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Weekly UpdatesSUMMARY
In this paper, we present the case of Chinese mobile phone manufacturers and their development. Issues related to entry barriers for these manufacturers, such as technological capabilities & market dominance by multinational corporations (MNCs), are discussed, as well as the reasons for overcoming these barriers, including technology and market specifics, as well as policies and regulation dynamics. We argue that market scale, diversification of demand, as well as modular architecture of products and global supply of technologies, are the main reasons for the lowering of entry barriers.
KEY WORDS
China market entry; regulation; modularity; Chinese mobile phone industry
INTRODUCTION
The nature of globalization has favored well-established players, such as multinational corporations (MNCs), in the expansion of their activities into emerging markets (Dawar & Frost 1999). In the special case of emerging industries, such as mobile telecommunications, MNCs have had a very dominant position due to technological expertise and ownership over core technologies. Firms originating in developing countries, or even those from developed nations with no history in developing and producing technologies in a particular area, are in a very weak position to build own brands and to enter markets with own brand products. In the past two decades, in the mobile phone industry, companies from only two developing nations, China and South Korea, were able to enter successfully into the field. Korean brands, mostly originating from companies with a telecom or consumer electronics background, established their presence in the latter half of the 1990s, while the Chinese mobile phone manufacturing industry emerged at the very end of the last decade, achieving success on the local market in the early 2000s, with indications for entering international markets.
The purpose of this paper is to answer the following question based on a case study of the Chinese mobile phone industry: How were local enterprises in developing countries, in an industry where core technologies are owned by MNCs, able to manage successful entry into the industry?
The approach to the question required review of factors such as interaction between producers and the market, building of technological capabilities, as well as national industry policies, from a historical perspective, as a supportive factor for the development of local companies. The evolution of a China-specific value chain in this industry is also reviewed. The historical perspective approach is used to avoid limitation of the cross-sectional data when analyzing the dynamics of firms and the industry.
The study is based on a literature review and materials drawn from various media sources, including industry reports by consulting and research organizations. Semi-structured interviews with industry professionals, policymakers and local Chinese company managers were also conducted to gain better understanding of the dynamics.
MARKET AND TECHNOLOGY BACKGROUND
Market pull and technology push are two important factors for industry development. In this section, the characteristics of the mobile phone market in China and its basic product technology are briefly summarized as background for further analysis. Also described is the basic value chain of the industry.
China is the largest mobile phone market in the world with over 300 million mobile subscribers in 2005. Despite the impressive figures, the market is highly unbalanced in income distribution with the wealthiest population segment located in national and provincial capital cities and a few rich counties in coastal areas. Approximately 70% of the country's 1.3 billion inhabitants live in rural areas. From the market structure perspective, considering such factors as income, consumer behavior, lifestyle and business environment, the market can be divided into three tiers. Tier 1 includes most capital cities of the 32 provinces, cities under direct jurisdiction of central government--Beijing, Shanghai, Tianjin and Chongqing, and highly developed cities such as Shenzhen and Suzhou. Tier 2 includes a few provincial capital cities of less developed provinces, such as Guiyang, and provincial cities such as Baoding, as well as a few rich coastal counties. Tier 3 consists mostly of less developed counties and small-size towns in less or underdeveloped areas (Letovsky, Murphy & Kenny 1997).
With regard to technology, mobile phone architecture is based on modular design, where the handset can be split into independent parts assigned as modules (Baldwin & Clark 2003). The basic hardware architecture of mobile phones includes three parts: radio frequency (RF) module, intermediated frequency (IF) module, and base band (BB) module. Mobile phone software consists of three parts. First, the physical layer software, Layer 1, which is inseparable from digital signal processing (DSP), forms the core IP of a mobile phone. Second, there is the protocol stack (Layers 2 and 3), provided by Total Solutions chip-manufacturers or specific software suppliers. The third is the man-machine interface and S/W (software) (Layers 4 to 7) which determines whether the mobile phone is user-friendly and looks attractive (Zhu 2005).
The basic value chain for mobile phones includes component (chip) providers, handset design, manufacturing, marketing and distribution.
