large-scaled fur-
niture industrial cluster. It is beneficial to carry out cooperation among enterprises
and develop the efficient scientific and technological innovation platforms,
including key laboratories, engineering and technology centers and enterprise R&D
centers. Enterprises in the cluster can share a variety of public service platforms,
such as the technology public service platform, resource service platform, intel-
lectual property rights service platform and information service platform. Such
integration of various resources can develop the innovation synergy.
4.2.5.4 Improving the Technical Ability Is an Effective Way

for Enterprise Transformation and Upgrading
When developing the furniture industry, Dalingshan government has encouraged

companies to adopt the most advanced technology by launching a series of expert
seminars and overseas exchanges and providing supports to major projects. As a
result, the technological capability has been raised, new products have been
developed, and new technologies and new manufacturing techniques have been
introduced, promoted and applied. The companies have thus not only improved
their productivity, but also partly solved the pollution problem resulting from tra-
ditional furniture production. All these efforts have ensured the furniture industry to
embark on the road of self-design, self-production, self-marketing, so as to achieve
sustainable, steady and healthy development in accordance with the established
goals.
Chapter 5
Case Analysis of Public Technology
Platforms
5.1 High-Tech Industry Development by Taiwan ITRI
5.1.1 Background of ITRI
Founded in 1973 in Taiwan, Industrial Technology Research Institute (ITRI) is a

nonprofit and public R&D organization engaging in technical services of public
research in applied technology. Its origin could be traced to the Sun Yunxuan’s era.
During his visit to the Korea Institute of Science and Technology, Sun Yunxuan,
the Minister of Economic Affairs at that time, found that a large number of
US-returned scholars had focused on developing the electronic, chemical and textile
technologies, which successfully assisted the South Korean firms to upgrade. After
returning to Taiwan, Sun decided to set up a similar institute named “Industrial
Technology Research Institute”. It was established through a merger of the
equipment, land and talents of three research organizations: the Union Industrial
Research Laboratories, Mining Research and Service Organization, and the Metal
Industrial Research Institute. To help small and medium-sized industries in Taiwan
overcome the long-term risks resulting from their lack of R&D resources and
innovative capabilities, ITRI has developed a series of prospective, critical and
universal technologies and transferred them into the industries. Besides, it has
closely integrated the government’s technology-development schemes with the firm
and market-demands, thereby jointly driving the industrial development. Over the
past four decades, ITRI has played a vital role in introducing and transferring
foreign technologies, cultivating talents, providing information, incubating com-
panies, and offering technical services. Thanks to its significant achievements in
talent cultivation, specifically, ITRI has been honored as the place nurturing general
managers for Taiwan’s enterprises. Currently, the number of experts transferred
from ITRI into Taiwan’s industries has exceeded 15,000, most of which have
played critical role in their companies and in Taiwan’s science and technology
(S&T) industry, incubating the emerging technology industry with outstanding
https://doi.org/10.1007/978-981-13-1260-1_5
198 5 Case Analysis of Public Technology Platforms
sustainable performance. And the majority of researchers from the Electronic

Institute, a subordinate body of ITRI, have developed the well-known semicon-
ductor industry and spinoff high-tech corporations such as TSMC and UMC in
Hsinchu Science Park. Thanks to these outstanding performances, ITRI has been
awarded with “The Best Incubation Center of the Year” by the U.S. National
Business Incubation Association (NBIA) in 2006, the first time an Asian institute
receiving this award since NBIA’s two decades of foundation.
5.1.2 Objectives and Visions of ITRI
ITRI is a world-class technology research and development (R&D) institute. After

accumulating relevant technology know-how and experience, it transformed itself
from a technology purchaser and follower to a technology innovator. Moreover, the
connotation of R&D has shifted from simple learning to innovation and creativity.
Such continuous innovations contribute to substantial R&D achievements, which
quickly facilitated the transfer of technology to the industrial community. ITRI aims
to become one of the global leading R&D institutes generating new industrial value,
a workplace welcomed by R&D talents, and a cradle of industrial technology
innovators.
5.1.3 Organizational Structure of ITRI
5.1.3.1 Personnel Structure
Statistics show that, until February 29th, 2008, ITRI was home to over 5,826
employees and 13 research institutions. Figures 5.1, 5.2 and 5.3 reveal the edu-
cation level, working years and post distribution of ITRI’s staff.
In addition to the business promotion department and the administrative
department, ITRI relies mainly on Linkage Center, Basic Research Institutes and
Focus Center to fulfill its missions of advancing corporate upgrades. The Linkage
Center aims to promote the cross-cutting and cross-disciplinary cooperation in the
research institutes. The basic research institute comprises the Biomedical Center,
Energy and Environment Center, Material and Chemical Center, the Institute of
Machinery, Information and Communication Center, Electronic and Optoelectronic
Center. And the Focus Center, including five core technology centers, hence also
named the Core-tech center, sticks to carry out international cooperation.
5.1 High-Tech Industry Development by Taiwan ITRI 199
Fig. 5.1 Education 11%

attainment of the personnel 17%
17% Doctor 1,017

Master 3,216
Bachelor 974
Junior College 619
55%
Fig. 5.2 Working years of 6%

the personnel
13%
10 years 2,751
5-10 years 1,207
13% 47% 3-5 years 743
1-3 years 763
1 year 362
21%
Fig. 5.3 Post distribution of 1%

the personnel
15% R&D 4907
Administrative 869
Tech support 50
84%
5.1.3.2 Linkage Center
Linkage Center consists of five subdivisions, that is, Creative Center, Nanometer
Center, Industrial Economics and Knowledge Center, Measurement Center and
Service and Technology Application Center.
Creative Center
Set up by ITRI in 2004, Creative Center aimed to promote the establishment of new
industry models and provide good ideas, thereby playing a key role in the inter-
national arena. It strived for the industrial transformation from “Made in Taiwan” to
“Created in Taiwan”, directing scientific and technological R&D for social needs.
The center strived to show its original concepts by means of demonstrating
prototypes, thus stimulating industrial opportunities. Also, it refined the team’s

creative methods and processes so that they could be spread to the industry and be
integrated with the technology and industry.
Nanometer Center
Established in 2002, it is an interdisciplinary linkage unit in ITRI. As a

S&T-network organization, it centered on knowledge-operation team and coordi-
nated with other core teams. It mainly engaged in business planning, intelligence
collection, facilities management, external window and other matters.
Industrial Economics and Knowledge Center (IEK)
The center aimed to enhance the added value of the industry and to provide cus-
tomers with information and consultancy services such as industry research, policy
research, prospective trends and other innovative services.
Measurement Center
It was jointly established in 1985 by ITRI and the Central Bureau of Standards
(now the Standard Inspection Bureau) of Ministry of Economic Affairs. It aimed at
the promotion of cross-field and cross-disciplinary cooperation to create derivative
value. Its functions include planning and promotion, standards and technology
development, standards and legal measurement technology development, the
development of instrument and sensing technology, measurement verification and
innovation applications, medical device validation and prospective sensing tech-
nology development.
Service and Technology Application Center (STC)
Established in 2006, it was designed to explore opportunities in industrial value

chains, to initiate original, technological and long-term service industry, to develop
a comprehensive service system, and to construct the environment required by the
technological service center.
5.1.3.3 Basic Research Institutes
ITRI’s R&D mainly focused on six major technical fields, including electronics and
optoelectronics, information and communication, advanced manufacturing and
systems, chemical and nanometer, biotechnology and medicine, energy and
environment. (1) Electronic Information and Photoelectric Institute played a sig-

nificant role in Taiwan’s industrial development and even in the world.
(2) Information and Communication Research Institute focused on R&D in four
aspects, including the entire IP telecommunications networks and services, broad-
band wireless communications, mobile digital life and wireless sensor network.
(3) Machinery and Control Institute has also made a great contribution to the
development of Taiwan’s machinery industry. (4) Materials and Chemical Research
Institute, stressing the cooperation between academia and industry, concentrated on
the R&D of industry-needed special chemicals and materials. (5) Energy and
Environment Research Institute provided various resources (including coal, mining,
geothermal, renewable energy, energy conservation and water) and integrated all
kinds of energy, resources and environmental technology, so as to conduct the
research on environmental protection and industrial safety and health, which played
a significant role in advancing the industrial development. (6) Biotechnology and
Medicine Research Institute, applying genosome and medical technology as the
core, carried out various researches, mainly focusing on proteinoplast, genechip,
biomarker, bioinformatics, stem cell and cell therapy, biomaterial, and natural
medicine development.
5.1.3.4 Core-Tech Center
Core-tech center is the main R&D base of ITRI, including Technology Display
Center, Wafer Center, Solar Photoelectric Center, Medicine Center and
Identification Center. In particular, Identification Center is the first qualified test
center in the Asia-Pacific region.
ITRI’s organizational structure is shown in Fig. 5.4.
5.1.4 ITRI’s S&T Projects, Service Revenue, Talent

Cultivation and Patent Application
As shown in Fig. 5.5, in 2006 ITRI received a total revenue of NT $17.633 billion
(about 4 billion RMB), 48.3% of which was from industrial services (NT $8.5
billion) and 49.7% from S&T projects (NT $8.7 billion).
Apart from industrial service income, ITRI has also contributed greatly to talent
cultivation. From 1973 to 2005, it has nurtured 18,490 professionals, among which
15,209 work in enterprises, 1,718 in academia, 891 for further education and 672 in
governmental institutions (Fig. 5.6).
In 2005, ITRI applied for 2,149 patents, among which 2005 were granted (see
Fig. 5.7).
In 2005, with 49,558 industrial technical service projects undergoing, ITRI
provided technological services for 26,358 companies (see Fig. 5.8).
Board of Board of
Directors Supervisors
ITRI
Industrial
South
College
Branch
Business Development Department Administrative Department
Technology Transfer and Service Human Resources

Center Accounting
Research office Administrative Services
International Business Center Information and Technology Service center
Marketing & communication office
Linkage Center Basic Research InsƟtute Core-tech Center

Creative Center Electronic Information and Photoelectric Technology
Nanometer Institute display Center
Center Information and Communication Research Wafer Center
Industrial Institute Medicine Center
Economics and Machinery and Control Institute Solar photoelectric
Knowledge Center Materials and Chemical Research Institute, Center
(IEK) Energy and Environment Research Institute Identification center
Biotechnology an medicine Research Institute
Fig. 5.4 ITRI’s organization
Fig. 5.5 Revenue from scientific projects and industrial services

Fig. 5.6 Output of ITRI’s

talents
Fig. 5.7 Application of patents
Fig. 5.8 Industrial and technological services

Fig. 5.9 Technological transfer
Fig. 5.10 Entrusted research
In 2005, a total of 663 items of technology were transferred from ITRI to 851
companies (see Fig. 5.9).
In 2005, ITRI accepted 1,188 entrusted projects from 12,775 companies (see
Fig. 5.10).
5.2 The Operational Model and Characteristics of ITRI
Comparing the organizational structures and functions between mainland China’s

institutes and Taiwan’s ITRI, we can draw the following conclusion. Horizontally,
institutes in the Mainland were relatively decentralized and mono-disciplinary,
lacking scientific research institutes like ITRI with comprehensive infrastructure
and cutting across multiple disciplines. Vertically, mainland China lacked an
5.2 The Operational Model and Characteristics of ITRI 205
effective carrier and system for industrializing scientific research achievements. In

particular, the ambiguous attitude toward sharing research achievements between
research staff and institutes and the dubious boundaries on entitlement became an
important barrier on the way of industrialization. Therefore, China has not devel-
oped a functional system and carrier to nurture enterprises. Both the lower indus-
trialization efficiency of college achievements and inadequate ability in incubating
qualified companies from research institutes led to huge waste of resources and
disjunction of IUR (Industry-University-Research). Specifically, the ITRI has the
following characteristics in its operation.
5.2.1 The Legislation and Commercialized Operation

Jointly Support the Development of ITRI
According to the Regulation on the Establishment of ITRI, ITRI was set up by

government-invested funds. After four decades of development, the sources of
funds have gradually shifted from solely depending on the government investment
to mainly relying on the contract management. The government’s sponsoring and
ITRI’s self-creation contribute to ITRI’s survival and growth. As a non-profit sci-
entific and research institute founded privately and subsidized governmentally, the
history of ITRI can be divided into 3 phases (as shown in Fig. 5.11).
The first phase, from 1973 to 1979, is the start-up period. Taiwan government
donated three institutes that originally belonged to the Ministry of Economic Affairs
to establish the ITRI, the first time a government-funded private institute in Taiwan.
With the total amount of funds coming from the government, ITRI was under the
supervision of donation charter and organizational regulations. By this way, the
government could guarantee the execution of scientific and technological plans and
Longtan Science Park

Hsinchu Biomedical Science Park
Hsinchu Science Park
Hsinchu South Science Park Yilan Science Park
Causeway Science Park
Taichung Science Park Houli Science Park

Taizhong Science Park
Huwei Science Park
Tainan Science Park Hsinchu Science Park: 1386 hectares

Kaohsiung Science Park Central Science Park: 711 hectares
Kaohsiung Biotechnological Science Park Tainan Science Park: 1616 hectares
Total:3773 hectares
Fig. 5.11 Development status of Taiwan science park

the proper use of capitals, so as to fulfill its objective of promoting scientific and
technological development.
In the second phase, from 1980 to 1992, ITRI grew rapidly. Led by the Plan of
Scientific and Technological Special Project, ITRI has made great progress in the
establishment of institutions, technology development and transfer and industrial
services. Consequently, it became the core institute in facilitating IUR cooperation
and supporting emerging high-tech industry.
From 1993 till now, ITRI entered the steady developing phase. It strengthened
the industrial services by using the 1:1 ratio as quantitative indicators, that is,
balancing the expenditures on carrying projects in public sectors (including relative
governmental organizations) and entrusting projects for enterprises. The expendi-
tures consist of the following four sources. First is from public projects which are
commissioned by government departments. Second is from technological services
projects commissioned by the military and enterprises and from industrial services
such as consultancy, training, inspection and market analysis. Third is from
research projects, that is, assisting companies to carry out technological innovation
and R&D regarding specific products. Fourth is from non-operating revenue and
donation. Currently, 49% of ITRI’s revenue comes from the government. Basically
all of the bodies of ITRI are independent operational centers that cope with their
own profits and losses. These operational centers enjoy sufficient exchange and
communication vertically and horizontally.
Along with the increasingly strong R&D capability and comprehensive power,
ITRI launched a “refresh” revolution, proposing the privatization and internation-
alization strategy towards the 21st century. Privatization stands for, through R&D
cooperation and technical services, gradually increasing the contractual income of
companies and reducing governmental reliance. Internationalization refers to
establishing strategic alliance with famous scientific and research institutes and
manufacturers to boost the innovative and prospective research in ITRI, thereby
developing ITRI into an institute with international competitiveness and thus
upgrading the Taiwan industry from technology “follower” to technology
“innovator”.
Table 5.1 shows the development phrases and operational pattern of ITRI.
5.2.2 Integration Center Offers Powerful Capabilities

in Integrating Cross-Field Resources
The integration center of ITRI is composed of the innovation center, nanotech-

nology center, IEK, measurement center and service and application center. All of
these centers base on the existing system of ITRI and have close interactions with
industries to integrate cross-discipline, cross-industry and cross-region resources.
Specifically, the Innovation Center provides unique creativity continuously to
nurture a diversified development environment. The Nanotechnology Center, by
Table 5.1 Development phrases and operational pattern of ITRI
Future development
Rapid growth period Operational mode:

conducting privatization
Start-up period Source of funds :
and internationalization
carrying projects in public
strategy;
Ownership: independent sectors and entrusting
enhancing cooperation
corporation established projects for enterprises;
with scientific and
by legislation Structure of
research institutes and
Source of funds : totally expenditures:
companies, and reducing
government-funded Public projects,
governmental reliance.
Operational mode: technological services
under governmental projects, research
supervision projects, non-operating
revenue and donation
holding a series of nanotechnology-related activities, established a world-class

laboratory to carry out large-scale cross-field research and proactively participate in
international nanotechnology exhibitions and APEC events. It not only supports
TTRI’s schemes, but also shares resources with the outside world, so as to maxi-
mize the resource utilization. IEK provides customers with information and con-
sultancy services such as industry research, policy research, prospective trends and
other innovative services. It also created a top-class industrial think-tank through
the internet. The Measurement Center aims at the promotion of cross-field and
cross-disciplinary cooperation to create derivative and assists in the continuous
improvement of technology and industries in Taiwan. The Service and Technology
Application Center (STC), through effectively utilizing ITRI’s cross-field resources,
helps enterprises seek for cooperation opportunities and speed up the development
of science and technology of service industry, in a pursuit of forming newly service
industry and service industrial clusters.
5.2.3 The Open Research System Based on OpenLab Project
ITRI is a highly open system, featured by its highly innovated labs. The OpenLabs
provides institutes with a whole set of Total Resource Services, including tech-
nology licensing, research commission, company cooperation, analysis of markets,
strategy and organization, capital search, resolution of legal issues, information,
communication, space infrastructure and lab equipment. It strives to develop a

one-stop system that can support R&D, innovation, startup business and industrial
growth, which can take full use of its functional advantages. Since its foundation in
1996, OpenLabs have hosted more than 200 companies (with over 5,300 people),
113 of which are start-ups, with total investment and R&D input exceeding NT
$42.5 billion.1
In terms of daily operation, OpenLabs are applied by companies and run by
ITRI, government and companies together. The government and companies account
for 60% and 40%, respectively, of the total investment. If enterprises and indi-
viduals possessing patents and specific technology want to carry out further
research or applicable development, they can hand out application to OpenLabs
with their development plans. Once approved, they can use the labs’ equipment and
co-work with the research team. The proportion of achievements could be nego-
tiated according to the interment and research input of both sides.2
5.2.4 Establishing a Flexible Inflow-and-Outflow

Mechanism for Talents to Cultivate More Innovative
Sources
The openness of ITRI is also reflected in its loose mechanism of personnel flow.
ITRI actively recruits talents from many fields and uses mechanisms to attract
overseas graduates to stimulate more innovative thinking. A few years ago, the poor
scientific research environment in Taiwan caused a large number of talents to go
abroad every year and ITRI had to take the initiative of attracting and cultivating
college graduates. Talents nurtured by upstream colleges or research institutes could
receive industrial knowledge training from ITRI and then flow to the downstream
industries. Accordingly, ITRI become the important talent pool and innovation
resources for the development of small and medium-sized enterprises in Taiwan. It
encourages R&D personnel to transfer to enterprises (i.e. “job hopping”) or resign
to set up science and technology enterprises. ITRI believes that the sole purpose of
its existence is to transfer the developed scientific and technological achievements
to corporate production, rather than profit making. Thus whether it is technology
transfer or technical-personnel flow to enterprise, the result are the industrialization
of scientific and technological achievements. By the end of December 2005, it has
nurtured 18,490 professionals, among which 15,209 to enterprises, 1,718 to aca-
demia, 891 to further education and 672 to governmental institutions. These talents,
who bring technology to industry, have contributed significantly to Taiwan’s
1
Ruan, C.H. et al., 2006. The importance of Taiwan’s ITRI operational mode to the construction of
public research and development platform in Hangzhou. Journal of The Party School of CPC
Hangzhou.
2
Liu, Q., 2003. Case study of Taiwan's ITRI. R&D Management.
technological transformation and upgrading. Takes the Optoelectronics Institute of

ITRI as an example. Among those who left this institute and started up enterprises,
25 became CEO by 2002. They helped Taiwan’s optoelectronics industry achieve
rapid development, generating an output value of NT $4012 billion in 2001 with
products like CD-ROM, scanner and LED ranking among the world’s top three.
5.3 Development of Taiwan’s Science Parks
In the United States, Silicon Valley is not only a science park but also an ecological
system, wherein start-up technological achievements by small companies and
independent inventors can be commercialized rapidly and thus grow into
world-class enterprises. Otherwise, these important inventions would be taken by
large corporations eventually, which is proven by numerous examples.
Taiwan Hsinchu Science Park, in imitation of Silicon Valley, has achieved
remarkable performances in cultivating a number of globally famous world-class
enterprises, thus enjoying substantial reputation among the lots of science parks in
the world. Following this example, Tainan Science Park was then programmed and
came into being. In May 2006, an interview was conducted by the author’s research
team Professor Liu, who engages in innovation management in National Sun
Yat-sen University. Subsequently, a series of surveys were carried out in Tainan
Science Park on Chimei Innolux, a photoelectric enterprise, and Meisuo
Technology, a biotechnology enterprise, in an effort to know more about the
innovation and upgrading experience of Taiwan science parks.
5.3.1 From Hsinchu Science Park to Tainan Science Park
At the beginning of 1970s, the economy in Taiwan developed rapidly. Taiwan’s

government determined to construct a high-tech industrial park in Hsinchu like the
Silicon Valley, in an effort to enhance the international competitiveness of
exporting products manufactured in the export processing zones and accelerate
industrial upgrades and industrial structure transformation.
Located in the southeast of Hsinchu city, Hsinchu Science Park (hereinafter
referred to as HSP) has controlled a planning area of approximate 2100, 600 ha of
which are exploitable (see Fig. 5.11). With its slogan “multi-targets and
multi-functions”, this park aims at an integration of college, park and community.
Officially opened in 1980, by the end of 2004 it housed a total of 384 firms with US
$32.3 billion of sales revenue and 113,000 employees.
Thanks to past three decades of development, HSP has formed six pillar
industries, including semiconductor, computer and auxiliary equipment, commu-
nication, optoelectronics, precision machinery and biotechnology (see Fig. 5.12).
Among them, the semiconductor and computer industry have yielded impressive
Hsinchu South Hsinchu

