from manufacturer to - milken institute · 2014-08-20 · gdp levels, china vs. w. europe select...
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From Manufacturer to Innovator : China is the New Kid on the Block
GDP Levels, China vs. W. EuropeSelect Years, CE 0 - 1820
0
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0 1000 1500 1600 1700 1820
Millions International 1990 $
China Western Europe
GDP Levels, China/India/JapanSelect Years, CE 0 - 1820
0
50,000
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250,000
0 1000 1500 1600 1700 1820
China
India
Japan
Millions International 1990 $
GDP Per Capita, China vs. …Select Years, CE 0 - 1998
10
100
1,000
10,000
100,000
0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998
China Western Europe United Kingdom United States India Japan
Number of Years to Double Per Capita GDP
ChinaChina
KoreaIndonesia
JapanU.S.
U.K.
70
60
50
40
30
20
10
0
Number of Years
1780-1838
1839-86
1885-1919
1970-88
1966-77 1987-961978-87
Modern Greater China: Educated Population
Percent Workforce with Secondary Education or Better
TaiwanHong Kong
South KoreaMainland
JapanThailand
100
80
60
40
20
0
Year 2000Year 2020
Mainland China’s Six Major Economic Districts
Economic District Core CitiesPopulation (Millions)
GDP (US$ Bil.)
North East 3 Provinces Dalian & Shenyang 107 119
Beijing & Tianjin Beijing & Tianjin 91 112
Shandong Qingdao & Yantai 91 104
Changjiang Delta Shanghai & Suzhou 138 234
Zhujiang Delta Shenzhen & Guangzhou 86 116
Fujian Xiamen & Puzhou 35 48
548 733
Taiwanese Electronics CompaniesEstimated Capital Investments
14.1 13.3 12 10.5 8.8 7
2.6 3.7 5.2 6.8 8.6 10.5
0
5
10
15
20
2001 2002 2003 2004 2005 2006
US$
b
In Taiwan In Mainland
China - Manufacturing
02010099989796959493929190
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0
14.0
13.0
12.0
11.0
10.0
Value Added, billions Employees, % of Labor Force
Manufacturing, Value Added (L)
Manufacturing Employment as a % of Total Labor Force (R)
Note: SOE Reform Began
0%
10%
20%
30%
40%
50%
60%
1997 1998 1999 2000 2001 2002 2003
China - Speedy Move Up Tech Ladder
HT / Exports
HT / Manufacturing
Share / Global IC
Share / Global R&D
Science and Technology ProfileChina & U.S., 2004
Metric Unit China U.S. Ratio
Scientists and Engineers in R&D Per million people 584 4,099 7
Scientific and Technical Journals Number 11,675 163,526 14
Expenditures for R&D Percent of GDP 1.09 2.80 3
High Technology Exports US$ Millions 68,182 162,345 2
Royalty and License Fees Receipts in US$ Mill. 133 44,142 332
Patent Applications Filed Number 118,970 184,750 2
Trademark Applications Filed Number 6,252 292,464 47
Locations of China High-Tech CentersBy Market Capitalization of Technology Firms, 2004
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Jinan
Fuzhou
Beijing
Kunming
Shanghai
HangzhouChangsha
Guangzhou#
Hong Kong#
Shenzhen
#
Taipei#
Taoyuan
#
Hsinchu#
T̀ ai-chung#
Kao-Hsiung
#
Nanjing
#
Zibo
#
Tianjin
China High-Tech Centers’ ProfileBy Market Capitalization of Technology Firms, 2004
High-Tech Center Province Specialized IndustriesBeijing Beijing Computers, SoftwareFuzhou Fujian ComputersGuangzhou Guandong Pharmaceuticals, ComputersShenzhen Guandong Computers, PharmaceuticalsHong Kong Hong Kong Biotechnology, SemiconductorsChangsha Hunan Computers, SoftwareNanjing Jiangsu SoftwareJinan Shangdong Communication SoftwareZibo Shangdong PharmaceuticalsShanghai Shanghai Semiconductors, PharmaceuticalsHsinchu Taiwan SemiconductorsKao-Hsiung Taiwan SemiconductorsTai-chung Taiwan SemiconductorsTaipei Taiwan Computers, SemiconductorsTaoyuan Taiwan ComputersTianjin Tianjin Pharmaceuticals, BiotechnologyKunming Yunnan Biotechnology, PharmaceuticalsHangzhou Zhejiang Semiconductors, Pharmaceuticals
