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[January 31, 2014]
The Rules Have Changed [Research Technology Management]
(Research Technology Management Via Acquire Media NewsEdge) A Case Study of Chinese Government Support of Local Technologies (ProQuest: ... denotes non-US-ASCII text omitted.) Beginning in the late 1990s, the Chinese government began to understand the negative effects of relying on external technology transfer, the country's key technology sourcing policy since the 1980s: local firms were becoming so depen- dent on external technology that they were not developing effective internal technology capabilities to sustain their competitiveness. In response to this realization, govern- ment agencies such as the Ministry of Science and Technol- ogy and the National Development and Reform Commission began to work to promote indigenous innovation. The cul- mination of these efforts came in June 2003, when the Chi- nese central government invited more than 2,000 experts to participate in a two-year study of the country's science and technology policy. Based on that work, the results of which were released in 2005, the Chinese central govern- ment decided in 2006 to make promoting indigenous in- novation a national strategy (PRC State Council 2006).
Although mobile technology was an early target for gov- ernment efforts to nurture indigenous development efforts (Lou 2008), firms did not react quickly to those efforts. One of the three international standards for mobile communications, TD-SCDMA (time division--synchronous code division, multi- ple access), was based mainly on technologies developed by Chinese firm Datang Telecom Technology & Industry Group (Datang); TD-SCDMA was proposed as a candidate standard in 1998 and adopted by the International Telecommunica- tions Union (ITU) in May 2000. Thus, TD-SCDMA was an indigenous innovation with international applications. The government provided various kinds of support to reduce both technology and market uncertainties, intended to in- crease firms' confidence in adopting TD-SCDMA. However, multinational firms, displayed a lack of sensitivity to the Chinese government's intention to promote indigenous inno- vation and took a "wait and see" attitude toward TD-SCDMA. As a result, these firms lost their dominant market position in China. The story of multinationals' response to government efforts to support TD-SCDMA offers important lessons for MNEs attempting to build a presence in China.
Government Support of TD-SCDMA The Chinese government used four strategies to support indigenous development of TD-SCDMA technology: *Leveraging the size of China's market to support TD-SCDMA, *Supporting development of TD-SCDMA through fre- quency spectrum assignments, *Providing financial and technical support for develop- ment of TD-SCDMA technology, and *Supporting TD-SCDMA by deploying government power.
The sheer size of the Chinese telecommunications market gave the government leverage to influence multinationals' choice of technologies. The Chinese telecom equipment market is the largest in the world; once the market opened to multinationals, those firms rapidly came to dominate the market, nearly shutting out local firms. Clearly, this was not a market they wanted to lose. At one point, when some multinational firms tried to block the acceptance of TD- SCDMA as an international standard, the Minister of the Information Industry invited top managers of these firms in China to come to the Ministry, where he delivered a clear message: the Chinese government wanted to see TD- SCDMA treated the same as other candidates in the mobile communications standards selection process. The implica- tion was that multinationals that did not support TD- SCDMA would be shut out of China. The support of multinational firms played a critical role in the eventual ac- ceptance of TD-SCDMA as an international standard.
The government further supported the development and adoption of TD-SCDMA by allocating favorable frequencies to the technology. The frequency spectrum allocation for 3G mobile telecommunications, announced in 2002 by the Min- istry of the Information Industry, assigned 155MHz to TD- SCDMA and 180MHz total to WCDMA and CDMA2000, the other two international 3G standards, combined-just 90 MHz for each of the two alternate standards. This was a strong signal of the government's support of TD-SCDMA.
The government also deployed financial and technical support for the 3G technology standard. For example, about 700 million RMB Yuan was offered by government agencies such as the National Development and Reform Commission to facilitate collaboration between member firms of the TD- SCDMA Industry Alliance, an organization created in 2002 to promote TD-SCDMA. This not only lowered the barriers for member firms to develop TD-SCDMA--based technology and products but also increased member firms' confidence regarding the future of TD-SCDMA. (Incidentally, this ap- proach also strengthened the position of local firms, as very few multinationals joined the alliance at its inception; more multinationals have since joined the organization.) On the technical front, the government provided important facilities to enable early testing of the technology standard on a sys- tem level, demonstrating the capability of the TD-SCDMA system to be deployed as a standalone network, rather than only as a complement to WCDMA.
