transformation and upgrading of chinese enterprises

Yunshi Mao

Transformation and Upgrading of Chinese Enterprises

Transformation and Upgrading of ChineseEnterprises

Yunshi Mao

Transformationand Upgrading of ChineseEnterprises

123HigherEducationPress

Yunshi MaoBusiness SchoolSun Yat-sen UniversityGuangzhou, China

Translated by Yangchun Liu and Sidan Wu

ISBN 978-981-13-1258-8 ISBN 978-981-13-1260-1 (eBook)https://doi.org/10.1007/978-981-13-1260-1

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Contents

1 The Pressure of Chinese Enterprises’ Transformation andUpgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 The Bankruptcy of Smart Union Factories and the Pressure

of Chinese Enterprises’ Transformation and Upgrading . . . . . . . . . 11.1.1 The Closedown of Smart Union Factories Indicates

the Importance of Transformation and Upgrading . . . . . . 11.1.2 Definition of Enterprise Transformation

and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.1.3 The Pressure of Chinese Enterprises’ Transformation

and Upgrading Has Long Existed . . . . . . . . . . . . . . . . . . 51.2 The Financial Crisis Has Intensified the Pressure for Chinese

Enterprises to Transform and Upgrade . . . . . . . . . . . . . . . . . . . . . 101.2.1 China Has Been Affected by the Global Financial

Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.2.2 The Financial Crisis Hit the Export-Oriented Economy

in the Pearl River Delta and Yangtze River DeltaParticularly Hard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

1.3 Planning for Change in Time of Crisis . . . . . . . . . . . . . . . . . . . . . 131.3.1 In Front of Chinese Enterprises Are Three Ways:

Relocating, Upgrading, or Going Out of Business . . . . . . 131.3.2 Chinese Enterprises Should Bravely Break Through

in the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2 Experiences of Corporate Transformation and Upgrading in AsianEmerging Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172.1 High-Level Dedicated Foundry Road of Taiwan’s Semiconductor

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

v

2.1.1 Five Development Stages of Taiwan’s SemiconductorIndustry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2.1.2 Sources of Competitiveness of Taiwan’s SemiconductorCompanies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2.1.3 Transformation and Upgrading Process of TaiwaneseEnterprises from Dedicated Foundry to Industrial ChainIntegration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

2.2 The Realization of Transformation and Upgrading by SouthKorean Companies Through Technological Innovation—fromSmall Workshops to Conglomerates . . . . . . . . . . . . . . . . . . . . . . 312.2.1 Five Phrases of Korean Enterprises’ Transformation

and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332.2.2 The Leapfrogging Model of Technology Upgrading:

Introduction ! Imitation ! Improvement !Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

2.2.3 The Growth Process of Korean Enterprises from SmallWorkshops to Large Groups . . . . . . . . . . . . . . . . . . . . . . 36

2.3 Comparison of Enterprise Transformation and Upgradingin Emerging Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442.3.1 Enterprise Transformation and Upgrading in Taiwan

and South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442.3.2 Enterprises Should Have the Right Positioning

in the Course of Their Transformationand Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

3 Enterprise Case Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473.1 Independent Innovation Path of Guangdong Enterprises from

OEM to ODM to OBM: Comparison Between Donlimand Jasic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473.1.1 The OEM, ODM, OBM Status of Guangdong

Enterprises and Research on Their Transformationand Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

3.1.2 Definition of OEM and Concepts Related to ItsTransformation and Upgrading . . . . . . . . . . . . . . . . . . . . 50

3.1.3 Transformation and Upgrading Models of OEMEnterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

3.1.4 Case Enterprises: Donlim Kichen Group Co., Ltd.and Jasic Technology Co., Ltd. . . . . . . . . . . . . . . . . . . . . 57

3.1.5 Guangdong Donlim Kichen Group Co., Ltd. . . . . . . . . . . 583.1.6 Shenzhen Jasic Technology Co., Ltd. . . . . . . . . . . . . . . . 593.1.7 Comparison of Basic Information . . . . . . . . . . . . . . . . . . 60

vi Contents

3.1.8 Comparison of the Two Enterprises’ Transformationand Upgrading Paths . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

3.1.9 Comparison of the Factors Influencing the TwoEnterprises’ Transformation and Upgrading . . . . . . . . . . . 65

3.1.10 Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903.2 Case Two Enterprise Upgrading in the Toy Industry:

Comparisons Between Lung Cheong Toys andHaYiDai Toys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 933.2.1 Situation Analysis in the Toy Industry . . . . . . . . . . . . . . 933.2.2 Case Selection: LungCheong and HaYiDai . . . . . . . . . . . 983.2.3 Lung Cheong International Holdings Ltd. . . . . . . . . . . . . 993.2.4 HaYiDai Toys Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 1043.2.5 Comparison of Basic Information . . . . . . . . . . . . . . . . . . 1073.2.6 Comparison of Self-Innovation Capacity . . . . . . . . . . . . . 1083.2.7 Influencing Factors of Self-Innovation of Lung

Cheong and HaYiDai . . . . . . . . . . . . . . . . . . . . . . . . . . . 1183.2.8 Facts and Discoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

3.3 Upgraded Enterprise in Lighting Industry: NationStarOptoelectronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1243.3.1 Company Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1243.3.2 Upgrading Path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1253.3.3 Company Competence Supports NationStar’s

Upgrading Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1333.3.4 The Industrial Cluster of Enterprises Promotes

the Upgrading of NationStar . . . . . . . . . . . . . . . . . . . . . . 1393.3.5 NationStar’s Upgrading in Response to the Change

of Market Environment . . . . . . . . . . . . . . . . . . . . . . . . . 1423.3.6 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

3.4 Rapid Growth of Taiwan’s Atotech . . . . . . . . . . . . . . . . . . . . . . . 1493.4.1 Brief Introduction of Atotech . . . . . . . . . . . . . . . . . . . . . 1493.4.2 Atotech’s Path of Progressive Upgrading . . . . . . . . . . . . . 1543.4.3 Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

4 Case Analysis of Industrial Regions, Clusters and Parks . . . . . . . . . 1634.1 High-Tech Industries in Shenzhen Characterized by Independent

Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1634.1.1 Basic Situations and Characteristics of Shenzhen

High-Tech Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . 1644.1.2 Constraints on Shenzhen’s High-Tech Industry

Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1784.2 Transformation and Upgrading of Furniture Industrial Cluster

in Dalingshan Town, Dongguan City . . . . . . . . . . . . . . . . . . . . . . 181

Contents vii

4.2.1 Brief Introduction of Dalingshan . . . . . . . . . . . . . . . . . . . 1814.2.2 Current Situation of the Furniture Industry

in Dalingshan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1824.2.3 The Furniture Industry Is Facing Challenges

of Transformation and Upgrading . . . . . . . . . . . . . . . . . . 1844.2.4 Transformation and Upgrading of the Dalingshan

Furniture Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1904.2.5 Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

5 Case Analysis of Public Technology Platforms . . . . . . . . . . . . . . . . . 1975.1 High-Tech Industry Development by Taiwan ITRI . . . . . . . . . . . . 197

5.1.1 Background of ITRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1975.1.2 Objectives and Visions of ITRI . . . . . . . . . . . . . . . . . . . . 1985.1.3 Organizational Structure of ITRI . . . . . . . . . . . . . . . . . . . 1985.1.4 ITRI’s S&T Projects, Service Revenue, Talent

Cultivation and Patent Application . . . . . . . . . . . . . . . . . 2015.2 The Operational Model and Characteristics of ITRI . . . . . . . . . . . 204

5.2.1 The Legislation and Commercialized Operation JointlySupport the Development of ITRI . . . . . . . . . . . . . . . . . . 205

5.2.2 Integration Center Offers Powerful Capabilitiesin Integrating Cross-Field Resources . . . . . . . . . . . . . . . . 206

5.2.3 The Open Research System Based on OpenLabProject . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

5.2.4 Establishing a Flexible Inflow-and-Outflow Mechanismfor Talents to Cultivate More Innovative Sources . . . . . . . 208

5.3 Development of Taiwan’s Science Parks . . . . . . . . . . . . . . . . . . . 2095.3.1 From Hsinchu Science Park to Tainan Science Park . . . . . 2095.3.2 Transformation and Upgrading of Taiwan’s Science

Parks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2125.4 ITRI Supports the Development of Taiwan’s Science Parks . . . . . 220

5.4.1 ITRI Specialized Incubation Center Can Provide anEffective Business Incubation Source . . . . . . . . . . . . . . . 220

5.4.2 Establishing Spin-off Companies and CultivatingLarge-Scale Enterprises Through an IntellectualProperty Rights Transfer System . . . . . . . . . . . . . . . . . . . 221

6 Factors that Influence Enterprise Transformationand Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2236.1 Theories About the Influence Factors of Enterprise

Transformation and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . 2236.1.1 Enterprise Transformation and Upgrading Is Inseparable

from Independent Innovation . . . . . . . . . . . . . . . . . . . . . 2236.1.2 Theoretical Research on the Factors that Influence

Independent Innovation of Enterprises . . . . . . . . . . . . . . . 224

viii Contents

6.1.3 Other Factors that Influence Enterprise Transformationand Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

6.1.4 Theoretical Framework for Analyzing Influence Factorsof Enterprise Transformation and Upgrading . . . . . . . . . . 227

6.2 Analysis of the Factors that Influence Enterprise Transformationand Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2276.2.1 Cost Comparative Advantage Is Gradually

Disappearing, and Profit Margins Are Shrinking . . . . . . . 2276.2.2 In the Intense Competition at Home and Abroad,

OBM with Intellectual Property Rights Is the MajorDevelopment Direction of the Transformation andUpgrading of EEEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

6.2.3 The Benefits Are Extremely Unevenly Distributedand Most of the Profits Go to the Firms at the UpperEnds of the Industrial Chain . . . . . . . . . . . . . . . . . . . . . . 229

6.2.4 The Inherent Risks of Low-End Manufacturing AreBecoming Prominent. Enterprises Urgently Need toUpgrade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230

6.3 Motivation for Enterprise Transformation and Upgrading . . . . . . . 2316.3.1 Entrepreneurship and Brand Awareness Are the Major

Driving Force Behind Enterprise Transformationand Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

6.3.2 The Ownership of Key Resources and the Acquisitionof Key Capabilities Constitute the Foundation forEnterprise Transformation and Upgrading . . . . . . . . . . . . 232

6.3.3 Increasing Consumer Demand at Home Has ProvidedMarket Support for Enterprises to Establish TheirOwn Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

6.3.4 Government Policies Promote and EncourageEnterprises to Upgrade . . . . . . . . . . . . . . . . . . . . . . . . . . 233

6.3.5 Good Relationship with Cooperative Partners ProvidesTechnical and Management Reference for Enterprises . . . 234

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

7 Measurement Standards and Paths of EnterpriseTransformation and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2377.1 Theoretical Research on Enterprise Transformation

and Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2377.1.1 Studies on Enterprise Transformation and Upgrading

from the Perspective of Core Competence and DynamicCapability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

7.1.2 Studies on Enterprise Transformation and Upgradingfrom the GVC Perspective . . . . . . . . . . . . . . . . . . . . . . . 238

Contents ix

7.2 Measurement Standards of Enterprise Transformationand Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2417.2.1 Improved Product Technological Content and Increased

Value Added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2417.2.2 Enhanced Product Function . . . . . . . . . . . . . . . . . . . . . . 2417.2.3 Developing from OEM to ODM and then to OBM . . . . . 2447.2.4 Shifting from Single Products to Product Lines, from

Single Businesses to Business Solutions, Leadingto New Products, New Services and Even NewMarkets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

7.2.5 Developing Strategic Assets and Creative Assets toEnhance Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . 246

7.3 Paths of Enterprise Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . 2467.3.1 Achieving Overall Transformation and Upgrading

by Recognizing New Features and New Demandsof Traditional Industries and Repositioning Them . . . . . . 247

7.3.2 Achieving Transformation and Upgradingby Substituting First for Imported Products, thenfor Multinational Companies’ Products in Chinaand in Foreign Markets . . . . . . . . . . . . . . . . . . . . . . . . . 249

7.3.3 Creating New Products and New Demands on the Basisof Blurred Industrial Boundaries and IndustryConvergence, and Achieving Inter-sectoralUpgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

7.3.4 Removing Barriers to Key Components and AchievingOverall Upgrading Through TechnologicalAccumulation and Capability Evolution . . . . . . . . . . . . . . 253

7.3.5 Achieving Upgrading by Increasing Investmentin Production Services and Boosting Value Added . . . . . . 256

7.3.6 Achieving Enterprise Upgrading by Reducing Inputsand Consumption, Lowering Costs, and EnhancingEnvironmental Standards and Value Added . . . . . . . . . . . 256

7.3.7 Achieving Upgrading Through the Establishmentof Strategic Alliances Between Cluster Enterprisesand with Large Enterprises Promoting the Developmentof Small Ones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

7.3.8 A Large Diversity of Upgrading Paths from OEMto ODM and then to OBM . . . . . . . . . . . . . . . . . . . . . . . 260

x Contents

7.3.9 Leapfrogging to Advanced Technological Levelsand Achieving Enterprise Upgrading by AcquiringStrategic Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

7.3.10 Achieving Upgrading with the Facilitation of IndustrialClusters and Parks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2698.1 Be a Prepared Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

8.1.1 Change Mindset and Actively Implement the Strategyof Transformation and Upgrading . . . . . . . . . . . . . . . . . . 270

8.1.2 Use a Variety of Ways to Achieve Upgradingfrom Manufacturing to R&D . . . . . . . . . . . . . . . . . . . . . 270

8.1.3 Expand Beyond the OEM Roots to ODM and thento OBM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

8.1.4 Put a Premium on Entrepreneurship and Cultivatethe Entrepreneur’s Crisis Awareness and Foresight . . . . . 272

8.2 Be an Efficient Service-Oriented Government . . . . . . . . . . . . . . . . 2728.2.1 Foster Enterprise Upgrading on the Basis of Value

Chain Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2738.2.2 Promote Industrial Upgrading by Taking the Modern

Service Industry as the Locomotive . . . . . . . . . . . . . . . . . 2748.2.3 Promote Industrial Upgrading by Using Industrial

Clusters and Parks as the Platform for FosteringTechnological Development . . . . . . . . . . . . . . . . . . . . . . 275

8.2.4 Foster Enterprises’ Technological Strength by Creatingan Effective Platform for the Industrializationof Scientific Research Achievements . . . . . . . . . . . . . . . . 278

Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285

Contents xi

Chapter 1The Pressure of Chinese Enterprises’Transformation and Upgrading

Chinese enterprises’ transformation and upgrading conspicuously started with theoutbreak of the 2008 financial crisis. However, the pressure for change has existedlong before 2008. And now the financial crisis has stepped up this pressure. AreChinese enterprises ready to change in face of such crucial situations?

1.1 The Bankruptcy of Smart Union Factoriesand the Pressure of Chinese Enterprises’Transformation and Upgrading

1.1.1 The Closedown of Smart Union Factories Indicatesthe Importance of Transformation and Upgrading

From the second half of 2007–2008, a number of economic factors were changingquickly. The appreciation of Renminbi (RMB) led to a decrease in export profits;the enforcement of the labor contract law provoked increased labor cost; and theprices of raw materials kept rising. These economic changes put to a stern test theeconomic growth mode in China’s Yangtze River Delta, Pearl River Delta, andeastern coastal areas, which had relied on cluster economy as the main growthengine and was characterized by original equipment manufacturing (OEM). Withlow-cost advantages gradually disappearing, many companies are now in opera-tional difficulties. Facing innate deficiencies (low value added products, lack of ownbrand names and technological content) and external pressures (policies againstenvironmental pollution and currency appreciation), traditional exogenous indus-trial clusters are badly in need of finding new ways of development.

The toy enterprises in Dongguan, Guanggong can be used as an example toillustrate this situation. In 1980s, large numbers of foreign toy companies wereshifted to Dongguan, which soon made Dongguan an industrial hub with a huge

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cluster of toy manufacturers. Before the financial crisis, Dongguan had more than5,000 toy manufacturing and supporting companies, employing over 300,000workers, creating more than 13 billion Yuan worth of annual output, and grabbing36% of the total foreign exchange China’s toy industry earned through exporting.However, the outbreak of the global financial crisis in September 2008 and theconsequent economic slump in the US posed severe challenges to theexport-oriented manufacturers. On October 15, Smart Union Group (Holdings), oneof the world’s largest toy manufacturers, announced that its two factories located inZhangmutou, Dongguan went into bankruptcy. They were remarked as “China’sfirst industrial entities closing down due to the strike of the global financial crisis”.Founded in Hong Kong in 1996, Smart Union Group (Holdings) largely undertookOEM manufacturing and manufactured toys for three of the world’s top five toybrands. The group had in total 10,000 employees in its heyday. But the closedownof its two factories left 6,500 workers unemployed.1

Smart Union Group (Holdings) is a typical manufacturer of the toy industry inDongguan. Dongguan toy manufacturers epitomize the multitudes of OEM man-ufacturers in Dongguan. And all Dongguan OEM manufacturers are representativeof the manufacturing firms at the low segments of the value chain in the Pearl RiverDelta, the Yangtze River Delta, the eastern coastal regions and even the wholecountry. These manufacturers were once the primary impetus behind the rapideconomic development of China’s different regions. But the negative consequencesof this economic growth model are also obvious. Firstly, the majority of exportproducts are at the low end of the value chain. They do not have their own brandnames. And their profits are very thin. Secondly, the economic growth is obtained atthe expense of resources, energy, and environment, and through low labor price andbad working conditions, thus, further widening the gap between the poor and therich. Thirdly, enterprises and industries do not boast key intellectual property rightsor independent innovation capability, thus leaving themselves to the mercy ofmultinational companies in terms of core technology. Consequently, both aca-demics and practitioners agree that to ensure long-term development, companiesmust accomplish transformation and upgrading. The bankruptcy of Smart Unionfactories indicates that unless companies really engage in transformation andupgrading, they will not survive, let alone have sustained development.

Although several years have passed since the financial crisis, the overall situa-tion of OEM manufacturers is not getting better. Instead, they face more complexeconomic environment and more fierce competition. Many enterprises are still inplight. On December 5, 2014, Suzhou-based United Win Technology Limited, awell-known OEM manufacturer of mobile phone parts, went bankrupt. United WinTechnology Limited was a subsidiary of Wintek in Taiwan, employing over 20,000people at its peak. But beginning from 2014, the subsidiary started deteriorating. Bythe time of its closure, there were only about 3,000 workers left. It used to be an

1Vide NetEase Finance (Survey upon “The First Case of the Financial Storm Impacting China’sIndustries”) http://money.163.com/special/002530E6/hejun.html.

2 1 The Pressure of Chinese Enterprises’ Transformation and Upgrading

http://money.163.com/special/002530E6/hejun.html

important component supplier for Apple and MIui, but got excluded from their listof suppliers because of its obsolete technology, low rate of quality products, andhigh costs.2 Almost at the same time as the closure of United Win TechnologyLimited, Silitech, another mobile phone parts supplier situated in Xukou, Suzhou,announced its closedown and laid off most of its employees. As a subsidiary ofTaiwan’s listed Liteon Group, it produced mobile phone keys for Nokia, with thenumber of workers coming to more than 10,000 at its summit. A report says that theasset impairment loss of the company accrued to 972 million New Taiwan(NT) dollars in the first three quarters of 2014, with after-tax net loss reaching 1.265billion NT dollars.3 Here again take Dongguan as an example. Statistics show thatin October 2014, over ten large-scale OEM factories, went bankrupt, including thewell-known Hing Hong Shoe Factory coming from Taiwan.

In fact, local governments and enterprises were aware of this problem and weremaking efforts to pursue transformation and upgrading. For example, the abovementioned Smart Union Group (Holdings) had tried hard to change the vulnerablesituation of depending only upon contract manufacturing. In 2004, it developed atoy cat connected to the computer through a USB line. Starting from 2005, it hadannually invested 5 million yuan in design and own brand building. And it hadestablished a dedicated R&D department. But unfortunately, these efforts forupgrading ended up in failure. Branded toy manufacturers in developed countrieswere willing to have Smart Union Group (Holdings) supply products for them. Butthey would not allow it to develop its own brands in the international market andcompete with them.4 The above-mentioned Wintek expanded the scale of itsproduction facilities given promising prospects of iPhone sales growth. But theproduction facilities mainly served the purpose of producing iPhone modelsintroduced before iPhone 4S. However, since 2014, Apple has launched iPhone 5and iPhone 6, which employ thinner screens. Wintek was not able to adapt,eventually being excluded from Apple’s suppliers list.5 Therefore, the crucialquestions arise: “what approaches and paths should developing country manufac-turers inserted in the lower parts of the global value chain (GVC) take to achievetransformation and upgrading successfully?” “What factors should influence thetransformation and upgrading of cluster enterprises?”

2Vide World Wide Web Finance (China’s OEM Manufacturers Suffer Cold Current, A LargeEnterprise in Suzhou with over 10,000 Employees Halted Production Waiting for Closure) http://finance.huanqiu.com/hongguan/2015-01/5377426.html.3Vide Morning Post (A tidal wave of closedown became of China’s OEM enterprises) http://www.zaobao.com/finance/comment/story20150112-434301.4Vide Sohu News (The Story of Smart Union Factories’ Closedown Continued: It Would FailEven Without the Financial Tsunami) http://news.sohu.com/20081018/n260100769.shtml.5Vide National Business Daily (Wintek Hurt Two Listed Firms. Its Subsidiary in Dongguan HadBeen Building Production Facilities Just Before its Shutdown, and http://www.nbd.com.cn/articles/2014-12-16/883589.html).

1.1 The Bankruptcy of Smart Union Factories and the Pressure … 3

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1.1.2 Definition of Enterprise Transformationand Upgrading

As a popular term, “transformation and upgrading” has frequently appeared in newsreports and government documents. There is no corresponding term in the Englishliterature for enterprise transformation and upgrading. However, in China’sdomestic research, enterprise transformation and upgrading is the most frequentlyused term. And the term “transformation” or the term “upgrading” is also used quitea lot. But some scholars do not make a clear distinction between “transformation”and “upgrading” in academic research, which often results in the misuse or thereplacement of the two terms. Therefore, it is necessary for us to define theseconcepts before further analysis.

The concept of enterprise upgrading was first put forward in the late 1990s,when Gereffi (1999) introduced it into the global value chain (GVC) analysisframework. He argues that enterprise upgrading refers to the process by which anenterprise improves its ability to move towards more profitable and capital- andtechnology-intensive economic niches. Poon (2004) also points out that enterpriseupgrading is an economic role transfer process which enables manufacturers tosuccessfully move from labor-intensive low-value products to higher-value capital-and technology-intensive products. Kaplinsky and Morris (2001) believes thatenterprise upgrading means making better products, manufacturing products moreefficiently, or performing activities that require more skills. Humphrey and Schmitz(2000) believe that upgrading represents that a company enhances its competi-tiveness and engages in high value-added activities through the acquisition oftechnological and marketing capabilities.

When faced with a bottleneck in development, a company can adopt a strategicshift, return to the origin and rethink, and make radical changes in business strategyand proactively probe the transformation direction. Some scholars analyze enter-prise transformation from the micro level of industry. Porter suggests that thesuccess of the enterprise depends not only on the competitive position of theenterprise in the industry, but also depends on whether it is in a profitable industry.6

So enterprises that pursue sustainable growth must be sensitive to their operatingenvironment. When the original industry is difficult to provide sufficient growthspace for them, timely transformation will become a wise choice for the enter-prises.7 Some other scholars interpret enterprise transformation as organizationalchange and reengineering, and emphasize that enterprise transformation is a com-pletely new change in cognition, thinking and behavior. In order to survive anddevelop, and break through the bottleneck of operation, enterprises change theirorganizational structure through organizational adjustment or goal transformation,and create new business models that meet the needs of the future. Obviously,

6Porter M.E. Towards a dynamic theory of strategy, Strategic Management Journal, 1991(12).7Wang D.L., Zhang M.R., Zhou M. A Review of the Research on Technological Capabilities ofTransformative Enterprises in Industrial Transformation [J]. Journal of Management, 2006, 6.


enterprise transformation is one way to break the status quo when the enterprisefaces survival crisis. By way of constant reform, organization leaders are forced tothink about the direction of the future, inject new vitality into the organization,make the enterprise more competitive and develop flexibility to respond to theenvironmental change. On the other hand, as will be mentioned later in this book,many companies are actively rather than passively implementing transformationand upgrading.

Although they are frequently used in China, the three concepts—enterpriseupgrading, enterprise transformation, and transformation and upgrading have neverbeen defined and clarified. Therefore, there is confusion between transformationand upgrading. This is mainly reflected in the confusion about organizationaltransformation and business transformation. There is even a confusion overupgrading and innovation (Bao et al. 2008). If we define enterprise transformationat the business level without having to cover the organizational level, then anenterprise’s transformation and upgrading are closely related. It is neither necessarynor possible to separate the two from each other. In particular, transformation andupgrading of enterprises is an important practice in emerging economies, and theterm “transformation and upgrading” has been widely used in China. We do notneed to avoid it only because there is no corresponding terms in the Englishliterature.

1.1.3 The Pressure of Chinese Enterprises’ Transformationand Upgrading Has Long Existed

Since the reform and opening to the outside world, China has achieved a leap fromthe initial stage to the mid stage of industrialization. The level of urbanization hasimproved rapidly and urban infrastructure has been greatly strengthened. Privateenterprises have risen from nothing and obtained space for development. Theaverage annual growth of China’s economy by now has reached 9.67%. But aftermore than thirty years of development since reform and opening, we should alsorecognize the many problems existing in the current economic growth model. Infact, the challenges for Chinese enterprises have existed for a long time, mainlybecause of six factors.

1. Resource shortages, rising costs, and environmental protection have put pressureon coastal areas

China, especially the Pearl River Delta region has achieved industrial take-offthrough the development of “three-plus-one” trading-mix (custom manufacturingwith materials, designs or samples supplied by foreign buyers). As a result,heavy-polluting labor-intensive electroplating, furniture, and other industriesaccount for a large proportion. Although in recent years, China is making a big pushto protect the environment, the “high input, high consumption, high pollution andlow output” extensive growth mode has not been fundamentally changed and it is


imposing a serious restriction on the sustainable development of China’senterprises. In 2012, China’s primary energy consumption was 3.62 billion tons ofstandard coal and it consumed 20% of the world’s energy. Unit GDP energyconsumption was 2.5 times the world average, 3.3 times that of the United States,7 times that of Japan, and higher than that of Brazil, Mexico and other developingcountries. Every ton of standard coal consumed in China only creates 14,000Yuan GDP, while the global average is 25,000 Yuan. For every ton of standard coalconsumption, the United States generates 31,000 Yuan GDP, and Japan 50,000Yuan GDP.8 Most segments of the Pearl River that run through the cities in thePearl River Delta and most streams in this area are badly contaminated. The rangeand frequency of red tide have increased year by year. People’s petition letters anddirect complaints to the authorities caused by environmental problems keepgrowing. And they emerge as the third major social concern after social and laborsecurity. Each year, the government’s environmental protection requirements forenterprise production are increasingly strict. The deterioration of the environmentand resources and the government’s policy on energy conservation and environ-mental protection are compelling enterprises to undertake transformation andupgrading.

2. Policy adjustment in export tax rebate for processing trade impacts on thestructure of export commodities

In order to further balance the structure of China’s foreign trade export and optimizethe structure of export commodities, the state ministries and commissions jointlyissued notices stipulating that from July 1, 2007 on, export tax rebates would becancelled for 10 types of 553 high energy consumption, high pollution andresource-intensive products and that the export rebate rates would be reduced for15 types of 2268 products which are prone to cause trade frictions. From August 1,2008 to June 2009, China had 7 times increased the value-added tax rebate rates ofthe labor-intensive, high technological content and higher value-added textile,clothing, electronics, mechanical and electrical export products. Among them, thehigh technological content mechanical and electrical products got a full 17% taxrebate. At the same time, as of 2014, a total of 1871 customs code products wereincluded in the prohibited catalogue of processing trade.9 Take Guangdong, a majorprovince of foreign trade, for example. The adjustment in the export tax rebatepolicy has an important and far-reaching impact on the development ofGuangdong’s foreign trade and industrial restructuring. According to the statisticsfrom Guangzhou customs, from January to June 2007, the total value of exported

8Vide Sina Finance (Per-Unit GDP Energy Consumption in China reaches 2.5 Times the World’sAverage, an Academician Suggests Developing Nuclear Power) http://finance.sina.com.cn/chanjing/cyxw/20131130/014317485049.shtml; CNII (In 2012, China’s Primary EnergyConsumption was 3.62 Billion Tons of Standard Coal) http://www.chyxx.com/data/201312/224566.html.9Vide Guangzhou Commerce Commission (Adjustment of Tax Rebate Policy Has Affected 3289Enterprises in Guangzhou) http://www.gzboftec.gov.cn/article.jsp?id=22538.


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goods involved in the policy adjustment in July 1 was $66.42 billion, accountingfor 40% of Guangdong’s total export value in the same period.10 In 2008, after thecountry raised its export tax rebate rate for seven times in a row, Guangdong’saverage export tax rebate rate increased from 12.21 to 14.27%, a total increase of2.06% points.11 According to the statistics of Guangdong provincial tax bureau, in2009, Guangdong province handled 146.552 billion Yuan for export tax refund(exemption), a year on year increase of 9.594 billion Yuan, and a yearly increase of7%.12 The constant adjustment in processing trade policy will threaten the survivalof many low-end processing trade enterprises in the Pearl River Delta. Nearly 20%of the processing trade enterprises will no longer enjoy preferential tax policies.Of the tens of thousands of Hongkong-invested companies, over 4,000 are on theverge of being shut down. Seen from another perspective, the introduction of thesepolicies is to strictly control the export of “high energy consumption, high pollu-tion, resource-based” products as well as low value-added, low technologicalcontent products, and at the same time to encourage the export of high techno-logical content high value-added products, so as to optimize the industrial structureand export commodity structure, and promote the transformation of foreign tradegrowth mode. Therefore, enterprise transformation and upgrading is a matter ofgreat urgency.

3. RMB appreciation is increasing pressure on exporting

Since the appreciation of RMB against the U.S. dollar in 2005, the long-term trendof RMB appreciation is obvious. From 2006 to 2012, the annual appreciation ofRMB against the US dollar was 6.804%, 6.882%, 3.349%, 0.09%, 3.09%, 5.11%and 0.25% respectively.13 From the beginning of 2013 to October 16, 2013, RMBappreciated by 2.1% against the US dollar. For companies that depend upon export,RMB appreciation has brought enormous pressure on their profits. According to thesurvey of Chinese Entrepreneurs, 82.4% of the enterprises believe that changes inRMB exchange rate have a direct impact on the operating activities of enterprises.In addition to the decline in export competitiveness brought about by the appre-ciation, RMB appreciation against the US dollar has led to immediate exchange rateloss. As for the Pearl River Delta and the Yangtze River Delta, which have

10Vide Sina Finance (The Gross Value of Guangzhou’s Exported Goods in the First Half of theYear Reached 17.92 Billion Dollars) http://finance.sina.com.cn/china/dfjj/20070806/04043853077.shtml.11Vide China Export & Credit Insurance Corporation (The Impact of Export Tax RebateAdjustment on Guangdong Foreign Trade Export During the Financial Crisis) http://www.sinosure.com.cn/sinosure/xwzx/rdzt/ckyj/ckfx/130973.html.12Vide Xinhua Net (Last Year, Guangdong Carried Out 146.5 Billion RMB of Export Tax Rebatesto support Enterprises’ Going Global) http://news.xinhuanet.com/fortune/2010-01/21/content_12851641.htm.13Vide Xinhua Net (RMB Appreciated 0.25% in 2012 While is Expected to Appreciate 1.9% ThisYear) http://news.xinhuanet.com/fortune/2013-01/02/c_124175472.htm.


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numerous export-oriented enterprises, the rising exchange rate of RMB has exertedpressure on the operating costs of many processing trade enterprises.

4. The rise of raw material prices and the enforcement of the new Labor ContractLaw have raised labor cost

On January 1, 2008, the new Labor Contract Law came into force, and provisionsfor protecting laborers have been added to it. But in the short run, it has greatlyincreased the labor cost of enterprises, for example, there is a rise in medicalinsurance, overtime pay, and so on. In recent years, local governments in variousparts of China have also raised the minimum wage standards. In 2011, 24 provincesin China adjusted the minimum wage, with an average increase of 22%; in 2012, 25provinces adjusted the minimum wage, with an average increase of 20.2%; in 2013,27 provinces and autonomous regions raised the minimum wage, with an averageincrease of 17%. In 2014, the minimum wage in Shenzhen went up to 1808 Yuan,taking the lead in the whole country. In February 2013, the State Council approvedthe Opinions on Deepening the Reform of Income Distribution System, whichprovide that by 2015 the minimum wage in most areas will reach above 40% of theaverage wage of local urban employees.14 Because of the hard gap of domesticresources and the rapid growth of investment, the pressure of raw materials willbecome a new burden to enterprises, especially those in the textile industry. Withthe prices of water, electricity, raw materials, fuel, transportation, etc. rising, pro-duction and sales costs of enterprises are increasing rapidly. The foundation for thesurvival of labor-intensive industries has been undermined. Chinese enterprisesurgently need to find a way out through transformation and upgrading.

5. Enterprises are at the bottom of the smiling curve and have low value added

In order to “reinvent Acer”, Taiwan’s Acer Group founder Mr. Stan Shih, proposedthe “smiling curve” in 1992 (see Fig. 1.1). This is actually a curve that illustratesthe added value of the industry and is used to explain the strategic direction of Acer.The curve is like a smiling mouth, with both ends facing upwards. In the industrialchain, value-added is more reflected in the two ends of design and sales, while inthe middle segment of manufacturing, the value added is the lowest. Stan Shihbelieves that Acer should abandon its assembly in Taiwan and concentrate onhigher value areas of expertise. Many Chinese enterprises are still stuck at thebottom of the industrial chain, barely having any capability to create value added.Facing shrinking market and meager profit, they are in an increasingly difficultsituation. So in order to survive and develop, Chinese enterprises need to liftthemselves up to the higher sections of the value chain.

6. Enterprises are in a passive situation facing anti-dumping, quality and envi-ronmental certifications, and other trade barriers

14Vide Xinhua Net (the State Council Approved “Some Opinions on Deepening the Reform ofIncome Distribution System”) http://news.xinhuanet.com/politics/2013-02/05/c_114625358.htm.


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Most export-oriented enterprises in China are mainly small and medium-sized ones.They are small in size and lack strength, and their ability to resist and avert risks isvery limited. In the process of development, these enterprises are vulnerable toexogenous external factors like changes in the political and economic environment.With the increasing expansion of China’s foreign trade, the number ofanti-dumping lawsuits suffered by export-oriented enterprises has also increased. Inaddition, it is difficult for them to win the cases. And this further encourages foreigncompanies to lodge more anti-dumping complaints against China’s export products,resulting in a vicious circle. In 2006, the anti-dumping duties imposed by theEuropean Union (EU) on some China-made leather shoes were substantiallyincreased from 4.8 to 19.4%, which immediately threatened the survival of smalland medium-sized OEM shoe factories.15 Besides anti-dumping lawsuits, Chineseenterprises have to face the international product quality certification and the“green” barrier, which have virtually increased the non-material costs of enterprises.For example, in the toy industry, the International Council of Toy Industry (ICTI)launched “ICTI Code of Conduct” to safeguard the legality and safety of toys. Thishas generated a rather big impact on Chinese toy manufacturers. As of March 2006,a total of 195 toy brands, had signed to recognize ICTI certification, including theworld’s top brands like Mattel, Hasbro, Leap Frog, Mega, Lego, Toys “RU”s etc.,purchasing altogether more than 65% of the toys in the world toy market They werecommitted only to take products produced by ICTI certified factories after a certainperiod of time. This means that if the domestic toy enterprises cannot obtain ICTIcertification in a certain period of time, they will be faced with the risk of losing alarge number of orders. The toys recall storm in 2007 caused a huge economic andreputational blow to Chinese toy enterprises. Especially in Guangdong, a major toyexport province, orders reduced in varying degrees in most enterprises. InDongguan, the closedown of large numbers of toy manufacturers initiated by SmartUnion factories was related to the increasingly strict international quality andsecurity requirements.

Fig. 1.1 The smiling curve.Source Stan Shih, Acer’sCentury Change, TaiwanWorld Culture PublishingHouse, 1997

15Source: Foshan Daily, June 15, 2006.


1.2 The Financial Crisis Has Intensified the Pressurefor Chinese Enterprises to Transform and Upgrade

1.2.1 China Has Been Affected by the Global FinancialCrisis

The financial crisis triggered by the U.S. subprime crisis has intensified and itquickly spread from the local place to the whole world. China, one of the majorholders of US securities, was also affected by the crisis (see Table 1.1). As ofSeptember 2008, China’s foreign exchange reserves amounted to US $1.905585trillion; of China’s foreign exchange reserves, 65% are US dollar assets, 25% Euroassets, and 10% assets of the Yen and other currencies;In the dollar assets, 50% arethe U.S. government’s long-term bonds, 35% the U.S. institutional bonds, such asthose issued by Fannie Mae and Freddie Mac, 15% corporate bonds or othershort-term bonds.

The financial crisis has not only affected China’s financial markets, but also thereal economy. In the first three quarters of 2008, China’s GDP growth fell from10.4% in 2007 to 9% in the third quarter of 2008, with the largest decline in thesecondary industry, down from 13.4% last year to 10.5% in the third quarter (seeTable 1.2). In November 2008, the whole country’s exports fell by 2.2% comparedwith the same period of last year, and exports fell by 17.9%. In January to Septemberof 2008, industrial added value increased by 15.2% on a year on year basis, 3.3%points lower than the same period of last year, and in September only increased by11.4%. In January to September of 2008, power generation growth slipped to 9.9%,with only 3% in September.16 Domestic enterprises have also been greatly affected.The business climate index released by China’s National Bureau of Statisticsdropped from 146 in the second quarter of 2007 to 128.6 in the third quarter of 2008.Entrepreneurs hold reservations about economic recovery. Among all sectors, theindustrial sector and the real estate sector are affected most (as shown in Table 1.3).

1.2.2 The Financial Crisis Hit the Export-OrientedEconomy in the Pearl River Delta and Yangtze RiverDelta Particularly Hard

Most enterprises in the Pearl River Delta and Yangtze River Delta regions are smalland medium-sized manufacturers producing low-end products for the export mar-ket. In recent years, because of a combination of domestic supply side constraints(rising raw material prices, higher labor costs, tight electricity supply) and macroeconomic changes (reduced export tax rebate, greatly increased environmental

16Source: National Bureau of statistics, http://www.stats.gov.cn.


http://www.stats.gov.cn

protection costs, and RMB appreciation), the weaknesses inherent in the enterprisesmanufacturing low value added products have gradually emerged. For the PearlRiver Delta region that has a large concentration of export-oriented enterprises,the impact of the global financial crisis was especially hard. For example, in

Table 1.1 Asset composition of US securities held by foreign investors. Unit: US $1 billion.Source US Treasury report, June 30, 2007

Country Total Equity Long-termgovernmentbonds

Long-terminstitutionalbonds

Long-termcorporatebonds

Short-termbonds

Japan 1197 220 553 229 119 76

China 922 29 467 376 28 23

Uk 921 421 43 28 405 24

Caymanislands

740 279 23 52 347 38

MiddleEast

308 139 79 30 17 44

Total 9772 3130 1965 1305 2737 635

Table 1.2 China’s GDP growth rate. Source National Bureau of Statistics http://www.stats.gov.cn

2007 2008 Q1 2008 Q1-2 2008 Q1-3

GDP year-on year growth rate (%) 11.9 10.6 10.4 9.9

The primary industry 3.7 2.8 3.5 4.5

The secondary industry 13.4 11.5 11.3 10.5

The tertiary industry 12.6 10.9 10.5 10.3

Table 1.3 China’s business climate index. Source National Bureau of Statistics http://www.stats.gov.cn

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

Total 139.7 146 144.7 143.6 136.2 137.4 128.6

Manufacturing 140.1 146.9 144 143 133.3 135.7 125.8

Construction 127.7 142.4 143.2 146.4 136.7 144.2 135.3

Transportation, storage and postalservices

137.7 137.7 139.2 133.4 135.1 129 119.6

Wholesale and retailing 151.7 152.1 154.7 152.2 153.2 147.5 143.6

Real estate 138.8 141.1 140.3 140.3 132.2 131.8 118.9

Social service 128.1 136.9 139 135.5 132.2 124.8 127

Information transmission, computerservices and software industry

155.1 158.5 160 160.3 159 162.9 147.6

Accommodation and cateringservices

125.1 131.4 130.2 129.5 123.3 121.3 119

1.2 the Financial Crisis Has Intensified the Pressure … 11





Guangdong Province, as of November 2008, the export volume of processing tradewas US $21.108 billion, accounting for 62% of all exports. Because Guangdonghas a high degree of dependence on foreign trade, under the pressure of domesticsupply side constraints and macro economic changes, Guangdong’s export pro-cessing enterprises are gradually approaching the critical line. The growth rate ofindustrial added value in January to November of 2008 was lower than the nationalaverage (shown in Table 1.4). In November 2008, Guangdong’s export deliveryvalue of industrial products increased by 11.1%, down 11.8% points year on year.Among them, the export volume of processing trade in November grew by −14.3%,down 27.5% compared with the same period of last year. By types of enterprises, inNovember exports from state-owned enterprises and the three kinds offoreign-invested enterprises (namely Sino-foreign joint ventures, cooperativebusinesses and exclusively foreign-funded enterprises) fell by more than 10%(shown in Table 1.5).

According to the survey of Guangdong’s enterprises by the National Bureau ofStatistics, the overall prosperity condition of enterprises in Guangdong provincedeclined significantly in the third quarter of 2008. The entrepreneur confidence

Table 1.4 The growth rate of industrial added value in China and Guangdong in 2008 (%)Source National Bureau of Statistics http://www.stats.gov.cn

Month Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov.

National total 15.4 16.4 16.3 16.3 16.3 16.1 15.7 15.2 14.4 13.7

Guangdong 12.7 13.6 13.7 13.7 13.7 13.4 13.4 13.3 13 12.8

Table 1.5 Import and export volume of Guangdong province in Nov. 2008 (US$100 million).Source http://www.gdstats.gov.cn

Indicator Nov.2008

Year-on-yearincrease (%)

Cumulativetotal

Year-on-year increaseof cumulative total (%)

Export volume 338.45 −5.1 3716.54 11.1By types of trade

1. General trade 104.52 13.5 1055.87 11

2. Processing trade 211.08 −14.3 2417.11 8.3

2.1 Processing withsupplied materials

46.51 −11.9 532.57 12.2

2.2 Processing withimported materials

164.57 −14.9 1884.54 7.3

By types of enterprise

1. State-owned enterprises 47.8 −10.7 562.84 8.8

2. Three kinds offoreign-investedenterprises

205.94 −10.9 2361.71 12.3

3. Collectively ownedenterprises

13.7 14.3 142.64 20

4. Private enterprises 70.22 20.3 637.24 8.2



http://www.gdstats.gov.cn

index and business climate index had dropped to a new low since the third quarterof 2003. The main classification climate indexes all declined in different degrees. Inthe third quarter of 2008, Guangdong’s business climate index was 132.9, down4.6 points compared with the second season and down 16.9 points compared withthe same period of the previous year. The climate index of the real estate industrywas the lowest in eight major sectors. And the manufacturing climate index wentdown instead of up in peak seasons (see Table 1.6).

In the manufacturing sector, 23 major manufacturing sub-sectors showed dif-ferent degrees of decline compared with the same period of the previous year.Compared with the second quarter, 15 industries including the textile industry sawdeclined business climate index; in three industries the index was basically thesame; only in five industries including the metal product industry the prosperityindex rose (shown in Table 1.7).

1.3 Planning for Change in Time of Crisis

1.3.1 In Front of Chinese Enterprises Are Three Ways:Relocating, Upgrading, or Going Out of Business

Faced with the impact of the financial crisis, a number of enterprises have fallendown, and large numbers of employees were unemployed. It is really worrisomethat enterprises at the low segments of global value chains (GVCs) showed littleability to withstand risks when facing turbulence in the external environment.According to the statistics released by Guangdong SME Bureau, the closureof enterprises in the first three quarters of 2008 mainly concentrated in the Pearl

Table 1.6 Guangdong business climate index in 2008 Q3 Source National Bureau of Statisticshttp://www.stats.gov.cn

Sector Q3 Increasecompared toQ2

Year-on-yearincrease

Estimatefor Q4

Overall condition 132.9 −4.6 −16.9 135.2

Manufacturing 133.8 −3.6 −16.0 137.3

Construction 129.2 −1.6 −8.8 131.6

Transportation, storage and postalservice

143.4 6.3 −4.9 139.2

Wholesale and retail 141.2 −2.4 −10.4 139.9

Real estate 110.9 −31.8 −34.0 111.6

Social service 127.2 5.6 −30.0 130.2

Information transmission, computerservices and software industry

153.8 −2.8 −14.0 156.1

Accommodation and catering service 118.3 −3.6 −20.3 122.9

1.2 the Financial Crisis Has Intensified the Pressure … 13


River Delta region. In this region, the cities where a significant number of enter-prises were closed down are in turn Dongguan with 1464 failed enterprises,Zhongshan 956, Zhuhai 709, Shenzhen 704, Shanwei 587, Foshan 526 andChaozhou 432. Examined from its distribution in different industries, the closure ofenterprises mainly concentrated in textile and clothing, hardware and plastics,electronic products, ceramics and building materials and other low technology, highenergy consuming traditional industries.17 According to statistics from Guangdong

Table 1.7 Business climate indexes of some major manufacturing sectors in 2008 Q3 SourceNational Bureau of Statistics http://www.stats.gov.cn

Sector Q3 Increase comparedto Q2

Year-on-yearincrease

Textile 100.1 −7.21 −14.69

Plastic products 103.36 −11.86 −7.69

Furniture 107.46 −17.96 −18.1

Melting and processing of ferrous metals 108 −7.81 −7.34

Textiles and garments, shoes, hatmanufacturing

108.03 −41.2 −46.48

Manufacturing of general equipment 111.49 −20.14 −36.56

Leather, fur, feather products 116.28 −13.63 −16.43

Paper making 117.83 −10.88 −45.32

Non-metallic mineral products 118.62 −6.68 −15.82

Agro-food processing 122.47 0.11 −21.54

Melting and processing of non- ferrousmetals

126.86 −24 −36.88

Metal products 130.83 14.36 −18.04

Food manufacturing 130.84 4.78 −20.32

Manufacturing of electrical machinery andequipment

131.3 −16.97 −28.4

Printing, manufacturing of recorded media 132.14 −0.87 −0.24

Manufacturing of specialized equipment 134.65 10.81 −15.09

Chemical materials and chemical productsmanufacturing

139.86 −4.53 −19.52

Pharmaceutical Manufacturing 141.41 −7.42 −23.13

Beverage 143.17 3.33 −30.34

Manufacturing of cultural, education andsporting goods

144.17 1.52 −9.93

Communications equipment and computers 148.19 −4.42 −10.67

Manufacturing of instruments and officeequipment

152.69 −3.9 −9.67

Manufacturing of traffic, transportationequipment

156.87 −0.61 −0.09

17Source: Guangzhou Daily, November 17, 2008.



Customs, in the first three quarters of this year, more than 6800 enterprises inGuangdong withdrew from the export market due to a decrease in export orders.And more than half of them are small and weak private enterprises.A Dongguan-conducted survey reveals that, 30% of the city’s enterprises were inthe red; 20% profited slightly; only 50% remained profitable, while prior to thecrisis, 90% of the enterprises were profitable.

According to a Xinhua report, batches of export processing enterprises in thePearl River Delta and China’s coastal areas have closed down; many large andmedium-sized manufacturing enterprises have also rapidly slowed down the pace ofexpansion, resulting in large numbers of rural migrant workers being laid off orforced to take indefinite leave. Although it is not the end of the year (when ruralmigrant workers usually go back home for the conventional Spring Festival),beginning in October, Guangzhou Railway Station has ushered in an unusuallylarge stream of people and has a daily passenger volume of 90,000–130,000 people.A rather large part of them are rural migrant workers working in Guangdong.Because many factories stopped operating, they have to go home early or to findanother way to make a living.18 Similarly, in Wenzhou, one of the most eco-nomically active areas in the Yangtze River Delta, 20% of the SMEs at present havestopped working, or are operating on halftime, or even closed down. According to aRuian report “Analysis of the Industrial Economic Situation on the Implementationof the Labor Contract Law in Ruan”, the great majority of the three leadingindustries and six traditional industries are labor intensive industries. 20% of theenterprises in these industries have stopped functioning or closed down. And onethird of the enterprises in the footwear industry are out of business.

Confronted with the rapidly changing economic situation in the world, Chineseenterprises have three paths to take. The first is relocating. This means shiftingproduction bases to areas with lower labor costs and using cost advantages to makeprofit, just as more than 10 years ago many Taiwanese companies chose to movemanufacturing plants to mainland China which had lower labor costs. The secondpath is upgrading. This includes not only the upgrading of enterprise products inorder to obtain higher value added, but also the upgrading of the enterprise to bothends of the value chain, that is, from simple manufacturing to upstream R&D anddownstream brand promotion and service. The third path is only to maintain thestatus quo and eventually be eliminated by the market.

1.3.2 Chinese Enterprises Should Bravely Break Throughin the Crisis

Business competition is like car racing. It is difficult to tell the difference when thedrivers are speeding along a straight track. The best time to test the wisdom and

18Source: Sina, http://www.sina.com.cn, November 7, 2008.

1.3 Planning for Change in Time of Crisis 15

http://www.sina.com.cn

courage of the drivers and to judge the performance of the cars is while they aretaking a turn around the corner, for only good racing drivers and cars can win overthe opponents in turning the corner. Similarly it is the best time to test the man-agement strength of an enterprise and the will of an entrepreneur when the enter-prise undergoes changes and is in a turbulent environment with its rivals.Companies that anticipate and have prepared for the crisis are usually able to seizethe opportunity and outstrip their rivals. According to the data compiled in theOctober 29, 2008 issue of China News Weekly, 67,000 SMEs closed down inChina in the first half of 2008.

However, some high-tech enterprises in Shenzhen are relatively strong and havethe ability to withstand the financial turmoil. In the first three quarters of 2008, theadded value of high-tech products in Shenzhen was 177.190 billion Yuan, accountingfor more than 60% of the city’s industrial added value. Local high-tech enterprisescontinue to maintain a high growth rate and become the backbone of Shenzhen’shigh-tech industries. For example, in the first three quarters of 2008, HuaweiTechnology Co., Ltd. achieved output value of 81.70 billion Yuan, an increase of50%; ZTE realized output value of 27 billion Yuan, an increase of 23%. In 2012, theadded value of hi-tech products in Shenzhen was 282 billion Yuan, increasing by12.1%, accounting for 30.9% of the city’s GDP, down 3.9% points. The proportion ofhigh-tech manufacturing sector has risen. In the first three quarters of this year, theadded value of advanced and high-tech manufacturing sector was 259.377 billionYuan and 210.730 billion Yuan, rising by 4.6% and 7.9%, accounting for 71% and57.7% of the added value of industrial enterprises above designated scale respectively(at present, industrial enterprises above designated size in China refer to thoseenterprises whose annual main business income is more than 20 million Yuan).

Shenzhen enterprises perform better in face of crisis because industrial upgradinghas long been carried out. Therefore, they have the preparation as well as the ability torespond to the financial crisis. Facing changes in the global economic environment,enterprises are under increasingly great pressure for transformation and upgrading. Atthe moment of crisis, are Chinese companies ready? Can they break through?

References

Bao, J., Miao, Y., and Chen, F. Low Carbon Economy: Revolution in the Way of HumanEconomic Development [J]. China Industrial Economics, 2008, 22(4): 153–160. (in Chinese)

Gereffi, G. International Trade and Industrial Upgrading in the Apparel Commodity Chains [J].Journal of International Economics, 1999(48): 37–70.

Humphrey, J., and Schmitz, H. Governance and Upgrading: Linking Industrial Cluster and GlobalValue Chain Research [C]. IDS Working Paper 120, Brighton: Institute of DevelopmentStudies, 2000.

Kaplisnsky, R., and Morris, M. A Handbook for Value Chain Research. Prepared for the IDRC.2001.

Poon, T. S. C. Beyond the Global Production Networks: A Case of Further Upgrading of Taiwan’sInformation Technology Industry [J]. Technology and Globalization, 2004, 1(1): 130–145.


Chapter 2Experiences of CorporateTransformation and Upgrading in AsianEmerging Economies

2.1 High-Level Dedicated Foundry Road of Taiwan’sSemiconductor Industry

Since 1950s, Taiwan has embarked on an export-oriented economic developmentperiod, enabling itself to develop rapidly for over two decades. When Taiwanesewere expecting the golden time of “advanced economy”, however, the island’sindustrial development encountered a great setback. During the mid-and-late 1980s,it almost lost the competitive advantages in resource-intensive industry and sufferedfrom the surging cost-pressure in land, labor and raw materials. Besides, the highpolicy uncertainties and competition from latecomers in Southeast Asia andmainland China put Taiwan enterprises into difficulties, which the mainlandChinese enterprises now face and have to manage. At that time, a large number ofTaiwan entrepreneurs carried out strategic reactions. Some of them attempted totransfer their business to mainland China to enjoy low labor-cost. Some, byincreasing their products’ added value and thus their competitiveness, strived toupgrade so as to guarantee a new round of development. Some others, however,were facing the bankrupt threat. Accordingly the Taiwanese government deter-mined to, apart from the continued development of textile industry and heavychemical industry, prioritize the development of technology-intensive industriesincluding the electronics, communications, semiconductors, precision instrumentsand health care. From then on Taiwan has entered a new era of industrial upgrading.

Most Taiwan companies followed the upgrading pattern often utilized by theprocessing trade enterprises. Generally, late-movers, when selecting their expan-sion strategy, would prioritize the upgrading of intra-industry OEM, followed bythe inter-industry OEM and finally OBM. But OBM, the highest level of upgrading,requires a combination of production scale, R&D capabilities and managerial skills.


17




Hence, lots of enterprises attempted to upgrade their original OEM business for thesake of survival, including Foxconn Technology Group, Taiwan SemiconductorManufacturing Company (TSMC) and United Microelectronics Corporation(UMC). OEM companies as they were, though, they occupied the key positions inthe industrial chains, thanks to their considerably higher value-added technology.Some other enterprises, in the industry with certain technological strength, haveachieved upgrading by transforming international OEM to OBM, such as GiantGroup in the bicycle industry and Acer Inc. and AsusTek Computer Inc. in thecomputer industry. These brands have gained substantial recognition around theworld, thus becoming the representative enterprises in Taiwan’s industries. Some ofthem, motivated by the entrepreneurship, carried out upgrading proactively andcreated high-quality brands; while others were forced to upgrade their business dueto the limited potential of profits and growth. Particularly, Taiwan’s semiconductorindustry is a typical one which not only represents the characteristics of the globalvalue chain, but also provides a solid foundation to facilitate the economic trans-formation of Taiwan in the past thirty years, during which the semiconductorenterprises have upgraded towards advanced OEM.

2.1.1 Five Development Stages of Taiwan’s SemiconductorIndustry

Starting with the establishment of packaging factories by foreign investors,Taiwan’s semiconductor industry has seen five stages of development, includingthe emerging stage from 1966 to 1973, the introducing stage from 1974 to 1979, thegrowing stage from 1980 to 1995, the expanding stage since 1996 and the maturestage currently. Thanks to three decades of development, Taiwan has cultivatedindependent technological capabilities in such fields as wafer materials, mask ser-vice, circuit design, manufacturing, packaging and test.

2.1.1.1 Stage One: Emerging Stage of Taiwan’s IC Enterprises(1966–1973)

In 1966 Kaohsiung Electronics Co. was set up by General Instrument Inc. (anAmerican company), engaging in the packaging business of transistors. It was thefirst company to introduce integrated circuit (IC) packaging technology intoTaiwan, followed by the factories invested by Texas Instruments and PhilipsElectronics Building Elements. These foreign companies brought about IC tech-nologies such as packaging, test and quality control, laying down initial foundations

18 2 Experiences of Corporate Transformation and Upgrading …

for the development of Taiwan’s IC industry which at that time was constitutedmainly by the packaging firms. In 1964 the National Chiao Tung University(NCTU), placing emphasis on the teaching of IC courses, set up an IC laboratorywhich, as the only one at that time, possessed the IC producing capability and thuscontributed enormously to the cultivation of IC technicians in Taiwan. Up to now,most top R&D talents of great importance in the IC industry have graduated fromNCTU, which is one of the key factors contributing to the smooth development ofTaiwan’s IC industry.