China – Global R&D PresenceForeign R&D Centers in China, 2004
High-Tech Center Province Specialized IndustriesBeijing Beijing Computers, SoftwareChangsha Hunan Computers, SoftwareFuzhou Fujian ComputersGuangzhou Guandong Pharmaceuticals, ComputersHangzhou Zhejiang Semiconductors, PharmaceuticalsHong Kong Hong Kong Biotechnology, SemiconductorsHsinchu Taiwan SemiconductorsJinan Shangdong Communication SoftwareKao-Hsiung Taiwan SemiconductorsKunming Yunnan Biotechnology, PharmaceuticalsNanjing Jiangsu SoftwareShanghai Shanghai Semiconductors, PharmaceuticalsShenzhen Guandong Computers, PharmaceuticalsTai-chung Taiwan SemiconductorsTaipei Taiwan Computers, SemiconductorsTaoyuan Taiwan ComputersTianjin Tianjin Pharmaceuticals, BiotechnologyZibo Shangdong Pharmaceuticals
China – Six Economic Districts
Economic District Core CitiesPopulation (Millions)
GDP (US$ Bil.) Major Industries
North East 3 Provinces Dalian & Shenyang 107 119 Heavy Industries
Beijing & Tianjin Beijing & Tianjin 91 112 Software, IT
Shandong Qingdao & Yantai 91 104 Farming, Energy
Changjiang Delta Shanghai & Suzhou 138 234 Finance, Computers
Zhujiang Delta Shenzhen & Guangzhou 86 116 Electronics, Processing
Fujian Xiamen & Puzhou 35 48 Food, Electronics
China’s Top Exports
2003 2004 Percent(US$ Billions) (US$ Billions) Change
Electrical Machinery & Equip. 89.0 129.7 45.8Power Generation Equip. 83.5 118.1 41.7Apparel 45.8 54.8 19.7Iron & Steel 12.9 25.2 96.0Furniture & Bedding 12.9 17.3 29.1Optics & Medical Equip. 10.6 16.2 53.6Footwear & Parts 13.0 15.2 17.4Toys & Games 13.3 15.1 13.6Mineral Fuel & Oil 11.1 14.5 30.2Inorganic & Organic chemicals 10.7 13.9 29.8
Commodity Description
China’s Top Imports
2003 2004 Percent(US$ Billions) (US$ Billions) Change
Electrical Machinery & Equip. 103.9 142.1 36.7Power Generation Equip. 71.5 91.6 28.2Mineral Fuel & Oil 29.3 48.0 64.2Optical & Medical Equip. 25.1 40.2 59.8Iron & Steel 25.6 28.4 10.9Plastics 21.0 28.1 33.4Inorganic & Organic Chemicals 18.7 27.8 48.4Ore, Slag, & Ash 7.2 17.3 141.0Vehicle & Parts 11.8 13.1 11.2Copper 7.2 10.5 46.3
Commodity Description
0201009998979695949392
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US$ Billions Percent Change, Year Ago
Value - LGrowth Rate - R
China - High-Tech Exports1992-2002
Scientists & Engineers in R&DTop 10 Countries by Per Mil. Population, 2003
Rank Country NumberPer MillionPopulation
1 Japan 648,778 5,0952 Finland 26,378 5,0593 Sweden 40,534 4,5114 Singapore 19,737 4,1405 Norway 18,811 4,1126 U.S. 1,201,233 4,0997 Switzerland 26,762 3,5928 Russian Federation 501,621 3,4819 Denmark 18,816 3,476
10 Australia 66,775 3,353
50 China 705,689 54572 India 167,414 157
0200
9896
9492
9088
8684
8280
2.2
2.0
1.8
1.6
1.4
1.2
1.0
25
20
15
10
5
0
-5
-10
Millions Percent Change, Year Ago
Science Research Workers - LGrowth Rate - R
China – Science Research Labor force1980-2002
GermanyJapan
U.S.U.S.+Japan+Germany
China
350
300
250
200
150
100
50
0
55
50
45
40
35
30
25
20
15
Thousands Percent
NumberPer 100,000 People
Engineering GraduatesBachelor’s Degrees, 2004
20032002
20012000
19991998
19971996
19951994
19931992
1991
100
80
60
40
20
0
-20
-40
Percent Change
China - LHong Kong - LTaiwan - R
China – Patent GrowthU.S. Patent and Trademark Office, 1991-2003