• 159 hectares
• Introduced industries: biotechnology, • 625 hectares
• Introduced industries: semiconductor,
communication and optoelectronics
computer and auxiliary equipment,
communication, optoelectronics, precision
Taichung machinery and biotechnology
Tongluo
• 414 hectares
• Introduced industries: precision
machinery and optoelectronics • 350 hectares
• Introduced industries:
Huwei communication, optoelectronics,
micro precision machinery
• 97 hectares
• Introduced industries: agricultural biotechnology
Tainan Kaohsiung
• 1038 hectares • 570 hectares

• Introduced industries: semiconductor, computer and • Introduced industries: semiconductor,
auxiliary equipment, communication, optoelectronics, communication, optoelectronics and
precision machinery and biotechnology biotechnology
Fig. 5.12 Categories of industrial introduction in Taiwan’s science parks
achievements. Until 2004, HSP hosted 164 semiconductor manufacturers with a

sales volume of NT $388 billion, engaging in design, production, testing and
packaging. Ranging from upstream, middle-stream and downstream, these com-
panies formed a complete semiconductor industrial chain, becoming one of the
world’s most significant centers for semiconductor manufacturing. Regarding the
computer and auxiliary equipment industry, HSP was home to Taiwan’s important
computer manufacturers such as Acer, Mio and MAG. Until 2004 this industry had
generated a gross output value of over NT $100 billion with products consisting of
personal computers, monitors, image scanners, network cards, mice and so on.
In 1982, not long after the opening of HSP, a second scientific industrial zone
was called for establishing in Taiwan. After repeating contemplation and location
selection, in 1995 the government approved the establishment of Tainan Science
Park (hereinafter referred to as TSP) in Xinshi, Shanhua and Anding Districts of
Tainan City. Such governmental strategy was aimed at sustainably satisfying the
expansion demands of the high-tech industry and pushing the high-tech industrial
development in southern Taiwan.
TSP has developed Phase I site, Phase II site and Bamboo site, with the former
two in Tainan county, covering a total area of 2,565 acres (10.38 km2). The park
focuses on optoelectronics, semiconductor, biotechnology, and precision machinery
industries. Since 1998 TSP has attracted an increasingly large amount of high-tech
companies. By the end of 2014, this number reached 180 with an operating volume
of NT $639.43 billion (see Figs. 5.13 and 5.14).
To face the challenges that may occur in 2008, Taiwan’s government formulated
development priorities in 2002 and then the “Two Trillion and Two Stars” program
in 2003. It aims to raise the production capacity of Taiwan within 5 years,
strengthen scientific and technological R&D, expand four high-tech industries
including semiconductors, monitors, digital contents and biotechnology, turn to a
high value-added manufacturing base in 5 years, and subsequently develop a
5.3 Development of Taiwan’s Science Parks 211
Fig. 5.13 Growth of introduced manufacturers in Tainan science park (number of enterprises)
Fig. 5.14 Turnover growth of Tainan science park (NT $0.1 billion)
globally competitive knowledge-economy industry in 10 years. “Two Trillion”

refers that the output value of semiconductors and monitors would exceed NT $1
trillion in 2006. “Two Stars” refers that the digital content and biotechnology would
become the star industries, with the output value reaching NT $370 billion and NT
$250 billion, respectively, in 2006. In accordance with this development path, HSP
and TSP have made great achievements in these four industries, playing a critical
role in the “Two Trillion and Two Stars” program.
5.3.2 Transformation and Upgrading of Taiwan’s Science

Parks
Throughout the development of Taiwan Industrial Zone, it can be found that along
with the transfer of industry focus and economic traits, gradual transformation and
upgrading also emerge in the business activities in Taiwan’s industrial zones (see
Table 5.1).
In 1940s, Taiwan’s economy relied heavily on import substitution and focused on
agriculture, resulting that most industrial parks engaged in traditional processing. In
1950s, the economy transformed into export orientation and focused on the people’s
livelihood industry, along with the rapid development of scientific parks led by the
booming of export processing zones. In 1960s, the government started to enhance
infrastructure and develop heavy chemical industries, with petrochemical industries
accounting for most of the industrial zones. In 1970s, threatened twice by oil crises
and the growing pressure from labor-intensive industries, Taiwan advocated
innovation-oriented economic development and attached great important to tech-
nology industries, contributing to the emergence of scientific parks in real sense. The
establishment of HSP in 1980 was a typical example of this development stage.
Overall, Taiwan science parks have shifted from initially focusing
more-on-manufacturing and less-on-technology to focusing on both at the end of
1990s, indicating its sustainable upgrades. The success of HSP and TSP and the
decline of Taiwan export processing zones reflected the changes in Taiwan’s
industrial structures.
In fact, along with the industrial transfer in Taiwan, its industrial parks also have
experienced sustainable transformation and upgrading, leading to the leapfrogging
development of HSP and TSP. HSP plays a key role in Taiwan’s first-stage
high-tech development, while TSP is important in the second-stage high-tech
development and the major construction planning and development strategy of TSP
are related to industrial upgrades and operation-mode changes.
5.3.2.1 High-Tech Positioning and Industrial Upgrading
The development positioning of TSP is very clear, that is, “introducing high-tech
industrial and technological talents”, “encouraging industrial technology innova-
tion”, and “promoting high-tech industry”. For this reason, both HSP and TSP
attach great importance to the development of several high-tech industries such as
IC, optoelectronics, biotechnology and communication. But TSP and HSP are
different in their positioning. HSP is famous for the cultivation of R&D and
manufacturing capability of those globally well-known semiconductor corporations

such as TSMC and UMC, leading Taiwan high-tech industries to develop towards
industrialization. In the late 1990s, soon after TSP’s foundation, optoelectronic
products, due to its huge market potential, turned to the highlight in the global
high-tech industry, which pushed the industrial development in Taiwan and sub-
sequently became the development direction of TSP.
Tracing Taiwan’s industrial development process in these recent two decades,
we can find a high-tech-driven path. In 1980s, computer peripherals industry
brought brilliant achievements to HSP, laying a solid foundation for the subsequent
growth of computer information industry. Then in the 1990s, semiconductor
industry started to develop, driving Taiwan to become a chip foundry base and the
2nd largest region of IC design in the world. Its vertical labor-division structure
brought enormous economic benefits, reshaping the management pattern of global
semiconductor industries. In 2003, HSP witnessed the output value of photoelectric
industry accounting for 1.3% of that in the world and 12.6% of that in Taiwan.
Until the end of 2014, TSP housed 53 photovoltaic enterprises with NT $315.82
billion of turnover.
Table 5.2 shows the industry distribution of TSP.
In fact, Taiwan’s government has taken semiconductor and computer industries
as two strategic development goals in its Science and Technology Development
Scheme in the past two decades, which attracted abundant corporate investment in
these two industries. This enabled Taiwan to become the 3rd largest exporter of
computer products in the world, trailing the United States and Japan. At that time,
these two industries were experiencing the growing phrase in the industry life cycle,
reaching a higher level of profitability and expansion. Along with the increasingly
mature computer industry in recent years, Taiwan’s government and enterprises
have started to focus on emerging industries, such as communications, imaging
electronics, precision equipment and biotechnology. For biotechnology industry, in
particular, the government programs the development of agricultural biotechnology,
pharmaceutical biotechnology, genomics and other related fields. Due to the late
emergence of biotechnology industry, HSP didn’t put it as the development priority
Table 5.2 Industry distribution of Tainan science park (TSP)

Industrial distribution Tainan science park (2014)
Number of enterprises entering the park Turnover
Photoelectric 53 3158.2
Integrated circuit (IC) 13 2806.2
Computer and peripheral 2 18.9
Biotechnology 50 61.1
Communication 11 50.3
Precision mechanism 46 274.6
Other 5 25.0
Amount 180 6394.3
in the early time, but simply set up a biotechnology park in Chupei (near Hsinchu).
TSP, instead, was determined soon after its foundation to set up a core biotech-
nology park, which consists of substantial research resources such as Computer
Center, Second Animal Center, NCKU (National Cheng Kung University)
Hospital, QiMei Medical Center and Livestock Research Institute.
5.3.2.2 Enterprise Admittance System and Qualification Upgrading

in the Parks
It is generally believed that science parks have far-reaching significance in the

development of high-tech industries. However, limited by space area, introducing
some enterprises with higher efficiency and growth potential in the specific
high-tech industries became a key issue for the Taiwanese government to consider.
At the same time, rising land prices in the park also selected the superior enterprises
and eliminated the inferior enterprises. Enterprises that had the finest qualities and
developmental potentials tended to invest and build factories in science parks which
had better development environment.
HSP, the first large-scale science park built by the Taiwanese government,
shouldered heavy responsibilities for heading economic transferring to high-tech
industries. Constantly revising operational planning and improving admittance
system, HSP sets higher requirements for the entry of labor-intensive and
resource-intensive enterprises and restricts or rejects those low technology-intensive
companies. For enterprises meeting admission requirements, they could enjoy tax
incentives, preferential land plants and financial incentive policies. Take financial
incentives as an example. Manufacturers could first apply for the government
involvement in their corporate investment with the government-funded shares
accounting for as high as 49%, which could be repurchased by manufacturers
partially or totally. If investors want to become shareholders by means of tech-
nology, they could own a maximum of 25% of shares. These preferential policies
have attracted a lot of enterprises to enter HSP, but only those competent and
qualified enough can gain approval for admission due to the strict admittance
system.
Following HSP’s experiences, TSP has clear direction in developing high-tech
industries. Its admittance system and qualification requirements reveal three char-
acteristics as follows.
(1) The positioning of developing high-tech was quite clear, that is,
technology-leading enterprises can be admitted first.
(2) The obligations of admitted enterprises were clarified. First, for example, they
must pay certain amount of deposit for their investment. Second, they can run
business including foreign trade but cannot engage in foreign trades solely.
Third, they must pass reviews before gaining admittance approval and submit
the management fees (0.2% of operating income) to the park every year.
(3) Limits were set on the number of annual approval. For example, the number of
companies approved to settle in TSP was only 20 in 2005. And the man-
agement office was rather strict about the admission approval, which could be
gained by only 20% of the total applying companies, ensuring the industrial
quality of TSP in the future.
In addition, the land in TSP can only be rent but not for sale, ensuring com-
panies cannot get the added value from the land. This virtually eliminates those
opportunists who simply chase for the profits from value-added estate of science
parks, thus guaranteeing the quality of high-tech enterprises in TSP.
5.3.2.3 Extending and Upgrading Towards the High Value-Added

Parts of the Industrial Chain to Form a Relatively Complete
Industrial Cluster
To accelerate Taiwan’s high-tech industry development, TSP promoted economic

development mainly through the revitalization plan. Different from HSP, as a
consequence of global economic integration, Taiwan’s economy is under the threat
of rising labor costs, leading to the large-scale transferring of labor-intensive
manufacturing industry into mainland China and Southeast Asia. As far as the
current situation is concerned, the development trend of Taiwan’s science parks has
gradually transformed from focusing more-on-manufacturing but less-on-R&D to
laying equal stress on both (see Table 5.3).
Take the IC industry in HSP as an example. Its technological development
underwent five phases, that is, technology sprouting ! introduction ! indepen-
dence ! diffusion, thereby forming a professional labor-division structure
including upper, middle and lower-stream. The IC industry is still developing key
technologies of next generation, in an effort to achieve full-scale development in the
areas such as talents cultivation, designing, processing, packaging, testing, mate-
rials and equipment. In this period, Taiwan’s semiconductor industry transferred its
Table 5.3 Development process of IC industry in Hsinchu science park

1960s 1970s 1980s 1990s 2000s Equipment
Chips
Layout
Design tools
Chemicals Chemicals
Lead frame Lead frame
Test Test
Mask Mask Mask
Design Design Design Design
Production Production Production Production Production
Packaging Packaging Packaging Packaging Packaging Packaging
focus from labor-intensive and lower value-added assembly sector to the higher
value-added designing and manufacturing sector (see Table 5.3).
The planning of TSP further reveals how Taiwan’s government has developed
science and technology for the sake of solving crises during economic develop-
ment, facilitating industrial restructuring, upgrading towards higher value-added
parts in the industrial chain, and thus gaining sustainable competitiveness. TSP
aims at the future development of biotechnology industry and actively introduces
this industry into the park, It programs biotechnology core districts and corridors
and sets up biotechnology standard factories, fermentation pilot plant, common
instrument center, key laboratory and animal center. TSP positions its future
development of biotechnology industry at healthcare products (including medicine,
biological information and genomes, Chinese herbal medicine and medical equip-
ment), bio-chip, agricultural biotechnology products and aquatic products. The
original biotechnology companies in TSP engaged in pharmaceutical application,
downstream of biotechnology industrial chain, but lacked sufficient investment in
“gene biotechnology platform”, the most important part in the upstream.
Afterwards, TSP strove to attract genetic technology enterprises in many ways. By
January 2006, 30 approved biotechnology companies have settled down in TSP,
revealing the forming of biotechnology industry cluster (see Fig. 5.15).
In addition, TSP also formed a relatively complete IC industrial cluster and
optoelectronic industrial cluster, striving to become the key centers for 12-in. wafer
foundry and optoelectronic manufacturing in Taiwan.
5.3.2.4 Integration of Industry, Government and University Around

Industrial Agglomeration
Along with the gradually disappearing advantages of volume production in Taiwan,

the business activities and development modes of science parks also undergo sig-
nificant changes. The rapid development of high-tech industries in science parks
can be attributed to industrial clusters, technical support system formed by research
institutes and colleges, multi-dimensional financing system, and well-developed
intermediary service system. TSP, consisting of a specific area, has formed an
industrial R&D system built jointly by the government, universities and enterprises
(see Fig. 5.16). They can share research platforms and lay their focus on basic
research, applied research and technology development, respectively, so that tal-
ents, information and technical resources can flow quickly. TSP is committed to
cultivating a rich and diverse high-tech culture, making it different from HSP.
Taiwan’s science parks devoted considerable inputs to the R&D of basic science
and applied technology, creating a favorable environment for the incubation and
cultivation of world-renowned enterprises.
In 2003, HSP invested NT $50.4 billion on R&D (accounting for 5.0% of the
total turnover), the largest part of which goes to IC industry (about NT $32.2
billion). Nevertheless, the highest strength of R&D (the ratio of R&D funds to
turnover) was in biotechnology industry (24.1%), reflecting Taiwan’s strong
Pharmaceutical Industry
Small Molecule Drugs

Chinese Herbal
Scinopharm Taiwan Ltd. / GeneFerm
G&E Herbal
Biotechnology Co., Ltd. / Savior Lifetec
Biotechnology Co.,
Corp. / High Science Co., Ltd. / San Heh
Ltd. / Biotanico Inc.
Pharmaceutical Corp. / Original
BioMedicals Co., Ltd.
Emerging Biotechnology Industry
Biotechnology Regenerative Food

Drugs Medical Biotechnology
GenMont Sunmax Biotech Co., Ltd. Tuck-More. /
Biotechnology / Life Fusion Inc. / Biotechnology Co.,
Inc. Charsire Biotechnology Ltd. / Synbio Tech
Corp. / Bionet Corp. Inc. / ProMD
Biotech Co., Ltd
Medical Equipment
Eped Inc. / Hung Chun Bio-s Co. Ltd / Codent Technical Industry Co.,
Ltd. / Biomate Medical Devices Technology Co., Ltd / Huang Liang Biomedical
Technology Co., Ltd. / Fiberpure Co., Ltd. / Joy Medical Devices Corp. / Jo Corp. /
GET-Green Energy Corp., Ltd. / United Orthopedic Corp. / D & Y Intelligence Co.,
Ltd. / Taiwan Caretech Corp. / NanoRay Biotech. / Aurora Imaging Technology. /
Taiwan Implant Technology Co., Ltd. / Arix Cnc Machines Co., Ltd. / Coalition
Technology Co., Ltd. / Jianxin Biomedical Technology Co., Ltd. / Matise Instruments
Co., Ltd. / CC Bio Co., Ltd. / TricornTech Corp. / Excelsius Medical Co., Ltd. / Pishon
Biomedical Co., Ltd. / MEN Dental Technology Co., Ltd. / MedicalChain
International Corp. / LightMed Dental Technology Corp. / Mesophase Technologies,
Inc. / Kaiwood Technology Co., Ltd. / Alliance Global Technology Co., Ltd. /
Dermacare Co., Ltd. / Meet Tec. Co., Ltd. / Choice Biotech Co., Ltd. / Kangyi
Technology Co., Ltd. / Comdek Industrial Corp. / Taiwan Innovation Biomedec Co.,
Ltd. / Acro Biomedical Co., Ltd. / Imediplus Inc. /
Medical testing
AsiaGen Corp. / Firstep Bioresearch, Inc. / YB Biotech.
/ General Biologicals Corp. / CurieMed Corp.
Fig. 5.15 Biotechnology industrial cluster in Tainan science park

Number of companies Percentage of rewards
Fig. 5.16 Innovation and R&D rewards in the Tainan science park. Source According to the
official website of Tainan Science Park (www.stsipa.gov.tw)
determination to develop new industries. Besides, HSP hosts 10,918 researchers

(accounting for 11% of total employees), of which 6,038 people engage in in IC
industry.
TSP, soon after its foundation, has clearly set up the development goal of
facilitating Taiwan’s high-tech industry. Management agencies and companies in
TSP often launch activities relevant to R&D. It has attracted excellent talents at
home and abroad, including 5000 overseas returnees at the end of 2005. Annually it
spends 6% of its revenue on R&D, which contributes to a large number of invention
patents, accounting for 40% of Taiwan’s total patents. Furthermore, TSP encour-
ages enterprises and institutions to carry out R&D on innovative technology. Since
2001, it has set up R&D rewards, gradually expanding the scope and scale of
rewards (see Fig. 5.16).
5.3.2.5 Building Factor Supply and Service Systems and Speeding

up the Incubation and Cultivation of Competitiveness of New
Enterprises
The success of the industrial clusters in Taiwan’s scientific parks can be attributed
to the privileges provided by the parks, including a better investment environment,
technology development, capital market, efficient and professional intermediary
services, as well as good community service. For example, Taiwan Industrial
Technology Research Institute (ITRI) not only undertakes prospective research
projects commissioned by the Ministry of Economic Affairs of Taiwan government,
but also short and medium-term research projects initiated by companies in the
parks Aimed at the industrial interests of Taiwan, ITRI first scans and tracks
globally leading technologies, then jointly develop technology with companies in
the parks so as to absorb, digest and utilize these new technologies in their projects,
and finally drive the commercial process through the output of products, equipment
and technical know-how. UMC and TSMC and other world-renowned enterprises
are spinoff companies from ITRI.
In terms of intermediary services systems in the science parks, the trade asso-
ciation is a typical case. It is responsible for planning and management, import and
export operations, financial and accounting management, personnel training, public
welfare of employees and so on. It also helps to coordinate the relationship among
enterprises and that between enterprises and government. Hence, it is quite
important in optimizing the daily operation in the science parks.
Regarding the community construction in TSP, it offers comprehensive services
such as dormitories, schools, hospitals, banks, post offices, leisure, and security,
playing an important role in attracting talents.
5.3.2.6 Promoting the Development of Local Enterprises
The establishment of the science parks has promoted the development of local
enterprises. The settling of many large enterprises pushes forward the transforma-
tion and upgrading of local industries, which subsequently drives the local com-
panies to transform and upgrade towards high technology. For example, Yishang, a
company once focused on precision machinery, spotting the rapid development of
the chip industry, shifted to manufacturing chip protection box and developing
cleaning equipment and pressurized de-foaming equipment for TFT-LCD manu-
facturing process. Changxing Chemical, a company once specialized in chemical
materials, also transferred to chip industry and manufactured
semiconductor-specific grinding fluid. And, thanks to the establishment of TSP,
many other companies in southern Taiwan, especially those competent in precision
machinery industry, have started to set up mechanisms for high-tech R&D and IUR
(industry-university-research institutes) cooperation, for the sake of participating in
the future industrial transformation and upgrading.
5.3.2.7 The Development Direction of Taiwan’s Science Parks—New