2.1.1.2 Stage Two: Introducing Stage (1974–1979)—TechnologyIntroduction and Innovation Derivation (Period of OEMand ODM)

In 1974, the semiconductor industry witnessed a vigorous growth in the world andplayed an increasingly important role on related industries, though the semicon-ductor manufacturing industry has not come into being in Taiwan yet. During thisperiod, the industry development strategy, primarily under the direction of thegovernment, started with the introduction of advanced technologies from interna-tional high-tech companies, followed by the derivative foundation of technologicalcompanies that required the pass of market test, and finally the initial forming ofsemiconductor industry. To guarantee the electronic industry’s relentless movementtoward technology-intensive segments, the Electronics Industry Research Centerwas established in 1974 by the Industrial Technology Research Institute (ITRI).ITRI is a nonprofit organization dedicated to the transferring of mature technologiesto the private sector. Shortly after its establishment, it signed an agreement withRadio Corporation of America (RCA) to license two semiconductor process tech-nologies in 1975 and set up the first IC demonstration foundry in 1977. Moreover,this learning-and-imitation era of IC manufacturing technologies has seen theorganization of UMC, a spinoff of ITRI, which had to target the products at thoselow value-added regional markets and keep away from the mainstream marketsoriginally occupied by the international leading companies.

2.1.1.3 Stage Three: Growing Stage (1980–1995)—TechnologicalImprovement and Strategic Alliance

After mastering the technologies transferred from RCA, ITRI successfully launchedproducts in the market and received acceptance. Then it continued with the SecondDevelopment Plan of Electronic Industry (1979–1983), the Very Large ScaleIntegration-Circuit (VLSI) program (1983–1988) and the Sub-Micron Plan (1990–1994). These schemes gradually laid a solid foundation for the technology devel-opment of Taiwan’s IC industry.

2.1 High-Level Dedicated Foundry Road of Taiwan’s Semiconductor … 19

For the enterprises engaging in upgrading, frankly, it was an inevitable challengeto improve their own technology and narrow the gap with the internationaladvanced companies. Hence, Taiwan’s OEM IC foundries has not only kept onpursuing research cooperation with ITRI under the governmental commission andseen the creation of Taiwan Semiconductor Manufacturing Corporation (TSMC) asa spinoff of ITRI, but also maintained partnerships with those international man-ufacturers for high-tech licensing and transferring which ensured their product salesin the international mainstream markets. Under this circumstance, the joint venturesof TSMC-Philips and Acer-Texas Instruments came into being. In a word, theindustrial development strategy in this stage was featured by the utilization ofgovernment resources to promote technological innovation and by the establish-ment of international strategic alliances to gain high-tech licensing, so as to getaccess to the international mainstream market and speed up the enterprises’ inno-vations. Therefore, it was the growing stage of Taiwan’s semiconductor companies.

2.1.1.4 Stage Four: Expanding Stage (1996)—Self R&Dand Industry-University—Research Collaboration

Before 1975, Taiwan’s semiconductor firms were still in its infancy, But after overtwo decades of development, aggressively promoted by the government and theindustry-university-research cooperation, they gradually entered the expandingstage of self-innovation Despite the recession in the global semiconductor market in1996, Taiwan’s companies witnessed a considerable increase in output value thanksto their balanced distribution of product structure. Particularly in the field of waferfabrication, TSMC and UMC as well as other companies accounted for over 60% ofthe global market, thus driving the semiconductor industry to step into the era ofstrategic alliances and dedicated division of labor. By 2005, a total of NT$2 trillionhad been invested to construct the wafer fabrication facilities (a.k.a. fabs), enablingthis island to grow into the most active district for developing semiconductorindustry in the world.

When these companies approached from behind the advanced manufacturers inthe technological level, however, technology introduction and licensing becameincreasingly difficult. To maintain their competitiveness in the international market,consequently, they must carry out independent R&D for more advanced tech-nologies. Yet, the resources and risks involved in such independent R&D were toohard to be afforded by a single manufacturer from the underdeveloped area. Hence,the industry-university-research cooperation promoted by the government couldhelp enhance the R&D competitiveness of the whole industry. Thanks to thisindustrial development strategy, Taiwan’s semiconductor industry in a stepwisemanner entered the market expansion stage.


2.1.1.5 Stage Five: Mature Stage—Resources Restructuringand Integration

After decades of efforts, some of Taiwan’s semiconductor enterprises have beentechnologically and sufficiently capable to compete with the advanced manufac-turers. Then it was important for them to launch resource restructuring and inte-gration from a globalization perspective so as to further promote the industrialinnovation. Hence, after developing into the mature stage and embedding them inthe global semiconductor industry, these enterprises must take into account how toenhance their core competitiveness and collaborate with international advancedmanufacturers for global resources restructuring and integration. This constitutedthe development strategy of semiconductor industry in this period.

Frankly speaking, Taiwan’s semiconductor industry structure was quite excep-tional, compared to that in Europe, the United States, Japan and South Korea.Semiconductor firms in the US were mostly led by the investment enterprises ordedicated IC companies, while those in Japan were dominated by the conglomer-ates (South Korea also belonged to this type). Such differences led to their dis-tinctions in the industry development. By comparison, Taiwan’s semiconductorcompanies were led by the investment enterprises in many sectors, which is similarto the US type. But unlike the US companies whose technical R&D could besupported by the military budget, Taiwanese firms developed their advancedtechnology mainly through the international cooperation strategy.

2.1.2 Sources of Competitiveness of Taiwan’sSemiconductor Companies

2.1.2.1 Vertical Disintegration and Professional Division-of-LaborSystem in the Semiconductor Industry Contributed to ItsInternational Competitiveness

After decades of efforts, Taiwan’s semiconductor industry has gradually developedinto large scale with international competitiveness and formed a unique industrialdivision-of-labor system called vertical disintegration. In fact, Taiwan’s semicon-ductor industry is a sophisticated network consisting of firms specializing in somespecific phase in the semiconductor industrial chain, such as chip design, foundry,test and packaging. These specialist firms constitute a vertically disintegratedsemiconductor supply chain in Taiwan, which is quite different from the verticalintegration often deployed in Japan, Europe, U.S. and other advanced industrialcountries, wherein a firm would perform all of the above activities as well asmarketing and system development. By comparison, Taiwanese firms were sig-nificantly smaller than those in the above competing counties and these small ormedium-sized firms lacked adequate resources, such as sufficient capital, skilledtechnicians and established international connections. Hence, they could only select


some strategic areas and consistently improved the technology, product quality andmanufacturing process so as to enhance their competitiveness. Since the early1980s, the semiconductor industry has been programmed as one of the strategicindustries heavily supported by Taiwan’s government and regarded as the mostsuccessful case during the development of Taiwan’s emerging technology industry.

2.1.2.2 Good Cluster Supporting Environment and AppropriateBusiness Strategy Were the Key Factors for the Upgradingof IC Enterprises in Taiwan

In the fiercely competitive industry, the establishment of industrial clusters andscience-based industrial parks has played a vital role in the development ofenterprises. Set up in 1980, Hsinchu Science Park has provided IC firms withattractive infrastructure and easy access to administrative procedures and servicesso that these firms can concentrate on product and technology development. Themutual support and friendly competition among these geographically clusteringcompanies has ensured their technological innovation and attempt at self-brandestablishment after completing the primary accumulation of capital. Later, TainanScience Park was set up based on Hsinchu Science Park and followed the samepattern, thus driving the development of science and technology industry insouthern Taiwan.

2.1.2.3 ITRI Was the Innovation Source of Semiconductor Firms

For several decades, ITRI has provided great leadership and strong technical sup-port to Taiwan’s semiconductor industry and many of the renowned Taiwanesesemiconductor enterprises can be traced back to ITRI. In September 1974, ITRI setup the Electronic Industry Research Center to carry out “The Plan of Setting ICDemonstration Plant”, introducing and transferring the semiconductor manufac-turing technology to the private sector. In 1979, the Electronic Industry ResearchCenter was renamed as the Institute of Electronics Industry, enabling the Taiwan ICfoundry industry to equip itself initially with complete manufacturing technologycapability. Afterwards, ITRI successfully completed the First Phase of ICDemonstration Program (1975–1979), the Second Phase of ElectronicsDevelopment Program (1979–1983), the Very Large Scale Integration-Circuit(VLSI) Program (1983–1988) and the Sub-Micron Plan (1990–1994). Theseschemes have gradually laid down a solid foundation to support the rapid devel-opment of Taiwan’s semiconductor technology.

As a nonprofit organization, ITRI carried out technology projects aiming tocultivate the local semiconductor industry by established technology. Hence, a largenumber of research achievements have been transferred to the private sectors underthe government’s guidance and ITRI’s cooperation. ITRI has facilitated theestablishment of those spinoff companies, such as UMC, TSMC, Taiwan Mask


Corp. and Vanguard International Semiconductor Corp., which stepped up thetechnological innovation and promoted the upgrading of Taiwan’s semiconductorindustry in the long term.

2.1.2.4 Entrepreneurship in Taiwan

Taiwanese entrepreneurs have relied heavily on personal networks to launchbusiness activities. The corporate upgrading and self-brand establishment has beenaccelerated by continued improvement in areas such as production process, productquality, management capabilities and technical R&D. In particular, the self-brandawareness of Taiwanese companies reflects the innovation and positive spirit oftheir entrepreneurs.

Taiwan is one of the most active areas with regard to entrepreneurship, whichcould be best manifested by the semiconductor industry due to its rapid updates andshort cycles of technology. In fact, Taiwan’s contract manufacturing model is arelational structure between the consignor and small-scale manufacturers (theso-called laoban in Taiwan), which has not only promoted Taiwan’s export-orientedindustrial development, but also provided Taiwanese with lots of opportunities tostart their own businesses. Besides, the majority of Taiwan’s laoban are indepen-dent SME owners, chairmen and general managers, who can skillfully use personalnetworks for business purposes. The complex personal networks of Taiwan societyhave provided laoban a social context that suits their partnership-oriented andguanxi-oriented business activities. The mutual communication could facilitate theexchange among companies and bring about business opportunities. With regard tothese semiconductor enterprises, the entrepreneurial network ranges from domes-tical National Chiao Tung University (NCTU) to advanced enterprises in SiliconValley such as Hewlett Packard Enterprise, Intel Corporation and so on. During thisexport-oriented period, Taiwanese entrepreneurs have strived to seize the oppor-tunity to enhance their learning and absorbing of overseas technologies for capitalaccumulation, which laid down a solid foundation for their self-brandestablishment.

Entrepreneurs of underdeveloped areas should have adaptive entrepreneurship. Asindicated by Joseph A. Schumpeter, the Austrian economist, the task of entrepreneursis “creative destruction” and innovation is the essence of entrepreneurship.Nevertheless, with regard to entrepreneurs in latecomer economies in particular,“adaptive entrepreneurship” is more likely than overall innovation to serve the pur-pose of business upgrading. For instance, they can increase product functions andimprove quality to boost market sales, or provide new commodities that have beeninadequate in the market, or provide better services for existing market segments.Such “adaptive entrepreneurship”, quite different from the so-called “creativedestruction” entrepreneurship, is an updating and improvement to the existing cir-cumstances, which would be more essential to latecomer countries or regions.

Generally, Taiwanese entrepreneurs have a sense of mission, concerned aboutthe island’s industrial development. This could be illustrated by Stan Shih, the


founder of Acer Inc., who is known as Taiwan’s IT godfather. His smiling curvetheory and meritocracy thought have influenced a large number of entrepreneurs.After retiring from Acer, he continues to pay attention to his company. Meanwhile,he is committed to Taiwan’s industrial development, remaining active in the“Branding Taiwan” Plan to help local brands step to the international market. Mr.Shih also founded a virtual college, dedicated to cultivating brand awareness andinternational perspective of Taiwan’s youth.

In Taiwan, many entrepreneurs like Shih have emerged. As an example, inNovember 2008 the author’s research team visited the China InformationDevelopment Co., Ltd., located in Nanzih Export Processing Zone (north ofKaohsiung city, Twaiwan), wherein the impressive business-introduction by GeneralManager Wang Jinqi showed his great concerns about Taiwan’s future development.

To sum up, the success of Taiwan’s semiconductor industry can be attributed tothe following factors. First, the five years of preferential tax treatments implementedby the Hsinchu Science Park provided a healthy investment environment andlowered investment risks. Second, the relatively strong manufacturing capacityensured the quality and cost advantages in global competition. Third, compared tointernational manufacturers, Taiwan’s semiconductor firms can response to changesin market demand flexibly thanks to the cost-efficiency in fixed assets, overheadcharges and R&D, the relatively complete vertical disintegration of supportingindustries, the effective and efficient decision-making process and theentrepreneurship. Fourth, the companies can make full and real-time use of inter-national resources, including overseas talents, technologies of international manu-facturers, overseas market information and international strategic alliances. Fifth,the diversification of product structure and technology sources and rapid marketresponsiveness significantly reduced the risk of market changes. Sixth, the world’s3rd-ranking IT industry created about 6% of the global semiconductor demand, thuslaying a solid foundation for the development of the semiconductor industry.Seventh, the unique and excellent entrepreneurship and sense of industrial missionof Taiwanese entrepreneurs guaranteed the sustainable development of the semi-conductor industry.

2.1.3 Transformation and Upgrading Process of TaiwaneseEnterprises from Dedicated Foundry to IndustrialChain Integration

2.1.3.1 The Establishment of TSMC

When South Korea’s three conglomerates began competing for the global semi-conductor market in the early 1980s, the electronics industry in Taiwan, despite of


the earlier introduction of IC technology under the government’s strong support,did not emerge yet, except for UMC’s production of consumer chips.

To compete with the South Korean enterprises, Taiwan’s government decidedaccordingly to set up a large-scale IC experiment plant in ITRI, which became thepredecessor of TSMC.

Thanks to the government support and the effort of Morris Chang who is knownas the semiconductor industry founder of Taiwan, TSMC successfully raised capitalby floating shares and was incorporated in February 1987. When planning to gopublic in 1991, Chang negotiated several times with Philips’ chairman inNetherlands with the final result of Philips’ agreement of giving up some privilegeterms, which contributed to TSMC’s being listed. And the implementation ofEmployee Stock Ownership (ESOPs) has further developed TSMC into the mostdesirable company to Taiwanese graduates.

After embarking on the independence-oriented road, TSMC has graduallybecome a Taiwan-based dedicated IC foundry (OEM manufacturer). The twocompanies which once gave each other tit for tat now established closepartnership. Philips became the customer, shareholder and technical collaborator ofTSMC who, in return, was the most profitable client in Philips’s global investment.As an example, in 1997 Philips’ headquarters determined to sell out its shares ofTSMC which was estimated as high as NT $100 million.

TSMC is the world’s largest dedicated independent (pure-play) semiconductorfoundry, with its headquarters and main operations located in the Hsinchu SciencePark. TSMC’s first 12-in. wafer fab (Fabs 12), also the first 12-in. fab in Taiwan,began volume production for customers’ products in January 2002. Currently itoperates three 12-in. (300 mm) wafer fabs, 48-in. (200 mm) wafer fabs and one6-in. (150 mm) wafer fab in Taiwan. TSMC also has substantial capacity com-mitments at its wholly-owned subsidiary: WaferTech in the United States andTSMC China Company Limited, and at its joint venture fab: SSMC (Systems onSilicon Manufacturing Company, cooperated with NXP Semiconductors inSingapore). The annual capacity of the manufacturing facilities managed by TSMCand its subsidiaries reach above 8 million 8-inch equivalent wafers in 2007 and 10million 12-in. equivalent wafers in 2016, with the annual operating incomeexceeding half of that of the dedicated IC foundry services. Moreover, as the firstdedicated IC foundry entering the “Top 10 Semiconductor Sales Leaders” in 2002,TSMC has witnessed its increasingly high ranks in this list, jumping to the 6th in2007 and 3rd in 2017, according to the reports launched by Insights’ StrategicReviews Database. Besides, TSMC has long been the leading company in waferfoundry, closely followed by UMC, according to the statistics released by Gartner,Inc., an American research and advisory firm.


2.1.3.2 Main Features of TSMC’s Dedicated Foundry

Stringent and Innovative Corporate Culture

As the Chairman of TSMC, Morris Chang has always warned colleagues that theimplementation of corporate culture is the first priority; and integrity, customer-oriented partnership and innovation should be realized in every corner of theenterprise and every item of regulations.

TSMC’s senior management never denies that reengineering comes from the topand needs to be conducted more thoroughly. Stringent in behavior, Chang admitsthat TSMC is highly disciplined and demanding. That is, not only senior managerswould be strictly questioned by the chairman and CEO in the meetings, but thosemiddle and first-line managers would face rigorous introspection if they could notexplain to their subordinates in details. Chang believes the future business modelshould be shifted from technology-driven to customer-oriented so as to better serveits clients.

Strong R&D Competence and Technology Leading Strategy

Unlike Taiwan’s traditional business model, TSMC attaches great importance tostrategic planning and scientific management. Usually it would thoroughly collectthe global market information, evaluate its rivals’ strategies and their advantagesand disadvantages, and then formulate the business plan and competitive strategy.

While expanding its business, TSMC also endeavored to build up the system ofa large international enterprise by establishing a series of rules and regulations.Even if the turnover reached NT $1.2 billion, 10 billion and even 30 billion, TSMChas never been lax or lowered its expectations. Even if the profit rate reached above50% of its total wafer revenue, Chang still put forward a variety of targets and setup a number of business indicators, in an effort to stimulate the employees to keepin line with Intel. Believing that financial figures could simply reflect the results butnot the corporate competitiveness, he always urged his colleagues that, regardlessof the economic situation and profits rate, the responsibility of mangers is toestablish a competitive advantage so as to maintain TSMC’s leading position in theglobal wafer foundry and leave its counterparts far behind.

The advanced manufacturing technology is among the important reasons thatTSMC could maintain its industrial leadership. Mastering the cutting-edge tech-nology enables it to consistently develop the manufacturing technology so as tokeep up with the advanced enterprises globally. It has joined in the US IC I300Ialliance, equipping itself with 12-in. wafer technology.

TSMC became the world’s first dedicated IC foundry introducing 45-nm hi-techinto volume production. Even facing a heightened challenge from existing rivalsand newcomers, TSMC’s market share in the total semiconductor foundry segmentrose successfully, from 47% in 2007 to 56% in 2016, more than double the


percentage of the closest competitor. Such performance could be practically illus-trated by its sustainable R&D input which, as an example shown in Fig. 2.1,amounted to about NT$9.9 billion with a 14.5% growth in research team in 2007.

Changing Marketing Approach and Establishing Partnerships withCustomers

TSMC redefined marketing as not about selling goods but establishing partnershipswith customers. That is, from the chairman to the engineers, every employee mustlisten to customers’ needs, through both traditional approaches and modern infor-mation technology. Accordingly, TSMC has a large number of staff collectingindustrial dynamics, the latest technology, and they hold technical seminarsannually to share information with customers. TSMC has developed a compre-hensive system so that customers can quickly complete the design which wouldhelp the early launch of the product. Marketing staff not only have to study theneeds of customers now but also to collect customer needs in the future, so that alldepartments can respond to the needs, just like they had an antenna to access to thesignal in the very beginning.

As indicated by a TSMC manager, the more critical the customers are getting,the more difficult it is to do with technology, which, however, spurs the corporatecompetitiveness. For example, shortly after its foundation, rather than outsourcingthe mask service to Taiwan Mask Corporation, the island’s sole specialist, TSMCset up its mask unit with support from ITRI’s research personnel so as to helpcustomers save time, regardless of its profit scarifying. Internationally competitiveas it is currently, the mask unit simply serves for its customers without cooperatingwith or leasing to other firms, despite of the collaborating invitation by DuPont. Thesuccessful establishment of customer-oriented partnership has thus becomeTSMC’s new competitiveness.

Recruiting First-Class Talents

Striving to attract top personnel from home and abroad, TSMC has ranked first inTaiwan’s enterprises in talent reserve, including more than 100 doctorates and 800masters. The majority of senior managers are doctorates with a great breadth of

R&

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ditu

re (N

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2008 (Q1)

2007

2006

Fig. 2.1 TSMC’s R&Dexpenditure


experience as world-class business leaders in such US enterprises as HP, IBM andIntel. Morris Chang said that TSMC has persisted to recruit the locals as leaderswhen establishing branches around the world, as a result of which WaferTech in theUSA has been led and managed by the Americans from the very beginning.Coming from different major semiconductor companies originally, WaferTech’s400 employees are distinctive in nationality, race and culture, contributing toTSMC’s first-class talents. Besides, to expand the marketing team substantially,TSMC has selected and cultivated the staff with technical background and mar-keting potential, who could provide suggestions for the company’s decision-makingin their global perspective.

Low-Cost Competitive Advantage

When customers complained about its high prices, TSMC would sit down anddiscuss with them to find out cost-saving approaches. For example, originallycustomers had to ship the products to Southeast Asia for testing, which, with theassistant from TSMC, could be finished by the specialist firms in Taiwan. TSMC’sengineers have strived to help customers save money. According to the ViceGeneral Manger of Adaptec, Inc., one of TSMC’s clients, the frequent contact andcooperation with TSMC’s diligent engineers enabled them to develop a set ofinformation system, by which the design could be flowed and modified so muchfaster that the time length was shortened from 58 to 32 days. Given the enormousinvestment on a wafer factory, this cost-efficient system has been popularized toother customers.

Speed Being the Secret of Success

Standing in the high-tech industry filled with high risk, TSMC’s customers are verylikely to be hit hard or even confronted with bankruptcy, as a result of which TSMCwould inevitably be affected and thus need to retain the old customers and developnew clients simultaneously. The key point is, by listening to the customers’ needs,to create customer values in areas such as good quality, high efficiency and newtechnology. To achieve this goal, multinationals would extend the working hoursfrom 8 h to 12 or even 24 h, with the efficiency increasing exponentially. TakeMotorola which has two groups of engineers in US and India respectively as anexample. Thanks to the time difference, when US engineers finish their designbefore duty off, they would send it to their Indian colleagues who continue with thework so as to realize a 24-consecutive-hour working day. Similarly, when TSMC’sAmerican customers convey problems to TSMC’s subsidiary in US, the staff wouldcontinue with the second-round work positively, even when it is dark outside andmost people go off work. Maintaining close contact with corporate headquarters inHsinchu, Taiwan, the American staff help customers to hasten their chip products,convey their needs, jointly solve their problems, and shorten their waiting time.


Providing Diversified Services

To maintain a sustainable and close partnership, TSMC provides customers withboth cutting-edge manufacturing technologies and innovative services which, in thecompany’s perspective, should be both diversified and differentiated from thecompetitors. As wafer foundry, though, TSMC has collaborated with clients fromthe beginning, far beyond the manufacturing service. To cope with the increasinglysophisticated design of semiconductor, for instance, its electronic library offers ageneral design module for specific customers who accordingly have no need todesign from the beginning. This not only shortens the designing time and thusspeeds up the products’ market entry, but saves more on design payment. Further,TSMC’s electronic network provides patent services for its customers who couldutilize the patents developed and purchased by TSMC, which accordingly solvesthe troublesome problems of patent violating in semiconductor designing.

In line with the increase of market share, companies must provide diversifiedservices. In Taiwan, in Silicon Valley or in Europe, TSMC, known for being toughand rigorous, has been pretty flexible in satisfying customers’ needs. For example,the daily production-capacity rate, which to achieve maximum benefit in the pastmust reach 100% or even 120%, is now reduced to 85 or 90%. This could providecustomers with a little more flexibility in modifying their production process andwith surplus production-capacity in meeting their urgent product-launching needs.In 2007, TSMC carried out the Multi-Layer Mask (MLM) service, which providedcustomers with the greatest flexibility in trial manufacturing and verification orsmall-volume production on the single-chip and multi-chip. In the same year, itlaunched the new generation of Reference FlowTM 8.0, in an effort to furtherreduce the defective rate and operating risks and improve the design margins.

Establishing Cost-Efficient and Time-Saving “Virtual Wafer Fab” forCustomers

In the decade after 1997, the fierce competition emerged in the semiconductorindustry that witnessed the wafer foundry step into the 12-in.-wafer and0.13-l-wafer era. To develop a new wafer product, the required capital investmentsare measured by ten more millions of US dollars. Establishing the capital- andtime-saving fabs become increasingly important to customers. Taking the cus-tomers’ needs as its own responsibility, TSMC began to extend its manufacturingbusiness to the higher value-added service industry. The concept of “Virtual WaferFabs” (VWF) was put forward, expecting to provide customers with high-qualityproducts at the fastest speed and lowest cost. VWF refer to those pure-play foun-dries, which by restructuring the surrounding and downstream resources, provide afull range of integrated semiconductor foundry services for the sake of high cus-tomer satisfaction. After surfing VWF’s information platform, customers can accessto TSMC’s internal network and conduct real-time tracking of the production


schedule and defective rate of chips, thereby reducing the production costs andshortening the time to market.1

VWF has two advantages. First, with regard to the customers, after the com-mission of processing business to TSMC, they can still obtain sufficient informationabout the complete manufacturing process, tracking the schedule of their orders andproduction. Second, in terms of TSMC, the strategic alliance or cooperativeinvestment with clients can help share the investment risk and enjoy the economicbenefits mutually. TSMC has strived for the response time, confidentiality,volume-production flexibility, packaging and testing services, intellectual propertyrights, product technologies and technical information offering, so that customerswould feel so convenient that it seems VWF were their own.

Establishing a Wide Range of Strategic Alliances

TSMC announced in March 1997 that it would establish a strategic alliance withTaiwan’s ASE Group, cooperating in areas such as marketing, R&D, productionand customer service. This was the collaboration between the world’s largestdedicated wafer foundry and the world’s second largest provider of semiconductormanufacturing services in packaging and test, putting the VWF concept intopractice. Such cooperation enabled the customers of both sides could enjoy theoverall service in IC manufacturing.

2.1.3.3 Transforming from Dedicated Foundry to Industrial ChainIntegration

In the face of the financial crisis, foundry leader TSMC was also hit hard from thedecrease of customer orders in 2008, resulting in a 34.0% decline in sales revenuecompared with the previous year. To get through the Crisis, TSMC deployedretrenchment strategy to enhance cost control and reduce capital expenditure. Butthat didn’t mean it would play down the layout of production and R&D. In fact, thiscrisis was regarded as a good opportunity to widen the gap with opponents,according to TSMC’s top management at that time, including Morris Chang, LoraHo (CFO and spokesman), Jason Chen (Senior Vice President of Worldwide Salesand Marketing) and Rick Tsai (President and CEO). Thanks to their efforts, the12-in. wafer fab has begun with volume production in 2009 with a monthly pro-duction capacity of over 60,000 wafers. It would also undertake the R&D on 32-,22-and 15-nm wafers, as a crucial sector of TSMC long-term strategy. Further,TSMC has witnessed the enhancement of manufacturing layout in Fab 6 (located inthe Tainan Science Park) and the significant increase of production capacity in Fab10 (located in Shanghai, China) after its acquition of secondhand equipment.

1See Jiang Yizhi, TSMC “Virtual Fab”, Vision, February 2004 issue.


Since 2007 TSMC has transferred its focus from pure-play foundry to overalloperation. According to J. H. Tzeng, TSMC spokesman, the global semiconductorindustry has undergone a transition from high-speed growth to steady growth,causing foundry companies to change from production-oriented to industrial chainintegration. Striving for the layout of segments around production-in these years,TSMC has not only become competent in integrating the design, production andservice, but also reached the stage of formulating standards, very similar to theprimary IDM (integrated device manufacturer) model of Intel. Moreover, thejoining of Jason Chen, known as a master in “integrating Intel’s semiconductorindustry chain” responsible for chip design, foundry, packaging and test, wasgenerally considered as TSMC’s preparation in “transforming from a pure-playsemiconductor foundry to the integration of semiconductor industrial chain”.

Taiwan’s foundry companies have changed from the diligent and low-costproducers to innovative manufacturers providing customers with intellectual anddiversified services. In contrast, the majority of OEM firms in mainland China,simply specializing in processing materials, have been hit hard by the overseaseconomic fluctuation and thus vulnerable to the crisis. With the increasing com-petition globally, the industrial overcapacity has resulted in the intensified pricecompetition among OEM firms, some of which would even reduce price up to 50%to retain customers. Consequently, it is crucial for those without independent brandsto transform from pure-play semiconductor foundry to dedicated and advancedfoundry, in which respect TSMC and UMC offers outstanding examples. Theirsuccess in dedicated foundry can be0 attributed to their efforts in areas such asself-developed technologies, excellent talents, services in fulfilling customers’needs, systematic solutions, international pioneering quality, rapid response tochange and consistent innovative thinking. Therefore, only adapting to the dynamicsituations could OEM firms achieve survival and sustainable development in thisfiercely competitive industry.

2.2 The Realization of Transformation and Upgradingby South Korean Companies Through TechnologicalInnovation—from Small Workshopsto Conglomerates

Over the past three decades of development, South Korea has transformedfrom a traditional and poor agricultural country to a newly industrializedcountry with dozens of large well-known international corporate groups,commonly known as “chaebols”. It was in this period that it completedthe industrialization and urbanization that the Western developed countries


needed more than a century to achieve, creating a world-renowned economicmiracle commonly known as the “Miracle on the Han River”. Since the 1960sand 1970s, the nation has witnessed a substantial and rapid growth inchaebols and large and medium-sized enterprises, which played a significantrole in and contributed greatly to the domestic economy development.2

South Korea’s semiconductor and automotive industries have a pivotalposition in the international market. Korean enterprises met a great deal ofobstacles in the course of development, yet some of them survived the crisesand grew from mall workshops to giant international conglomerates, inte-grating the production, trading, investment, management and humanresource. South Korea, once among the world’s poorest countries, had fivelarge corporate groups on the world’s Top 100-Consortium list in 1993,namely, Samsung, Hyundai, Daewoo, LG and SK.3

To cope with the 2008 Financial Crisis, these business groups took positiveresponsiveness, mainly by increasing investment and reforming operations.Consequently, Samsung Group saw its market share of DRAM semiconductorexceeding over 30% in the second quarter of 2008 and 35% in the fourth quarter. Itstop management was reported to have actively visited overseas market, inspectingthe underestimated technology and business and contemplating acquisitions. Interms of LG Group, regardless the continued decline in LCD prices from June2008, LG Display has newly set up the 8th and 7th generation of production line inthe of Paju factory and Gumi factory respectively. Siltron, another subsidiary of LGspecializing in wafer production, has increased production equipment and facilitiesin Gumi Fab 3, thereby raising the annual production capacity of 12-in. wafers from250,000 to 350,000. Hyundai Kia Motors, to achieve the 21.1% increase of salesvolume (4.85 million cars) and 14.6% increase of sales income (118 trillion won)than 2007, has input 3.5 trillion won (up by 35.1% year on year) to technologicalR&D, attaching great importance to quality improvement and high-class brandcreating. POSCO (Pohang Iron and Steel Co. Ltd) has increased the annual pro-duction capacity in Pohang and Gwangyang Iron and Steel to about 10 million tonsin 2012 and invested substantially in iron ore minerals in Ukraine and Madagascar.Lotte Group and Shinsegae have expanded the domestic and foreign departmentstores and supermarket networks in 2008. Thanks to the above positive reactions,“the Korean semiconductor industry became the first one to invest globally in the

2Chen Xiao-xiao, Wang Chang-ping, South Korea's Enterprise Group's Characteristics andDevelopment Trends, International Trade Issues, 1998 No. 2.3Wang Hui, Yang Zirui editor, the World 100 Consortium List, China Economic PublishingHouse.


recession and those large enterprises would speed up their investment in this year,regardless of the uncertainty of the world’s economy,” said Lee Seung-cheol, theManaging Director of the Federation of Korean Industries (FKI).4

The rapid rise and growth of South Korea and its corporations gain greatattention from a number of economists and scholars, who observed and analyzedthe nation from their own specialized field and published their research works andput forward their theories.5 Since China today is in the initial stage of industrial-ization and urbanization, an environment similar to the Korean enterprises’ in the1970s, Chinese companies could learn substantially from the upgrading path ofKorean enterprises, especially their growth process from small workshops to largebusiness groups.

2.2.1 Five Phrases of Korean Enterprises’ Transformationand Upgrading

2.2.1.1 Import-Substitution Phrase (Before the 1960s)

\Before the 1960s, South Korea, a country that had just undergone the baptism ofthree years of war, was considered one of the poorest countries in the world.POSCO, a Korean enterprise on the Fortune 500 list nowadays, experienced loanrejection by the World Bank which recognized it as a company with low practi-cality.6 The severe shortage of resources, capital and technology due to the postwareconomic recession forced the government then to implement the import-substitution strategy. It focused on the development of consumer goods industryand accumulated substantial foreign currency by selling the U.S. aided commodi-ties, thereby meeting the domestic consumption needs and thus stabilizing theeconomy. This policy played an effective role in rejuvenating the economy at thattime.

2.2.1.2 Labor-Intensive Export-Oriented Phrase (During the 1960s)

The long-term import-oriented economic development with the reliance on theimported raw materials for production has subsequently led to the country’sunfavorable balance of payment deficit. The government then redirected the eco-nomic development towards export-oriented mode, stimulating and nurturing the

4See The Korean Journal, 2008-10-07.5Cui Songhu, Jin Fuzi, From Imitation to Innovation—A Study of Korea’s Technology Tracingand Productivity, Evolution of Dade, 2008.6Zhu Naixin, the perspective of changing the mode of economic development—Taking thetransformation and upgrading of Korea as an example. Masses, 2008(6): 55–57.

2.2 The Realization of Transformation and Upgrading … 33

industry with developing potential, in an effort to promote the country’s industri-alization and urbanization process. Accordingly, the textile industry was given thepriority to develop during 1962–1971 and companies were encouraged to engage inthis low labor-cost industry for the exports of textile products. Such economicdevelopment trend was captured acutely by some entrepreneurs who respondedpositively to this national policy, contributing to the flourish of a number of textileworkshops in this stage.

2.2.1.3 Development Phrase of Capital-Intensive Heavy ChemicalEnterprises (During the 1970s)

Export-oriented industrial policy not only boosted the rapid development of theKorean economy, but also brought rich capital accumulation for the Koreanenterprises. Nevertheless, the government no longer satisfied with the economicgrowth brought by the textile-related light industry, but actively adjusted theindustrial policy and explicitly stated to develop the capital-intensive heavyindustry. The Heavy Chemical Industry Development Plan was issued in 1973 tosupport the growth of those industries such as shipbuilding, steel, automobile,electronics and petrochemicals, as a result of which the domestic urbanizationprocess started to speed up. The development of heavy chemical industry haspredominantly facilitated the sustained and rapid growth of Korean economy,promoting the optimization of industrial structure and thus realizing the industrialupgrading. The scale expansion of related industries has subsequently led to thesignificant changes in market structure.

2.2.1.4 Development Phrase of Technology-Intensive Enterprises(After the 1980s)

Since 1980s, in line with changes in the global economic and technological envi-ronment and the rise of scientific and technological revolution, South Korea putforward national strategy of advancing science and technology, revealing the nationwould focus on the development of technology-intensive industries since then.Enterprises were encouraged to raise technological capability by increasing theinput in R&D. Subsequently, technological transformation and upgrading werecarried out in the traditional industries such as textile, cement, petrochemical, steel,home appliances, automobiles and shipbuilding. Simultaneously, the governmentattached great importance and provided financial support to the development ofhigh-tech industries including precision chemistry, precision instruments, comput-ers and aerospace, stimulating large enterprises to carry out high-tech research. Andthe government’s concern for the new industries involving the information, newmaterials and bioengineering, and the enterprises’ positive innovation in technol-ogy, both facilitated the subsequent growth of Korean conglomerates andenterprises.


2.2.1.5 High-Tech Phrase (After the 1990s)

Having stood the test of 1997 Asian financial crisis, South Korean conglomerateswere aware of the enormous risks led by excessive diversification and expansion.This forced them to “cut back” and carry out business restructuring, under thedirection the government, so as to response more flexibly to the rapid changes in theglobal market. South Korean government, in accordance with the world’s infor-mational tide, confirmed the industrial structure would develop towards hightechnology. Not only would it take the chaebols as the major target of restructuring,but it would also strengthen SMEs’ independent R&D and further cultivate theirinnovation capability, offering positive supports and preferential treatment in areassuch as capital, tax, land and technical guidance. And thanks to the promotion ofthe Industry-University- Research Institutions cooperation, a sound technologicalinnovation atmosphere came into being, greatly enhancing the technical compe-tence of the domestic industry.7

2.2.2 The Leapfrogging Model of Technology Upgrading:Introduction ! Imitation ! Improvement !Innovation

The key in importing foreign technology is to absorb advanced technology and newknowledge, on the basis of which companies carry out independent innovation andsubsequently step into the advanced technological stage, thereby leapfrogging somestages of technological development. Such innovative pattern enables companies tolearn from the developed countries’ technological pioneers, particularly theiradvanced technology experience, which would decrease or avoid unnecessarytwists and turns and help R&D input more targeted. This approach, having suc-cessfully enabling Japan’s automobile industry and South Korea’s semiconductorindustry to realize their technological leapfrogging, is relatively cost- andtime-saving and thus apt to companies from developing countries.

The development of the Korean automobile industry began from the assembly ofimported parts by utilizing foreign technology (1962–1966) to localization of autoparts by technological improvement (1967–1976). The large-scale localizationcontributed to the substantial enhancement of manufacturing capability of Koreanautomobile enterprises and the exploration of domestic market. Thanks to the initialaccumulation of capitals and technology, these enterprises increased investmentwith a certain degree of independent development capacity (1977–1982). Sincethen, Korean automobile enterprises, determined to develop the national-brand cars,

7Xu Dongqing. 2007. Japan and Korea Industrial Structure Evolution and Experience:Enlightenment to the Economic Development in Southern. World Economic and Political Forum,6: 100–105.


have consistently improved the car appearance and functions and subsequentlystepped into the independent R&D phrase facilitated by the government. Hyundaiand Daewoo, as the typical representatives then, employed R&D personnel of 2000and 500 respectively. Both of them spent 4% of their sales revenue to R&D in1886, reaching the level of those automobile enterprises (3–5%) in the advancedcountries at that time.8 Such technological improvement enabled Korean automo-bile enterprises to launch foreign direct investment and establish production basesin Europe, America, Asia and Oceania, thereby establishing the overseas manu-facturing system and global marketing network (Table 2.1).

Similar to the development path of automobile industry, the technologyupgrading of semiconductor industry also started from technology importing, thenimitation and improvement, and finally leapfrogging.9 As Table 2.2 shows, SouthKorea, although four years later than the US and Japan in developing DRAM(dynamic random-access memory), persistently ran after the technology pioneersand launched the world’s first 256 Mb DRAM in 1994 by Samsung Electronics.Such technological breakthrough could attribute to the high-speed and effectiveimitation process based on the “reverse engineering” model, that is, by thoroughlystudying the internal structure and logic of some importing commodity so as to seekout the possibility for further improvement and innovation.10 This imitation pro-cess, quite similar to Japan in the technological development path, was criticized astechnology “stealing” from developed countries, which, however, played a sig-nificant role in realizing the technological leapfrogging of Korean enterprises.

2.2.3 The Growth Process of Korean Enterprises from SmallWorkshops to Large Groups

After several decades of leapfrogging development, a group of Korean enterpriseshave grown from the original small workshops into large conglomerates, leadingthe rapid development of domestic economy. Samsung Group, the largest SouthKorean chaebol and the 6th highest global brand value, hosts a great number ofaffiliates in the world which produce around a fifth of South Korea’s total exports.Hyundai Motor Group, the largest vehicle manufacturer in South Korea and the 2ndlargest chaebol, has an output value accounting for about 20% of Korea’s GDP. LGGroup is the 3rd largest chaebol. YAKULT Group is among the world’s largestproducers of lactic acid bacteria. And Lotte Group is the largest food and distri-bution company in South Korean.

8Liu Xisong, Deng Lizhi, Li Guo. Japan, South Korea, the independent innovation of enterprises inChina, China’s revelation, Economic Aspect, 2006 the second period.9Chen Dezhi, Chen Xiangtang, South Korea semiconductor industry technology leap research,Science and Technology Management Research, 2006 the second period.10Xu slightly, “Samsung rely on what goes beyond Sony”, Chinese and foreign management,2004 the seventh period.


2.2.3.1 Samsung Group: An Ever-Changing Conglomerate

Founded in 1938, Samsung Group grew from a small workshop-style company ofelectronic assembly products into a world-renowned multinational conglomerate.Currently, the group has more than 400 affiliated companies in over 80 countriesand diversifies into areas such as electronics, petrochemical, heavy industry,shipbuilding and so on. Highly recognized in the Chinese market, Samsung hasranked top among the most valuable consumer brands in China by the PekingUniversity Business Review. As the flagship company of the group, SamsungElectronics’ total sales stood at US $216.7 billion and net profit US $28.9 billion in2013, ranking 13th in the Fortune Global 500 list in 2014. Since its establishment in

Table 2.1 Characteristics comparison of the IC Industry among the US, Japan and Taiwan.Source Nomura Union Research Institute, quoted from Liu Changyong, 1993, “study on industrialscience and technology projects as the very transfer model”, the National Science Council specialprogram research report

Characteristics

US type • The establishment of semiconductor industry was led by the investmententerprises whose advanced technology was mainly achieved by militarydevelopment

• They have established the highly efficient IC/CASE and other IC designmechanisms, advantageous in the high value-added logic IC products

Japanesetype

• The establishment of semiconductor industry was led by the conglomerates,laying the foundation for the industry through large governmental projects

• Conglomerates involved those sectors adopting IC and proficient in ICapplications. Due to the large size and abundant capital, the conglomerateswere able to carry out large-scale R&D and investment and thusadvantageous in the mass production of IC memory

Taiwanesetype

• The establishment of semiconductor industry was led by the investmententerprises which obtained advanced technologies through internationalstrategic cooperation

• Enterprises were advantageous in the cost control and management• Products were properly distributed in the IC memory, ASIC chip, foundryservice and other businesses; the entire industry was evenly developed andstable

Table 2.2 Changes in technology gap of DRAM. Source Jin Linzhu. “From imitation toinnovation”. Beijing: Xinhua Publishing House, 1997: 175

64 Kb 256 Kb 1 Mb 4 Mb 16 Mb 64 Mb 256 Mb

Developmenttime in US andJapan

1979 1982 1985 Late1987

Early1990

Late 1992 Middle1994

Developmenttime in Korea

1983 1984 1986 Early1988

Middle1990

Late 1992 Early1994

Technologygap

4 years 2 years 1 year 6 months 3 months Simultaneous In thelead


1969, it determined to develop the home appliances and electronics products, twoof the greatest potential industries. The lack of key technologies in the initial stage,however, forced it to explore the market by assembling 12-in. black-and-whitetelevisions and low-class DRAM for customers from the developed countries.

In line with the technology dismantling and learning from the assemblingproducts, Samsung Electronics gradually mastered the key technology ofblack-and-white TV and thus developed an improved economical TV for thedomestic market, representing the corporation embarked on a technological pathfrom then on. The increasingly heavy investment in R&D enabled it to improve thetechnical content of products and speed up the launch of high value-added elec-tronic products so as to seize market opportunities, which contributed to Samsung’sspeedy and competitive advantages in its sustainable development. Thanks to thesuccess of the economical TV, Samsung Electronics continued with the develop-ment of 14-in. color TV (in 1976), microwave (1979), home-video recorders(1984), 1 Mb DRAM (1986) and portable video recording machine (1989). Theseachievements were attributed to the annually heavy input in R&D input for thedevelopment of new technology and new commodities such as mobile phones,iPad, computer, processor and camera. Samsung also set up R&D centers at homeand abroad including one in Finland (in 2012) and another in Silicon Valley (in2013). Samsung’s R&D input in 2014 reached about US $13.4 billion, accountingfor 6.4% of its total fiscal revenue.

As a consequence of the 1997 Asian financial crisis, South Korean enterprisessuffered a heavy blow and chaebols such as Samsung and Hyundai were confrontedwith survival crisis. Until 1998, 7 out of 30 biggest enterprises (taking up 80% ofKorean economy) declared bankruptcy, including Kia Group (ranking the 7thdomestically), Halla Group (13th), Hanbo Group (14th) and Jinro Group (19th). Inthe year 2000, Daewoo Group filed for bankruptcy protection and Hyundai Groupwas forced to accept public funds for survival. Such giants suffered severely in thatfinancial crisis, as a result of which the decline of big enterprises gained greatattention. To people’s surprise, however, Samsung survived the crisis relativelyunharmed, compared to other major Korean companies and became even strongerafter the crisis. In 1999 when the crisis was over, statistics showed that the marketvalue of its total asset amounts to the sum of the other three conglomerates, namely,Hyundai, LG and SK. Such achievement was attributed to the New ManagementMovement led by Lee Kun-hee, the CEO of Samsung Group. This movement,focusing on the “Changes” in the corporate culture, aimed at stimulating innovationand independent decision-making of the management team and reducing bureau-cracy. Lee strived to cultivate an atmosphere where ticklish staff can step forward tobreak the rigid corporate regulations. He believed Samsung needs ticklish staff tohelp the corporation compete with counterparts at home and abroad. Samsungshould nurture the initiative and creativity of employees and encourage the inde-pendent decision-making of managers. Such change-oriented value revealed thecorporation, for the sake of breaking the rigid bureaucracy of hierarchy, set up aNew Samsung Culture characterized by the flattening of organization structure andorganizational creativity. As Lee pointed out, crisis gives the company a chance to


renovate, the only way for Samsung to survive. In his viewpoint, the challenge wasnot the implementation of one-time change but a long-term reform, in pursuit ofquality rather than quantity. Lee brought up a vision that Samsung strives to be aworld-class conglomerate at the start of 21st century, which was achieved today.

Samsung, an ever-changing business group, has continuously met the challengingchanges so as to survive the crisis and even explore new opportunities. According tothe media reports, 2014 would be the most devastating time for Samsung due to thedramatically decline of its market value, operating revenue, operating profit andsales volume. Nevertheless, a strong recovery was shown in the past 3 months,according to the financial report released in July 2015, despite of the 8% decrease oftotal sales and 4.2% drop of operating income than the previous year.

2.2.3.2 SK Group: Following the Economic Growth Path of SouthKorea

From 1970s on, the development of Korean economy has been predominated by theconglomerates. Driven by the government, a number of small companies in relatedindustries joined together to form large enterprise groups so as to realize resourcesintegration and thus meet the challenges of international competition. Take SKGroup, which changed its name from Sunkyong Group in 1997, as an example.Founded in 1953, it is one of the largest conglomerates (chaebol) in South Koreaand ranked 57th in the 2015 Fortune Global 500, with its large businesses involvedin energy and chemical, information and communication, international trade,shipping and financial securities. Starting from Sunkyong Textile with merely 20machines originally, it established Sunkyong Fibers Ltd. in July 1969 with Japanesecompanies, starting to produce polyester fiber and export original yarn. Thisfacilitated the development of Korean fiber industry. In 1973, SK then establishedSunkyong Oil, forming a long-term operating strategy which integrated the petro-chemical, refining and crude oil exploitation. In line with the gradual maturity ofvertical integration strategy, SK began to enter the newly telecommunicationbusiness from the mid-1980s. SK Telecom, after becoming Korea MobileTelecommunication Service’s largest shareholder in 1994, launched the world’sfirst CDMA (Code Division Multiple Access) commercial service in 1996 inIncheon and Bucheon, two of Korean cities. This not only enabled SK itself tobecome the domestically largest mobile communications operator, but laid a solidfoundation for the nation to become strong in telecommunication. Moreover, SKCorporation, observing the great potential in the life science field, set up the first lifescience research center as early as in 1989 and developed YKP1358, a new drugcandidate for schizophrenia, in 2003, with the goal of developing SK Chemicalsinto one of the world’s leading biomedical enterprises,

Apart from its diversified business development mode to expand the businessscope, SK, from the early establishment of the affiliate in Los Angeles in 1976,never stopped the pace of internationalization. Not only was the first Korean cor-poration that set up a subsidiary in China, it hosts more than a hundred offices


worldwide including Europe, the Middle East, Asia, America and Africa.11 As aninternational conglomerate nowadays with total revenue reaching 157 trillion wonin 2013 (see Fig. 2.2), its growth path was oriented towards diversification, inter-nationalization, dedication and conglomeration, which represents the country’seconomic growth history. That is, it first engaged in textile industry and became apolyester fiber manufacturer, then entered the energy and chemical industry byestablishing a refinery factory, and finally stepped into the telecommunicationindustry after long-term preparations.12Such process was nearly the same as that ofthe country’s economic development, pointed out by SK’s Chairman in 2002 in theRepublic of Korean-China Economic Symposium. In fact, before each leapfroggingupgrading, SK had been well prepared and sought for the appropriate timing toenter a new field.

The reasons that SK could obtain such remarkable achievement and rank amongthe world’s Top-100 consortium attributes to not only the technologicallypioneering spirit and appropriate business strategy, but also the entrepreneurs’long-term vision and pursuit of excellence towards sustainable development. Since1976, SK has stuck to the study of corporate growth strategy in the long run andestablished the development goal of becoming a world-class conglomerate. Itscontinuous improvement of corporate culture has brought itself growth momentumincessantly. It is also the first Korean corporation that expatriated employees tocountries such as China, Japan, US and Southeast Asia to carry out overseas circuittraining. These expatriates are expected to be trained as team leaders to guide SK toembark on a sustainable path in the future.13

Fig. 2.2 Total Revenue ofSK Group. Source SK GroupOfficial Website

11(see the official website of the Beijing Group http://www.sk.com.cn/).12(see http://www.people.com.cn/GB/jinji/222/7776/7782/20020327/695906.html).13(Hongjiang, to the world of Korean fresh Beijing Group, Chinese and foreign science andtechnology policy and management, 1999 the sixth period).


http://www.sk.com.cn/

http://www.people.com.cn/GB/jinji/222/7776/7782/20020327/695906.html

2.2.3.3 Growth, Transformation and Upgrading of Conglomerates:Government-Driven Corporate Restructuring

The majority of South Korean corporations have grown in accordance with thechanges in the governmental policies. Since the 1970s, the government issued theHeavy Chemical Industry Development Plan, mapping out the high value-addedheavy chemical industry as the development direction. A series of preferentialtreatments relevant to financing and exports were implemented in the fields such asshipbuilding, steel, electronics and petrochemical, from which both SK Group andLG Group benefited substantially. Then in the 1980s the government put forwardthe policy of “developing a nation via science and technology”, shifting priority tothe development of technology-intensive industries from heavy chemical industry.It is such governmental policy support that boosted semiconductor and telecom-munication enterprises, represented by Samsung Electronics and SK Telecomrespectively. Korean companies recognized that technology was the key factor forthe development of enterprises, for which they spared no effort to invest in scienceand technology. The number of institutes launched by South Korea Enterprisessoared from 47 by the early 1980s to nearly 4000 now, and the number of businessresearchers rose from several thousands to nearly 40,000, and there were 45.1researchers among every one thousand workers, which had reached the level of thecounterparts in Britain and France. The total investment in R&D of the enterprisesincreased from about US $2.8 billion in 1989 to US $15 billion. Since the 1990s,this index has exceeded that of the total investment in national research anddevelopment, and it ranked first in the world, exceeding America, Japan andGermany. Korea has formed technical support of enterprise development andproduct competition, accelerating the transformation of scientific and technologicalachievements to actual productivity, and improving the ability of enterprises todigest and improve foreign technologies. As a result, the industry quickly got closeto the level of developed countries. At present, Korea has become one of theworld’s top ten producers and exporters of steel, automobile, shipbuilding, elec-tronics, and semiconductor industries.14

Just as the high-speed expansion of Korean conglomerates is achieved with thegovernment support, their corporate restructuring is facilitated by the government.After the 1997 Asian financial crisis, the government not only carried out a strongrectification to the financial market, but conducted a drastic reform to the con-glomerates, gaining remarkable results.

First of all, the government established the “5 Plus 3” Corporate ReformPrinciples for chaebol groups, which, due to their sophisticated relationship with thepoliticians in the past, was very difficult to launch structural adjustment. Hence, thegovernment enacted what is known as the “Five Principles of Corporate

14(see http://www.zjsme.gov.cn/newzjsme/list3.asp?id=15079).


http://www.zjsme.gov.cn/newzjsme/list3.asp?id=15079

Governance”. These were the enhancement of management transparency,strengthening owner-manager accountability, elimination of cross-debt guaranteesamong chaebol affiliates, improvement of capital structures, and consolidation ofcore business areas. Afterwards, the government pushed for even more extensivereform through the “Three Additional Principles”, which consisted of improvingcorporate governance of non-bank financial institutions, reducing circuitous equityownership and unfair transaction among affiliated companies, and preventingirregular wealth succession among chaebols. Based on the “5 Plus 3” CorporateReform Principles, laws and regulations were passed to limit the expansion ofchaebol. At present, the vast majority of enterprises have introduced the“Professional Managers” and “Outside Director” system, thereby improvingobjectivity on their board of directors and the business transparency. Rather thanhaving the decision-makers be insiders, affiliates or family members, the chaebolwere expected to hold representation who reflected the interests of investors,especially minority shareholders who gained a significant amount of rights. Thanksto the government-led industrial restructuring, the majority of conglomerates wit-nessed the relative centralization of their business scopes and the decline ofdebt-to-equity ratios to below 200%, revealing an enhancement of theirrisk-resisting capability.

Further, the myth that Korean conglomerates were “too big to fail” was dis-pelled. Over the past years, financial institutions, directed by the Korean govern-ment, carried out rectification by setting deadlines for a number of large enterprises,adopting the division or auction approaches to those enterprises unlikely torecovery. Subsidiaries of chaebol that were debt-laden or on the verge of bank-ruptcy were instructed to be liquidated, sold or merged so that they were moremanageable. These reforms ensured the quick recovery and competitivenessupgrading of the chaebol. By 1999, Daewoo, the second largest conglomerate inSouth Korea with interests in about 100 countries, went bankrupt, with debts ofabout 80 trillion won (US $84.3 billion). The group was reorganized and its 12subsidiaries experienced divestiture, auction or bankruptcy, ringing the siren forexisting chaebol companies.

Since 1997, the financial crisis in South Korea was mostly raised by problems inbig companies. Therefore, restructuring is essential to the Big Five Groups:Samsung, Hyundai, LG, SK and Daewoo. According to the “5 Plus 3” CorporateReform Principles, subsequently, the Big Five Groups made decisions of restruc-turing to avoid excessive expansion in different industries. That is, a large enterprisegroup can only get involved in three to five industries, and the rest of the businessshould be carried out asset replacement, merger, sale or closure.

On October 7th, 1998, the five conglomerates reached an agreement on thestructural adjustment in the core sectors such as petrochemical, semiconductor andaircraft manufacturing. In the petrochemical and aircraft manufacturing sector, asingle incorporated company was founded by these five conglomerates with the


same amount of shares. In the railway vehicle sector, three corporations (Hyundai,Daewoo and Hanjin) were merged into two (Hyundai and Hanjin), where corporaterestructuring was carried out. In the semiconductor sector, the merge of LG andHyundai was evaluated by specialized business assessment agencies and the betterone would become the major shareholder with 70% of share. In the power gen-eration equipment sector, Samsung’s power generation equipment was transferredto Hanjung, which subsequently negotiated with Hyundai Heavy Industries on theintegration of the power equipment sector. Further, the marine engine sector ofSamsung Group was transferred to Hanjung. Hyundai Group would partly mergethe refining sector of the Hanwha Group. Such restructuring was designed toeliminate serious duplication and excess investment, as a result of which largecorporations could concentrate on their core and advantageous sectors so as toimprove their competitiveness. After acquisition, the debt-to-equity ratios ofcompanies in petrochemical and aircraft manufacturing was reduced to below300%, and railway vehicle sector below 200%. In addition, foreign investors werepermitted to become the major shareholders and business entities.