China – Patents Per 100,000 PeopleU.S. Patent and Trademark Office, 2003
Country PatentsPatents Per
100,000 PeopleU.S. 87,901 30.27Japan 35,517 27.92Taiwan 5,298 23.44Germany 11,444 13.89Korea 3,944 8.21U.K. 3,627 6.04Hong Kong 276 4.05India 341 0.03China 297 0.02World 169,028 2.68
20032002
20012000
19991998
19971996
19951994
19931992
19911990
10
8
6
4
2
0
Number
ChinaKoreaJapanU.S.GermanyIndia
Patents Per US$ Billion of GDPU.S. Patent and Trademark Office, 1990-2003
20032002
20012000
19991998
19971996
19951994
19931992
19911990
50
40
30
20
10
0
Number
ChinaKoreaJapanU.S.GermanyIndia
Patents Per US$ Billion of Industrial ProductionU.S. Patent and Trademark Office, 1990-2003
02010099989796959493929190
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200
100
0
100
95
90
85
80
75
Value Added, billions Employees, millions
China - Manufacturing
Manufacturing, Value Added (L)
Manufacturing Employment (R)
Note: SOE Reform Began
China - Manufacturing
02010099989796959493929190
500
400
300
200
100
0
14.0
13.0
12.0
11.0
10.0
Value Added, billions Employees, % of Labor Force
Manufacturing, Value Added (L)
Manufacturing Employment as a % of Total Labor Force (R)
Note: SOE Reform Began
0%
10%
20%
30%
40%
50%
60%
1997 1998 1999 2000 2001 2002 2003
China - Speedy Move Up Tech Ladder
HT / Exports
HT / Manufacturing
Share / Global IC
Share / Global R&D
China – Top 10 Car Manufacturers2004 Q1
Rank Car Manufacturing Company1 Shanghai Volkswagen2 First Automobile Group Volkswagen3 Shanghai GM4 Tianjin First Automobile Group Xiali5 Chang-An Automobile6 Guangzhou Honda7 Qi-Rui8 ShenLong Automobile9 Beijing Hyundai
10 First Automobile Group Automobile
China – Car Market Explodes2002-2003
Percent Change
2002 2003 2002-200312 32 166.7%
Production 3,250 4,440 36.6%Sales 3,249 4,370 34.5%Production 1,090 2,010 84.4%Sales 1,090 1,970 80.7%Exports 3.5 4.7 34.0%Imports 7.8 14.4 84.0%
Purchase Share of the World 5.7% 7.5% 31.6%
Trade (US$ Bill.)
Chinese Car MarketDomestic Car Manufacturing Company
Total Car (Thou.)
Passenger Car (Thou.)
China – Mobile Phone vs. Wired Phone2003-2004
Phone Market 2003 2004
Percent Growth
2003-2004Wired Phone Users 312.4 315.6 1.0%Mobile Phone Users 334.8 339.8 1.5%Wired Phone Per 100 People 24.9Mobile Phone Per 100 People 25.9
China – Mobile Phone Market2002-2003
Percent Change
Chinese Mobile Phone Market 2003 2004 2002-2003Production (Millions) 186.5 233.4 25.2%Sales (Millions) 178.4 230.4 29.1%Exports (Millions) 95.3 146.1 53.2%Users Share of the World 20.0%Production Share of the World 35.1%
China – Mobile Phone Market Share2004
Others26%
Motorola12%
Nokia12%Samsung
10%Ninbo Bird
10%
Konka6%
TCL Mobile8%
Sony Ericsson
3%Dbtel Technology
5%
Guanzhou Soutech
4%Amol4%
China – Mobile Phone Market Share2002 vs. 2004
2002
Chinese Brands
24%
Foreign Brands
76%
2004
Chinese Brands
37%
Foreign Brands
63%
Top 250 ICT* FirmsRanked by Employment Size
Rank Country Firms
Revenue, US$ Mill.,
2003
Net Income, US$ Mill.
2002
Employment, Thousands,
20021 U.S. 139 937,910 -99,184 3,5252 Japan 39 656,382 -20,603 2,3663 EU 33 535,484 -105,339 2,2964 Germany 5 153,213 -21,212 7525 France 9 98,636 -25,551 5006 U.K. 8 101,419 -44,991 3467 Korea 4 86,657 8,483 2818 Netherlands 3 42,492 -17,473 2179 Canada 7 41,073 -4,396 19310 China 3 29,556 7,083 192
OECD 228 2,306,194 -215,757 8,861Total 250 2,421,327 -205,404 9,422
*ICT: Information and Communication Technologies
China – Top Ten Corporations*By Total Assets
* Financial institutions are excluded
Rank Company Industrial Category Total Assets (US$ Bil.)
