China

How did China become a world leader in

the manufacture and exports of telecom
equipments?

Objectives

1) Show that China is the leader in the
telecommunication sector

2) Understand how China became the
industry leader

3) Support our thesis with a case study:
Hauwei


China
Is China the leader in the
telecommunication equipment market?
1st Part:
China The new leader in the
Telecommunication equipment sector

Brief recap of the chinese economic growth
Empirical evidence
Focus on the telecommunication equipment manufactures
Different ways to evaluate the leadership in the
telecomunication equipment sector:
R&D, Patents, Exports
Export data of
China vs World
China vs Brics (Brasil, Russia, India, South Africa)
China vs developed countries (i.e. U.S. )



Chinese economic growth
From a very poor, stagnant, centrally controlled, vastly inefficient and isolated
economy
To foreign trade, investment and the implementation of free market reforms (1979)
In recent years, China has emerged as a major global economic and trade power: it
is currently the worlds second-largest economy, largest merchandise exporter,
second-largest merchandise importer, largest manufacturer.
With the global economic crisis that began in 2008 Chinas exports and imports
declined, GDP growth slowed, and unemployment increased.
But the government policies enabled to weather the effects of the sharp global fall in
demand for Chinese products, while several of the worlds leading economies
experienced negative or stagnant economic growth.
From 2008 to 2012, Chinas real GDP growth averaged 9.2%.
Some economists forecast that China will overtake the United States as the worlds
largest economy within a few years.
China GDP
Telecom Equipment
Telecommunications Equipment is hardware used for the purposes
of telecommunications (telephone, data, radio and TV broadcast, and
wirless communications networks.
In particular, the industry produces transmitters and receivers
(including satellites), signal boosters, signal processors, connecting
devices, power supplies, switches and phones
Profitability for individual companies is linked to technical
innovation and the ability to secure high-volume contracts from large
customers.
There are large economies of scale in manufacturing standard
products, but many products are specialized and produced in small
manufacturing plants.
The industry is highly concentrated(i.e. in US, the 50 largest
companies generate about 80% of revenue)
Measuring the Leadership
Nowadays, the largest Telecommunication Equipment
Manufacturers (TEM) could be found in many different
countries, from the U.S. to Japan and South Korea, from
Europe to China.

In order to find out which country is the leader in
Telecommunications Equipment Manufacturing, it is possible
to consider different measuring indicators:
o R&D investment
o Number of Patents
o Total Exports
R&D investment
PROs CONs

Detailed subclassifications
that are available in many
countries
Data classified into sector of
performance
Long period over which data
has been collected
Good harmonization across
countries

May be difficult to measure,
since some of the innovation
activities are not reflected in
accounting procedures of firms
It is about input only
Often taken as aggregate data
(no disaggregation process
take place)
Number of Patents
PROs CONs

Detailed information about
new technologies
Public Record (continuous)
Data collected with a
detailed and slow-to-change
classification system
Very long history
Data is freely available
They permit the analysis of
spillovers of knowledge
and of patent values

Inventions are not always
innovations (no economical
success)
Some types of technologies
and innovations are not
patentable
Affected by strategic
behavior: using patents to
prevent competitors
patenting and using it
Total Exports
PROs CONs

Exports are public and
industry-specific

Exports take into account
the global competitiveness
and, in general, the
globalization issue.

Is not easy to separate
assembling from actual
producers
For these reasons, total exports is considered the best indicator to measure the
World leadership in Telecommunications Equipment manufacturing.
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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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Exports: China vs World
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Trade Value
(bln $)
1992 1,35
1997 5,63
2002 20,10
2007 102,79
2012 182,88
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RUSSIA
SOUTH AFRICA
INDIA
Exports: China vs Brics
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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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RUSSIA
SOUTH AFRICA
INDIA
Exports: China vs Brics
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INDIA
BRAZIL
RUSSIA
SOUTH
AFRICA
Exports: China vs U.S.
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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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USA
CHINA
Conclusion
As an evidence from the data collected,
the chinese exponential growth in telecom equipment
exports has established China as the world leader for the
industry, above the other developing countries and
overcoming U.S.
China
How did this country become a world
leader in the manufacturing and export of
telecom equipment?