Urged by the government, large conglomerates developed their restructuringschemes. From 1999, Hyundai Group carried out business spin-off, reducing thenumber of companies from 83 to 31. In August 2000, to get rid of the disputescaused by the family management rights, Chung Mong-koo, the second son ofChung Ju-yung (founder of Hyundai Group), integrated 8 affiliated companiesrelated to vehicles into an independent corporation. The heavy industry department,controlled by Chung Mong-joon, the sixth son of Chung Ju-yung, underwentbreak-up from Hyundai Group in 2001. In line with the independence of HyundaiElectronics, some financial enterprises (including Hyundai Securities, HyundaiTrust and Hyundai Life) were sold by the Korean government in 2003 to PrudentialFinancial, Inc., an American multinational insurance corporation.15

Among the five chaebols, although Daewoo finally failed to survive the crisis,Samsung and Hyundai rejuvenated through restructuring, revealing several char-acteristics about their future reform. First, substantial changes would be seen inchaebols which would decrease the infinite expansion and downsize the businessstructure, as a result of which the conglomerates might be transformed into inde-pendent enterprise-unions formed by a number of firms with independentaccounting function. Second, the emergence of new corporations in such industriesas semiconductor and automotive through the business/asset replacement andmergers could improve their international competitiveness and expand their prod-ucts’ international market share. Third, the competition among enterprise groupswould transform from scale to quality, advancing the overall operating efficiency.

15(see the International Financial Times, 2003-11-25).


Fourth, along with a gradual separation of ownership and management rights,business operation was further improved and became more board-centered.16

2.3 Comparison of Enterprise Transformationand Upgrading in Emerging Economies

2.3.1 Enterprise Transformation and Upgrading in Taiwanand South Korea

It is the common goal of all emerging industrial countries (or regions) that helpsenterprises cultivate their self-innovation capability and promotes their upgradingso as to catch up with those technology leaders in the developed countries. Theirupgrading path, however, is not likely to follow the pattern of those leaders whichcommand the cutting-edge technology. In fact, enterprises in emerging economieshave neither necessity nor possibility to engage in the development of originaltechnology. Although both Taiwan and South Korea are emerging economies, theirupgrading roads are not likely to be the same, due to the distinctions in thedevelopment stage and market environment. Table 2.3 shows the comparison ofcorporate transformation and upgrading between Taiwan and South Korea.

2.3.2 Enterprises Should Have the Right Positioningin the Course of Their Transformation and Upgrading

Taiwan’s companies recognized their positions in the global value chain very early.They first performed simple processing and manufacturing activities, then increasedinput in R&D and integrated the global resources, and finally developed towards thehigh-level dedicated foundry. Such upgrading, from the bottom of the “smilingcurve”, brings aboutmore value-added for enterpriseswhich have become the key partof the global semiconductor industry chain. By comparison, South Korea’s enter-prises, starting from scratch, achieved the technological leapfrog through the path oftechnology importing ! imitation ! improvement ! innovation. Supported bythe government, these enterprises realized rapid expansion and developed intoglobally-known corporate groups and chaebols. China, as one of the most dynamicemerging economies nowadays, has a large domestic market and abundant human

16(See “People’s Political Consultative Conference”, 1999-07-12).


resources. It should learn from the upgrading experiences of other countries(or regions) and identify the right positioning in the process of upgrading andexploring an appropriate and sustainable upgrading road for the domestic enterprises.

Table 2.3 Comparison of enterprise transformation and upgrading between Taiwan and SouthKorea

Comparison Taiwan South Korea

Achievement oftransformationand upgrading

• The semiconductor industry obtainedhigh value-added and achievedupgrading through high-leveldedicated foundry

• A number of self-brand enterprisesemerged in IT industry

Achieved the “Miracle on the HanRiver” in three decades• A large number of small privateworkshops grewinto large international conglomerates

• The industries of automotive andsemiconductorhave strong internationalcompetitiveness

Direction oftransformationand upgrading

Advanced foundry enterprises Large enterprise groups or chaebols

Phases oftransformationand upgrading

Semiconductor enterprises: Emerging! technology importing and spinoff! technological improvement andstrategic alliance ! self R&D andindustry-university-researchcollaboration ! global resourcesrestructuring and integration

Import substitution ! labor-intensiveexport-oriented industry !capital-intensive heavy chemicalindustry ! technology-intensiveindustry !advanced technology industry

Acquisition ofcompetitiveness

Semiconductor enterprises:• high-level vertical disintegration;• industrial clusters and industrial parksas innovation carriers;

• ITRI as technological innovationsource

• The leapfrogging model oftechnology upgrading: importing !imitation ! improvement !innovation;

• Restructuring of large enterprisegroups

Typicalcorporations

• Enterprises with self-brand: GiantGlobal Group, Acer Inc., AsusTekComputer Inc.;

• Dedicated semiconductor foundry:TSMC, UMC

Samsung Group, Hyundai Group, LGGroup,SK Group, YAKULT Group, HanjinGroup,Lotte Group

Role ofgovernment

• Establishing ITRI to support thetechnology development of Taiwan’senterprises;

• Focus on the development of keyindustries with adequate support

In the early stages of development, thegovernment supported the merger ofsmall businesses into large enterprisegroups to cope with the internationalcompetition, and then advanced therestructuringof large enterprise groups to survive thecrisis

Entrepreneur-ship

• Strong personal networks;• Adaptive entrepreneurship in thelatecomer countries (or regions);

• A sense of mission that values theisland’s industrial development

Continuous innovation and changes

2.3 Comparison of Enterprise Transformation and Upgrading in Emerging Economies 45

Chapter 3Enterprise Case Analysis

Enterprise transformation and upgrading is not only the micro level of the industrydevelopment, but also it is an ultimate foothold. This chapter aims to provide areference to other enterprises facing the confusion of transformation and upgradingand selects six typical enterprises from different industries with different types.After a number of respective field visits and research, the typical case analysis andcomparative case studies are combined together. What is more, the book deeplyanalyses their upgrading path, model, influencing factors and so on.

3.1 Independent Innovation Path of GuangdongEnterprises from OEM to ODM to OBM: ComparisonBetween Donlim and Jasic

3.1.1 The OEM, ODM, OBM Status of GuangdongEnterprises and Research on Their Transformationand Upgrading

Since the 1980s, due to the gradual slowdown of economic development and rise ofdomestic labor-costs, developed countries have changed their economic develop-ment patterns, mainly by reinforcing their scientific and applied research. Thecontinuous technological innovation activities have not only maintained theirleading position in the science and technology, but helped transfer their corebusiness towards the downstream of industrial value chain, a new profit growthpoint. Such downstream business not only consist of traditional product warranty,after-sales service and system maintenance, but also a full range of value-addedproduction activities such as financing, leasing, consulting and training (Liu and Hu2002). Simultaneously, foreign developed countries gradually shifted their manu-facturing industries to developing countries which enjoyed low labor-costs and


47




preferential industry-policy. The implementation of OEM production mode couldhelp developed countries protect their natural environment and reduce their pro-duction costs, thus achieving sustainable economic development. In such a macroenvironment, enterprises in East Asia, Eastern Europe, South America and otheremerging industrial countries successfully integrated into the outsourcing system ofthe global value chain and thus shared the industrial profits. Leveraging theircomparative advantages in labor force and raw materials, these countries andregions have developed OEM business vigorously and achieved rapid growth intheir economy. At present, OEM is very common in China. It is mainly concen-trated in the industries with higher universalization and standardization, such asclothing, home appliances, IT, toys, daily consumer goods, electronic communi-cation. Comparatively, OEM production is most prominent in the home applianceindustry, in which 90% of enterprises have engaged in this business, according torelated statistics. Since OEM companies in Japan, South Korea and Taiwan grad-ually achieve their transformation towards ODM and OBM, China has graduallyreplaced these countries and regions as the most important OEM production base inthe world. During this period, a large number of well-developed domestic OEMindustries and enterprises have emerged (see Table 3.1).

As one of the first batch of the regions to implement the opening policy,Guangdong actively developed the “three plus one” trading mix (“three” refers tocustom manufacturing with materials, designs and samples supplied by foreigncompanies; and “one” refers to compensation trade), making full use of interna-tional and domestic markets and resources. Therefore, it has achieved rapid eco-nomic development. In 2007, the GDP of Guangdong exceeded 3.07 trillion yuan,accounting for 12.4% of that in China (24.67 trillion yuan); and the total trade (sumof imports and exports) of Guangdong was valued at $634.05 billion, accountingfor over 29.2% of that in China and ranking top domestically for 22 consecutiveyears. In particular, the value of imports and exports of processing trade amountedto $403.4 billion, an increase of 16.5% than the previous year, accounting for63.6% of Guangdong’s total trade and 40.9% of China’s total imports and exportsof processing trade. However, we should be soberly aware that, althoughGuangdong has developed into an export processing base, its economy was pre-dominated by the lower value-added OEM business, which is less likely to drive theindustrial structure upgrading. In 2007, for example, Guangdong’s general tradetotaled $105.5 billion, accounting for 28.4% of the total exports. The export ofprocessing raw materials supplied by foreign companies was $528.3 billion and thatof processing raw materials imported from foreign companies was $193.34 billion,totally accounting for 67% of the domestic exports.1 In 2006, the exports ofGuangdong’s high-tech products was $104.45 billion, among which 80.4% wascontributed by foreign-invested enterprises and the remaining 20% was by localfirms, reflecting the lower competitiveness of domestic companies in the global

1According to the statistics in Guangdong Statistics Information Website (http://www.gdstats.gov.cn).

48 3 Enterprise Case Analysis



industrial chain. Besides, key technologies and equipment such as CPU, integratedcircuits and general software mainly depended on imports and 70% of manufac-turing industries still engaged in low-tech and traditional industries. Only a smallamount of high-tech products enjoyed independent intellectual property rights inprocessing trade. For example, Whenever a Guangdong OEM company exported aDVD valued at $39, $19.7 was paid to foreign companies as royalty fee and 70% ofcost went to the imports of key devices such as chips and decoders.2 These

Table 3.1 China’s well-developed OEM industries and representative enterprises

RepresentativeOEMenterprises

Major OEMproducts

Representatives of brandowners

Traditionalhomeappliances

Galanz Microwave oven Delong (Italy), GE (US),Sanyo (Japan)

ShenzhenKingstarit

DVD and relatedproducts

TCL, Kim Jung, Hisense

Skyworth,Konka, TCL

Color TV,multimediaproducts

Sanyo, Hitachi, Mitsubishi,NEC, Thomson

ITmanufacturing

ShenzhenFoxconn

Laptop HP, Apple computer

Taiwan Hon HaiPrecision

PC and itscomponents

IBM, Apple Computer, Sony

Communication Eastcom,Inventec, TCL

Mobile phones andspare parts

Motorola, Philips, Alcatel

Clothing andfootwear

GuangdongEsquel

Clothing CK, Nike, Boss, Polo, Jeans,Hugo

TaiwanPouchen(Dongguanbase)

Sports shoes Nike, Adidas, Reebok, LiNing, Anta

Daily chemicalproducts

Canton DameKiss

Cosmetic Polo

NICE Washing products P&G (US), Henkel (German)

Small homeappliances

Donlim Western-style smallhouseholdappliances

Philips, Kenwood, MorphyRichard, Breville, RussellHobbs

Source (1) www.21co.com.cn(2) Chen Xuan. Discussion on the Development Strategy of OEM Enterprises in China. DongbeiUniversity of Finance and Economics. 2006(3) Hu Yi. Decision Research on Enterprise Strategic Transformation Changsha University ofScience and Technology. 2007

2Yunshi Mao. From OEM to ODM and then to OBM—processing enterprises realize transfor-mation and upgrading. March 3rd, 2007. (http://www.nanfangdaily.com.cn)

3.1 Independent Innovation Path of Guangdong Enterprises … 49

http://www.nanfangdaily.com.cn

enterprises, relying on orders from multinational companies, lacked strong R&Dcapability and independent brands.

After nearly 3 decades of industrial development, the economic growth model ofGuangdong has resulted in a lot of problems. Firstly, the long-term extensiveeconomic growth model is at the price of cheap labor force, poor working condi-tions, waste of abundant resources and energy, and environmental destroying.Secondly, most of the export products are in the low-end of value chain. Manyindustries and enterprises are less capable to develop key intellectual propertyrights, self-innovation capability and self-brands, as a result of which they couldearn an extremely meager profits. Since the second half of 2007, a number of majorchanges in the economic environment have brought about great pressure toGuangdong’s industrial development, and the transformation and upgrading of itsenterprises.

3.1.2 Definition of OEM and Concepts Related to ItsTransformation and Upgrading

OEM is the abbreviation of Original Equipment Manufacturing or OriginalEquipment Manufacturer, the former of which stands for a method of production,while the latter refers to the enterprises using this mode of production. Originatedfrom the western clothing industry in Europe and the United States mainly forcost-reduction considerations, OEM is an outsourcing model. That is, an entrustedmanufacturer produces goods according to the designs, drawings and technicalequipment provided by its brand owners (entrusters) and then uses the brand nameor trademark designated by these brand owners on the manufactured goods, whichis accordingly known as “OEM production” or “foundry production” (Xu and Qu2005). In the industrial society, for the sake of production-costs reduction andtransport convenience and so on, well-known brand owners would find othermanufacturers to produce some parts and components. These entrusted companieswere then referred to as OEMs (Original Equipment Manufacturers) and theirproducts were called OEM goods.

In China, OEM is often called “Tiepai” or translated into “OutsourcingProduction” by some scholars, which is regarded as an entrusted production andprocessing relationship. In other words, brand owners, taking advantage of theirbrand names, core technologies, creative designs and marketing channels, do notcarry out production directly but entrust to some professional OEM manufacturers,and then market these products under their own brands.3

Generally speaking, OEM entrusters design their own products, then commis-sion the production to other manufacturers, and eventually sell the products under

3Zhang Yabin. OEM: An important way for Chinese companies to enter the international market.International Economic Cooperation. 2000 (11). (in Chinese)


their own brands. These entrusters are advantageous in product designing and brandmarketing, but less favorable in manufacturing. Entrustees, instead, are less capablein product designing and brand marketing, but comparatively advantageous incontrolling production cost and responding to market changes. It is such comple-mentary needs that stimulate the emergence of OEM production model, as shown inFig. 3.1.

From this figure, we can discover that entrusters predominate during the coop-erative relationship, because they master a large amount of information related tomarket demand and thus can allocate the production orders to other entrustees.Therefore, the influence of entrusters on entrustees is much larger than that of thelatter on the former. For this reason, in the figure the arrow from the entrusters tothe entrustees is a solid line, while that from the latter to the former is a dotted one.Besides, since the entrusted enterprises carry out production based on therequirements of orders, they are also responsible for the monitor of marketfeedback.

ODM (Original Design Manufacturing) refers to a cooperative pattern, in whichmany renowned companies (i.e. some Taiwan-funded electronic firms), for the sakeof time-saving in R&D, fully or partially leverage the product designs of othermanufacturers who manufacture products under the designated brands. These

Brand PopularityR&D Capability

Marketing Channels

Controlling Capability of Production CostMass-Production Capability

Rapid Market-Response CapabilityAdvantages in Procuring Raw Materials

Entruster Entrustee

Linked by products, both sides establish cooperative relationship and carry out operational activities

according to their advantages.

End-products manufactured by the entrustee are under entruster’s brand

The entruster-branded products enter sales channels

MarketFeedbacks

Fig. 3.1 OEM business model


enterprises, responsible for both production and design, are also called ODMmanufacturers. Usually, brand owners simply put forward their own requirements,but commission the designing and processing activities completely to ODM man-ufacturers, who will design and develop products meeting requirements and thendeliver them to brand owners for the subsequent marketing. Consequently, brandowners can decrease their input in developing new products, but concentrate theirenergy and resources on the construction of brand and channels as well as marketdevelopment. Simultaneously, since ODM manufacturers not only cope with theoriginal production and assembly but carry out research and designing service, theadditional value of ODM products is higher than that of OEM ones. To realize thispurpose, an excellent ODM manufacturer must not only possess an industry-leadingscale to efficiently reducing manufacturing costs, but also strong R&D anddesigning capability to continuously provide customers with new products meetingmarket demands. Quanta Computer, a Taiwan-funded company, is a typical ODMcase. Nine of the global top-10 notebook manufacturers, including Dell and IBM,depend on Quanta’s design and manufacturing. According to IDC data, in 2004 theoverall income of global ODM enterprises reached US $4.37 billion, 24% of whichwas generated by Quanta, making it the biggest ODM manufacturer in the world.

OBM (Original Brand Manufacturing) means that manufacturers produce andsell products under their own brands and often represents the other party relative toOEM or ODM companies. OBM companies not only master core technologies orleading R&D capability, but possess strong brands, market channels andend-consumers, which contribute to their higher value-added products. With theaim of setting up intermediate-product brands, OBM strategy enables companies toconduct sustainable technology upgrading and product development, and launchself-brands ultimately. A number of intermediate-product manufacturers in the ITmanufacturing industry have set up their own brands, such as Intel and AMD inCPU, ASUS and Giga-Byte in main board, Hitachi and Samsung in hard disk, andKingston and Smart in internal storage, and even the cheapest accessory of PC, themouse is sold under brands. For example, though produced by OEM manufacturers,Logitech optical mouse, has witnessed a rise in market price by more than ten timesonce labeled with “Logitech”.

3.1.3 Transformation and Upgrading Models of OEMEnterprises

3.1.3.1 Establishing an Operational Standard for Identifyingthe Development Stages of OEM Enterprises

In view of the relevant literature at home and abroad, nowadays, it still lack anoperational standard to define the OEM, ODM and OBM stage of enterprises.Existing research determined in general the development phases of enterprises


according to the original definition of OEM, ODM and OBM, which causesambiguity to researchers.

In order to better study the transformation and upgrading of OEM enterprises, itis necessary to set up an operational standard in advance so that we can clearlyidentify the development stages at a specific time in the process of transformationand upgrading.

Most scholars agree the most direct index that can reflect the development stageof an enterprise is the profit contribution rate (R) of these three businesses (OEM,ODM and OBM) in an enterprise. For the convenience of description, we mark therate of each type of business as ROEM, RODM and ROBM respectively.

Generally speaking, ROEM + RODM + ROBM = 100%.This book stipulates that, if the profit rate of OEM business is no less than 2/3

that is, ROEM � 2/3, the enterprise is obviously in the OEM stage. Similarly, thenecessary and sufficient conditions for an enterprise to be apparently in the ODM orOBM stage would be RODM � 2/3 or ROBM � 2/3 respectively (see inTable 3.2).

However, the development of OEM enterprises at home and abroad also showthat their transformation and upgrading are not confined to a single path, but amixture of paths combining several modes as well. For example, when an OEMcompany transform to ODM, it can also carry out OBM business or OEM diver-sified development. Moreover, in the process of upgrading from OEM to ODM andOBM, there are many transitional phases, in which mixed modes such as OEM/

Table 3.2 Operational standards for identifying OEM enterprises’ development stages

Phase ofOEMfirms

Annotation Conditions

Phase led by asingle-mode

OEM OEM-leading phase 1 � ROEM � 2/3

ODM ODM-leading phase 1 � RODM � 2/3

OBM OBM-leading phase 1 � ROBM � 2/3

Phasepredominated by amixed-mode

Mixed(OEM*)

OEM-leadingmixed-phase

2/3 > ROEM � 1/2

Mixed(ODM*)

ODM-leadingmixed-phase

2/3 > RODM � 1/2

Mixed(OBM*)

OBM-leadingmixed-phase

2/3 > ROBM � 1/2

Mixed(OEM)

OEM-predominatingmixed-phase

ROEM < 1/2 andROEM > RODM andROEM > ROBM

Mixed(ODM)

ODM-predominatingmixed-phase

RODM < 1/2 andRODM > ROEM andRODM > ROBM

Mixed(OBM)

OBM-predominatingmixed-phase

ROBM < 1/2 andROBM > ROEM andROBM > RODM


ODM, OEM/OBM, or OEM/ODM/OBM may exist. And some companies mayadopt OEM, ODM and OBM simultaneously. These phases are defined asmixed-mode phases in this book. By comparing the relative strengths of OEM,ODM and OBM, we list nine major development stages and define the operationalstandards to identify the stages of OEM enterprises (see Table 3.2).

Of course, the ratio of R&D input in sales revenue, the scale of staff engaged inR&D and designs, and the ownership of self-brands are also important indicatorsthat can reflect the development stages of enterprises. Hence, these indicators willalso be adopted when determining the development stage of case enterprises.

3.1.3.2 Establishing Description Models for OEM Enterprises’Transformation and Upgrading

Obviously, with other conditions unchanged, the larger the ROBM is, the higherlevel the enterprise’ stage is at. In terms of the single-mode predominant phases, thehighest degree is OBM, followed by ODM and OEM. With regard to the formerthree mixed-mode phases, the highest degree is mixed (OBM*), followed by mixed(ODM*) and mixed (OEM*). Regarding the latter three mixed-mode phases, thehighest degree is mixed (OBM), followed by mixed (ODM) and mixed (OEM).However, if merely based on the conditions listed in the above table, we cannotaccurately rank the nine major stages of development by levels from high to low.But provided that we further refine the conditions, it would greatly increase thecomplexity of our studies.

Inspired by the advantages of the simple form and clear expression of geometryin mathematics, the author strives to use such method to create a visual descriptionmodel for OEM companies’ transformation and upgrading so as to simplify theanalysis process.

According to the above division standards, the author has drawn the“Description Model of OEM Enterprises’ Transformation and Upgrading”, asshown in Fig. 3.2.

In accordance with the proportion of three production modes in differentdevelopment stages of OEM enterprises, we can demonstrate their developmenttrack through the description model. For the convenience of analysis and expres-sion, it only considers the starting point and terminal point of the enterprise. Thus,this development track is a vector (for the convenience of presentation, hereinafterreferred to as the path vector). In this way, we can make use of the direction and theslope of the vector to directly make an adverse judgment of whether the enterprisehas actually been transformed and upgraded, or whether it has attained the effect oftransformation and upgrading.

When judging whether an enterprise has actually undergone a transformationand upgrading, we set the following criteria (see Fig. 3.3).

Combining the conditions in the Recession to a lower-level stage or failing toachieve upgrading above table with the geometric properties of vectors, we can


obtain the judgment criteria that can be directly used for the description model, asshown in Table 3.4.

By this way, we can utilize the description model to easily interpret the trans-formation and upgrading path of OEM enterprises.

Mixed

Mixed

Mixed

Mixed

Mixed

Sample Path

Fig. 3.3 Example oftransformation and upgradingpath of OEM enterprises

(Contribution Rate of OEM Business)

(Contribution Rate of ODM Business)

Mixed

Mixed

Mixed

Mixed

Fig. 3.2 Description model of OEM enterprises’ transformation and upgrading


The polygonal lines in Fig. 3.3 show the path illustration. We can find that thespecific evolution process of the illustration path, that is, OEM ! Mixed(OEM*) ! Mixed (OEM) ! Mixed (OBM) ! Mixed (OBM*) ! OBM. If wemerely observe the starting point A and the terminal point F, due to the vector AF’sslope K < −1 and the direction being oblique downward, we can find that the OEMenterprise has attained the upgrading effect along the illustrating path, according tothe judgment criteria in Table 3.4. However, when we carefully look at the specificpath, it can be found that upgrading is not realized in every part of the illustratingpath. For example, vector BC meets the condition of 0 > K > −1 and its direction isoblique downward, which means the enterprises suffer a recession or fail to achievethe upgrading effect, according to Table 3.4. Therefore, although such enterpriseseventually realize transformation and upgrading, temporary regression, due tovarious factors, may still happen in the entire transformation and upgrading process.Besides, the specific evolution process of the illustrating path reveals a fact that,during the upgrading road from OEM to ODM and to OBM, there are manycoexisting realities such as OEM/ODM, OEM/OBM and even OEM/ODM/OBM.The above results are in line with our objective experience.

Thus, we can base the above analysis to give an operational definition for thetransformation and upgrading of OEM enterprises. That is, substantial changesemerge in the production patterns of OEM enterprises, which, according toTable 3.3, enables them to achieve upgrading effect (Table 3.4).

Table 3.3 Evaluation criteria for the transformation and upgrading effect of OEM enterprises

Transformation and upgrading effect Judgment criteria

Achieving upgrading effect ROBM "ROBM ! and RODM "

Recession to a lower-level stage or failing to achieve upgrading ROBM #ROBM ! and RODM #

Table 3.4 Judgment criteria for description model of OEM enterprises’ transformation andupgrading

Judgment criteria

K > 0 K = 0 0 > K > −1 K � −1

Achieving upgrading effect Diagonaldownward

Left Diagonalupward

Diagonaldownward

Recession to a lower-level stage orfailing to achieve upgrading

Diagonalupward

Right Diagonaldownward

Diagonalupward

Note K refers to slope


3.1.4 Case Enterprises: Donlim Kichen Group Co., Ltd.and Jasic Technology Co., Ltd.

3.1.4.1 Reasons for Case Selection

In this chapter, we select Guangdong Donlim Kichen Group Co., Ltd. andShenzhen Jasic Technology Co., Ltd. for case study, from the large number ofGuangdong enterprises that successfully achieved transformation and upgradingfrom OEM to ODM to OBM. The rationale for choosing them can be attributed tothe following reasons.

First of all, with regard to the corporate strength, Donlim is called the “HiddenChampion” in the domestic small-appliance industry, and Jasic is the leadingenterprise in the domestic welding industry. Furthermore, Donlim was classified byGuangdong Economic and Trade Commission as the typical case which turnedfrom “Made in Guangdong” to “Designed in Guangdong”. The two companies’success in transformation and upgrading is very representative.

Secondly, regarding the industry nature, Donlim is labor-intensive and Jasictechnology-intensive. In terms of the scale, the sales revenue and staff of Donlimwas over 4 billion yuan and 20,000 employees in 2006, while that of Jasic was only250 million yuan and 730 employees. In terms of the business location, Donlim islocated in Leliu Town (Shunde City) and aims at both domestic and foreign mar-kets, though more emphasis was on the foreign market, while Jasic is located inBao’an District, (Shenzhen Municipality) and attaches almost equal importance toboth domestic and overseas markets. The comparative study of these two enter-prises, which are different in the industry nature, enterprise scale and operationallocation, makes the conclusions more general.

3.1.4.2 Data Source and Collection

The data collection methods used in this study are shown in Table 3.5.Owing to various objective and subjective factors, the representatives on behalf

of the enterprises might have some subjective opinions in the process of data

Table 3.5 Data source and collection

First-handdata

• Several deep semi-structured interviews with managers of production, R&Dand marketing departments of case companies

• Telephone interviews and e-mail surveys• Internal documents provided by case enterprises, including publications andannual summaries, and brochures of products and enterprises

Second-handdata

• Browsing websites of case enterprises• Searching university databases• Reviewing statistical yearbooks• Consulting relevant newspapers and magazines


collection. To avoid this problem, the author tried to use a variety of measures, suchas asking the respondents for facts and data in addition to the general informationoffered and confirming the first-hand data and second-hand data by comparing themwith each other so that the collected material can reflect the real situation of theresearch objects to the greatest extent.

3.1.5 Guangdong Donlim Kichen Group Co., Ltd.

Guangdong Donlim Kichen Group Co., Ltd. (hereinafter referred to as Donlim) wasfounded in 1998 in Leliu Town, Shunde District, Foshan City, a production base ofsmall household appliances in China. The group has invested and held a controllinginterest in two core companies: Guangdong Xinbao Electrical Appliances Co., Ltd.and Zhongshan Donlim Electric Power Co., Ltd., which specialize in producingsmall appliances (i.e. electric kettles, coffeemakers, bread makers, microwaveovens, toasters, electric irons) and large appliances (i.e. washing machines andrefrigerators) respectively. Over 95% of these products are exported to somedeveloped markets in Europe, US and Australia. Donlim is a well-known manu-facturing enterprise in the kitchen appliances market in over 100 countries andregions.

In recent years, Donlim has rapidly grown into one of the strongest 200 nationalindustrial companies. Guo Jiangang, Chairman of the group, was designated“Outstanding Private Entrepreneur of 2002” by the government of Guangdongprovince. In 2004, the group was identified by the ministry of information industryas one of the Top 100 Enterprises. Its holding company, Guangdong XinbaoElectrical Appliances Holdings Co., Ltd. (Xinbao) is China’s largest exporter ofelectric kettles, coffee makers and mixers. Its global market share of the electrickettle had ranked first for four consecutive years. From 2004 to 2006, its electriciron and microwave oven products were awarded the “National Inspection-freeQualification”, the electric kettle and steam iron won the honor of “GuangdongFamous Brand Product” and the electric kettle was granted the title of “ChinaFamous Brand Product”. In 2005, Xinbao’s sales reached over 3.1 billion yuan andthus became the “export champion” among domestic private enterprises. Besides,the annual tax payment of over 100 million yuan made it one of the top 10taxpayers in Shunde. It was also granted the green card of the procurement supplierby the United Nations.

At present, Donlim has set up a relatively independent and complete salessystem including 4 sales regions, 18 provincial-level branches, over 300 customersand more than 1000 terminal stores, an efficient and transparent financial operationand management system supported by K3 software and the after-sales servicenetwork has covered all sales areas nationwide. The company has more than 20,000employees. More than 3000 of them are professional and technical personnel. Andthe production site covers more than 400,000 m2.


The group owns excellent R&D capabilities, with more than 200 engineers, ofwhich nearly 100 people specializing in product development. It has a number ofadvanced R&D institutions, including the engineering and technology developmentcenter for electric and thermal home appliances with support from the provincial,municipal and district governments, the innovation and design center which is theexecutive director unit of Guangdong Industrial Design Association, the productR&D center, the industrial innovation center, and national laboratories which wasaccredited by UL, GS and other authoritative international certification companiesand laboratories.

“Developing based on OEM and growing based on self-brand” is the coredevelopment strategy of Donlim. Thanks to the advantages in its brand, technology,talents, capitals and management, Donlim has achieved its magnificent goal ofreaching 10 billion yuan of global sales within 5 years and realizing benignexpansion of its businesses and appreciation of its own brand.

3.1.6 Shenzhen Jasic Technology Co., Ltd.

Originated from Shenzhen’s Ruiling Power Source Technology Co., Ltd., JasicTechnology Co., Ltd. was founded in 1993 and was successfully restructured intoShenzhen Ruiling Electric Appliance Co., Ltd., which was renamed to JasicTechnology Co., Ltd. (hereinafter referred to as Jasic) in July 2003.

Jasic was the first high-tech enterprise in China’s early development period thatcombined independent R&D, production, and sales. Sticking to the principle of“being founded on technology and growing through continuous innovation”, Jasichas been committed to the R&D and production of the inverter welding machine,reaching the internationally advanced level in technologies. Adopting uniqueinverter technology, it substantially reduced the cost, size and weight of products inChina, and achieved satisfaction from numerous customers at home and abroad,thanks to its excellent quality, lower price, elegant appearance and high-qualityservice. Products are exported to Southeast Asia, Hong Kong, Macao, Taiwan,Africa, Europe and America, Middle East and other countries and regions, showingan optimistic market potential. The “JASIC” brand has become a symbol of stablequality, outstanding performance and high performance-to-price ratio.

At present, the annual production capacity of Jasic has reached over 200,000pieces and its sales volume has continually hit new highs. In 2007, Jasic saw itssales income standing at 250 million yuan with an annual average sales growth rateof 64%. The years of effort enable Jasic to set up a sound sales network at home andabroad. Domestically, it has adopted the full-agent operational mode, including 5branches, 10 offices, over 120 agents and 300 distributors. Internationally, it hasestablished good relationship with approximately 80 customers in more than 50countries and regions.

Jasic, equipped with excellent R&D capability, has already constructed an R&Dteam with strong technology, innovation, efficiency and experience, and two R&D


centers in Shenzhen and Taiyuan respectively. It has advanced production andtesting equipment, including several globally advanced automated production linesthat meet the EU ROHS lead-free environmental standards, as well as manyautomatic plug-in lines and digital electronic detection systems. Besides, all theproducts have passed ISO9001-2000 international certification of quality manage-ment system and reached 3C, CE, ROHS standards. Its product ranges cover almostall industries including shipbuilding, boilers, chemicals, petroleum, railways, con-struction, electricity and steel. And it also involves dozens of new products in sixseries, such as digital manual arc welding machine, digital full-function pulse argonarc welding machine, digital pulse DC square wave argon arc welding machine,digital MIG/CO2 welding machine, digital pulse MIG welder and inverter sub-merged arc welding machine.

Currently, Jasic is becoming the leader in its industry for its unique businessstrategies, sophisticated technology and stable quality. What Jasic’s staff alwayspursuing and sparing no efforts to is “to achieve best quality, best performance andhighest performance-to-price ratio so as to create value for customers”. Thanks toits continuous improvement in innovation and scientific management, Jasic ismaking a large step towards the international top-brand in the welding industry.

3.1.7 Comparison of Basic Information

Table 3.6 shows the comparison between Donlim and Jasic in terms of basicinformation.

3.1.8 Comparison of the Two Enterprises’ Transformationand Upgrading Paths

3.1.8.1 Changes in OEM, ODM and OBM Because of EnterpriseTransformation and Upgrading

Table 3.7 shows the changes in OEM, ODM and OBM in Donlim and Jasic inrecent years.

Based on Fig. 3.7, we can draw the OEM ! ODM ! OBM upgrading path ofDonlim and Jasic, as illustrated in Fig. 3.4 and Fig. 3.5 respectively.

As indicated in the above figures, the export sales of OEM products has pre-dominated the total sales of Donlim. Since the company didn’t adopt OBM modelin the overseas markets, the total contribution of OBM business to the foreign anddomestic market is slightly lower. However, it operates OBM business in thedomestic market from the very beginning, which can be called as “Born OBM”.Therefore, Donlim follows an “OEM ! ODM” path abroad but sticks to “Born


Table 3.6 Comparison between Donlim and Jasic. Source According to the author’s investigation

Donlim Jasic

Founding time 1998 1993

Company type Private Enterprise Foreign-owned Enterprise

Location Leliu Town, Shunde District,Foshan City, GuangdongProvince

Bao’an District, ShenzhenCity, Guangdong Province

Industry Small household appliances(Small household appliances inwestern style)

Welding (Inverter weldingmachine)

OEM/ODM/OBMbusiness operation

• Operating OBM Business inChina

• Operating OEM and OBMsimultaneously in foreigncountries

• Operating OBM Businessin China

• Operating OEM, ODMand OBM simultaneouslyin foreign countries

Corporatestrength

Enterprisescale

• Over 20,000 employees• 400,000 m2 of workshop

• Over 730 employees• 12,000 m2 of workshop

Salesvolume

Approximately 4 billion yuan ofsales income in 2007

Over 0.51 billion yuan ofsales income in 2010

Awards ofenterprise

The export champion of smallhousehold appliances amongChina’s private enterprises

Leading company in theinverter welding machineindustry in China

Table 3.7 Changes in thestrength of OEM, ODM andOBM of Donlim and Jasic.Source According to theauthor’s investigation

Donlim Jasic

OEM (%) ODM OBM OEM ODM OBM

1999 100 / / / / /

2000 95 5% / / / /

2001 87 13% / / / /

2002 76 24% / 100% / /

2003 66 33% 1% 70% 20% 10%

2004 50 47% 3% 50% 30% 20%

2005 40 54% 6% 30% 28% 42%

2006 32 60% 8% 25% 25% 50%

2007 27 64% 9% 15% 15% 70%

2008 32 60% 8% 17% 17% 66%

2009 30 61% 9% 22% 15% 63%

2010 30 60% 10% 23% 15% 62%

2011 29 59% 12% 23% 17% 60%

2012 27 64% 10% 28% 7% 65%

2013 26 63% 11% 24% 9% 67%

2014 26 63% 11% 25% 9% 66%


OBM” at home. And when it comes to the whole market scope, it follows the“OEM ! ODM ! OBM” path.

Similar to Donlim, Jasic was also a “Born OBM” company in domestic market.Their difference lies in the overseas market, where Jasic carried out brand trans-formation in 2007 and strategically replaced the original brand with its own brandfor its overseas products, which has achieved great success. Accordingly, itsupgrading path in overseas market is “OEM ! ODM ! OBM”.

3.1.8.2 Analysis of Donlim’s Transformation and Upgrading Paths

Firstly, according to Fig. 3.2, the transformation and upgrading path of Donlim canbe drawn in Fig. 3.6.

Fig. 3.4 OEM-ODM-OBM upgrading path of Donlim

Fig. 3.5 OEM ! ODM ! OBM upgrading path of Jasic


In Fig. 3.6, the dotted line is the specific trajectory of the transformation andupgrading of Donlim, and the real line is the path vector, namely AI. We can clearlysee the specific evolution process of Donlim’s transformation and upgrading, thatis, OEM ! Mixed (OEM*) ! Mixed (OEM) ! Mixed (ODM*) ! ODM.Regarding the path vector AG, we can see its slope is K < -1 and its direction isoblique-downward, which indicates an effective upgrading, according to theupgrading criteria in Table 3.3. If looking at the specific path, we can also find thatDonlim has been upgrading sustainably in its whole development process.

According to the description model in the previous section, we find that the mostadvanced stage of Donlim is ODM, namely the ODM dominant stage. In otherwords, Donlim has not achieved upgrading to OBM or reached any OBM domi-nating stage. In fact,.it has not put much emphasis on moving to OBM. As a result,the effect of upgrading to OBM is not obvious. In the figure, the slope of vectorAG’s absolute value is close to 1, which explains the situation. This is in line withwhat we learned in the investigation process about the effect of the enterprise’stransformation and upgrading from the management of Donlim.

In addition, the specific evolution process of Donlim’s transformation andupgrading path indicates that there are transitional phases in which many mixedmodes such as OEM/ODM and OEM/ODM/OBM may exist in the process ofupgrading from OEM to ODM.

Transformation and Upgrading Route of Donlim

Mixed

Mixed

Mixed

Mixed

Fig. 3.6 Transformation andupgrading path of Donlim.Note (1998: 100, 0, 0) in thefigure means that theproportion of Donlim’s OEM,ODM and OBM in the totalbusiness in 1998 is 100, 0 and0%. (The same below)


3.1.8.3 Analysis of Jasic’s Upgrading Path

Firstly, according to Fig. 3.2, the transformation and upgrading path of Jasic can bedrawn in Fig. 3.7.

In Fig. 3.7, the dotted line is the specific trajectory of the transformation andupgrading of Jasic, and the real line is the path vector, namely AI. We can clearlysee the specific evolution process of Donlim’s transformation and upgrading, thatis, OEM ! Mixed (OEM*) ! Mixed (OEM) ! Mixed (OBM) ! Mixed(OBM*) ! OBM. Regarding the path vector AG, we can see its slope is K < −1and its direction is oblique-downward, which indicates an effective upgrading,according to the upgrading criteria in Table 3.3. Moreover, the slope’s absolutevalue of AF is very large, indicating the transformation effect of Jasic is extremelyoutstanding. If looking at the specific path, we can also find that Jasic has beenupgrading sustainably in its whole development process.

In particular, Jasic achieved high-speed development in transformation andupgrading from 2005 to 2007, which can be attributed to two key reasons. Firstly,Jasic entered the domestic market with OBM in 2003 and gradually established acomprehensive sales and service network in China in the next year. Subsequently,the company witnessed brilliant achievements in the domestic market, as its pro-portion of OBM business rapidly increased to 42% in 2005 and reached 50% in2006. Secondly, Jasic carried out brand conversion in 2007 and systematicallyreplaced the original brand with its own brand for its overseas products, whichachieved remarkable success and drove its proportion of OBM business to 70%.

Transformation and Upgrading Route of Jasic

MixedMixed

Mixed

Mixed

Fig. 3.7 Transforming andupgrading path of Jasic


Additionally, the specific evolution process of Jasic’s transformation andupgrading path also indicates that, during the upgrading process from OEM toODM and to OBM, there are a lot of transitional phases, in which may exist variousmixed-modes such as OEM/ODM, OEM/OBM or even OEM/ODM/OBM.

3.1.9 Comparison of the Factors Influencing the TwoEnterprises’ Transformation and Upgrading

3.1.9.1 The Background of Case Enterprises’ Transformationand Upgrading

Cost Comparative Advantage Is Gradually Losing and OEM Profit MarginsContinues to Shrink

When talking about the economic factors that affect the transformation andupgrading of enterprises, the views the respondents of the two companies expressedare very similar. They considered the rising price of raw material, increasing laborcosts, tight energy supplies and the appreciation of RMB are the significant factors.

First of all, in domestic and foreign markets, the costs of crude oil, coal, elec-tricity and other resources and raw materials keep rising. The negative impact onthe corporate profit margins is direct and obvious. According to this survey, inrecent years, the rise in raw material prices in Donlim and Jasic is about 20%.

Secondly, due to the economic development, the improvement of people’s livingstandards and formal effect of the new “Labor Contract Law”, China’s labor costshave been rising. It is reported that the average salary in Donlim has increased by13% over the same period last year (excluding the increase in insurance costs), andthe salary in Jasic has gone up by about 15%. In addition, “recruitment difficulty”has further increased the labor costs of enterprises. As the overseas sales manager inDonlim Kitchen revealed that since 2007, the “recruitment difficulty” has preyed onthe company. Fortunately, in 2008, due to the withdrawal of some Taiwanese andKorean companies from China, the labor shortage problem was partially resolved.

At the same time, the reduction on export tax rebate rate increases the burden onenterprises, and further reduces their profit margins. Through in-depth research, itcan be learned that in 2007, export tax rebate rate of small household appliancesdecreased from 17 to 13%, down by nearly 24%. But the overseas sales specialist ofJasic said that in recent years, the export tax rebate rate of the welding machine hasnot been reduced by the state. Therefore, the reduction of export tax rebate rate didnot have a substantial impact on Jasic.

In addition, pollution caused by excessive processing and production hasbrought about the increase of environmental protection costs, which is nibbling theprofits of China’s OEM business.


Under the influence of rising raw material prices, increasing labor costs, tightenergy supply, appreciation of RMB, continuously declining export tax rebate rateand rising environmental protection costs, Donlim and Jasic have suffered contin-uous declines in profit margins. According to the representative of Donlim, theprofit margin of the group was only 5–6% in 2010.

Fierce Competition at Home and Abroad Forces OEM Companies toTransform and Upgrade to OBM with Independent Intellectual PropertyRights

It is reported that small household appliance industry where Donlim lies is verycompetitive. According to the statistics from the China Media Monitoring in 2006,in the competitive small household appliances market, food cooking machinemarket had a high-degree of brand concentration, hence market competition isfierce. Three brands, namely, Joyoung, Philips and Xibele, accounted for about60% of the market share, among which Joyoung accounted for 30% while Ouke,Leeper, Haomami and Supor competed fiercely for the remaining 20%. In the juicerproducts market, Philips ranked top with the accumulated retail sales volume of22% in 2006,followed by Supor (9.3%), Joyong (7.0%) and Leeper (6.0%). In theblender market, Philips and Leki were evenly matched and their share of retail salesin 2006 was 24.1% and 22% respectively, followed by Joyoung (17%). These threebrands shared a total of 63.1% of market share. In soymilk products market,Joyoung came out on top of the series of the product market with the retail share of81.4%, attributed to advantages in capital, technology and local brand.

Compared with the small household appliance market, the competition in thewelding industry is relatively less intense, and the market concentration is not sohigh. According to Pan Lei, Jasic’s General Manager, as the market share of the top10 enterprises in the current domestic and foreign welding industry accounts for lessthan 20% of the overall market share, market monopoly has not really formed.Nevertheless, there are a large number of well-known strong enterprises in thedomestic welding industry, such as the United States Lincoln Electric Company,Shanghai General Electric Welding Co. Ltd., Panasonic Welding Machine Companyand Beijing Times Group, and Hangzhou Kelda Welding Machine Co. Ltd.

Donlim and Jasic are unlikely to break out of such fierce competition by simplycarrying out OEM. Currently, independent intellectual property plays a critical rolein developing the core competitiveness in an industry. With the improvement andperfection of the intellectual property protection system in the world, an authorizedpatent spells a market niche, as a result of which controlling patents means con-trolling the market. Without independent intellectual property rights, a firm willonly position at the purely OEM stage of low level, earning slender processing fees.In contrast, enterprises originated from developed countries predominate both endsof the value chain, which enables them to enjoy the vast majority of profits andhigher added-value thank to their core technologies and global brands.Consequently, to outperform in such industrial competition and surpass advanced


enterprises, the only way for domestic OEM companies is to cultivate their owncore-technology and R&D capability through sustainable learning and innovation,based on which to foster their independent global brands.

International Trade Friction Is Increasing, and Export Trade of OEMEnterprises Suffers Multiple Barriers

In line with the increasingly strained international trade relations, European coun-ties and the United States, for the sake of protecting their own interests, haveconstantly restrain the exports of China’s products by the means of Anti-dumping,Product-specific Safeguard Measure, Technical Barriers to Trade (TBT), SocialAccountability 8000 International Standard (SA 8000) and so on. As regards theimpact of anti-dumping on the small household appliance industry, we can takeArgentina as an example. Its Deputy State Secretariat for the trade management andpolicy of the Economic Production Ministry announced to levy 59.35–69.26%anti-dumping duties on China’s exports of microwave oven on a five-year basissince 2007. Besides, a four-month minimum price control to the electric ironoriginated from China was carried out since March 5th, 2008, that is, the FOB priceof dry iron and steam iron should not be lower than $3.92 and $5.53 per setrespectively. According to the vice-general manager of Jasic, what Jasic mainlyencountered in the international trade was technical barrier, while commercialbarriers mpact little on them. Usually taking environmental protection, safety,health and social progress as excuses, developed countries leverage technical bar-riers to weaken the low-cost competitiveness of Chinese enterprises, therebycompleting the transition from simple tariff barriers to sophisticated technicalbarriers. To pass these technical barriers requires high testing fees, which greatlyslows the pace of Chinese enterprises to enter the overseas market.

The Profit Distribution Is Highly Unbalanced and Most of the Profits Go toBrand Owners in Developed Countries

In terms of industrial division, OEM enterprises are dedicated in processing andmanufacturing, but less competent in independent R&D, core-component produc-tion, market development and brand management, which lead to lower value-addedproducts. Besides, positioned at the bottom of global industrial value chain, theseOEM companies face great profit pressure and are squeezed heavily by entrustingenterprises in the upstream and downstream, which results in narrow profit marginand the least profit share in the international market. Take the electronic informationindustry as an example. Of the overall profits, at least 60% go to American com-panies (in upstream) that manufacture high value-added chips and software andabout 20% to Korean and Japanese enterprises (in middle-stream) that producecomputers and key components of electronic products, while the rest 10% leave to


Chinese companies that assemble and produce goods for the above foreign cus-tomers and thus are at the bottom of the industrial chain.

In fact, “95% of profits go to transnational supermarkets, wherein some productsare sold ten times the price of their costs,” said Mr. Shen, head of the domesticmarketing department in Donlim. The vice-general manager of Jasic also said:“Some products that price at $100 in China can climb up to $300 in India.” Thesereveal that the vast majority of profits are swept away by brand purchasers, and theremaining are left to the large number of OEM companies, indicating an extremelyunreasonable input-to-output ratio.

The Inherent Risks of OEM Production Are Increasingly Prominent andEnterprises Urgently Need to Transform and Upgrade

The operational mechanism of OEM production mode is doom to have manyinevitable risks.

Above all, constrained by the OEM production mode, a large number ofdomestic entrusted companies could only carry out production relying on thoseorders assigned by a handful of large purchasers. Once the buyers stop cooperation,these OEM companies are most likely to encounter bankruptcy crisis. According tothe “investment portfolio” view of Markowitz, one of the important principles infinance is that “do not put all your eggs in one basket” so as to spread theinvestment risk (Zhu and Qiu 2002). For instance, years ago Taiwan Giant Groupwas almost bankrupt due to the heavy reliance on simply one US bicyclebrand-owner, whose orders accounted for 75% of Giant’s total output. Onceproblems emerge in the sales channels, OEM enterprise will completely collapse.Scholars believed that an OEM enterprise must be vigilant if over 20% of its outputgoes to a single purchaser. Otherwise, it could only bear the oppression from thisbuyer, for the sake of survival. In brief, OEM enterprises are inherently passive inthe trading process.

Moreover, merely engaging in production activity, the lowest value-added endin the production chain, OEM enterprises are difficult to raise their profitability. Themeager profits, accordingly, are difficult to afford them to stand at the drasticfluctuations of raw material prices and the impact of sharp market changes. As aresult, this immensely increases the operational risks of OEM enterprises.

Thirdly, the OEM production mode itself consists of inevitable financial andlegal risks. Under the OEM mode, outsourcing companies control the brands anddistribution channels, while OEM enterprises can only conduct production.However, their technologies are imported from overseas and their products areexported to foreign market through buyers. Such profit mode, which simply aims ateconomies of scale, is unsafe and would increase the risk of OEM enterprise. Andthe will be the first to bear the brunt, once the turbulence arises internationally. Forexample, the 1997 Asian financial crisis seriously affected the regular production ofa large number of OEM enterprises.


3.1.9.2 The Motivation of Case Enterprises’ Transformationand Upgrading

Entrepreneurship and Brand Awareness Are the Main Driving Forces forEnterprise Transformation and Upgrading

The innovative, proactive, passionate and perseverant entrepreneurship can accel-erate the transformation and upgrading process of OEM firms. Besides, the brandawareness of entrepreneurs also plays an important role during such process.

Influenced by the entrepreneurship and strong brand awareness of ChairmanGuo Jiangang, since the establishment of Donlim, it has been determined to be the“high quality of life supplier”. Being aware of the importance of brand building, thecompany quickly formulated a development strategy of “developing through OEMand taking off by branding” and set the ambitious target of attaining a global sellingscale of 10 billion yuan within 5 years and benignly expanding the industry andboosting the brand value. Committed to the pursuit of innovation and excellence,Dolim has been making giant efforts to become the top brand of the domesticelectrical appliance sector.

In the process of the rapid development of Jasic, general manager Pan Lei hasplayed a very important role. This is because Pan always has excellent leadershipand rich marketing experience in the welding industry. On the other hand, it’sbecause he has the courage to innovate, the entrepreneurial spirits of beingproactive, passionate and persevering, the strong sense of responsibility towards hiscountry and staff and the strong awareness of intellectual property rights protectionand brand. Under the leadership of General Manager Pan, since the inception, Jasichas adhered to the business principles of “technological foundation and continuousinnovation”. Thanks to the years of development and accumulation, the companyhas cultivated a strong corporate culture which advocates “people orientation,pragmaticism and efficiency, learning and innovation, and creating an open,democratic, harmonious corporate atmosphere”. At the same time, from the inter-view with Mr. Pan, the author knew that Jasic was almost acquired by LincolnElectric, an American multinational and a global manufacturer of welding productsand equipment. After nearly six months’ negotiations, the purchasing price was sohigh that Jasic was unlikely to earn within the next decade. Facing such temptingconditions, many shareholders expressed their consent while Pan, as the top leader,clearly understood what would be the result after the acquisition. As a result, hetried his utmost to turn around the situation and attain the support from shareholdersand board of directors, leading the company to embark on the self- innovation road.Frankly speaking, without the insistence of general manager Pan, China would losean excellent national brand, and Jasic’s partners (mainly agents) and employeesmay fall into difficulty. Besides, Pan has attached great importance to the protectionof intellectual property rights and the establishment of self-brand. Until 2010, Jasichas successfully registered its trademark “JASIC” in over 28 countries and regionsand would register its own patents overseas. In addition, Pan also has the preciousspirit of continuous learning.


Looking back on the development processes of Donlim and Jasic, we can findthat entrepreneurship and brand awareness have actually played a critical role sincethe corporate establishment to the success of transformation. The sustainablehigh-speed growth of both companies can be attributed to the innovative, proactive,passionate and perseverant entrepreneurship, strong sense of responsibility for thenation and employees, and strong awareness in protecting intellectual property andestablishing self-brand.

Acquisition of Key Resources Laid the Foundation for Enterprises’Transformation and Upgrading

Capital Accumulation

When carrying out transformation and upgrading, no matter what strategy and pathdo OEM enterprises adopt, they must base on the corresponding economic strength.Despite the larger potential profitability of ODM model, both the R&D anddesigning cost and risk are extremely high. Similarly, implementing OBM businessrequires a huge sum of cost for market development and brand construction. Onlythose financially strong enough enterprises can afford to the transformation andupgrading sustainably.

To study the influence of capital accumulation on the transformation andupgrading of OEM enterprises, we can analyze the sales income, profit scale andfinancing ability (e.g. attracting foreign capital and listing in the stock market).

From the data in Table 3.8, we can see that in this study, the two companieswhich have successfully achieved transformation and upgrading boast goodfinancial resources. With abundant capital accumulation, Donlim and Jasic mademassive investments in R&D, design, promotion and so on, which has enhanced thelevel of technological innovation, promoted the brand image of corporate product,and ultimately achieved transformation and upgrading.

It is worth mentioning that, from the perspective of absolute value, Donlim hasoutperformed than Jasic in sales revenue and profit scale. However, the size of thewelding industry is comparatively smaller than that of the small home applianceindustry. For example, in 2007, the sales income of Donlim and Jasic was 4 billionyuan and 250 million yuan respectively. Although simply accounting for only6.25% of Donlim’s sales income, Jasic was much larger than other domesticcounterparts. It is known that the 50-million sales income is a threshold for themanufacturing enterprises in the welding industry, wherein most welding-machinemanufacturers still hovered around 20–30 million and very few could reach 50million. Therefore, when observing the capital and resource situations of OEMenterprises, we should take into account the industrial nature as well.


Human Resources

The transformation and upgrading of OEM enterprises have high requirements forthe quantity and quality of human resources. For example, OEM requires a lot oftechnicians and skilled labors, ODM requires large numbers of professional andexperienced R&D personnel and designers, and OBM need many marketing andplanning talents who are professional and proficient in market. A lot of studiesfound that during the period of transformation and upgrading, almost all OEMenterprises are suffered from talent shortages, especially those senior managerialtalents who can lead the enterprises to continue with development in new areas.They ensure OEM enterprises that have realized upgrades to accomplish theirstrategic planning and maintain their competitiveness.

Donlim is quite clear that talented people are important to innovation. Thanks togreat attention and financial investment from the top management as well as thesupport of the whole staff, Donlim College, a training and management institutebelonged to all Donlim employees, was set up in 2004. It has now become atraining and teaching place and internship base of some universities. Apart fromtaking advantage of the corporate resources, Donlim College not only rationallyintroduces external talents, courses and advanced operational systems to improve itsinternal management, but also cooperates with external training institutions.Consequently, a training and education system with Donlim characteristics cameinto being, which has fostered a large amount of technical and management per-sonnel with strong practical skills for the company and community. In addition, thecooperation with Sun Yat-sen University and Jilin University enabled Donlim tolaunch MBA on-job seminars and MEM (Master of Engineering Management)seminars, and set up a variety of talent pipelines including “talent echelon con-struction”, “qualification identification”, and “internal training supplemented byexternal recruitment”. These efforts have cultivated a number of high-level

Table 3.8 Capital accumulation of Donlim and Jasic

Donlim Jasic

Sales In 2006, the total sales revenueexceeded 4 billion yuan, increased by25% than the previous year. Itsaverage growth rate in recent years ismore than 30%

In 2007, the total sales revenueexceeded 250 million yuan, increasedby 69% than the previous year andranking the fifth domestically. Itsaverage growth rate in recent years is64%

Profitlevel

The average profit margin of theentire industry is about 15%

The average profit margin of entirethe industry is 10.73%

Financingcapacity

In the early period, it was mainly runon its own funds. Its affiliate,Guangdong Xinbao ElectricalAppliances Co., Ltd., was listed inChina’s stock market in 2014

In the early period, it was mainly runon its own funds. But it introduced theChina Merchants Technology Groupand other strategic investments intothe company in 2007. It was listed inChina’s stock market in 2011


technical and managerial talents for Donlim. Until 2009, the company hosted over20,000 employees, including about 2,000 professional technicians.

Currently, although Jasic still lags behind Donlim in terms of the input intensityand effects of personnel training, it has attached great importance to the introductionof external talents, especially those management and technical personnel.According to the author’s research, Jasic has introduced more than 10 seniorengineers, who had years of experience in developing welding machines, tospecifically participate in the R&D and design of products. Besides, it not onlyrecruited two professors as the company’s financial counselors, but paid highersalary to hire a senior professional with 8 years of research experience in BeijingTimes Group to handle Jasic’s R&D work. To help product R&D meet the marketdemands better, Jasic has introduced a handful of senior technicians from ship-building and other industries to participate in the development of new products. Inaddition, Jasic has set up business schools in the company, which can provide asystematic and pertinent training system so as to improve the overall quality ofemployees. Until year 2009, Jasic hosted 730 employees, of which 7% are man-agers, 8% are R&D personnel, 12% are marketing staff, and 8% are technicalengineers. In other words, of the total employees, around 35% (over 250 people)engage in professional technical work.