Generation of Soka Park
Viewing the development process of Taiwan’s industry, volume-production is no

longer the industrial leading advantages and enterprises position more on the value
creation. “New Generation of Soka Park” can better describe the future develop-
ment of Taiwan’s science parks. It no longer puts the manufacturing in the first
place, but focuses more on technology development and basic research. Despite its
small size, it is highly flexible in mastering the development trend of market
demand, directing enterprises to develop marketable products, and providing
value-added services. Hence, it can help Taiwan’s industries create more value, thus
becoming the driving force of Taiwan’s new round of economic growth. Flexibility,
speed, vitality and efficiency become functional characteristics of Taiwan’s science
parks. For instance, to provide service platform and more opportunities for
high-tech enterprises, the “New Generation of Soka Park” has adopted a variety of
flexible forms, including cultivation park for startup-business talents, pilot park for
research and innovation, creative park for software design, and economic and
trading park for intellectual property services.
5.4 ITRI Supports the Development of Taiwan’s Science

Parks
5.4.1 ITRI Specialized Incubation Center Can Provide

an Effective Business Incubation Source
Founded by ITRI in 1996, the Incubation Center is the earliest unit of

entrepreneurship spirit education in Taiwan with an average of 50 companies set-
tled each year. Companies which were set up based on discoveries of potential
projects through internal R&D have mounted up to 148, of which 36 have been
transferred to the Science Park and 6 have successfully listed on OTC. The amount
of manufacturers’ cumulative total investment has been up to NT $47 billion.
According to the report of Electronic Engineering Album in 2006, ITRI was granted
the “Best Incubation Center” by the National Business Incubation Association
(NBIA). Companies in this Incubation Center are from various industries, such as
communications, electronics, medicine, IC design, optoelectronics and materials.
Among them, a number of listed companies enjoy high market value, including
Phison Electronics Corp., King Billion Electronics Corp. and Prolific Technology
Inc. Besides, other outstanding companies also settle in the Science Park, involving
Jietai Technology Corp., Taiwan Micro-image Corp., RDC Semiconductor Corp.,
Handlink Technologies Inc. and Conwise Technology Corp.
The successful operation of ITRI’s Incubation Center attributes to its profes-
sional operation mode. First, it strives to raise the working and living standards in
areas such as accommodation, transportation, medical, leisure, finance, post and
telecommunication. Second, it provides startup companies with comprehensive
hardware facilities, including web facilities, large conference rooms, open labora-
tories and technical support equipment. Third, it offers abundant software services,
involving library services and data retrieval, information and consultation, technical
cooperation and strategic planning. Further, the Incubation Center has collaborated
with resources such as venture capital funds, university and intermediary assistance
system for companies led by government, thereby constructing a multifunctional
5.4 ITRI Supports the Development of Taiwan’s Science Parks 221
service center that consists of commerce services, management training, financial

supports and technical supports. All the above efforts have promoted the rapid
growth of startup companies.
5.4.2 Establishing Spin-off Companies and Cultivating

Large-Scale Enterprises Through an Intellectual
Property Rights Transfer System
A spin-off company refers to a new independent company set up by some research

staff who can utilize the scientific and technological achievements created by the
original research institute, for the sake of further promoting technological innova-
tion and commercializing these research achievements. These spin-off companies
have contributed significantly to the development of semiconductor industry in
Taiwan. No matter whether the advanced and new technologies are introduced from
overseas or developed independently, they are still the so-called “laboratory tech-
nology” in the research stage. What the enterprise needs, however, is the industrial
technology with market-acceptable quality and cost. For this reason, shortly after its
establishment, ITRI has strived to explore a new transfer mode for technology. In
the mid-to-late 1970s, the electronic department of ITRI introduced the American
integrated circuit (IC) technology into the island and then established its own
experimental plant for technology improvement and innovation. Afterwards, it
carried out the thorough technology transfer involving mature technology, skilled
engineers and managers, on which basis United Microelectronics Corporation
(UMC), Taiwan’s first private semiconductor manufacturing enterprise, was
established. It laid a solid foundation for the overall development of Taiwan’s
information and electronics industries.
Subsequently, ITRI adopted this pattern and successively established nearly 100
high-tech enterprises such as TSMC, Taiwan Mask and Granville. By the end of
2000, 31 Spin-off Companies had been established through staff and technology
transfer from ITRI. In Hsinchu Science Park, the majority of rapidly growing
companies in the emerging industries such as semiconductor, information, opto-
electronics, materials and automation, were set up either by the spinoff technology
from ITRI or by the investment and innovation from ITRI’s staff. Such
“spinoff-company groups” thus became the leading force in pushing the emerging
high-tech industry in Taiwan. ITRI itself can also recover the investment cost by
either technology license to spinoff companies or equity participation in spinoff
companies by pricing the technology.
The emergence of spinoff-company groups and the successful cultivation of
large enterprises depend on ITRI’s establishment of a series of standardized man-
agement systems for intellectual property rights (IPRs), which facilitate the
firm-orientated technology transfer and thus realize technology industrialization.
For instance, ITRI’s Technology Transfer and Service Center is responsible for
planning, applying, registering, maintaining and protecting the intellectual prop-

erties (IPs) strategy and handling other IPs business for ITRI.
According to ITRI’s Provisions of Intellectual Property Management and
Application, it regulates the ownership of IPRs as follows. First, all IPRs, including
invention, creation and business secrets, generated by ITRI’s employees during
their employment period are owned by ITRI. Second, if the generation of the above
invention, creation and business secrets utilizes ITRI’s resources or experience,
they can be implemented or utilized by ITRI in priority. Third, when ITRI, no
matter as a consignor, consignee or cooperator, carries out technological R&D, the
ownership of IPR would be negotiated according to contracts.
The principles when applying the above IPRs management are as follows. First,
ITRI should timely license its IPRs to local manufacturers and, if necessary, carry
out cross-license with foreign manufacturers so as to benefit local manufacturers.
Second, the utilization of ITRI’s IPs aims to maximize its benefits by the means of
non-exclusive license, exclusive authorization, transferring and so on. Third, to
ensure the performance of IPs, the pricing of IP license and technology transfer
should be separated. Forth, inventors or creators have the obligation to assist ITRI
in the promotion and application of their inventions, creations and related IPs.
Chapter 6
Factors that Influence Enterprise
6.1 Theories About the Influence Factors of Enterprise

6.1.1 Enterprise Transformation and Upgrading Is

Inseparable from Independent Innovation
The factors influencing enterprise upgrading have received some theoretical clari-
fications. Amsden (1989) believes that for the newly industrialized countries (re-
gions), enterprise upgrading and independent innovation are accomplished through
a sequential approach which allows firms to start from simple original equipment
manufacturing (OEM), and then to progress on to original design manufacturing
(ODM), and eventually to launch their own brands and become original brand
manufacturers (OBM). Gereffi (1999) argues that industrial upgrading is a process
of improving the ability of a firm or an economy to move to more profitable and
technologically sophisticated capital- and skill-intensive economic niches. Liu
(1998) claims that the three key stages that best reflect the evolutionary process of
enterprise innovation capability are the segments representing “manufacturing”,
“R&D” and “sales (brand)” on the industrial value chain. This suggests, from a
different perspective, that enterprise transformation and upgrading is in essence a
process of constantly improving innovation capabilities. Liu (2005) also points out
that in order to achieve transformation and upgrading, Chinese enterprises need to
progressively build on their learning ability and independent innovation
capabilities.
These scholars have all pointed out that independent innovation of an enterprise
is closely related to its transformation and upgrading. Therefore, the important
factors that affect the independent innovation capability will also have a significant
impact on the transformation and upgrading of the enterprises.
https://doi.org/10.1007/978-981-13-1260-1_6
224 6 Factors that Influence Enterprise Transformation and Upgrading
6.1.2 Theoretical Research on the Factors that Influence

Independent Innovation of Enterprises
There exists an extensive amount of foreign research on the influence factors of

independent innovation capabilities. Cohen and Levinthal (1989, 1990) believe that
a firm’s technological innovation strength depends largely on the absorptive
capacity for external technological knowledge. Garud and Nayyar (1994) conclude
that independent technological innovation capabilities can be achieved through the
accumulation, storage, maintenance and activation of corporate knowledge and that
technological innovation occurs as a result of the integration of different knowledge
areas. Nelson (2000) proposes that firms should not neglect exploiting internal
resources while they should also keep in mind the role of the external network in
the process of innovative activities.
Oerlemans et al. (2001) likewise point out that the result of a firm’s innovation
depends on the effective use of internal and external resources. Carayannis and Watson
(2004) shows that the factors that nurture independent innovation include investment
and commitment, strategic alliances, intellectual property rights, human resources, etc.,
while the factors that hinder it are excessive rules, national and international techno-
logical development levels, market entry barriers and cultural conflicts. Westphal
(1981), from the perspective of organizational behavior, views independent innovation
capability as the synthesis of organizational ability, adaptability, and the abilities to
acquire technology and information. He thinks that the levels of these factors influence
the firm’s independent innovation capability. Yam et al. (2004) have studied the
innovation processes. They find that technological innovation capabilities are a com-
prehensive manifestation of abilities related to R&D, manufacturing, marketing,
organization, innovative decision-making, resource allocation and learning.
Burgelman (2004) regards innovation capabilities as the combination of available
resources, understanding of competitors, understanding of the environment, organi-
zational structure and change, and pioneering strategy. Barton (1992) emphasizes the
combination of skills and expertise of technological people and senior technicians,
technology system and management knowledge and values. Cyert and March (1963)
point out that a firm’s ambition is an important factor that influences the imple-
mentation of independent innovation programs and thus foster the transformation and
upgrading of the firm. And the level of the ambition is determined by factors such as
corporate culture, entrepreneurship and so on. Winter (2000) agrees with this view.
Enterprising and innovative corporate culture and entrepreneurs’ creative spirit can
accelerate the process of transformation and upgrading of enterprises.
Some foreign scholars have studied the factors that influence the ability of inno-
vation from the perspective of the firm’s external environment. Gans and Stern (2003)
point out that external factors, such as speeding up the construction of information
and communication facilities, providing preferential tax policies for firms’ techno-
logical innovation, providing more venture capital and ensuring its effective con-
figuration, and strengthening the protection of intellectual property rights can lead
firms to actively carry out independent innovation. Kenneth King (1984) studies the
6.1 Theories About the Influence Factors of Enterprise … 225
independent innovation capability of the third world countries in terms of the rela-
tionship between the development of science, education and technology and the
capabilities of innovation. He also suggests that in order to improve the capability of
the nation’s independent innovation, education and training should be promoted.
Rycroft (2004) proposes a self-organized network model of technological change
made up of firms, schools, scientific research institutions and other organizations.
This model does not need to involve a centralized and detailed micro-management,
since it allows innovative strength. Vergragt and Brown (2007) argue that the gov-
ernment can stimulate firms’ independent innovation through policies, incentive and
subsidy systems, investment in infrastructure, and guidance and organization.
Domestic scholars have also conducted in-depth research on the factors that affect
independent innovation capabilities. Wang et al. (2005) believe that the key to
enhance the strengths involves increasing the firm’s autonomy to take innovative
initiatives. They further observe that Chinese enterprises’ innovative abilities are weak
because of the restrictions of their internal conditions such as profit level and
investment abilities. In addition, gains from innovation, talents for innovation,
entrepreneurship, and corporate systems are often not stimulating needed changes.
Xu and Chen (2006) have found, based on empirical research, that knowledge
accumulation, technological learning, and R&D activities are the main factors that
influence firms’ innovative strength. Song (2006) believes that the acquirement of
technological innovation property rights (mainly refers to patents and other technical
intellectual property rights) and of innovation gains (including profits and techno-
logical progress obtained from innovation) is the driving force for enterprises to carry
out independent innovation. Guo (2005) argues that the idea and strategic innovation
are the precursor of a firm’s independent innovation system. Hu (2006) notes that a
firm’s investment in technological innovation is of strategic importance for its
long-term development, which also requires strong motivation of the management and
good corporate culture to support change. At the same time, he thinks that entrepre-
neurs are the dominant force in enhancing the capability of independent innovation.
Wang et al. (2005) also indicate that a firm’s independent innovation capability
is not only affected by internal conditions, but also subject to external factors, which
mainly include industrial development stage, market environment, technology
chain and innovation chain, national innovation system, and intellectual property
protection. Zhou (2002) emphasizes that the establishment of national innovation
system is a precondition of technological innovation. It is necessary to speed up
firm system reform with a shareholding system as the central ingredient to promote
the formation of technological innovation mechanism. Both Lu and Liu (2005)
believe that the macro environment, including policy environment, innovation
system, and the scientific and technological investment of the country has signifi-
cant influence on firms. Mao and Wang (2006) assert that Chinese enterprises
should take full advantage of the opportunities in international industry transfers,
while at same time strengthen cooperation and competition with international
companies, pursue learning of technology and management and cultivate an
innovative culture.
6.1.3 Other Factors that Influence Enterprise

In addition to independent innovation capability, scholars at home and abroad have

also studied the factors that affect the transformation and upgrading of enterprises,
focusing on aspects of market competition, capital accumulation, shrinking profit
margins, and the relationships with collaborative companies.
The research findings of Liu (2000) show that low-end manufacturing enter-
prises are investing too much in manufacturing at the same technological level so
that “homogeneous” competition evolves in the same industry. This demanding and
fierce competition is forcing companies to pursue transformation and upgrading.
Mao and Dai (2006) also point out that such rivalry determines that the ultimate
goal of independent innovation of emerging economy enterprises is to have their
own intellectual property rights. As for the importance of capital accumulation,
Forbes (2001) emphasizes that the implementation of a brand strategy must be
based on a strong financial strength and time accumulation. If the enterprise
undertakes transformation and upgrading, it means it has to invest in both pro-
duction and brand development and it has to manage both areas. Mao and Dai
(2006) explain that with the economy in emerging countries (regions) developing
further, raw material prices and local wage levels have greatly improved, and the
disadvantages of low-end manufacturing are beginning to emerge. Multinational
companies may shift their production bases to other developing countries, just as
they did from Southeast Asia to mainland China. At that time, it would be too late
to seek transformation and upgrading. Therefore, the development of the enterprise
innovation strengths is the key factor in industrial transformation and upgrading
(Jin 2011).
Zhao and Xu (2013) have found through empirical analysis, that R&D invest-
ment is the most important factor in promoting the transformation and upgrading of
enterprises; both sufficient human resources and the increased use of advanced
managerial skills play significant roles in bringing about this change.
Other scholars expound the factors affecting enterprise upgrading in terms of
external factors, organizational learning, firm size, and government policies.
From the perspective of external factors, Reger (1992) argues that organizational
change is influenced by many factors, such as external environment, scientific and
technological level, organizational culture, etc. When the external environment is
stable, the firm generally chooses the mode of incremental change. But once drastic
changes in the environment occur, it will adopt the mode of radical revolutionary
transformation. Most studies have analyzed the impact of competitive pressures on
the upgrading of enterprises (Gereffi 1999; Humphrey and Schmitz 2000). Fierce
competition will compel OEM firms to perform innovative activities and enhance
core competence, and eventually become OBM firms with their own intellectual
property rights (Forbes 2001). Co-located inter-firm cooperation, interpersonal
communication, labor mobility and other cluster learning methods will help pro-
mote the growth and transformation of cluster enterprises (Grabher and Ibert 2006).
6.1 Theories About the Influence Factors of Enterprise … 227
In terms of organizational learning, the advanced technology and management

knowledge learned in the process of contract manufacturing will contribute to the
transformation and upgrading of OEM firms (Hobday 1995; Ching and Chen 2008).
Mao and Wen (2014) argue that sustained investment in innovation and organi-
zational learning are the foundation of enterprise upgrading, and entrepreneurship
and institutional pressure can accelerate the process of such changes.
For the firm size, Kong (2012) proposes a model to study the factors that
influence enterprise upgrading, including innovation, firm scale, export trade,
market structure, government financial support, industrial agglomeration, branding,
educational level of the person(s) in charge, technical level of the industry, and
advanced technology and equipment of the firm. The empirical results show that
firm innovation capability and firm scale are the major influence factors.
In the aspect concerning government policy, Zhang (2011) emphasizes the
important role of local government in enterprise transformation. Either the indus-
trial generic technology or the regional brand has the attributes of public products.
Therefore, the local government should act as the maker of this strategy and the
organizer of the strategy implementation.
6.1.4 Theoretical Framework for Analyzing Influence

Factors of Enterprise Transformation and Upgrading
On the basis of summarizing previous research results and by means of further

decomposition and refinement, the author finally gets the following analysis
framework shown in Table 6.1.
6.2 Analysis of the Factors that Influence Enterprise

All kinds of concrete influence factors will be analyzed and discussed below
according to the above influence factor framework of enterprise upgrading.
6.2.1 Cost Comparative Advantage Is Gradually

Disappearing, and Profit Margins Are Shrinking
The rising price of raw materials, the increase in labor cost, the tight supply of
energy, and the appreciation of RMB are the most significant influence factors. First
of all, the costs of resources like crude oil, coal, electricity, and the costs of raw
materials in both domestic and foreign markets are on the rise. In 2007,
Table 6.1 Framework for analyzing influence factors of enterprise upgrading

Background and motivation of enterprise transformation and upgrading
Back Cost comparative advantage is gradually disappearing and profit margins of
ground low-end manufacturing enterprises are shrinking (Mao and Dai 2006, etc.)
In the intense competition at home and abroad, OBM with independent
intellectual property rights is an important development direction of independent
innovation of emerging economy enterprises (EEEs) (Liu 2000; Mao and Dai
2006)
The benefits are highly unevenly distributed. And the great majority of the profits
go to branded purchasers (Starck 1970, etc.)
The inherent risks of low-end manufacturing are becoming increasingly
prominent. Enterprises urgently need transformation and upgrading (Pang 2006,
etc.)
Motivation Entrepreneurship and Innovative, aggressive, passionate, persistent
brand awareness entrepreneurial spirit, a strong sense of responsibility to
the nation and employees, a strong sense of
independent intellectual property rights and brand
awareness (Cyert and March 1963; Gersick 1994;
Winter 2000; Barton 1992; Wang and Guo 2005;
Hu 2006; Yang 2010; Kong 2012)
Critical resources Capital accumulation (Forbes 2001; Wang 2005)
Human resources (Carayannis 2004; Wang 2005)
Key capabilities Independent innovation capability (Amsden 1989;
Gereffi 1999; Liu 1998; Liu 2005, etc.)
Marketing and service capabilities (Yam et al. 2006;
Lall 1991; Hobday 1995; Schmitz 2007; Qu 2007; Liu
2008)
Dynamic capabilities (Teece and Pisano 1997)
Market environment The market potential is huge; the consumer psychology
is increasingly mature; and the market competition
order is more and more standardized (Wang 2005, etc.);
Competitive pressure (Gereffi 1999; Humphrey and
Schmitz 2000)
Government push The government has worked hard to create a favorable
environment for technological innovation, boosting
rapid transformation and upgrading of enterprises
(Gans and Stern 2003; Lu 2005; Liu 2005; Vergrat and
Brown 2007, etc.)
Relationship with Good relations with cooperative enterprises are
cooperative enterprises conducive to the “learning by doing” and “learning by
using” of low-end manufacturing enterprises (Pfeffer
and Salancik 2003; Carayannis 2004; Rycroft 2004;
Mao and Wang 2006)
international crude oil prices jumped nearly 60%. Rising oil prices stimulated the
increase in chemical fiber costs, electricity prices, coal prices, freight rates, etc.,
resulting in rises in the costs of all segments of the industrial value chain. Second,
labor costs are also rising. Third, under the condition of nationwide energy short-
age, the government has developed energy efficiency standards and implemented
6.2 Analysis of the Factors that Influence Enterprise … 229
peak electricity policies. These measures have increased the costs of environmental
protection and power consumption, and are restricting the development of enter-
prises. In addition, the accelerated appreciation of RMB has greatly intensified the
export pressure of enterprises. According to the data People’s Bank of China
authorized China Foreign Exchange Trading Center to announce, since 2008, the
value of RMB has increased 4.32%. At the same time, the reduction of the export
tax rebate rate has increased the burden on enterprises and further reduced their
profit margins. What’s more, the rise of environmental protection costs caused by
pollution from excessive processing production is eroding the profits of low-end
manufacturing enterprises in China.
6.2.2 In the Intense Competition at Home and Abroad,