Finally, the government provided support through admin- istrative order when necessary, requiring telecommunications companies to provide needed facilities and other support. For example, in 2006 the government initiated a large-scale TD- SCDMA network application trial project; as part of the proj- ect, it required telecom service providers to support trials in five cities. At other points, when local service providers were reluctant to adopt the TD-SCDMA standard, administrative orders were issued requiring them to support the standard. In 2009, China Mobile, one of the three major telecom service providers in China, was issued the TD-SCDMA license, effec- tively requiring the company to deploy TD-SCDMA. (The gov- ernment also hedged its bets, issuing licenses for the other two international standards to the other two firms, so that all three standards are used in China today.) The government support could be seen as quite success- ful. According to data from the TD-SCDMA Industry Alli- ance, by the end of 2012, China Mobile had 87.93 million users of its TD-SCDMA service, about 38 percent of the Chi- nese 3G market. New generations of technology based on TD-SCDMA (TD-LTE and TD-LTE Advanced) are attracting firms around the world, and TD-LTE Advanced has become one of the international standards of 4G mobile communi- cations. By the end of September 2012, 11 telecom service providers had deployed 12 TD-LTE networks around the world, and 24 telecom service providers had signed 31 con- tracts to deploy TD-LTE technology.
The Response of Multinationals Multinational firms responded in a number of different ways to the government's efforts to support TD-SCDMA, creating winners and losers. A few foreign firms, such as Samsung and Alcatel-Lucent, chose to operate as insiders and collaborated with Datang to promote the standard (Poggianti 2010). As Wang Tong, director of the Beijing Samsung Tele- communications Research Center, told an interviewee from the TD Forum, Samsung decided to "play it hard" from the very beginning (TD Forum 2009). When Datang approached Samsung, the Korean company took a very positive attitude, eventually becoming a central participant in T3G, a joint venture created by Datang, Samsung, and some other firms to develop TD-SCDMA--based integrated circuits; Samsung provided significant testing work to the T3G effort (TD Fo- rum 2009, 125). As a result, Samsung became a leader in the market for TD-SCDMA--based handsets.
However, most multinationals operated from assumptions that proved to be wrong. They believed that the Chinese gov- ernment could not create a technology standard without in- dustry cooperation, and that the Chinese government would not intervene aggressively in the market to support TD- SCDMA (Yin 2002). Furthermore, most did not believe TD- SCDMA was the best technology. He Qingyuan, then the executive vice president of Nokia China and now the presi- dent, argued in a 2003 interview that WCDMA was the only technology that could help China's economic growth (Xinhuanet 2003). The best choice, Nokia felt, was for TD-SCDMA to play a complementary role to WCDMA. Simi- larly, in 2002 Mao Yunan, President of Nortel China, com- mented, "Up to now, there is no clear signal to indicate that TD-SCDMA would have a bright future. In China, even if the government would like to give telecom service provid- ers licenses to operate TD-SCDMA, the service providers would prefer not to take the licenses because it would be hard for them to adopt a technology standard that seems to have a dim future" (Yin 2002, 10--11).
Most foreign firms did not understand that TD-SCDMA came just as the Chinese government determined to promote indigenous innovation. Thus, the government was willing to systematically intervene to support the standard, from the minister level on down. Most multinational firms also be- lieved that they could jump in later, after the technology was established, and still succeed, so they did not act quickly to invest seriously in TD-SCDMA. Ericsson, for instance, did not start its R&D on TD-SCDMA radio network controllers until 2005 and did not start its TD-SCDMA base station R&D until 2007. The result was that Ericsson had to ask ZTE, a local firm, to make base stations for it in the first phase TD-SCDMA network development (TD Forum 2009, 145). Similarly, al- though Nokia had been a force in the Chinese handset mar- ket, it maintained a passive attitude toward the new technology until October 2005, when it decided to form a joint venture with Potevio, a local firm, to manufacture TD- SCDMA products-the first clear signal that Nokia had at last decided to support TD-SCDMA. As a result of their delays in entering the market, multinational firms, which had head starts in many technologies, lost the opportunity to act as co- creators in developing the TD-SCDMA value chain. As they entered the market only after Chinese firms had built up their capabilities, these multinationals could not add as much value when they did finally decide to play.