2nd part
How did China become the leader?

Brief history of the telecommunication sector in China
SSI model
Three main actors in the market: Chinese government, MNCs,
Chinese companies and the relationship between them
Xingwang Industrial Park cluster
Internal innovation
Hauwei case
brief history of the company
company data (e.g. revenues, market share)
company strategy





Brief history of the telecommunication
sector in China (1)

the telecomunnication administration system was
established after the foundation of the Peoples Republic
considered instrument of the government control and
national defence

1978 : the open door policy allowed China to open to
foreign business even if telecommunication sector still
remained under the tight control of the government

until 1990 : telecom remained underdeveloped

BUT





Brief history of the telecommunication
sector in China (2)

The Government started to approach actively
multinational suppliers for technology transfer and
JVs negotiations

1984 Shanghai Bell Telephone Equipment
manufacturing corporation
1988 JV between Siemens in Germany and a
factory owned by the Ministry of Electronics Industry
to establish a company called BISC




As a result, the involvement of
FDI had transformed the
chinese market from the one
dominated by direct
imported goods to a JV
dominated one


Brief history of the telecommunication sector in
China (3)

1997 : China telecom was listed in Hong Kong to
capture foreign investment
1998 : new round of reform started by the State
Council in order to mantain discipline in the market
1999-2002 : Chinese telecom divided in 4 state-own
major players China Mobile, China Unicom, China
Telecom, China Netcom (nowadays privatized)




2000s : China big-jump
thanks to the new policies, China started
to deploy the latest technology (fiber-
optic) instead of going step-by-step
through the previous ones
Leapfrogging strategy

SSI Model
( sectoral system of innovation )

Revised by Malerba (2006)
He finds that the same success or failure factors of
countries are also the base of the emergence and growth
of a sector in a country
these factors are the key building blocks of the
theoretical concept of the SSI

SSI Model

3 main blocks
1. technologies and
arranging access to
foreign knowledge
2. Demand conditions
3. Actors

1. Technologies and arranging access to
foreign knowledge

Initial access was arranged via JV government with strong
bargaining power.

3 organizations responsible for the indigenous development of
digital switches: the Center for Information Technology (CIT), the
Post and Telecommunications Iindustrial Corporation (PTIC), the
Luoyang Telephone Equipment Factory (LTEF).

The later development obtained by knowledge diffusion via inter-
firm mobility of skilled engineers.
2. Demand condition

China is not only huge but is also segmented

Two different market in China: one similar to
developed countries and the other more often found in
underdeveloped countries

Thus demand for telecommunication services from
inland districts or rural areas are different from
those of large cities.

3. Actors
Expansion and upgrading in telecommunications
infrastructure and capabilities resulted from dynamic and
complex interactions between 3 players:
1. The Chinese government
2. Multinational corporations
3. Chinas indigenous industry

Chinese Government

Shift from a central-planned economy to a market one
Change of ideology
Understood that investment and technology from foreign
multinational corporations were critical in helping China
achieve its goals

Multinational Corporations
Chinas enormous market size, low cost labour and some
R&D projects have attracted nearly all of the major
telecommunications manufacturers in the world
Multinational corp. brought theirs R&D centers in China
Entry decision in Chinese market was driven by profits
Forced to transfer technologies directly or indirectly by
Chinas government policies and market competition
from other global and local partners

How did Knowledge Get
Transferred?