OBM with Intellectual Property Rights Is the Major
Development Direction of the Transformation
and Upgrading of EEEs
When the market has a high concentration of branded products, the competition
among small enterprises is very fierce since they can only fight and compete for a
small share of the market. This forces small enterprises to emphasize the cultivation
of a core competitive advantage. They attach importance to manufacturing capacity,
and at the same time they pursue technology and market share. OBM with inde-
pendent intellectual property rights is the main upgrading direction of emerging
economy enterprises.
6.2.3 The Benefits Are Extremely Unevenly Distributed

and Most of the Profits Go to the Firms at the Upper
Ends of the Industrial Chain
As early as the late 1970s, Starck pioneered the idea of transforming OEM into
OBM.1 The statistical data from THE KEY (brand consultancy founded by Starck)
show that the “top 100” OEM firms in Asia created profits of near US $4.7 billion
while the “top 100” global brands created a value of US $448 billion. The huge
profit gap between the two is no doubt a wake-up call for all Chinese companies:
they must consider establishing their own brands, and step up the pace of
upgrading.
1
The essence of Starck’s concept of transformation from OEM to OBM is to encourage large
manufacturers (OEM or ODM), by first formulating a clear strategic vision, to develop product
brands and increase the value added of their businesses so that their superior but low-price OEM
products can climb up the value ladder through the ownership of their own brands.
From the perspective of the industrial division of labor, many small and
medium-sized enterprises in China are largely in processing production. They lack
R&D strength, core components production capacity as well as market development
and brand management capabilities. And their products have low added value.
Besides, OEM firms are at the bottom of the global industrial value chain and are
squeezed by upstream and downstream companies for profits. Therefore, they have
very small profit margins and can only get the slightest share of the profits in the
international market. Branded purchasers have been harvesting the great bulk of the
profits while the huge number of OEM enterprises only earn meager income with
exceedingly unreasonable output-input ratios.
6.2.4 The Inherent Risks of Low-End Manufacturing Are

Becoming Prominent. Enterprises Urgently Need
to Upgrade
Pang (2006) points out that the operating mechanism of low-end manufacturers
steers them to unavoidable risks. First, because of the limitation of the production
mode, some processing trade enterprises organize production only according to the
orders given by large purchasers. Many domestic enterprises’ orders are highly
concentrated in the hands of a few large buyers. For the low-end manufacturing
enterprises, once the buyer dissolves the partnership, they are likely to fall into
bankruptcy. The reason why Taiwan’s Giant Group once almost failed was that the
orders from a single US bicycle brand accounted for 75% of its production. When
this sales channel goes wrong, the enterprise can hardly avoid a crash.
Second, the enterprises have a weak profitability picture, since they are only
engaged in the lowest value-added manufacturing activities in the value chain. The
meager profits leave them unable to withstand the ups and downs of raw material
prices and drastic changes in the marketplace. This greatly increases the operational
risks of such enterprises.
Finally, the low-end manufacturing mode itself also has hard-to-avoid financial
and legal risks. Chinese OEM enterprises long rely on imported raw materials and
imported technology. Outsourcing firms or foreign buyers control brands and dis-
tribution channels. These OEM enterprises are basically in a situation with the
technology and the market outside them and only have production in-house. This
profit model that only seeks economies of scale is not safe and will increase the
enterprise’s operational risks. Once the international environment is in turmoil,
OEM enterprises will be the first to be affected. For example, the 1997 Asian
financial crisis impacted on the normal production of large numbers of OEM
enterprises. Therefore, only through transformation and upgrading can these
enterprises have the initiative in processing trade, especially in export trade, and can
they effectively avoid the risks inherent in OEM production mode.
6.3 Motivation for Enterprise Transformation and Upgrading 231
6.3 Motivation for Enterprise Transformation

and Upgrading
6.3.1 Entrepreneurship and Brand Awareness Are

the Major Driving Force Behind Enterprise
Cyert and March (1963) claim that a firm’s ambition is an important factor that
influences its transformation and upgrading. And the ambition of the firm is the
external manifestation of entrepreneurship and corporate culture.
Gersick (1994) believes that changes in internal conditions and the external
environment generate the need for shift, but they will not directly produce revo-
lutionary change. One of the major reasons for the transformation of firms lies in the
subjective conditions of the leaders’ cognition. Only when the top leaders believe
that there is need for a change in the organization’s situation, then the organization
will change.
Kotter (1995) shows that a firm’s transformation process consists of eight stages,
namely creating a sense of crisis, developing a high caliber team, communicating
the vision, empowering people to act according to the new vision, planning and
achieving phased victories, consolidating achievements, promoting more changes,
and institutionalizing them. Each stage of the transformation cannot go on without
the management abilities of the firm.
Kenichi Ohmae argues that the prime condition for the success of enterprise
transformation is the leaders’ determination to make changes and their accurate
understanding of the changes needed in the foundation of the firm’s operation. Then
the organizational structure needs to be adapted to the change. The focus of the
transformation lies in how the organization adapts to changes in the environment
and how it actively taps and develops employee potential and capabilities.
This view was approved by Winter (2000). Innovative, aggressive, passionate,
persistent entrepreneurial spirit can speed up the process by which firms build original
brands. In addition to entrepreneurship, the brand awareness of entrepreneurs also
plays a very important role in the establishment of original brands in OEM firms.
Top leaders’ entrepreneurship is a key factor in promoting an enterprise to
upgrade from ODM to OBM (Yang 2010). Entrepreneurship consists primarily of
innovation, risk taking (willingness to pursue business opportunities at a reasonable
cost of failure), and a strong drive (overcoming difficulties to achieve goals)
(Birkinshaw and Fry 1998). Core competence in production and R&D accumulated
over time is path dependent, thus limiting the brand development of OEM enter-
prises. At the same time, because of long-term OEM manufacturing and low price
strategy, appropriate branding limps for lack of funds and talents. Therefore, at this
stage, the senior leaders’ entrepreneurial spirit and their strong will to create their
own brands are essential to develop branding competence (Yang 2010). The
internal factor of entrepreneur ability is also an important factor that influences the
upgrading of enterprises (Kong 2012).
The successful transformation and upgrading of enterprise cases discussed in the

previous chapters of this book are all brought about by innovation originating from
entrepreneurial spirit. For example, ASUS’s four founders, Tong Zixian, Xu
Shichang, Xie Weiqi, and Liao Minxiong, were all Acer’s senior engineers. In
1989, they together resigned from Acer and founded ASUS. Specializing in
development and design and manufacturing for computer motherboard companies
in the beginning, ASUS has grown to be one of the world’s top 500 companies. In
the course of development, entrepreneurship has played a huge role. The nearly
crazy “dedicated and pragmatic” engineer culture enabled ASUS to sprint to the
commanding heights of global IT technology at the very beginning, thus laying a
foundation for high technology. The adventurous, aggressive, but risk-resisting
corporate culture has helped ASUS to grow fast and steadily, and to upgrade from
OEM manufacturer to first-class own brand manufacturer.
6.3.2 The Ownership of Key Resources and the Acquisition

of Key Capabilities Constitute the Foundation
for Enterprise Transformation and Upgrading
It can be seen, from the theoretical support and the case analysis in the previous
sections, that enterprises which have successfully upgraded have rich capital
resources. With abundant capital accumulated, they are able to make large
investments in R&D, design and promotion, thus, leading to improved level of
technological innovation and enhanced product brand image, and ultimately
establishing their own brands. In addition, the human resource is also a key factor in
the success of enterprise transformation and upgrading. Enterprises successful in
transformation and upgrading have adopted various methods, such as the estab-
lishment of internal training centers, the cooperation with external institutions like
colleges and universities, and training agencies, to create pipelines for talented
people and develop high-level technological and managerial personnel. They also
emphasize the introduction of talents, especially management and technological
talents from the outside so as to optimize the quality of their human resources.
The key capabilities of an enterprise include innovation capabilities and expertise
in marketing and service providing. Innovation capability is embodied in many
aspects, such as innovation achievements, innovation management ability, status of
R&D organization and personnel, and industry-university-research institute cooper-
ation. To upgrade successfully, enterprises need to have great innovative power. Only
through relentless innovation in R&D and design, and continuous improvement of
product technological content and brand image can an enterprise avoid the devastating
price wars and gradually realize upgrading. Capabilities in marketing and service are
manifested in sales, development of service network, size of the sales team, publicity
and promotion activities and so on. Without heavy investment in marketing and
promotion, OBM business is not likely to gain rapid development.
The manufacturer’s strategic opportunities stem primarily from its own skills
and capabilities (Barney 1991). Barker and Irene (1997) believe that the pressure
6.3 Motivation for Enterprise Transformation and Upgrading 233
for change (performance pressure, technological change) and the ability to change
(resources) are the two major causes of enterprise transformation. Teece and Pisano
(1997) suggest, from the perspective of dynamic capabilities, that enterprises can
upgrade their capabilities through skill acquisition, knowledge and know-how
management and learning. The resources and capabilities within the organization
and the support of external partners are the basis for the transformation and
upgrading of OEM enterprises (Pfeffer and Salancik 2003)
Technology gaps and marketing gaps are the major competitive disadvantages of
developing country enterprises in the international market. Filling these gaps should be
the direction of constructive improvement (Lall 1991; Hobday 1995; Schmitz 2007).
Technological capability and marketing capability are the main components of an
enterprise’s competitive strength, and therefore the chief driving force behind enterprise
upgrading (Verona 2007). Enhanced technological strength can enable OEM firms to
progressively move from OEM to ODM and finally to OBM (Qu 2007; Liu 2008).
6.3.3 Increasing Consumer Demand at Home Has Provided

Market Support for Enterprises to Establish Their
Own Brands
Low-end manufacturing enterprises are faced with increasingly fierce foreign

competition and the financial crisis exacerbated the business environment. So how
to survive and grow in adversity is the most important issue facing enterprises.
China has a large population and growing consumer demand. This provides strong
market support for China’s enterprises to shift from exporting abroad to expanding
domestic demand. As large numbers of multinational companies have established
their presence in China’s market, Chinese enterprises should also consider trans-
ferring their products to the domestic market, cultivating national brands and
producing products that their own country people need, thus promoting the trans-
formation and upgrading of enterprises. Furniture enterprises in Dalingshan of
Dongguan are actively adjusting their strategic thinking. Some foresighted com-
panies have turned their attention to the domestic market, and successfully gained
new competitive advantages through the establishment of their own brands.
6.3.4 Government Policies Promote and Encourage

Enterprises to Upgrade
The government may create favorable conditions for enterprises in such aspects as
innovation system, policy support and encouragement, construction of financing
environment, creation of talent development mechanism, and construction of sup-
porting service system, so as to promote the upgrading of enterprises.
In terms of the financing environment, Shenzhen for example has performed

very well. The city has an efficient and well-developed financing market. In order to
get over the problems of financing enterprises (especially high-risk high-tech
start-ups), the government has made efforts in many aspects: promoting the
development of small and medium-sized financial institutions; using fiscal funds to
support the development of high-tech enterprises; funding the establishment of
“investment services limited company for high tech industry” to provide R&D
special-project loans and liquidity loans guarantees for the city’s high-tech enter-
prises of different ownership system. Establishing a sound mechanism for the entry
and exit of venture capital to attract the inflow of venture capital. With the efforts of
the Shenzhen government, local venture capital in the area is among the best in the
whole country. China Merchants Technology Group’s total investment in 2006
amounted to 60 million Yuan, which was invested in 6 projects; Tsinghua Leaguer
Group invested 70 million Yuan in 7 projects; Shenzhen Innovation Investment in
2006 invested in 16 projects with the amount of investment coming to 240 million
Yuan; The city has a total of 133 venture capital institutions, more than 10 billion
Yuan of funds, accounting for one third of the nation’s venture capital.
6.3.5 Good Relationship with Cooperative Partners Provides

Technical and Management Reference for Enterprises
Small and medium-sized domestic enterprises can learn advanced business experi-
ences through establishing relatively long-term stable partnerships with many
well-known branded companies. Particularly for some processing trade enterprises,
long-term partners will send standing QC (quality control) to them to offer technical
guidance and quality control. In the course of cooperating with different professional
manufacturers in the world, enterprises can accumulate rich experiences. They absorb
advanced knowledge of management and technology from professional manufac-
turers through “learning by doing” and “using by doing”. This learning enables them
to make products that come up to the level of advanced countries in terms of
technology, production processes and quality control. In addition, they can exchange
human resources and expertise with their partners. Good cooperative relationships
with partners provide not only a stable source of order for low-end manufacturing
enterprises, but also an excellent platform for accessing, understanding and learning
advanced technology and management experience from their partners, therefore,
greatly accelerating their upgrading process.
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Chapter 7
Measurement Standards and Paths
of Enterprise Transformation
and Upgrading
7.1 Theoretical Research on Enterprise Transformation

and Upgrading

from the Perspective of Core Competence
and Dynamic Capability
Foreign scholars begin the study of enterprise upgrading primarily from the point of
view of core competence and dynamic capability (Zhang 2004). Bell and Albu
(1999) believe that to study the upgrading of an enterprise, one should first attach
importance to the study of core competence, which focuses on the ability of an
enterprise that other companies can not copy, and that provides end consumers with
the value they need, and that is adaptable, valuable and difficult to imitate. Then,
one should follow the study of dynamic capability (Teece and Pisano 1997), which
refers to the ability that an enterprise has developed to learn, adapt, and change over
time. It emphasizes that enterprises must strive to cope with the changing envi-
ronment, update and develop their capabilities. And the ways to improve and
update ability are mainly through skills acquisition, knowledge and know-how
management and learning. Enterprises can accomplish upgrading by developing
dynamic capabilities.
The studies with respect to core competence and dynamic capability are largely
concerned with upgrading from within, and often ignore the environment in which
enterprises operate and the relations and connections between enterprises. The
global value chain (GVC) theory is the approach to the study of international
division of labor, regional economic development, industrial upgrading and
enterprise upgrading from the perspective of a global network. It offers a new clue
to the study of enterprise upgrading and it is the major theoretical basis on which
foreign scholars have built their research.
https://doi.org/10.1007/978-981-13-1260-1_7
238 7 Measurement Standards and Paths of Enterprise Transformation …

from the GVC Perspective
Enterprise upgrading was introduced into the theoretical framework of GVC in the
late 1990s. Gereffi (1999) was among the first to identify the different levels of
industrial upgrading. He points out that industrial upgrading is a process of
improving the ability of a firm or an economy to move towards more profitable and
technologically sophisticated capital- and skill-intensive economic niches.
According to the view of resource allocation, he distinguishes industrial upgrading
into four levels of analysis: within enterprises; within inter-firm enterprise net-
works; within local or national economies; and within regions. Humphrey and
Schmitz (2000, 2002), on this basis, propose four types of enterprise upgrading
from the micro level of the enterprise: (1) process upgrading. By reorganizing the
production system or adopting more advanced technology, enterprises can convert
inputs into outputs more efficiently, and achieve process upgrading; (2) product
upgrading. By moving into more sophisticated product lines and introducing new
products or improving existing products, enterprises can increase the added value of
their products and realize product upgrading; (3) functional upgrading. By
acquiring new functions or abandoning existing functions in the chain, such as
shifting from production to more profitable design and marketing, enterprises may
rise from original equipment manufacturing (OEM) to original design manufac-
turing (ODM) and then to original brand manufacturing (OBM) and achieve
functional upgrading; and (4) inter-sectoral upgrading. By using the knowledge and
expertise acquired in particular functions to move into a different sector or different
sectors, enterprises can accomplish inter-sectoral upgrading. Kaplinsky and Morris
(2001) agree with the classification of industrial upgrading under four types. They
find, through their empirical study, that many industries have showed a ladder of
similar development patterns in the course of upgrading. Generally, enterprises
begin with process upgrading, then gradually progress to product upgrading and to
functional upgrading, and eventually achieve inter-sectoral upgrading, though there
are leaps or even regressions. This classification has been widely accepted by
scholars, and has been used as a theoretical basis for the study of enterprise
upgrading in developing countries (see Table 7.1).
Poon (2004) also points out that enterprise upgrading is an economic role
transformation process of moving from the production of cheap labor-intensive
products to the production of expensive capital- or technology-intensive products.
Avdasheva et al. (2005) interprets upgrading as an action aimed at boosting process
efficiency, introducing new products or improving existing products, changing the
scope of value creation activities, and switching to new value chains. Yang (2006),
from the perspective of organizational learning, argues that upgrading means that
local firms are inserted into global production networks and learn from international
firms to improve their position in the global production networks or global value
chain.
7.1 Theoretical Research on Enterprise Transformation and Upgrading 239
Table 7.1 Process of enterprise upgrading. Source Kaplinsky, R., Morris, M. A handbook for
value chain research, 2001
Process Product Functional Inter-sectoral

upgrading upgrading upgrading upgrading
Trajectory
OEA ODM OBM
Movement in the
Demonstration
chain
OEM
increased value
Value added
Brach and Kappel (2009) believes that, in terms of technological capability,

enterprise upgrading represents enhanced technological, technical and organiza-
tional capabilities, as well as heightened positions of enterprises in the global value
chain. Humphrey and Schmitz (2002) points out that, from the enterprise level,
upgrading is the ability of an enterprise to improve its competitiveness and to
engage in higher value-added activities by acquiring technological and marketing
capabilities. To sum up, enterprise upgrading is a process of improving competi-
tiveness and increasing the added value of products and services. Meanwhile,
upgrading reflects the ability of an enterprise to innovate and to enhance the added
value of products and services (Kaplinsky and Readman 2001; Humphrey and
Schmitz 2002).
Domestic scholars Mao and Wu (2009), based on the views of economics,
defines enterprise upgrading as a process of improving its competitiveness and the
added value of its products and services. It is upgrading at the micro level of
industrial upgrading. Cluster researchers mostly link the upgrading of industrial
clusters to the global value chain (GVC) and study the role of GVC governance
models in enterprise upgrading. GVC can be used to study the realization of each
link’s value added in different value chains, and the impact of governance patterns
(Humphrey and Schmitz 2004), that is, the impact of GVC governance model on
enterprise upgrading, the dynamic mechanisms and approaches of enterprise
upgrading under GVC.
The studies on enterprise upgrading abroad has not yet developed into an
independent system. Most of them are still theoretical frameworks on core com-
petence theory, dynamic capability theory and GVC theory. They have only out-
lined the general growth trajectory of enterprises. Few studies point out that
enterprises will adopt a mixed upgrading model according to their own situation in
the process of upgrading.
Domestic scholars have gone beyond the above theories. They are studying the
upgrading direction of enterprises by integrating industrial cluster theory, industrial
upgrading theory and GVC theory. Cao (2006) applies the view of dynamic
capability to the study of industrial cluster upgrading. He concludes that the
dynamic ability of industrial clusters is primarily composed of identification ability,

learning ability, network ability and integration ability. After examining the
upgrading and development process of Taiwan PC industrial cluster in the past
20 years, Mei et al. (2005) suggest that, OEM enterprises in China should follow
the example of Taiwan OEM enterprises in the PC industry. They should first
actively insert themselves into the GVCs, and then gradually develop from OEM to
ODM and OBM. They should change their development direction, moving from
low cost focus to innovation orientation and gradually rise to the high ends of the
value chain, thus realizing process, product, and even functional upgrading. Tang
and Cheng (2006) have explored the upgrading path of Wenzhou lighter enterprises
from the three levels of product upgrading, process upgrading and functional
upgrading. Mao and Wang (2006) put forth the concept of product upgrading, and
have summed up five upgrading paths based on product upgrading: upgrading by
substituting for multinational companies’ products; upgrading by utilizing fuzzy
industry boundaries; upgrading for taking over internationally transferred indus-
tries; upgrading because of changes in industry standards; and upgrading by
accelerating imitative innovation.
According to the above literature review, it can be seen that the research about
enterprise upgrading in China is still in the early stage. The researchers are pri-
marily learning and putting to use foreign theories. Systematic theoretical frame-
work has not come into being. Their knowledge of enterprise upgrading is still on
the basic level. The research tends to emphasize the imperative of enterprise
upgrading, and in a certain degree, induces and sums up the upgrading direction and
paths of enterprises, but lacks comprehensive and systematic analysis of the mea-
surement and path choice of enterprise upgrading. As for the foreign research, the
GVC theory, the core competence theory and the dynamic capability theory provide
a sound theoretical basis for the study of enterprise upgrading, and they have very
important reference significance. However, careful observation shows that these
theories do not distinguish between stock and increment of enterprise upgrading. In
terms of the stock, enterprise upgrading means enhanced ability and increased value
in the enterprise; in terms of the increment, enterprise upgrading is manifested in
the enterprise’s innovativeness. It is a process of developing new products, new
services, new brands, and new markets based on the improvement of technology
and capability.
On the basis of referring to the existing literature and considering the increment
and stock factors of enterprise upgrading, this book puts forward the measurement
standards of enterprise upgrading, and develops a systematic analysis framework of
enterprise upgrading path.
7.2 Measurement Standards of Enterprise Transformation and Upgrading 241
7.2 Measurement Standards of Enterprise

