Catching-up in China’s Telecommunication industry

Xielin LiuGraduate School, China Academy of Science (CAS)

Ping GaoIDPM, The University of Manchester

Outline

A review of theory of catching-up

A analysis of catching-up in

telecommunication industry of China

Theory of catching-up

Gershenkron (1962) argued that targeting rapidly gro

wing and advanced technologies is the advantage of

catch-up countries.

According to Perez and Soete (1988), a “window of o

pportunity” may arise in the evolution of a technology

system. With appropriate social, industrial and technol

ogy policies, a country may catch-up. Otherwise, it wil

l continue to lag behind.

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.

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.

Outline of Chinese ICT industry

2000(million RMB)

2006(million RMB)

Average annual growth

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 industry

607,000 3,800,000(2005)

31% #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 .

Indicators of China’s telecommunication industry

Indicator Unit 1995 2000 2001 2002 2003 2004

InvestmentBillion RMB

199.5 231.4 264.2 210.6 224.6 217.3

Local fixed phone switches

million gate

72.0 178.3 255.7 286.6 350.8 423.5

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 popularity

set/100 people

3.4 11.5 13.9 16.8 21.2 24.9

Mobile phone user Million 3.6 85.3 144.8 206.6 268.7 334.8

Mobile phone popularity

Set/100 people

0.3 6.8 11.2 16.2 20.9 25.9

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。

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 ver

y similar technological regime, and industrial promotion and technological regime do not show a such a strong trend to catch-up?

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.

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

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.

But there was mismatches of the products with the market

Most of imported or joint ventures’ products were used in th

e large city areas and their design were based on market n

eeds in their own main market, did not care much about ne

eds in Chinese market. For example, fixed phone users ofte

n access internet via fixed line, this made the phone line ver

y busy, Huawei found that problem and introduced a solutio

n for that.

The prices of their products were usually high, the users in t

he small cities or rural areas could not afford.

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.

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 wit

h an ownership structure of private companies, aimed the low en

d market with their own technology.

In 1993, ZTE launched out digital switch ZXJ2000 for rural marke

t; in 1995, Huawei developed C&C08. Both ZTE and Huawei aim

ed at rural market (small towns and counties) which is neglected

by multinationals.

Both of them started earlier to develop product of accessing equi

pment which can make exchange among different system of digit

al switches possible.

Huawei’s market share in switches in China

Sales Market share (%)

1997 4115 20

1998 7000 24

1999 7500 32

2000 16500 35

Path following in GSM and 3G

From 1995 on, the market had undergone a sharp change: mobile t

elecommunication experienced a fast growing stage. Motorola, Noki

a and Eriksson became the main players in the new market.

In GSM system, there is Abic interface between base station controll

er (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 i

n GSM than Chinese new comers.

How domestic companies do? CDMA is one of the technologies to break the GSM monopo

ly in China.

To get marginal GSM market with lot of incremental innovati

on for Chinese market. Huawei constructed mobile intellige

nt network for China Mobile allowing users to make prepay

phone calls.

When text message became a big market for value added s

ervice, Huawei quickly established their capability here and

got two third of Chinese market.

To go global to access international low market. Chinese co

mpanies are good at innovation for low-end market.

Stage-skipping in TD-SCDMA From 1990s on, MPT supported research on CDMA. MOST be

gan to support research on CDMA in 1993 and 3G in 1997. Th

e research basically followed the path of Ericsson and Qualco

mm, though had made some progress but no breakthrough, bu

t it provided Chinese with useful knowledge on 3G technology.

Chinese companies have already accessed necessary knowle

dge from Qualcomm via government help. In 2000, in order to

get Chinese market share, Qualcomm licensed its technology t

o Huawei, ZTE, Datang and other companies of base station, s

witches and handset. This is a action as a result of market for t

echnology, but also the strategy of multinational to enter China.

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.

Alliance with Siemens to develop the product based on the concept

Datang and Siemens signed the contract. The develo

pment project is consisted with two parts, base statio

n and end product.

Siemens almost finished the joint development in bas

e station, as for a long time the market is not clear, so

Siemens stopped the further development of end pro

ducts. It is just because this complex joint process, th

ere is a wide distribution of patents in this technology.

Further support by government In 2002, State Development and Reform Committee, MOST an

d MII jointly made a strong support for the industrialization of T

D-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 tec

hnology is now an authorized technology for China’s 3G marke

t in the future.

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?

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.

Thank you!