The Growth of Key Capabilities Will Promote the Transformation andUpgrading Process of Enterprises

Independent Innovation Capability

Enhancing OEM enterprises’ self-innovation capability is of great significance tothee optimization and upgrading of traditional manufacturing industry. Judgingfrom the new-round global economic restructuring, we can find that if one companygrasps the core technologies in the leading and strategic industries, it will capturethe competitive advantages and predominate in the higher end of industrial chain,thus obtaining excessive profits. Otherwise, it will only stay in the lower end ofindustrial chain, serving as the “assembly workshop” or “processing base” of othercompanies and earning poor processing fees. Therefore, from the viewpoint ofChina, we must vigorously reinforce the self-innovation capability of OEMenterprises, for the sake of speeding up the adjustment of industrial structure andraising the status of traditional manufacturing industry in the internationallabor-division.

With regard to the enterprises themselves, enhancing the self-innovation capa-bility can change OEM enterprises from heavily relying on the large input ofproduction factors such as capital, labor, energy, resources, thereby realizing thetransformation of production mode from factor-driven to innovation-driven. This isin accordance with the survival and growing requirement of OEM enterprises. Inaddition, raising self-innovation capability is urgent for these companies to


effectively avoid many risks resulted from OEM model and to enhance theirinternational competitiveness.

The self-innovation capability is a key factor in determining whether OEMcompanies can successfully achieve transformation and upgrading. During thedevelopment from OEM to ODM and then to OBM, it is critical for companies tocontinuously carry out technological innovation and thus consistently upgrade theirproducts and techniques, thereby achieving ODM technologically and eventuallytransforming to OBM enterprises. Therefore, the improvement of independentinnovation capability is not only important in driving enterprises to transform fromOEM to ODM and then to OBM, but also among the most direct ways in reflectingtheir upgrades.

Based on the comparison and analysis of typical case enterprises, such as AcerComputer, Samsung, Galanz, Mao and Dai (2006) summarized the characteristicsof innovation in OEM, ODM and OBM and other developing phases (see Fig. 3.8).All these can vividly reflect the close connection between technical innovation anddeveloping phases of OEM enterprises.

In this case, the analysis of innovation capability of case enterprises mainlyfocuses on the following aspects, including the achievements of independentinnovations, the managerial capability to innovations, the input of science andtechnology, the R&D institutions and personnel, and the development ofindustry-university-research.

Prod

uct

ODM (product concepts comes from Buyers)

Microwave-oven business of Samsung Group before 1990Acer Inc.in the late 1980sGuangdong Galanz Group Co., Ltd. during 1995-1997Hewlett-Packard Company (Singapore) in 1977

ODM (independent design) or OBM → Innovations on Proprietary Technology

Hewlett-Packard Company (Singapore) after 1980ZTE Corporation after 1993Guangdong Galanz Group Co., Ltd.after 1997Admiral Oversea Corporation (AOC) after 2004Guangdong Donlim Kichen Group Co., Ltd. after 2004

Tec

hnol

ogy

OEM

Microwave-oven business of Samsung Groupbefore1980Hewlett-Packard (Singapore) in 1970Guangdong Galanz Group before 1995Guangdong Donlim Kichen Group Co., Ltd.during 1988-2004Zhongxing Semiconductor Co., Ltd in 1985Top Victory Electronics (Fujian) Co., Ltd.

Deepening of OEM → Innovations on Techniques

Taiwan Semiconductor Manufacturing Company (TSMC) in 1990sUnited Microelectronics Corporation (UMC) in the late 1980sReliance Petrochemical Co., Ltd.Ispat Steel (India) Co., Ltd.

Non-Proprietary Technology Proprietary Technology

Fig. 3.8 Innovative characteristics of typical enterprises at different phases. Source The frame-work of this diagram refers to the coordinate system technology-product-proprietary technology,which was proposed by Nashid Forbes (2001)


As it shown in Table 3.9, these two companies have cultivated strongself-innovation capability. Indeed, it is the continuous innovation in R&D anddesign and consistent enhancement in technical content and brand image that enable

Table 3.9 Independent innovation capability of Donlim and Jasic

Donlim Jasic

Achievements ofself-innovation

The company developed over200 new products annually,which has exceeded 1000 kindssince its foundation.A standardized managementsystem for intellectual propertyrights has been set up, with 4invention patents, 8 internationalpatents and over 500 domesticpatents. It took on many nationaland provincial technical projects,including the Development ofThermal Insulation ProtectionDevice, one of the NationalTorch Programs. The companyhas been selected as one of thetypical cases of transformingfrom “Made in Guangdong” to“Designed in Guangdong”. In2007, it became the leader ofsetting the national standardsabout the “PerformanceRequirements and Test Methodsof Electric Kettle”

The average number of productsdeveloped and put into themarket reaches 5–10 every yearand now it has more than 20kinds of domestic patents. InOctober 2006, it was appraisedas Shenzhen High-techEnterprise by ShenzhenMunicipal Government. From2006 to May 2007, Jasic becamea member of National WeldingStandardization TechnicalCommittee, China ElectricalEquipment Industry Association,and China Welding Branch,respectively. Meanwhile,Ruiling Star welding machinehas become a general standard ofthe domestic V-MOS Pipewelding machine and civilwelding machine

Innovation managementcapability

A standardized intellectualproperty management systemwas set up, leading to ahigh-degree industrialization ofscientific research andinnovation achievements. Toencourage innovation, a varietyof incentives have beenestablished, such as quarterlyselection of technologicalinnovation and rewards toreasonable suggestions

In the early stage, the companydid not pay much attention to theprotection of intellectualproperty rights and trademarks,resulting that the “Ruiling”brand was counterfeited by someillegal manufacturers, and thebrand image was severelydamagedThe current situation has beengreatly improved. The comapnyhas attached great importance tothe protection of intellectualproperty rights and theestablishment of self-brand.Until 2010, Jasic hassuccessfully registered itstrademark “JASIC” in over 28countries and regions and wouldregister its own patents overseas

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Donlim and Jasic to get round the brutal cost and price competition, and thus realizethe gradual achievement of transformation and upgrading from OEM to ODM andthen to OBM. It corresponds to the opinions expressed by Donlim’s representativesduring our investigation.

Table 3.9 (continued)

Donlim Jasic

R&D input Each year substantial fundswould be input to thetechnological innovation anddevelopment. The percentage ofenterprise’s R&D expensesaccount for sales revenue alsorose from 2.91% in 2000 to5.18% in 2005, an increase of 16times, reaching 170 million yuanin 2005

The investment in R&D ismainly shown in project fees.Each year the company woulddevelop different R&D projects,according to the market demand,with the cost from 50,000 to100,000 yuan

R&D institutes and personnel (1) The enterprise has a numberof advanced R&D institutions,including three-level (provincial,municipal and district)engineering technology R&Dcenters for electrothermal anddynamoelectric small householdappliances, Innovative DesignCenter, Product R&D Center,Industrial Innovation Center aswell as the national laboratorywhich was authorized by the UL,GS and other authoritativeinternational certificationcompanies and laboratories(2) The group has more than 200engineers, accounting for 1% ofthe whole staff, of which nearly100 are specialized in productR&D

(1) Currently it owns two mainR&D institutions, one of whichis in Shenzhen and the other is inTaiyuan city(2) The company hosts morethan 730 employees, 16% ofwhich engage in R&D anddesign (116 people). With highsalary, Jasic has introduced morethan 10 senior engineers, whohad years of experience indeveloping welding machines,and set up four project teams tocarry out R&D worksimultaneously. To help productR&D meet the market demandsbetter, Jasic has introduced ahandful of senior techniciansfrom shipbuilding and otherindustries

Industry-University-Researchactivities

In 2006, a postdoctoralprogramme was established tobuild an innovativeIndustry-University-Researchplatform. Several technicalcooperation projects were alsocarried out with universities suchas Jilin University and HeFeiUniversity of Technology

Up to now, a number oftechnical cooperation projectshave been carried out withuniversities such as TsinghuaUniversity and South ChinaInstitute of Technology, and therelevant supporting enterprises athome and aboard


Manufacturing Capability

Manufacturing capability is the comparative advantage that OEM enterprises relyon for survival. The outstanding manufacturing capability could help OEM com-panies to gain more orders, facilitating their OEM business and laying a solidfinancial foundation for their transformation and upgrading. Moreover, during theprocess of enterprise transformation and upgrading, brand building is a long andcostly process and OBM business is less likely to make profits from the beginning.As a result, enterprises should retain a certain proportion of OEM business, theprofit of which could support the subsequent development of OBM business andpromote the process of transformation and upgrading.

According to our survey, Donlim hosts over 20,000 employees and more than400,000 m2 of production area, and Jasic has over 730 employees and more than12,000 m2 of production area. According to their output value as shown inTable 3.9, both two companies have a considerable scale of manufacturing capa-bility. Although the output value of Jasic is less than 300 million, its scale was stilllarger than its domestic peers.

In the research, the OEM business of both two enterprises still takes up a certainproportion (e.g. Donlim is 25% and Jasic is 15%) and the absolute sales volume hasbeen increasing, revealing that OEM business is still one of the important sources oftheir operational revenue. Thanks to its enhance of manufacturing capacity, Donlimhas witnessed the increasingly large share of its OEM products in the overseasmarket. This not only enables Donlim to powerful bargaining power in the nego-tiation with foreign brand purchasers, but ensures it to receive sufficient revenue tosupport its subsequent implementation of higher value-added business (e.g. ODMand OBM). This is in accordance with our previous analysis. As for Jasic, itsbrilliant performance on OEM business over the past years has not only realized itscapital accumulation, but also created good reputation for its product quality. Onthis basis, its brand switch, a task officially starting in 2007, has received notableeffects and its proportion of OEM business of the whole company has quicklyreduced to nearly 15%.

Therefore, the excellent manufacturing capacity not only benefits the expansionof OEM business, but drive OEM enterprises to transform and upgrade towardsODM and OBM.

Marketing Service Capability

Enterprise marketing service capability refers to the capability of an enterprise tomeet the market demand, to actively guide the consumption and to create com-petitive advantage so as to achieve its business objectives. It is a comprehensiveembodiment of the decision-making ability, adaptability, competitiveness and salesability of an enterprise. It is the strength of marketing ability that determines thesize of business achievement of an enterprise and the key to its success. It is alsoimportant to the transformation and upgrading of OEM enterprises, especially in thetransition to OBM. The process from OEM to OBM is actually a process of


enterprises transforming from production-oriented to brand marketing-oriented. Thekey to success is whether enterprises can quickly develop and establish marketingcapabilities necessary for market competition.

The analysis of marketing service capabilities can be proceeded from the fol-lowing aspects: the construction of corporate marketing service network, the scaleof sales force and the promotional activities.

As is shown in Table 3.10, the two companies have made great efforts toimprove their marketing services capability with positive effects. Donlim focusedmore on the domestic market but have fewer promotions in the overseas markets,only participating in various exhibitions. By comparison, Jasic attached equalimportance to both domestic and foreign markets. This reflects the difference in thecorporate strategy of these two companies.

Besides, concerning the input difference of marketing service in the domesticand overseas market, it is the substantial investment in the domestic marketing andpromotion that enables Donlim achieved rapid development in ts OBM business.As Donlim’s overseas market is not involved in the OBM business, what it needs todo mostly is stabilize the partnership with those large foreign brand purchasers bythe means of improving its product quality, reducing costs and shortening deliverycycle. Thus, it has no necessity to spend too much to promote its brand image toattract end-consumers. According to the general manager of its domestic company,“It is more difficult for small household appliance producers to promote business in

Table 3.10 Donlim’s and Jasic’s marketing service capabilities

Donlim Jasic

Construction ofmarketingservice network

(1) Overseas: Overseas branches haveall been evacuated except one in HongKong(2) Domestically: An independent andcomplete sales system has been set up allover the country, with 4 sales districts,18 provincial branches, more than 300customers and more than 1000 terminalstores. An efficient and overt financialoperation and management system hasalso been built, with the K3 softwareinformation supporting. After-salesservice network are also providedcovering all sales areas nationwide.Besides, a number of innovations havebeen made in marketing mode, such asthe Membership in Beijing in 2003 andthe direct sales on television in Shanghai

(1) Overseas: Good cooperationrelationship has been established withnearly 80 customers in over 50countries and regions(2) Domestically: It owns 5 branchesin Beijing, Shanghai, Chongqing,Guangzhou and Dongguan, 10 offices,114 agents (A-level) and more than300 distributors (B-level). It hasimplemented a full-agent operationmode. The service network has beenperfected. Three levels of nationalUNPROFOR programs have beenimplemented across the country. Itpromised that technical support wouldbe responded within two hours andarriving at the scene for door-to-doorservice within 24 h

Marketingpersonnel

About 200 marketing employees,accounting for about 1% of the totalnumber of staff

About 90 marketing employees,accounting for about 12% of the totalnumber of staff

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the domestic market than in the overseas market, where all you need to do is findthe right selling partners.” Unlike Dolim, Jasic aims to build “Jasic” into aninternationally famous brand with competitiveness. Therefore, it must lay out itsoverseas sales network and carry out a series of marketing campaigns in overseasmarkets, in an effort to promote the “JASIC” brand image. From the above com-parison, we can summarize that the marketing service capability is a significantfactor that influences the successful transformation of Donlim and Jasic.

At the same time, from Table 3.10, obvious differences can be found in theirpromotional activities. According to the manager of Jasic’s International TradeDepartment, the company spent a few in market promotions, except for theexpenses for participating in a variety of exhibitions. By comparison, the methodsof Donlim input substantially in the domestic marketing with more promotionchannels, such as participated in various exhibitions and platforms, and welcomingsome celebrities to make advertisements. According to our research, we believe thatsuch difference could be attributed to the characteristics of their products. The majorproducts of Donlim are small household appliances, the end-customers of which are


Donlim Jasic

Promotionactivities

(1) Oversea market: The forms ofmarketing activities are relativelylimited, mainly concentrating inattending various exhibitions andsending a small number of staff to seekfor cooperation with well-known buyers(2) Domestic market: The promotionways are more diversified and the scaleis also relatively strong. To vigorouslypromote its brand image, it hasparticipated in various exhibitions andplatforms, and welcoming somecelebrities to make advertisements

It has always been very active invarious exhibitions at home and board.It has attended a variety of importantexhibitions, includes “Beijing-EssenWelding and Cutting Exposition”a,“International Welding Exhibitions”,“American Manufacturing Technologyand American Welding Societywelding Exhibition”b. Theseexhibitions have greatly promoted itspopularity in markets at home andabroad, and seized the opportunities tocooperate with overseas customersfrom India, Germany, Israel, Russiaand other countries. In addition, toenhance its brand visibility, it alsocaptures opportunity to hold dealermeetings and commendationconferences

aBeijing-Essen Welding and Cutting Expo, a large-scale international welding and cutting exhibition,also known as the world’s Olympic Games of the welding industry, is sponsored by China MechanicalEngineering Society and its welding branch, China Welding Association, China Electrical EquipmentIndustry Association Welding Machine Branch, German Welding Society and German Essen ExhibitionCompanybThe exhibition is co-organized by American Manufacturing Technology and the American WeldingSociety Welding Exhibition, the American Welding Society (AWS), the American Society ofManufacturing Engineers (SME) and the American Association of Manufacturers (FMA). Thewelding exhibition is the largest welding exhibition in North America and the third largest weldingexhibition in the world except the German Essen and Beijing-Essen welding exhibitions


the large number of consumers, thus the company must strive to improve theproduct recognition among consumers so as to achieve good sales performance.However, the products of Jasic are welding products, designed mainly for industrialusers, hence participating in professional exhibitions could receive better promotioneffect compared with launching advertisements.

Management Ability

The enterprise management capability refers to the way how the enterprise makesuse of resources effectively and efficiently to achieve its pre-set objectives andstrategies. Such capability consists of a variety of functions (e.g. planning, strategyformation, execution, control, and coordination) and elements (e.g. organizationalstructure, information transformation, corporate culture and incentive mechanism).From the perspective of strategy transformation, to leverage the managementcapability, a company should base their existing resources and capabilities toeffectively integrate the corporate transformation strategy with resources andcapacities, and subsequently make full use of such integration. Therefore, the levelof management capability determines the effect and efficiency of transformation andupgrading of OEM companies.

Frankly speaking, the transformation and upgrading of OEM companies indi-cates that the companies will not only face new customers and competitors, but willcarry out changes in the entire management system, ranging from the productionprocess to organizational structure, and from the internal and external supply chainto the corporate culture. All these changes will test their management capability.Thus, in the process of transformation and upgrading, it is important for OEMenterprises to solve two problems simultaneously, that is, how to allocate variousproduction resources and elements so as to realize maximum effects, and how toadapt to the significant changes in the operational and management system led bystrategic transformation.

Owing to the huge trade surplus between China and western countries, devel-oped countries have been attempting to restrict the exports of Chinese productsthrough trade barriers such as technology and environmental protection, which ledto the constant trade frictions between China and other countries. For instance, inJune 2007, RC2 company, headquartered in New York, has recalled 1.5 milliontoys produced in Guangdong. On August 2007, Mattel, the biggest toy maker in theUS, announced to recall nearly 18.2 million toys made in China from worldwidestores. These two recalls could be attributed to magnets that would be easilyswallowed by kids and the excessive amount of lead paint. Since then, manyinternational organizations, media and governments questioned the quality ofChinese products, resulting in a linear decrease in overseas sales and even someawful events such as business failures and entrepreneurs’ suicide. Thus, it can beseen that the quality is the life of enterprises. Based on the above considerations, thecapability of quality management is to be focused on when studying OEM’smanagement ability in this case.


Besides, scholars also has analyzed the transformation and upgrading of OEMcompanies from the perspective of strategic planning capability (Zhang 2004) andorganizational efficiency (Burgelman 2004). In addition, this study will considerthat whether enterprises have introduced professional manager system and staff’soverall quality, which will influence the enterprise management capability.

When it comes to the quality management, both enterprises have made anendeavor and achieved excellent performance. Taking “the quality overwhelmseverything” as the management tenet, Donlim has positively carried outhigh-quality product strategy. “The company prefers to give up the profit, ratherthan the quality, of an order,” the company’s representative expressed confidently.Thanks to the efforts of the whole staff, the company has achieved great success inquality management. In December, 2006, Donlim stood out from 93 companies andbecame the leader of setting the national standards about the “PerformanceRequirements and Test Methods of Electric Kettle”. In June 2007, XinbaoElectrical Appliances Co., Ltd was awarded Quality Management Prices ofGuangdong Province. Products such as electric irons, microwaves and juicers havebeen consecutively granted with the National Inspection-Free Qualification. Donlimhas won the top-ten brands of national household appliance, and grasped the firstexport inspection-free project in Shunde City. The sub-brand Weili was granted thetitle of “Top-Ten of Customers’Most Trusted Household Appliance”. Besides, withthe development of projects like CPK and IE, Donlim has cultivated many QAengineers that enable the company to possess the capability of supervising andanalyzing self-quality management.

Jasic has insisted on strengthening internal quality management, combining thesoftware and the hardware and thus embarking on the road of normalization,institutionalization and standardization. It has established the first and mostadvanced lead-free production workshop in China so far. And it possessed severalglobally advanced automated production lines that meet the EU ROHS lead-freeenvironmental standards, as well as many automatic plug-in lines and digitalelectronic detection systems. Not only did the company pass the ISO9001-2000international quality management system, but its products met a number of stan-dards such as Chinese 3C, EU’s CE, Australian C-TICK, US’s UL and lead-freeROHS. And

In spite of the excellent performance in the quality management, the productmanager of Donlim said, “What we always attach most importance to is quality. Inrecent years, the sustained and rapid growth of sales volume indicates that thelow-cost expansion policy has achieved great success. However, despite the ly largeincrease of market share, substantial distance still exist in the product’s technology,appearance and quality, compared to those world-class companies.” Since thequality of small household appliances is directly related to customers’ health andsafety, ant minor negligence might incur serious consequences. Returns, claims andeven recalls caused by quality problems would undoubtedly deal a fatal blow toenterprises and the brands that the companies spared great effort to build wouldprobably be wiped out. Therefore, only if paying attention to quality first and


foremost can these enterprises truly realize transformation and upgrading fromOEM to OBM.

The Expansion of Domestic Appliances and Welder Machine DemandMarket Has Confidently Supported the Enterprises to Establish Their OwnBrand

The consumers’ mentality has recently changed from the basic life needs to thenutritional health tastes of life due to the influence of western culture and thechange of living condition, and consumers increasingly choose products that areclosely related to the diet of European and American countries such as electriccoffee pot, toaster and food cooking machine, which provides opportunities todevelop the market of western-style small household appliances. Along with thedevelopment of economy and the change in living concept, the structure of Chinesefamily has begun to become smaller and the number of households has beenincreasing, which causes the increasing demand of household appliances and thechange in product demand. Consequently, the miniaturized, simplistic and per-sonalized goods have shown huge market potential.

Currently, the market prospect of small home appliances is very enormous andthe development space is quite huge. In terms of market demand, the averagenumber of small household appliances owned by each family is over 30 in Europebut only 3–4 in China. The overall market size of small home appliances in Chinareached 85.31 billion yuan in 2006, an increase of 14.1% than the previous year,which would grow at about 8% within the next five years, according to the researchmade by CCID. And according to the data from the research group of China’s homeappliance market, in recent years, China’s small home appliance market has beengrowing at a rapid rate of 10–14% per year, with huge market potential. In addition,the service life of small home appliance products generally is about 5–6 years,indicating a number of these products will be replaced by new product.

In recent years, China has witnessed the sustained and rapid development in thedomestic economy, the constant growth of population and the continuousimprovement of urbanization, which have provided huge market space for weldingproducts. Research shows that in 2006, 48 domestic electric welding machineenterprises saw their major business income stood at about 4.04 billion yuan, ayear-on-year increase of 24.38%, and their exports reached 578.5496 million yuan(excluding that of auxiliary machinery accessories and components) with 640,250sets of export volume, a significant increase than the previous year. Meanwhile,since residents pay an increasing concern to environmental protection, the mainproducts of Jasic, the inverter welding machine, owing to its well performance inraw-material reduction and energy-saving compared to traditional welding machine,has gained high popularity from consumers.

The broad prospects of small household appliances and welding machine pro-vide a huge development space for these two companies. In recent years, the sales


growth rate of Donlim and Jasic is 25% and 64% respectively, attributed to therapid expansion of market demand at home and abroad.

Meanwhile, with the improvement of living standards, residents are increasinglymature in the consumption psychology and stronger in brand consciousness. Theyare more likely to purchase higher-price and better-quality goods. Under this sit-uation, enterprises can no longer drive sales performance simply by the means ofprice reduction, but need to improve product quality and cultivate self-brands toexpand market share. Along with the growth of market demand, the consistentmaturity of consumer psychology has created a good environment for OEMenterprises, including Donlim and Jasic, to realize transformation and upgradingthrough technological innovation.

Furthermore, the introduction of relevant industry standards has standardized thecompetition order of the industry and eliminated “inferior” enterprises, creating afair competition environment for the development of enterprises. The author learnedfrom the representatives of Donlim and Jasic that these two enterprises are bothbeneficiaries and framers of the industry standards. In December, 2006, Donlimstood out from 93 companies and became the leader of setting the national stan-dards about the “Performance Requirements and Test Methods of Electric Kettle”,which greatly contributed to the standardization of China’s small householdappliances industry and promoted its integration with the world. Similarly, from2006 to May 2007, Jasic became a member of National Welding StandardizationTechnical Committee, China Electrical Equipment Industry Association, and ChinaWelding Branch. It also participated in the standard formulation of the domesticelectric welding machine, playing a pivotal role in standardizing the competitionorder of electric welding machine (Table 3.11).

Government Policy Support Encourages Enterprise Transformation andUpgrading

Supported by the local government, the technological innovation environment ofLeliu Town and Shenzhen Municipality can be shown in Table 3.12.

As shown in Table 3.12, supported and driven by the local government, bothLeliu town (where Donlim is located) and Shenzhen city (where Jasic is located)have established outstanding environments for industrial innovation, which becomea significant impetus for these two companies to implement the independenttechnological innovation and ultimately succeed in transforming from OEM toODM and then to OBM.

Simultaneously, the author found that, owing to its more efficient and advancedfinancing market, Shenzhen outperforms Leliu in the construction of financingenvironment. To solve the financing difficulties of enterprises (especially thehigh-tech enterprises with higher start-up risk), the government has made variousefforts. First, it has managed to develop small and medium-sized financial institu-tions. Second, adopting market-oriented way, it has distributed fiscal funds tosupport the development of high-tech enterprises, such as establishing High-tech


Table 3.11 Management capability of Donlim and Jasic

Donlim Jasic

Qualitymanagementcapability

Taking the concept “qualityoverwhelms everything” as theguiding principle and giving greatimpetus to high-quality productstrategy, Donlim has implementedthe quality reform and set up afull-time quality management teamrepresented by vice-president. It hasestablished an excellent ISO9000quality management system,introduced six sigma, started CPKa

and IEb project, and cultivatedseveral quality engineersBesides, it has signed theMemorandum of Global StrategicPartners with Intertek, a reputablecompany specialized in productquality and safety service

Based on the concept of “quality isthe blood of the enterprise”, Jasichas insisted on strengtheninginternal quality management,combining the software and thehardware. It has embarked on theroad of normalization,institutionalization andstandardization. Not only did thecompany pass the ISO9001-2000international quality managementsystem, but its products met anumber of standards such asChinese 3C, EU’s CE, AustralianC-TICK, US’s UL and lead-freeROHS. And it has also establishedthe first and most advancedlead-free production workshop inChina so far, which has reached theinternational advanced level

Strategicplanningcapability

Donlim has been advantageous inestablishing strategies according tospecific circumstance of domesticand foreign markets, whichachieved good performanceIn the domestic market, it has set upits network widely and energeticallycarried out OBM businessIn the foreign market, it hasmaintained a good partnership withother brand owners. At the time offurther expanding its OBMbusiness, it has capturedopportunities to step into ODMbusiness

Jasic has a very clear developmentplan. Since the successfulrestructuring in 2003, it has carriedout two three-year plans based onits internal and external conditionsThanks to its first three-year planfrom 2003 to 2005, it achieved thesales target of reaching a hundredmillion and made the brand of“Jasic” known at home and abroadFrom 2006 to 2008, the companyunderwent its second three-yearplan: 2006 was the year of “qualityservice” of Jasic, and 2007 was theyear of “brand shaping”, a key yearfor the company to become largerand stronger and grow towardshigher goals. And 2008 was theyear of “international development”

organizationalefficiency

(1) The organizational structure isrelatively flat(2) Departments have greaterautonomy with independentoperation and accounting(3) Establish efficient andtransparent financial operation andmanagement system, which issupported by K3 software

(1) Small organization scale withflat structure(2) Intensive office location withlow communication costs(3) Introduce a number of softwareand systems to help companyimprove the efficiency in handlinginformation

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Donlim Jasic

Overall qualityof staff

It has owned a thorough trainingsystem and has established DonlimInstitute, a special traininginstitution, to train the whole staffcomprehensivelyMoreover, cooperated withSun-Yatsun University and JilinUniversity respectively, it has set upsuch as on-job MBA classes andMaster of Engineering classes. Theprofessionals has accounted formore than 10% in staff

Over these years, Jasic has recruitedlots of technicians with years ofR&D experience in the field ofwelding machine industry. Theproportion of professionals hasbeen up to 35% in the staff. Besides,it plans to build up a corporateinstitute to raise the overall qualityof employees by targeted training

aCPK is the abbreviation of Complex Process Capability Index, an indicator used to represent themanufacturing capability of a modern enterprisebIE(Industrial Engineering) originated in the United States. It is an applied engineering andtechnology discipline with the emphasis comprehensively placed on improving productivity,reducing production costs and ensuring product quality, so that the system is in the best operationstate and achieves huge overall benefits

Table 3.12 Technological innovation of Domlim and Jasic

Domlim kitchen (Leliu town) Jasic (Shenzhen municipality)

Basic situation (1) Leliu has been renowned as a“Science and TechnologyDemonstration Town ofGuangdong Province”,“International StandardizedTown”, and “The First Batch ofIndustry-University-ResearchDemonstration Town ofGuangdong Province andMinistry of Education”(2) Up to April 2007, 35Industry-University-Researchcollaboration projects have beensigned, a total of 5,189 patentshave been applied, and 4,667patents have been authorized

In 2006 the city’s high-techproducts had created 629.4 billionyuan and the high-tech productswith independent intellectualproperty accounted for 58.9% ofthe total output value of high-techproducts, both of which rankedfirst in the countryR&D investment in the wholesociety accounted for 3.4% ofGDP. The number of patentapplications increased by 42% to29,728, ranking second in thecountry. The number ofapplications for invention patentsrose by 75.3%, ranking the first inthe country. PCT internationalpatent application volumeremained the most in China

Innovation system An enterprise-based independent innovation system has been set up inboth Leliu and Shenzhen, but the latter outperforms than the former.Shenzhen enterprises are not only home to over 90% of R&Dinstitutions, which host 90% of the total research personnel, but also 38engineering development centers and 21 postdoctoral centers

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The supportive andincentive policiesof the government

(1) Sparing great efforts todevelop the technical standardservice, the local government hasestablished standardized systemfor enterprises, which takescorporate manufacturingmanagement standards as basis,product quality standards askeynote, and inspection standardas guarantee. The governmentalso strengthens the supportivemeasure to the key field and theestablishment of industrytechnical standards. Enterpriseshave been stimulated toparticipate in the formulation andreformulation of the industrial,national and even internationalstandards, the keynote of whichis intellectual property rights.And these companies areencouraged to adopt theinternational standards and theadvanced foreign standards(2) A Standardized ServicePlatform was set up in Leliutown, organized by the domesticCommerce Chamber ofHardware and HouseholdAppliance and SGS-CSTCStandard Technical Services Ltd.(an International CertificationAgency in Geneva, Switzerland).This platform aims to improvethe efficiency and quality of theadministrative work, whichenabled Leliu to be renowned asthe “International StandardizedTown” in 2006(3) The local government hasalso put forward two policies,Opinions on Speeding up theImplementation of IndependentInnovation Strategy andPromoting the CoreCompetitiveness of Leliu’sIndustry and the Notice onspeeding up the implementationof Independent Innovation

(1) Stepping up effort to promotethe scientific and technologicalinnovation of enterprises, themunicipal government haspromulgated a number ofregulations and rules, with regardto the protection of technicalsecrets, the appraisal of intangibleassets, the protection ofcomputer-software copyright, theextraction and utilization ofenterprises’ technologicaldevelopment funds, thetechnology equity and therewards to corporate technicians(2) It also builds up a good legalenvironment to protect theintellectual property rights, for thesake of promoting the healthydevelopment of the regionalinnovation system. The layout ofregional independent-innovationsystem has been set up step bystep, and 11.5 km2 of high-techindustrial parks and 150 km2 ofhigh-tech industrial belts havebeen planned and constructedsuccessively. More than 240innovative enterprise incubatorshave been set up, solving the lackof development space ofindustrial clusters. Besides, agroup of university scientificresearch and innovation systemshave been established, includingthe Advanced TechnologyInstitute (Shenzhen) of ChineseAcademy of Sciences, the VirtualPark of University and theUniversity Town. Eight sessionsof the High-Tech Fair and the firstsession of High Tech Expo havebeen held successfully, greatlyimproving the basic research andincreasing the technology sourcein Shenzhen(3) Furthermore, the governmenthas implemented the roadmapscheme for high-tech enterprises,

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Strategy and Promoting the CoreCompetitiveness. According tothese two policies, since 2007 thelocal government was required tospend no less than 2% of its fiscalrevenue, as special funds, toscientific and technologicalresearch every year, for the sakeof supporting the technicalinnovation of leliu town

that is, “sharereform + trusteeship + privateequity ! growth + publicoffering + listing in stockmarket”, guiding their financingactivity

Financingenvironment

The financing environment isrelatively poor. Except financingin the stock market by qualifiedenterprises with standardizedmanagement, other companiesare limited in financing sourcesbut relied on their owned funds

(1) The financing market isefficient and developed. Thegovernment has established arelatively complete entry andrecession mechanism forventure-capital investmentsand developed small andmedium-sized financialinstitutions, in an effort tosolve the financing difficultiesof enterprises (especially thehigh-tech enterprises withhigher start-up risk)

(2) Thanks to the above efforts,the amount of Shenzhen’sventure capitals has been inthe forefront domestically. In2006, the Science andTechnology Group of ChinaMerchants SteamshipCompany invested 60 millionyuan to 6 projects. TsinghuaLeaguer invested 70 millionto 7 projects. ShenzhenCapital Group invested 240million yuan to 16 projects.Until 2010, Shenzhen washome to over 133 venturecapital institutions withcapitals exceeding 10 billionyuan, accounting for one thirdof the domestic venturecapitals

(3) The government has adoptedmarket-oriented way for along time to distribute fiscalfunds to support thedevelopment of high-techenterprises, such as

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establishing High-techIndustry Investment ServiceCo., Ltd., offering specialloans for high-tech enterprisesto carry out R&D activities,and providing working-capitalloan guarantees for high-techcompanies of differentownership

Talent cultivationmechanism

(1) In 2005, Leliu ProductivityPromotion Center helpedDonlim launch the 321engineering andschool-enterprise cooperationsigning agreement. Aneffective communication andinteraction platform was setup for both sides to solve thestudent training andemployment issue, which canpromote the commondevelopment of enterprisesand schools

(2) Besides, Leliu town is hometo the Postgraduate TeachingPractice Base (Shunde) ofJilin University, MBATeaching Practice Base(Shunde) of Sun Yat-senUniversity, Donlim ResearchInstitute of HeFei Universityof Technology, and DolimPostdoctoral Progromme.They play an important rolein helping enterprise attractand cultivate talents

(3) In addition, since the majorityof SMEs were short oftechnical talents, a trainingbase was established to fosterprofessional talents by Leliuvocational schools. Thecourses, with the industrialcharacteristics of Leliu, havestrengthened the training ofsecondary technical personneland skilled technical workers,thereby continuouslyproviding technical andpersonnel support forenterprises in Leliu

(1) In the talent policy, Shenzhenhas adhered to the policy ofinternal cultivation andexternal introduction. Themunicipal government hasissued a variety of preferentialpolicies, established talentmarket, improved talent flowmechanism, whichsubstantially raised theefficiency of talent allocationand thus attracted a largenumber of talents

(2) To further ensure the source oftalents and technology for thedevelopment of high-techindustry, the municipalgovernment has established asci-tech industrial park incooperation with the ChineseAcademy of Sciences, theResearch Institute (Shenzhen)of Tsinghua University,ShenzhenIndustry-University-ResearchBase with Beijing Universityand Hong Kong University ofScience and Technology, andShenzhen InternationalInstitute of technologyInnovation with HarbinInstitute of Technology.Thanks to the above efforts,free office space and all sortsof support have been providedfor the industrialization ofscientific and technologicalachievements and cultivationof advanced talents

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Industry Investment Service Co., Ltd., offering special loans for high-tech enter-prises to carry out R&D activities, and providing working-capital loan guaranteesfor high-tech companies of different ownership. Third, a comprehensive entry andrecession mechanism has been set up for venture-capital investments so as to attractthe inflow of venture capitals.

With regard to the supporting service system, the author discovered that theamount of R&D institutions established by Leliu town government was large thanthose established by Shenzhen government. In fact, Shenzhen government inputless in R&D and simply set up five R&D institutions hosting 88 scientific andtechnological personnel. And Shenzhen enterprises are not only home to over 90%of R&D institutions, which host 90% of the total research personnel, but also 38engineering development centers and 21 postdoctoral centers. Furthermore, thescientific and technological expenditure from enterprises is 600 times more thanthat from the municipal government. It is such a small amount of governmental



Supporting servicesystem

(1) The town is home to 1national-class laboratory, 3enterprise technology centersof Guangdong province, 2engineering technologycenters of Foshan city, 2engineering technologycenters of Shunde city, and 1industrial technologyresearch institute of Leliutown

(2) Meanwhile, two LeliuTechnological InnovationCenters of Foshan ResearchInstitute were set uprespectively by South ChinaUniversity of Technologyand China University ofGeosciences in 2007. AndLeliu Intellectual PropertyResearch Association alsohung out in 2007

(3) In addition, the town builtthree technology industrialparks, including theintelligent householdelectronic informationindustrial park, precisionmetal products industrial parkand modern transportmachinery industrial park.

Relevant supporting servicesystem is sound and a whole setof science and technologyintermediary service system hascome into being, including anumber of professionalinstitutions and agents in terms oftechnological innovation service,science and technologyevaluation, certification testingagency, technical brokerage,information technologyconsulting services, high-techdevelopment, startup centers inuniversity science park, industryassociations, accounting firms,financial institutions, assetassessment, venture investmentcompanies and so on

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expenditure but enormous corporate input that generated such an amazing outputvalue of high-tech products. In 2006, the sales revenue of high-tech productsreached 143.3 billion yuan, ranking the first in Guangdong province. Hence, whenpromoting the enterprises to carry out technological innovation, the key measuretaken by the government is not simply increasing the spending on research, butdriving it through institutional innovation. In other words, the government shouldassist companies to establish and improve the technological development system,ensuring them to become the main body in technological progress, technicalinnovation and research input.

However, during the author’s research, the technical director of Jasic indicatedthat the company suffered a heavy blow in the enthusiasm of technical innovation,since the government didn’t make enough efforts to supervise the intellectualproperty infringement, and the cost of stealing intellectual property was too low forcompetitors. Hence, the large number of hi-tech enterprises always worry abouthow to retain employees who have rich R&D experience and master core tech-nology, so that these experts would not be poached by their rivals’ higher salary orstock option incentive. For this reason, governments should strengthen theirmonitor and management in this respect.

The Stable Relationship with the Cooperative Parthers Provides a Referencefor the Enterprises in Terms of Technology and Management

The self-innovation capability is key to the transformation and upgrading of OEMenterprises, but the cultivation of technical capability has a long way to go.Enterprises in late-development countries (or regions) can take the advantage ofOEM pattern to introduce, digest and assimilate advanced technology of developedcountries (or regions), and then take OEM as a springboard to transform themselvesinto ODM or even create their own brands through continuous technologicalinnovation, and finally transform into OBM. Therefore, the partnership betweenOEM enterprises and entrusting enterprises, in areas such as the realization ofresource sharing and the breadth and depth of technology exchange, will acceleratethe formation process of OEM’s independent technological innovation capability,and then promote its transformation and upgrading process. Jonney Shih, Chairmanof ASUS, has publicly expressed that one of the benefits of cooperating withfirst-class international manufacturers was that ASUS could steal their managementmode during frequent exchanges, which could facilitate ASUS’s furtherimprovement.

As regards “the relationship with partner enterprises”, Donlim has establishedrelatively stable long-term cooperative relationships with numerous well-knownenterprises. During such cooperation, these partners would dispatch quality con-trollers to provide technical guidance and quality supervision, which strengthens themutual technology and talent exchanges. By comparison, the collaboration of Jasicwith many globally professional manufacturers enables the company to accumulatea large number of managerial and technological experiences through many ways


such as “learning by doing” and “learning by using”. These efforts drive itsproducts to reach international level in terms of technology, manufacturing tech-nique, and quality control. Moreover, Jasic has set up close technical and personnelexchanges with its partners. For example, Jasic’s domestic workshop can regularlyreceive QC instruction from its overseas partners, according to Jasic’s manager ofInternational Trade Department,

In a word, both Donlim and Jasic have established sustained partnerships withtheir cooperative enterprises, which not only bring them stable orders but set upcommunication platform. This enables them to learn from their partners theadvanced technology and managerial experience, thus facilitating their transfor-mation and upgrading significantly.

3.1.10 Implications

Whether seen from the transformation effects or the upgrading speed, both Donglimand Jasic are typical OEM enterprises that successfully achieve transformation andupgrading in Guangdong and even in China. Their experience from OEM to ODMand to OBM has valuable and practical significance to general OEM enterprises.

By comparing the transformation and upgrading paths of Donglim and Jasic in alongitudinal and widespread perspective, we can discover the following facts.

3.1.10.1 OEM Is an Effective Approach for Enterprisesin Late-Development Countries (or Regions) to Integrateinto the Global Industrial Chain, Keep Pacewith the Technology and Even Become OBM Firms

Above all, OEM is an effective approach for enterprises in late-developmentcountries (or regions) to integrate into the global industrial chain and partially sharethe industrial profits. Under the OEM production mode, companies can simplyfocus on production without carrying out complex marketing research or setting upchannels. It helps to save marketing costs and achieve economies of scale in pro-duction, which greatly reduce production costs and thus gain more profit. Besides,these companies can base their lower production costs to carry out OEM business,thereby integrating into the global industrial chain and sharing industrial profits.

Secondary, OEM is an effective way for enterprises in late-development coun-tries (or regions) to realize technological follow-up. Frankly speaking, these firmsare less unlikely to surpass those in developed countries in manufacturing techniquein a short time. The process of “OEM ! ODM ! OBM”, instead, enables them togradual learn advanced know-hows and periodically accumulate technology andexperience. Such process can not only help enterprises avoid deviating from thecorrect course in product and technology innovation in the early stage, but enablesthem to effectively lower development cost and reinforce technology foundation. In


this comparative case study, we also found that it is the “learning by doing” and“leaning by using” with internationally well-known enterprises that contribute tothe accumulation of their advanced managerial experience and the subsequentimprovement of their operation and research.

Finally, OEM is also an effective way for firms in late-development countries (orregions) to set up self-brands and realize OBM. The implementation of brandstrategy requires strong financial strength and technology accumulation.Accordingly, if companies determine to carry out OBM strategy, they need to investand manage both their brands and manufacture. They will not only disperse theirenergy and resources but have to bear dual risks in brand-construction and man-ufacturing, while the mode of “OEM ! OBM ! ODM” can serve as a smoothtransition. Jasic, since its entry of overseas market in 2002, realized its capital andtechnology accumulation after five years of effort, which laid a solid foundation forits subsequent launch of OBM strategy in 2007 and great success within one year.Suppose Jasic implemented the OBM strategy abroad in the early 2002, it is morelikely to fall into trouble and hard to enter the overseas market.

3.1.10.2 The General Upgrading Path of OEM Enterprises Is“OEM ! ODM ! OBM”

The shrinking profit margin of OEM enterprises can be attributed to a variety offactors such as the increase cost of raw material and labor force, shortage of energysupply, valuation of RMB, continuous decline of export tax rebate rate, and risingcost of environmental protection. To maintain their survival and development,OEM enterprises must implement transformation and upgrading in time.Concerning the fierce competition at home and abroad, enterprises in emergingeconomies must carry out independent innovation and OBM strategy with the aimof possessing intellectual property rights. Furthermore, other factors including theescalation of trade conflicts, increase of trade barriers and uneven distribution ofbenefits also forced OEM enterprises to enforce transformation and upgrades.

In addition, along with the growing scale of OEM enterprises, the inherent risksof OEM mode become increasingly apparent. Only by transforming and upgrading,setting up own brands and controlling distribution channels can OEM enterprisespaly a positive role in the processing trade, especially the export trade, and thuseffectively avoid the inherent risks of OEM mode.

There are two ways for OEM enterprises to change the continuously shrunkenprofit margin and take an active part in fierce competition in domestic and inter-national market. Firstly, the continuous self-technology innovation and increase oftechnical content of products can raise the competiveness of OEM enterprises andtheir products’ added value. Secondly, competent OEM enterprises should activelyestablish and promote self-owned brands to raise profit margin. As OEM enterprisesextend their business from the lowest value-added part of the smiling curve(manufacturing in the bottom) to its both ends (R&D in the left high-end and brand


marketing the right high-end), they will transform their business modes form OEMto OBM and even to ODM.

Donlim entered the overseas market by carrying out OEM business in 1998 andthen ODM in 2000, while Jasic explored the foreign market by the implementationof both OEM and ODM from 2002 and then OBM through thebrand-transformation work since 2007. In other word, in overseas market, thetransformation path of Donlim is “OEM ! ODM” while that of Jasic is“OEM ! ODM ! OBM”. Despite the apparent difference in such path, thegeneral upgrading direction of OEM enterprises is from OEM to ODM and then toOBM.

3.1.10.3 Multiple Modes Are Implemented Simultaneously Accordingto OEM Enterprises’ Own Circumstances: Donlim WasPredominated by ODM While Jasic by OBM

Although most firms adopt the general upgrading path mentioned above, they willcarry out various operational strategies during the practical transformation andupgrading in accordance with their own conditions (Amsden 1989).

The development courses of these two case enterprises sufficiently illustrate thediversity of approaches towards transformation and upgrading. Donlim entered thedomestic market in 2003 with “Born OBM” mode and started to carry out ODMbusiness in the overseas market from 2000, but had no OBM business till 2010.Hence, its developing path is “OEM ! ODM”. Similarly, Jasic was also a “BornOBM” company in domestic market. Their difference lies in the overseas market,where Jasic carried out brand transformation in 2007 and strategically replaced theoriginal brand with its own brand for its overseas products, which has achievedgreat success. Accordingly, its upgrading path in overseas market is“OEM ! ODM ! OBM”.

From the above comparison, we can find although both companies has realizedtransformation and upgrading at different levels, they took different operatingstrategies according to their own resources, capabilities and other factors.

Furthermore, the author also discovered that Jasic not only adopt differenttransformation and upgrading paths in domestic and overseas markets, but alsocarry out a variety of upgrading modes in overseas market simultaneously. Forexample, the first mode is providing purely-OEM service, that is, Jasic strictlybased on the whole set of product design drawings, from the external appearance tointernal parts, provided by the buyers. The second mode is that, after receivingbuyers’ design drawings about the external appearance and internal parts, Jasicengaged in the production of internal parts and outsourced the external parts toother OEM firms. The third mode is providing ODM service, that is, buyers wouldraise their requirements but without the offering of design drawing, then Jasicwould design the external appearance, manufactured components, and possessed allthe intellectual properties except brands. The fourth mode is providing OBMservice.


Moreover, Jasic adopted different packing methods, including no Jasic-relativetags would be stuck on the OEM or ODM products, and “Jasic” trademark wouldonly be stuck on the back of OEM or ODM products. Thanks to such combinationof various development strategies in parallel under different circumstances, Jasichas not only continuously reinforced and expanded its OEM and ODM business,but rapidly embarked on the self-brand road, expressed confidently by its managerof International Trade Department.

3.2 Case Two Enterprise Upgrading in the Toy Industry:Comparisons Between Lung Cheong Toysand HaYiDai Toys

3.2.1 Situation Analysis in the Toy Industry

3.2.1.1 The Global Toy Industry Has Entered the Era of Scientificand Technological Innovation and Multi-industryConvergence

Human civilization has witnessed the advancements of toys, which have developedfrom ancient humble stone or wooden ones to modern vivid mechanic and elec-tronic ones, Such evolution represents the increasingly higher level of humanknowledge. Despite the long history of toys, the toy industry is still new comparedwith other traditional ones. It came into being in the early 20th century in the UnitedStates, and even later in China. Before its liberation in 1949, there existed some toyfirms in Shanghai, Tianjin and other places, and they were renewed after thefoundation of the new China. Though severely damaged during the Great CulturalRevolution (1966–1976), they rejuvenated in the mid-1970s and developed untiltoday to a certain scale. Its continuous progress was characterized by changes inmaterials employed. For instance, toys were mainly made of wood and wool in1940s and from plastics after the World War II. And the substantial growth ofscience and technology since 1970s drove the development of electronic andintelligent toys, which captured market share rapidly.

Nowadays, the toy industry has turned into a comprehensive industry, whichintegrates R&D, manufacture and marketing together and merges with multipleindustries such as aesthetics, sports, education, media and IT. Technical advance-ments continuously instill new vitality, leading to the faster and more complicatedupdates of toys and thus imposing increasingly great pressure on enterprises’innovation.

Confronted with such burden, though, these enterprises have strong incentives tocarry out innovation. The global toy market has seen a tremendous growth potentialin the Middle East and Asia, especially in China. China has about 360 millionchildren under the age of 16, accounting for 20% roughly of the total population. At


present, the consumption of Chinese children takes up 30% of the total householdexpenditure and the monthly spending of 0–12 year-old children exceeds $3.5billion. But the annual toy consumption per kid under 14 is only 20 to 30 yuan(about $2.4–$3.6) in China, far below the average level of Asia ($13) and the world($34). If Chinese consumption reaches the Asian average, the market scale isexpected to exceed 30 billion yuan and the annual growth rate of domestic toymarket will reach 40% in the near future. Besides, along with the economicdevelopment, consumers of different age groups demand not only plush, plastic andelectronic toys that children often play with, but also intelligent, electromechanicaland high-tech toys. However, the development of China’s toy industry lack a broadperspective. By comparison, the western countries market toys suitable for peopleaging from 0 to 100 years old, with the increasingly large proportion for adults andthe old. International toy manufacturers have introduced a wide range of toys notonly for the intellectual development of infants and children, but also for the young,the middle-aged and the old. For instance, the young favor “pet toys” such as robotcats and robot dogs, while elderly people like to have “clone” toys that can mimicreasonably well the image, voice and tone of a particular person and can com-municate with them and accompany them. Some toys such as superman and cartooncharacters are designed for “parenting consumption” (e.g. played between fatherand son). In the mature markets like Europe and North America, adult toys accountfor 50% of the total market share. In Asia, especially in China, children toys take upnearly 100% market share while the adult-toy market remains blank. According tosome questionnaire survey conducted in China, 64% of consumers indicated that, ifaffordable, they would consider buying their own toys; and among these con-sumers, 33% are adults, who had interest and willingness to purchase toys. Suchresults reveal huge market potential for adult toys.

3.2.1.2 Dongguan, as a Toy Manufacturing Base, Faces Pressureand Challenge in Transformation and Upgrading for Lackof Innovations and Self-Brands

In 1980, Lung Cheong of Hong Kong established factories in Dongguan, the firsttoy manufacturing enterprise investing in this city, followed by VTECH, Silverlitand other companies. The growth of Dongguan toy industry can be attributed to theinvestments and industrial transfer of Hong Kong enterprises.

Toys are the epitome of Dongguan’s economy. As the first open coastal area inthe initial stage of China’s reform and opening up, it attracted the transfer ofinternational capitals, technologies and processing industries, which contributed toits primarily strong and rapid development. Thanks to the implementation of reformand opening up in the coastal cities of Guangdon Province in the early 1980s andlower costs in land and labor, large numbers of Hong Kong enterprises graduallytransferred their labor-intensive production to the mainland to conduct processingwith supplied materials. As a result, Dongguan and Hong Kong were linkedtogether with the former engaging in manufacturing while the latter focusing on


sales. Around year 1990, the toy industrial cluster in Dongguan were emerging,which at present hosts about 3000 manufacturing enterprises and 2000 supportingcompanies. Such relatively complete supply-chain systems advances the entire toyindustry in Dongguan. According to the statistics released by China MarketInspection Center, among the top 50 Chinese toy manufacturing enterprises,Dongguan’s enterprises account for one fifth; and among the top 10 Chinese toymanufacturing enterprises, three are from Dongguan. Dongguang has overwhelm-ing advantages with respect to number of enterprises which have received theexport quality license. Statistics show that in China over 3000 toy manufacturingenterprises have obtained a quality license, among which 1300 are located inGuangdong Province and over 700 in Dongguan.

According to the statistics in 2004 released by the Dongguan government, 10enterprises saw a gross output value of over 100 million yuan and 8 enterprises hada sales revenue of over 100 million yuan. Plastic toys, electric toys, stuffed toys andmechanical toys produced by Dongguan enterprises were exported to the UnitedStates, EU, Hong Kong, Japan, etc.

And some incomplete statistics also showed that, nearly 75% of toys in theworld were made in China and Chinese toy enterprises especially predominated themarket of plush stuffed handmade toys. Currently, China accounts for 70% theglobal t toy manufacturing, and Guangdong accounts for 70% of China’s manu-facturing and Dongguan 60% of Guangdong’s manufacturing. This reveals thesignificant role Dongguan toy enterprises have played in China and even in theworld.

As regards the export value of toys, Guangdong was $4.54 billion andDongguan $1.213 billion in 2005. Then in 2006, the exports of China climbed up to$7.055 billion and that of Guangdong $4.805 billion. From January to October in2007, Dongguan accounted for 26.1% ($1.29 billion) of Guangdong’s total exportvalue ($4.94 billion).

However, three recalls of toys occurred from June to August of 2007, whichgave a heavy blow on the exports of Dongguan and even the whole GuangdongProvince. In September, Guangdong showed a negative growth in export for thefirst time. Although September was the “selling season” for exporting Christmastoys, Guangzhou Customs showed Guangdong’s exports of toys was simply $710million, $5.776 million less than that of August, which was the first negative growthmonth on month. But this impact lasted a short period of time, a strong recoveryoccurred in October. Consequently, the total exports of Guangdong toys duringJanuary to October in that year reached $4.94 billion, an increase of 22.9% and agrowth rate of 18.6% than the same period of the previous year. The export value ofDongguan, in particular, was $1.29 billion, increased by 23% than the previousyear, which shows the important role of the Dongguan toy industry in Guangdongprovince and even in the world. Currently, Dongguan is home to a number ofwell-known toy brands, including Disney, Barbie, Snoopy, Blue cat and TeenieWeenie. And a lot of foreign enterprises take Dongguan as their toy manufacturingbase.

3.2 Case Two Enterprise Upgrading in the Toy Industry … 95

In spite of the advantages of the Dongguan toy industry, we should also concernthe disadvantages that will affect the industrial development in the future. AlthoughDongguan hosts over 4000 toy manufacturing enterprises, 95% of them areforeign-invested enterprises of three kinds (including Sino-foreign joint ventures,enterprises with Sino-foreign cooperation, and wholly-owned foreign enterprises)and nearly two-thirds engage in processing and compensation trade with littleindependent R&D, resulting that their design and sales are controlled by foreignclients. Less capable in technical development, a number of OEM companies areless independent in production and marketing, and have to process materials sup-plied by or imported from foreign companies or manufacture goods under desig-nated brands. And some other firms survive by imitation and thus always sufferfrom infringement complaints, which could only make profits from the lowerproduction costs or meager processing and overcharge fee. In a word, most com-panies, depending on export-oriented production, spend little in R&D and have noself-brands or designing capability, as a result of which they have no core com-petence but low cost advantage. Although the majority of “made in Dongguan” toysare sold in overseas markets under foreign brands, the processing fees earned byDongguan manufacturers merely account for a tiny proportion of the total productprice. In recent years, 95% of the toys produced in Dongguan are for the exportmarket, and the majority of orders come from well-known brands such as Disneyand Bluecat. Statistics show that toy processing trade accounts for 99% of the grossexport value of Dongguan and OEM is still the major business of local companies,few of which carry out ODM or OBM business. Even among the top 10 enterpriseswhose output value exceeds $100 million, only several have independent R&Dcapability and self-brands.

In recent years, the Dongguan toys industry is confronted with increasingly moredifficulties. A large number of enterprises are satisfied with the profit earned by theOEM business and reluctant to carry out self-innovation transformation, which iscaused by the shortage of labor resources, insufficient energy supply, sharplyraising price of imported raw materials (i.e. plastic, chemical fiber, copper wire),increased testing and marketing costs (caused by various international standards),low-degree market standardization, and insufficient protection of intellectualproperty rights. Due to the predominance of processing business in these OEMcompanies, technical personnel have few opportunities to contact markets and thusfind it hard to judge the market trend, leading to the absence of self-innovationtrigger. Besides, the innovation environment and external intellectual support inDongguan are far from perfect, since there are few agencies or companies spe-cialized in toy designs.

Moreover, along with the increasing concern about the safety and quality of toysin the world, Chinese toy enterprises have encountered substantial challenges in theprocessing trade. In 2007, to ensure the legality and safety of toys, the InternationalCouncil of Toy Industries (ICTI) released the ICTI Behavior Code, bringing a greatshock to China’s toy industry. According to this code, if domestic toy processingenterprises could not raise the product quality and technology to the ICTI standardwithin the allotted time, they would run the risk of losing a large number of orders.


Consequently, in that year a series of toy recalls were imposed by the product safetyinstitutions of US, EU and other countries against toys manufactured in andexported from the mainland China because of numerous alleged consumer safetyissues.

The above difficulty in toy industry also represents the predicament of the wholemanufacturing industry in Dongguan in recent years. On one hand, most companiesstill engage in low-tech and low value-added processing trade, positioning mar-ginally in the global production networks. On the other hand, the room forindustrial development has been squeezed and the city lags behind in theself-technology upgrading and self-brand establishment, resulting in the marginalplace in the domestic production system. Frankly speaking, The Dongguan toyindustry, as a whole, has suffered from the lack of independent intellectual propertyrights, the lower value-added technologies and the larger proportion of traditionaltoys. The rise of production costs and a series of quality-related recalls in 2007impacted considerably on Dongguan’s manufacturing industry. And the labor-costadvantage of mainland China has been surpassed gradually by neighboring coun-tries. Therefore, whether it can acquire the self-innovation capability quickly andthus innovate and upgrade both the industry and products so as to capture favorablemarkets have become the highest priority of Dongguan’s toy manufacturingindustry.