Based on the analysis of GVC theory, core competence theory and dynamic
capability theory, this book summarizes and analyzes the measurement standards of
enterprise transformation and upgrading.
The theoretical basis and measures for enterprise transformation and upgrading
are shown in Table 7.2.
7.2.1 Improved Product Technological Content

and Increased Value Added
To increase the technological content and the added value of products, enterprises
have to develop and use advanced technology to improve product quality and to
replace low value-added products with high value-added products. For example, in
the domestic market, color TV manufacturers in the home appliance industry have
followed the pace of foreign-funded companies, upgrading their product from tra-
ditional color TV to flat panel TV of slightly higher technological content, then to
the sunrise products of rear-projection TV and plasma TV. Domestic enterprises
actively and constantly upgrade their products, and improve the products’ tech-
nological content. They position their products at high added value, facing head-on
the products produced by multinational companies in China and gaining market
share. These products have higher added value than processed export products or
exports of low-value products.
7.2.2 Enhanced Product Function
The enhancement of product function is also a form of enterprise upgrading. For

example, the product upgrading of Microsoft and many other companies is built on
the product function upgrading. In 1985, Microsoft’s Windows Version 1.0 came
out, and then followed Windows Version 2.0. In May 1990, Windows Version 3.0
was put into commercial use. In April 1992, Windows Version 3.1 was launched,
and in 1993, it was upgraded to Windows 3.2. These operating systems, shortened
as Windows 3.X, ran on DOS and were limited by the DOS operating system. In
August 1995, Windows 95 came into existence and it changed the DOS operating
mode. In 1998, Microsoft launched a more powerful operating system—Windows
98. Windows 2000 (Chinese version) and Windows XP Home and Profes-
sional were officially released respectively in March 2000 and November 2001.
The interface is more flexible and convenient, covering digital multimedia, home
Table 7.2 Theoretical basis and measurement standards of enterprise upgrading
242
Relevant Definition of upgrading Measurement of upgrading Practice of upgrading

theories
GVC Process upgrading: transforming inputs into Improvement in production efficiency and In value R&D; improvement in logistics or
outputs more efficiently by reorganizing the product quality chain quality; introduction of new
production system segments machines
Between R&D; supply chain management
value process improvement and learning;
chain e-commerce capability advancement
segments
Product upgrading: moving into more Improvement of existing products and the In value Expanding design and marketing
sophisticated product lines, accelerating the rapid introduction of new products, chain departments; establishing or
launch of new products and increasing the shortened product life cycle, increased segments strengthening cross-functional teams
products’ added value product technological content, enhanced for new product development
product function and increased product Between Working with suppliers and
unit price value customers to develop new products
chain
segments
Acquiring new functions or abandoning Shifting from production to more In value Taking in new, higher value-added
existing functions in the chain profitable design and marketing, moving chain functions in the value chain;
from OEM to ODM and then to OBM segments outsourcing low value-added
activities
Between Moving into new, higher
value value-added activities
chain
segments
Inter-sectoral upgrading: using the Enhanced product function increased Entering the new value chain and organizing
knowledge acquired in one function to product technological content, and production; adding new features or functions in
move into a different sector increased product unit price the new value chain
(continued)
7 Measurement Standards and Paths of Enterprise Transformation …
Relevant Definition of upgrading Measurement of upgrading Practice of upgrading
theories
Core The ability that is difficult for others to Development of core competence in
competence replicate and that provides end consumers technology, talent, branding,
with the value they need management, etc.
Dynamic The ability that an enterprise has developed Skills acquisition, knowledge and
capability to learn, adapt, and change over time, and know-how management and learning
the ability to cope with the changing
environment, and to update and develop
their own capabilities. to update and
develop their capabilities
Source (1) Kaplinsky, R., & Morris, M.A handbook for value chain research, 2001
(2) Mao and Wu. Research on enterprise upgrading paths and analysis model. Journal of Sun Yat-Sen University: Social Science Edition, the first issue of
2009
7.2 Measurement Standards of Enterprise Transformation and Upgrading
243
networking and communication functions.1 Although the core part of these prod-
ucts has not changed fundamentally over a fairly long period of time, by contin-
uously improving its products and upgrading their functions through patches and
upgrades, the company has expanded its production and sales and market coverage.
This upgrading path helps the company reduce competitors, enhance its dominance
and monopoly advantage in the market and obtain higher profits. Companies that
have successfully implemented the strategy of product function upgrading are able
to maintain desirable profit margins in fierce competition.
7.2.3 Developing from OEM to ODM and then to OBM
OEM means that companies with superior brands outsource the processing and
production of their products to other enterprises. They themselves provide product
design parameters and technical and equipment support to the manufacturers in
order for them to meet the requirements of product quality, specification and model.
The branded company will sell the products on its own brand when they have been
produced. Original design manufacturing (ODM) refers to the partnership in which
the principal (the branded company) entrusts the production and all or part of the
design of its products to the agent (the manufacturer) while selling the products on
its own brand. Original brand manufacturing (OBM) means that the enterprise
develops its own independent brands and participates in domestic and international
market competition.
In the process of conducting OEM business for developed country companies,
the enterprise is gradually accumulating manufacturing experience through learning
in production. At the same time, by way of reverse engineering, the enterprise
studies, explores, imitates and improves imported equipment and technology and
incrementally develop their own design and preliminary R&D capabilities, moving
step by step to ODM, the upstream of the industrial value chain. With its strength
further increasing, the enterprise can establish its own brands, and become an OBM
manufacturer. The independent intellectual property rights developed in ODM stage
provide the necessary support for the establishment of its own brands. As a matter
of fact, the enterprise has successfully upgraded its technology and product while
evolving from OEM to ODM and to OBM.
1
Mao Y.S., Shu Z.P., Wu Y. Business Global Competition Built around Standards—Based on the
Case Analysis of Microsoft [J]. Economic Theory and Business Management, 2008(2).
7.2 Measurement Standards of Enterprise Transformation and Upgrading 245
7.2.4 Shifting from Single Products to Product Lines,

from Single Businesses to Business Solutions, Leading
to New Products, New Services and Even New Markets
7.2.4.1 Moving from a Single Product to a Range of Products
In the context of industrial convergence and fuzzy industry boundaries, moving

from a single product to diversified products and even to a whole range of products
is the key to dealing with intense competition and achieving product expansion and
enterprise upgrading. Although the range of products may have similarities with the
original single product, both their features and functions have changed dramatically,
thus, extending the business area and scope and creating a new market. For
example, Taiwan’s United Group has expanded well beyond its roots as a producer
of flour, gradually moving to feedstuff, oil, food and beverages, dairy, and the
comprehensive food industry related to people’s livelihood. The company’s busi-
ness area now spans many different sectors, including foodstuff, pharmaceuticals,
electronics, biotechnology and it has developed different ranges of product. With
product diversification, the company’s brand has been strengthened. Although this
expansion approach has much to do with the original business, business expansion
built around product upgrading in many cases can be regarded as an entirely new
product development. This mode of expansion has become increasingly important
in many industries, especially in the high-tech and information industries.
Microsoft, Intel, and IBM in the information industry, and companies in the
pharmaceutical industry are growing and expanding by relentlessly upgrading their
products and developing product ranges.
7.2.4.2 Expanding from Single Businesses to Business Solutions
The ultimate winner of modern business competition is the customer. In return,

understanding customers and providing better service for them can lead to
improved response ability and sustained competitiveness, and customers are the
source of impetus for the upgrading of enterprises. In the high-tech community,
many companies capture new markets through the growth of new businesses cre-
ated by new products and services. Atotech Taiwan Ltd. is a precision chemical
company, which mainly produces printed circuit boards and chemical liquids
needed in the IC manufacturing process and provides technological solutions for
related customers. The company is very strict with the development of new prod-
ucts. Each year, it introduces to the market one forth of the new products according
to the needs of customers. The company sends special teams to work closely with
the customers and direct their technology development and production. Atotech
Taiwan Ltd. has grown from a product seller into an integrator of products and
services. This change has brought about huge profits, which enable the company to
increase R&D expenditure and maintain high growth rate against the financial
crisis.2 Taiwan’s United Microelectronics Corporation (UMC) has become a

leading company in wafer manufacturing also because of its ability to provide
systematic solutions for customers.
7.2.5 Developing Strategic Assets and Creative Assets

to Enhance Competitiveness
The resource-based strategic management view suggests that assets that generate
sustained competitive advantage for a company are strategic assets. In order to
obtain sustained competitive advantage, companies need to develop strategic assets
which are specific to them and rivals have difficulty imitating. Creative assets are a
concept proposed by Dunning, referring to the assets developed on the basis of
natural assets (natural resources and untrained labor). They can be tangible assets,
such as physical and financial assets, or intangible assets, such as proprietary
technology, trademarks, organizational capability, management ability, institution
and culture.
The development of strategic assets and creative assets is essential for companies
to enhance their competitiveness. Enterprises in less developed countries can
improve their competitiveness by entering foreign markets through foreign direct
investment to increase international competition experience, or by acquiring firms
in developed countries through merger and acquisition to learn and absorb their
advanced technology and management experience. For example, the purpose of
Lenovo’s acquisition of IBM’s PC business is to obtain the IBM brand value, core
technology in the PC business, foreign markets, human resources, and enhance the
level of its international operations. Lenovo’s acquisition is a typical example of
enterprises seeking assets to improve competitiveness.
7.3 Paths of Enterprise Upgrading
The literature review shows that the research about the measurement and path of
enterprise upgrading is based on the GVC, and is concerned about how enterprises
move from commissioned processing (OEM) to research, development and design
(ODM) and finally to the establishment of original brands (OBM).
Many scholars have explained the upgrading path of OEM-ODM-OBM in terms
of the enterprise’s technological capability and marketing capability (Amsden 1989;
Gereffi 1999; Mei et al. 2005; Zhu et al. 2006; Yang 2010). For example,
OEM-ODM follows the technological path while 0EM - OBM entails the brand and
market path. The studies on the upgrading path indicate that enterprises change
2
Based on the author's investigation into Atotech Taiwan Ltd. on November 17, 2008.
7.3 Paths of Enterprise Upgrading 247
from low cost focus to innovation orientation, gradually rise to the high ends of the
value chain through accumulation of capital and technology, and ultimately switch
to functional upgrading from process and product upgrading.
Nie and Zhong (2010) argue that enterprises should take the path of upgrading
from simple OEM production (such as manufacturing with foreign supplied parts
and designs) to complex OEM production (taking on a broader range of manu-
facturing functions, including the designing of parts, the sourcing of inputs, and
logistics functions) within the OEM stage on the basis of process and product
innovations. Some scholars claim that enterprises can realize economies of scale by
enlarging the size of OEM manufacturing, and that they can develop supporting
businesses (Hu et al. 2005). Yang (2006) emphasizes that domestic OEM enter-
prises can achieve upgrading through the extension and expansion of OEM busi-
ness. Mao (2009, 2012) uses the smiling curve and dual smiling curve to analyze
various paths of enterprise upgrading from the perspective of the value added and
costs that enterprises have in the value chain. The object of the research on
upgrading is extended from OEM enterprises to general types of enterprises.
Through the combination of large numbers of phenomena observed and case
analysis, a path selection model of enterprise upgrading is proposed. The smiling
curve and dual smiling curve are integrated to analyze ten major upgrading paths
and the corresponding changes of the smiling curve. Field investigation and liter-
ature research into the enterprises have verified that the framework has strong
explanatory power and expansibility for the upgrading of enterprises in emerging
economies and it provides research directions for probing new upgrading paths.
7.3.1 Achieving Overall Transformation and Upgrading

by Recognizing New Features and New Demands
of Traditional Industries and Repositioning Them
With the economic environment and ideas changing and the income increasing,
new features and new demands have emerged in some traditional labor-intensive
industries, and they are changing the nature of the traditional products. For
example, Taiwan’s bicycles have upgraded from traditional vehicles to high-end
fitness and leisure products and household toys. As a result, the average price of
bicycle exports of Taiwan in 2009 was 6 times that of the Mainland China (300:50
US dollars). Because of this upgrading, there appears a new demand for bicycle
products in both developed countries and emerging economies, and several new
consumer market segments have developed. In addition, traditional labor-intensive
industries can widely use highly advanced technology, and even become high-tech
industries by integrating with new technologies. Taiwan’s clothing, fabrics and
other textiles have upgraded from the basic necessities of life to high-end products
with high technological content and deodorant and antibacterial functions. The
average price of Taiwan’s exports of cloth and garments is 6 times that of Mainland
Fig. 7.1 Change of the

industry smiling curve due to
repositioning
China (US $18:3). This shows that traditional industries can achieve overall
upgrading by recognizing the new features and new demands and repositioning
their products in the market.
The successful upgrading of Taiwan’s bicycle industry is based on renewed
knowledge and deep understanding of the bicycle’s features, functions and con-
sumer characteristics in the “post-industrial society” and “leisure society”; With
industries transferred to Mainland, Taiwan’s bicycle manufacturers repositioned
Taiwan as the location for research and development and automated production of
high priced bicycle models, which have been exported to Europe, the United States
and other developed countries. They moved the production of medium and low
priced models to mainland China, which are mainly exported to the Middle East
and other developing countries. Taiwan’s three major bicycle manufacturers all
have set up factories in Mainland. Pursuing different production and marketing
modes on both sides of the Taiwan Strait, Taiwan’s bicycle manufacturers are able
to avoid low price competition with mainland China bikes.3 And their commitment
to innovation, premium quality, upscale market, and high value-added allow them
to become the world’s leading suppliers of exclusive bicycles.
This upgrading path causes the whole smiling curve to move upward because the
repositioning of R&D, production and marketing has boosted the brand value and
added value (shown in Fig. 7.1).
3
Analysis of competitive advantages of Taiwan’s bicycle industry, Chen Yinxuan, July, 2008; A
study on the performance of all enterprises in the industrial cluster—an analysis of Taiwan’s
bicycle industry, Li Junkun, Feb., 2009; Key success factors in promoting the A-team in Taiwan’s
bicycle industry and performance evaluation, Li Qiongyao, June, 2007.
7.3.2 Achieving Transformation and Upgrading

by Substituting First for Imported Products, then
for Multinational Companies’ Products in China
and in Foreign Markets
Technological capability enhancement of developing country enterprises follows a

multi-step technological catch-up route of introduction, digestion and assimilation,
imitation, overtaking, and independent innovation. The active follower strategy
pursued by enterprises has provided strategic foundation for substitution for
multinational companies’ products. They have progressively realized upgrading in
the course of replacing multinationals’ products, and finally achieved technological
leaps.
7.3.2.1 Making Use of Late-Mover Advantage and Pursuing Active

Follower Strategy to Replace Multinationals’ Products
The follower strategy is a strategic choice to learn and imitate the lead firms’
superior qualities and excellent methods of doing things in order to more efficiently
use resources and time than independent innovation. It can fall into product fol-
lower strategy, regional follower strategy, and marketing follower strategy in
accordance with the type of lead firms. For Chinese enterprises in a weak position
in the international market, the follower strategy represents that they search for and
study good market performance products and technologies of foreign or
foreign-funded companies who are or are not in direct competition with them, then
produce products to take the place of imported products or products made by
multinationals in China so as to substitute for products made in foreign countries or
by foreign-funded companies in China, and finally gain domestic market share and
penetrate the international market. Some research findings show that developing
countries, especially China, are in a better position to implement the follower
strategy and get better results. One reason is that China has a vast domestic market
that many other developing countries do not possess, which is a good condition for
the implementation of this strategy. On the other hand, many enterprises in China
have strong technical power and deep technological accumulation, which provides
the possibility of implementing the follower strategy. In the start-up stage or when it
is not strong enough, the enterprise usually imitates and follows the existing
products and technologies of multinational companies. This approach has been used
by most Chinese manufacturing enterprises. For instance, 90% of China’s com-
munication enterprises are followers.
7.3.2.2 Adopting a Progressive Way of Upgrading and Achieving

Technological Leaps in the Course of Substituting
for Multinational Companies’ Products
The Japanese comparative technology historian Takeshi Hayashi (1986) put for-
ward the theory of “five stages of technology from dependence to independence”:
grasping operating techniques; maintenance of imported machinery and equipment;
making repairs and a series of minor improvements; designing and planning; and
localization. This seminal research provides a clear exposition of the technological
catch-up process of latecomer countries.
Mao and Li (2006), based on the study of upgrading paths of some successful
home appliance enterprises in China, propose the idea of enhancing the enterprise’s
technological strength through the replacement of multinationals’ products. They
point out that the upgrading of the enterprise’s technological capability is
path-dependent and undergoes three stages: introduction of mature technology and
digestion and absorption—imitative innovation and cooperative innovation—in-
dependent product innovation. This sequential pattern contributes to technological
accumulation and enterprise upgrading. They further point out that product sub-
stitution follows a path of replacing products imported from foreign countries—
replacing products produced by multinational companies in China—replacing
multinational companies’ products in foreign markets. China’s Haier, Galanz and
Changhong have achieved technological innovation and independent research and
development, and accomplished product upgrading by moving along this path.
Take Changhong as an example, in the early 1980s, it introduced Panasonic’s
production line and produced color TV TA movements (the stage of introduction,
and digestion and absorption); In the early 1990s, it worked together with Toshiba
to develop NC-2 and NC-3 color TV movements (the stage of imitative innovation
and cooperative innovation); In 2000, Changhong accomplished the development
of digital high-definition television and digital high-definition rear projection
products (the stage of independent innovation).
The overall upgrading of China’s air conditioning industry reflects the accu-
mulation of technology and the evolution of manufacturing, management and
marketing capabilities. Air conditioning manufacturers, Gree, Haier, Midea, and
other domestic brands have moved to upscale market mainly through two steps. The
first step is to shift from replacing imported foreign products to the substitution for
products made by multinationals in China. In 2009, LG had only 2.18% of the
market share in China. And Toshiba, Sanyo, Hitachi and other foreign
air-conditioning companies all lost ground in the Chinese market. In the field of
frequency conversion air conditioning whose technology had been controlled by
foreign manufacturers, domestic air conditioners nabbed a whopping 75% share.
The second step is to replace multinationals’ products in foreign markets. China’s
home-grown air conditioners are exported to more than 200 countries and regions,
accounting for 70% of the global output.4
By imitating products of multinational companies, ZTE conducted technological
learning and gradually narrowed the technological gap between itself and foreign
giants, thus, achieving product upgrading and replacing multinationals’ products in
both domestic and international markets. In 2009, ZTE won a 35% share and
ranked first in the Chinese 3G wireless equipment market. It also received large
orders in emerging markets such as Indonesia, Turkey, Vietnam and Saudi Arabia
and made a breakthrough in the European market by collaborating with Deutsche
Telekom’s affiliated T-Mobile, ranking third among the world’s DSL broadband
access equipment providers.
This upgrading path also causes the whole smiling curve to move upward
because enhanced R&D, production and marketing capabilities have increased the
products’ value added. By pursuing active follower strategy, Chinese enterprises
imitate imported goods and products produced by multinationals in China and
absorb advanced technology. At the same time, they adopt catch-up strategy,
attaching importance to intellectual property rights, carrying out innovative research
and development, and finally accomplishing three types of replacement: replacing
imported products—replacing products made by multinationals in China—replac-
ing multinationals’ products in the international market.
7.3.3 Creating New Products and New Demands

on the Basis of Blurred Industrial Boundaries
and Industry Convergence, and Achieving
Inter-sectoral Upgrading
Since 1990s, with the rapid development of communication technology and com-
puter technology, the boundaries of industries tend to be blurred, and industries
begin to converge. There is intersection and convergence between tangible prod-
ucts, between intangible products, and between tangible and intangible products.
Especially for some high-tech companies related to information technology,
industry convergence and blurred boundaries caused by information technology
provide an opportunity for their expansion and innovation.
Apple is the world’s model of inter-sectoral upgrading. In terms of product
research and development, Apple spans traditional manufacturing, IT, cultural
creativity, art and other fields. In terms of product functions, Apple’s iPad combines
traditional communication, computer applications, culture, entertainment, media,
4
GREE is No. 1 for 13 consecutive years in the air conditioning industry because of its paranoia,
Documentary, He Dazhuo and Dong Mingzhu, Issue 16,2009; Pride and prejudice led to the bitter
failure of foreign air conditioning companies in China, IT Time Weekly, Issue 21, 2010.