1 China Petroleum & Chemical Oil/Gas 386.22 China United Telecommunication Telecommunication 143.23 Baoshan Iron & Steel Co. Iron/Steel 60.34 Huaneng Power Intr Inc. Electric Utilities 48.75 China Southern Airlines Co. Airlines 38.96 China Eastern Airlines Co. Airlines 36.17 Sinopec Shanghai Petrochem Chemicals 25.48 Maanshan Iron & Steel Iron/Steel 22.99 Sichuan Changhong Electric Home Electronics 22.2
10 SP Power Development Co. Electric Utilities 21.1
China – Top Ten Corporations*By Market Capitalization
* Financial institutions are excluded
Rank Company Industrial CategoryMarket Cap (US$ Bil.)
1 Petrochina Co. Oil/Gas 82.32 China Petroleum & Chemical Oil/Gas 50.03 China Telecomunication Telecommunication 23.84 Huaneng Power Intr Inc. Electric Utilities 15.35 Baoshan Iron & Steel Co. Iron/Steel 10.46 China United Telecommunication Telecommunication 9.77 China Yangtze Power Co Ltd. Electric Utilities 8.98 Aluminum Corp of China Iron/Steel 7.89 Sinopec Shanghai Petrochem Chemicals 5.0
10 Semiconductor Manufacturing Electrical Comp. & Equip. 4.9
China – Top Ten Corporations*By Sales
* Financial institutions are excluded
Rank Company Industrial CategorySales
(US$ Bil.)1 China Petroleum & Chemical Oil&Gas 42.42 Petrochina Co Ltd. Oil&Gas 30.43 China Telecom Corp Ltd. Telecommunications 11.84 China United Telecommunication Telecommunications 5.85 Minmetals Development Co. Distribution/Wholesale 5.26 Baoshan Iron & Steel Co. Iron/Steel 4.47 Sinopec Shanghai Petrochem Chemicals 2.98 TCL Corp. IT Products 2.89 Sinopec Zhenhai Refining Oil&Gas 2.8
10 Huaneng Power Intr Inc. Electric Utilities 2.3
20152010200520001995199019851980
140
120
100
80
60
40
20
0
Millions
China – Population of Young Adults Population of 20-24 Year-Olds, 1980-2015
China
India
Western Europe
United States
20152010200520001995199019801970
100
90
80
70
60
50
40
30
Percent
ManWomanTotal
China – Literacy RateAdult Literacy Rate, By Gender
China – Urban & Rural PopulationAs Percent of Total Population, 1950 - 2030
20302025
20202015
20102005
20001995
19901985
19801975
19701965
19601955
1950
100
80
60
40
20
0
Percent
Urban Population Rural Population
0200989694929088868482
70
60
50
40
30
20
10
Percent
AgricultureManufacturing & ConstructionServices
China – Labor Force TransformationEmployment Structure, 1982-2002
Foreign Students in JapanBy Country of Origin
China, 64.7%
S. Korea, 14.5%
Taiwan, 3.9%
Malaysia, 1.8%Thailand,
1.5%
Other, 12.2%
Indonesia, 1.4%
(70,814 students)
(15,871 students)
(4,235 students)
(2,002 students)(1,641 students)
(1479 students)
(13,466 students)
Hong KongMexico
CanadaTaiwan
JapanKorea
ChinaIndia
80
60
40
20
0
Thousands
1
2
34
5 6
7 15
Foreign Students in the U.S.Rankings and Country of Origin
China + Taiwan + Hong Kong = 100,850
Table of Contents• Overview of Foreign R&D into China• Overview of China’s R&D • Case Study of Foreign Vendor R&D in China • The Outsourcing Trend
Foreign investment continues to flood into China
40.3 40.746.9
52.7 53.560.6
0
10
20
30
40
50
60
70
1999 2000 2001 2002 2003 2004
US
D B
illio
nChina FDI Growth 1999-2003
Different waves of foreign investment
Outsourcing of Design & ‘True’ R&D
Software Outsourcingto China (mainly from
Japan)
‘Showcase’ R&Din China
Relocation of Production Capacity
to China
First wave: Relocation of production capacity to China
Beijing:Nokia JVEricsson JV
Guangdong Dongguan: Nokia Factory
Sichuan Leshan: Motorola Semiconductor JV Hangzhou:
Motorola System JV
Tianjin: Motorola WOFE
Dalian Ericsson JV
Nanjing: Ericsson JV
Shanghai: Alcatel JV
Suzhou:Alcatel WFOE
Relocation of Production Capacity
All major telecom equipment manufacturers have established manufacturing capacity in China to leverage the cheap labor in China and get closer to the local market
Second wave: ‘Showcase’ R&D
• Foreign vendors set up R&D centers in China in the late 90’s to meet the government’s requirement for technology transfer to the local companies
• Many of those R&D centers were “show” R&D, focusing on localization of software and customer services
• The R&D centers also help foreign vendors show their commitment to China and serve as good PR/GR
Symbolic R&Din China
Third wave:China as regional software outsourcing hub
Korea, 2%
Others,5%
Japan,67%
HK, 11%
Taiwan,4%
US, 11%
• Japan is China’s largest software export market representing over 60% of total export value.