The result of these wrong assumptions and ineffective strategies was a dramatic shift in market share from multina- tional firms to Chinese firms (Table 1). For example, foreign firms controlled about 90 percent of the 2G equipment mar- ket. Foreign firms' market share declined dramatically with the advent of 3G, to less than 20 percent of the TD-SCDMA market. Ericsson, the leader of the 2G equipment market, had only 1 percent market share in the first phase of the TD- SCDMA network. In the second phase, Ericsson's market share grew to 5 percent, still far behind local firms such as Datang, with a market share of about 7.5 percent for the first three phases of network development, and ZTE, with a 34 percent market share.
Lessons for Foreign Firms The development of TD-SCDMA provides important les- sons for foreign firms attempting to build a presence in China. Specifically, it suggests that these firms must change their mindset and integrate into local innovation networks (Johanson and Vahlne 2009). To do so, multinationals must develop a deep understanding of the strategic intent and capabilities of the Chinese government, rethink their identities as multinational firms, and provide timely, stra- tegic support both to government initiatives and to indig- enous firms.
China-and other countries like it-are not satisfied with being developing countries; they want to move forward to join the developed countries. The pursuit of indigenous innovation is part of that effort, and the Chinese government has both the incentive and the capabilities to intervene in the market. In that reality, multinational firms must rethink their approach to China.
In the literature, multinational enterprises are defined as outsiders entering a host country to exploit that country's unique resources and capture market share (Hymer 1976); this usually requires that the firms localize their processes and offerings. In fact, telecom equipment firms have been very active in localization-Ericsson China now has about 11,000 employees, more than 5,000 of them doing R&D, making China the second largest R&D base for the company; the work of most of those employees is focused on modifying home-country products for the Chinese market. However, foreign firms' losses in the transition to TD-SCDMA in China suggest that simple localization is not sufficient when local firms have developed advanced technologies. Rather, to avoid being locked out, multinationals must understand internationalization as an entrepreneurial process that in- cludes building relationships and trust with local partners (Johanson and Mattsson 1987, 1988; Johanson and Vahlne 2009). Samsung-a winner in the TD-SCDMA effort-has pursued its operations in China with this understanding; the company has consciously made itself Samsung of China, not merely Samsung i n China. Samsung believed that in order to benefit from the big Chinese market, it had to not only exploit Samsung's own unique resources to capture market share but also co-create new opportunities with local stakeholders, such as by participating in the T3G joint venture with Datang. As a result, Samsung is the leader in the market for high-end TD-SCDMA handsets.
In fact, Samsung has benefited more widely from its em- brace of TD-SCDMA. The company's multibillion-dollar inte- grated circuits investment in Xi'an is a good example. Located in the relatively underdeveloped northwest part of China, Xi'an plays a central role in the government's strategy to de- velop China's western regions. While most multinationals are hesitating to commit resources to this government- backed initiative, Samsung is benefiting from its investment, gleaning goodwill from central and local governments that yields returns in the form of intangible benefits, tax cuts, and favored land prices.
Conclusion Multinationals frequently bring superior resources, such as advanced technologies, to developing markets like China. Historically, they have been able to use those resources to steer markets and dictate the direction of technological de- velopment. However, as the TD-SCDMA story indicates, that situation is changing. Governments are increasingly seeking to nurture local innovation, and local firms are also develop- ing advanced technologies and successfully commercializing them-sometimes internationally. In this new environment, multinationals seeking to succeed in developing markets must change their mindset and strategy, become true insiders of the host country, and fully integrate into the local innova- tion network.
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Xudong Gao is senior research fellow at the Tsinghua University Research Center for Technological Innovation. He also serves on the Expert Commit- tee of Telecommunications Economy, Ministry of Industry and Information Technology, PRC. He received his BE from Harbin Institute of Technology, MA from Renmin University of China, and PhD from MIT. firstname.lastname@example.org DOI: 10.5437/08956308X5701164 (c) 2014 Industrial Research Institute, Inc
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