smiling curve due to
inter-sectoral upgrading
Industry 1
Industry 2
finance, securities, art and etc. Apple has created a huge new market in the world
and has recently become the world’s most valuable company.
Inter-sectoral upgrading can be applied either to the convergence between
manufacturing industries or to the convergence between traditional and newly
emergent industries, and even to the fusion between traditional manufacturing
industry, newly emerging industry and service sector. It not only increases the value
and total output, also fosters the change of industrial structure and upgrading. The
process of the enterprise moving from producing a single product to producing
diversified products and then to developing product ranges is the key to product
expansion and enterprise upgrading.
The blending of toy industry, aesthetics, sports, education, media, IT, and many
other sectors is offering traditional toy manufacturers new ways to develop. They
may launch new products and establish new channels and new models. For
example, Lungcheong Toys Co. Ltd. have combined traditional toys with electronic
products, giving birth to wireless remote control products and electronic products,
with radio-controlled toys accounting for 57% of its turnover. Auldey Animation
Group, through the integration of animation and toy production, has launched many
animation-related toy products to which the market respond very well, while pro-
ducing and broadcasting animation works. Hayidai Co. Ltd. takes advantage of the
channel integration of supermarket chains. Its sales outlets are distributed around
many provinces and cities through different supermarket chains such as Lotte,
Wal-Mart, Carrefour, Trust-Mart, etc. It also provides plush toys for large branded
companies, such as FAW Volkswagen, Brilliance Auto, Construction Bank, China
Mobile and so on.5
The enterprise originally produced products of low value and was situated on the
lower smiling curve. Owing to blurred industrial boundaries and industry conver-
gence, the enterprise may realize product upgrading and produce products with
higher value added. This upgrading path, by superimposing the smiling curve of
5
Based on the author’s investigation into Lungcheong, Alpha Animation and Culture, and Hayidai
in Jan. 2008 and Nov. 2011.
Industry 2 on the smiling curve of Industry 1, has raised the new product smiling
curve to a higher level (see Fig. 7.2).
7.3.4 Removing Barriers to Key Components and Achieving

Overall Upgrading Through Technological
Accumulation and Capability Evolution
In the environment of global competition, companies in developed countries

command the majority of the world’s cutting-edge and key technologies. And they
have the major say in the development of technological standards. Key components
of many industries are controlled by foreign firms. Breaking down barriers to and
restrictions on key components has become an important way for enterprise
upgrading in developing countries, which requires product innovation and tech-
nological innovation. Product and technological innovation are increasingly
dependent on capital and technology accumulation, especially technology accu-
mulation. The accumulation and development of technological capabilities is a long
and arduous learning process (Gil et al. 2003; Chen and Qu 2003). In order to
cultivate and develop technological capabilities, enterprises need to take the ini-
tiative to pursue systematic technological learning so that they can enhance con-
tinuously their professional skills in various technological functions and keep on
deepening technological knowledge (Bell and Pavitt 1995). An (2004) points out
that there are five stages in the development of technological capabilities: tech-
nology selection, technology acquisition, digestion and absorption, technology
improvement, and technology creation. Increasing the products’ added value and
strengthening the brand requires strong support from the accumulation of funds and
technology. Linsu Kim (1997) proposes a general model for the growth of devel-
oping countries’ technological capabilities: introduction of mature technology—
digestion and absorption—product innovation. The growth of technology is an
evolutionary process. Since enterprises in developing countries usually do not have
great independent R&D capability, it is difficult to develop all on their own.
However, by taking advantage of late-mover advantages and introducing the latest
production equipment and technology, latecomer enterprises are in a relatively
favorable competitive position compared with established companies when they
enter a rather advanced and high-growth speed industry. To illustrate, consider the
case of Lungcheong Toys Co. Ltd. (Lungcheong) in Changping, Dongguan.
Though the global financial tsunami has badly affected China’s manufacturing
enterprises, Lungcheong, which has more than 8,000 employees, is currently wit-
nessing both production and sales booms. Its hit product, the intelligent robot, sold
at home and abroad, sells at as much as 2,000¥ apiece. And its production orders
lined up to next year.6 Lungcheong started with OEM manufacturing for toy
brands. By improving its own R&D and design capabilities, acquiring dedicated
R&D and design organizations, proactively introducing talented people, it has
successfully achieved technological accumulation and enterprise upgrading. In
1998, Lungcheong created the high-tech product R&D department; in 2000 it
established the high-tech intelligent product R&D department; in the same year, it
acquired the Taiwanese-founded Chuangyi Precision Machine Co. Ltd. (Dongguan)
for HK $18 million; and it has cooperated with external research institutions and
universities to develop technologies and new products. In 1997, it floated shares,
raising capital to support its upgrading. Meanwhile, Lungcheong values the intro-
duction of external technology and knowledge. Through cooperation with the
Chinese University Hong Kong, it obtained the technology for the remote-control
tumbler; it also worked together with Wuhan University of Technology, Tsinghua
University, and Harbin Institute of Technology to develop intelligence-related
technology.7
There are quite a few successful cases of achieving enterprise upgrading by
removing barriers to and restrictions on key components. For example, Lu Guanqiu,
founder of Wangxiang Group (Wangxiang) said in the 1990s that Wanxiang should
develop high value-added and high technology content activities, and focus on key
component and key process development and give up preliminary low value-added
processing and assembly. For the auto parts it was making, Wangxiang set a clear
direction of product upgrading: single components—a variety of components—
systems modules. Initially manufacturing components like ABS and sensors,
Wangxiang later entered the field of automotive electronics and gradually devel-
oped key components such as lithium-ion power battery and created its own
electric vehicle along the way of “battery—electric motor—electric control—
electric vehicle”. At present, it is the only enterprise in China that has the ability to
produce key components for electric vehicles like battery, motor, control, and
power system, establishing itself as a leading player in the industry.
Taiwan’s bicycle manufacturers are also concentrating their efforts on making
technological leaps in new materials and processes. They actively develop, design
and manufacture key components. Meanwhile, they emphasize the learning and
introduction of foreign advanced technologies. They have introduced the modular
technology from the United States and the supply chain model from Japan. On the
basis of independent innovation and digestion and assimilation of imported
advanced technology, from 1983 on, the material for making bicycles in Taiwan
has changed from steel pipe to titanium alloy and magnesium alloy and then even to
carbon fiber, reducing the weight of the bicycle from 30 kilos to the present 7 kilos;
and the manufacturing technology has developed from brazing to argon welding,
6
Based on the report in Xinhuanet on Nov. 21, 2008 http://www.gd.xinhuanet.com/dg/2008-11/21/
content_14984941.htm.
7
Based on the author’s investigation into Lungcheong on Jan. 27.
Fig. 7.3 Change of industry

smiling curve due to the
development of R&D
capability
from integral forming to non-oxidizing arc welding. Their bicycles have become
light, rigid, tough and strong.8
Beginning as systems assembler, Taiwan’s Hsinchu Scientific Industrial Park
and Tainan Scientific Industrial Park have gradually grown to be key component
developers and producers. For example, in the photoelectric industry, under the
trend of continuous expansion of corporate size and development of the next
generation panels, enterprises in the parks have a great magnetic absorption effect
on key component and raw material suppliers, and have “competition—exclusion”
and “spillover—connection” effect on the area’s industry structure. The “compe-
tition—exclusion” effect indicates that emerging industries in the park pay
employees much better than traditional industries, which makes it difficult for the
latter to recruit or puts them under the pressure of substantial labor cost increase, so
many traditional manufacturers are forced to relocate elsewhere; The “spillover—
connection” effect shows that, with industries in the park growing, manufacturers in
the park will enter into close partnership with those on the outside owning to
contracted processing and raw material supply. With the park’s technology dif-
fusing, high-tech enterprises will gather in the vicinity of the park.9
This upgrading path causes the left side of the smiling curve to slope upward
because the industry can achieve technological leaps in material, process, or key
components through technological innovation and acquisition, thus raising the
products’ value added (see Fig. 7.3).
8
Analysis of competitive advantages of Taiwan’s bicycle industry, Chen Yinxuan, July, 2008.
9
Based on the author’s investigation into the Science Park in southern Taiwan and the Taiwan
Institute of Industrial Technology in May 2006 and November 2008 respectively.
Fig. 7.4 Change of industry

smiling curve due to service
focus
7.3.5 Achieving Upgrading by Increasing Investment

in Production Services and Boosting Value Added
According to the experience in the automotive industry, the profit ratio of used car
trading, after-sales service and new car sales in Europe and the United States is
3:2:1; the experience in the elevator industry shows that Japanese elevator giants
survive on orders for 5,000 elevators because there is huge demand for elevator
maintenance and renovation. Obviously, for some industries, especially those in
relatively saturated markets, producing large durable goods of rather long service
life, and having high maintenance requirements, there is much room for after-sales
service. Therefore, in these industries, traditional marketing can be extended to
production services. By increasing investment in production services the industry
can raise its value added and achieve upgrading.
This upgrading path causes the right side of smiling curve to slope upward. As
marketing is extended to production services, the enterprise can create higher value
added and achieve upgrading (shown in Fig. 7.4).
7.3.6 Achieving Enterprise Upgrading by Reducing Inputs

and Consumption, Lowering Costs, and Enhancing
Environmental Standards and Value Added
Low-carbon operation is not something that only requires investment but reaps no
profits. By purchasing environmental protection equipment, changing processes,
and developing green technology, enterprises can reduce environmental impact,
lower costs, improve product quality and enhance corporate value.
Pacific Textiles Printing and Dyeing Co. Ltd. (Pacific Textiles) is a typical
enterprise which has moved away from high energy consumption and large emis-
sion to green operation. In 2007, it spent 100 million Yuan and installed an airflow
dyeing machine to save energy and reduce waste; in 2009, it began purchasing
Fig. 7.5 Changes of the enterprise’s dual smiling curve (left) and smiling curve (right)
phosphorus-free dye additives; in 2008, the enterprise invested 40 million Yuan in a

RO reverse osmosis waste water treatment and recycling project. The wet open
width setting process adopted by the enterprise has yielded an annual savings of
3,000 tons of standard coal. It obtained the International Oeko-Tex Standard 100
certification for ecological textile products in 2003, and Swiss GOTS Global
Organic Textile Standard certification in 2008. Moreover, Pacific Textiles actively
participates in the formulation of environmental standards in the industry. The
average unit price of its products has doubled within 10 years, ranking first in
China’s textile industry. Production costs have fallen by almost 5%. Energy saving
projects have generated annual revenues of about 35 million Yuan. In 2008, Pacific
Textiles’ operating income was 3.4 billion Yuan, with a total profit of 152 million
Yuan. In 2009, its revenue increased to 3.8 billion Yuan.10
Hongyuan Industrial Inc. Ltd. (Hongyuan) has achieved upgrading through
energy saving and emission reduction, and through the development of ecologically
friendly products. In 2009, its gross profits rose to 20%, and fuel costs fell 39%
compared with 2008. Taiwan’s textile enterprises mostly have low carbon operation
awareness. And the majority of them have obtained international certifications
about environmental standards while in Mainland China only a small number of
their counterparts have obtained them. In 2007, the percentage of qualified clothing
products from Mainland was below 70%.11
This upgrading path induces the smiling curve to move upward twice. On one
hand, by installing equipment and processes that improve resource productivity and
reduce emissions and by purchasing green materials which lower operating costs
and reduce or even eliminate pollution, the enterprise’s dual smiling curve has
moved downward because its total costs have dropped, as shown on the left side of
Fig. 7.5. On the other hand, the smiling curve has jumped twice. First, by devel-
oping green technology and products and redesigning production processes, the
enterprise has improved its value added, so the smiling curve rises to the position of
Curve 1. Then it continues to go up to Curve 2 (the New Curve) because obtaining
10
Based on the author’s investigation into Pacific Textiles in March and April, 2011.
11
Based on Hongyuan’s annual reports, the company website and other related public information.
international certifications about environmental standards can enhance the enter-

prise’s product value and competitiveness, as shown on the right side of Fig. 7.5.
7.3.7 Achieving Upgrading Through the Establishment

of Strategic Alliances Between Cluster Enterprises
and with Large Enterprises Promoting
the Development of Small Ones
Industrial clusters provide a good platform for independent innovation of enter-

prises and improvement of industrial chains. An individual enterprise usually lacks
the funds and R&D capability to make technological breakthroughs. Therefore,
through the establishment of strategic alliances between cluster enterprises and
competition (cooperation and competition) between them, and with large enter-
prises promoting the development of small ones, the entire industrial cluster can
achieve upgrading.
In 2003, Taiwan’s bicycle industry association A-Team was established. Two of
the industry’s three major manufacturers “Giant” and “Merida” and parts manu-
facturers formed a center-satellites system. Central manufacturers focus on
inspection, assembly, research and development, and marketing; satellite manu-
facturers, with a steady source of orders and no need for marketing, are dedicated to
production. And they keep on improving productivity owing to the assistance and
contractual requirements of central manufacturers. Large enterprises foster small
enterprises and central manufacturers nurture satellite factories. This finally facili-
tates the whole industry to rise to the higher levels of the technological and
value-added ladder. In terms of performance, A-Team manufacturers perform sig-
nificantly better than non A-Team manufacturers. First, the product unit price of
A-Team manufacturers is US $140 higher than their peers (350:210). Second,
95.2% of A-Team members use their own brands to sell products, while the average
percentage of the industry is 55.46%. This shows that A-Team has effectively
promoted the overall upgrading of the industry.12
In order to improve their technological level, narrow the technological gap with
advanced manufacturers, and eventually achieve upgrading, Taiwan’s enterprises
actively allied themselves with developed country companies in related industries.
For example, TSMC and UMC sought alliances with established companies in the
early development stage. The licensed technology they obtained has laid a solid
foundation for their leading position later in Wafer OEM manufacturing technol-
ogy. Atotech Taiwan Ltd. also enhanced its technological strength by creating a
strategic alliance with the dominating company Compeq in the industry. Building
up industrial chains through alliances can improve the overall R&D strength of the
12
Key success factors in promoting the A-team in Taiwan’s bicycle industry and performance
evaluation, Li Qiongyao, June, 2007.
Fig. 7.6 Change of industry dual smiling curve (above) and smiling curve (below)
allied companies, and facilitate industrial and enterprise upgrading. Consider the
example of the communications industry. China has a large-scale communications
industry, but it is not a country with powerful communications technology. The
technological standards of the first and second generation mobile communication
were dominated by European and US companies. China’s communication tech-
nology enterprises were in a passive position in the process of their development.
However, the third generation mobile communication standard, TD-SCDMA,
independently developed by Chinese enterprises, has successfully become the
international standard. It is a typical example of technological leaps. The success of
TD-SCDMA reveals that developing country enterprises can use their late-mover
advantage to attain capability leaps in new technological fields by standing on the
shoulders of others, which will help them to narrow the technological gap with or
even leapfrog incumbent companies. The TD-SCDMA standard resulted from the
joint efforts of nearly 50 enterprises. Equipment manufacturers, terminal manu-
facturers, chip developers, and testing instruments enterprises etc. created the
industrial alliance, spending four years in researching, developing, and testing, and
jointly accomplishing the development of the TD-SCDMA standard.
The cost of an industrial cluster is the lowest point of tangency of each enter-
prise’s cost in the cluster. So the dual smiling curve of the industrial cluster is the
envelope curve of each enterprise’s dual smiling curve. The added value of the
industrial cluster is the highest point of tangency of each enterprise’s added value in
the cluster. So the smiling curve of the industrial cluster is the inner tangent of each
enterprise’s smiling curve. This upgrading path changes both the smiling curve and
dual smiling curve. Since by relying on the platform of the industrial cluster, the
added value of enterprises in the cluster has reached the highest level (above), and
the cost of enterprises in the cluster is at the lowest level (below). The industry in
the cluster has achieved overall upgrading (see Fig. 7.6).
7.3.8 A Large Diversity of Upgrading Paths from OEM

to ODM and then to OBM
This book presents a descriptive model on the transformation and upgrading of

OEM enterprises. This model is used for the comparative analysis of the upgrading
path choices of two enterprises in Guangdong Province: Donlim Kitchen Group
(Donlim) and Jasic Technology Company (Jasic). Of these two enterprises, one is
the “hidden champion” in the domestic small electrical appliance sector, the other is
the leading enterprise in the domestic welding industry. Both enterprises have
successfully upgraded from OEM to ODM and then to OBM, but they differ in the
process of upgrading. The book also details the upgrading processes of two
Dongguan toy enterprises: Lungcheong and Hayidai. Through the analysis of these
cases, we find that the descriptive model developed in this book can well illuminate
the specific trajectory of OEM enterprises’ transformation and upgrading. And with
the help of Table 3.3, which shows the judgment criteria for the descriptive model
on OEM enterprises’ transformation and upgrading, one can readily make a rather
objective evaluation of the transformation and upgrading results of OEM enter-
prises. Moreover, the research into the upgrading paths of OEM enterprises reveals
that they display a large diversity in the choices of upgrading paths: in terms of the
general direction, OEM enterprises follows the path of upgrading from OEM to
ODM, and then to OBM. But for a particular enterprise engaging in actual trans-
formation and upgrading, it should adopt different strategies according to specific
situations.
7.3.8.1 Achieving Upgrading by Coordinating Both Domestic

and Foreign Markets, and Conducting OEM, ODM and OBM
Concurrently
OEM Manufacturing is an effective avenue for late-mover countries or regions to

profit sharing, technological catch-up and even the attainment of OBM. However,
Fig. 7.7 Path of upgrading from OEM to ODM and then to OBM. Source Wang and Mao (2007)
changes in the external environment have forever disrupted this economic devel-
opment in China. Raw material prices have risen; labor costs are increasing; energy
supplies fall short; RMB appreciates; the export tax rebate rate keeps on declining;
and environmental protection costs are rapidly increasing. As a result of these bad
changes, OEM enterprises’ profit margin is increasingly shrinking. To survive and
develop, they must implement upgrading in a timely manner. Figure 7.7 shows the
upgrading path of OEM enterprises.
In the process of upgrading, enterprises will gradually develop independent
design capability and product innovation capability, thus moving to the higher
segments of the value chain. In order to catch up with foreign advanced companies,
they develop their own core technology and R&D capability through continuous
learning and innovation. And on this basis, they cultivate independent global
brands, achieving upgrading from OEM to ODM and then to OBM. However,
travelling up the value ladder from OEM to ODM and then to OBM imposes heavy
requirements on OEM enterprises. It demands long-term commitment and invest-
ment in R&D capability and the configuration of global marketing networks and
distribution channels. Moving from OEM to ODM and then to OBM is an incre-
mental learning and phased technological and experience accumulation process.
This gradual development process keeps late-mover enterprises from venturing into
the wrong path in their early stage of product and technology innovation and helps
them reduce development costs and accumulate technological capability.
The development course of Donlim and Jasic has illustrated the diversity of path
choices for OEM enterprises’ transformation and upgrading.
In 2003, the OEM enterprise, Donlim entered into the domestic market by
establishing its own brand, as is often called a “born OBM” path, while in the
overseas market, it began performing ODM in 2000. Since then, it focuses on ODM
business over there and has not pursued OBM business. So its upgrading path
outside the home country is progressing from OEM to ODM (OEM-ODM). Jasic’s
strategy for opening the domestic market is similar to Donlim. But they acted
differently in the overseas market.
Though it followed the “born OBM” path in the domestic market, Jasic switched
brands in the overseas market. Part of its products exported to the overseas market
Fig. 7.8 Change of positions

in the smiling curve
Fig. 7.9 Transformation and

upgrading paths of OEM
enterprises
began to take on its own brand “JASIC” (including the “JASIC” brand placed on
the back of OEM/OBM products). However, in the overseas market Jasic assumed a
mixed pattern. It still performs OEM tasks, manufacturing to precise buyer-supplied
specifications and drawings, not changing anything. Or it only produces internal
parts of the product and outsources the production of the product shell to other
OEM manufacturers. Meanwhile, it initiated ODM business. The customer only
gives basic product concepts and requirements. Jasic designs everything from
outside appearance to inside parts and manufactures complete final products for the
customer, holding all the intellectual property rights except the brand.
This upgrading path lands the enterprise in higher value-added segments on the
smiling curve (see Fig. 7.8). In the foreign and domestic markets, enterprises may
follow three upgrading paths: first is to upgrade from OEM to ODM; second from
OEM to OBM; and third is to be able to afford OEM, ODM, and OBM
concurrently.
7.3.8.2 Achieving Upgrading and Conducting OEM, ODM, and OBM