• Outside Japan, demand from U.S. and Korea is likely to develop as the industry matures.
65%
15%
0%
60%
11% 10%
67%
13%
0.5%0.6%
16%11% 11%
2%
4%
0%
20%
40%
60%
80%
Japan HK US Taiwan Korea
2002 2003 2004
Mainland China’s Software Exports to Key Markets as % of Total Exports
China’s Software Export Breakdown in 2004
Software Outsourcing
Current wave:Outsourcing of design and ‘real’ R&D to China
Outsourcing of Design and ‘Real’
R&D to China
CompetitionCompetition • Increasing competition in the domestic market for items such as handsets is forcing foreign vendors to launch more models to capture market share.
• Foreign vendors have to rely on local design houses and ODMs for some products
ProductsProducts • A growing consumer electronics market is driving demand for outsourcing in China
• Foreign vendors have to design their consumers products here to better suit consumer demand
Local demandLocal demand • Domestic demand is an important long-term driver for R&D outsourcing in China.
• Manufacturers, such as Motorola and Nokia, wants to increase their R&D to better suit taste of local customers
Table of Contents
• Overview of Foreign R&D into China• Overview of China’s R&D • Case Study of Foreign Vendor R&D in China • The Outsourcing Trend
Background to China’s R&D• National high-tech initiatives – 1980s/1990s
– Spark Program (1986): S&T advances applied to agriculture– ‘863’ Program for High Tech R&D (1986): political initiative to gain technological parity
with West– Torch Program (1988): established 53 High Tech Development Zones (HTDZs)
including Beijing’s Zhongguancun corridor; offered state funding, loans, tax benefits– National New Products Program (1988): supported R&D in new high-tech products– National Science & Technology Diffusion Program (1990): support to SOEs to
commercialize R&D– National Basic Research Priorities Program (1991): Basic research initiative– ‘973’ National Basic Research Priorities Development Program (1997)
• Selected Legal Reforms – 1982 to Date– Trademark Law (1982, revised 1993, 2001, 2002)– Technology Contract Law (1987)– Patent Law (1984, revised 1993, 2000, 2001)– Copyright Law (1990, revised 2001)– Product Quality Law (1993)– Law on Promoting the Transformation of Science & Technology Achievements (1996)
Huawei and ZTE are creating a pool of talent for foreign vendors to tap
0
100
200
300
400
500
2001 2002 2003 2004
HuaweiZTE
Million USD
• ZTE is known as the “Huang Pu / Whampoa Military School” of handset engineers in China as the first domestic vendor to invest heavily in handset R&D
• Huawei currently has a 24,000-strong global workforce, with over 46% of these employees working in R&D.
• ZTE has about 22,000 employees, of which over 37% focus on R&D.• Huawei and ZTE invest about 10% of their annual revenues in R&D.
– In its IPO prospectus in 2004, ZTE committed to invest about 40% of proceeds, c. USD 140 million, in 3G-related R&D.
– In 2004, Huawei’s R&D expenditure totaled USD 480 million, up 25% from USD 385 million the previous year.
Annual R&D Spending
Balancing act: Self-confidence/internationalism vs. protectionism/nationalism
• Protectionist tendencies– Technology as leapfrogging tool– National security concerns– Call for government intervention / subsidies to assist
struggling vendors, research institutes– Examples:
• WAPI: Wireless LAN Authentication and Privacy Infrastructure (shelved in Apr 2004)
• China’s self-confidence / ability to operate on global marketplace
– Increasing weight of China in global market– Rise of homegrown vendors
• Equipment• Handsets
– Growth in private sector telecom, technology and media companies, driven by consumers, not government policies/direction
Table of Contents
• Overview of Foreign R&D into China• Overview of China’s R&D • Case Study of Foreign Vendor R&D in China • The Outsourcing Trend
R&D Focus of Selected Foreign Vendors• Focus areas include semiconductor design, mobile network
solutions, MMI technologies and software development
• Microsoft Research China, Beijing: One of 4 global research centers (est. 1998). Includes Advanced Technology Center (ATC) (est. 11/2003). Voice recognition is a key focus. Targeting 80 engineers and developers in its first year.