The Dongguan government should strongly stimulate enterprises to improvetheir comprehension and assimilation of internationally new standards and newtechnologies, carrying out long-term accumulation of professional knowledge.Based on this, companies can realize independent innovation and thus facilitate theDongguan toy manufacturing industry to transform from OEM to ODM and evenOBM.

In spite of the different opinions of domestic scholars in how to improveself-innovation capability, they believe that China should stick to the upgrading pathof “introduction ! comprehension ! assimilation ! integrated innovation !self-innovation”. According to such study results, Dongguan’s toy manufacturingenterprises should first focus on the comprehension and assimilation of foreignmanufacturing techniques and cutting-edge designs, based on which they shouldthen carry out integrated innovation under the intellectual property system, so as tocontinuously improve their capabilities in R&D, design and innovation, and even-tually embark on the self-innovation road.

During the current growing stage, Dongguan’s toy-manufacturing industry stillneeds to upgrade its innovation capability gradually. Technology innovation willnot only bring enterprises new growth space and enhance their independence andgrowth, but also generate competitive edges and raise their international competi-tiveness. The whole industry also requires self-innovation to instill new incentivesfor industrial upgrading. Accordingly, it is necessary to strengthen the corporateself-innovation awareness, enhance the leading role of entrepreneurs in theself-innovation process, and emphasize the advancement of corporate R&D capa-bility. These are significant to the improvement of self-innovation capability ofDongguan’s enterprises. Furthermore, the local government should leverage its


guidance. For instance, supporting policies were issued in Dongguan City FamousBrands Development Planning (2006–2010) to facilitate toy manufacturing com-panies to establish their own brands. To help private enterprises cope with theproblems in deficient quantity, small scale and poor technology, the Planning aimsto, apart from encouraging and leading the localization of foreign-funded enter-prises, strategically support lots of domestic companies, which are mature enoughto create known brands and which possess good foundations, new technologies,excellent management and large domestic sales. The government has been strivingfor a breakthrough in building famous toy brands from zero in the short term andimproving the market exploring capability of companies in China, in pursuit ofcultivating at least two ministry-level brands and five provincial famous brands.

3.2.2 Case Selection: LungCheong and HaYiDai

3.2.2.1 Gist for Case Enterprise Selection

The purpose of this case study is to explore the feasible independent innovationpath and influence factors of Dongguan’s toy manufacturing enterprises. Amongthem, 95% are foreign-invested enterprises of three kinds (including Sino-foreignjoint ventures, enterprises with Sino-foreign cooperation, and whollyforeign-owned enterprises), the majority of which are Hong Kong-funded while theremaining are private-owned. Hong Kong-funded enterprises, as the leading forceof Dongguan’s toy industry, have consistently raised their self-innovation capa-bility, which is crucial to the transformation and upgrading of Dongguan’s toyindustry. Therefore, exploring their self-innovation path has a profound and prac-tical meaning. Private-owned enterprises, as a new force of economic developmentin China, are playing an increasingly important role in the domestic economy afterthe reform of state-owned enterprises. The research on private enterprises’self-innovation path would contribute greatly to both Dongguan’s toy industry anddomestic economic development.

As the first Hong Kong-funded enterprise in Dongguan, LungCheong Toys Co.,Ltd. now is one of the biggest toy enterprises in this city. It is a miniature ofDongguan’s toy industry development. Since the end of 20th century, it graduallytransformed from OEM business originally to ODM business in 1994 and then toOBM business in 2002. Its self-innovation activities and process is relatively typicaland has substantial implications to other Hong Kong-funded enterprises.

HaYiDai Toys Co., Ltd., a private enterprise set up in Dongguan in 1996, isamong the few private toy enterprises that embarked on the self-innovation road inChina. Its developing process is meaningful to other private toy manufacturers.

Therefore, we choose these two enterprises for comparative case-study, trying tofind out some know-hows from their outstanding performance.


3.2.2.2 Data Source and Collection

In this case, we base the conclusion on a lot of data, focusing on firsthand materialsas well as secondary sources. Firsthand materials mainly come from ourface-to-face interviews with senior managements, company files, telephone inter-views and E-mail surveys. Secondhand data mainly come from documentation,including reports released by known website, newspapers and periodicals, as wellas relevant company webpages and individual biographies. We carefully examinedthe data validity and reliability by repeatedly consulting internal employees of caseenterprises. In the process of case writing, we carried out two times of research. Thefirst one was a field study, an interview with the senior management of the caseenterprises. And a second survey was conducted by telephone interviews andE-mail questions during the subsequent writing, which provided valuable firsthandmaterials.

3.2.3 Lung Cheong International Holdings Ltd.

3.2.3.1 Brief Introduction of Lung Cheong

Lung Cheong International Holdings Ltd. (hereinafter referred to as Lung Cheong)was founded in 1963 by Mr. Liang Lin. After 40 years of development, LungCheong has not only become a toy manufacturer for many famous brand ownersand consumer-goods producers, but also developed into a multinational corporationwidely recognized at home and abroad. From producing single toys in 1980 todiversified entertainment products now, Lung Cheong has been capable in pro-viding “one-stop” toy manufacturing service. Its products include remote-controltoys, electronic and plastic toys, consumer goods and electronic products, which areexported to over 100 countries and regions around the world. It not merely producestoys for brand owners such as Taiyokogyo, Tomy Company, Mattel, Little Tikes,Bandal, but also engages in R&D, production and sales for its self-brand goods.

The wireless remote-control toy is the core business of Lung Cheong. Thanks toits professional wireless technology and designing and engineering competence,Lung Cheong invests its resources in wireless non-toy business of higher profitmargins. In addition to the wireless remote-control cars and plastic toys, LungCheong expands its product categories to advanced and competitive non-toyelectronic products, in an effort to increase its income sources. Of the turnover,consumer electronic products account for 17%, radio-controlled toys 57% andelectronic and plastic toys 26%. Lung Cheong not only produces toys for itsself-brands such as Bendos series and Robert X series, but also accepts processingorders from Japanese cartoon brands including “Mado King Granzort”, “ArmoredSwat”, “Hikarian” and “Sonic Youth”, as well as a domestic cartoon brand “Legendof Nezha”.


Consequently, the group’s revenue reached 750 million yuan in 2006 and 704million yuan in 2007. In 2010, it host over 7,000 employees, most of which are inDonguan. Headquartered in Hong Kong, it set up affiliates and factories in mainlandChina and Indonesia and offices in the United States. Listed in Hong Kong in 1997,Lung Cheong becomes one of the few listed companies in the toy industry. As aHong Kong-listed company with solid foundation, it has gained substantial supportsfrom strategic investors. And its strong production base and energetic marketingstaff enhance its industrial competitiveness. Data from 2006 to 2007 show thatmainland China and Hong Kong accounted for 23% of the group’s turnover, US39%, Japan 14%, Europe 15% and other regions 9%. Lung Cheong is known as the“Quality Trusted Organization” by the China’s Customs. And Chairman Liang wonthe World’s Outstanding Chinese Award in 2005 and has been elected as theHonorary Citizen of Dongguan city for many times. Lung Cheong was awarded asthe “Intellectual Property Pilot Enterprises” of Dongguan city and “AdvancedIntellectual Property Enterprise” of Guangdong province in 2003. Subsequently, the“Research Center of Engineering Technology for Intelligent Educational Digitalelectronics” was set up in Dongguan in 2005, based on which its remote-control toycar ranked second in the Patent Prize of Dongguan in 2006. Thanks to the aboveperformances, Lung Cheong was selected as a case for studying industrial devel-opment process by the Asian Faculty of Hong Kong University and HarvardBusiness School.

Dongguan Lung Cheong Toys Co., Ltd. is a subsidiary of the group. Takingadvantage of advanced engineering capabilities in Dongguan and high cost-benefitsachieved by Indonesian factories, the group manufactures a series of electronic,plastic toys and interactive products. Such all-round competitiveness enables LungCheong to become the best partner of the world’s famous toy companies. Itssuccesses can be attributed to the unified production standards and excellent pro-duction technology. Besides, Lung Cheong continuously enriches its productionequipment to meet the customers’ ever-growing needs and strictly controls costsunder the vertical integration of production facilities. Giving first priority to qualityin every manufacturing procedure, its comprehensive quality assurance team andstrict quality-control ensure the prestige of Lung Cheong and position in its clients.In 2007, Dongguan LungCheong Toys Co., Ltd., was elected as one of the domesticTop-10 toy manufacturers by China Market Inspection Center.

Led by the group’s top management, Lung Cheong has formed a corporateculture of continuous learning and innovation, keeping a close eye on market trendsand acting proactively. At the same time of conducting transformation from OEMto ODM and then to OBM, it actively set up its own brands. Also, it strives to seizeemerging business opportunities of electronic products, begins to get involved inentertainment products industry, and engage in comprehensive entertainmentindustry.


3.2.3.2 Growth of Lung Cheong

As early as 1963, group Chairman Liang Lin first established Lung CheongIndustrial Co., Ltd., beginning to produce remote-control toy cars in December1980, when Lung Cheong was just a company with a single product, low tech-nology content and weak competitiveness. Lung Cheong Electronics Co., Ltd. andLung Cheong Toys Co., Ltd. was established in 1988 and 1989 respectively, withthe latter replacing the business of Lung Cheong Industrial Co., Ltd. in 1990. Thenin 1993 Indonesia branch was established. Dongguan Lung Cheong Co., Ltd. wasfounded in 1994, which replaced the business of Lung Cheong Electronics Co., Ltd.In the same year, Lung Cheong Technology Co., Ltd. was established, starting toproduce consumer electronics products from the next year. Subsequently, the grouppurchased Chuangyi Precise Machine Co., Ltd. (hereinafter referred to as ChuangyiPrecise Machine) in 2000, in an effort to strengthen its R&D capability. In 2002, theacquisition of Kid Galaxy, a North American toy company, enabled Lung Cheongto gain a famous brand “Bendos” and the widespread sales network. In 2004, a newfactory, located in Changping County, Dongguan city, began construction. Thanksto its strategic position, in the center of railway network, this factory can serve asthe centers of design, production, sales and logistics in China, enabling the group tofocus on developing high-end electronic products and high value-added products.

Figure 3.9 shows the organizational structure of Lung Cheong.

3.2.3.3 Self-Innovation of Lung Cheong

In the early time, Lung Cheong was a processing company, which received ordersfrom other manufacturers or manufactured products that other factories had nointerest. In other words, it suffered double exploitation from toy buyers and inter-mediaries, pushing the company to engage in OEM business since November 1979.Adhering to the “Customer-friendliness” business philosophy, it strives to improveits service quality and lower its price to attract customers. Consequently, it estab-lishes long-term cooperation with customers such as Taiyokogyo, TOMY, Matteland Little Tikes. The annual turnover of OEM business became the main source of

Lung Cheong International Holdings Ltd

Lung Cheong Toys

Co., Ltd.

Lung Cheong Entertainment

Ltd.

Lung Cheong Resource

Management Co., Ltd.

ChuangyiPrecise Machine

Co., Ltd.

Lung Cheong Overseas

corporation

Kid GalaxyCorporation

Lung Cheong(BVI) Holding

Limited

PT.LungCheong Brother

Industrial

Dongguan Lung Cheong Digital Technology Co.,

Ltd.

Dongguan Lung

Cheong Toys Co., Ltd.

Dongguan Lung Cheong Plastics Co.,

Ltd.

Lung Cheong Technology Co., Ltd.

DongmeiChuangyi

Precise Machine Co., Ltd

Kid GalaxyInc

Kid Galaxy Limited

Fig. 3.9 Organizational structure of Lung Cheong International Holdings Ltd.


its profit margin and accounted for 82% of the group’s turnover, according to thestatistics in March 31st 2000. Nevertheless, the low value-added processing busi-ness could simply bring Lung Cheong a small amount of processing fees, while themajority of profit goes to external enterprises dedicated in design and sales. And theheavy reliance on clients’ orders led to Lung Cheong’s poor bargain power.Eventually, such passive situation stimulated Chairman Liang to advance corporatetransformation and embark on the self-innovation road.

Enhancing R&D and Designing Capability so as to Upgrade from OEM toODM

Driven by Chairman Liang, Lung Cheong started with transformation, gettinginvolved in ODM business. Although they still take orders before producingproducts, the specific program is designed by Lung Cheong itself, which promotestheir own profit margins. Its ODM business, officially carrying out from November1994, attaches great importance to the design of remote-control cars, electronicgames, video game controllers, electronic toys and consumer electronics, which arethen sold to overseas markets under its customers’ brands.

In order to strengthen its designing and product developing capabilities, LungCheong actively introduced talents by establishing R&D Center for Hhigh-techProducts (in 1998) and R&D Center for High-tech Intelligent Products (in 2000). Italso acquired Chuangyi Precise Machine, a Taiwan-funded company in Dongguan,at the price of HK $18 million. Chuangyi Precise Machine is not only competent indesigning, producing and distributing mold and related equipment, but also hasestablished sustainable partnership with manufacturers of toy and other consumerproducts in Taiwan and Japan. Such an acquisition raised Lung Cheong’s R&Dcapabilities to a higher level. For example, Chuangyi Precise Machine, with only 60employees before acquisition, now developed into an engineering and designdepartment of Lung Cheong with over 300 employees. Now it can provide acomplete set of design services (ODM) for commissioned customers and alsodesign new products for its self-brand by a specialized department. The advancedtechnology for making models and the talented design and engineering teams ofChuangyi Precise Machine have laid a solid foundation for Lung Cheong to becomea “one-stop” manufacturer. Its diversified design, development and manufacturingservices all contribute to Lung Cheong’s international reputation and the subse-quent improvement of mainstream toys and molds as well as model products.

In order to have independent intellectual property rights, Lung Cheong hasgradually increased R&D input. An annual 20 million yuan has been invested inequipment updating, talents introduction and scientific research activities. An R&Dteam has been organized with over 200 technical staff, of which more than 20 havesenior engineer certificate and are specialized in developing products and tech-niques. Lung Cheong is thus capable to developed about 250 new productsannually over these years.


In addition, Lung Cheong has established an open mechanism of government-business-university-research cooperation. For instance, the cooperation withChinese University of Hong Kong helped it obtain “remote tumbler technology”.And the intellectual research conducted jointly with Tsinghua University, HarbinInstitute of Technology and Wuhan University of Technology enabled LungCheong to make technical achievements and realize industrialization. Lung Cheongalso established strategic partnership with a number of software design companies.These efforts enhance the company’s R&D capabilities in high-tech sector.

Embarking on the Self-Brand Road and Upgrading Towards OBM

Liang Zhongming, son of Chairman Liang Lin and General Manager of LungCheong, gradually realized that “Excellent products also need a good brand andgood channels”, which led the company to step on the self-brand road from 2002. Itfirst acquired the brand “Bendos” of Kid Galaxy and then introduced it into HongKong market, which became the group’s first self-brand. Kid Galaxy is a NorthAmerica company and famous for producing a kind of humanlike toys, under itsown brand “Bendos”, whose limbs can flex and extend. When acquired by LungCheong, the company was home to a sales network of 2,800 gift stores in theUnited States. Its brand and sales channels could serve for Lung Cheong’s OBMbusiness subsequently. In recent years, Kid Galaxy has set up over 3,000 salespoints globally with more than 200 toy characters under its brand Bendos, enablingLung Cheong to distribute its Bendos-branded products in Asia and Europe. Thanksto the growth of Kid Galaxy, Lung Cheong managed to set up its affiliates in USand further expanded Bendos’s distribution network to sporting goods and homegardening shops. Bendos-branded toys obtained franchise right from three majorprofessional sports leagues in US, including ice hockey, baseball and football. Inaddition, since its first entry of the Beijing market in March 2004, Bendos has set upa number of sales stores in the major cities of eastern and central China.

Besides, Lung Cheong has also gradually developed a series of product brandssuch as KG Races, Elite Fleet, Mad Dog Motors and GoGo, for the sake ofincreasing its proportion of self-brand products. Branding sales enable enterprisesto contact with the market directly and thus better master demand changes.Moreover, Lung Cheong is well versed in the innovative path of toy production,attaching great importance to the information about market changes and globalhigh-tech trends. After the acquisition of Kid Galaxy, Lung Cheong hired 12 localemployees in US, who are responsible for both local sales and localtoy-consumption statistics collecting. These statistics would then be sent toDongguan R&D center for conducting video conferences, so as to discuss the newconcept of toy development. Through the deployment of the sales network, LungCheong extends its innovation throughout the market, ensuring it can gain sus-tainable innovative ideas. Simultaneously, it always maintains sensitivity to theworld’s advanced technology, specifies the labor-division of R&D department,concerns much about the updates of global production techniques, and maintains


knowledge interaction with the outside world, in an effort to ensure Lung Cheongcan keep up with the world’s technology trends.

In 2002, of Lung Cheong’s total business, OEM products accounted for about76%, while ODM and OBM together accounted for the remaining 24%. Themarginal profit of OBM was up to 50%, ODM 20% and OEM 15–25%. In therecent years, OEM, ODM and OBM coexist in Lung Cheong. The income ratio ofOEM business decreased from 95% in 1998 to 50% in 2010, while that of ODMbusiness rose from 10% in 2000 to 35% in 2010, thanks to its acquisition ofresearch companies. And the income ratio of OBM increased from zero originallyto 15% in 2010.

3.2.4 HaYiDai Toys Co., Ltd.

3.2.4.1 Brief Introduction of HaYiDai

Dongguan HaYiDai Toys Industrial Co., Ltd. (hereinafter referred to as HaYiDai)was established in 1999. A plush toys business with its self-brand, it combinesprofessional development, design, production and sales together. Currently, it hostsover 800 employees, among which about 200 are in Dongguan. Its vision is tobecome China’s top-brand of plush toys, leading the domestic trend and growth ofenvironmental-friendly plush toys. It is committed to developing a high-quality andenvironmental-protection toy brand. In 2004, a branch was set up in ShangcaiCounty Industrial Zone (Zhumadian City, Henan Province) with independentdevelopment and production capabilities nowadays.

In the early days, HaYiDai mainly engaged in processing plush toys for brandowners such as McDonald’s and Disney. This enabled it to accumulate sufficientproduction experience and to raise its product quality, which developed into its corecompetence and laid a solid foundation for its subsequent OBM business.Currently, HaYiDai has transferred its business direction from production-orientedto marketing-oriented and managed to get rid of the passive situation wherein it hadto compete in the bottom level of market. Driven by markets, it fully integratesinternal and external resources, improves functional and image management, andeventually establishes an effective external communication mechanism.

At present, the company has its own toy-brand “HaYiDai”, covering over 1,000varieties of products of more than 30 series such as plush toys, holiday gifts, caraccessories, stationery, mobile phone accessories, bedding, children gifts and someother areas. These products, featured by fashion and utility, are not only distributedto hundreds of chain stores in China, but also exported to Europe, US, Japan,Taiwan and other countries and regions. Accordingly, the annual productioncapacity reaches to 10 million toys.

Thanks to such excellent performance, HaYiDai was awarded as “China’sFamous Brand” by China International Association of the Promotion and Protectionof Consumer Rights and Interests, China Institute of Management Science Brand


and Market Strategy Expert Committee. Besides, it was also awarded as “ExcellentIndependent Brand” and “Quality Trust Units” by Dongguan Toy IndustryAssociation. All of its products are made under CE, EN71, ASTM, CPSIA stan-dards. As a plush-toy brand, HaYiDai participated in the public investigation of“China’s most Reputable Consumer Brands”, which was jointly organized by theChina Consumer Satisfaction Survey Organizing Committee, China Survey andStatistics Industry Association, China Quality Association, and World ConsumerReport (Chinese version). The company won the “Chinese famous brand” honorarytitle in 2007. It was also honored as “Favorite Brand of Chinese consumer” in thelarge-scale polls of “My Favorite Brand in China” and “A study of the effect indexof Chinese consumers’ favorite brand” in 2006, which was co-sponsored by someworld-renowned financial media such as World Quality Weekly (Chinese version),World Economist Weekly (Chinese version), and World Consumer Report (Chineseversion), and co-organized by Chinese Market Consumer Index Research Office,Chinese Olympic Industry Economic Research Center, Chinese QualitySupervision and Quarantine Promotion Association and Chinese Survey andStatistics Industry Association. In 2011, HaYiDai won the “Top Ten Chinese ToyBrands” and other glorious titles.

3.2.4.2 Growth of HaYiDai

Established in 1999, HaYiDai, was originally a purely processing companyreceiving commissioned orders. Taking quality as its first concern, it mainlyengaged in processing materials supplied by or imported from foreign companies,which led to its heavy reliance on these clients’ orders. As a result, the increase oflabor costs and shortage of labor resources in Guangdong province forced HaYiDaito set up a branch in 2004 in Shangcai County Industrial Park, Henan Province.Afterwards, it started to carry out self-marketing and self-built channels in 2006,forming the organizational structure as shown in Fig. 3.10.

3.2.4.3 The Road to Independent Invention of HaYiDai

In 1990s, nearly 2 million jobs were created by toy industry in Dongguan City.Simultaneously, the perfect combination of low labor-cost and handicraft manu-facturing industry substantially facilitated the development of Dongguan toyindustry. However, in recent years, China witnessed an all-round development ofdomestic economy, rapid growth in Yangtze River Delta, large-scale developmentin west China, preferential treatments in agricultural industry, and the arrival ofonly-child working age. These factors results in the labor shortage in Pearl RiverDelta, a situation that will go on in the future years. Besides, the toy industry alsoexperienced the falling price of products, lack of energy, sharp rise in water chargesand labor costs in Dongguan, and various international technical standards thatincreased product testing cost. Consequently, the profit margins of toys declined


sharply and processing enterprises were pushed to the crossroads of transformation.The transformation of HaYiDai was carried out in such a situation.

Since its establishment to 2006, the company mainly engaged in receivingcustomers’ orders and then processing plush toys. Without self-brand, it was apurely production-oriented processing company. The serious labor shortage inGuangdong in 2005 resulted that OEM companies had to bear the increasinglyhigher labor-costs. And the gradual higher quality-demand led to the rise of productinspection costs in international markets, which directly increased the operationalcosts. Coupled with the volatility of international orders, the business environmentwas increasingly difficult for OEM companies. Under this circumstance, XiaoSenlin, HaYiDai’s Chairman, realized that, to achieve long-term development, thecompany must set up its sales-channels and self-brand and carry out independentmarketing. Subsequently, he led the company to launch corporate transformation.From 2006, the company got involved in self-brand business, creating its own toybrand “HaYiDai”. When choosing this way, the whole staff realized that buildingself-brand was not a slogan, but needed sustained efforts of all employees. And,based on mutual benefit, the company also strives to establish strategic partnershipwith various enterprises, actively exploring a variety of external cooperation.

Depending on its excellent quality, HaYiDai successfully entered lots ofsupermarket chains, including those foreign-funded ones such as Armik(Russia-funded), Lotte (South Korea-funded), Wal-Mart, Carrefour, and someChinese ones such as Tian He (in Dongguan city), Dennis (in Henan province),Century Ginwa (in Xi’an city) and Haiya (in Shenzhen city), which made its sales

Source: www.hayidai.com

Dongguan HaYiDai Toys

Industrial Co., Ltd.

Board of Director

General Manager

Dongguan HaYiDai

Trading Co., Ltd.

Quality Department

Marketing Department

Accounting Department

Administrative Department

International Business Department

Engineering Department

Developing Department

Designing Department

Legal Department

Dongguan HaYiDai Toys

Factory



Product Control Department

Quality Department

Outsourcing Department

Business Department

Manufacturing Department

Machine-sewing Department

Hand-sewing Department

Cutting-table Department

Packaging Department

HaYiDai(Henan) branch



Quality Department

Manufacturing Department Machine-sewing Department

Hand-sewing Department

Cutting-table Department

Fig. 3.10 Organizational structure of HaYiDai. Source www.hayidai.com


outlets spread across many provinces and cities. In addition, HaYiDai establishedmutually beneficial partnership with a number of domestic enterprises, includingFaw-Volkswagen, Brilliance Auto, China Construction Bank, China Mobile,Shenzhen Happy Valley, Dalian Laohutan Ocean Park, Sichuan Wolong PandaBase, Taiwan Dicos, Ashley, Hsu Fu Chi and so forth. Serving as their designatedsupplier, HaYiDai provides them with plush toys products. Besides, in 2007HaYiDai was the exclusive manufacturer producing mascots for several events,including the Tenth China Paralympic Games (in Yunnan province), the EighthChina Art Festival (in Wuhan city), and the Sixth China Municipal Athletics Meet(in Wuhan).

Simultaneously, HaYiDai strives to construct its channels, planning to establisha distribution network in the country and open chain stores with a unified image.The in-depth promotion and marketing could help it establish long-term terminalchannels. Since its first holding of franchisee fair in December 2006 to showcase theadvantages of its products, HaYiDai has set up lots of franchised stores in over 20provinces across the country. It is the first Chinese toy brand that operatesdomestically in chain stores domestically and the only plush-toy brand enterprisethat integrates design, development, production and sales. In September 2007,HaYiDai held a winter product-ordering fair in Dongguan and took the opportunityto promote its newly developed and designed products. By this way, it couldcommunicate with customers, grasp market dynamics, and respond to such trendsquickly.

Since its establishment, HaYiDai not only carries out OEM business for manyworld brands such as McDonald’s, Hasbro and Disney, but also promotes its owntoy brand HaYiDai. There are more than 30 series and 1,000 varieties under itsbrand, most of which are plush toys. As products are upgrading, production tech-nologies like shadow control, recording, electric toy are integrated into products.The company has created its own competitiveness through continuous innovationand updating of new products. In 2010, its OEM and OBM business accounted for40% and 60%, respectively, of the turnover. Chairman Xiao said that he expected toexpand the proportion of OBM business continually and make “HaYiDai” becomea well-known brand domestically in the subsequent five years. For this purpose,HaYiDai has drawn up a long-term strategic plan and will go further on the OBMroad.

3.2.5 Comparison of Basic Information

According to the background introduction of Lung Cheong and HaYiDai,Table 3.13 shows the comparisons of their founding time, ownership nature,business status and scale.


3.2.6 Comparison of Self-Innovation Capacity

From the growth process of Lung Cheong and HaYiDai, we can find that these twocompanies have gone through different transformation paths. Lung Cheong startedfrom OEM and then gradually stepped into ODM business, adopting these formssimultaneously in several years. On such basis, it got involved in OBM businessand then carried out these three forms of businesses simultaneously, thus realizing

Table 3.13 Comparison of basic information between the two enterprises

Company name Lung Cheong HaYiDai

Foundation time The group was established in1963. As its subsidiarycompany, Lung Cheong ToysCo., Ltd. was established in1989 and its main body isDongguan Lung Cheong ToysCo., Ltd.

The company was established in1999, its main body isDongguan HaYiDai ToysFactory

Enterprise ownership Hong Kong-funded enterprise Private enterprise

Business segment Carrying out OEM business, itproduces remote-control toys,electronic and plastic toys,consumer goods and electronicproducts for brand owners suchas Sun Industry, Takara Tomytoys, Mattel toys, Little Tikes,Bandai. It also engages in R&D,production and distribution ofself-brand products under itsown brand “Bendos” (OBM)

It not only produces andprocesses plush toys for somewell-known enterprises (OEM),but engages in the design,production and distribution ofplush toys under its own brand“HaYiDai” (OBM)

Scale Staff Up to March 31st, 2007, ithosted 6,053 employees, ofwhich 5,771 are in Dongguanwith the rest in Hong Kong,Indonesia and US

In 2010, it hosted over 800employees, of which over 200people in Dongguan factorywith the rest in Henan branch

Turnover Its turnover reached HK $750million in 2006 and HK $704million in 2007

Annual turnover reached tens ofmillions Hong Kong dollars

Productioncapacity

The annual output value is overHK $100 million

The annual production capacitywas 10 million toys whenengaging in OEM business.Despite the decrease of outputafter conducting OBM business,the added-value of productsincreased

Market Its markets consist of mainlandChina and more than 100overseas countries and regions,including Japan, US and Europe

It carries out self-brand businessmainly in domestic market andstarted business in Russia from2010


semi-transformation. HaYiDai, by comparison, also began from OEM but thentransformed towards OBM business. Table 3.14 shows the differences in theirtransformation processes and development of self-innovation capability.

The comparative analysis above reflects the distinctions in these two enterprises,in different scale and business ownership, before and after their self-innovation. Itcompares their different practices when raising self-innovation competence andconducting transformation and upgrading, during which their external situation andinternal conditions, however, are distinctive.

Table 3.15 compares the promotion of self-innovation capability of LungCheong and HaYiDai in the course of transformation and upgrading, wherein thenecessities and contingencies of their path selection and competence raising aresignificant to other enterprises.

Table 3.14 Comparisons of transformation process between Lung Cheong and HaYiDai

Contrast item Lung Cheong HaYiDai

First stage oftransformation

Second stage oftransformation

Beginning yearof transformation

It started from OEM andthen gradually steppedinto ODM business from1994

It possessed self-brand“Bendos” in 2002

It owned its brand“HaYiDai” in 2006

Transformationmode

The gradual engaging inODM business enhancedits R&D capabilities,which was furtherreinforced after itsacquisition of ChuangyiPrecise Machine, aprofessional research anddesigning company

Thanks to the acquisitionof Kid Galaxy, a NorthAmerican toys company,Lung Cheong possessedits brand Bendos andcould distribute its toysunder this brand

Based on its its originaltechnology andmanagementfoundation, It graduallycreated new brands andbuilt channels, andeventually took theself-brand road

Previous services Mainly OEM business.the added value of theproduct was relativelylow, the space of profitmargins was small, themarket fell into a passiveposition

OEM and ODM businesscoexisted with strongR&D capabilities.Mainly producedremote-controlled car,video games consoles,video game controller,electronic toys, consumerelectronics design and soon

Good quality is the maincompetitiveness of thecommissionedprocessing business ofplush toy

Business aftertransformation

When conducting OEMbusiness, it had strongR&D capabilities. ODMbusiness mainly focusedon the design of suchproducts asremote-controlled car,video games consoles,

After conducting OEMand ODM business, ithas owned several seriesof self-brands such asBendos, KG Races, EliteFleet, Mad Dog Motors,and GoGo. It has formeda wide range of

While operating OEMbusiness, it has its ownbrand “HaYiDai”. Thereare more than 30 seriesand 1,000 varietiesunder its brand,covering plush toys,holiday gifts,

(continued)


According to the above comparison, substantial experiences can be summarizedfrom the transformation, upgrading and self-innovation of Lung Cheong andHaYiDai.


Contrast item Lung Cheong HaYiDai

First stage oftransformation

Second stage oftransformation

video game controller,electronic toys andconsumer electronics.OEM and ODMaccounted for 80% and20% respectively

marketing network athome and in NorthAmerica

automotive supplies,stationery, mobile phoneaccessories, bedding,children gifts and otherproducts. And it hasbuilt a marketingnetwork throughout thecountry. OBM accountsfor 60% of the totalbusiness

The ability gapand the remedyway before andafter thetransformation

(1) Lung Cheongactively introducedtalents by establishingR&D Center forHigh-tech Products (in1998) and R&Ddepartment for High-techIntelligent Products (in2000). It also acquiredChuangyi PreciseMachine, aTaiwan-funded companyin Dongguan, at HK $18million(2) It collaborated withexternal researchinstitutions anduniversities for the sakeof developing technologyand new products.(3) The listing in HongKong Stock Market in1997 provided financialsupport for thetransformation

(1) Kid Galaxy not onlyhelped Lung Cheongestablish its strongholdsin US, but furtherexpanded Bendos’sdistribution network tosporting goods and homegardening shops. Bendoshas obtained toyfranchise right of threemajor professional sportsleagues in US, includingice hockey, baseball andfootball(2) Bendos has set up anumber of sales-stores inthe major cities of easternand central China(3) To expand marketshare, it obtainedfranchise right of manytoy brands, includingGranzort, Armor Swat,Hikarian, Sonic Boy, andLegend of Nezha

(1) HaYiDai establishedmutually beneficialpartnership with anumber of domesticenterprises, such asFaw-Volkswagen,Brilliance Auto, ChinaConstruction Bank,China Mobile. HaYiDaiserved as theirdesignated supplier(2) It took full advantageof chain retail terminals,and successfully enteredlots of chainsupermarkets(3) It manufacturedmascots for severalevents(4) It held franchisee fairto invite cooperators


Table 3.15 Comparison of self-innovation capability

Influencing factors of enterprises’independent innovation ability

Lung Cheong toys HaYiDai toys

Entrepreneurship Chairman Liang’s strongsense of urgency and firmdetermination of innovationenables the whole group tooperate towards theself-innovation goal

Chairman Xiao has played aleading role in thecompany’s self-innovationroad

Innovationconcepts

Independentintellectual propertyideas

Lung Cheong has a keensense of owning andprotecting its intellectualproperty

HaYiDai emphasizesproduct designs for plushand stuffed toys, the majorproducts of the company.But the idea of intellectualproperty needs to be furtherenhanced

Brand consciousness Lung Cheong possesses itsself-brand throughacquisition. It also placesmore emphasis on R&Dcapability and intellectualproperty

HaYiDai transitioned fromOEM to ODM directly andaims to establish Chinesepeople’s toy brand. Brandawareness is its importantmotivation

R&D Capability (1) Emphasizing the input inR&D

(2) Setting up professionalR&D department

(3) Attracting R&D talents

(1) Emphasizing productdesign

(2) Encourage whole-staffdesign and innovation

Resourcesstatus

Acquisition andemployment oftalents

Well-preparation for talentintroduction and providetalents with favorable R&Denvironment

Cultivate talents appropriatefor corporate developmentby external recruitment andinternal training

Acquisition andutilization of capitals

External financing Internal capital accumulationand some small loans

The acquisition,accumulation andapplication oftechnology andknowledge

(1) Encouraging innovationand improving itselfthrough internaltechnology accumulation

(2) Emphasizing theintroduction andassimilation of externaltechnology andknowledge

(1) Encouraging all internalstaff to provide freshideas and new designsfor the company

(2) Raising designingcapability of staffthrough higher education

(3) Cooperating withexternal companies

Managementcapability

Strategic planningcompetency

Formulating strategicplanning in accordance withtime and implementingstrategic adjustment andbased on clear objectives

Establishing strategicpositioning according to itscompetitiveness andconsistently adjustingbranding strategy andcompetitive strategy

(continued)



Influencing factors of enterprises’independent innovation ability

Lung Cheong toys HaYiDai toys

Organizationadjustment andadaptation

Adjusting organizationcontinuously, rapidly andflexibly according tostrategic deployment

Adjusting organizationcontinuously, rapidly andflexibly according tostrategic deployment

Knowledgemanagement

(1) Perfecting thedepartment ofprofessional intellectualproperty

(2) Formulating themanagement system forcompany’s intellectualproperty

(3) Generalizing the IP8001Intellectual PropertyManagement System

Resistance to imitationbehavior through continuousproduct renewal and qualityassurance. At present, themain independentintellectual property is itsbrand. The infringement ofbrand will be firmly againstand there will be no worryabout the imitation ofproduct appearance

Industry characteristics High technology content andlong cycle of productsdetermine the key point toinnovation is maintainingcontinuous innovationcapability. Hence it embarkson a road from OEM toODM and gradually toOBM. It focuses on thecontinuous improvement ofR&D and designingcapabilities, graduallycompleting thetransformation ofindependent innovation.Intermediate transitions areindispensable

Low technology content andfast product cycle enable itto leapfrog the ODM phaseand conduct OBM businessdirectly. It focuses onproduct designing,development of channelsand brand building andexpansion

Externalenvironment

Competitionenvironment

At present, Lung Cheongpossesses strong competitiveadvantages with few directcompetitors in the market. Itis at the high-end of thewhole industry with highvalue-added products

Very few homogeneouscompetitors in the market

Market environment Lung Cheong’s R&D andmanufacturing capabilitiescontinue to maintainforefront in the globalremote-control toy market.Domestic market demand isfull of potential

The demand of domestic toyis growing 40% per year,indicating great marketpotential

Government impetus Dongguan government formulates a number of incentivepolicies


3.2.6.1 Innovative Spirit of Entrepreneurs

The success of Lung Cheong’s independent innovation has close relationship withChairman Liang who stresses on the innovative and cooperative entrepreneur-ship. His strong sense of hardship and self-innovation belief enables the corporationto operate consistently towards the target. Besides, the creativity and cooperationamong the top management ensures the continuous improvement of its innovativecapacity and smooth implementation of transformation. This can also be reflected inHaYiDai, which could hardly go further on its self-brand road without the inno-vation determination of Chairman Xiao.

3.2.6.2 The Key to Self-Innovation Is Realizing IndependentIntellectual Property Rights and Forming Self-Brands

Although both Lung Cheong and HaYiDai embark on the self-innovation path, theyhave different understanding in how to realize this aim. Lung Cheong has a strongdesire to attain independent intellectual property rights, the key of which, from thecompany’s perspective, is the sustainable upgrading of R&D capability. Hence, anincreasingly large input goes to R&D activities. For instance, an annual 20 millionyuan has been invested in equipment updating, talents introduction and scientificresearch activities. An R&D team has been organized with over 200 technical staff,of which more than 20 experts have senior engineer certificate and are specializedin developing products and techniques. Then an R&D Center for High-TechIntelligent Products was set up in 2000. Afterwards, Chuangyi Precise Machine, aTaiwan-funded enterprise, was acquired in 2002 for its outstanding technologiesand designs. And then Kid Galaxy was also purchased in 2002, owing to its famousbrand and marketing network. Next, the “Research Center of EngineeringTechnology for Intelligent Educational Digital Electronics” was set up in Dongguanin 2005. In addition, a system that encourages internal research and creativity hasbeen developed to reward those employees who make research achievements. In aword, the above efforts have greatly facilitated the company’s R&D competence.

HaYiDai, based on its product quality, managed to establish its channels andbrand, for the sake of creating a toy brand of Chinese people. Due to the lowertechnological content of plush toys, the company has positioned its competitivenessaccurately without taking the intellectual property rights as its main target. It investssubstantially on the product design to guarantee its rapid renewal of products andmaintain its competitive advantages. A nice innovation-oriented atmosphere hascome into being gradually, stimulating each employee to provide innovativedesigns or elements for product development and facilitating the generation of gooddesigns. Consequently, a large sum of capital was not spent on R&D, but on thechannel construction and brand promotion, for the sake of building the self-brand.Hence, such innovation path is quite appropriate for HaYiDai whose products arelower in technological content.


3.2.6.3 Corporate Self-Innovation Cannot Be Separatedfrom Resources

In terms of acquiring resources needed for innovation, the two enterprises sharemany common features. Lung Cheong takes proactive measures in talent intro-duction to enhance the company’s core competence. Apart from hiring professionaltechnicians by paying higher salary, Lung Cheong carries out effective strategies inemployees’ training, retention and assignment, hence providing a nice environmentfor R&D. Besides, the company plays an active role in technical accumulation andresearch, stimulating internal innovation. It also lays great emphasis on the intro-duction and assimilation of external technology and knowledge. For example, it notonly mastered the remote-controlled tumbler technology by cooperating withChinese University of Hong Kong, but attained relevant technical achievements ofintelligent research by collaborating with Wuhan University of Technology,Tsinghua University and Harbin Institute of Technology. Subsequently, thesetechnologies and technical achievements have been productized and industrializedby Lung Cheong after its comprehensive assimilation. In addition, it has establishedstrategic partnerships with a number of software designing companies to developgame accessories. Lung Cheong makes full use of all the resources available aroundfor the sake of sustained development. Its successful listing in Hong Kong stockmarket provided it with sufficient financial support for its subsequent transformationand self-innovation. In 1999, the increased capitals from its original shareholder,Citigroup Everbright Fund Management Co. Ltd., and the equity participation ofmany clients ensured Lung Cheong to continue with its ODM business, strengthenOEM production equipment, expand customer group, and strive for the licensingand sales rights of domestic television cartoon toys.

HaYiDai, by comparison, carries out external recruitment, internal training andfurther education to gradually foster a large number of talents appropriate to itsdevelopment. Although the company relied on production quality to explore marketand satisfy customers’ demands in the early days. The transformation in theserecent years has enabled it to attach more importance on the market expansion.Regarding technology, it adopts market-follower strategy and appoints professionalinformation collectors to track down the progress of processing techniques. Itencourages all employees to actively provide innovative materials and new designsfor the company. Furthermore, HaYiDai, to maintain the sensitivity to the outsideresources, dispatch the staff to universities for further study to enhance theirresearch and designing capabilities. In addition, by establishing and enhancing thecooperation with external companies, HaYiDai makes good use of their appearancedesigns to develop corresponding products and then promotes these own productsthrough self-channels, which facilitates HaYiDai’s transformation. Different fromLung Cheong, the majority of HaYiDai’s capitals used for self-innovation trans-formation come from internal accumulation and the rest from external loans, sincesmall private firms are quite difficult to receive many financial services.


3.2.6.4 Corporate Transformation and Upgrading Needs CertainManagement Capabilities

Strategic Planning Capability

On the path to self-innovation, Lung Cheong and HaYiDai have presented out-standing strategic planning capability, which provides an important guarantee fortheir successful transformation. In the early days, Lung Cheong attempted to get ridof the passive situation through establishing its distribution channels. Lung CheongElectronics Co., Ltd. was set up accordingly in 1988 by the group and DongguanSupply and Marketing Cooperatives, expecting to establish its supply and mar-keting system and subsequently expand the domestic market. But this trial failedbecause of the non-standardized domestic markets. Afterwards, Lung Cheong putforward another strategic layout. It first improved the independent R&D byacquisition and then gradually built up is R&D and designing advantages, based onwhich it strategically purchased a brand company and thus possessed its own brand.Consequently, it realized the consistent raising of self-innovation capability. So far,Lung Cheong has gradually formed its own development strategy, that is, sus-tainably enhancing and developing the corporate research strength, attachingimportance to the development of intellectual property and independent brand,motivated by the deepening of reform and the innovating of enterprise system, so asto thoroughly improve the comprehensive strength of Lung Cheong and strive todevelop itself into the first-class and advanced enterprise in the industry.

HaYiDai, based on its advantages in the specialized production and high quality,aims to establish a plush-toy brand of Chinese customers. Considering the risingcosts resulted from the labor shortage in Guangdong province, HaYiDai decidedlylaid out the research and designing sectors in Dongguan city and manufacturingsector in Henan province, spreading its markets across the country. And brandpromotion has been conducted consistently for further exploration of domesticmarket. Positioned itself in the high and medium-end market for many years, it hasdeveloped towards the high-end. With years of efforts, HaYiDai has set up adevelopment strategy, namely, developing its brand by raising quality consistentlyand enhancing its brand value by carrying out media publicity, participatingexhibitions and so on. Progress towards the goal of building a well renowned brandis afoot. Meanwhile, HaYiDai has composed its unique brand strategy. That is, afterinviting a large number of brand franchisees, HaYiDai collaborates with chainstores and different-sized distributors and agents, thereby steadily developing itsown brand.

Organizational Adjustment and Adaptive Capability

The organizational structure of Lung Cheong has changed rapidly and sustainably,along with its adjustment of strategic deployment. It first established the R&DCenter for High-tech Products in 1998 and then the R&D Center for High-tech


Intelligent Products in 2000. It also acquired Chuangyi Precise Machine in 2000and then Kid Galaxy in 2002, during which time it set up the management systemfor overseas affiliates. In 2007, it began to gradually move its Dongguan factoryfrom the original Zhouwu County to Changping County, which not only improvedits productivity but saved costs. And its flexible structural adjustment capabilityensures the implementation of transformation strategy.

Compared to Lung Cheong, HaYiDai is a small-sized private enterprise, but alsopresents excellent flexibility during its launch of transformation strategy.Considering the resource shortage in Guangdong province would hinder itsdevelopment, the company was decisive to choose inland as its new manufacturingbase and formed a new organizational structure, which not only solved thelabor-shortage problem but reduced operational costs.

Knowledge Management Ability

Lung Cheong protects its intellectual property rights through the establishment andimprovement of specialized intellectual property department. At the end of 2003, itestablished its intellectual property department, formulating guideline and relevanttargets of intellectual property work. It not only appointed some professional staffand was equipped with relevant facilities, but also formulated and improved a seriesof regulations and rules, such as “Regulations on Lung Cheong IntellectualProperty Registration”, “Lung Cheong Patent Management System”, “LungCheong Trademark Management System”, “Process of Lung Cheong Product R&DProtection “and “Lung Cheong Confidentiality Agreement”. To regulate the overallmanagement of intellectual property rights, IP8001 Intellectual PropertyManagement System has been implemented in the company. This can not onlyprotect the intellectual property rights of its own and clients, but prevent theunknowing infringement of intellectual property rights of other companies.

HaYiDai, whose products mainly lie in plush and stuff toys, has adopted uniquebrand protection strategy for its self-brand. It is not long since the company beganto build its own brand, so that the brand value is not very significant. One strategyHaYiDai has pursued to fight bogus imitations is to speed up product replacementand and to ensure product quality. And because the brand of HaYiDai is not soprominent, the profit margin of the imitations is small even under the condition ofthe same quality as the branded products. This makes imitations less perplexing aproblem. At present, the company’s major effort is aimed at combatting brandinfringement since the brand is its main independent intellectual property right.


3.2.6.5 Several External Factors Influence the Paths of CorporateTransformation and Upgrading and Self-Innovation

Industrial Characteristics Affect Corporate Choice of Self-Innovation Path

As special entertainment products, toys can be roughly divided into high-tech andlow-tech types. The majority of Lung Cheong’s products are wirelessremote-controlled products and electronic products, featured by high-tech and longR&D cycle, while the whole toy industry is characterized by rapid productupgrading. Therefore, Lung Cheong understands that maintaining continuousresearch and innovation capabilities plays a critical role in the self-innovation road.Accordingly, during its transformation from OEM to ODM and then to OBM, italways focused on the sustained improvement of R&D and designing capabilities,which contributed to its subsequent realization of independent innovation. Suchemphasis on innovation is a necessity for Lung Cheong.

By comparison, HaYiDai concentrates on the production of plush toys, whichare not only featured by lower technological content and faster upgrading cycles,but also easily integrated with other technological products. Based on its owncharacteristics, the company accurately positions its self-innovation path, wherein itleapfrogged the ODM stage and directly conducted OBM business. That is, whilefocusing on the novelty, practicality and innovativeness of designs, it spared noeffort on the development of channels and the construction and expansion ofbrands. In a word, both companies have captured the key in how to enhanceself-innovation capability.

External Environment Affects Enterprises

Both companies are facing relatively good competitive environment and marketenvironment. In terms of the competitive environment, Lung Cheong is at thehigh-end of industrial competition and owns strong competitive edge, owing to itsrelatively high value-added products and the lack of market rivals. This also enablesLung Cheong to promptly adjust strategies according to its development.Manufacturers of counterfeit and shoddy products are mainly the abnormal com-petitors. To crack down them administrative and judicial measures must be taken.These efforts, to a large extent, contribute to its knowledge management system,With regard to market environment, not only does its research and manufacturingcapabilities maintain forefront in the global remote-control toy market, butincreasingly large efforts have been taken consistently to the research and pro-duction of intelligent robot series. The company enjoys technological superiority inthe international market with huge market capacity. And it also attaches greatimportance to the expansion of domestic market, the enormous demand potential ofwhich also motivates it to carry out transformation.

HaYiDai, one of a handful of plush-toys companies in China, has carried outindependent research and design and promoted its self-brand products. Therefore, it


has few homogeneous competitors. Although there are some plush-toy brands inChina, many of them are brand operators, who outsource its toy manufacturing to asingle producer. But such cooperative relationship is fragile, which is different fromHaYiDai who integrates branding operation and production together. Next,HaYiDai sticks to the development and expansion in the domestic market.According to the statistics of Ministry of Commerce, the market demand of toys inChina maintains an annual growth of 40%, indicating a favorable market envi-ronment. Nevertheless, due to the lower technological content of plush toys,HaYiDai is less likely to benefit from government supports.

Government Affects the Transformation and Upgrading of Both Enterprises

In recent years, the Dongguan government has introduced a series of policies andmeasures to motivate corporate innovation. An annual specific-fund of 1 billionyuan, named “Technological Dongguan”, has been established to support compa-nies in terms of technological research, patent services and intellectual-propertyprotection. With regard to private enterprises, the government will optimize thefinancing environment, guide them to purchase R&D institutions, R&D team andresearch achievements at home and abroad, for the sake of raising their innovativecapability. As regards foreign-invested enterprises, the government will motivateand support them to build localized research teams and institutions, transformingthemselves from “Three-plus-one” trading-mix enterprises to joint ventures orcooperative enterprises. Meanwhile, the government actively engages itself inbuilding public technology platform, industrial technology platform, and corporateR&D institutions. Besides, some public innovation centers have been set up,including the Wool-Textile Technology Innovation Center as well as the DongguanExperimental Center of Key the National Key Mould Laboratory.

To attract more talents, the municipal government has set up a broader-coveragehousehold registration system and improved the services and supporting policies.Subsequently, a variety of Science Parks for Startups and Innovation have been setup for returned overseas graduates, doctors and SMEs. Relying on innovativeprojects and excellent enterprises in these parks, the government can proactivelyintroduce more high-quality talents for the long-term independent innovation.

3.2.7 Influencing Factors of Self-Innovation of LungCheong and HaYiDai

From the above comparison in terms of R&D capability, resources status, man-agement ability, external environment and government functions, it is shown thatduring the transformation process towards self-innovation, both companies havebeen influenced and promoted by their internal and external factors. Taking the road


of independent innovation is not a whim and whether the transformation couldachieve success is related to many factors. Shown from the development process ofthe above two enterprises, they have embarked on the self-innovation road under aparticular historical background. Different in the transformation mode and process,though, they share something in common.

3.2.7.1 Influencing Factors of Lung Cheong’s Independent Innovation

External Pressure of Lung Cheong’s Transformation

The transformation of Lung Cheong is mainly attributed to the passive marketposition and cost pressures. Since OEM business is positioned in the middle streamof the industrial chain, companies simply engaging in this business would be easilyaffected by brand owners. These OEM companies, lacking contact with markets, arenot only difficult in building sustained competitiveness, but very likely to becomethe victim of brand owners in terms of cost-shifting. This is because the brandowners could turn the saved manufacturing costs into their own profits, but put theblame on the processing party when problems appear. The 2007 Recall is the bestevidence. Chairman Liang once said that if Lung Cheong had not started with theestablishment of self-channels and self-brands ten years ago, it would have beendifficult for the company to escape from the 2007 crisis. For consumers, theyusually make a purchasing decision based on brands instead of place-of-origin.Even if the processing party manufactures high-quality products, all of the benefitsand rewards would be taken away by the brand owners. It is such foresight thatenables Lung Cheong to embark on the self-innovation road.

Besides, the increased prices of raw materials (i.e. rubber and oil) and labor forcein Guangdong Province have led to the rise of manufacturing costs and decrease ofprofit margins, which directly drove the transformation of Lung Cheong. For a longtime, the profit margins of OEM business have been squeezed heavily by fiercemarket competition, clients’ price-cutting and huge cost pressure. This situationforced OEM companies to expand ODM and OBM business to maintain higherprofit margins. Chairman Liang once expressed that the gross profit rate of OEMcould reach 30–40% in 1980, which decreased by 50% in 2010. Nevertheless, LungCheong still maintains the profit margin of about 30%, thanks to the launch ofODM and OBM business of high value-added and high profit. Moreover, LungCheong has taken proactive measures to expand non-toy product business, such aseducational wireless robots and Bluetooth headphones, against the intensified pricecompetition in the toy industry.

Internal Factors of Lung Cheong’s Successful Transformation

First of all, the subjective consciousness of the top management plays a significantrole in advancing the transformation of Lung Cheong. Its development enjoyed a


relaxing and smooth decade from 1985 to 1995, heavily relying on the amount ofclients’ orders. Yet it had to pay a high price for that. Once the clients cancelledorders, the factory would become unsustainable. During the many years of OEMbusiness, Lung Cheong had been suffering from the exploitation of brand ownersand Chairman Liang always hoped to have more initiative. For this reason, hedetermined to carry out transformation and establish its own distribution channels.Consequently, Lung Cheong Electronics Co., Ltd. was set up in 1988 by the groupand Dongguan Supply and Marketing Cooperatives, expecting to establish itssupply and marketing system and subsequently expand the domestic market.However, due to the large amount of counterfeit products in Chinese market at thattime, consumers could not identify the authenticity of products, while the pro-duction and circulation costs of fakes were relatively low, both of which resulted inLung Cheong’s difficulty in building its own channels. To survive this predicament,Chairman Liang and his brother strategically conducted the acquisition of ChuangyiPrecise Machine in 2000 and Kid Galaxy in 2002. The former acquisition hassubstantially promoted Lung Cheong’s R&D and design capability, and the latterhas enabled the company to establish independent brand. Consequently, LungCheong has successfully transformed from a pure processing company to a com-prehensive toy enterprise with self-brand, self-R&D and self-marketing. Suchtransformation is driven by its entrepreneurs within the company.

Moreover, the capabilities in effectively integrating resources and takingadvantage of opportunities guaranteed the smooth transformation of Lung Cheong.It started with transformation in the late 20th century and went public in 1997. Thissuccessful financing in the key time of transformation provided favorable financialsupport for the subsequent transformation of Lung Cheong. And its long-termexceptional commitment and input to the research and designing section contributesto the fostering and upgrading of its R&D and designing capabilities, while alsoplays an essential role for its subsequent self-brand development. The rapid growthof Lung Cheong is also attributed to the accurate insight into the surroundingopportunities and resources, the selection of Chuangyi Precise Machine, thecooperation with universities to obtain high-tech franchise right, the attention to theentertainment dynamics and the procurement of brand agents.

Furthermore, the heavy input in R&D and technology-oriented andmarket-driven concept also contribute to Lung Cheong’s outstanding performance.The consistent R&D investment ensures the continuous improvement of R&Dcapability. And the sufficient manufacturing experiences accumulated from themany years of OEM business guarantee its product quality. Such combinationbrings about regular customers for the company and thus ensures its businessvolume. Besides, innovative awareness was perfectly shaped in the company.Employees are encouraged for positive innovation, which would be rewarded fornew ideas (after corporate evaluation) and technical achievements. Accordingly, apositive and innovative atmosphere comes into being in the company. Afterengaging in ODM business, Lung Cheong, assisted by the increasingly strongdesign and engineering department, makes full use of its sophisticated radio


technology to develop a variety of `remote-controlled toys of vehicles, ships andaircraft.

Apart from increasing R&D input internally, Lung Cheong enhances its part-nership with external scientific research institutes and higher educations, such asTsinghua University, Harbin Institute of Technology and Wuhan University ofTechnology. Such cooperation enables Lung Cheong to obtain information andprojects of intellectual products, then industrialize some intellectual research pro-jects that have market benefits and potential, so as to increase the company’sproportion of OBM products. Meanwhile, it collaborates with domestic mass mediaand organizations and takes advantage of various programs, in an effort to developpotential products and strengthen its brand image. These activities can help rein-force the company’s tangible and intangible assets, generating new momentum forthe company’s sustainable development. Thanks to the above principles andguidance, Lung Cheong successfully develops robots, home robots and smarteducational robots through the launch of cooperative projects with Hong KongPolytechnic University, Tsinghua University, Harbin Institute of Technology andWuhan University of Technology. Some of the projects have been completed andintroduced into the market while some are still on the way. These projects not onlyaccelerate the company’s R&D strength but facilitate the upgrading of its brand.

In addition, to reinforce the Group’s professional competence, the executivelevel has planned to restructure its management and processing procedure so as torationalize the utilization of resources used in production and operation. It will alsointegrate manufacturing facilities and equipment to improve the overall profitmargins of the Group.

3.2.7.2 Influencing Factors of HaYiDai’s Independent Innovation

The successful transformation of HaYiDai can be attributed to the followingfactors.