CASE STUDY: INDUSTRIAL DYNAMICS OF THE CHINESE MOBILE PHONE INDUSTRY
In this section, the industrial dynamics of the Chinese mobile phone industry is studied in a longitudinal manner. The history of mobile handset manufacturing industry in China (1987-2005) is divided into four stages. In each stage, regulation, as well as manufacturing and marketing efforts of the reigning firms, is reviewed. In the conclusion, the value chain evolution of the industry is summarized.
1987-1997: Administrated market stage
In the late 1980s, the structure of the Chinese telecom sector was based on a classical system of Post, Telecom and Telegraphs (PTTs), with the Ministry of Post and Telecommunications (MPT) as sole monopolist for all kind of operations and services, including the analog mobile telephony introduced in 1987 (Nie & Zeng 2003).
Further development of China's economic reforms pushed the state to begin a process of separating operations and service provisioning from the regulatory functions of the MPT. As a first step, in March 1994, the Mobile Telecommunications Office (precursor organization to China Mobile) of MPT was established. The next step taken by the State Council, with the primary goal of breaking up the monopoly, was to support the founding of China Unicom in July 1994. In its early stages, the newly formed competitor did not have a real impact on the market and was not in a position to challenge the monopoly status of MPT until 1998 (Xu & Pitt 1999). To some extent, China Unicom, established as a state-owned enterprise, facilitated the development of mobile communication and influenced the national mobile industry. Both began operating GSM standard based networks in 1994.
The source of mobile phones in the market evolved from a majority of foreign imports in 1987 into a predominance of phones locally manufactured by MNCs in the first half of 1990s. Before 1997, subscribers were able to buy a mobile handset only as part of bundled services from telecom operators. As a result, locally producing enterprises such as Motorola, Ericsson, Nokia, Panasonic, NEC, Siemens, Alcatel, Philips, MTC and IPC, could not sell their products direct to users but only through China Mobile and China Unicom.
1997-1999: Terminal--services separation stage
In September 1996, newly introduced regulation recognized the mobile phone as separate from the SIM (Subscriber Identity Module) card. This regulation positioned mobile phones to become independent of service packages and no longer necessitated bundling with a subscription to mobile operator services. With this freedom, consumers were able to buy mobile devices from sources other than mobile service providers.
As a result, on the one hand, entry market barriers, such as administration of the value chain, were significantly lowered, allowing for new entrants. The virtual monopoly of system equipment manufacturers, the main suppliers of mobile phones and network equipment, was challenged by these new companies without any telecom system equipment manufacturing background to offer terminal handsets. On the other hand, marketing, sales and after-sales services were no longer performed solely by mobile service providers but could be organized by manufacturers or thirdparty organizations.
Before 1999, mobile phone manufacturers participated in almost all activities along the value chain, except distribution. That is, they internally developed integrated circuit chips and designed and manufactured mobile phones. There were only a few companies with such capabilities, including Nokia, Motorola, Siemens, Sony-Ericsson, LG, Samsung and NEC.
According to regulations at the time, foreign enterprises were not permitted to form distribution subsidiaries, but must cooperate with locally established resellers. The typical MNC distribution channel in 1998 was a hierarchical distribution system comprising a general agent, regional agent, area agent, and the retailer (Figure 1). Accordingly, specialty sales companies such as Cellstar, Double Phosphor and TianYin emerged.
[FIGURE 1 OMITTED]
After 1999, the stage was set for an explosion in the market. Many companies saw the opportunity and were poised to enter.
1999-2003: Manufacturing restricted deregulation stage
In 1998, the newly established Ministry of Information Industry (MII) absorbed the functions of the former MPT, Ministry of Electronic Industry, State Radio Regulatory Office, State Information Office and Bureau of Special Electronic Installations. One of the first tasks of MII was to establish a framework supportive of the development of national mobile phone manufacturers--on one side, protecting local companies from global competition pressures, but on the other, establishing conditions for market competition among them (Li and Zhao 2004). As a consequence, by the end of 1998, the statement jointly issued by the National Plan Commission (which later evolved into the National Development and Reform Commission) and MII, concluded the following:
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