• Intel China Lab: application research and product development in Beijing, Shanghai and Shenzhen. Focus includes Human-computer interface (HCI) technologies, computer architecture, system software, assembly and translation technology and embedded system tools, wireless technology, others
• China investments total over €2 billion. Focus areas include speech & handwriting recognition, IPv6, location based services,multimedia technologies.
Selected wholly owned foreign R&D in China
Language processing, speech & handwriting recognition, pervasive computing, mobile computing, multimedia, and e-business technologies & solutions
$ 1.2 millionEquipment investment in last five years
BeijingIBM
Information technology study regarding computer, internet, distant access and Chinese-application related voice recognition
$ 50 millionBeijingIntel
Voice recognition, image and picture technology, Multimedia technology
$ 80 million BeijingMicrosoft
Semiconductor device and process modeling and simulation, chip design, advanced material research, software development, personal communication product design development, most advanced mobile communications network solutions, PowerPC application and development, man-machine interaction technologies in future hardware and software applications
$ 300 million BeijingMotorola
Technology HubsInvestmentsLocationCompanies
Selected wholly owned foreign R&D in China
Technology HubsInvestmentsLocationCompanies
Communication software: Access network, mobile system and consumer terminal
N.A.ShanghaiEricsson
Next generation(3G,4G) mobile communication, GSM top end application, Chinese voice recognizing/compounding, natural language processing, digital TV and PC application software and display tube basic technology
$ 500 millionIn future 5 years
BeijingPanasonic
Speech & handwriting recognition, mobile IPv6 technology, Mobile internet, Mobile locating, SCTP Protocol, ROCH & HSPA technology and multimedia
*Euro 2.3 billion
BeijingNokia
Chinese Language processing technology, OCR recognition and Voice recognition, IMT-2000 technology and LSI technology
$ 4.4 millionBeijingFujitsu
Nokia increased R&D activity in China to better service domestic demand in its largest market
Nokia’s 10 major markets by net sales
2002 EURm
2003 EURm
2004EURm
531748768Spain
1 3421,003884Italy
9251,886909UAE
570938Russia
7738051,091Brazil
5391,0621,364India
1,8492,2971,730Germany
3,1112,6932,261UK
2,8022,0132,660China
4,6654,4753,416USA
• China has overtaken UK and Germany to become Nokia’s No. 2 market and is in process of overtaking US
• Nokia has set up two R&D Centers in Beijing and Hangzhou respectively
• Beijing handset R&D will design 40% of Nokia’s new handset models launched globally.
• The number of employee in Hangzhou3G R&D center has increased to 500.
• Nokia is also in discussion with local handset design house Techfaith to outsource some low-end model design
Headquarters Manufacturing Subsidiaries
Technical and R&D Center
Beijing - China Headquarters- R&D Center- JV
Dalian Neu-Nokia JV
Hangzhou 3G R&D center
Dongguan Factory
Key Locations of Nokia in China
Motorola is the first mover in conducting real R&D in China
• Motorola is the 5th largest foreign company in China in 2004 in terms of revenue.
• Motorola is the 2nd handset vendor in China in 2004 with 14.1% market share.
• Motorola is the first foreign handset vendor who design handsets specifically for the China market back in 2001.
• Importance of Chinese market for Motorola– Revenue from domestic sales in China was
USD 4.67 billion in 2003.– Exported products totaled USD 4.09 billion in
2003.– Plans to increase the revenue to USD 10 billion
in 2006
Key Locations of Motorola in China
Headquarter Manufacturing Subsidiaries
Technical and R&D Center
Shanghai R&D Center
Suzhou IC Design Center
Hangzhou Mobile System JV
Sichuan Chengdu: -R&D center-Telecom Solution center
Beijing: - NEA Headquarters- Personal communication center and the headquarters of telecom solution
Sichuan Leshan: - Semiconductor JV
Tianjin WOFE
Ericsson is also increasing R&D in China
• Importance of Chinese market to Ericsson– Revenue from Chinese market
was RMB 15.8 billion and export RMB 7.4 billion in 2004.