Concurrently Through Spinning-off and Restructuring
There are two major ways for OEM enterprises to become truly large and strong:
one is transformation and upgrading (product and technology innovation), includ-
ing progressing from OEM to ODM (technological path) and upgrading from OEM
to OBM (branding path); the other is to expand and diversify the OEM business
(business model innovation). The transformation and upgrading paths of OEM
enterprises are summarized and shown in Fig. 7.9.
As Fig. 7.9 shows, the first type is OEM-ODM, which takes the technological
route; the second type is OEM-OBM, which takes the branding route. The essence
of these two upgrading paths lies in climbing to higher value chain segments in
pursuit of higher value added. ODM-oriented progressing to higher segments of the
left side of the value chain involves technological upgrading. Superior ODM
manufacturers should not only have industry-leading scale to effectively reduce
manufacturing costs, but also strong R&D and design capabilities to constantly
provide new products to meet the needs of the market, thus enhancing their com-
petitiveness. OBM-oriented upgrading to higher segments of the right side of the
value chain involves building brands and/or acquiring other companies’ brands,
expanding to forward value chain activities, thus increasing the enterprise’s profit
level. This is actually to develop branding and marketing capabilities on the basis of
the enterprise’s existing manufacturing capability.
V1-V2 represents the diversification of the OEM enterprise. It is essentially a
horizontal leap across the value chains for the sake of securing higher added value
on one hand and spreading risk on the other.
Economies of speed and economies of networks explain corporate restructuring
which consolidates the core business through merger and acquisition, and spin-off
from the angle of factors flow speed and integration of external resources respec-
tively. By way of spin-off and reorganization, large enterprises or corporate groups
can be divided into several discrete companies so as to separate the different
businesses and set up dedicated organizations to manage them, which is conducive
to the overall upgrading of the enterprises. Therefore, instead of upgrading from
OEM to ODM and then to OBM sequentially, enterprises can achieve upgrading
from OEM to ODM or OBM while retaining their existing OEM manufacturing
advantage by splitting into OBM, ODM and OEM firms so that OEM, ODM, and
OBM coexist.
Acer started as an OEM manufacturer, but later created its own brand. In 2002, it
was split into two independent firms through spin-offs: one takes on OBM business
and the other takes on OEM business. Acer is an OBM firm specializing in desktop,
notebook computer and display, and electronic service. And Wistron is dedicated to
OEM manufacturing.13
13
Based on the author’s investigation into Hongyuan in October, 2008.
Value-added
After spin-off (OBM)
Before spin-off
After spin-off (OEM)
Value chain
Fig. 7.10 Change of the smiling curve due to spin-off and reorganization
This upgrading path causes the original smiling curve to fall into two (see
Fig. 7.10). The new curve above the original one represents the OBM or ODM firm
with enhanced added value; the smiling curve below the original one represents the
dedicated OEM firm. Through spin-off and reorganization, the OEM enterprise has
upgraded to ODM and/or OBM while still keeping its OEM.
7.3.9 Leapfrogging to Advanced Technological Levels

and Achieving Enterprise Upgrading by Acquiring
Strategic Assets
The willingness of some advanced country companies to sell their strategic business
units because of operational difficulties or the adjustment of strategic objectives
makes it possible for developing country enterprises to acquire sophisticated
technology and other strategic assets. When entry barriers are low, latecomer
enterprises can achieve technological leaps through the acquisition of advanced
country companies (Xiong and Tang 2008). For example, in order to leapfrogging
to advanced technological level, China’s Goldwind Science and Technology
acquired the German company VENSYS.
Latecomer enterprises barely have the strategic assets such as proprietary tech-
nology, brands, and distribution networks. The enterprises that only adopt the
conventional follower strategy will forever be in a passive position. Therefore,
mobilizing resources for the acquisition of strategic assets in certain sectors is an
important way for latecomer enterprises to achieve upgrading. Here, strategic assets
comprise technology, natural resources, brands, management capabilities, service
capabilities and so on.
In 2002, Taiwan’s bicycle manufacturer Merida acquired up to 48% equity stake
in the top U.S. bicycle brand Specialized, and the German brand Centurion.
Through these two acquisitions, it gained advanced technology, R&D capability

smiling curve due to
acquisition of strategic assets
and market opportunities in developed countries at relatively low cost and in a short
period of time. Its order control ability, production scheduling efficiency and
high-end bicycle market share in Europe and the United States increased signifi-
cantly. The sales revenue of Merida’s own brand products accounted for more than
90%.14
With roots as an OEM manufacturer, Lacquer Craft Mfg has successfully
upgraded from OEM to ODM and OBM through accumulation of resources and
capabilities and acquisition of high-end European and US furniture brands.15
This upgrading path causes the smiling curve to move upward since through the
acquisition of technology, brands and other strategic assets, the acquirer has
enhanced both capability and added value and achieved upgrading (see Fig. 7.11).
7.3.10 Achieving Upgrading with the Facilitation

of Industrial Clusters and Parks
In the environment of fierce market competition, industrial clusters and parks have
become an important platform for enterprise development. The development of
industrial clusters and the establishment of industrial parks play a key role in
promoting the upgrading of enterprises. For example, Silicon Valley in the United
States is not just a science and technology park, it is also an ecosystem and a
mechanism. Under the Silicon Valley mechanism, small companies and individual
inventors whose technological achievements are rapidly commercialized and
launched to the market soon grow into world-class companies. This mechanism
provides sufficient nourishment and fertile soil for the upgrading of enterprises. For
lack of the Silicon Valley mechanism, many clusters and parks simply represent the
geographical agglomeration of enterprises, and they hardly give full play to the
14
A study on the performance of all enterprises in the industrial cluster—an analysis of Taiwan’s
bicycle industry, Li Junkun, Feb., 2009.
15
Based on the author’s investigation into Lacquer Craft in July, 2009 and in September, 2009.
scientific research and network advantages. Such examples are countless.

Therefore, it is both the industrial clusters, parks and the ecological environment
they create that foster the innovation.
7.3.10.1 The Ecosystem of Industrial Clusters and Parks Involves

the Development of Well-Structured Factors Supply
and Service Systems
As the platform for enterprise innovation, industrial parks provide good investment
environment, technology development, capital market, efficient and professional
intermediary service, and good community service. Take Taiwan’s industrial parks as
an example. Their success in nurturing enterprises is down to the good environment
created for attracting investors to set up plants and well-structured factors supply and
service systems. For example, Taiwan Industrial Technology Research Institute
(ITRI) undertakes both forward-looking research projects of Taiwan’s Ministry of
Economic Affairs and medium- and short-term research projects initiated and spon-
sored by enterprises in the park. Aiming at Taiwan’s industrial interests, ITRI scans
and tracks global leading-edge science and technology, organizes joint development
of technology, and applies the newest technology to projects in the enterprises of the
park and ultimately drives business processes through products, equipment, and
technological know-how. ITRI has served as an incubator of world known enterprises
including UMC and TSMC.16
7.3.10.2 Big Companies in Industrial Clusters and Parks Are

the Driving Force Behind the Development of Local
Enterprises
The establishment of the industrial park has promoted the development of local
enterprises. First of all, on the industrial level, large companies’ presence in the
park has driven the upgrading of local industries; Secondly, this industrial
upgrading has led the local enterprises to shift to and develop high-tech businesses.
For example, as mechanisms related to high technology, R&D and cooperation
between industry and university were in place in Tainan Science and Technology
Park, many enterprises in southern Taiwan, especially those in the deeply
embedded precision machinery industry eagerly hoped to upgrade their capability
and become subcontractors of big companies.
16
Based on the author’s investigation into Taiwan Institute of Industrial Technology on November
18, 2008.
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Chapter 8
Conclusion
8.1 Be a Prepared Enterprise
Manufacturing enterprises in China are mostly low-end small and medium-sized

ones with an extensive growth mode. Many of them were immediately swept away
by the strike of the global financial crisis. Chinese enterprises have long relied on
abundant supplies of labor force and other low-cost advantages. But, only relying
on low cost inputs will certainly spell serious trouble for them down the road
because comparative advantages in inputs never last. However, some enterprises
had attempted to upgrade before the financial crisis happened, so they were able to
survive the crisis, and to grow fast even in tough times. For example, Taiwan’s
Atotech in the presence of the financial crisis, increased their R&D expenditure and
witnessed a rapid revenue growth. Another example is Lungcheong Toys Group in
Dongguan. Since it has consciously developed independent R&D capabilities and
established its own brand from very early on, it was able to withstand the crisis,
though many others did not succeed in surviving. And some high-tech enterprises
in Shenzhen also showed an ability to resist risks. Toyota is a high-growing and
high-performing company. Professor Fujimoto at University of Tokyo, Japan,
conducted decades of research into Toyota and published the book “Evolution of
Manufacturing Systems at Toyota”, which analyzes its capability building process
and draws the conclusion that Toyota is a prepared organization. Enterprises that
make preparations are not only forethoughtful and plan ahead, but also have the
ability to defend themselves against crises. And in the long run, this is also key to
the creation of sustainable competitive advantages and the change towards growth.
https://doi.org/10.1007/978-981-13-1260-1_8
270 8 Conclusion
8.1.1 Change Mindset and Actively Implement the Strategy

of Transformation and Upgrading
With the deepening of reform and opening-up, accession to the WTO and the
surging tide of globalization, Chinese enterprises are facing enormous challenges of
technological change and fierce competition in a fully open market. How to rapidly
accumulate technological capabilities and effectuate technological advancement to
cope with the global economic integration is a severe test for most enterprises in
China, especially for small and medium-sized ones, which account for 99.6% of the
total number of enterprises. China’s “11th Five-Year Plan” has clearly put forward
the initiative of independent innovation. So it is essential for Chinese enterprises to
improve rapidly their technological capability and develop their innovative per-
formance. Enterprises situated in the lower segments of the value chain, especially
the OEM firms, should wake up to the necessity and urgency of transformation and
upgrading. They need to change their mindset by actively implementing the strat-
egy of transformation and upgrading, and gradually shifting the business focus to
higher value-added R&D and marketing segments.
8.1.2 Use a Variety of Ways to Achieve Upgrading

from Manufacturing to R&D
Technology is the foundation of enterprise transformation and upgrading. But

enterprises need to find a suitable approach to the development of technological
capabilities based on comprehensive consideration of multiple factors including
their own industry environment, business strength, human resources, technological
capability and so on. The analysis of a number of real world cases in the previous
chapters allowed us to detect several paths for upgrading from manufacturing to
R&D. Enterprises can choose one or more paths to improve their technological
strength.
Firstly, for enterprises with considerable technological strength and innovative
capability, it is necessary to continue to make big R&D investments, and carry out
innovation activities so that they can achieve continual upgrading. And for
IT-related high-tech enterprises, there is much need to speed up infiltrating and
extending into relevant industries and achieve product upgrading, since the con-
vergence and blurred boundaries of industries brought about by IT has created good
opportunities for expansion and innovation of enterprises.
Secondly, if the enterprise does not have technological capabilities, it had better
in the early stage import foreign advanced technology, imitate foreign products, and
implement the product imitation and substitution strategy. This does not mean one
should only focus on the introduction of complete sets of equipment. One should
also try to introduce relevant product designs and production technology and
develop abilities to decompose and imitate the equipment. Otherwise, it will have
8.1 Be a Prepared Enterprise 271
no way to digest and assimilate the imported technology, and may fall into a vicious
circle of “introducing—falling behind—introducing more—falling farther behind”.
Statistics show that in 2004, the ratio of technology import and assimilation by
China’s large and medium-sized industrial enterprises is 1–0.07, and this ratio in
both Japan and South Korea remains at about 1–10. Therefore, Chinese enterprises
should increase their absorptive capacities and enhance their ability to innovate on
the basis of digestion and absorption.
Thirdly, latecomer enterprises can speed up the development of new products
and achieve upgrading by means of cooperative R&D and strategic alliances. This
includes technological cooperation with transnational companies as well as joint
development efforts with universities and research institutions. Whatever cooper-
ation is adopted, it is doubly important for enterprises to have a clear positioning
and accomplish complementary advantages for both sides and accelerate the
technological development and upgrading process.
8.1.3 Expand Beyond the OEM Roots to ODM and then

to OBM
Well-known companies, including South Korea’s Samsung, Taiwan’s ASUS, and

Acer, all started with OEM manufacturing for developed country firms. This is
mainly because these emerging market companies in their early stage of develop-
ment lacked the needed production technology, though they had low cost advan-
tages in manufacturing. With the economy developing in these countries, labor
costs and raw material prices began to rise. The disadvantages of OEM manufac-
turing will surface if companies still stay at the lower part of the value chain
conducting unskilled assembly activities. Actually independent intellectual property
rights have now become key to the success of business competition. Without them,
latecomer enterprises would be forever performing low level processing activities
and earn razor-thin margins, while developed country companies at the high ends of
the value chain are reaping most of the profits and added value due to their own-
ership of core technology and global brands. In order to catch up with advanced
companies, latecomer enterprises have no choice but to develop their own core
technologies and R&D capabilities through continuous learning and innovation,
and on this basis cultivate their own global brands. Specifically, in the process of
conducting OEM business for developed country companies, they should accu-
mulate manufacturing experience through learning by doing, and at the same time,
probe, study, imitate and improve the imported equipment and technology through
reverse engineering. This is actually a process of technology introduction, assimi-
lation, absorption and innovation. Once the enterprise has developed its own design
and preliminary R&D capability, it should gradually move to ODM, expanding to
the upper reaches of the industrial chain. With its strength augmenting further, it
may move to OBM, since intellectual property rights developed in the ODM stage
272 8 Conclusion
can provide necessary support for the development of its own brands. Therefore, in
the course of evolving from OEM to ODM and then to OBM, the end result is that
the enterprise has succeeded in achieving technological and product upgrading.
8.1.4 Put a Premium on Entrepreneurship and Cultivate

the Entrepreneur’s Crisis Awareness and Foresight
The ideas and values of entrepreneurs play a decisive role in the development of an
enterprise. The entrepreneurs with a sense of crisis and foresight typically will be
able to get the enterprise ahead of others and formulate strategies in line with the
trends of industrial development, so that they come out first in the competition.
There is simply no way the enterprises included in this book would have become
successful without the wisdom and courage of their decision-makers. It’s the
entrepreneurs’ determination and ambition that continually push the enterprises to
new heights.
The entrepreneur’s crisis consciousness and foresight are reflected in strategy,
organization, and every other aspect of the enterprise. Farsighted entrepreneurs
make preparations of technology, management, talent pool, and so forth long before
the crisis. Therefore, crises offer good opportunities for these individuals to
implement transformation and upgrading. For example, when the financial crisis
swept across the world, TSMC in Taiwan was contemplating improving its com-
petitiveness through the acquisition of some companies at a discount. And some big
conglomerates in South Korea were planning for change at the depth of the crisis,
becoming poised for further expansion.
8.2 Be an Efficient Service-Oriented Government
In the waves of industrialization, the development model of the so-called “four

tigers in Asia” (Singapore, Korea, Hongkong and Taiwan) is most striking. Within
a couple of decades they accomplished industrialization that many developed
countries had spent more than a hundred years to do. The industrial transformation
and upgrading in Singapore has followed the development path of import substi-
tution—export—labor intensive—capital and technology-intensive—knowledge—
intensive. The industrial structure has been transformed five times. And the gov-
ernment has played a leading role in each of these brilliant transformations. Under
the guidance of the government, Singaporean companies made changes and
adjustments to improve the technological content and the added value, and they also
began to go international and seek development opportunities in vast overseas
markets. In addition, the Singapore government went to great lengths to foster
high-tech industries as well as the supporting service sectors, thus striking a
8.2 Be an Efficient Service-Oriented Government 273
structural balance between the three industries. The governments of Singapore,

South Korea and Taiwan have played an important role in promoting enterprise
transformation and upgrading. Their experience can furnish very instructive lessons
for China.
China is an emerging economy in transition. The market economy here is far
from being perfect. Therefore, the government should take it as the goal to provide
efficient support. It ought to provide efficient service in the following four aspects
with reference to the experience of Singapore and South Korea, and the current
world environment and the overall goal of China’s industrial transformation.
8.2.1 Foster Enterprise Upgrading on the Basis of Value

Chain Upgrading
In the new round of international industrial transfer, China, especially the Pearl
River Delta and Yangtze River Delta regions, should consider both undertaking
international industrial transfer and downgrading activities in certain industries. The
upgrading of the value chain may provide a good opportunity for China’s relatively
developed areas to change the unfavorable low technological content and low value
added conditions so that it can truly take over the core part of the value chain, and
realize the transformation from “made in China” to “created in China”. They can
improve their position in the international division of industry and enhance com-
petitiveness, and foster the upgrading of local enterprises. For example, in
Guangdong Province, which was the worst hit by the financial crisis, there are two
major ways of upgrading:
8.2.1.1 Achieve Technological Upgrading in the Process

of Undertaking International Industrial Transfer
Most industries in China’s coastal areas are operating in a globalized environment.

The transfer of international industries and the influx of foreign investors have
become a primary impetus behind China’s industrial growth. With the rapid
advancement of information technology, the pace of R&D globalization is accel-
erating. Industrial innovations in various countries exhibit geographical features
that transcend national boundaries due to the easy flow of R&D personnel across
borders and the sprouting up of international technological alliances. The transfer of
international industries provides learning opportunities for Chinese enterprises. For
them, the multinational companies in China are both powerful competitors and
benchmarks. They may cooperate with the multinationals while competing with
them and follow their example, and consciously improve the learning ability so that
274 8 Conclusion
they can learn advanced technology and management experience from them, and
manage to develop their own independent innovation capability. In this way, OEM
enterprises can gradually move from OEM to OBM and then to OBM.
8.2.1.2 Improve Positions in the Division of Industry Through

Gradient Transfer of Regional Industries
China’s Pearl River Delta and Yangtze River Delta regions and other coastal cities
can not only be the undertaker of industrial transfer, but also serve as the transferor
of industries. With the continuing economic expansion, costs in these regions are on
the rise. In order to pursue new space for development, traditional resource- and
labor-intensive industries and even some capital- and technology-intensive indus-
tries in coastal areas, by virtue of their existing advantages, are carrying out a new
round of relocation. First, they continue to fan out to the east and west wings,
Guangdong’s mountainous areas and inland provinces; and second, textile,
shoe-making and many other resource- and labor-intensive industries and some
high-tech industries speed up the outward movement to ASEAN.1 Under this trend,
enterprises in China’s coastal areas can selectively carry out regional industrial
transfer so as to make room for international advanced industries, and promote
industrial upgrading through better resource allocation.
8.2.2 Promote Industrial Upgrading by Taking the Modern

Service Industry as the Locomotive
In the traditional industry-based economy, the boundaries between industries are

clearly marked. However, since the 1990s, the rapid development of communica-
tions technology and computerized technology has blurred and extended the
boundaries of industries, and the intersection and convergence of industries have
become the characteristics and trends of the contemporary economy. Among these
trends, the most notable is the convergence of information technology, services and
culture, which has become the fastest growing modern service industry in the
world. The US scholar David Moschella (2002) points out that the synergy of cost
advantage, network effect and consumer effect arising from industrial convergence
will provide huge opportunity for enterprise to increase revenue.2 The economic
1
Report on China’s Regional Economic Development in 2006–2007 [M]. Social Science
Academic Press 2007.
2
The US scholar David Moschella (2002) points out that industrial convergence enables resources
to be rationally allocated in larger scope, thereby greatly reducing the costs of providing products
and services and generating cost advantages. Meanwhile, the convergence expands the reach of
network applications, and leads to greater possibilities that various resources gain entry to the
network, resulting in network effect; Moreover, the openness of the production system resulting
focus of major developed countries has shifted to the service sector, leading their
industrial structure to transform from an “industrial economy” to a “service econ-
omy”. Global service sector value added is now accounting for more than 60% of
GDP. The development experience of Singapore suggests that in the process of
moving to capital- and technology- intensive economic niches, it is necessary to put
emphasis on the development of the service industry so that the country can grow to
be a global center for commerce, telecommunications, finance, and service from a
processing production base. Therefore, the modern service industry, integrating
information and culture, will act as the locomotive that drives the upgrading of
traditional industries and injects new impetus to their development.
8.2.3 Promote Industrial Upgrading by Using Industrial

