PRODUCT CYCLE, WINTELISM AND CROSS-NATIONAL PRODUCTION NETWORKS FOR DEVELOPING COUNTRIES

ZIXIANG (ALEX) TAN

(ASSOCIATE PROFESSOR AT SYRACUSE UNIVERSITY,

SYRACUSE, NY, USA

Presented By:Eshaan RaizadaB09K R Shyam B17Shubham Singh

B15Ayush HirwaniB12Sarvesh Mishra

B60

AN OVERVIEW

“The case study provides insights about concepts like product cycle, the Wintelism

phenomena and cross-national networks for developing countries by taking the China’s

Telecom Manufacturing Industry as a case.”

• China has recently emerged as a significant player in the global telecommunication

industry

• Direct imports support most of China’s high end markets

• The medium-end Chinese market is handled by subsidiaries and joint venture with

multinational corporations

• The indigenous manufacturers have come up to dominate low-end markets and are

progressively trying to capture the medium-end markets

OBJECTIVES

• To understand the concepts of product cycle, wintelism, and cross national production network

• To plot growth and maturing of Chinese telecom sector

• The importance of the role of the Chinese government in terms of regulations and policies enabling indigenous production and reverse cross national production

• To learn from China’s success as a developing nation during the past decade

PRODUCT CYCLE THEORY

• The original product cycle theory was developed by Japanese economist Akamatsu

Kaname(called the flying geese formation theory)

• This theory explains the three main stages of product development in advanced

countries, their introduction to developing countries and finally setting up of export

centers in developing countries

WHAT HAPPENED IN CHINA?

• The product cycle theory explains multinational corporations strategy in

China however the existing literature needs to be expanded

• The multinational corporations localize their product in China to take

advantage of lower labor costs and to remove entry barriers

• The rapid technological growth has made the last step of product cycle less

relevant

WINTELISM

The Wintelism theory has been developed from the success of Microsoft’s Windows in the operating system market and Intel’s CPU in computer processor market

CROSS-NATIONAL PRODUCTION NETWORKS

• This concept refers to the consequent disintegration of the

industry’s value chain into constituent functions that can be

contracted out to independent producers

• US philosophy : ‘open’, ‘fast’, flexible’, ‘formal’, ‘disposable’

• Japanese philosophy: ‘closed’, ‘cautious’, ‘centralized’, ‘long-

term’, ‘stable’

THE IMPACT

• Most facilities in China have served as assemble centers for

developing nations rather than production centers

• The success of Wintelism and Cross-national production

network have had significant impacts on China’s indigenous

markets

• The implementation of reverse cross national production

networks

THE CHINESE MARKET AND GOVERNMENT POLICY

INTRODUCTION

• China has emerged as a significant Telecom market since the

late 80’s

• In 2002, China had 120 million landline users, 120 million

mobile users, and 26 million internet users.

• Rapid facility and large scale support build-up.

• High demand for infrastructure: influx of Telecom

multinationals, such as AT&T, Motorola, CISCO, NORTEL,

Ericsson, Nokia, Samsung to name a few.

• Engaged in Direct Import, Local production, Joint ventures to

technological transfers.

GOVERNMENT POLICY

• Regulations and policies have focused on:

• Production localisation of Multinational corporations

• Subsidiaries and joint ventures

• Nurturing indigenous manufacturers.

• These policies try to restrict direct imports and promote the

establishment of joint ventures and local subsidiaries by MNCs

• Government Guidelines for foreign investment in

telecommunication: Encouraged, restricted, and prohibited

PROCUREMENT POLICY

• Market shares are given to MNCs who are willing to transfer

technologies and to establish local production

• Procurement policies lean towards local manufacturers.

• Providing them favourable bank loans, attractive tax breaks,

generous R&D support.

• Rise of local players such as Huawei, ZTE and many more.