• R&D– R&D staff planned increase to
600 in 2005 from 500 in 2004 – Plan to invest USD 0.5 billion
in R&D in China to expand market share
– Has also setup a global 3G system manufacturing center in Ericsson Nanjing.
Ericsson Has Strong Legacy in China’s 2G Market
Key Locations of Ericsson in China
Headquarter Manufacturing Subsidiaries
Technical and R&D Center
Shanghai Software R&D Center
Beijing: - China Headquarters- Beijing JV
Dalian JV
Nanjing Panda JV
Guangzhou JV
Consulting Co.
Chengdu R&D centerChengdu R&D center
Table of Contents• Overview of Foreign R&D into China• Overview of China’s R&D • Case Study of Foreign Vendor R&D in China • The Outsourcing Trend
Design houses and ODMs are helping domestic vendors to bridge the R&D gap
OS/Stack
Software
Hardware
IntegrationManufacturing Post ProductionChipsets
Base
Ba
nd
Des
ign
& C
odin
g
PCB
Layo
ut
Des
ign
& C
odin
g
Dis
trib
utio
n
Mar
ketin
g &
Bra
ndin
g
Test
ing
RF Su
b-Ass
embl
y
Des
ign
APP/MMI
Software
Exte
rnal
D
esig
n
Fina
l Ass
embl
y
ZTE
DaxianODM (such as Pantech)
SoutecDesign House (such as Cellon)
Chipset Vendors(such as TI)
Vendors can get products quickly into the market by outsourcing designs to ODMsand design houses
Profile of Key Design Handset Houses and ODMs
• PalmOne• T-Mobile• Verizon• Audiovox
• Siemens• Philips• Other domestic
handset vendors
• NEC• In discussion with
Nokia• Haier and other
domestic handset makers
Customers
• 900
• 800
• 500 - 600
R&D Staff
• Independent design house in China
• Plans for Nasdaq listing
• Contract manufacturer based in Taiwan
• Designer of handheld devices and smartphones
• Independent design house
• Spun off from Philips• Has big labs in China
and France
Key BusinessCompany
Techfaith
Software Outsourcing: China’s linkage with other Asian regions
• China to Japan:– Leading Chinese software outsourcing firms (i.e.
DMK and Sinocom) target Japan.– Japanese firms (i.e. NEC, Fujitsu, and NTT Data)
have established software development centers in China, which export software back to their corporate parent.
– Japanese companies have also made strategic investments and set up JVs in China. The JVs conduct software outsourcing primarily for Japan.
• China to Korea– Korea currently attracts limited software
outsourcing from China with most software development still conducted domestically. However, growth potential is significant as Korean companies seek to reduce costs to stay competitive.
• China to Hong Kong and Taiwan– Software outsourcing to Hong Kong and Taiwan
makes up a small share of China’s total industry, but Hong Kong firms in particular do outsource to China.
1
2
1
2
3
3
Customer Linkages: Software outsourcing companies
• NEC Software, Nomura, Daiwa, HP, SUN, IBM, and Hitachi
• Leading Japanese vendors
• GE, IBM
• NEC, NTT Data, Hitachi, GE, Mitsubishi Electronics, Nomura Research Institute, and Fuji Xerox
Major Customers
• The largest independent software outsourcing company in Beijing
• DMK was the first Chinese company to pass the SEI-CMM Level 5 Assessment (March, 2003).
• DHC was ranked 1st in export value in China’s 2002 software exporters list
Market Position
• USD 33.7 million• 76% from software
outsourcing
• Almost all of DHC’s software revenues are from Japan.
• 92% of SinoCom’soutsourcing comes from Japan.
• Sinocom does BPO for Sun’s technical support (6% of total revenues).
• Focus on software outsourcing
• Primarily target Japan market
Key Business
• USD 14.7 million• 90% from software
outsourcing
• USD 12 million • 95% from software
outsourcing
2003 RevenuesVendors
DMK
Investment Linkages: Japan -> China Software outsourcing investments
• Company focuses on both SI activities in China as well as outsourcing for its parent company, NEC Japan.
• NEC Solutions, a recent consolidation of previous NEC SI and NEC CASS, has close to 1,000 employees
• The main function of the JV is to complete software projects outsourced by NTT Group in Japan.
• The JV has recently started looking at conducting SI activities for companies in China as well.
• NTT Data established a joint-venture subsidiary with DHC in Beijing, employing about 100 software developers.
• JV exports software back to Japan• Fujitsu conducts outsourcing activities through its local joint-venture subsidiary, Beijing Fujitsu Software (BFS), which was established with CS&S in 1992.