Clusters and Parks as the Platform for Fostering
Technological Development
Science parks sprang up in Mainland China in the middle and late 1980s. Up to now,
53 state-level high-tech industrial development zones have been set up, distributed
all over the country. And nine of them have joined IASP (IASP, International
Association of Science Park).3 Science parks have played a key role in the devel-
opment of science and technology and in promoting economic development and
industrial transformation and upgrading. However, further observation reveals that
there exist some major problems that are restricting their development: vague
positioning of the high-tech parks; mediocre enterprises in the parks; low industrial
value added; and a lack of clear orientation in the parks. Chinese industrial parks can
learn from the development model of Tainan Science Park in Taiwan, and promote
the upgrading of the enterprises in the park trough the upgrading of the science park.
8.2.3.1 Determine the Positioning of the Science Parks, Make

Adjustment and Transformation in the Parks, and Enhance
Their Overall Independent Innovation Capability
For a long time, various parks have emerged in China, bearing many different
names, such as science parks, industrial parks, development zones, processing
zones and bonded zones. Although these parks have been adjusted and rectified
from the convergence integrates consumers as part of the production factors, producing conven-
tional consumer effect. The combination of these three effects will create huge opportunities for
enterprises to increase revenue.
3
Currently, IASP is the only worldwide association regarding science parks, business incubators
and other innovative institutions. Founded in 1984, with the headquarter in Spain, it has
Asia-Pacific Chapter, European Chapter, North American Chapter and Latin American Chapter,
attracting more than 200 members from 54 countries. IASP holds a worldwide meeting each year.
276 8 Conclusion
several times, there remain lots of problems. In fact, a number of provinces and
cities have begun to make investigations and adjustments. It is reported that the
investigation made by four Anhui provincial government counselors reveals that at
present, in Guangdong’s development zones, enterprises focus on “enclosure”,
there is a gathering of miscellaneous industries. Land resources are in urgent need
of planning again as a whole. Beijing City applied to the State authorities for the
retention of 28 development zones. After the national audit, it has been officially
approved to retain 27. Among them, photoelectric, mechanical and electrical base,
national environmental protection industrial park, Badachu hi-tech park and Daxing
biological medicine base merged into Zhongguancun science and technology park.
Li Shufan, deputy director of the Beijing Municipal Bureau of Industrial Promotion
said that they would press fundamental change to the mode of attracting investment
in the development zones so that the zones can shift from the mode of “attracting
companies” with the emphasis on the size and the quantity of investment to the
mode of “attracting industries” focusing on the improvement of industrial
agglomeration.
In order to get over the problems such as scattered resources, overlapped con-
struction and low-level competition, etc., the government, after taking into account
industrial development trends, the parks’ overall strategic positioning, functional
positioning, industrial positioning and industrial planning, should make adjustments
to the parks accordingly so that each park has its own focus in the direction of
industrial development, and some parks transform to high-tech ones, thus, ulti-
mately enhancing the total independent innovation capabilities of enterprises in the
parks.
8.2.3.2 Improve the Qualification Level of the Enterprises Admitted

into the Parks and Foster Distinctive High-Tech Enterprise
Clusters
At present, many high-tech parks in China regard investment promotion as a top

priority, and almost have no requirements for the qualifications of enterprises.
Those that basically meet the requirements of industrial planning will be admitted
into the park if they apply. Therefore, the quality of the admission enterprises is
mixed. Some of them have only the minimum technological innovation capability.
Real high-tech enterprises simply account for half of the total number in a park. In
the end, the high-tech parks are not able to play a major role in the dissemination of
advanced technology and in industrial upgrading. So the parks should place more
emphasis on the screening of enterprises, and formulate the qualifications and
standards for admissions consistent with the positioning of parks, which will be
conducive to the generation of high-tech agglomeration effect and innovation
network.
8.2.3.3 Encourage Enterprises in the Parks to Climb to High Value

Added Segments of the Industrial Chain and Achieve
Upgrading
Beginning as systems assembler, Taiwan’s Hsinchu Scientific Industrial Park and

Tainan Scientific Industrial Park have gradually grown to be key component
developers and producers. For example, in the photoelectric industry, under the
trend of continuous expansion of corporate size and development of the next
generation panels, enterprises in the parks have a great magnetic absorption effect
on key component and raw material suppliers, and have “competition-exclusion”
and “spillover-connection” effect on the area’s industry structure. The
“competition-exclusion” effect indicates that emerging industries in the park pay
employees much better than traditional industries, which makes it difficult for the
latter to recruit or puts them under the pressure of substantial labor cost increase, so
traditional many manufacturers are forced to relocate elsewhere; The
“spillover-connection” effect shows that, with industries in the park growing,
manufacturers in the park will enter into close partnership with those on the outside
owning to contracted processing and raw material supply. With the park’s tech-
nology diffusing, high-tech enterprises will gather in the vicinity of the park.
Mainland China should also make use of the “competition-exclusion” and
“spillover-connection” effect to influence the enterprises in and around the park to
participate in the development of key parts and components, increase the
self-sufficiency rate of key components, and to move to technology-intensive
economic niches, finally leading to the transformation of the local economy.
8.2.3.4 Strengthen Service Functions for the Enterprises in the Parks

and Create an Environment for Small Businesses to Grow
Rapidly
Investigations into the parks show that many parks put emphasis on attracting
enterprises to enter into the parks, but lack service consciousness for them after they
have entered there. Some other parks were established quite early on so that their
infrastructure and service systems are not in good condition. Still some do not have
a dedicated service system and usually rely on social resources. To a certain extent,
this is not favorable to the incubation and growth of enterprises, and also makes it
difficult to cultivate competitive new enterprises. This is also the reason why
Guangdong’s science parks “have no moon but stars” (big famous companies like
Huawei, ZTE, TCL, etc. in different parks grew up before the establishment of the
parks). Therefore, two suggestions emerge:
First, further strengthen the planning and construction of basic supporting
facilities and service systems in the science parks, give more support to enterprises
with respect to research and development, financing channels, and cultural life, and
provide intermediary services such as information, training, and counseling.
278 8 Conclusion
Second, improve the market system and set up sound intermediary service
systems in the entire society; give greater support to R&D-oriented enterprises in
the aspect of resource allocation and policy; encourage the parks to cooperate more
closely with scientific research institutions, universities and enterprises by formu-
lating right policies, jointly incubate scientific and technological achievements in
the parks, help enterprises to expand rapidly, and change the situation of “having
only stars but no moon”.
8.2.4 Foster Enterprises’ Technological Strength

by Creating an Effective Platform
for the Industrialization of Scientific Research
Achievements
8.2.4.1 Improve the Ability to Integrate Resources in Different

Domains and Establish Systematic Scientific and Technological
Intermediary Service Platforms
ITRI (Industrial Technology Research Institute of Taiwan) has attained effective

utilization and circulation of resources by melding original ideas, technology,
knowledge, service and R&D arising from different technological areas, industries
and regions through the establishment of the five linking centers. Mainland China
also has similar scientific and technological intermediary agencies. But they lack
talented people, important links and service ability. Therefore, the funds planned for
some scientific and technological platforms should be pooled and the focus should
shift to the construction of systematic scientific and technological intermediary
institutions and the enhancement of their capabilities, developing management
consulting services according to the demands of enterprises, and looking for a
number of promising technological enterprises to carry out pilot consultancy service
while providing on-site training.
8.2.4.2 Consolidate the Scientific Research Function of the Incubation

Center in the Parks and Set up an Effective Platform
for Enterprises
Specific policies should be developed to run the incubation center in the scientific
park. There should be definite rules and regulations on the employees, the enter-
prises, the scope of their business, and the assessment of their operating perfor-
mance in the park’s incubation center. An operational prospectus should be
submitted in advance in order to avoid blind establishment of an incubation centre.
Applicants should be required to submit their business plans and relevant docu-
ments, and the qualifications of admission enterprises and their management teams
should be rigorously reviewed and defined. The time length for an enterprise to stay
in an incubation center should be stipulated, and it has to move out of the center
after graduation. The operational results of the incubation centre should be evalu-
ated periodically, and it should be accordingly rewarded or punished. And it is
important to give the incubation center preferential policies, cheap land, and tax
breaks, and so on. The service scope of the incubation centre needs to be specified
and its scientific research function consolidated so that it is better positioned to
provide for enterprises technological research and development, service support,
financing, information and forecasting.
8.2.4.3 Strengthen Government Support and Guidance to the Selected

Research Institutions to Intensify Their Incubating Function
and Advance the Development of New Ventures
ITRI is a public research institution founded and dominated by the government. In

the beginning it was not run with a market orientation, but funded and administrated
by the government. Later, its wholly government-funded model shifted to the
jointly funded model through the government’s project plans and enterprises’
entrustment. However, scientific research institutions in Mainland China pursued
free enterprise from inception and made blind investment without any knowledge of
market demands. As a result, many of them suffered premature death in the middle
of industrializing scientific research results for lack of industrialization funds and
management personnel. In view of this, the government should make use of the rich
scientific and technological resources of the research institutions to develop pro-
fessional incubators of enterprises and meanwhile provide strong financial and
policy support to them. It is also important for the government to plan and create
incubators dedicated to providing supporting services for high-tech enterprises with
regard to the development requirements of the country’s high-tech industry. Some
key universities or research institutions may be delegated to establish business
incubator research centers and entrepreneurship programs so that forward-looking
and insightful research into the business incubator sector can be conducted and
specialized talented people can be nurtured and provided for various business
incubators, the venture capital sector and start-up enterprises.
8.2.4.4 Establish Market-Oriented Open R&D Institutions

and Provide Services for Enterprises
Establishing market-oriented open laboratories with a focus on providing services

for enterprises can contribute to their upgrading. Open laboratories may charge
users the cost for using their creative offerings, and see themselves as businesses
selling products or services when providing services to different sectors.
280 8 Conclusion
8.2.4.5 Create Effective Systems for the Transfer of Intellectual

Property Rights and the Diffusion of Technology and Specify
the Rights and Interests that R&D People and Institutions
Have Claim to
The government may establish property rights trading centers to help price tech-
nological products, stipulating specific steps for the transfer of scientific and
technological achievements, ownership of their property rights, share of interests
and responsibilities, and ways of usage. Scientific research institutions should set up
technology transfer service centers, and define the ownership of their intellectual
property rights and the principles for transferring them. There are two ways to
transfer technological products: license and transfer. The government may
encourage research institutions to pursue more technology transfers so that their
scientific results can benefit more enterprises.
8.2.4.6 The Public Technology Development Platform Should Create

a Sound Mechanism for the Flow of Talents and Help
Researchers to Start Businesses with Their Own Scientific
Achievements
It is difficult to mobilize the enthusiasm of scientific research people simply through

technology transfer. Besides, transferred technology need the researcher’s
follow-up study, without which technological development may be readily inter-
rupted and there will probably appear low transfer rate and difficulties in indus-
trialization. It is more likely for transferred technology to generate the desired effect
if scientific research people throw themselves into business and become a member
of the enterprise. For example, in the 1980s and 1990s, some scientific researchers
left research institutions and started new ventures, some of which have grown into
successful high-tech enterprises, as exemplified by Lenovo and Sugon.
The government can facilitate researchers to go into business through policies.
Permanent scientific researchers in research institutions, colleges and universities,
and other institutions who leave the post with scientific results should be allowed to
compete for a post in their original organization within the prescribed time limit.
Once they have secured the post, the time spent outside should be added to their
length of service years. Researchers who resign formally from universities and
institutions and set up high-tech ventures or join enterprises to help the transfer of
advanced technology should be granted certain level of policy welfare if they can
show the certificate of successful technology transfer.
8.2.4.7 Establish Technological Innovation Systems that Meld

Government, Industry, University and Research Institution
While Highlighting the Major Role Enterprises Play
in Innovation
The government should offer strong support to the development of public research
institutions such as universities, research institutes and so on. In their initial
development stage, the government needs to play a guiding and organizing role and
provide support with regard to policy, land, funds and service to help them grow
rapidly; when these institutions are on the right operation track, the government
may point them in the direction and give them financial support by means of
entrusting them with national and provincial key research projects.
In addition, research institutions should not be isolated ones. They can form a
bridge between enterprises and the scientific world and take the lead in the estab-
lishment of industrial R&D alliances by virtue of their advantages in R&D and in
information. In the alliance, the research institution, through the collection and
analysis of the latest technological and industrial trends in the world, may give
R&D offers to enterprises and conduct technology development, technology
transfer and personnel training for them. Enterprises that have joined the alliance
may participate in different stages of the R&D activities according to their own
situation, thereby obtaining a corresponding share of the research results.
Epilogue
My research on Chinese enterprises’ transformation and upgrading dates back to the

autumn of 2005, when I was having a three-month lecture visit on the invitation of
the Institute of Innovation Research in Takahashi University, Japan. At a seminar in
the University of Tokyo, the chief executive of UMC’s (United Microelectronics
Corp of Taiwan) Japanese subsidiary told the story of UMC’s development and its
acquisition of a Japanese listed company in 1999. It struck me that UMC was a
typical case having upgraded from its OEM base. And I also started to wake up to
the fact that transformation and upgrading would be the major practical and theo-
retical problems enterprises in mainland China will have to face. Returning to
China, I began the research on enterprise upgrading in China.
During the time period from then (2005) to the outbreak of the financial crisis,
we conducted intensive field investigations into enterprises and government
agencies in both the Pearl River Delta and Taiwan. In the spring of 2006, I was
invited for a lecture visit in Taiwan’s National Sun Yat-sen University. While in
Taiwan, I, together with my two Ph.D. candidates, Yuan Jing and Dai Yong. made
long visits to Atotech and Taiwan Science Park. From their development experi-
ence, I began to know more about the upgrading paths of enterprises and the great
significance the upgrading of a science park had generated, which is home to plenty
of enterprises. In 2007 and 2008, I visited many companies located in different
cities of the Pearl River Delta, including Shenzhen’s JASIC Technology Co., Ltd
and JICON Technology Co., Ltd, Shunde’s Donlim Kitchen Group, Dongguan’s
Lung Cheong International Holdings Ltd and HaYiDai Toys CO., Ltd, and
Dongguan’s Dalingshan furniture industrial cluster and the Dalingshan district
government. etc. In November 2008, I went to Taiwan once again with my doctoral
students Jiang Yuesun, Wu Yao and Zhang Chenzhi for the purpose of deeper and
wider investigation. We paid visits to Taiwanese Industrial Technology Research
Institution, Atotech, Acer Inc., Asustek, and the Innovation and Incubation Center
of National Sun Yat-sen University there.
Our research based on these investigations gave birth to a number of advisory
reports, which are appreciated and valued by senior officials in Guangdong
https://doi.org/10.1007/978-981-13-1260-1
284 Epilogue
Province government, some municipal governments in the Pearl River Delta,and in

the government agencies in charge of scientific and technological development, and
have aided them in making relevant policies by providing them a frame of refer-
ence. we have also written and published a series of academic papers on this topic.
Thanks to the long time investigations, interviews, and research on enterprise
transformation and upgrading, our book “Chinese Enterprises: Transformation and
Upgrading” came into being and were published in March 2009, when the financial
crisis raged across the world and hit the Chinese enterprises hard. It is a timely book
winning praises from different walks of life. Later, it was revised and updated. And
the second edition came out in 2010. The book is an important achievement of the
major project I presided over for the Ministry of Education emergency program
“Study on the Upgrading of Chinese OEM Enterprises under the Financial Crisis”.
I am convinced that the publication of this book will provide useful reference for
Chinese enterprises’ transformation and upgrading and for the government who
aims to be efficient and service-oriented.
In the process of writing the first edition of the book, many Ph.D. candidates and
postgraduates assisted me in performing various tasks such as the collection and
organization of information, investigation into enterprises, the drafting of some
segments, and the drawing of some figures. I express my sincere appreciation to
them for their contributions. They are Mo Weijie, Cao Yuchun, Wang Qiuxiao,
Liang Wenyan, Yu Kezhuang, Yuan Jing, Wen Siya, Wu Yao, Dai Yong, Jiang
Yuxin, He Jun, Zou Hong Xing. Particularly, Wu Yao did a lot of work in helping
me formulate the first draft of the manuscript.
Since the publication of the second edition in 2010, the global economic envi-
ronment in the post-crisis era has changed dramatically. However, economic
structural adjustment, industrial upgrading, and enterprise transformation and
upgrading are still the major and frontier subjects in China at present and will
continue to be in the next 5–10 years. With this in mind, and at the suggestion of
Sun Yat-sen University Press, I made a drastic revision to the book again, which led
to the third edition. This latest edition involves revisions and updates in the fol-
lowing six aspects: Firstly, added to the book is an account of changes in the
economic environment in over five years after the financial crisis. Secondly, the
new edition features changes and progress in all the case companies, science parks,
and industrial clusters through our revisiting and reinvestigation into them.. Thirdly,
I deleted the cases which were not based on first-hand information. Fourthly, I gave
up the content about Singapore’s transformation and upgrading, which was not
directly related to the theme of this book. Fifthly, a few new research cases are
included. Finally, on the basis of our recent research, the book has a much more
in-depth analysis of the influence factors and paths of enterprise transformation and
upgrading in the book.
In the course of preparing the third edition, one of my postgraduates, Chen
Yuting, assisted me in collecting and sorting out parts of the information and
materials. The publication of this book has been strongly supported by Sun Yat-sen
University Press and the copy editor Cai Haoran. I am grateful to them.
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Translated by Yangchun Liu and Sidan Wu

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1 The Pressure of Chinese Enterprises’ Transformation and

3.1.8 Comparison of the Two Enterprises’ Transformation

4.2.1 Brief Introduction of Dalingshan . . . . . . . . . . . . . . . . . . . 181

6.1.3 Other Factors that Inﬂuence Enterprise Transformation

7.2 Measurement Standards of Enterprise Transformation

7.3.9 Leapfrogging to Advanced Technological Levels

Chinese enterprises’ transformation and upgrading conspicuously started with the

1.1 The Bankruptcy of Smart Union Factories

1.1.1 The Closedown of Smart Union Factories Indicates

1.1.2 Deﬁnition of Enterprise Transformation

As a popular term, “transformation and upgrading” has frequently appeared in news

1.1.3 The Pressure of Chinese Enterprises’ Transformation

imposing a serious restriction on the sustainable development of China’s

Fig. 1.1 The smiling curve.

1.2 The Financial Crisis Has Intensiﬁed the Pressure

1.2.1 China Has Been Affected by the Global Financial

1.2.2 The Financial Crisis Hit the Export-Oriented

Guangdong Province, as of November 2008, the export volume of processing trade

1.3 Planning for Change in Time of Crisis

1.3.1 In Front of Chinese Enterprises Are Three Ways:

1.3.2 Chinese Enterprises Should Bravely Break Through

2.1 High-Level Dedicated Foundry Road of Taiwan’s

Since 1950s, Taiwan has embarked on an export-oriented economic development

2.1.1 Five Development Stages of Taiwan’s Semiconductor

Starting with the establishment of packaging factories by foreign investors,

2.1.1.1 Stage One: Emerging Stage of Taiwan’s IC Enterprises

2.1.1.2 Stage Two: Introducing Stage (1974–1979)—Technology

2.1.1.3 Stage Three: Growing Stage (1980–1995)—Technological

For the enterprises engaging in upgrading, frankly, it was an inevitable challenge

2.1.1.4 Stage Four: Expanding Stage (1996)—Self R&D

2.1.1.5 Stage Five: Mature Stage—Resources Restructuring

After decades of efforts, some of Taiwan’s semiconductor enterprises have been

2.1.2 Sources of Competitiveness of Taiwan’s

2.1.2.1 Vertical Disintegration and Professional Division-of-Labor

After decades of efforts, Taiwan’s semiconductor industry has gradually developed

2.1.2.2 Good Cluster Supporting Environment and Appropriate

In the ﬁercely competitive industry, the establishment of industrial clusters and

2.1.2.3 ITRI Was the Innovation Source of Semiconductor Firms

Corp. and Vanguard International Semiconductor Corp., which stepped up the

2.1.2.4 Entrepreneurship in Taiwan

Taiwanese entrepreneurs have relied heavily on personal networks to launch

2.1.3 Transformation and Upgrading Process of Taiwanese

2.1.3.1 The Establishment of TSMC

the earlier introduction of IC technology under the government’s strong support,

2.1.3.2 Main Features of TSMC’s Dedicated Foundry

Stringent and Innovative Corporate Culture

Strong R&D Competence and Technology Leading Strategy

Unlike Taiwan’s traditional business model, TSMC attaches great importance to

R&D expenditure (NT S1000)

percentage of the closest competitor. Such performance could be practically illus-

Changing Marketing Approach and Establishing Partnerships with

Recruiting First-Class Talents

experience as world-class business leaders in such US enterprises as HP, IBM and

Low-Cost Competitive Advantage

Speed Being the Secret of Success

Providing Diversiﬁed Services

To maintain a sustainable and close partnership, TSMC provides customers with

Establishing Cost-Efﬁcient and Time-Saving “Virtual Wafer Fab” for