EVOLVING MARKET COMPETITION• DIRECT IMPORT FROM MULTINATIONAL CORPORATION

PREFERRED

• DIFFERENT PATHS HAVE EVOLVED FOR DIFFERENT PRODUCTS

Local assembly

Production

Joint Ventures

• FACTORS DETERMINING THE PATH

Competition

Technology

Government Policy

Demand

Capacity of Manufactures

• CATCHING UP PERIOD DEPENDING UPON THE AVAILABILITY OF CORE COMPONENTS

CENTRAL OFFICE SWITCHES1982

1987

1992

1997

2000

Direct import

100 89 54 5 0

Joint Venture

0 11 36 63 57

Suppliers 0 0 10 32 43• China has started the export to other countries but they have been successful with only less developed countries

• Difficulties to match the modern day technology

• Direct Import from western countries of ATM & IP technology

WIRELESS COMMUNICATIONS SYSTEMS

• The competition is moderately fierce

• 1G technology was relied on direct import from two suppliers

Motorola & Ericsson

• 2G made the competition fierce

• The model was changed from direct import to local assembly

• The export to other countries has not been started

DATA COMMUNICATIONS SYSTEMS

• New market in China

• The advanced technologies have created much less severe

pressure for MNC to localise their production.

• The situation leads to a direct import market

Historic Evaluation

1871-Planning economic system

1871-1949 1949-1978 1978-1994 1994-2000 2000-

Before PRC establishment

intrducing competation

reformingtelecomsectors

marketoriented

Re-Organization In CHINA’s Telecom Sector

Separation of Politics from Enterprise

of Telecom and Post Industry in 1994

Establish China Unicom in 1994

Implement the separation of Telecom from

MII in 1997

China Telecom reorganization in February 1999

Guo Xin Paging

China Mobile

4.20.2000China Satellite

Communications

12.19.2001

China Telecom

Year 2000

China Network

Communications Ltd. 1999

China Railway

Communications Ltd. 2000

China Netcom

5. 2002

China

Telecom

5. 2002

Ji

Tong

China Mobile China Railway

Communications

China Satellite

Communications

China

Netcom

China

Telecom

China

Unicom

Emerging Indigenous Production

6.18

10.3 1112.8

18.1 19.4

26.9

33

24.6

3.3 4.66.8 7.1

11.8

16.818.8

26.5

33.7

37.5

42.7

49.7

2.51.31.20

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Investment Revenue

High growth of télécom services revenues, but investments are under

pressure, especially in fixed voice.

Growth In Mobile Users In CHINA

China Is Developing A Strong Telecom Industry

> Chinese vendors are already

well established in fixed

networking

> They are increasing their

market share in mobile

infrastructure

> The main vendors have

complete product portfolio

> They started in China, and

are now exporting

aggressively

Telecom industry in China

55%45%

Fixed networking

6%

94%

Mobile infra

Chinese vendors: Huawei, ZTE, WRI, UT Starcom, etc

Int’l vendors: Alcatel, Ericsson, Nokia, Siemens, Lucent, Nortel, Motorola, etc

Government’s Support To Domestic Vendors

assignment of research grant for R&D

low interest loans

discounted tax rates

generous provision of land in high-tech

industrial parks

Operators are encouraged to purchase

products of domestic vendors: Supply-

demand coordination conference

31%

16%37%

14%

0%

2%

China Telecom Revenue From Companies In 2003

CT CN

CM CU

CS CR

Revenues From Companies

Elements in the value-chain

Dis-integration and outsourcing

Sarvesh Mishra B-60

Traditionally integrated systems

Dis-integratedGlobal Economy

Cross National production networks make it possible for the production of any elements in the value chain to be contracted out to independent producers

China’s indigenous corporations emerge as powerful competitors to MNCs

Wintelism

CNP

Government

industrial

policiesFavorable Financial incentives

Challenges

Weak in some elements of production

IC industry still behind advanced countries

Not sophisticated enough in Sys Design & S/F dev

Keep the strengths &

outsource the

weaknesses

Developing countries

contract out to firms in

advanced countries

Reversed Cross National Production networks

Established in 1988, Shenzhen China

Sales reached 2.66$ in year 2000

Products: Fixed n/w, wireless n/w, data comm n/w & optical transmission n/w

Products exported to 40 countries

Major success factors:

• Entrepreneurship • Govt support• Wintelism• CNP• Capable of designing & assembling its own sys at low cost

Challenges and operations:

ASIC (application specific ICs)

Outsourced to Texas

Instruments, IBM, Motorola

and others

Cooperation with Foreign

partners

Up To Date component

s

Lets ConcludeChina has attracted most of the MNCs for trade and

production

Coexistence of direct imports, local subsidiaries & JV of MNCs and indigenous manufacturers

Shaped market competition: Interrupted product cycle

Development and deployment in advanced countries, imported to China as demand emerges

MNCs are pressured to establish local assembly & production facilities: to break market entry barriers

Local assembly to local production

Reversed cross national production networks

Contract out what they are weak in

Similar trends are evident in markets like India and Brazil