The Entrepreneurship of Chairman Xiao Plays a Significant Role inPromoting Transformation

The precarious situation prompted Chairman Xiao to lead his company to starttransforming its business mode and to build its own brand. The consciousness ofentrepreneurial leadership always has a great influence on the development ofChinese private enterprises and, to a certain extent, determines its direction. Fromthe previous accepting orders for processing to the subsequent self-research,self-designing, self-production and self-sales, companies must bear the rise of costsand decline of business volume in the early stage. Meanwhile, companies arerequired to put new efforts into R&D and marketing, which they did not need to payany attention to before, and to grow up through continuous exploration. Whetherentrepreneurs can firmly insist on the self-innovation road will determine the


success or failure of the transformation. Chairman Xiao, together with his staff, hasformulated and steadfastly implemented its long-term development plans, enablingHaYiDai to go further on the self-brand path.

HaYiDai Has Accumulated Substantial Processing Experience in OEMBusiness. International Norms Were Used to Standardize Products, WhichFacilitated the Company to Focus on the Continuous Improvement ofProduct Quality in the Early Days

Quality is one of the key factors in the success of HaYiDai’s transformation. Theshortage of capitals resulted in its difficulty in carrying out massive market pro-motion, as a result of which product quality has become one of its competitiveness.Adhering to the business philosophy of “high quality first, scientific managementforemost, reputation for market, quality for development”, HaYiDai managed toproduce highly qualified products and provide outstanding services for its clients,laying a solid foundation for its self-brand construction. At present, HaYiDai ishardly afraid of being forged or counterfeited. Relying on a wide range of productseries, short product upgrading cycle, prominent product quality as well as accuratemedium-market pricing, the company leaves few profit margins for counterfeitersand highlights itself in the protection of product intellectual property rights.

HaYiDai Devotes Itself to the Manufacturing of Plush Toys Which AreDifferent from Electronic Toys and Mechanic Toys

Plush toys, thanks to the wide range of forms, can be easily intermingled withvarious festivals at home and abroad. The higher flexibility, lower technologicalcontent and faster upgrading cycle contribute to its difficulty in applying designingpatents. Consequently, HaYiDai worries little about being counterfeited, but candevelop and launch new designs and new products with confidence.

Meanwhile, HaYiDai attaches great importance to the continuous innovation andupgrading of its R&D capability. An R&D team consisting of more than 20members makes use of the market information collected by the marketing depart-ment to understand the changes in consumer demand and introduces new designs,in an effort to shape its competitive edge with continuous innovation. According toChairman Xiao, HaYiDai lays significant emphasis on the input in R&D, whichaccounts for 20% of the business income. Moreover, a number of staff will bearranged for further study in universities to raise their research capability. Inaddition, the cooperation with external institutes helps HaYiDai to enrich itsdesigning resources and thus promote its products’ added value. And thanks to thecollaboration with companies producing electronic toys and battery-operated toys,HaYiDai can take advantage of their advanced technology and enrich its ownproduct lines.


3.2.8 Facts and Discoveries

From the above analysis, we find that the development processes of Lung Cheongand HaYiDai are instructive to Dongguan’s toys enterprises. The transformation ofthese two enterprises, to a great extent, was passively driven by historical envi-ronment but actively led by their entrepreneurs in practice. The management plight,as the external pressure, forced companies that originally engaged in lowvalue-added processing business to conduct transformation for greater profit mar-gins. Although the success of Lung Cheong and HaYiDai differs in kind, it impliessome common features behind their growth process and patterns.

Above all, the comparison and contrast above show that, despite the differencesin the external environment during their transformation, both enterprises haveaccurately captured the market potential and the key point of future competition.And this is the prerequisite when they determine to carry out independentinnovation.

Moreover, the entrepreneurship of their leaders plays an important role in theinitial stage of corporate innovation. Among the number of self-innovation cases,some are successful while many have failed. The main reason that they failed todevelop self-innovation capability is that their leaders lack the willingness toinnovate and do not have the influencial entrepreneurship to direct corporateinnovation. This is particularly evident in private companies.

Furthermore, when entrepreneurs have strong entrepreneurship and firm deter-mination to lead transformation, their management capability and corporateresources play a more significant role on their innovation path. Independentinnovation is not a short-term activity, but requires the companies to formulatelong-run strategic plans, get resources and improve capability sustainably. Besides,they should pay attention to knowledge management, protect independent intel-lectual property rights, and carry out organizational adjustment, thereby ensuringthe smooth growth of enterprises. Since Lung Cheong’s main products have higherdegree of scientific and technological content, its R&D capacity is indispensableduring its long-term development. Therefore, in the whole process of transforma-tion, Lung Cheong is concerned about R&D investment and talent introduction,remaining sensitive to the surrounding knowledge resources. By comparison,HaYiDai’s main products are plush toys with lower technology content, thusconstructing channels and brands of its own are essential to its continuous devel-opment. Hence, after ensuring product quality, HaYiDai is committed to the con-struction of channels and brand, personnel training and organizational adjustment,in an effort to ensure the smooth generation of self-innovation achievements.

Undoubtedly, every company has its own particularities. Exploring theself-innovation path does not mean to find out a bright avenue suitable for allenterprises. Lung Cheong has transformed from OEM to ODM and then to OBM. Itis a gradual innovation process. HaYiDai directly transformed from OEM to OBMand launched its own brand. They base their path selection on their strengths and


product characteristics. Therefore, regarding the choice of self-innovation path thereis no absolutely right or wrong ones, but fitness or unfitness.

Finally, in spite of the large amount of research on how companies improve theirself-innovation capability, domestic scholars focus too much on the governmentalrole. The development of Lung Cheong may have been facilitated by the govern-ment to some extent, but HaYiDai, comparatively, mainly relied on itself for thegrowth of innovative capability.

Therefore, we can summarize that, to promote the independent innovation of toyenterprises in Dongguan, it’s necessary to conduct feasibility analysis of marketenvironment, stimulate innovation awareness of entrepreneurs, and raise corporatecapabilities in internal management and key-resource access, After the formulationof detailed strategic planning, it’s necessary to select an appropriate self-innovationpath, improve key capabilities for innovation, carry out organizational adjustmentand intellectual property rights protection, in an effort to promote self-innovationsteadily and sustainably.

3.3 Upgraded Enterprise in Lighting Industry: NationStarOptoelectronics

3.3.1 Company Profile

Founded in 1969 in Guangdong province of China, Foshan NationStar Co. Ltd(hereinafter referred to as NationStar) is specialized in the development, productionand sales of LED chips and LED lighting products. As an outstanding high-techenterprise in Guangdong province, it is also one of the key high-tech enterprises ofthe National Torch Plan. Currently, its production bases are located in the city ofFoshan (in Guangdong province) and Wuxi (in Jiangsu province). With expertise inLED packaging field and advantages on capital, distribution channels, R&D, andmanagement, it has been ranked as one of the largest LED packaging enterpriseswidely recognized in LED industry. On 16th July, 2010, it launched its initialpublic offering and was listed in Shenzhen Stock Exchange.

Having been attaching great importance to technical development and innova-tion, the company is equipped with the post-doctoral science workstation, theenterprise technology center of Guangdong province, the optoelectronics researchcenter of Guangdong province, and the research office of Academician Qiang Su. Inrecent years, the company has undertaken various research projects supported bynational and local governments, such as the National “863” Plan Project, theScience and Technology Project of the National “Tenth Five-Year-Plan”, NationalElectronic Information Industry Development Fund, and other provincial andmunicipal major R&D special projects. Furthermore, NationStar’s products havebeen granted with a lot of national and provincial key product titles as well asprovincial and municipal scientific progress awards. The company has passed the


international certifications of ISO9001 quality management system, ISO14001environmental management system, ISO/TS16949 quality management system andOHSAS18001 security management system. Table 3.16 shows the basic informa-tion of this company.

3.3.2 Upgrading Path

3.3.2.1 Being Supported by Packaging, and Developing CoreCompetencies Through Technology Accumulation

LED packaging is in the middle-stream and downstream of the industrial valuechain. Its upgrading path seemed to be limited when compared with some upstreamparts like chips and epitaxial slices manufacturing. However, thanks to the supportof packaging and technology accumulation in LED packaging, NationStar hasdeveloped core competencies and achieved upgrading successfully.

Since the foundation, NationStar has engaged in OEM business with meagerprofit for over ten years. Since 1981, it has begun to cooperate with Japan’s Sanyo

Table 3.16 Basic information of NationStar

Founding time 1969

Company property From state-owned to private-owned

industry of company Semiconductor optoelectronic device manufacturing industry(engages in the R&D, manufacturing and marketing of LEDdevices and components; and the products are widely appliedto the fields of consumer electronics, home appliances,computers, communicating, flat panel and lightingengineering)

Business condition Conducing OBM business domestically, and ODM as well asOBM business abroad. Adopting OEM in processing part

Enterprise scale (up toDecember 31st, 2013)

Staff number: 1617Sales revenue: yuan 1.142376 billionTotal assets: yuan 3.400881 billion

Listing situation Being listed on Shenzhen Stock Exchange on July 16th, 2010

Industry ranking One of the greatest LED packaging enterprises, industryleader

Enterprise honor Semiconductor Lighting Technology Standard WorkingGroup Member Unit, Scientific and Technological InnovationFund for Outstanding Small and Medium—sized Enterprisesof Guangdong Province, Key Hi-tech Enterprise of theNational Torch Program Hi-tech Enterprise of GuangdongProvince, IPR Demonstration Enterprise of GuangdongProvince, AAA Grade Credit Enterprise, IntegrityDemonstration Enterprise in Guangdong Province, and theTop 500 Enterprises in Guangdong Province in 2010, etc

3.3 Upgraded Enterprise in Lighting Industry: NationStar … 125

Electric Co. Ltd in processing LED display panels and introduced its advancedLamp LED product line in 1991. This cooperation brought the internationallyadvanced LED packaging technology to NationStar, which greatly enhanced itstechnical skills and manufacturing ability. Furthermore, NationStar introducedJapanese advanced management systems and ideas which are still having profoundinfluence on itself today. After this event, developing for over three decades,NationStar gradually becomes the leading company in the LED packaging industry.According to the research of CCID Consulting, among the 10 top enterprises inChinese LED market sales in China in 2008, 7 were respectively occupied byTaiwanese manufacturers, the US company Cree and the Japanese company Nichia;while the 8th one was NationStar, which means it ranked 1st in mainland China.

LED packaging is different from integrated circuit packaging. Large high-endLED packaging companies can foster core competitive advantages in terms of thetechnical reserves, talent pool and economies of scale. As the reliability of LEDproducts depends on the LED packaging technology, excellent packaging and heatdissipation technology that can lengthen the longevity of LED products. Moreover,different application fields—from cellphone screens to outdoor all-color displayscreens, from indoor lights to outdoor road lamps—have diverse requirements topackaging technology. For example, the packaging devices from LED backlight forLiquid Crystal Display Television need a high degree of high power lighting, whichhas higher requirement on heat dissipation and service life; and the devices ofoutdoor display screens should be waterproof and ultraviolet-proof besides goodluminous performance. Attaching great importance to the technological accumu-lation in such aspects, NationStar has developed its core technology in this field.Relying on the technology advantage in led packaging field and utilizing theprinted-circuit board (PCB), it further developed a new kind of high-power LEDdevices and manufacturing technology in 2011. The devices have great competitiveadvantages in term of heat dissipating property, optical property and productioncosts.

LED packaging is NationStar’s major source of profits. From 2007 to 2009, thesales revenue of LED products accounted for 85.98%, 81.60% and 84.28%respectively; and compared with the same industry, the gross margin was muchhigher than the industry’s average level (see Fig. 3.11) and another three famousTaiwanese LED packaging enterprises (see Fig. 3.12), from which the obviousadvantage of core competence can be seen.

Thanks to its core competitive advantage in this field, NationStar is getting morerecognition from the society. It has become IBM’s qualified supplier since 2010. InJanuary of the same year, it won the bid for the hall’s energy-saving lighting projectof China Mobile Company with its bid-winning LED spotlights accounting for asmuch as 31% in the whole project.


Resources: Prospectus of NationStar and Guizot Jun’an Securities Research

Harvatek Corp.

NationStar Co. Ltd. Everlight Electronics., Ltd.

Bright Led Electronics Corp.

Fig. 3.12 Gross margin comparison between NationStar and three Taiwanese LED packagingenterprises (2007–2009). Resources Prospectus of NationStar and Guizot Jun’an SecuritiesResearch

Resources: Prospectus of NationStar and Guizot Jun’an Securities Research

Average gross margin of electric component industry

Gross margin of NationStar’s LED business

Gross margin of NationStar

Fig. 3.11 Gross margin comparison between NationStar and the industry (2007–2009).Resources Prospectus of NationStar and Guizot Jun’an Securities Research


3.3.2.2 Starting from OEM and Coordinating Both Domesticand Foreign Markets with OEM/ODM/OBM Coexisting

NationStar was just a state-owned small factory at the very beginning after itsestablishment, manufacturing silicon and semiconductors only. Having maintainedsuch OEM business for more than ten years, it gradually went on the road of ODM/OBM by introducing the advanced LED packaging technology of Japan’s SanyoElectric Co. Ltd. So far, it has developed OBM business domestically and simul-taneously undertaken ODM and OBM and OEM business abroad. Table 3.17shows the specific sales revenue.

In the domestic market, the production of LED is in the top three nationwide andNationStar is also the biggest supplier of (SMD) LED in China. In foreign markets,it promotes its products mainly by fairs and brand influence with the sales scopespreading over the world and has lots of customers in many areas, includingAmerica, Europe, Asia, Africa and so on. In particular, the volume of business withthe USA, Britain, Germany, Spain, Australia, Korea, Japan, India and Russia hasaccounted for the major part in the company’s sales revenue. This indicatesNationStar has achieved outstanding effect in the globalization progress. Table 3.18shows the company’s revenue of main business in different areas.

3.3.2.3 Adopting the Innovation Pattern from TechnologyIntroduction to Digestion and Absorption and thento Independent R&D

The technological innovation of NationStar mainly follows the procedure ofintroduction, digestion and absorption, imitation, and independent innovation.Since 1981, it has manufactured LED display boards cooperating with SanyoElectric Co., Ltd., Thanks to Sanyo’s introduction of Lamp LED (Direct plug-inled) production line, NationStar has mastered LED packaging technique bydigesting and absorbing the advanced technology. It has also built up a relativelywell-developed system of process control, production management and quality

Table 3.17 Business composition of NationStar (2007–2009). Resources: Investigations on thecompany and Prospectus

2009 2008 2007

Sales(10,000 ¥)

Ratio(%)

Sales(10,000 ¥)

Ratio(%)

Sales(10,000 ¥)

Ratio(%)

OBM 52,104.32 82.98 45,336.21 80.00 38,008.60 85.63

ODM 1,148.85 1.83 1,125.14 1.99 295.74 0.67

OEM 9,537.93 15.19 10,211.04 18.02 6,082.23 13.70

Total 62,791.09 100.00 56,672.39 100.00 44,386.57 100.00


management. By continual learning and practice, it has possessed the capability ofindependent R&D (see Fig. 3.13).

The achievements mentioned above benefit from NationStar’s great devotion toindependent innovation. It has set up a provincial enterprise technology center and aprovincial optoelectronic engineering technology research center. Up to December31st, 2009, it had invested a total of ¥50 million in the new products’ technologicalR&D and transformation. Until October, 2011, it had applied for 180 patents andachieved 135 authorized ones including 10 authorized patents for invention, whichwas really remarkable.

In addition, as the executive director unit of China Solid State Lighting Alliance,the deputy director unit of Optoelectronic Devices Branch of COEMA (ChinaOptics and Optoelectronics Manufactures Association), and the annual member unitof Working Group on Technology Standard of Semiconductor Lighting from 2005to 2009, the company has participated in setting many national standards.

Nowadays, NationStar has transformed from a previous labor-intensive com-pany processed with supplied materials to a self-innovated company with inde-pendent manufacturing and marketing. It has become one of the top three biggestLED packaging companies and the biggest SMD LED packaging enterprise inChina.

Table 3.18 Revenue of main business in different areas (2007–2013). Resources: Investigationson the company, prospectus and annual reports

Region 2013 2012 2011 2010

Revenue(10,000 ¥)

Ratio(%)

Revenue(10,000¥)

Ratio(%)

Revenue(10,000¥)

Ratio(%)

Revenue(10,000¥)

Ratio(%)

Internalarea

916,12.1 80.6 711,28.7 75.4 82256.0 76.8 68369.0 78.2

Externalarea

220,04.6 19.4 232,35.9 24.6 24889.2 23.2 19073.3 21.8

Total 1,136,16.6 100.0 94364.6 100.0 107145.3 100.0 87442.3 100.0

Region 2009 2008 2007

Revenue(10,000 ¥)

Ratio(%)

Revenue(10,000¥)

Ratio(%)

Revenue(10,000¥)

Ratio(%)

Internalarea

45252.0 72.5 38923.5 69.0 32082.7 72.5

Externalarea

17207.9 27.6 17527.8 31.1 12164.9 27.5

Total 62459.9 100.0 56453.3 100.0 44247.6 100.0


3.3.2.4 Taking SMD LED as a Strategic Foothold to Develop Productsand Customers of New Domain

Among LED packaging, SMD LED packaging is the most difficult one in terms oftechnology and has high added value, which makes its profitability much higherthan lamp products. Hence, NationStar carries out a steadfast development strategythat emphasizes on SMD LED as well as stabilizes the traditional lamp LED. The

Fig. 3.13 Independent R&D process of NationStar. Resources Investigations on the company,official website, annual report and other secondary sources


company’ s present product structure, according to the product classification, can beclassified as Lamp LED, SMD LED and LED lighting products; according to thecustomer classification, can be classified as display products, household appliancesproducts and lighting products. Among these products, display products andhousehold appliances products are the traditional ones of the company and displayproducts enjoy rapid growth. (Table 3.19).

Accordingly, the company regards SMD LED as its strategic point and adjustsits product structure. In 2010, the capacity of its SMD products expanded largely. Inparticular, the output of the product Top View expanded from 130 million yuan in2009 to 1 billion yuan in 2010, thus driving 32% growth in the company’ s revenue.Meanwhile, reinforcing the investment of the lighting product’s R&D and salesincreased 60 million yuan of the sales income of lighting SMD modules, andcontributed to the company’s 10% revenue growth.

High value-added SMD LED products have a wide range of applications withlots of profit growth points. Currently, the company has vigorously expanded newcustomer base, including IBM, Sandisk (the world’ s largest flash data memory cardsupplier), Huawei Technologies, BOE (manufacturing LCD TVs with LED back-light), Nanjing Lopu Co., Ltd, Shanghai Sansi Technology Development Co., Ltdand other famous LED display screen manufacturers in China. In addition, by rightof self-innovation and technology advantage, the company introduced high-techproducts promptly to the market because they were featured by wide application.This move has successfully developed new customers in the field of display screen,helping the company create a new profit growth point and remain a high gross profitrate during the reported period. At present, following the customers of homeappliances, those of display screen have become the company’ s major ones, withthe display screen sales income accounting for 28.40% of the company’ s totalrevenue in 2009.

Table 3.19 NationStar’s product structure and applications. Resource: Company announcementsand Northeast Securities

LampLED

Household appliances, outdoor display, automobile lighting and so on

SMDLED

Chip LED Household appliances, indoor whole– colored display screen and soon

PLCC LED TopEmission

both outdoor and indoor whole-colored displayscreen, small and medium size backlight, indoorlighting and so on

Side-viewEmission

Small size backlight and so on

High-powerLED

GE lighting, large-size backlight and so on


3.3.2.5 Vertically Integrating the Industry Chain by Mergersand Acquisitions, Enterprise-University-Research Cooperationto Enhance Competitiveness

The chain of LED industry is relatively long. Upstream chip and other technologiesplay key roles in this chain and possess the highest added value, while the appli-cations in downstream are scattered with diverse application characteristics. Thevertical integration of industry chain can provide products and solutions withtechnology and cost competitiveness, which can enhance the company’ srisk-resisting capability. Therefore, apart from the company itself taking measuresto develop both upstream and downstream, NationStar’s mergers and acquisitionsare of great significance to its vertical integration strategy of industrial chain.

Based on packaging, NationStar’s specific movement to extend the downstreamand upstream are as follows:

Downstream expansion. To expand itself to lighting applications of LED, LightingDivision of NationStar was established at the end of 2009 and engaged in the R&Dof downstream LED product applications such as LED and light modules. Thisdivision was upgraded to Foshan NationStar Optoeletronics Co., Ltd. in June 2011.A marketing center, which was formally established in Sichuan in October 2011,was NationStar’s first domestic provincial marketing center of LED lightingproducts. Langyue Photoelectric Technology Co. Ltd. was also established as theonly legal Sole Distributor of NationStar’s LED lighting products in Sichuanprovince, which is the important start of NationStar’s new-channel strategy. In thefuture construction of LED lighting channel, NationSatr will pay continuousattention to the development of market segmentation.

Upstream expansion. In 2009, with 15% shares, NationStar set up XuruiOptoelectronics jointly with SemiLEDs (the U.S. Chip maker) and other compa-nies. This company engaged in LED epitaxy and chip production. In August 2010,NationStar decided to spend the over-raised funds of 17.17 million yuan in pur-chasing the right to use a piece of land, which covers an area of 16.80523 squaremeter, in Chancheng (in Foshan city) and spend 132 million yuan in building a newplant on it. In the new plant, NationStar will invest 224 million yuan in imple-menting the new TOPLED manufacturing technology and industrialization projects.As the world’s pioneering technology, new products of TOPLED project are a newkind of TOPLED holder which are made by PCB materials and have independentintellectual property rights made by PCB materials with independent intellectualproperty rights. The new TOPLED model, designed and packaged based on thisnew substrate material, has high-thermal conductivity so that the device has betterheat dissipation performance. In March 2011, cooperated with Chengxin VentureCapital, GF Xinde Investment Management Company and so forth, NationStarspent 40 million yuan from the over-raised fund setting up a joint venture namedNationStar Semiconductor with a stake of 66.67%, in order to carry on LED epi-taxial chip research, development and manufacture. This project planned to invest2.5 billion yuan to construct the workshop and supporting houses of 50,000 m2. In


addition, the project planned to introduce 20 MOCVD product lines and corre-sponding chip production equipment in 2011. Another 2.5 billion yuan wasinvested to introduce 50 MOVCD wafer production lines and corresponding epi-taxial production equipment. Having entering the construction phase of the plant,NationStar Semiconductor will continue to promote the packaging business ofNationStar and provide support for large-scale production of LED.

In the LED industry chain, R&D and manufacturing of epitaxial chip is crucialfor the company to take initiative in the industry chain and market development.Based on the concept of “Overseas Talent Introduction, Independent R&D andCollaborative Innovation among Enterprise-University-Research institutions andIndustry Chain”, NationStar will strive to improve the epitaxial chip technologyand promote the industry chain’s vertical integration. On the whole, a company ofvertical structure is expected to outperform a specialized company especially interms of internal motivation, cost control and operational stability.

3.3.3 Company Competence Supports NationStar’sUpgrading Process

3.3.3.1 Insights into the Industrial Environment

As a domestic LED packaging giant, NationStar has been in this industry for over30 years. It has grown step by step with its deeper insights into the changes of themarket. NationStar is also a forerunner of the LED industry and has perceived thetrends and potentials of the market as it consolidated its packaging business,extending the industrial chain and promoting the vertical integration. When theLED illumination industry developed at an extraordinarily fast speed with thecutting-edge technology that cut down the costs, NationStar acutely noticed anenormous market in LED illumination and hence invested more capital in buildingbrand, expanding the market, and setting up the LED illumination department. Allthese measures effectively accelerated the company’s upgrading process.

3.3.3.2 Technological Innovation

NationStar attaches great importance to R&D investment. More than 4% on averageof the annual turnover is put into the R&D section every year, where a team ofwell-educated staffs, of which the R&D personnel with bachelor’s degree or abovetake up 76%, is working for innovation. All of this investment will guarantee thatNationStar can keep up with the trends of the development of LED industry, as wellas speed up the technological innovation and product upgrading process as well asbetter meet the needs and adapt to the trends of LED industry. Table 3.20 shows theR&D expenditure, strength and patents.


The core technology with independent research and development capabilityhelps enterprises to realize the accumulation of technology and upgrade the product.NationStar has established strong independent R&D institutes including the Stateand Regional Laboratory of Semiconductor Lighting Materials and Devices,Post-doctoral Science Workstation, the Optoelectronics Engineering R&D Centerof Guangdong Province, the Enterprise Technology Center of GuangdongProvince, and the research office of Academics Qiang Su (a famous Chinesescholar). It is currently in preparation for NationStar power center institute ofresearch and development which also has a strong ability of independent researchand development.

To further improve its R&D capability, NationStar has built multilevel andmultimodal cooperative relationship, IUR (industry-university-research), with uni-versities and research institutions, including Sun Yat-sen University, South ChinaUniversity of Technology, Xi’an Jiaotong University, Xiamen University, ZhejiangUniversity, Huazhong University of Science and Technology, Wuhan University ofTechnology, Shenzhen University, Guangzhou Research Institute of ElectronicTechnology of Chinese Academy of Sciences (CAS), Semiconductor ResearchInstitute of CAS and the 13th CEC of Ministry of Industry and InformationTechnology.

Table 3.20 R&D statistics of NationStar (2008–2013). Resource: Field research in the company,prospectuses and annual reports

2008 2009 2010 2011 2012 2013

R&Dexpenditure(10,000 ¥)

2,677.34 2,898.24 3,572.16 3817.73 4109.68 4467.19

Revenue(10,000 ¥)

56,672.39 62791.09 87,746.55 10,3994.91 92190.07 114,237.63

Proportionof R&D (%)

4.72 4.62 4.07 3.68 4.48 3.91

R&DPersonnel(person)

136 601 583

Percentage(%)

7.2 39.41 36.05

Patents(item)

70licensedpatents

Applied for33 newpatents andgained 29licensedpatents

36 newlicensedpatents

46 newpatentapplication

By the end of2013, totallyapplied for 286patents andgained 218licensed patents


3.3.3.3 Manufacturing Capacity

As the key capability of production enterprises, manufacturing capacity is reflectedby the advanced manufacturing process and technology, sufficient capacity andhigh production efficiency. Outstanding manufacturing capacity plays an active rolein the enterprises’ upgrading process and product upgrading.

NationStar majors in LED widgets and gadgets production. And it has set upfour manufacturing bases in Foshan, Wuxi and other cities, as showed inTable 3.21.

Based on the encapsulation of LED, widgets and gadgets of Lamp LED andSMD LED are the main sources of NationStar’s operating revenue, in which theSMD LED accounts for over 70%. From 2004 to 2006, in the total LED productionin China, NationStar’s LED production respectively accounted for 2.28%, 2.8%and 4.10%, which was among the top three domestically. In particular, SMD LEDproduction respectively accounted for 17.86, 22.27% and 34.00% in the totaldomestic SMD LED production, which was bigger than any other enterprises inChina. These achievements have benefited from the strong manufacturing capacitywhich in turn gradually improves its productivity. Table 3.22 shows the capacityincrease of Lamp LED and SMD LED from 2007 to 2009.

Table 3.21 NationStar’s four manufacturing bases. Resource Official websites

Production range Basearea(m2)

Foshan Huabao Plant LED widgets, LED gadgets 139000

Foshan Fengjiang Plant LED lighting products manufacturing Base 20000

Wuxi NationStarTechnology Limited

Processing trade of electronic circuit boards, PCBand LED components and application products

9000

Foshan NationStarSemiconductor TechnologyLimited

LED R&D 60000

Table 3.22 Capacity change of NationStar (2007–2009). Resource : Prospectus

Annual output capacity (million) 2007 2008 2009

SMD components

Capacity 1800.00 2400.00 2570.00

Output 1686.72 2012.31 2107.08

Sales volume 1574.73 1953.34 2177.99

Lamp components

Capacity 260.00 360.00 360.00

Output 359.58 252.12 261.32

Sales volume 349.97 257.58 267.32


Currently, the company’s capacity of Lamp LED maintains stable while that ofSMS LED increases rapidly. In particular, the productivity of Top View rise from130 million in 2009 to 1billion in 2010, leading to a 32% increase of companyrevenues. Meanwhile, NationStar input more to R&D and marketing on lightingproducts. As a result, the sales revenue of lighting SMD components increased 60million yuan, leading to a 10% increase to the company’s revenues.

Taking its outstanding advantages of economies of scale and production processmanagement, NationStar improved its products quality which is much higher thanthe average industrial level. These reduced the production cost effectively andexpanded the production.

By integrating its vertical industrial chain, NationStar expanded to the upstreamapplication field and improved its productivity. For a long time, NationStar had topurchase the LED chips from foreign and domestic epitaxial wafer producer,especially the high-end products high-brightness and high-powered chips areimported from Japanese and Taiwanese companies. Concerning that the corematerials are controlled by others to some extent, in March 2011 NationStar set ajoint venture (NationStar Semiconductor) to carry on LED epitaxial chip devel-opment and manufacturing. It invested 2.5 billion yuan for introducing 50 MOVCDwafer production lines and extension of corresponding production equipment. Afterentering the LED upstream epitaxial wafer field. NationStar greatly improved itsproductivity and market competiveness.

3.3.3.4 Marketing Capability

With the expansion of business and the need for upgrading, NationStar has con-stantly spared no efforts to construct stronger marketing capacities. The company’smarketing department takes charge of the domestic sales, using its own brand andadopting the direct-selling mode. The Overseas Department is in charge of theoversea sales, adopting OBM/ODM through local sales agents while OEM forprocessing business. According to the concrete sales process of the issuer product,NationStar divides its business into two main modes, independent sales and salesthrough dealers/agents. Among large household appliance customers, such as Greeand Midea, NationStar adopts direct-selling which belongs to independent sales.Besides, its processing business is directly offered to Japanese customers withoutany agencies. Dealers/agents sales model are mainly applicable to North America.Virginia Optoelectronics Inc., as the exclusive agent in North America, isresponsible for the local business promotion. Through this agency, NationStar cansell its products by using its customers’ brands according to relevant licensingcontract, which is a kind of ODM business mode.

As the selling points of NationStar’s domestic market, LED devices and light-ings and lighting products contribute most to the sales revenues. Table 3.23 showsthe market segment and component of corresponding products in 2013.

NationStar has placed much emphasis on building up versatile channels. In2011, the company spent 90.231 million yuan raised funds on implementing brand


and channel’s construction, including 60 million yuan in developing 20direct-selling channels, 20 million yuan in 10 cooperated channels and the rest 10million yuan in brand building. With the project implementation, NationStar willobtain better oversights towards the existing market, improve the equality of cus-tomer service, and expand in market share with new market development.

With the economic development in West China, NationStar has made Chengducity a gateway to open LED lighting markets in Southwest China. On Oct 30th,2011, NationStar LED Lightings Sichuan Marketing Center, the company’s firstdomestic provincial marketing center, was established. As the sole authorizeddistributor of NationStar LED Lightings in Sichuan, the establishment of LangyuePhotoelectric Technology Co. Ltd marked the significant start of NationStar’s newchannel strategy. In the future construction of the channels of LED Lightings,NationStar continues to focus on the development of regional market and marketsegmentation, with the hope of having a breakthrough in channel building.

On the basis of over 40 years’ technology foundation, NationStar has set up itsreliable brand and corporate image, receiving wide market recognition. Manyproducts have been prized “Guangdong Top Brand” and the enterprise itself hasbeen awarded many times as “The Most Potential Enterprise in China’s LEDIndustry”, “The Key Enterprise of Strategic Emerging Industry in Guangdong”, and“The Most Influential Enterprise of the Inspiring Decade”. In 2013, it was rated“Golden Globe Award of Advanced Engineer LED lighting brands on Top TenCirculation Channels and Top Ten Engineering Channels”.

3.3.3.5 Capital Capability

Strong capital capacity can provide a solid foundation for a company’s upgrading.By accumulating internal capital, listing and financing, operating capital reasonablyand so on, a strong capital capacity plays a significant role in a company’supgrading. As shown in Table 3.24, NationStar has a strong profitability andinternal capital accumulation.

In recent years the company performs well in the current ratio, quick ratio, assetliability ratio, interest cover ratio, indicating a strong solvency. Such a goodfinancial situation guarantees the sound operation and development of the company.

Financing from the market is essential in funds raising, increasing and renewingof technical equipment, and scale expansion of the company and market. NationStarraised over 1.54 billion by listing on Shenzhen Stock Exchange. It has used the fivehundred million in1.54 billion for four projects: the project of new technical

Table 3.23 NationStar sales districts and markets in 2013. Resource: NationStar Annual Report

Market segment Domestic: 80.63%; overseas: 19.37%

Market component (Revenue proportion) Epitaxial Chips: 0.26%; LED Devices: 62.54%;LED Component: 17.06%; Lighting and others: 20.14%


innovation of surface-mount light-emitting diode, the project of technical trans-formation of high power LED and LED light source module, the project of LEDback light technology reform, and the project of key technology and industrial-ization of semiconductor lighting lamps. These projects will increase Chip LED 200million per month, 40 million PLCC LEDs per month, an annual output of 120million high power LEDs and 12 million light source modules for the company.These sharply improved the advancement and quality of products. In August 2010,using the rest of the fund which was 17.17 million yuan, NationStar purchased theusing right of an area in Chancheng, Foshan City, which covered a total area of16805.23 m2. And 132 million yuan will be spent in building a new plant area there.In the new plant, NationStar will invest 2.24 million yuan to implement the newTOP LED manufacturing technology and industrialization projects. The raising andproper using of funds provided a crucial material security for enterprise upgrading.

The development of NationStar has had no funds from international capital yet.But in 2011, NationStar cooperated with Nanyang Xichen science and TechnologyCo, Ltd and these two companies jointly established the Baoli Vanadium Scienceand Technology Ltd. The current exploitation of Henan province’s largest vana-dium ore will bring greater impact on the performance. Furthermore, in order tosupplement cash flow, the company plans to issue less than 500 million yuan bondsand borrow from the bank for a loan of 1.3 billion yuan. Thanks to the partner’stechnical patents, mineral resources, local government support and other advan-tages, this investment can exert good effects on the company’s capital operation.

3.3.3.6 Management Capability

As a leading enterprise, NationStar has gradually fostered excellent managementskills. It introduced Japan’s advanced process management system and qualitymanagement methods. Thanks to its information system, it has created an advancedmanagement system. In addition, NationStar also focuses on the management oftalents, suppliers, and partners, ensuring its normal operation.

Table 3.24 Capital accumulation of NationStar (2007–2013). Resource: According to thecompany’s annual report

2007 2008 2009 2010 2011 2012 2013

Operatingincome(10,000 ¥)

44,386 56,672 62,791 87,746 107,563 94,797 114,237

Net profit(10,000 ¥)

6,501 10,967 11,804 14,773 12,050 3,760 10,338

Profit margin(%)

14.65 19.35 18.80 16.84 11.20 3.97 9.05


Perfect management is the quality guarantee of hyperfine and large-scaleSMD LED packaging. Having been cooperating with Japan Sanyo Electric Co.,Ltd. for more than 20 years, NationStar has not only mastered the advanced LEDpackage technology, but also set up a complete process management system andquality management methods that are in line with international criterion. Thecompany has set up perfect enterprise management system which has independentsystem of production, supply and marketing. A series of effective rules and regu-lations have been formed according to the accumulated management experience.The company has passed a number of international certifications and establishedERP management system.

For the management of talents, NationStar has its own unique advantages. Atpresent, the R&D center has a technology development team of more than 200talents, including 6 doctors, 12 senior engineers (3 with professor level) and morethan 30 masters. In addition, the company has more than 300 professional tech-nicians with bachelor degree or above (with famous college graduates accountingfor over 60%) in many units such as equipment technology, quality technology,process technology and computer technology. The company has also taken a seriesof measures to strengthen the construction of talents team, such as scientific humanresource allocation with extensive recruitment and training, flexible salary policy bytaking performance evaluation mechanism, professional and technical employmentsystem, construction of “second channels” for professions with a professionaltechnical duty appointment system, cultivation of all-round talents by strengtheningthe construction of R&D, establishing Post-Doctoral Research Center, and gener-ating harmonious corporate culture to retain talents.

It is worth noting that, NationStar, an originally state-owned enterprise foundedin 1969, has successfully transformed into a private-owned joint-stock company.The smooth Management Buy-Outs (MPOs) reflects the outstanding operationalcapabilities of top managers. After restructuring the corporate system, withdrawingstate-owned shares, inviting the rich to join in, and cleaning up employee shares,Wang Yaohao and the other two top-managers have developed NationStar intoChina’s first listed enterprise in LED packaging field.

3.3.4 The Industrial Cluster of Enterprises Promotesthe Upgrading of NationStar

Foshan city, wherein NationStar is located, is an important base for producing anddeveloping traditional lighting sources in our country, which has formed a completeindustry chain of LED manufacturing equipment, chip, package, applicationproducts production and so on. In 2009, the gross industrial output value ofindustrial cluster in Foshan was over 10 billion, and the number of related upstream,midstream and downstream enterprises was over 400. High-tech enterprises in theelectric light resource industry reached 45, taking up 9.5% of the city’s total


high-tech enterprises. Foshan has built 5 provincial technology research centers inthe field of Electric Light Resource. NationStar, Foshan Electrical and Lighting CoLtd, Asahi Optoelectronics, Yusheng photoelectric are the local champions of theindustry of LED in Foshan.

3.3.4.1 Innovation Network Developed Within the Cluster PromotesEnterprise Upgrading

In Foshan, to fully maintain the advantages of former electric lighting resourceindustry, Nanhai district has gone ahead and built several bases includingGuangdong Financial High-tech Service Area, Nahai Economic DevelopmentZone, Luocun New lighting resource industrial base and so on for the developmentof semiconductor lighting industry. Besides, it has established the whole semi-conductor lighting industry chain from chip researching, equipment manufacturing,LED epitaxial wafer and chip manufacturing, high-power package, applicationproduct developing, testing and producing, product testing to market circulating. InChancheng district of Foshan, the amount of patent applications in the first threeseason were 2037, 50% higher than last year. The amount of the patent applicationsof invention were 336, 40% higher than last year. The number of patent autho-rizations was 178, 30% higher than last year.

Foshan also actively promotes the combination of industry, academy andresearch. For example, it helped to locate the Guangdong Research Institute ofXi’an JIAOTONG University in Foshan Chancheng district, making full use of theopportunity of international science and technology cooperation between ProvincialScience and Technology Department and CIS countries and actively undertakingand configuring the international resources to organize some new public innovationplatforms. In terms of intellectual property alliance strategy, Chancheng district hasconstituted a complete organism of intellectual property alliance system and hasformed regionally industrial innovation chain with the “Five-in-One” model oforganization, technology, patent, criterion and market, five major leagues.

Besides, Nahai district has introduced the cutting-edge semiconductor lightingtechnology team at home and provincial semiconductor lighting industry-academy-research innovation league, including ten national key research institutions like SunYat-sen University, Peking University, Tsinghua University and SemiconductorResearch Institute of Chinese Academy of Science. In 2007, 19 colleges andenterprises jointed together to establish “Digital Manufacturing EquipmentIndustry-Academy-Research Innovation League”, promoting the integration ofinnovative resources and systems and pushing forward the equipment manufac-turing industry of Guangdong province into a higher level by promoting the abilityof innovation During the process of upgrading semiconductor lighting industry,Nanhai district of Foshan city assembles has many leading enterprises like AsahiOptoelectronics, NationStar, Qili Electronics. It has established strong industry-academy-research relationship in LED with many universities such as Sun Yat-senUniversity, Huazhong University of Science and Technology, The Hong Kong


University of Science and Technology and so on. Now, it has dozens of LEDrelated enterprises and service institutes, and its output value of 2009 was over 2billion. In September, 2011, United Innovation Center for Semiconductor LightingIndustry of Guangdong province was established, which has further promoted theprogress of development of Technology Innovation Platform for LED industry ofFoshan.

3.3.4.2 Cooperation Between Cluster Enterprises Promotes CommonUpgrading

Joint action among cluster enterprises can transform the situation that each enter-prise is fighting alone into a concerted force, and reach advanced resource com-plementary in a greater degree and improve the cluster effect. Industry association isthe primary manifestation of enterprise joint action. To promote corporateupgrading, it provides advanced technology and management innovation ideas andinformation by organizing and learning from outstanding domestic and overseascounterparts, participating in professional product exhibition and so on. On May20th, 2009, Nanhai Electric Lighting Industry Association (in Foshan) was formallyestablished. At present, this association has more than 100 enterprises, coveringfrom the electric lighting and lighting accessories from upstream to downstreamindustrial chain in all aspects, coordinating and promoting the development of theentire industry. This association has organized 57 activities to create regional brandin this two years. At The 16th Guangzhou International Lighting Exhibition held inGuangzhou Pazhou Convention and Exhibition Center, Nanhai electric lightingindustry association organized 22 member companies to participate in this exhi-bition and display their products in Nanhai brand museum, attracting the attentionof a large number of domestic and foreign merchants, which was conducive to theinternational market expansion of the member companies. On March 13th, 2012,the first domestic LED enterprise alliance standard, the Packaging Logo standardsfor LED Lighting Product in Foshan Union, was set by the Foshan Institute ofTechnical Standards, Foshan Lighting Association, Shunde Lighting Association,the United Nations Star LED and other leading enterprises. This standard aims atthe common development of LED packaging identification standards, acceleratingthe upgrading of enterprises and industry by the establishment and enforcement ofthe standardized alliance.

These joint actions also enhance the confidence of enterprises. When enterprisesget the support for the industry from cluster and government, they can make betteruse of their advantages and find better partners, which benefit the acceleration ofenterprise upgrading a lot.


3.3.4.3 Institutional Environment Provides Good Conditionsfor Upgrading of Cluster Enterprises

Foshan government provides good institutional environment for the development ofcluster enterprises. In February, 2010, the establishment of LED IndustrialDevelopment Joint Conference System in Foshan completed the institutionalenvironment of LED industry. Foshan government released many encouragementpolicies, which greatly promoted the development of LED industry. In February2012, to improve the resilience of Nanhai LED industry, Nanhai Entry - ExitInspection and Quarantine Bureau assisted electric lighting enterprises in buildingup LED industry alliance by organizing “Enterprise Service Year” activity andcontinued setting up a green channel for enterprises which have high credit ratingand improving the releasing speed by technical means to shorten demurrage time.As the leading enterprise of LED package, NationStar also benefits from a numberof subsidy policies and gains strong supports from government and related insti-tutions, which are conducive to the development of original industry and acceleratethe expansion of international market.

3.3.5 NationStar’s Upgrading in Response to the Changeof Market Environment

3.3.5.1 The Introduction of Energy Conservation and EmissionReduction Policy Promotes the Development of GlobalEnergy-Saving Lamps and LED Products Market

Low carbon economy has become the trend of global economic development. Sincethe conception of low carbon economy was put forward in 2003, many countriesaround the world have joined the ranks of energy conservation and emissionreduction, improving resource utilization efficiency by means of energy technologyinnovation and so forth to achieve low energy consumption, low pollution, lowemission and high efficiency. Under such general background, lots of countriesannounced the ban on selling filament lamp, showed as Table 3.25.

China also released the road map of disusing filament lamps officially inNovember 2011 and planned to obsolete filament lamps gradually in 5 years.Behind the disuse of filament lamps is that government’s policy support ofenergy-saving lamps and LED products which greatly drove the market-oriented ofthese energy-saving products. In February 2013, 6 ministries and commissions,such as National Development and Reform Commission, Ministry of Science andTechnology, Ministry of Industry and Information Technology, Ministry ofFinance, Ministry of Housing and Urban-Rural Development, and GeneralAdministration for Quality Supervision and Inspection and Quarantine, jointlyestablished Semiconductor Lighting Energy-Saving Industry Planning, accelerating


the speed of domestic environmental protection, energy conservation and emissionreduction from the aspect of policy. As shown in Fig. 3.14, government policiesdramatically stimulate the consumer demand for LED application market in dif-ferent periods.

Table 3.25 Time of the ban of filament lamps in countries. Resource: Sorted by secondary data

Year Country(region)

Concrete actions

2010 Australia Prohibit producing filament lamps from 2009 and prohibit usingtraditional filament lamps preliminarily at the latest by 2010

2012 EuropeanUnion

Ban the sale of filament lamps of all wattages from Sept. 2009, in 4stages till 2012

France Ban the sale of filament lamps over 100w from 2009 and filamentlamps of all wattages from 2012

Taiwan,China

Carry out filament lamps cutoff policy and ban the production since2010

Canada Prohibit the use of filament lamps from 2012

Japan Prohibit producing and selling filament lamps of high energyconsumption by 2012

America Carry out the policy of prohibiting the sale of most filament lampsfrom 2012 till 2014

2013 Korea Prohibit the use of filament lamps by the end of 2013

2016 China Ban the sale of filament lamps of all wattages from Nov. 2011,progressing in 5 stages till 2016

2002Constant governmentprocurement of compact fluorescent lamp (CFL).

2008Promotion plan for compact fluorescent lamp0.15-0.2billion lamps every year.100%

1996Green Lighting Program was initiated.

30% penetration rate in 2002

Permeability70% penetration rate in 2002

Increase the penetration rate of CFL in domestic market.

3% penetrationrate in 1996

1995 2000 2005 2010

Fig. 3.14 CFL permeating process in domestic market under policy promotion. Resource GaohuaSecurities Research


In order to promote fluorescent lamp and environmental protection, the nationalgovernment has intensified subsidies to the LED industry. Subsidies are not onlygiven to upstream companies when procuring MOVCD equipment, but also todownstream companies engaging in the “Ten City Lights” project. According to thetechnology development scheme in the 11th Five-Year Plan, semiconductorlighting products development are prioritized, which were supported by 3.5 millionyuan as R&D budget for solid-state lighting. In March 2012, the national gov-ernment has announced a new policy of subsidizing LED, with the product amountreaching 4 million as an initial step. In the next 3–5 years, subsidies towards LEDindustry will reach 8–10 trillion yuan, subsidy rate for end-product price will be 30–50%, and total subsidy will be as high as 16–20 trillion. These subsidy policiesmentioned above have greatly driven the development of LED industry (Figs. 3.15and 3.16).

In 2011, NationStar Semiconductor Technology Co., Ltd, NationStar’s sub-sidiary, has received 60 million subsidies for LED epitaxial chips project. In thesame year, it has also received a batch of 863 special funds of total 3.5 millionreleased by Ministry of Science and Technology, which were 2.5 and 0.996 millionrespectively. The former was used in Large LED epitaxial wafer, tube core andencapsulation technology, while the latter in industrialized preparation technologyresearch of in high efficiency white LED’s epitaxial wafer based on verticalstructure. In February 2012, “Research and Industrialization on New High ThermalConductive LED Substrate and Modular Light Source”, one of the NationStar’s

Fig. 3.15 Average prices of a sapphire and a LED chip from 2009 to 2011. Resource LEDinside,gg-LED, research of ghsl


projects, was awarded a special fund of 10 million yuan to promote the R&D ofrelevant projects.

3.3.5.2 Rising Prices of Raw Materials Lead to the Increasing Costsof Traditional Energy-Saving Lamps, Thus Stimulatingthe Production of LED Lighting Products

In the manufacturing process of traditional energy-saving lamps, trichromaticphosphors and rare earth are the main raw materials in the fittings tubular billets,among which rare earth accounts for 75%. As the raw material costs were all theway up in 2011, the share of phosphor powder in the costs of energy saving lampsshot up to around 60% after the increase of trichromatic phosphor cost, while it onlyoccupied 10% before the increase. Within half of the year, the prices of rare earthand phosphor powder rose almost ten-fold, making the cost of traditionalenergy-saving lamps increase sharply.

In order to cope with the great pressure of sharp rise in raw material prices, manytraditional energy-saving lamp enterprises began to accelerate their transformationto LED illuminating enterprises, thus promoting the development of LED industry.

Fig. 3.16 Growth and prediction of global LED scale. Resource IEK, R&D department of Ri XinSecurities


3.3.5.3 Overcapacity of Domestic LED Chips Stimulatesthe Application Market in the Downstream of the IndustrialChain

With a series of preferential policies issued by the government, such as a MOCVDdevice able to receive a subsidy of more than 300 yuan from the government, manyenterprises purchased a lot of MOCVD devices and invested heavily in chip pro-jects for the sake of commanding point, only to cause the overcapacity of LEDchips in the industry. According to the research of Gaogong LED, more than 80enterprises in China ordered about 3,000 MOCVD devices in early 2011, andaltogether 327 MOCVD devices were installed at the end of 2010, but one afteranother reduced their orders and shipments later. Besides, more than 40 Chineseenterprises planned to develop the sapphire production capacity of 330 million TIEwhich equal to two inch equivalent, while the Gold Sun Global LED Team pre-dicted that the global demand of sapphire would not reach 70 million TIEs in 2011,so the sapphires and LED chips will be oversupplied. According to Figs. 3.17 and3.18, the average prices of a sapphire and a LED chip from the 3rd quarter of 2009to the 2nd quarter of 2011 further reflected the situation of industrial oversupply.

In the meantime, the application of LED market has a broad developing pro-spect. In 2007, global LED industrial scale reached 6.85 billion dollars, and someagencies predicted that global LED industrial scale would reach 12.5 billion dollarsin 2011, with the industrial compound growth rate up to 16%. And at the end of2009, NationStar established its LED lighting division which specialized indownstream LED application products, such as LED, light source module, andextended to LED lighting application. What’s more, the LED lighting division wasupgraded to the branch company of Foshan NationStar Co. Ltd in June, 2011,responding to the LED lighting application market.

R&D cost R&D contribution income

Fig. 3.17 R&D cost and operating income in 2007–2010 (in million NT dollars)


3.3.6 Findings

3.3.6.1 The Enterprise Determines Its Upgrading Direction Accordingto the Market Environment Changes

Environmental factors such as rising costs, policy guidance, changes in industrydemand, etc. have an effect on the enterprise upgrading direction. NationStarobserved and analyzed the environmental change, grasped the upgrading oppor-tunity, and adopted the proper upgrading pattern and method. With the change ofmarket demand and policy guidance, LED illumination application has graduallybecome a new growth point of the industry development. NationStar has alsoextended to LED chips and illumination application and taken it as the upgradingdirection.

3.3.6.2 Manufacturing Capability and Technological InnovativeAbility Are Critically Important in Enterprise Upgrading

For a manufacturing enterprise, manufacturing capacity is the foundation of theenterprise development while the technological innovative ability is the key for theenterprise to form core competitiveness in the dynamic environment.

The leading manufacturing capacity and technological innovative ability enablethe enterprise to manufacture competitive products and provide competitive ser-vices. That is to say, when facing fierce competition, the stronger the manufacturingcapacity and technological innovation ability are and the solider the foundation is,

Annual revenue (unit: NT $1 million)

Fig. 3.18 Atotech’s annnual revenue (2001–2011)


the stronger the enterprise’s ability to defeat the competitors and achieve sustain-able development.

With excellent manufacturing capacity and technological innovative ability,NationStar has its core of competitiveness. Decades of industrial experience con-tributes to its strong production capacity in the field of LED packaging. The salesvolume of hi-tech SMD LED product occupies the maximum proportion among allthe enterprise businesses. Many products have reached international advanced level,filled a domestic gap in this field. All these capabilities lead to NationStar’sdominant status in the LED packaging industry.

3.3.6.3 Marketing Capabilities and Capital Capacity Playan Increasingly Important Role in Promoting EnterpriseUpgrading

With the intensification of market competition, marketing capability plays anincreasingly important role in the development and upgrading of enterprises. As theNationStar focused on LED packaging and many other manufacturing technologiesin the early stage, it lacked marketing capability. But in recent years, the Nationstarhas paid more attention to cultivating this ability.

Self-capital accumulation ability reflects the level of profitability, solvency,liquidity and any other aspects of the enterprises in the process of business oper-ating. While external financing capacity will help enterprises win more financialsupport, which can help the enterprises more smoothly upgrade. For the LEDindustry and other emerging high-tech industries, the sound capital input isbecoming increasingly important because enterprises often need to purchase a largenumber of high-valued equipment to carry out production, and further expand toachieve economies of scale and thus reduce costs. NationStar in recent years hashad impressive profitability and was successfully listed in 2010. These provided thecompany with financial support from the capital market and venture capital sector,thus tiding it over the cash flow difficulties, supporting it to expand production,R&D, sales and other areas of investment, and finally promoting its upgrading.

3.3.6.4 The Improvement of Industrial Cluster Environmentand the Promotion of Enterprise Transformationand Upgrading Are Mutually Reinforcing Each Other, WhichIs an Interactive Process

Some of the industrial cluster characteristics, such as location advantages, culturaltraditions, convenience, resource sharing, innovation platform and other factors, areextremely important for enterprise and cluster upgrading.

The enterprise in the case is in Foshan LED industrial cluster. The enterprises,government agencies and related institutions in the cluster are committed to creatinga positive innovation network, in which enterprises can get the best platform for


innovation and stimulation of the entire cluster. In these initiatives and policiesrelated to innovation, business upgrading has been significantly promoted. Thecluster enterprises enhance innovation, and it in turn further promotes the sharing ofinnovative resources within the cluster to further improve the innovation platform,as well as the introduction of more innovative policies and performance opti-mization, which can form benign interaction. The formation of enterprise alliance inthe cluster is also very important. Joint action can often have better effect thanseparate action, and can drive the performance of the entire industrial cluster,enhance the overall strength, and form the influence of regional brand. Thefavorable institutional environment will not only stimulate innovation of companiesin the cluster, but also upgrade corporate competence, facilitating them rapidly toembed in the global value chain and get higher value-added.

3.4 Rapid Growth of Taiwan’s Atotech

Since 2007, global economy has suffered a heavy blow from the financial crisis.A number of enterprises underwent business gloom and even bankruptcy as well asclosure due to the market depression and capital-chain rupture. People are shockedby the bankruptcy of many large toy processing enterprises, represented by theSmart Union Group Holding Ltd. in Dongguan city, Guangdong province. Andpeople are much concerned about the low tolerance for risks of these low-endmanufacturers in the global value chain in the turbulent economic environment.

In contrast to enterprises like Smart Union, Atotech Taiwan Ltd. (hereafterreferred as Atotech) increased investment heavily in R&D even in the financialcrisis, leading to a 10.5% increase of annual revenue than 2006. Its technologicalcompetitiveness and sustainable development in the depressed market, according tothe author’s research, is mainly attributed to the independent innovation as well ascorporate transformation and upgrading in manufacturing, R&D and branding.

3.4.1 Brief Introduction of Atotech

The author’s research team carried out surveys and interviews on Atotech May17th,May 18th, 2006, November 17th, 2008 and November 30th, 2011. The team hasinterviewed Dr. Huang Shenglang, general manager, Mr. Luo, director of R&D,and Mr. Wu, deputy manager of quality assurance. The company is a subsidiary ofAtotech Technology Group, part of TOTAL S.A, a French multinational companyand the fourth-largest international oil and gas major. Atotech is the global leader inplating chemicals, equipment and services that provides specialty chemical pro-cesses and equipment for the printed circuit board (PCB), IC-substrate and semi-conductor industries as well as the decorative and functional surface finishingindustries. Headquartered in Berlin, Germany, the Group operates in more than 40


countries in Asia, America and Europe, with 40 regional service centers, 16 fac-tories and 2 equipment factories. With main office in Taipei, Atotech Twaiwan Ltd.(hereafter referred as Atotech) hosts two branches in Taoyuan city and Tainan city,one production plant in Guanyin district, Taoyuan city and one technological center(TechCenter) in Kaohsiung city.

Moreover, Atotech offers a series of solutions, including new equipment plan,software upgrading and systematic training of the client side knowledge. Thecompany provides such technical services as system maintenance, calculation ofoperation cost and the budget price, investment and financial consultancy,cost-benefit analysis, environmental and ecological assessment, waste waterredemption, process optimization plan and efficiency analysis of operational cost.

3.4.1.1 Management Philosophy

Prospective and Globalized Management Philosophy Enhancing IndustrialImage Globally

Thanks to its prospective and globalization-oriented business philosophy, Atotech,based on its TechCenter, consistently develops and introduces globally cutting-edgecircuit board and wafer packaging technology to its end-customers. Suchco-development helps customers upgrade their international competitiveness andthus receive the certification from the international OEMs. Over the past years,Taiwan PCB Association has enhanced the overall image of the island’s PCB andwafer packaging industry since its establishement.

Furthermore, the great achievement generated by the first TechCenter pushedAtotech to set up another TechCenter in Kaohsiung city in 2008 with an investmentof two million Euros. Cooperating with Taiwan’s screws and fasteners industry, itwas supposed to advance the future industrial development of Taiwan.

Five Philosophies Committed to Providing Customers with Quality Services

The first philosophy is to provide diversified products. The sales of the newlyintroduced product must account for over one fourth of the annual turnover. Itmeans that the life cycle of each product lasts for only 4 years. Therefore, thecompany has to constantly develop new products and new technologies to enrichthe product lines and open up new markets. The company tailors its diversifiedproduct mix to the customer’s production technology to meet the demands of themarket.