Investments Business Scope
China’s Growth and Challenges to It
Short- and Mid-Term Challenges: Growth, Productivity, and Employment
l Chinese and U.S. economies share a problem and an opportunity:
– rising labor productivity (LP)
l LP a problem in near-term: – employment growth = GDP growth - LP growth– corollary: for given GDP growth, the higher is LP growth,
the less is employment growth– China’s annual GDP growth (1998-2003) 8-9%, annual
LP growth ~7%: hence, job creation 1% of labor force ~ 7-10 million annually
l 7-10 million is appreciable, yet modest relative to total unemployed/underemployed ~ 168 million
Short- and Mid-Term Challenges: Growth, Productivity, and Employment
l LP also an opportunity: major longer-term contributor to economic growth and social progress, boosts wages, drives demand for labor, raises profitability of capital
l in longer-term, short-term tension between rising LP and increasing employment can be mitigated by appropriate policies – trimming swollen bureaucracy in China (and in U.S.!) might be
moderated in consideration that these jobs are relatively low-productivity yet socially valuable
– increasing investments in China’s health services and improving serious air and water pollution problems: enhance quality of life without much effect on LP
l GDP growth of, say, 7% with LP growth of 3% may be preferable toGDP growth of 9% and LP growth of 7%!
From Manufacturing to Innovation
1. Manufacturing Power
started in ~ 1985
2. Consumption Power
started in ~ 1995
3. Innovation Power
started in ~ 2005
Lower Manufacturing Cost
Greater Market
Lower R/D Cost
Three Major Reasons that Companies go to China
Driving Forces Behind the Innovation
- R/D Spending Increase Steadily
- Large Talent Pool Available
- Government Push
- Market Demand
R/D Expenditure in ChinaR/D Expenditures
0
5,000
10,000
15,000
20,000
25,000
1 3 5 7 9 11 13
1991-2004
US
Dol
lars
in M
illio
n
Series1
- Growth rate >15% 2001-2004- 1.35% of GDP (greater than India and Brazil)- Will be Close to US today in about 15 years
Large Talents Pool Available
•More than 2200 University/College in China
•Graduate Students : - 326,000 entered in 2004 (MS/PhD ~ 4/1)
- 820,000 in school (MS/PhD ~ 4/1)
- graduated 151,000 in 2004 (MS/PhD ~ 5/1)
•College Students : - 4.47 million entered in 2004
- 13,335 million in school
- graduated 2,391 million in 2004
Backflow of Oversea Trained Talent Started
Government Push (Examples)
• 863 Project (Ministry of Science & Technology)
- Recommend by 4 Scientist and Signed by Deng Xiaoping in 1986
- National High-Tech R/D Program to Accelerate the High-Tech
Development to Boost Innovation Capacity
- Four Major Tasks : 1. Develop Key technologies for the construction of China’s
information infrastructure
2. Develop key biological, agricultural and pharmaceutical technologies to improve the welfare of the Chinese people
Government Push (Examples)
3. Master key new materials and advanced manufacturing technologies to boost
industrial competitiveness4. Achieve breakthroughs in key technologies for environmental protection,
resources and energy development to serve the sustainable development of the society
•211 Project (Ministry of Education)
- Build ~100 Reputable Universities for Knowledge Based Economy
in 21Centry; Started in 1995
- Funding Came from Central and Local Government ( ~US $ 2.2B)
- Focus on ~600 Key Areas :
New Technology (42%) & Basic Science (15%)
China Semiconductor Demand Outpaces Domestic Production
10%12%
29%
44%
0
10
20
30
40
50
60
2001 2002 2005 2010
Bill
ion
US
$
0%
10%
20%
30%
40%
50%
60%
Per
cent
Dem
and
Sat
isfie
d by
Dom
estic
Pro
duct
ion
Demand
Production
Percent Demand Satisfied byDomestic Production
Market Demand (Semiconductor Example)
• > 10 Foundries & IDM Companies Established (e.g. SMIC, Grace, Huahong, Baling, STMicro-Hynix,ProMOS,
Powerchip)
• 13 FABs are set to be built in the next 3 years• Capable of backend IC integration and SW
development• Relatively low development cost, but increasing in
coastal cities• > 500 design companies established, most are small
to medium; many of them established via VC funding & joint venture; Eager to develop IPR& new products
Conclusions Conclusions
• China is into a new era transitioning from manufacturing focus to marketing driven and to innovation; They are certainly the new kid on the block on innovation
• Four major forces are behind this including R/D expenditures, large talents pool, government program push and market demands
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