MNCs were forced to comply if they wanted entrance
in the market
Joint venture with local partners
Sale of licenses and know-how
Local sourcing
Set-up of local R&D
Set-up their sole-owned subsidiaries
Some could ignore Chinas request for technology transfer
thanks to absolute domination in the world market ex. Cisco

Indigenous Manufacturers

They were all newly established after 1978
They spend a significant portion, often over 10%, of their
revenues on R&D activities
They are sponsored by Chinas research institutes
They were facilitated by market size and rapidly growing
demand

Dynamic Adding-and-Dropping
Model
Catch-up
Imitation
Reverse Engineering
Internal R&D access to local talent, information and
connections to local markets
External R&D access to cutting-edge technology and
talent (ex. Huawei, in India, Silicon Valley, U.S.)
Catch-up: advantages
By conducting overall system design and assembly,
marketing and sales while outsourcing some core
technologies (ex. ASICs) to multinational corporations,
indigenous manufacturers are able to roll out their own
products at a fast pace comparable to multinational
competitors.
Many components may be manufactured by other MNCs
that arent necessarily direct competitors
Political environment favorable towards tech transfer
between China and other nations

Xingwang Industrial Park
Nokia-Capitel formed this cluster in 2005
Beijing Capitel Nokia Mobile Telecommunications Ltd.
(Nokia-Capitel), is a 5050 joint venture company
established in 1995 between Nokia and the China Putian
Beijing Capitel Co. Ltd.
Built within the Beijing Economic and Technological
Development Area (BDA)
Example of collaboration between MNCs and Chinese
government

How did the Government Help?
Grant of tax privileges to members of the cluster
For example, they did not have to pay the acquisition and
rent costs related to the land they were using.
Privileged access to BDAs troubleshooting services
Faster procedures in the import of parts and materials and
exports of the finished product
Closeness of the cluster to the capital meant it received
more attention from state officials
Guaranteed more transparency to application of laws
Results
Nokia-Capitels cluster became the most important within
the BDA
Accounted for 38% of the areas total sales.
Nokia-Capitel became Beijings leading exporter (one-
fth of the total export by foreign rms in Beijing in
2003) and top tax contributor (about RMB1.08 billion or
US$0.13 billion in 2004)
The fact that this was a joint venture meant that a lot of
technology transfer occurred in favor of the Chinese
Huawei case


Huawei
Huawei is a Chinese multinational networking and
telecommunications equipment and services company
It was founded in 1987, headquartered in Shenzen, China
Huawei is the largest telecommunications equipment
maker in the world


Huawei data
Huawei data


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2008 2009 2010 2011 2012
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HUAWEI Revenue
REVENUE
Huawei & innovation
Huawei has over 140,000 employees, 46% of whom are
engaged in R&D
It has 20 R&D institutes in countries all over the world
(including China, US, Germany, India, Sweden)
2012: Huawei's R&D expenses accounting for 13.7% of
the company's annual revenue = US$ 4.94 billion
Over the last decade, R&D expenditure was more than
US$ 21.34 billion


Huawei & innovation
As of December 31, 2012, Huawei had filed

41,948 patent applications in China,

12,453 under the Patent Cooperation Treaty (PCT),
and 14,494 outside China.

Among these applications,
30,240 patents have been granted.
Huawei strategy
How did Huawei manage to gain the leadership?
According to Xudong Gao and Weiqing Gao Innovation
capabilities and the rise of telecom equipment firms in
China, the key factors consist in developing innovation
capability and proprietary technologies.
Four main action
Huawei strategy
First action: taking the risk to invest in R&D

Ren Zhengfei, Huawei CEO: There are risks in innovation,
but you should not stop doing innovation because of risks. If
you do not take risks, you would have to follow the leaders,
and have to be a second class or third class firm.
Huawei goal is not profit maximization but it is improving the
firm's core competency
Huawei strategy
Second Action: developing close collaboration with
the knowledge frontier

Evidence from the R&D laboratories spread all over the
world
Huawei strategy
Third action: concentrating R&D in limited areas

Huawei used all its resources in the development of one
product or technology at one time to make sure that it will be
successful in this product or technology
Huawei invested almost all its profit in the early days of its
operation and developed HJD48, a PBX switch, in 1992
Following the same principle, in 1995, Huawei developed the
C&C08, a large-scale office switch that was a breakthrough
product
Huawei strategy
Fourth action: hiring and keeping a lot of talented people
Huawei belives that human capital is much more important
than financial capital
Policies and practices to keep talented people:
1) Capability-based fast promotion
2) Create an attractive work environment for the employees
3) Offer high salary and stock options
Thank you for your attention!