Top-down or bottom up Catch-up: which one will win out ...

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  • 1. Catching-up in China’s Telecommunication industry Xielin Liu Graduate School, China Academy of Science (CAS) Ping Gao IDPM, The University of Manchester
  • 2. Outline  A review of theory of catching-up  A analysis of catching-up in telecommunication industry of China
  • 3. Theory of catching-up  Gershenkron (1962) argued that targeting rapidly growing and advanced technologies is the advantage of catch-up countries.  According to Perez and Soete (1988), a “window of opportunity” may arise in the evolution of a technology system. With appropriate social, industrial and technology policies, a country may catch-up. Otherwise, it will continue to lag behind.
  • 4. Theory of technological regime  Technological regime affects the nature and success of innovative activities of those firms trying to catch-up (Breschi, Malerba and Orsenigo, 2000 ).  In the case of Korea, Lee and Lim (2001) argue that regimes, in which innovation is more predictable and frequent, will give latecomers more opportunity to catch up, such as automobile industries in Korea. In the opposite case, latecomers will have less opportunities to catch up.
  • 5. Why China’s telecommunication industry ?  China has make great economic achievement in the last twenty years. But how to understand the catching-up process in China?  Very few papers are available on the catching-up of China.  China’s telecommunications entered its fast track since 1980s.  It is the fastest growing industry in China and in the world. Even in the dismal period after the bubble of .com collapsed in USA.  Telecommunication industry in China keeps its high growing pace, making itself the target market of global telecommunication equipment makers.
  • 6. Outline of Chinese ICT industry 2000 2006 Average annual (million (million RMB) growth RMB) Fixed phone users 145 371 21% 1/4 of the world Internet users 33.7 131 31% 1/10 of the world Mobile phone users 85 449 40% Sales of ICT 607,000 3,800,000 31% industry (2005) #3 in the world Source: 吴邦国在2006年世界电信展开幕式上的讲话, 2006年12月3日.
  • 7. Indicators of China’s telecommunication industry Indicator Unit 1995 2000 2001 2002 2003 2004 Billion Investment 199.5 231.4 264.2 210.6 224.6 217.3 RMB Local fixed phone million 72.0 178.3 255.7 286.6 350.8 423.5 switches gate Trunk fiber 1000 km 110 290 400 490 590 700 Fixed phone user million 40.7 144.8 180.4 214.4 263.3 312.4 Fixed phone set/100 3.4 11.5 13.9 16.8 21.2 24.9 popularity people Mobile phone user Million 3.6 85.3 144.8 206.6 268.7 334.8 Mobile phone Set/100 0.3 6.8 11.2 16.2 20.9 25.9 popularity people 资料来源:根据《中国电子工业年鉴(1990~2005)》,中华人民共和国信息产业部网站等所提供的公开信息整理。
  • 8. Catching-up in China’s Telecommunication industry  Mu and Lee (2005) found that the important factors in the catching-up are the strategy of “trading market for technology”, the knowledge diffusion from Shanghai Bell to R&D consortia and Huawei, and the industrial promotion by government.  The technological regime of telephone switches is featured by a more predictable technological trajectory and a lower cumulativeness. Question: But why Chinese automobile and other industries with very similar technological regime, and industrial promotion and technological regime do not show a such a strong trend to catch-up?
  • 9. Key factors for successful catching-up in China  Existing, imported technologies are the starting points for companies in catching-up countries to make the innovation decision. If there is a large gap between the imported products and local demands, the domestic companies will get a strong incentive to innovate.  The design of existing foreign product system is the basis for future innovation. Openness of the product system design can give latecomers more opportunity to make innovation based on the existing product system. Closeness means it is not easy for latecomers to learn and enter its future development.
  • 10. Five key elements for successful catching-up  Finding mismatch area: innovation in low-end market  Technological opportunity: new technology from other industry or existing industry.  Governmental support: market for technology, stage-skipping.  Licensing and outsourcing strategy: role of FDI and university  Innovation strategy: path-following or stage-skipping
  • 11. Path-following Catching-up in the digital phone switches  From 1978, there was a boom for fixed phone market and digital phone switches.  The market was almost monopolized by imported or foreign joint venture products.
  • 12. But there was mismatches of the products with the market  Most of imported or joint ventures’ products were used in the large city areas and their design were based on market needs in their own main market, did not care much about needs in Chinese market. For example, fixed phone users often access internet via fixed line, this made the phone line very busy, Huawei found that problem and introduced a solution for that.  The prices of their products were usually high, the users in the small cities or rural areas could not afford.
  • 13. Availability of knowledge  Government’s strategy “market for technology ” to require the foreign joint ventures to transfer some technology (Mu and Lee, 2005).  The spillover of FDI: demonstration, labor turnover and others, e.g. Shanghai Bell provided lot of training and maintenance work for the Chinese customers, which was one important opportunity for Chinese to learn the technology.  Private company: heavy R&D investment.