The second philosophy is to maintain superior quality. The products manufac-tured by Atotech must pass a variety of strict quality inspection with the highestproduction standards, which drives all employees to engage in the continuousimprovement process to guarantee the product quality. The demand-meeting and


scheduled delivery of products and services help customers reduce production costsand thus enhance market competitiveness.

The third philosophy is to provide punctual delivery. The globalization ofproduction, delivery systems and regionalization of transport jointly contribute toAtotech’s punctual delivery of products to its end-customers. It also collaborateswith customers to realize flexible manufacturing and speed up the transactionprocess to save costs in circulation and inventory and to realize speed economies.

The fourth philosophy is to improve services. Decades of manufacturingknow-hows accumulated in the specialized field and the professional technical teamof engineers enable Atotech to provide all-round services for its customers,ensuring that products can be manufactured under the best condition.

The fifth philosophy is to realize environmental protection. The products andtechnologies of Atotech not only meet the quality standards, but also conform to theenvironmental protection requirements. Facing the increasing global demands forresources reservation and environmental protection, Atotech not only understandsthe environmental standards and trends around the world, but also integrates withthe direction of product R&D, providing not only green environmental products tocustomers, but also transferring environmental protection technology to customersso as to help customers realize clean production and reduce environmental pro-tection costs and social costs.

3.4.1.2 Business Strategy

Integrated Marketing Strategy

In order to promote the company’s ideas, products and technology, Atotech attachesgreat importance to the depth (connotation) and breadth (variety) of productadvertising, and regularly follows up the effect of advertising for further adjust-ments. The company not only publishes product advertisement, academic articlesand technical information on printed media such as professional magazines,newspapers and news reports, but also regularly mails printed DM to existing andpotential customers so as to facilitate information communication and improvecorporate image.

Furthermore, Atotech organizes regular seminars, touring customer visits,technical symposium, regional distributor meetings and customer strategy alliancesactivities, new product launches and promotion of industry associations. It alsoparticipates in various exhibitions and community exchanges at home and abroad.Besides, it positively collaborates with customers in strategic alliance to enhanceR&D capabilities and jointly develop new products as well as new technologies.The number of technical papers published by Atotech, written by itself or jointlywith its partners, ranks top in the industry every year. In addition, it holds weeklytechnical seminar lasting for three months every year and invites customers, R&Dstaff and marketing personnel to exchange technology information.

3.4 Rapid Growth of Taiwan’s Atotech 151

Whole-Staff Marketing to Raise Customer Satisfaction

In recent years, the global information market has been affected by the economicdownturn and subsequently the majority of customers reduced their orders. Atotechthen implemented the “Whole-staff Marketing Campaign”, encouraging allemployees to increase interactions with customers, strengthen mutual communi-cation and improve services so as to retain customers.

E-Commerce and Partnership Management for Customers

Atotech has established a broad marketing network and a long-term cooperativerelationship with Taiwan’s top-30 PCB manufacturers and overseas clients inEurope, America, Oceania and Asia. Atotech has been regarded as one of the threestrategic-alliance partners of Compeq Manufacturing Co. Ltd., the leader inTaiwan’s PCB industry.

3.4.1.3 R&D Capabilities

Basic Features

Founded in 2000 in Taiwan, the company has set up a production base the next yearand realized volume production at the end of 2002. In 2004, it invested 6 millioneuros (about NT $180 million) in setting up a semiconductor TechCenter inGuanyin district, Taoyuan city. This TechCenter strived for independent R&D andcommitted to technology upgrading of Taiwan’s electronics industry. The secondTechCenter metal surface was established in 2008, with an input of 2 million euros,in Environmental Science and Technology Park in Southern Kaohsiung, therebyserving customers in the south area and enhancing the international competitivenessof Taiwan’s automotive, screws and electronics industry. The third TechCenter wasconstructed with around 4.5 million euros to serve the semiconductor industry, inan effort to constantly develop and introduce global cutting-edge technologiesincluding the green technology.

Atotech allocates over 7.5% of its annual turnover every year to supportTechCenters, which enables the company to receive an annual R&D tax rebate of30% from the government. The annual R&D contribution remains at a high level.For instance, R&D cost in 2010 reached NT $17 million and R&D contribution wasas high as NT $235 million, accounting for 7.8% of its operating income (seeTable 3.26 and Fig. 3.17).


Major Tasks

The positioning of TechCenters in Taiwan is different from those in other regions.In terms of the task division between headquarter and subsidiaries, the former is tocarry out fundamental researches (e.g. nanotechnology) and the latter is to transferthe fundamental research results into market products and complete the back-enddevelopment work according to customer needs. In terms of region, TechCenters inGermany, U.S. and Japan focus majorly on the development of cutting-edge for-mula while those in Taiwan strive to introduce overseas foresighted technology,develop high-tech products suitable for local demand, and then carry out sustainedR&D for volume production. TechCenters in Seoul, Guangzhou and Shanghai aimmainly at providing technical services and process improvement.

3.4.1.4 Operational Performance

Atotech’s turnover increased dramatically from NT$ 90 million in 1995 to NT$ 300million at the end of 1997 and over NT$ 800 million in 1998. Such growth rate wasfar higher than other global affiliates of Atotech Group and thus received actualencouragement from the Group’s head office, including an increase of investedcapital from NT $5 million originally to NT $60 million and a new establishment ofproduction plant in Taiwan in 2000 with an total investment of more than 38million francs.

From 2003 to 2007, Atotech witnessed a 56% annual increase of employees anda NT $35 per share of annual pre-tax surplus (EPS). From 2004 to 2007, itsreturn-on-equity (ROE) surpassed 55% each year, with an annual tax increase ofover 69%. From 2001 to 2007, the annual compound growth rate reached 8.1%.Despite of the slight decrease of operating income in 2008 and 2009 due to thefinancial crisis, Atotech realized a V-shaped recovery in 2010 (NT $30 million) and2011 (NT $34 million), up by 13% year on year and 10 more times than theprevious decade (see Fig. 3.18).

Table 3.26 Taiwan’s R&D costs and R&D contributions 2007–2010 (in million NT dollars)

Project 2007 2008 2009 2010

R&D cost 64 12 56 17

R&D cost as a proportion of operating income (%) 2.2 0.4 2.1 0.6

R&D contribution 140 150 201 235

R&D contribution as a proportion of operating income(%)

4.8 5.4 7.4 7.8


3.4.2 Atotech’s Path of Progressive Upgrading

3.4.2.1 The First Upgrading: From a Pure-Play Sellerto an Independent Manufacturer

Upgrading Background

As a consequence of the 1997 financial crisis, the global economy suffered adownturn. Taiwan’s economy was deeply affected then, leading to a −1.9% ofeconomic growth in 2001, down to the lowest level since 1997. The PCB industrydropped so dramatically that its gross output value in the world in 2001 was simplyUS $33.9 billion (down by 22.5% year on year) and that in Taiwan was only US$390 million (down by 15% year on year). Such decline intensified the competitionin chemical industry, and as a result, cost leadership and customer responsivenessbecame the key elements of rivalry.

Upgrading Process

In 2001, Atotech invested 38 million francs in the construction of production basein Guanyin district (Taoyuan City, Taiwan), and the production base was positionedas the supplier of equipment and chemical materials for Taiwan’s PCB manufac-turers. Accordingly the company’s business achieved upgrading in the followingfour aspects. Firstly, the close collaboration with customers in production tech-nology enabled it to provide diversified products to meet customer demands pre-cisely. Secondly, encouraging the whole staff to participate in the continuousprocess improvement for product quality ensured the highest production standard ofmanufacturing. Thirdly, the adoption of global production networks, deliverysystems and regional transport contributed to Atotech’s punctual delivery andimprovement of customer responsiveness. Fourthly, the development of highervalue-added foundry business provided OEM services for customers.

3.4.2.2 The Second Upgrading: From a Pure-Play Manufacturerto a Technology Leader


As the increase of labor cost in Taiwan leading to a gradual decline of costadvantage, some industries then transferred to the surrounding countries or regions,leading to the industrial hollowing in Taiwan. And the remaining companies were


struggling to survive in such difficult situation. This forced the government toenhance its policy support in R&D since the 1990s.4

Consequently, Atotech has also underwent some changes, with the first beingstrategic adjustment. Atotech Group has adjusted the development strategy of theGreater China Region. Mainland China would continue to undertake manufacturingbusiness with low labor-cost, Hong Kong would take the advantage of internationalmarketing and financing, and Taiwan would develop as a high-tech base. Thesecond change was the customers’ increasing demand for product quality, perfor-mance and personal designs, which required more rapid and effective technologyand R&D services. Finally, Atotech was aware that Taiwan could no longermaintain its competitiveness as a “volume-production foundry” and only continu-ous development of new critical technologies could guarantee high value-addedcommodities.

Upgrading Process

In 2004, Atotech invested 6 million euros in constructing the first TechCenterdedicated to PCB technology, in Guanyin district, Taiwan. The investment projectsincluded land acquisition, instrumentation, expansion of plant, production ofexperimental lines and environmental equipment. It was Atotech TechnologyGroup’s fourth global TechCenter, following those in Germany, US and Japan.After its establishment, Atotech not only proactively introduced foreign experts, butalso attached great importance to establishing technological alliances with otherenterprises and customers. For instance, it signed technical cooperation programswith 15 PCB companies such as Compeq Manufacturing Co. Ltd., WUS PrintedCircuit Co. Ltd., Asia Pacific Circuits Co. Ltd., and Unimicron TechnologyCorporation. Its co-development of lead-free fabrication technology with AsiaPacific Circuits Co. Ltd. successfully replaced Japanese IC-substrate processingtechnology. Cooperative relationship has also been set up with Taiwan’s AcademicResearch Institutes to develop various processes, chemicals, materials andequipment.

Table 3.27 shows Atotech’s subsequent upgrading and establishment ofTechCenters after 2008, which has contributed to the increase of cumulativeincome. In 2008, the contribution income from R&D reached NT $2 million,accounting for 7.1% of total sales revenue (see Fig. 3.19).

4For example, Taiwan’s Minister of Economic Affairs implemented the Scheme of “IncubationCenter for Taiwan Small and Medium-sized Companies” in 1997 and “Small Business InnovationResearch” in 1999.


3.4.2.3 The Third Upgrading: From a Pure-Play Manufacturerto a Service Provider of Systematic Solution


With the continuous improvement of technology, chemicals industry competitionbecomes increasingly fierce. At the same time, customers have diversified needs,extending their concerns from product price and quality to services.

Upgrading Process

From 2007, Atotech equipped its high-quality and stable chemicals with sophisti-cated control equipment and provided customers with system solutions, includingsystem maintenance, calculation of operation cost and the budget price, investmentand financial consultancy, cost-benefit analysis, environmental and ecologicalassessment, process optimization plan and efficiency analysis of operational cost.Moreover, customers could receive all-round services in their plants from Atotech’sprofessional technical team of engineers. Furthermore, Atotech collected

Table 3.27 Information on TechCenter of Atotech

TechCenterlocation

Time ofinvestment

Time ofestablishment

Investmenttotal

Main services

Guanyindistrict

2004 2004 6 millioneuros

PCB TechCenter

Kaohsiung 2008 2009 2 millioneuros

Surface TreatmentTechCenter, applying toautomobile, aviation,machinery and otherindustries

Guanyindistrict

2011 2012 4.5 millioneuros

Semiconductor TechCenter

Fig. 3.19 Sales revenue of TechCenters (10,000 in NT $)


customers’ problems when using processing equipment and their suggestions inimproving chemicals, thereby carrying out technical promotions in such areas asmaterial specifications, surface treatment technology, new product R&D andenvironmental process. In addition, in-depth communication and exchange waslaunched with customers in automotive industry with appropriate system solutions.Thanks to the above efforts, Atotech upgraded from a chemicals manufacturer to aservice provider which provides designed systematic solutions to users with tech-nology R&D.

3.4.2.4 The Fourth Upgrading: From a System Service Providerto a Low-Carbon Operation Enterprise


In line with the rise of international green awareness, the chemical industry wasfacing the pressure of green transformation. Taiwan government then promulgatedthe Sustainable Energy Policy Program in 2008 and began to study the mechanismof carbon-footprint labels in 2009, requiring local companies to label the amount ofcarbon emissions. the European Union sequentially implemented a series ofinstructions such as ELV, WEEE/RoHS, REACH and EuP/ErP, indicating aincreasingly higher environmental protection requirements for products.Furthermore, the improvement of people’s living standards and the media’sextensive publicity boosted spontaneous environmental activities in communities,gradually affecting people’s environmental awareness.

Upgrading Process

Since 2009, staring with low-carbon operation, Atotech has comprehensivelyimproved product and internal operating process. The company issued the“Environmental Responsibility and Sustainable Development Strategy” report in2011 and implemented the 5R environmental policy namely, reduce, reuse, recycle,research and responsibility. The company’s low-carbon operating system is shownin Fig. 3.20.

In terms of products, Atotech developed a variety of environmentally friendlyproducts, including energy-saving equipment, equipment that can reduce or replacethe use of hazardous chemicals, pollution-free products, and chemical regenerationequipment. These products and services effectively reduce wasted water and pol-lution, save water, energy, equipment and chemicals, reduce scrap rates, therebyachieving cost saving and quality improvements. For example, the company’sHorizon series of energy-saving equipment can help customers reduce 54% ofwater consumption, 6% of electricity consumption, 67% of tankage dirt than tra-ditional equipment, and 67% of chemicals, as a result of which the total processingefficiency increased from 84 to 88%.


With regard to the internal management, Atotech introduced the “green design,green production, green service, green life” concept. The company prioritizes theprocurement of raw materials of green packaging, green design, recycling, lowpollution and energy saving. It regards environmental protection, safety, perfor-mance, product quality as equally important as profit when evaluating the newproduct development, product manufacturing, marketing, transport, utilization,rehabilitation and other parts. It also improves operating procedures and perfor-mance, decrease energy and waste, and carries out integrated recycling and reuse ofwasted energy resources. Finally, it takes regular detection of groundwater, wastewater, rejected material, air pollution and noise, as well as implements managementsystems such as “paperless office”, “green environmental-protection day” andenergy-saving uniforms.

Thanks to the enormous environmental-protection benefits generated byAtotech’s green products, it was rewarded in 2008 with “the Excellent Performancein cleaning wastes and renewable resources, and saving and recycling resources” bythe Environmental Protection Agency of Taiwan Executive Yuan. The companyhas realized pollution-free in its processing technology and chemical products, suchas lead-free and nickel-free cars and environmental-protection bathroom products.Currently, 50 UNIPLATE-code production lines have been utilized in the island,each of which can reduce water consumption by 5200 tons per year. Calculating byNT $10 per ton of water costs and NT $30 per ton of waste water treatment, theseproduction lines can save NT $10.4 million each year.

Figure 3.20 shows Atotech’s low-carbon operating system.

Green technology

Leading the industry to take the lead in the prac ce of green

technological revolu on

The world’s leading

technology

Cost savings, green technology and

quality improvement

Greenchemistry

Make peripheral

equipment clean

Water conserva on Waste water reducing Pollu on abatement Energy saving

Lowering reject rate Economizing raw materials Equipment saving Chemicals saving

Fig. 3.20 Low-carbon operating system of Atotech


Figure 3.21 shows Atotech’s upgrading route.Consequently, Atotech witnesses its continuous expanding of market influence

in Taiwan and ranks among the leading brands in its industry. For example, itsblack oxidation alternative process accounted for 50% of Taiwan’s market share. In2011, the company’s revenue reached NT $3.4 billion (as shown in Fig. 3.22), 37times that of 1995, with an average annual compound growth rate of 23.7%.

Simultaneously, Atotech also witnesses the continuous rising of its internationalcompetitiveness. It successfully passed the international certification of ISO9001quality management system and ISO14001 environmental management system in2002, and OHSAS18001 security management system in 2004. Subsequently,Atotech integrated these three international certifications of management system, asa result of which its Material Science Laboratory conformed to the internationalstandards of IEC/ISO 17025 in 2005 and TAF/ISO 17025 in 2006. And itsAnalytical Laboratory also passed the IEC/ISO 17025 international standards in2007. In Taiwan, among the tens of thousands of enterprises that passed theISO9001international certification, thousands of them conformed to ISO14001,hundreds of them received OHSAS18001, and only several possessed all thesecertifications simultaneously. Atotech is the first Taiwan-funded enterprise

Agency

Subsidiary

corpora on

Independent

produc on

R&D

innova on

System service

1994 1997 2001 2004 2007 2009

role

definition

Low carbon

opera on

Fig. 3.21 Atotech’s upgrading route

oper

atin

g re

venu

e

Fig. 3.22 Atotech’soperating revenue (in NT $0.1billion)


successfully passing all these certifications, which enables it to gain substantialinternational competitiveness.

3.4.3 Implications

3.4.3.1 Three Options of Taiwanese Enterprises

During the author’s interview, Dr. Huang, Atotech’s general manager, pointed outthat under the fierce changes in the economy, technology and enterprise competi-tions, Taiwan’s enterprises have three options. The first one is to shift productionplants to developing regions with lower labor-cost, so as to enjoy cost advantagesand obtain profits. At present, most Taiwan-funded enterprises adopted this strategyand removed their plants to mainland China. The second choice is corporateupgrading. This consists of not only product upgrading for higher value-added, butalso upgrading towards both ends of the value chain, that is, from simple manu-facturing to R&D (upstream) and brand promotion (downstream). Thanks to thesubstantial R&D talent reserves and rapid development of several scientific parks,Taiwan has created perfect R&D environment and thus enjoyed potentials andadvantages in technological upgrading. By comparison, due to the island’s limitedmarket capacity, enterprises perform worse in brand promotion towards Taiwanconsumers, but better towards overseas markets. This is different from mainlandChina. The third option is to remain unchanged, though eventually be eliminatedfrom the market.

Therefore, for enterprises that determined to develop continuously in Taiwan,they must realize that Taiwan could no longer maintain its competitiveness as a“volume-production foundry” and only continuous development of new criticaltechnologies could guarantee high value-added commodities. Atotech is among thesuccessful practitioners adopting this strategy.

3.4.3.2 To Achieve Continuous Upgrading by Avoiding or EvenTranscending Competition Rather Than Engaging in Inputand Cost Competition

Since the office establishment in Taiwan in 1994, Atotech Technology Group hasconstantly improved the corporate management by reorganizing internal structure,human resources management, financial planning and information construction. In1997, its subsidiary, Atotech Taiwan Ltd., was established and obtained operationalautonomy, which enabled it to participate in market expansion, product sales andcompetition. In 2002, Atotech set up a production plant in Guanyin district toachieve self-production and cost competition. In 2004, a TechCenter was estab-lished also in Guanyin district, indicating that the company embarked on aninnovation and R&D road and strived to get rid of competition. From 2009, shifting


its focus to green technology, green services and green living, the company startedto lead the industrial development in Taiwan to go beyond competition, from theperspective of community development and human survival.

To improve competitiveness and realize enterprise upgrading throughlow-carbon operation and environmental protection Atotech’s low-carbon operationis not only reflected in the management philosophy but also implemented in allaspects of the enterprise, ranging from green design, green production, green ser-vice to green life. Every place reflects the company’s low carbon culture. Suchprospective environmental awareness also affected the customers successfully. Atpresent, Atotech’s products can effectively assist customers in energy saving andemission reduction, provide alternatives to hazardous chemicals, and offernon-polluting products and chemical regeneration equipment. By launching a seriesof green products, Atotech enables its customers to reduce production costs andpass international environmental certifications so as to sell products successfullyoverseas. And this low-carbon environmental protection strategy ensures Atotech tosurpass its competitors sustainably.

3.4.3.3 “Car-Racing Theory” and Crisis Awareness

As a consequence of financial crisis, lots of companies underwent cash-strandbreaks. Atotech, instead, adopted effective approaches in time thanks to the oper-ation of its risk control department and thus grew steadily in a downward market,which attributes to the strong crisis awareness of its entrepreneurs. Dr. Huang,general manager of Atotech, proposed the “Car Racing Theory” for corporatecompetition. He believes business competition is just like car racing. Operating anenterprise in a stable environment is just like competing with your rivals in astraight track and it’s extremely difficult to overtake even just one parking spacedistance. Curve overtaking is the only choice for you to get ahead of your rivals. Itis the same for business operation. Only when an enterprise is undergoing changesand being placed in a turbulent market altogether with its rivals, can it take thechance and get ahead of its rivals. Therefore, companies should have a sense ofcrisis and recognize that a “calamity” is also an “opportunity” to surpass theircompetitors. Only by adhering to this strategy can enterprises avoid risks in normalmanagement and response positively in crisis and seize opportunity.

3.4.3.4 Entrepreneurship

Driven by the entrepreneurship, Atotech captures information about changes inindustry and policy much faster than its counterparts, thereby taking upgradingactions earlier and securing its upgrading results more effectively. Suchentrepreneurship can be found in two aspects including the top management team(led by general manager Dr. Huang) and the innovation-oriented strategy of theenterprise. It is mentioned by Joseph A. Schumpeter, the Austrian economist, in


The Theory of Economic Development that entrepreneurs should have visions tofind potential profits, keen insights to identify and seize opportunities, courage totake risks, and capability to organize and allocate the company’s internal andexternal resources. These four entrepreneurial characteristics can be found in Dr.Huang who has substantial professional knowledge and domestic and internationalmanagement experience.

References

Mao, Y.-S., and Dai, Y. From OEM, ODM to OBM: A Study on Business Self-Innovation Pathunder Emerging Economy [J]. Economic Management, 2006(20): 10–15. (in Chinese)

Zhang, H. Global Value Chain Theory and China’s Industry Development Research [J]. ChineseIndustrial Economy. 2004(5): 38. (in Chinese)


Chapter 4Case Analysis of Industrial Regions,Clusters and Parks

4.1 High-Tech Industries in Shenzhen Characterizedby Independent Innovation1

In 2008 Forbes ranked cities that had experienced substantial changes in China.The accompanying article illustrated that this country has been undergoing thelargest scale of industrialization process in human history. This ranking was basedon the gross domestic product (GDP), the market size and the changing degree ofthe city. The top-10 cities involved Shenzhen, Guangzhou, Hong Kong, Shanghai,Beijing, Dalian, Nanjing, Xiamen, Tianjin and Chongqing.2

Shenzhen has shown a sustainable development trend in recent years. Data of2015 indicated that Nanshan District, one of this city’s districts, achieved the localGDP of 346.41 billion yuan in 2014 (up 9% than the previous year) and the percapita GDP of 308.7 thousand yuan (up 8.5%). Such per capita GDP was 2.1 timesthan that of the city’s average level, surpassing that of Hong Kong and close to thatof Singapore. With outstanding high-tech industries in Shenzhen, Nanshan districthas been well-known as the strongest rival of Silicon Valley. Statistics revealed thatits research and development (R&D) input in 2014 exceeded 20 billion yuan,accounting for 5.8% in the local GDP. This has contributed over 75% to thescientific and technological (S&T) upgrading of this city, close to the level ofdeveloped countries. In the future the local government will continue to attach greatimportance to setting up the international maker center, gathering high-end inno-vative resources, and speeding up the construction of international knowledgeinnovation community. To attract more overseas graduates and talents returned tocarry out innovations and startups in Nanshan district, for instance, the InternationalMaker School was established in 2014 jointly by the Chinese Academy of Scienceand Steinbeis-Hochschule Berlin.

1According to the May 23, 2007 in Shenzhen research and public data collation.2Source: December 17, 2008, Yangtze Evening News.


163




4.1.1 Basic Situations and Characteristics of ShenzhenHigh-Tech Industries

4.1.1.1 Rapid Development, Outstanding Economic Contributionsand Strong Competitiveness of Shenzhen’s High-TechIndustries

Since 1992 Shenzhen government has endeavored to transform the processing andmanufacturing industry to the high-tech industry. It has achieved satisfied perfor-mances with an average developing speed of 20% roughly over the past 22 years.Take the data in 2012 as an example. The output value of high-tech products was1.29 trillion yuan, increased by 8.9% year on year. Of this output value, thehigh-tech products with independent intellectual property rights was 788.84 billionyuan, accounting for 61.0% and 0.2 percentage points higher than the previous year(see Table 4.1). Exports of high-tech products rose to US $141.22 billion (seeTable 4.2), accounting for 52.04% of the city’s total exports (US $271.37 billion).The above outstanding economic achievements indicated the high-tech industry hasbecome the major force of economic development of Shenzhen.3

As shown in Table 4.2, the high-tech industry in Shenzhen has enjoyed sus-tainable rapid development. In 2010, its output value exceeded 1 trillion yuan forthe first time, up 19.61% compared with the previous year. The output value ofelectronic information (E-information) products takes up 80% of that of high-techindustries; and the new energy, new materials and other strategically emergingindustries grew rapidly, increased by over 20% year on year.

High-tech industries in Shenzhen has enjoyed highlighted advantages in China.By the end of 2013, over 2,900 state-approved high-tech enterprises settled in thiscity. Among them, 70% have been engaging in the information technology(IT) industry and 15 have been placed inside the top-100 E-information enterprisesin China. The applications of international patents under the Patent CooperationTreaty (PCT) in 2013 exceeded ten thousand for the first time, accounting for48.1% of the total domestic applications. Such applications have ranked first amongthe country’s large and medium-sized cities for 10 consecutive years, 3.4 times and11.3 times more than that of Beijing and Shanghai respectively. In 2013, Shenzhenhad six enterprises on the top 10 list of enterprises in terms of the number of PCTpatents, with three high-tech companies ranking the leading positions, each owningover one thousand applications. They are Huawei Technologies Co. Ltd. (here-inafter referred to as “Huawei”), Zhongxing Telecommunication EquipmentCorporation (hereinafter referred to as “ZTE”) and Shenzhen city TencentComputer System Co. Ltd. (hereinafter referred to as “Tencent”).

3Source: “Shenzhen 2007 National Economic and Social Development Statistics Bulletin”,Shenzhen Municipal Bureau of Statistics.

164 4 Case Analysis of Industrial Regions, Clusters and Parks

4.1.1.2 Private Enterprises Have Become the Main Forcein the Development of Shenzhen’s High-Tech Industries

As a booming city, Shenzhen lacks prestigious universities recognized by thenation’s Ministry of Education and famed research institutes supported by the

Table 4.1 Output value of high-tech products with independent intellectual property rights inShenzhen (1999–2012). Source Shenzhen Bureau of Statistics

Year Output value of high-tech products withindependent intellectual property rights(billion yuan)

Year-on-yeargrowth (%)

Proportion in the outputvalue of all high-techproducts (%)

1999 38.336 46.8

2000 53.454 39.37 50.2

2001 74.563 39.49 53.7

2002 95.448 31.00 55.8

2003 1 38.664 45.28 55.9

2004 1 85.309 33.35 56.7

2005 2 82.417 33.35 57.8

2006 3 65.329 29.40 57.9

2007 4 45.439 21.90 58.6

2008 5 14.817 15.60 59.1

2009 5 06.210 −1.70 59.5

2010 6 11.589 20.82 60.1

2011 7 22.036 18.05 60.8

2012 7 88.841 9.25 61.0

Table 4.2 Imports and exports of high-tech products in Shenzhen (2001–2012). SourceShenzhen Bureau of Statistics

Year Total imports and exports of high-techproducts (billion US dollars)

Imports (billionUS dollars)

Exports (billionUS dollars)

2001 23.35 757 11.98 796 11.36 961

2002 33.44 119 17.75 195 15.68 924

2003 51.58 146 26.43 846 25.14 300

2004 69.28 262 34.22 565 35.05 697

2005 88.68 653 41.59 435 47.09 218

2006 115.36 580 54.01 421 61.35 159

2007 134.63 800 62.09 300 72.54 500

2008 140.99 495 61.62 273 79.37 222

2009 153.45 520 68.43 409 85.02 111

2010 197.70 075 88.97 407 108.72 668

2011 224.16 000 99.36 000 124.80 000

2012 252.06 532 11 0.84 532 141.22 000

4.1 High-Tech Industries in Shenzhen Characterized … 165

Ministry of Science and Technology. The growth of its high-tech industry has beenrelied mainly on private enterprises rather than foreign multinationals. In otherwords, the R&D expenditure, with a small portion from the municipal fiscalinvestment in S&T, mainly comes from the enterprises’ sales revenue. Statisticsrevealed that in 2012, 43.898 billion yuan was spent on the R&D of high-techproducts, 2.81 times more than that in 2007. And by the end of 2013, a total of63 registered patent agencies had been approved by the State Intellectual PropertyBureau in Shenzhen, an increase of 12 than the previous year.

Figure 4.1 shows the relatively large-scale high-tech enterprises in Shenzhen,including 1 enterprise with the output over 100 billion yuan, 3 over 50 billion yuan,11 over 10 billion yuan, 59 over 1 billion yuan, and 393 over 100 million yuan. Thetop three involve Huawei, ZTE and Tencent, followed by Shenzhen KingdomSci-Tech Co., Ltd. and Shenzhen Coship Electronics Co., Ltd.

According to the Research Report on Industrial Transformation and Upgradingof Listed companies (2014) released by the Shenzhen Securities RegulatoryCommission, Shenzhen, as one of the special economic zones, has witnessed threedecades of development, during which both the pillar industries and large-scaleleading enterprises have expanded through market competition. This has fostered afavorable market environment and culture, leading to an extensive social consensusthat industrial transformation and upgrading could be facilitated by marketapproaches. On one side, private firms have predominated the transformationprocess of listed companies. In fact, among the current 89 listed companies inemerging industries, 74 belong to private holding companies or companies withoutactual controllers in disclosure, with the remaining the state-owned holding com-panies. On the other side, very few corporate transformations in Shenzhen gotgovernmental fiscal support, implicit guarantees or even direct administrative pol-icy, which often occurred in some other cities in China yet. For instance, the total

1 enterprise>100 billion RMB

59 enterprises > 1 billion RMB393 enterprises > 100 million RMB

Fig. 4.1 Output value of Shenzhen’s emerging high-tech enterprises


investment of the 251 strategic projects in emerging industries launched by theabove listed companies rose to 56.205 billion yuan, with simply 2.674 billionyuan (accounting for 4.76%) coming from the governmental fiscal funding; and97 projects by 31 companies, receiving no governmental subsidies, raised theirfunds by market means. Furthermore, the government has offered inclusive finan-cial support at the grass-roots level, without excessive privilege towards particularcompanies or those of specific ownership.

4.1.1.3 By Utilizing Location Advantages, the High-Tech IndustryHas Integrated the Transformation and Upgrading Closelywith Internationalization

Thanks to the location advantage of being close to Hong Kong and Macao,Shenzhen has witnessed decades of domestic reform and opening up to the overseasmarket. The transformation and upgrading of its high-tech industries is thusfeatured by export-orientation, interwoven with internationalization.

This can be seen from the global sales of Shenzhen’s high-tech products. Forinstance, the boarding bridges in Paris Charles de Gaulle Airport have been man-ufactured by CIMC-TianDa. And those “Made in Shenzhen” medical products areused by nearly 80% of the 1,700 French hospitals. According to the ResearchReport on Industrial Transformation and Upgrading of Listed companies (2014),from 2010 to 2012, the overseas sales income by Shenzhen listed companies inemerging industries were maintained over 40% of their total income; in particular,this percentage of ZTE exceeded 50%.

In addition to product globalization, a certain number of Shenzhen enterpriseshave started to internationalize their structure, assets, personnel and management.The Research Report on Industrial Transformation and Upgrading of Listedcompanies (2014) reported that the overseas subsidiaries set up by Shenzhen listedcompanies increased so fast that the number was 17, 20 and 31 in year 2010, 2011and 2012, respectively. From 2008 to 2012, 27 overseas mergers and acquisitions(M&A) were carried out by Shenzhen listed companies with a total transactionvalue of 40.509 billion yuan; the annual transaction value of overseas M&A wasover 8 billion yuan, accounting for 35% of that by the total listed companies inChina.

4.1.1.4 Complete Industrial Chain System and Extensive R&DInvestment Drove the Rapid Growth of Shenzhen’s ITIndustry

Of all the Shenzhen high-tech industries, IT industry is the one that has experiencedthe fastest development and made the largest economic contributions. According tothe Report on Shenzhen IT Industry Development, the output value generated byShenzhen IT products in 2013 jumped to 1.243 trillion yuan, accounting for 88.7%


of that of Shenzhen’s high-tech products and equal to one-tenth of that of thedomestic E-information manufacturing industry; and the exports of IT productsaccounted for 19.2% of that of the domestic E-information products. Statistics alsoshowed that among the 2,900 state-certified high-tech companies in Shenzhen, 70%of which engaged in IT industry, 15 were selected as one of the top 100 ChineseE-information enterprises in 2012. And two thirds of the city’s companies listed athome and abroad are in E-information industry (a total of 200).

Specifically, Shenzhen has developed a complete industrial chain in the IT fieldfrom integrated circuit design, manufacturing, packaging to software. The manu-facturing and R&D of its communications equipment ranked second in the worldand the shipments of its mobile terminal accounted for 40% in the global market.In 2013 the shipments of its smartphones stood at over 200 million, of which the4th Generation cellphones were over 4 million; the scale of internet industry stoodat 210 trillion yuan with over 70 leading enterprises springing up in the internetsubdivided industries. So rapidly was E-commerce developed that the transactionvalue and online-shopping sales climbed to 951 billion yuan and 89 billion yuanrespectively, accounting for 20.1% of the total retail sales of consumer goods.Results in the Report on Shenzhen IT Industry Development also revealed thatShenzhen’s software industry has maintained a growth rate of over 20% in recentyears. In line with the manufacturing and R&D of telecommunications rankingsecond globally, a large number of world-class enterprises, such as Huawei andZTE, have kept on strengthening and expanding. The number of patents per tenthousand people in Shenzhen has reached 50, making the city rank firstdomestically.

All these outstanding achievements could be attributed to the persistentupgrading of technological innovation capability by Shenzhen’s software compa-nies whose R&D input increased from 54.79 billion yuan in 2011 to 64.64 billionyuan in 2012, a growth of 18% (see Fig. 4.2).

4.1.1.5 Utilization of the Capital Marketand Industry-University-Research Institutions CooperationFacilitated the Transformation and Upgrading of Shenzhen’sHigh-Tech Industries

The strong S&T innovation capability in Shenzhen has spurred its high-techindustries and the booming financial services industry has provided diversifiedfinancial support for its industrial upgrading. Accelerated by such dual engines of“technology innovation plus financial support”, Shenzhen has embarked on a fasttrack of transformation and upgrading. By the end of 2014, among the185 Shenzhen listed companies, 89 engaged in emerging industries such as the newgeneration of information technology, biological medicine, new energy and newmaterials, according to the statistics from Shenzhen Securities RegulatoryCommission,.


In recent years, near 70% of Shenzhen’s listed companies have establishedsubsidiaries in other places, 90% of which engaged in the above strategic emergingindustries. Their performance was above the national average level with a strongdeveloping momentum. Reported from Securities Times, a Chinese newspaper, in2013 the net profit realized by the domestic A-shares listed companies was 2.249trillion yuan, increased by 14.43% from one year earlier; while that by the184 Shenzhen listed companies was 167.794 billion yuan, an increase of 30%which was twice more than the national average level. In the first quarter of 2014,the growth rate of net profit of A-shares listed companies and Shenzhen listedcompanies was 8.7% and 22.66% respectively, with the latter much higher than theformer.

Besides, the Industry-University-Research Institutions cooperation in Shenzhenhas stepped up the industrialization and commercialization of S&T achievements,thus facilitating the transformation and upgrading of high-tech industries. Currently,a considerable number of universities and state-class research institutes haveestablished the S&T firms incubator, a model featured by “industry plus technologyplus capital plus talents”. In recent years, Shenzhen Tsinghua University ResearchInstitute has industrialized over 150 scientific research achievements, fostered morethan 600 high-tech companies, and supported about 10 listed companies. Up toJune 2010, 23 provincial industry-university-research institution demonstrationbases were set up in Shenzhen, ranking second in Guangdong province, whichcover the fields of integrated circuit, medical equipment, advanced manufacturing,digital television and biological medicine. Moreover, 355 technological specialistswere selected to settle in 296 enterprises in 3 batches by the Shenzhen government.Consequently, from 2006 to 2010, a total of 5,648 industry-university-research

Revenue Growth rate

R&D input (100 million yuan) Growth rate

Fig. 4.2 R&D investment in software in Shenzhen (2007–2012). Data source Report onShenzhen Software Industry


institution cooperation projects of different types were carried out in Shenzhen,financially supported by the enterprises (80.4 billion yuan) and local government(1.91 billion yuan) and participated by 4,918 enterprises and 537 universities andresearch institutes. Outstanding performances could be seen from the 7,925 patentapplications, 3,000 commercialized achievements, 825.5 billion yuan of outputvalue, 76 billion yuan of export sales, 143.7 billion yuan of taxation and130 thousand newly talents.

4.1.1.6 The Manufacturing Industry of E-Information Products Basedon OEM Are Changing from OEM Towards ODM and OBM

Shenzhen’s manufacturing industry of E-information products is composed of threeparts, including the consigned processing and OEM, self-brand whole deviceproduction, and equipment manufacturing with independent property rights. Underthe current circumstances, however, OEM is still the major business of mostE-information manufacturers. Of the total output value in this industry, FoxconnTechnology Group accounts for over a half, thus becoming the city’s main sourceof foreign exchange; and other domestic whole device production enterprises,represented by the Great Wall and Konka, account for another 30%. The remaining20% of output value is created by those companies with independent propertyrights, represented by Huawei and ZTE. Their core technology and main profit havebeen derived from the self-developed embedded software, thus helping them takeup the medium and high-end segments in the value chain. In recent years, in linewith the increasing input in S&T by the Shenzhen government and companies,the manufacturing industry of E-information products has gradually transformedand upgraded from traditional single OEM towards ODM and OBM.

4.1.1.7 The Software Industry Mainly Comprising of Local Brands IsBecoming the Major Force of Self-Innovation

Currently, Shenzhen’ssoftware and IT service industries take the lead domesticallyboth in industry scale and enterprise strength. The revenue of its software rose from56 billion yuan in 2005 to 189.14 billion yuan in 2010, an annual growth rate of27.6%. By the end of 2011, a total of 3,287 software firms were certified by thestate. Among them, 50 enterprises were successfully listed in the stock market, 27became the key software companies under the national planning, and 9 entered thelist of China’s Top 100 software enterprises with their business revenue accountingfor 40% of the total revenue of these 100 enterprises. In 2013, Shenzhen’s softwareindustry posted the output value of 602.9 billion yuan, registered software productsof 3,787 (21,913 cumulatively), registered software enterprises 320 (4,116 cumu-latively), and software exports of 18.4 billion yuan (a 14.1% year-on-year growth).

The software industry has become the leading force of Shenzhen’sself-innovation. Take the statistics in 2012 as an example. First, the amount


of international patent applications filed under PCT reached 8,024, accounting for40.3% of the total national applications and ranking first among all other cities for9 consecutive years. In particular, Huawei ranked the top in licensed inventionpatents (2,734), followed by ZTE (2,727). Second, Shenzhen’s software enterprisesreported investment of 64.64 billion yuan on software R&D, up 18% than theprevious year, accounting for 23.5% of their software revenue and thus ranking thetop domestically. Third, it was the first time that the number of software copyrightregistrations exceeded ten thousand (12,374) with a 29.85% increase year on year,only second to Beijing.

A group of strong enterprises have engaged in the formulation of industrialstandards. Shenzhen TYDIC Information Technology Co., Ltd. has been designatedone of “China’s Top 20 Software Companies in Terms of Innovative Capability” inthe “Selection of Chinese Software Innovative Enterprises”. The programs that ZTEand Huawei participated in have won the first prize of “State Technology InventionAward” and “State Scientific and Technological Progress Award” respectively. Sixprojects carried out by firms such as Tranzda Group and Arkmiro Technologies Inc.have won the funds of 290 million yuan from the “Nuclear Takamoto SignificantSpecial”, part of the Major National Science and Technology Special Projects.From 2009 to 2012, such national special projects launched in Shenzhen reached anumber of nearly 100, ranking first in China, including the “Nuclear TakamotoSignificant Special” and “A New Generation of Broadband Wireless MobileCommunication network”. Thanks to the ownership of the core technologies withindependent intellectual property rights, a number of enterprises have graduallybecome the benchmark in some fields and the providers of overall solutions,resulting in their positive participation in the formulation of national and interna-tional standards. Huawei, for instance, has joined in 123 international industrialstandards institutes and forums, assuming more than 180 key leadership positionsand summiting over 2,300 papers in such fields as optical transmission, accessnetwork and cyber security. Similarly, ZTE has striven for the integration betweenproprietary technology and standards, becoming members of more than 70 inter-national industrial standards institutes and forums.

4.1.1.8 The Increase in Government Fiscal Support Has EffectivelyPromoted the Development of High-Tech Industries

In 2001, Shenzhen’s government implemented a number of policies to stimulatesoftware development. Since 2009, the government carried out, initially in thecountry, the development plans and supporting policies of the internet industry withan annual extra support of 500 million yuan for a succession of 7 years.

The municipal government has consecutively introduced development schemesand policies to cultural creative industry, new-generation IT industry and otherstrategically software-related emerging industries. It has also constantly optimizedthe financial and technology service environment to support the industry devel-opment. In 2010, the city witnessed the number of Initial Public Offerings (IPO)


in Shenzhen Stock Exchange rank the top in the world and the venture capitals(VC) rise to 200 billion yuan.

In recent years, the municipal government has continuously enhanced its fiscalsupport for the S&T development. As shown in Fig. 4.3, during the five years from2001 to 2005, the total fiscal investment increased nearly 2 times, from 1.098billion yuan to 3 billion yuan roughly. This led to an outstanding performance in thesoftware industry, for instance, which reported 3 times growth of output value, from13.8 billion yuan to 56 billion yuan.

Such enormous expenditures on S&T development, comparatively, was equal tothe total R&D expenditure of several medium-sized provinces in mainland China.Since then, the fiscal investment in high-tech industries was reported 3.2 billionyuan in 2006 and that in scientific research and experiment was 22.187 billion yuan(a year-on-year growth of 16.3%) in 2007. And the implemented R&D funds onS&T in 2007 reached 719 million yuan, supporting 1,208 S&T projects. Brieflyspeaking, the vigorous investment on S&T has effectively accelerated the devel-opment of high-tech industries.

4.1.1.9 The Government Has Taken Various Measures to Supportthe Development of High-Tech Industries and Formeda Complete Industrial Supporting System

To further facilitate the development of high-tech industries, Shenzhen’s municipalgovernment has constructed an all-round mechanism through such approaches asbuilding public platforms, improving supporting industries, financing enterprises,formulating growth roadmap and instructing social capital investment. It hasattempted to form a complete industrial supporting system from the upstream,middle stream and downstream, for the sake of integrating the innovation chainwith the capital chain.

Total amount of fiscal input

Total amount of three items of expenditures

Input from Shenzhen Bureau of Science & Technology and Information

Fig. 4.3 Fiscal investment in science and technology in Shenzhen (from 2001 to 2005) (Unit:10,000 yuan). Source Shenzhen Bureau of Science and Technology and Information


As shown in Fig. 4.4, an integrated industrial supporting system has alreadybeen established in Shenzhen. The upstream mainly involves the original innova-tion bodies, including key labs and scientific research institutes (engaging in basicand applied research) and other innovative institutes (engaging in non-consensusprojects, civil inventions and civil technological innovations). The middle streammainly refers to those bodies engaging in S&T innovations, projects developmentand maintenance, which can enjoy a series of subsidizing schemes, includingsubsidy scheme for developing firms’ research, technology and experiment, sup-porting grants for state and province-class S&T projects, technical standardsdevelopment scheme and the certification scheme of Capability Maturity Model(CMM) for software enterprises. The downstream primarily refers to the industri-alization of S&T innovative projects, which can enjoy supporting schemes such asinterest discount/exemption scheme on technology loans, matchmaking scheme forstartup firms through VC, growth-roadmap subsidy scheme for innovative firms,and growth scheme for leading S&T enterprises in segmenting industries.

Fig. 4.4 Shenzhen High-tech industry supporting system. Source Shenzhen Bureau of Scienceand Technology and Information


4.1.1.10 The Government Has Been Vigorously Promotingthe Development of High-Tech Enterprises by Improvingthe VC Investment and Entrepreneurship Environment

In order to improve the investment environment of startup firms, the Governmentand Committee of Shenzhen Municipality unified the filing system of VC com-panies and implemented related management regulations. It also stipulated that theVC was in charge by the municipal S&T department, specifying the functions ofrelated institutions. It regulated clearly the VC firms applied for the record could notengage in real estate, financial bonds and other businesses, which were beneficial inpromoting the VC firms and thus the city’s VC environment. Until 2014, 16 VCcompanies successfully passed the verification and registration.

In order to better direct and improve the VC environment, the Government andCommittee of Shenzhen Municipality carried out the following measures.

Constructing and Promoting the Transaction Market of Technology PropertyRights

Speeding up the development of market-oriented transaction market of technologyproperty rights has been an important issue in Shenzhen. It can help promote thesustainable and rapid development of high-tech industries, construct and improvethe regional innovation system, and set up the multi-level capital market system.On November 30, 2005 the International Trading Center for Technology PropertyRights in China (South China) (hereinafter referred to as the “South China TradingCenter”) was officially established in Shenzhen. Apart from helping VC funds solvethe enter-and-exit problems, it would be the most important approach for the smalland medium-sized enterprises (SMEs) in Shenzhen and South China to ease thefinancing difficulty and thus carry out the public equity trading. As the mainoperation body of the South China Trading Center, Shenzhen InternationalHigh-tech Equity Exchange (hereinafter referred to as “High-tech EquityExchange”), was the first domestic joint-stock agency specialized in the transactionof technology property rights, featured by the process of “share reform + trustee-ship + private equity ! grow to be listed”.

Specifically, South China Trading Center, adopting an innovative mode of“government guidance plus enterprise operation”, has served the S&T SMEs inShenzhen and South China in the following six fields. First, it offers the transactionplatform for enterprises to carry out equity financing and property-rights flowing.Second, it offers the platform for S&T SMEs to reform their corporate governancestructure towards shareholding system. Third, it provided the service platform fornon-listed joint-stock companies to help them complete the registration, trusteeshipand swap of equity. Fourth, it provides the centralized platform for listed companiesand state-owned enterprises to launch M&A. Fifth, it provides VC with the entryopportunity and exit channel. Sixth, it can transmit excellent listing resources for


domestic and foreign securities market. Statistics showed that in 2006 it offeredequity trading and comprehensive services for more than 1000 S&T enterpriseswith a trading volume of nearly 20 billion yuan.

Implementing Roadmap Scheme for Innovative Enterprises

Helping enterprises develop their independent innovation capability is critical intaking the nation on an innovation-oriented path. SMEs, especially thosetechnology-based SMEs, are the main carriers of independent innovation whichdepend largely on the effective support of the capital market. To broaden thefinancing channels for the innovative SMEs, the Government and Committee ofShenzhen Municipality has taken full advantage of the capital market to acceleratethese SMEs’ rapid development. Accordingly the “Roadmap Scheme for Growth ofInnovation-oriented Enterprises in Shenzhen” has been implemented proactively bythe South China Trading Center, assisting companies to carry out stock reform fortheir growth and expansion. Property rights solutions have been provided withmultiple services, such as the standardized operation, non-public offering offinancing, introduction of strategic investment, and arrangements for governmentinnovation funds. The roadmap scheme is the “green channel” for Shenzhen’shigh-tech enterprises to grow and go public, as each candidate can enjoy thesubsidy as high as 3.1 million yuan if selected into the scheme.

Statistics on the China High-tech Fair website showed that in 2006 a total of 38projects with the subsidy of 20.5 million yuan were arranged for the roadmapscheme by the municipal S&T R&D funds, vigorously stepping up the growth ofinnovative SMEs.

4.1.1.11 The Government Has Clear Plans and DevelopmentGuidelines for High-Tech Industries

To effectively speed up the development of high-tech industries, the Governmentand Committee of Shenzhen Municipality has formulated clear planning anddevelopment guidelines, combined with supporting and funding policies. Duringthe period covered by the 10th Five-Year Plan, the government implemented “the10th Five-Year Plan and 2015 Vision of Shenzhen High-tech IndustryDevelopment”, which proactively facilitated the rapid growth of high-tech indus-tries and optimized its growth environment. And “The Outlines of the 11thFive-Year Plan of Shenzhen Science and Technology Development” and“The Outlines of the 11th Five-Year Plan of Shenzhen High-tech IndustryDevelopment” both revealed that great importance will be attached to the opti-mization of industrial structure and upgrading of the high-tech Industries.

When optimizing the structure of high-tech industries and advanced manufac-turing industry, Shenzhen has vigorously developed independent innovation-oriented high-tech industry, accelerated the adoption of high-tech and advanced


applicable technologies to restructure the traditional industries. It has set upagglomeration bases for the traditional industries with advantages, so as to establishmanufacturing clusters for three industries including electronic communications,digital equipment and household consumer goods. To advance the high-techindustry, the local government has strengthened the advantageous sectors ofhigh-tech industries and continued to reinforce the competitiveness of high-techleading sectors, thus further improving the regional innovation system. It wouldspeed up the platform construction in such fields as capital, intelligence, knowl-edge, intermediary and technology, striving to make breakthroughs in technologicalinnovation. It would also expand and enhance the advantageous high-tech industrialclusters, intensify the core competitiveness of high-tech industries, strengthen theregional cluster advantages in such competitive industries as computer and exteriorequipment, digital audio and visual equipment, communication equipment,microelectronics and basic components, software, electromechanical integration ofmachinery equipment and instruments, and medical apparatus and instruments.

The Major Plans for Shenzhen’s High-Tech Industries

According to the research by Shenzhen Municipal Science and TechnologyInformation Bureau, the city would mainly concentrated on four major areas,including the personal computers (PC), consumer electronics, communications, andautomotive electronics (see Fig. 4.5).

Specifically, the PC field would mainly carry out the plan of promoting indi-vidual mobile computing platform. The consumer electronics field would imple-ment various plans in such sectors as digital TV development, digital homedevelopment, medical electronic development and IC card application. The

Automotive electronics field

PC field

Communications fieldConsumer electronics field

Fig. 4.5 Main direction of Shenzhen’s information industry development. Source ShenzhenBureau of Science and Technology and Information


communications field would focus on the product development plan of smartphones. And the automotive electronics field would consist of vehicular electronicsprograms and intelligent navigation systems.

Development Goals of Shenzhen’s High-Tech Industries

Shenzhen’s municipal government has set up the goal of implementingself-innovation strategy and building into an independent innovation-oriented city,that is, “we should not only make use of our advantages in the environment, market,entrepreneurs and technological innovation system, but exploit the advantages inthe relatively complete industrial chain, innovative culture as well as the testingground of reform and opening up, so as to seize the commanding heights ofindependent innovation and become the spearhead of self-innovation.”

To become an independent innovation-oriented city, the municipal governmenthas determined to spend 15–20 years in improving such areas as the innovationsystem, innovative talents and firms, venture capitals, comprehensive environmentand high-tech industry. It will strive to bring about outstanding contributions in avariety of S&T fields, upgrade its self-innovation capability to be active in regionalcompetition, and transfer the growth pattern from extensive to intensive. Theseefforts will help accomplish the overall coordination, sustainability and harmo-nization between mankind and nature, as a result of which the residents will takepride in the city’s innovation capability.

Development Measures of Shenzhen’s High-Tech Industries

First is to foster the innovative culture, stimulating companies to carry out inno-vation for the prosperity of the community and nation.

Second is to build innovative facilities based on the public technology platform.Third is to establish S&T incubators, industrial bases and other physical space as

the innovation carriers.Fourth is to set up innovative capitals, with VC companies and institutions as the

main bodies, and technology property rights trading as well as the GrowthEnterprises Market (GEM) as the financing channels.

Fifth is to develop the entrepreneurs into innovation pioneers withentrepreneurship.

Sixth is to construct an innovative environment by facilitating the developmentof knowledge service industry.

Seventh is to establish the innovative system of applied fundamental researchwith key laboratories as the main bodies and university-enterprise cooperation asthe support.

Eighth is to generate the innovative sources with the creation, management,protection and utilization of intellectual property as the core.


Thanks to the above approaches, the government would develop Shenzhen intoan independent innovation-oriented city, featured by the perfect innovation system,abundant innovative talents, numerous innovative enterprises, active entrepre-neurial investment, excellent comprehensive environment and advanced high-techindustries.

4.1.2 Constraints on Shenzhen’s High-Tech IndustryDevelopment

4.1.2.1 VC Environment Needs to Be Improved

In general, VC has close relationship with the number of universities and researchinstitutes. Like the Silicon Valley which is adjacent to Stanford University, Beijinghouses Zhongguan Village and lots of research institutes and universities. Bycomparison, Beijing and Shanghai are strong in scientific research resources andcompetitive startup firms while Shenzhen is deficient in the educational field. Yet,as one of Special Economic Zones, Shenzhen enjoys the location and policyadvantages and numerous firms of higher marketization degree, with its venturecapitals and startup investments in the forefront domestically.

However, the development history of China’s VC market is quite short, com-pared with that in the United States and other developed countries. Shenzhen stillneeds to be committed to the market cultivation, system innovation and improve-ment, market regulation and supervision, and credit construction. For example, itshould work out how to deal with the high capital liquidity and enhance the con-fidence of venture capitalists, as well as how to cope with the problems caused byexisting offline transactions. Innovative SMEs are the main source of future inno-vation in China, especially in Shenzhen. Listing on the stock market is a veryeffective and promising way for SMEs to raise capital, but many domestic SMEshave completed the offline transactions before listing. Hence, to avoid disputesarising from offline transactions and other issues, VC firms should cope with thefunding problem before going public.

4.1.2.2 Resource Scarcity, Environmental Pollution and RisingOperational Costs Are Block Industrial Upgrading

At present, Shenzhen suffers mainly from land and water shortage, populationexpansion and environmental pressures. These problems have caused someindustries, especially those of manufacturing, to transfer to the undeveloped areas ofthe country and the export-oriented firms face the bankruptcy threat. This, to acertain extent, would bring about the “hollowing-out” problem in Shenzhen. Torealize the sustainable development, the government has thus, on one side,


encouraged these industries to shift to the northern, eastern and western cities ofGuangdong province which could also benefit from this industrial transfer. On theother side, the government is not only adjusting the industrial structure to help solvethe large floating population problem, but also promoting the further developmentof high-tech industry to alleviate the environmental pressure caused by the tradi-tional processing industries.

4.1.2.3 Public R&D Strength and Original Innovation Capability Callfor Enhancement

SMEs take up the majority of high-tech companies in Shenzhen, 95% of which aresmall and medium-sized technological enterprises that are uncompetitive in R&Ddue to the following reasons. First, the lack of capital, R&D capability, informationand talents cause many SMEs unable to participate in research and technologicalinnovation. Second, the heavy investment, long payback period and higher risksrequired by R&D directly affect enterprises’ enthusiasm for R&D. Third, since eachcompany has carried out the R&D individually, it is quite difficult to realize theeconomies of scale from technological innovation and the synergies from resourceoptimization.

According to the authors’ investigation into Shenzhen’s high-tech industries, formany years over 55% of output value has been created by the high-tech productswith independent intellectual property rights, but the ratio created by the productswith the core technology was still very low. In fact, the majority of key and coretechnologies has come from the introduction from foreign multinationals. Inaccordance with the frequent updating of product technology and the huge demandfor new products, new technologies and new techniques, the city should take thesynergy effect between the “visible hand” of the government and the “invisiblehand” of the market, that is, jointly exploiting the public technical resources andestablishing the public technology platform for all high-tech enterprises.

At present, the public service platform of high-tech industries in Shenzhen is farfrom perfect, and the applicable resources of high-tech public R&D institutions arelimited. Besides, the independent innovation capability in high-tech companies isfar from strong, due to the poor project development capability, ownership of fewintellectual property rights, low application rate of achievements and insufficientcooperation with enterprises. Accordingly, it is necessary for the city to furtheraccelerate the construction of public technology platforms so as to help high-techenterprises, especially SMEs, solve the technical difficulties. The governmentshould also direct the coordination between scientific research institutions andenterprises to develop generic and key technologies.