  • 14. Late innovators — Huawei and ZTE  But the in digital switches market, coming late means got more. Huawei and ZTE, both late comers, but these two companies with an ownership structure of private companies, aimed the low end market with their own technology.  In 1993, ZTE launched out digital switch ZXJ2000 for rural market; in 1995, Huawei developed C&C08. Both ZTE and Huawei aimed at rural market (small towns and counties) which is neglected by multinationals.  Both of them started earlier to develop product of accessing equipment which can make exchange among different system of digital switches possible.
  • 15. Huawei’s market share in switches in China Sales Market share (%) 1997 4115 20 1998 7000 24 1999 7500 32 2000 16500 35
  • 16. Path following in GSM and 3G  From 1995 on, the market had undergone a sharp change: mobile telecommunication experienced a fast growing stage. Motorola, Nokia and Eriksson became the main players in the new market.  In GSM system, there is Abic interface between base station controller (BSC) to base transceiver station (BTS) that is not open.  If in a regional system of mobile telecommunication is deployed, all mobile switches, BSC and bases have to be compatible.  As all of the telecommunication infrastructures were built by foreign companies, it left no space for domestic companies for Huawei and ZTE. Besides, Motorola, Nokia and Eriksson have long experience in GSM than Chinese new comers.
  • 17. How domestic companies do?  CDMA is one of the technologies to break the GSM monopoly in China.  To get marginal GSM market with lot of incremental innovation for Chinese market. Huawei constructed mobile intelligent network for China Mobile allowing users to make prepay phone calls.  When text message became a big market for value added service, Huawei quickly established their capability here and got two third of Chinese market.  To go global to access international low market. Chinese companies are good at innovation for low-end market.
  • 18. Stage-skipping in TD-SCDMA  From 1990s on, MPT supported research on CDMA. MOST began to support research on CDMA in 1993 and 3G in 1997. The research basically followed the path of Ericsson and Qualcomm, though had made some progress but no breakthrough, but it provided Chinese with useful knowledge on 3G technology.  Chinese companies have already accessed necessary knowledge from Qualcomm via government help. In 2000, in order to get Chinese market share, Qualcomm licensed its technology to Huawei, ZTE, Datang and other companies of base station, switches and handset. This is a action as a result of market for technology, but also the strategy of multinational to enter China.
  • 19. Role of overseas Chinese engineering and international standard  In 1994, overseas Chinese, one work for Motorola , the other in University of Texas developed a new wireless network system to bypass Qualcomm’s technology. They set up a joint venture with Research Academy of Post and Telecommunication of MPT.  Based on their work, in 1995 a new technology system called TD- SCDMA (Time Division - Synchronous Code Division Multiple Access) was developed.  In 2000, TD-SCDMA, supported by Chinese government, was accepted by ITU as the third international 3G standard.
  • 20. Alliance with Siemens to develop the product based on the concept  Datang and Siemens signed the contract. The development project is consisted with two parts, base station and end product.  Siemens almost finished the joint development in base station, as for a long time the market is not clear, so Siemens stopped the further development of end products. It is just because this complex joint process, there is a wide distribution of patents in this technology.
  • 21. Further support by government  In 2002, State Development and Reform Committee, MOST and MII jointly made a strong support for the industrialization of TD-SCDMA.  The government formed a TD-SCDMA Alliance. The members included Huawei, ZTE, China Putien, Lenove etc.  The government offered 0.7 billion RMB for further system test.  The government allocated TD-SCDMA a 155MHz spectrum for its future uses.  All these methods sent out a strong signal that TD-SCDMA technology is now an authorized technology for China’s 3G market in the future.
  • 22. The paradox of stage-skipping catching-up in the case of TD-SCDMA  TD-SCDMA is not compatible with WCDMA and CDMA2000.  Loose alliance: though there are many local and foreign companies joining the alliance, this makes future transaction costs very high. It is not easy to coordinate all players and push the technology forward.  At the same time, lot of so called alliance partner are watching and standing by to see the government’s further action. TD- SCDMA is just one of their technology options.  Market issue: How big is 3G market will be critical for its future. Some estimated the market value of TD-SCDMA will be about 400 billion. But some researchers pointed out that 3G made no money in other countries. Can Chinese make be an exception?
  • 23. Conclusion  With technological regime method we have looked at the catching-up experience in China with a large market and open economy.  The mismatch of existing (foreign) products with Chinese market needs, the openness of the product design and the availability of the knowledge (FDI, public research institutes and company’s own R&D) are the most important interactive factors for industry in a developing country to catch-up.  In China, path-following catching-up has proven to be a more appropriate strategy than stage-skipping in progressive industry.  Stage-skipping approach means more risky and needs better government-industry-academic cooperation. It has to play the game with the leading multinationals.
  • 24. Thank you!