4.1.2.4 Regulatory Barriers Hinder the Degree of Internationalization

Shenzhen Securities Regulatory Bureau has issued “The Research Report on theIndustrial Transformation and Upgrading of Listed Companies (2015)”, based onthe investigation on the current 89 companies in the emerging industries inShenzhen. Among them, only 11 companies has ever engaged in overseas businesssuch as raising capitals, establishing R&D centers and regional managementbranches, and purchasing technologies and core businesses; only ZTE and othertwo have enjoyed some degree of international brand awareness, according to thedata released by the World Brand Laboratory and the World Executive Group; andsimply two listed companies have hired over 100 foreign employees, the number ofwhich is another indicator representing the degree of internationalization.

According to this report, 60 of the above 89 companies pointed out twoimportant factors influencing their internationalization, that is, the complexrequirements of government review for various matters and the excessive admin-istration regulation. In particular, lots of prior reports and governmental approvalsinvolved in the overseas M&A have led to the difficulty in controlling the pur-chasing costs. In addition, many companies indicated that, under the strict foreignexchange control, they found it inflexible to carry out overseas transactions byadopting the equity as payment instrument and quite difficult to attract foreign toptechnical talents through the equity incentive mechanism.

4.1.2.5 The Capital Market Is not Fully Used for IndustrialTransformation and Upgrading

The capital market has played an important role in facilitating the transformationand upgrading of the high-tech industry in Shenzhen, which could be furtherimproved given the far-from-perfect resource allocation mechanisms and capitalmarket development in China. Detailed illustration can be found in “The ResearchReport on the Industrial Transformation and Upgrading of Listed Companies(2015)”. First, in terms of capital market services and supports, the current listingsystem of capital market in China is mainly designed for the traditional industrialenterprises, emphasizing more on the mature operation and stable revenue but lesson the new technology and new business patterns. It follows that the emergingindustries could only receive service from the capital market in the mature phrase.Second, concerning the supporting depth to the innovation, currently the devel-opment of emerging industries has mainly relied on the three traditional functionsof the capital market—financing, M&A and equity incentive, rarely receivingcapital support from the innovative financing instruments in the capital market.Third, as regards the policy supports to M&A and restructuring, the existingnational policies have given priority to the industries with overcapacity while less tothe emerging industries. Fourth, with regard to the professional services of market


institutions, the immaturity of the domestic capital market has resulted in thedeficiencies of Private Equity (PE), Venture Capital (VC) and securities companieswhen supporting the emerging industries.

4.2 Transformation and Upgrading of FurnitureIndustrial Cluster in Dalingshan Town, DongguanCity

4.2.1 Brief Introduction of Dalingshan

Dalingshan is a town under the jurisdiction of Dongguan prefecture-level city inGuangdong province. Across an area of 95 km2, 23 village committees (commu-nities) subordinate themselves to this town with a population of over 300,000including 47,000 registered permanent residents in 2014. It has been awarded with“the First Town for Exporting Furniture in China”, “Key Furniture Exporting Townin China”, “National Sanitary Town”, “China Green Town”, “National EcologicalTown”, “Guangdong Powerful Town in Education”, “Guangdong Sanitary Town”,“Guangdong Green Town” and “Guangdong Ecological Demonstration Town”.Moreover, Dalingshan town (hereinafter referred to as “Dalingshan”) enjoyssuperior location advantages, since it is near Hongkong and Macau and located inthe center of “three-in-one urban area” (the combination of central city area,Songshan lake and ecological park) of Dongugang city which is part of thedeveloped Pearl River Delta. Further, it has outstanding industrial advantages,featured by a number of high-class industrial zones and parks—such as Science andTechnology Industrial Zone, Lake-Side Industrial Zone and Panshan IndustrialPark, and over 2,400 industrial enterprises including 3 on the Fortune 500 list.Hence a diversified industrial system has been formed in Dalingshan involving theelectronics, furniture, electromechanical and equipment manufacturing and chem-ical engineering.

Take the fiscal achievements of Dalingshan in 2014 as an example. Its GDPincreased to 16.7 billion yuan, up 8.2% than the previous year. The value-added ofindustrial enterprises with annual revenue of 20 million yuan (about 3.02 millionUS dollars) rose to 8.4 billion yuan (up 8.8%). The total tax revenue was 2.78billion yuan (up 13.7%). The disposable financial resources of the local governmenthit 1.18 billion yuan (up 1.7%). The total amount of import and export in foreigntrade totaled 4.69 billion US dollars (up 9.9%), of which the export was 2.72 billionUS dollars (up 15.6%). In that same year the town carried out five major con-struction projects and a major preparatory project with a total investment of2.55 billion yuan; and the accumulated number of investment rose to 460 million,accounting for 110% of the annual plan.


4.2.2 Current Situation of the Furniture Industryin Dalingshan

In 2004, Dalingshan was awarded the honorary titles of “the First Town forExporting Furniture in China”, “Key Furniture Exporting Town in China” and“the Largest Furniture Production Base in Asia Pacific”, respectively, by theNational Light Industry Council, National Furniture Association and Council ofAsia Pacific Furniture Associations (CAPFA). In 2006, Dalinshan town was ratedas the Gunagdong second batch of “Upgrading Demonstration Zone of IndustrialCluster”. Then in 2009 its furniture industrial cluster was entitled the “key devel-oping industrial cluster supported by the Dongguan government”. In 2013, it wasawarded the “Excellent Industrial Cluster in China Furniture Industry” by theNational Furniture Association. Consequently, a “furniture kingdom” came intobeing rapidly, thanks to the unique location advantages, advanced furniture pro-duction line, improved industrial supporting services, abundant labor resources andunimpeded export channels.

4.2.2.1 A Large Number of Well-Known Furniture Brandsand Enterprises Have Emerged

Until September 2014, a total of more than 530 furniture enterprises have settleddown in Dalingshan, 350 of which enjoyed an annual revenue of 20 million yuan.These companies possessed over 160 furniture brands, two were awarded with the“Famous Trademarks in China”, one with the “Chinese Top Brand”, six with the“Guangdong Top Brand” and four with the “Guangdong Famous Trademark”.Besides, furniture-related patents reached to nearly 3,500 items. From 2008 to2014, the amount of furniture enterprises with over 100 brand stores in the countryincreased from 10 to 35, and those with over 300 brand stores increased from 2 to 8.In 2013, the output value of Dalingshan furniture industry reached to 10.9 billionyuan and the tax payment by the furniture production and supporting enterprisesaccounted for 30% of the town’s total tax income.

Nowadays over one hundred world famous brands have gathered in Dalingshan,including those of the US, Europe, Hong Kong, Taiwan and Mainland China.Products range from wooden furniture to iron furniture, and from bedroom series tooffice series. Some international brands consist of Universal Furniture (the secondlargest furniture retail chain stores in the U.S.), the Restonic (U.S.), Musterring(Germany), Isabella (France) and HOPO.DIMOLA. The domestically knownbrands include Frandiss, Monte Carlo and Edinburgh. Dalingshan furniture hasbecome the largest exhibitor in the large-scale furniture exhibitions held inShanghai, Guangzhou and Dongguan.


4.2.2.2 The Furniture Industry Has Become the Pillar Industryof Dalingshan

The furniture enterprises in Dalingshan are mostly export-oriented. Over 90% oftheir products are sold globally with over 200 containers every day. In 2006, itsgross industrial output value and total taxes accounted for 65% and 33% of that ofthe town, respectively. The export value was more than US $2.15 billion,accounting for 12.4% of the total value of furniture exports in the country (seeFig. 4.6).

In 2007, the furniture industry witnessed a gross industrial output value of12.168 billion yuan, accounting for 65% of the total gross industrial output value ofthe town; the tax payment of 310 million yuan, accounting for 33% of the total taxrevenue of the town; the revenue of overhead charges of 21 million yuan; and thesettlement of foreign exchange from processing and compensation trades of2.5 million yuan. They have substantially helped promote the economic develop-ment and the growth of economic revenue in Dalingshan.4

4.2.2.3 Furniture Industrial Cluster and Its Supporting IndustriesHave Been Established

Over the past two decades, Dalingshan has always adhered to the road of devel-oping industrial clusters, forming furniture economy with its own distinctivecharacteristic. Based on the domestically largest furniture industrial cluster, acomplete furniture production chain has come into being, supported by a largenumber of high-quality processing companies engaging in sheet metal, hardwarefittings, leather-ware, chemical, hardware and timber. They include not only thosesubsidiaries established by the multinationals such as the largest DIY paint man-ufacturer (in Japan), Akzonobel (in Netherland, one of the world’s Fortune500 enterprises) and Valspar Corporation (in U.S.), but also the domestic tradingcenters such as Jilong Timber Market (the largest timber distribution center in SouthChina) and Dacheng Hardware Trading Market (featured by the large scale andgreat variety of goods).

In these recent years, Dalingshan’s furniture production has replaced the tradi-tional manual production mode with modern production technologies. The automaticedge banding machines, laser engraving machines, laser cutting machines and otherseries of the advanced furniture production machinery have been widely applied inthe factories, forming the world-class production lines, namely, “veneering ! whitewood ! careful crafting ! oil painting ! drying ! packaging”. Hence, it is theadvanced machinery, excellent professionals and high-class production line that havegenerated the strong manufacturing capability of Dalingshan’s furniture industrial

4According to Dongguan City, Dalingshan Town People's Government internal informationobtained from the order.

4.2 Transformation and Upgrading of Furniture Industrial Cluster … 183

cluster. According to the research in 2014, the annual productivity of Lacquer CraftManufacturing Corporation and Fu Bao (Sofa) Manufacturing Corporation rose to200 million units (sets) and 8000 sets of high-quality sofas, respectively. And thetown has seen the utilized amount of furniture automation equipment increased from458 units in 2008 to 832 units in 2014.

4.2.3 The Furniture Industry Is Facing Challengesof Transformation and Upgrading

Currently Dalingshan’s furniture industry has been undergoing not only homoge-neous competitions against other domestic furniture clusters due to the medium andlow end of their majority commodities, but also the upgrading pressure exerted bythe state policy. Lacking self-own brands, these furniture enterprises, especiallythose engaging in the processing-trade exports, could only offer OEM service forcustomers simply from the European and U.S. markets. After the global financialcrisis, consequently, the stagnant overseas market and competitive domestic marketforced these furniture enterprises to carry out upgrading for the long-term effectivedevelopment.

Total exports of domestic furniture

Total exports of Dalingshan furniture

Fig. 4.6 Dalingshan furniture export amount. Source Dalingshan People’s Government (http://www.dalingshan.gov.cn/)


http://www.dalingshan.gov.cn/

http://www.dalingshan.gov.cn/

4.2.3.1 The Government Has Introduced Restrictive Policies in Orderto Direct Enterprises to Extend to the High Value-AddedSectors

Restrictions on Furniture Exports

On July 23, 2007, the “Prohibited Commodity Catalogue for Processing Trading in2007” was issued jointly by the Ministry of Commerce, the General Administrationof Customs and the State Environmental Protection Administration. Furtherrestrictions had been set up on the furniture exports, bringing more troubles to theexport enterprises. In accordance with the requirements, the furniture enterprises,when importing the materials to processing trade, were required to guarantee acertain number of deposits in the custom-designated accounts and could onlywithdraw this deposit after export verification. Further, they were prohibited toexport sheet metal and furniture that used domestic wood as raw materials, resultingthat most of the furniture enterprises had to pay extra costs to import lumber forfurther processing. Thus increasing the value-added of wooden processing productshas become an inevitable tendency.

Continuous Reduction of Export Tax Rebate Rate

In 2006 five ministries of the Chinese Government, namely the Ministry of Finance,the National Development and Reform Committee, the Ministry of Commerce, theState Administration of Customs and the State Administration of Taxation, jointlyissued a circular, “Concerning the Adjustment of the Export Refund Rate forCertain Commodities and Expansion of the Prohibited Commodity Cataloguefor Processing Trading”. In this Circular, the export tax rebate was canceled for rawmaterials such as coal and charcoal and reduced for products such as steel andtextile with the change in rates ranging from 2 to 5%; in particular, the exportrebates for furniture products dropped from 13 to 11%. In contrast, the exportrebates for the following products increased from 13 to 17%, including the majorkey technical equipment, IT products, biological and medical products, high-techproducts encouraged by the national industrial policies.

On June 18th, 2007, the above five ministries again jointly issued the “NoticeRegarding the Adjustment in Export Rebate Rate for Certain Commodities”, stip-ulating that since July 1st, 2007, the export rebates of furniture products made fromwood, metal, plastic and other materials would be reduced by 2–9%. Concerningthe impact of global financial crisis on the majority of export enterprises, though,the five ministries readjusted the export rebate tax rate from 9 to 11% for most ofthe domestic wood furniture since November 1st, 2008. Such policy changesrevealed that commodities of low technical-content and resource overconsumptionwould continue to face the deduction of export tax rebate.


4.2.3.2 Consumer Demands for Furniture Are Decreasingand Enterprise Operating Costs Are Increasing

Reduction of Furniture Export Demands

The global financial crisis occurred in the second half of 2007 has led to a slow-down of economic growth in the U.S. and other developed counties, which in turnresulted in their decrease of domestic consumption demands and transfer ofconsumption pattern to commercial investment and conservative financial man-agement. Heavily relying on the overseas market, China’s dollar-denominatedexports in 2005 accounted for 37.3% of the GDP, much higher than the globalaverage (27%), according to the statistics from World Bank. This percentage rose tohistorically high level in 2007 (37.5%), simply lower than that of Germany (40.7%)and Canada (37.9%) among the world’s ten largest economies but higher than thatof Russia (35.2%), India (19.9%) and Brazil (15.1%) among the emerging marketeconomies.5 The depression of foreign consumption directly led to China’s negativegrowth in exports, the slowdown in foreign investment and even the depreciation orloss of foreign exchange assets. The development of Dalingshan’s furniture industryhas been stalled accordingly, owing to its heavy dependence on the foreign market.Those export-oriented furniture enterprises that suffered severely from the decliningorders, in particular, had to retrench the production and reduce the operating time totide over the financial crisis.

Rise in the Operating Costs of Furniture Businesses

First, raw material prices increased. Statistics showed that in 2006 the prices ofsheet metal and hardware required in furniture production rose by more than 20%and 30% respectively.6 Second, labor prices rose. The implementation of the newLabor Contract Law has increased the labor cost while the labor shortages causedmost enterprises to raise wages to attract labor. Third, the appreciation of RMBfurther weakened the price advantages. On July 21st, 2005, China’s authoritiesannounced that “the yuan will be no longer pegged to the US dollar” and that“China will reform the exchange rate regime by moving into a managed floatingexchange rate regime based on market supply and demand with reference to abasket of currencies”. And the Chinese Central Bank revalued the yuan from 8.11per US dollar on July 21, 2005 to 6.81 per US dollar on July 16th, 2008. The largerevaluation (over 15%) in the past three years caused the export-oriented furnitureindustry Dalingshan endured serious challenges, such as the upward pressure inexport prices and the weakened competitiveness in prices.

5Shen Minggao, China: the test has just begun, Finance Magazine, No. 227(2008-12-22).6First Financial Daily, 2007-12-13.


A survey conducted in 2008 on the Dalingshan’s furniture industry revealed theratio of different costs in the company’s total costs. Each of the following reasons—the revaluation of yuan, the growth of wages and the reduction of the export taxrebates—has led to a 3% increase in the total costs, totally resulting in the profitdecrease of 12% roughly in 2007.7 Consequently, such rise in the operating costshas forced furniture companies to transform and upgrade.

4.2.3.3 Furniture Industry Is Facing Higher Quality Requirementsand in Need of Technological Upgrading

Trade Barriers Are Posing Higher Quality and Environmental ProtectionRequirements on Furniture Products

Dalingshan’s furniture industry has undergone a series of trade barriers. First is thetariff barrier. In November 2005, the furniture industry in Canada has submitted theapplication to launch safeguard investigation against the furniture products fromChina, requiring to impose high export surcharge for 3 years. Second is theanti-dumping trade barrier. In January 2005, the U.S. Commerce Department leviedanti-dumping duties on a large number of wood bedroom furniture from China,ranging from 49 to 198%. In the second half of 2006, the European Union(EU) applied for an anti-dumping investigation on a lot of furniture originated orimported from China, covering the majority of exported varieties. Third is the greentrade barrier, including the green tariff system, market access system and greentechnology standards system, which required the application of advanced tech-nology on furniture products. Since June 2007, the implementation of “Regulationson Registration, Evaluation, Authorization and Restriction of Chemicals” by the EUhas brought great impact on the furniture industry since it is one of the downstreamindustries of chemical products. Further, a number of European countries havedemanded the wood furniture imported from China should have a ForestStewardship Council (FSC) certificate. FSC certificate is currently the most widelyrecognized forest certification program globally, setting a higher environmentalrequirement on the furniture raw materials.8

Extensive Operation Mode and Low Labor Productivity

In terms of the gross national product (GNP) of furniture industry, the per capitaannual output value of domestic companies was 120,000 yuan and that of theenterprises above state-designed scale was 178,000 yuan, while that in the devel-oped countries exceeded 1 million yuan.

7People’s Network, 2008-06-23 (www.people.com.cn).8www.jiancai.cc, August 8, 2007.


Frankly, the intellectual property of Dalingshan’s furniture industry was notsufficient enough. By the end of 2007, the items of licensed patents were up to1,056, including 22 invention patents, 236 utility model patents and 798 appearancedesign patents. As the pillar industry in the town, furniture industry has witnessed agrowth trend in the number of authorized patents (Fig. 4.7), only accounting for onethird of the town’s total number. The amount of invention patents, utility modelpatents and appearance design patents were 1, 50 and 264 respectively, simplyaccounting for 7% of the city’s total furniture patents.

Besides, as shown in Table 4.3, most of the licensed patents in Dalingshan wererelevant to product design with only one invention patent that involved highertechnical content. This indicated that Dalingshan’s furniture industry has lesstechnological advantages, especially compared with other major furniture produc-tion districts such as Lecong town in Shunde city, Houjie town in Dongguan cityand Yuhuan county in Zhejiang province.

Fig. 4.7 Annual changes inlicensed patents ofDalingshan furniture industry(until 2007). SourceAccording to the patentinformation database of theNational Intellectual PropertyOffice

Table 4.3 Total amount of licensed patents in the major furniture production district (as of 2007).Source According to the patent information database of the National Intellectual Property Office

DongGuancity

Dalingshan inDongguancity

Lecong townin Shundecity

Houjie townin Dongguancity

Yuhuan county inZhejiangprovince

Inventionpatents

25 1 1 1 20

Utilitymodelpatents

729 50 85 61 150

Designpatents

3972 264 1597 1381 384

Total 4726 315 1683 1443 554


4.2.3.4 Fierce Competition in the Domestic Furniture IndustryIs Forcing Furniture Clusters to Look for Developmentwith Characteristics

In recent years, China has witnessed a speed-up agglomeration effect in thefurniture manufacturing industry. As a consequence, four major districts came intobeing, including the northeast furniture industrial district with Shenyang city andDalian city as the center; the Beijing-Tianjin-Tangshan furniture industrial districtwith Beijing municipality, Tianjin municipality and Shandong province as thecenter; the Yangtze River Delta furniture industrial district with Shanghai munic-ipality, Jiangsu province and Zhejiang province as the center; and the Pearl RiverDelta furniture industrial district with Guangzhou municipality and its surroundingcities such as Foshan, Zhongshan, Shenzhen and Dongguan as the center (seeFig. 4.4). Yet the majority of domestic furniture commodities are of middle andlow-class, leading to the fierce homogeneous competition and thus the overcapacityof some sorts of products. In addition, large number of export-oriented enterprises’transformation to domestic sales has further resulted in the intense rivalry in thedomestic furniture market.

Such product homogeneity and competitive situation also occurred in the fur-niture industry in Guangdong province. Located in Dongguan city and Shenzhencity (which is near Guangzhou in the east), the large factories invested by Taiwanand Hong Kong enterprises have mainly targeted the international markets. Bycomparison, most of the companies in Lecong town and Longjiang town (both inShunde district, Foshan city which is near Guangzhou in the west) are small,medium-sized and domestic privately-owned, focusing more on the domesticmarket and less on the overseas (Table 4.4).

So far, four towns in Guangdong province have won the titles of state-classdistinctive districts with six gilded signboards, including the Lecong town with the“Furniture Trading Center in China”; Longjiang town, the “Key FurnitureManufacturing Town in China” and the “Certer of Furniture Materials in China”;Dalingshan, the “Key Furniture Exporting Town in China” and the “First Town forExporting Furniture in China”; and Tai Chung town (in Zhongshan city), the“Mahogany Furniture Production Town in China”. Besides, Houjie town(in Dongguan City) was awarded with the “Famous Exhibition Town in China” in2007 by the China Convention and Exhibition Society (CCES). These achieve-ments revealed that large furniture industrial clusters have emerged in Guangdongprovince with different specialties, but the products are still easy to be substituted.Hence, how to solve the problem of product homogeneity has become a criticalissue for Dalingshan’s furniture industry during its industrial transformationprocess.


4.2.4 Transformation and Upgrading of the DalingshanFurniture Industry

As mentioned above, difficulties such as the dynamic adjustment of policies, therising production costs and the higher requirements for product technology andquality, have further compressed the profit margins of Dalingshan’s furnitureindustry, making its development prospects uncertain. Since 2008, particularly,a large number of furniture companies were severely impacted, simply relying onmeager profits to maintain their daily operations. Those less competent SMEs evengot a loss and closed down or relocated. Statistics showed that during the first fourmonths in 2008, merely two companies expanded their business with an increased

Table 4.4 Major furniture manufacturing regions. Source arranged according to CharacteristicDistrict Economy of China’s Furniture Industry (Chen Baoguang, Liu Xiaohong. Chinesewood-based panel, 2006(7):6–10)

Furniture industrial district in the PearlRiver DeltaIt is the earliest and largest furniture industrialdistrict and the largest furniture exportagglomeration area in ChinaIt has complete production system,well-developed sales market, soundsupporting industries (including woodworkingmachinery, hardware fittings, paint andcoatings, timber, leather, fabric art and otherraw materials), and improved industrial chainIt includes the export-oriented furnitureindustrial cluster in Dalingshan Town, thesoftware, office furniture and furniture rawmaterials industrial cluster in LongjiangTown, Shunde district of Foshan, the furnitureand exhibition industrial cluster in HoujieTown of Dongguan and the padauk furnitureindustrial cluster in Dayong Town ofZhongshan

Furniture industrial district in the YangtzeRiver DeltaIt has good manufacture industry base,concentrated talents, convenient traffic, anddeveloped information industryThe furniture market is of high capacity andhigh grade, with flexible, diverse and maturemarketing modelIn recent years, the furniture industry inZhejiang has developed rapidly, including theoffice chair industrial cluster in Anji County ofZhejiang Province, the European classicalfurniture of Yuhuan County and the panelfurniture industrial cluster in Wenzhou

Furniture industrial district in thenortheast ChinaIt relies on the strength of the northeastindustry base, self-produced timber and timberimported from RussiaThe solid wood furniture in Zhuanghe ofDalian and Yichun of Heilongjiang is the maintype of the region. Its scale and strength are ofleading place throughout the country

Furniture industrial district in theBeijing-Tianjin-Tangshan regionIt enjoys an advantageous location with hugefurniture consumption groups, large furnituremarketing and a great number of furnitureselling enterprises. It also has a long history offurniture manufacturingIt includes the metal glass furniture industrialcluster in Shengfang Town, Langfang ofHebei, the wooden dining table and chairindustrial cluster in Ningjin County ofShandong, the paulownia furniture industrialcluster in Zhuang Zhai Town


capital of 3.15 million US dollars, while five furniture companies closed down orrelocated, and no new companies were established., and. In order to promote thesustainable development of the furniture industry, accordingly, Dalingshan pro-posed that it would strive to develop itself from the “the First Town for ExportingFurniture in China” to “the First Town for Furniture in China”. To realize thisvision, it has aimed to enhance and enlarge the furniture industry, promote theregional brand of Dalingshan, and activate the furniture enterprises, so as to jointlyfacilitate the industrial transformation and upgrading.

4.2.4.1 Furniture Enterprises Are Actively Engagingin Transformation and Upgrading

Positively Carrying Out Product Development and Promoting ConsumerDemand

Located in Dalingshan, Fu Bao (sofa) Manufacturing Corporation is a privateenterprise specializing in manufacturing sofa and its supporting products. In recentyears, the company started to develop and introduce new products, such as tables,chairs and beds, and the office, living room, bedroom series except for the classicalsofa. This company has attempted to transform its manufacturing from simply sofato diversified furniture products.

Improving Production Process and Reducing Costs

Investigation results show that Lacquer Craft Manufacturing Corporation, alsolocated in Dalingshan, has arranged several production lines to stitch leftovertimber material which would be burned up in the past. Despite the cost in glue andlabor, this approach raised the utilization rate of timber by 5–10%. Other compa-nies, after satisfying the safety testing and the relative foreign standards, haveredesigned their commodities to save the cost of raw materials, for example, usinghollow wood to make bedposts and table legs.

Upgrading Functions to Increase Profits

A number of outstanding enterprises have not only carried out approaches such asstrengthening R&D and exploring new markets to address the current difficulties,but also launched M&A to successfully enlarge their business. For instance,Lacquer Craft Manufacturing Corporation, after acquiring a mature brand in theUnited States, began to layout its retail business in China by establishing its ownmarketing network and cultivating its marketing capability. Practitioners in thefurniture industry indicated that, if a company could set up its own branches and


realize self-production and self-sale in the overseas market, it could bear a 30%reduction in the retail price and thus enhance the pricing advantage in the furnitureindustry.

Launching Self-Brands to Transform from OEM to OMB

Different from the traditional OEM enterprises, some of the outstanding furnitureenterprises not only engaged in OEM service for foreign brands, but also stuck todeveloping their own brands by adopting the raw materials, design and productionof their own. Frandiss, a well-known brand introduced by Fu Bao (Sofa)Manufacturing Corporation in 1994, has been awarded with the “NationalInspection-Free Product”, “Guangdong Top Brand” and “China Top Brand”.Adhering to developing more self-brands, the company in these recent years haswitnessed the successful introduction of six brands, including Bofity, Romanes,Leotoni, Saddlersy and Cristin.9

4.2.4.2 The Local Government Is Actively Facilitating EnterpriseUpgrading

Upgrading the Furniture Cluster and Integrating It into the Town’s IndustrialDevelopment

In the seminar “Craft the First Town for Furniture in China and facilitate theupgrading of furniture industrial cluster” held in Dalingshan, Huang Qinghui, thetown mayor, declared that the town would constantly extend the furniture industrialchain by establishing the platform involving R&D, production and display, so as totransfer itself from “the First Town for Exporting Furniture in China” to “the FirstTown for Furniture in China” and thus create the regional brand for the furnitureindustry. He also showed that industrial upgrading is the top priority of the gov-ernment work and the upgrading of the furniture industry would become the coreissue of the town.10

Setting Up a Dedicated Office to Direct the Industrial Upgrading

On December 8, 2008, the “Industrial Upgrading Office in Dalingshan” was for-mally established by the local government. It would be responsible for organizingand facilitating the planning, adjustment and upgrading of the town’s industry andimplementing the policies and solutions relevant to the development of industrial

9Source: Fu Po Sofa Company Website, www.frandiss.com.cn.10Source: Dongguan Daily News, 2008-12-05.


clusters in Dongguan city. The main function of this office was planning, adjustingand upgrading the whole town’s industries; and formulating industrial upgradingplans in areas such as the comprehensive coordination, industry research, projectconstruction, event planning and public promotion.11

Implementing the Export-Driven Strategy to Promote the Upgrading of theFurniture Industrial Cluster

Firstly, the government selectively introduced 200 large furniture enterprisesoriginated from Hong Kong, Taiwan and overseas to set up affiliates in this town.They have generated a strong aggregation effect and attracted a large number ofsupporting firms, both upstream and downstream, to carry out local investment andset up factories. Secondly, the town has witnessed the introduction of outstandingentrepreneurs, technological talents, excellent furniture designers and manufactur-ing personnel as well as a large number of furniture enterprises from Taiwan, HongKong and the Mainland.

Cultivating a Sound Industrial Chain and Facilitating Its Upgrading

Dalingshan not only attracted the upstream and downstream enterprises of thefurniture industry as the main actors of investment, but also directed privateenterprises to actively engage in the supporting industries and thus promoted thedevelopment of timber and paint businesses.

Encouraging Furniture Enterprises to Enhance Learning Ability andTechnical Advantages

Major measures are as follows.First is promoting the continuous learning of furniture companies. The local

government and relevant departments have launched a series of seminars, lecturesand training for furniture entrepreneurs, encouraging them to further study businessmanagement and marketing approaches.

Second is helping furniture enterprises grasp industry development trends.Coordinated by the Furniture Association, the local government has helpedDalingshan furniture enterprises enhance the communication and exchange withother domestic and overseas furniture enterprises, so as to promptly identify theindustrial development trend and consistently improve the comprehensive qualityof their personnel.

11Source: Nanfang Daily, 2008-12-08.


Third is optimizing the technology constantly. The design and productiontechnology of Dalingshan’s furniture industry has been at the forefront of the world.Not only first-class production lines have been adopted in companies such asFortune Furniture Co. Ltd, Yeo Long Timber Co. LTD, Lacquer CraftManufacturing Corporation, Stylution Group, but the world’s most advanced pro-duction machinery has also been used in Decca Company and Hopo-BrightFurniture Group, Ltd.

Setting up a Public Service Platform for Dalingshan’s Furniture Industry

Cooperated with the scientific research institutes, the town government establisheda public service platform for the furniture industry, which could benefit from thesynergy of the government functions and the scientific research and technology.This platform has been managed by another partner, the Industrial Design Instituteof the Guangzhou University, who designed the operational programs consisting ofthe following three aspects.

First, it is to jointly construct a public service platform for the furniture R&D.This platform, to be operated by scientific research institutions and supported by thetown government, would provide services for the enterprises and society directly.As a nonprofit organization, it would receive fiscal support annually from the towngovernment.

Second, it is to cooperatively establish a creative center for furniture design. Thiscreative center, also to be operated by scientific research institutions and directed bythe town government, would provide enterprises with services such as design, R&Dcreativity, marketing and brand promotion. As a management agency, it wouldreceive funds from the government and adopt the joint-stock system composed bythe input of scientific intellectual property.

Third, it is to jointly set up a furniture marketing company. Introduced by thetown government and initiated by several leading enterprises, this marketingcompany would integrate the resources of some furniture companies and launchjoint-stock system, supported by the scientific research institutes engaging inmanagement.

Constructing a Furniture Industrial Zone

A furniture industry zone has been founded in Dalingshan with convenient trans-portation. It is located between the Yanglang Road (in Dongguan city) andLonghua-Dalingshan Highway, and near the Songshan Lake Science andTechnology Park in Dongguan City. Covering an area of 2.67 km2, it consists ofdifferent functional areas, designed for the furniture businesses to carry out sheetmetal processing, furniture manufacturing, logistics distribution and staff accom-modation. To create a qualified environment, a management center has been set upin the zone to deal with the water and electricity supply, waste disposal and other


issues of enterprises. Moreover, the local government has planned to build anotherhigh-standard and comprehensive furniture industry park (2 km2) and provide aseries of preferential treatments so as to attract those internationally and domesti-cally well-known furniture enterprises and their upstream-and-downstream sup-porting companies. Enhancing such centralized management can thus help achieveresource sharing, reduce the operational costs and create enormous benefits for theentire furniture industry.12

4.2.5 Implications

4.2.5.1 Industrial Upgrading Is the Joint Effort of Enterprisesand the Government

The industrial upgrading could only be achieved through the transformation andupgrading of enterprises relying on the joint efforts of enterprises and the gov-ernment. On one side, the government has strived to create a sound environmentand optimize the industrial structure, thus realizing the transformation of the eco-nomic growth pattern. On the other side, the companies have positively pursued theupgrading and made good use of the opportunities and challenges, hence improvingtheir status in the value chain.

4.2.5.2 Industrial Upgrading Requires Full Integration of Resources

When promoting the furniture industrial upgrading, various approaches have beenadopted to fully integrate resources. First, Dalingshan government has implementedthe foreign investment-driven strategy to facilitate the development of local furni-ture enterprises and their supporting industries. Second, the government hasintegrated the furniture industry by directing the furniture companies to take theintensive development path, while cleaning out labor-dependent, small-scaled,uncompetitive and environmentally unfriendly ones. This could strengthen thecentralized management of the industry and realize resource sharing. Thirdly, thefurniture companies have enhanced their learning through a variety of channels soas to raise their learning capability and master more market information. Fourthly,the government has organized various intermediaries to create a favorable serviceenvironment.

12According to Dongguan City, Da Lingshan Town People’s Government internal data obtainedfrom the order.


4.2.5.3 A Complete Industrial Cluster Needs to Be Fostered to AchieveIndustrial Upgrading

Dalingshan possesses leading global paint and coating companies, the largesttimber distribution center in Southeast Asia as well as a large number of supportingcompanies related to furniture production, accordingly forming a large-scaled fur-niture industrial cluster. It is beneficial to carry out cooperation among enterprisesand develop the efficient scientific and technological innovation platforms,including key laboratories, engineering and technology centers and enterprise R&Dcenters. Enterprises in the cluster can share a variety of public service platforms,such as the technology public service platform, resource service platform, intel-lectual property rights service platform and information service platform. Suchintegration of various resources can develop the innovation synergy.

4.2.5.4 Improving the Technical Ability Is an Effective Wayfor Enterprise Transformation and Upgrading

When developing the furniture industry, Dalingshan government has encouragedcompanies to adopt the most advanced technology by launching a series of expertseminars and overseas exchanges and providing supports to major projects. As aresult, the technological capability has been raised, new products have beendeveloped, and new technologies and new manufacturing techniques have beenintroduced, promoted and applied. The companies have thus not only improvedtheir productivity, but also partly solved the pollution problem resulting from tra-ditional furniture production. All these efforts have ensured the furniture industry toembark on the road of self-design, self-production, self-marketing, so as to achievesustainable, steady and healthy development in accordance with the establishedgoals.


Chapter 5Case Analysis of Public TechnologyPlatforms

5.1 High-Tech Industry Development by Taiwan ITRI

5.1.1 Background of ITRI

Founded in 1973 in Taiwan, Industrial Technology Research Institute (ITRI) is anonprofit and public R&D organization engaging in technical services of publicresearch in applied technology. Its origin could be traced to the Sun Yunxuan’s era.During his visit to the Korea Institute of Science and Technology, Sun Yunxuan,the Minister of Economic Affairs at that time, found that a large number ofUS-returned scholars had focused on developing the electronic, chemical and textiletechnologies, which successfully assisted the South Korean firms to upgrade. Afterreturning to Taiwan, Sun decided to set up a similar institute named “IndustrialTechnology Research Institute”. It was established through a merger of theequipment, land and talents of three research organizations: the Union IndustrialResearch Laboratories, Mining Research and Service Organization, and the MetalIndustrial Research Institute. To help small and medium-sized industries in Taiwanovercome the long-term risks resulting from their lack of R&D resources andinnovative capabilities, ITRI has developed a series of prospective, critical anduniversal technologies and transferred them into the industries. Besides, it hasclosely integrated the government’s technology-development schemes with the firmand market-demands, thereby jointly driving the industrial development. Over thepast four decades, ITRI has played a vital role in introducing and transferringforeign technologies, cultivating talents, providing information, incubating com-panies, and offering technical services. Thanks to its significant achievements intalent cultivation, specifically, ITRI has been honored as the place nurturing generalmanagers for Taiwan’s enterprises. Currently, the number of experts transferredfrom ITRI into Taiwan’s industries has exceeded 15,000, most of which haveplayed critical role in their companies and in Taiwan’s science and technology(S&T) industry, incubating the emerging technology industry with outstanding


197




sustainable performance. And the majority of researchers from the ElectronicInstitute, a subordinate body of ITRI, have developed the well-known semicon-ductor industry and spinoff high-tech corporations such as TSMC and UMC inHsinchu Science Park. Thanks to these outstanding performances, ITRI has beenawarded with “The Best Incubation Center of the Year” by the U.S. NationalBusiness Incubation Association (NBIA) in 2006, the first time an Asian institutereceiving this award since NBIA’s two decades of foundation.

5.1.2 Objectives and Visions of ITRI

ITRI is a world-class technology research and development (R&D) institute. Afteraccumulating relevant technology know-how and experience, it transformed itselffrom a technology purchaser and follower to a technology innovator. Moreover, theconnotation of R&D has shifted from simple learning to innovation and creativity.Such continuous innovations contribute to substantial R&D achievements, whichquickly facilitated the transfer of technology to the industrial community. ITRI aimsto become one of the global leading R&D institutes generating new industrial value,a workplace welcomed by R&D talents, and a cradle of industrial technologyinnovators.

5.1.3 Organizational Structure of ITRI

5.1.3.1 Personnel Structure

Statistics show that, until February 29th, 2008, ITRI was home to over 5,826employees and 13 research institutions. Figures 5.1, 5.2 and 5.3 reveal the edu-cation level, working years and post distribution of ITRI’s staff.

In addition to the business promotion department and the administrativedepartment, ITRI relies mainly on Linkage Center, Basic Research Institutes andFocus Center to fulfill its missions of advancing corporate upgrades. The LinkageCenter aims to promote the cross-cutting and cross-disciplinary cooperation in theresearch institutes. The basic research institute comprises the Biomedical Center,Energy and Environment Center, Material and Chemical Center, the Institute ofMachinery, Information and Communication Center, Electronic and OptoelectronicCenter. And the Focus Center, including five core technology centers, hence alsonamed the Core-tech center, sticks to carry out international cooperation.

198 5 Case Analysis of Public Technology Platforms

5.1.3.2 Linkage Center

Linkage Center consists of five subdivisions, that is, Creative Center, NanometerCenter, Industrial Economics and Knowledge Center, Measurement Center andService and Technology Application Center.

Creative Center

Set up by ITRI in 2004, Creative Center aimed to promote the establishment of newindustry models and provide good ideas, thereby playing a key role in the inter-national arena. It strived for the industrial transformation from “Made in Taiwan” to“Created in Taiwan”, directing scientific and technological R&D for social needs.The center strived to show its original concepts by means of demonstrating

17%

55%

17%

11%

Doctor 1,017

Master 3,216

Bachelor 974Junior College 619

Fig. 5.1 Educationattainment of the personnel

47%

21%

13%

13%6%

10 years 2,7515-10 years 1,2073-5 years 7431-3 years 7631 year 362

Fig. 5.2 Working years ofthe personnel

84%

15%1%

R&D 4907

Administrative 869

Tech support 50

Fig. 5.3 Post distribution ofthe personnel

5.1 High-Tech Industry Development by Taiwan ITRI 199

prototypes, thus stimulating industrial opportunities. Also, it refined the team’screative methods and processes so that they could be spread to the industry and beintegrated with the technology and industry.

Nanometer Center

Established in 2002, it is an interdisciplinary linkage unit in ITRI. As aS&T-network organization, it centered on knowledge-operation team and coordi-nated with other core teams. It mainly engaged in business planning, intelligencecollection, facilities management, external window and other matters.

Industrial Economics and Knowledge Center (IEK)

The center aimed to enhance the added value of the industry and to provide cus-tomers with information and consultancy services such as industry research, policyresearch, prospective trends and other innovative services.

Measurement Center

It was jointly established in 1985 by ITRI and the Central Bureau of Standards(now the Standard Inspection Bureau) of Ministry of Economic Affairs. It aimed atthe promotion of cross-field and cross-disciplinary cooperation to create derivativevalue. Its functions include planning and promotion, standards and technologydevelopment, standards and legal measurement technology development, thedevelopment of instrument and sensing technology, measurement verification andinnovation applications, medical device validation and prospective sensing tech-nology development.

Service and Technology Application Center (STC)

Established in 2006, it was designed to explore opportunities in industrial valuechains, to initiate original, technological and long-term service industry, to developa comprehensive service system, and to construct the environment required by thetechnological service center.

5.1.3.3 Basic Research Institutes

ITRI’s R&D mainly focused on six major technical fields, including electronics andoptoelectronics, information and communication, advanced manufacturing andsystems, chemical and nanometer, biotechnology and medicine, energy and


environment. (1) Electronic Information and Photoelectric Institute played a sig-nificant role in Taiwan’s industrial development and even in the world.(2) Information and Communication Research Institute focused on R&D in fouraspects, including the entire IP telecommunications networks and services, broad-band wireless communications, mobile digital life and wireless sensor network.(3) Machinery and Control Institute has also made a great contribution to thedevelopment of Taiwan’s machinery industry. (4) Materials and Chemical ResearchInstitute, stressing the cooperation between academia and industry, concentrated onthe R&D of industry-needed special chemicals and materials. (5) Energy andEnvironment Research Institute provided various resources (including coal, mining,geothermal, renewable energy, energy conservation and water) and integrated allkinds of energy, resources and environmental technology, so as to conduct theresearch on environmental protection and industrial safety and health, which playeda significant role in advancing the industrial development. (6) Biotechnology andMedicine Research Institute, applying genosome and medical technology as thecore, carried out various researches, mainly focusing on proteinoplast, genechip,biomarker, bioinformatics, stem cell and cell therapy, biomaterial, and naturalmedicine development.

5.1.3.4 Core-Tech Center

Core-tech center is the main R&D base of ITRI, including Technology DisplayCenter, Wafer Center, Solar Photoelectric Center, Medicine Center andIdentification Center. In particular, Identification Center is the first qualified testcenter in the Asia-Pacific region.

ITRI’s organizational structure is shown in Fig. 5.4.

5.1.4 ITRI’s S&T Projects, Service Revenue, TalentCultivation and Patent Application

As shown in Fig. 5.5, in 2006 ITRI received a total revenue of NT $17.633 billion(about 4 billion RMB), 48.3% of which was from industrial services (NT $8.5billion) and 49.7% from S&T projects (NT $8.7 billion).

Apart from industrial service income, ITRI has also contributed greatly to talentcultivation. From 1973 to 2005, it has nurtured 18,490 professionals, among which15,209 work in enterprises, 1,718 in academia, 891 for further education and 672 ingovernmental institutions (Fig. 5.6).

In 2005, ITRI applied for 2,149 patents, among which 2005 were granted (seeFig. 5.7).

In 2005, with 49,558 industrial technical service projects undergoing, ITRIprovided technological services for 26,358 companies (see Fig. 5.8).


Board of Directors

Board of Supervisors

ITRI

Industrial College South

Branch

Technology Transfer and Service Center

Research officeInternational Business Center Marketing & communication office

Human Resources AccountingAdministrative ServicesInformation and Technology Service center

Linkage Center Creative CenterNanometer

CenterIndustrial

Economics and Knowledge Center (IEK)

Core-tech CenterTechnology

display CenterWafer CenterMedicine CenterSolar photoelectric

Identification centerCenter

Business Development Department

Basic Research Ins tuteElectronic Information and Photoelectric

Institute

Information and Communication Research

Institute

Machinery and Control Institute

Materials and Chemical Research Institute,

Energy and Environment Research Institute

Biotechnology an medicine Research Institute


Fig. 5.4 ITRI’s organization

Fig. 5.5 Revenue from scientific projects and industrial services


Fig. 5.6 Output of ITRI’stalents

Fig. 5.7 Application of patents

Fig. 5.8 Industrial and technological services


In 2005, a total of 663 items of technology were transferred from ITRI to 851companies (see Fig. 5.9).

In 2005, ITRI accepted 1,188 entrusted projects from 12,775 companies (seeFig. 5.10).

5.2 The Operational Model and Characteristics of ITRI

Comparing the organizational structures and functions between mainland China’sinstitutes and Taiwan’s ITRI, we can draw the following conclusion. Horizontally,institutes in the Mainland were relatively decentralized and mono-disciplinary,lacking scientific research institutes like ITRI with comprehensive infrastructureand cutting across multiple disciplines. Vertically, mainland China lacked an

Fig. 5.9 Technological transfer

Fig. 5.10 Entrusted research


effective carrier and system for industrializing scientific research achievements. Inparticular, the ambiguous attitude toward sharing research achievements betweenresearch staff and institutes and the dubious boundaries on entitlement became animportant barrier on the way of industrialization. Therefore, China has not devel-oped a functional system and carrier to nurture enterprises. Both the lower indus-trialization efficiency of college achievements and inadequate ability in incubatingqualified companies from research institutes led to huge waste of resources anddisjunction of IUR (Industry-University-Research). Specifically, the ITRI has thefollowing characteristics in its operation.

5.2.1 The Legislation and Commercialized OperationJointly Support the Development of ITRI

According to the Regulation on the Establishment of ITRI, ITRI was set up bygovernment-invested funds. After four decades of development, the sources offunds have gradually shifted from solely depending on the government investmentto mainly relying on the contract management. The government’s sponsoring andITRI’s self-creation contribute to ITRI’s survival and growth. As a non-profit sci-entific and research institute founded privately and subsidized governmentally, thehistory of ITRI can be divided into 3 phases (as shown in Fig. 5.11).

The first phase, from 1973 to 1979, is the start-up period. Taiwan governmentdonated three institutes that originally belonged to the Ministry of Economic Affairsto establish the ITRI, the first time a government-funded private institute in Taiwan.With the total amount of funds coming from the government, ITRI was under thesupervision of donation charter and organizational regulations. By this way, thegovernment could guarantee the execution of scientific and technological plans and

Hsinchu Science Park: 1386 hectares

Central Science Park: 711 hectares

Tainan Science Park: 1616 hectares

Total:3773 hectares

Houli Science Park

Yilan Science Park

Longtan Science Park

Hsinchu Biomedical Science ParkHsinchu Science Park

Hsinchu South Science Park

Causeway Science Park

Taichung Science ParkTaizhong Science Park

Huwei Science Park

Tainan Science Park

Kaohsiung Science Park

Kaohsiung Biotechnological Science Park

Fig. 5.11 Development status of Taiwan science park

5.2 The Operational Model and Characteristics of ITRI 205

the proper use of capitals, so as to fulfill its objective of promoting scientific andtechnological development.

In the second phase, from 1980 to 1992, ITRI grew rapidly. Led by the Plan ofScientific and Technological Special Project, ITRI has made great progress in theestablishment of institutions, technology development and transfer and industrialservices. Consequently, it became the core institute in facilitating IUR cooperationand supporting emerging high-tech industry.

From 1993 till now, ITRI entered the steady developing phase. It strengthenedthe industrial services by using the 1:1 ratio as quantitative indicators, that is,balancing the expenditures on carrying projects in public sectors (including relativegovernmental organizations) and entrusting projects for enterprises. The expendi-tures consist of the following four sources. First is from public projects which arecommissioned by government departments. Second is from technological servicesprojects commissioned by the military and enterprises and from industrial servicessuch as consultancy, training, inspection and market analysis. Third is fromresearch projects, that is, assisting companies to carry out technological innovationand R&D regarding specific products. Fourth is from non-operating revenue anddonation. Currently, 49% of ITRI’s revenue comes from the government. Basicallyall of the bodies of ITRI are independent operational centers that cope with theirown profits and losses. These operational centers enjoy sufficient exchange andcommunication vertically and horizontally.

Along with the increasingly strong R&D capability and comprehensive power,ITRI launched a “refresh” revolution, proposing the privatization and internation-alization strategy towards the 21st century. Privatization stands for, through R&Dcooperation and technical services, gradually increasing the contractual income ofcompanies and reducing governmental reliance. Internationalization refers toestablishing strategic alliance with famous scientific and research institutes andmanufacturers to boost the innovative and prospective research in ITRI, therebydeveloping ITRI into an institute with international competitiveness and thusupgrading the Taiwan industry from technology “follower” to technology“innovator”.

Table 5.1 shows the development phrases and operational pattern of ITRI.

5.2.2 Integration Center Offers Powerful Capabilitiesin Integrating Cross-Field Resources

The integration center of ITRI is composed of the innovation center, nanotech-nology center, IEK, measurement center and service and application center. All ofthese centers base on the existing system of ITRI and have close interactions withindustries to integrate cross-discipline, cross-industry and cross-region resources.Specifically, the Innovation Center provides unique creativity continuously tonurture a diversified development environment. The Nanotechnology Center, by


holding a series of nanotechnology-related activities, established a world-classlaboratory to carry out large-scale cross-field research and proactively participate ininternational nanotechnology exhibitions and APEC events. It not only supportsTTRI’s schemes, but also shares resources with the outside world, so as to maxi-mize the resource utilization. IEK provides customers with information and con-sultancy services such as industry research, policy research, prospective trends andother innovative services. It also created a top-class industrial think-tank throughthe internet. The Measurement Center aims at the promotion of cross-field andcross-disciplinary cooperation to create derivative and assists in the continuousimprovement of technology and industries in Taiwan. The Service and TechnologyApplication Center (STC), through effectively utilizing ITRI’s cross-field resources,helps enterprises seek for cooperation opportunities and speed up the developmentof science and technology of service industry, in a pursuit of forming newly serviceindustry and service industrial clusters.

5.2.3 The Open Research System Based on OpenLab Project

ITRI is a highly open system, featured by its highly innovated labs. The OpenLabsprovides institutes with a whole set of Total Resource Services, including tech-nology licensing, research commission, company cooperation, analysis of markets,strategy and organization, capital search, resolution of legal issues, information,

Table 5.1 Development phrases and operational pattern of ITRI

Rapid growth period

Future development

Start-up period

Ownership: independentcorporation established by legislationSource of funds : totally government-fundedOperational mode:under governmentalsupervision

Source of funds:carrying projects in public sectors and entrusting projects for enterprises;Structure of expenditures: Public projects, technological services projects, researchprojects, non-operating revenue and donation

Operational mode:conducting privatization and internationalization strategy; enhancing cooperation with scientific and research institutes and companies, and reducing governmental reliance.


communication, space infrastructure and lab equipment. It strives to develop aone-stop system that can support R&D, innovation, startup business and industrialgrowth, which can take full use of its functional advantages. Since its foundation in1996, OpenLabs have hosted more than 200 companies (with over 5,300 people),113 of which are start-ups, with total investment and R&D input exceeding NT$42.5 billion.1

In terms of daily operation, OpenLabs are applied by companies and run byITRI, government and companies together. The government and companies accountfor 60% and 40%, respectively, of the total investment. If enterprises and indi-viduals possessing patents and specific technology want to carry out furtherresearch or applicable development, they can hand out application to OpenLabswith their development plans. Once approved, they can use the labs’ equipment andco-work with the research team. The proportion of achievements could be nego-tiated according to the interment and research input of both sides.2

5.2.4 Establishing a Flexible Inflow-and-OutflowMechanism for Talents to Cultivate More InnovativeSources

The openness of ITRI is also reflected in its loose mechanism of personnel flow.ITRI actively recruits talents from many fields and uses mechanisms to attractoverseas graduates to stimulate more innovative thinking. A few years ago, the poorscientific research environment in Taiwan caused a large number of talents to goabroad every year and ITRI had to take the initiative of attracting and cultivatingcollege graduates. Talents nurtured by upstream colleges or research institutes couldreceive industrial knowledge training from ITRI and then flow to the downstreamindustries. Accordingly, ITRI become the important talent pool and innovationresources for the development of small and medium-sized enterprises in Taiwan. Itencourages R&D personnel to transfer to enterprises (i.e. “job hopping”) or resignto set up science and technology enterprises. ITRI believes that the sole purpose ofits existence is to transfer the developed scientific and technological achievementsto corporate production, rather than profit making. Thus whether it is technologytransfer or technical-personnel flow to enterprise, the result are the industrializationof scientific and technological achievements. By the end of December 2005, it hasnurtured 18,490 professionals, among which 15,209 to enterprises, 1,718 to aca-demia, 891 to further education and 672 to governmental institutions. These talents,who bring technology to industry, have contributed significantly to Taiwan’s

1Ruan, C.H. et al., 2006. The importance of Taiwan’s ITRI operational mode to the construction ofpublic research and development platform in Hangzhou. Journal of The Party School of CPCHangzhou.2Liu, Q., 2003. Case study of Taiwan's ITRI. R&D Management.


technological transformation and upgrading. Takes the Optoelectronics Institute ofITRI as an example. Among those who left this institute and started up enterprises,25 became CEO by 2002. They helped Taiwan’s optoelectronics industry achieverapid development, generating an output value of NT $4012 billion in 2001 withproducts like CD-ROM, scanner and LED ranking among the world’s top three.

5.3 Development of Taiwan’s Science Parks

In the United States, Silicon Valley is not only a science park but also an ecologicalsystem, wherein start-up technological achievements by small companies andindependent inventors can be commercialized rapidly and thus grow intoworld-class enterprises. Otherwise, these important inventions would be taken bylarge corporations eventually, which is proven by numerous examples.

Taiwan Hsinchu Science Park, in imitation of Silicon Valley, has achievedremarkable performances in cultivating a number of globally famous world-classenterprises, thus enjoying substantial reputation among the lots of science parks inthe world. Following this example, Tainan Science Park was then programmed andcame into being. In May 2006, an interview was conducted by the author’s researchteam Professor Liu, who engages in innovation management in National SunYat-sen University. Subsequently, a series of surveys were carried out in TainanScience Park on Chimei Innolux, a photoelectric enterprise, and MeisuoTechnology, a biotechnology enterprise, in an effort to know more about theinnovation and upgrading experience of Taiwan science parks.

5.3.1 From Hsinchu Science Park to Tainan Science Park

At the beginning of 1970s, the economy in Taiwan developed rapidly. Taiwan’sgovernment determined to construct a high-tech industrial park in Hsinchu like theSilicon Valley, in an effort to enhance the international competitiveness ofexporting products manufactured in the export processing zones and accelerateindustrial upgrades and industrial structure transformation.

Located in the southeast of Hsinchu city, Hsinchu Science Park (hereinafterreferred to as HSP) has controlled a planning area of approximate 2100, 600 ha ofwhich are exploitable (see Fig. 5.11). With its slogan “multi-targets andmulti-functions”, this park aims at an integration of college, park and community.Officially opened in 1980, by the end of 2004 it housed a total of 384 firms with US$32.3 billion of sales revenue and 113,000 employees.

Thanks to past three decades of development, HSP has formed six pillarindustries, including semiconductor, computer and auxiliary equipment, commu-nication, optoelectronics, precision machinery and biotechnology (see Fig. 5.12).Among them, the semiconductor and computer industry have yielded impressive


achievements. Until 2004, HSP hosted 164 semiconductor manufacturers with asales volume of NT $388 billion, engaging in design, production, testing andpackaging. Ranging from upstream, middle-stream and downstream, these com-panies formed a complete semiconductor industrial chain, becoming one of theworld’s most significant centers for semiconductor manufacturing. Regarding thecomputer and auxiliary equipment industry, HSP was home to Taiwan’s importantcomputer manufacturers such as Acer, Mio and MAG. Until 2004 this industry hadgenerated a gross output value of over NT $100 billion with products consisting ofpersonal computers, monitors, image scanners, network cards, mice and so on.

In 1982, not long after the opening of HSP, a second scientific industrial zonewas called for establishing in Taiwan. After repeating contemplation and locationselection, in 1995 the government approved the establishment of Tainan SciencePark (hereinafter referred to as TSP) in Xinshi, Shanhua and Anding Districts ofTainan City. Such governmental strategy was aimed at sustainably satisfying theexpansion demands of the high-tech industry and pushing the high-tech industrialdevelopment in southern Taiwan.

TSP has developed Phase I site, Phase II site and Bamboo site, with the formertwo in Tainan county, covering a total area of 2,565 acres (10.38 km2). The parkfocuses on optoelectronics, semiconductor, biotechnology, and precision machineryindustries. Since 1998 TSP has attracted an increasingly large amount of high-techcompanies. By the end of 2014, this number reached 180 with an operating volumeof NT $639.43 billion (see Figs. 5.13 and 5.14).

To face the challenges that may occur in 2008, Taiwan’s government formulateddevelopment priorities in 2002 and then the “Two Trillion and Two Stars” programin 2003. It aims to raise the production capacity of Taiwan within 5 years,strengthen scientific and technological R&D, expand four high-tech industriesincluding semiconductors, monitors, digital contents and biotechnology, turn to ahigh value-added manufacturing base in 5 years, and subsequently develop a

Hsinchu South

159 hectaresIntroduced industries: biotechnology, communication and optoelectronics

Taichung

414 hectaresIntroduced industries: precision

machinery and optoelectronics

Huwei

97 hectares Introduced industries: agricultural biotechnology

Tainan

1038 hectaresIntroduced industries: semiconductor, computer and auxiliary equipment, communication, optoelectronics, precision machinery and biotechnology

Kaohsiung

570 hectaresIntroduced industries: semiconductor, communication, optoelectronics and biotechnology

Tongluo

350 hectaresIntroduced industries: communication, optoelectronics, micro precision machinery

Hsinchu

625 hectaresIntroduced industries: semiconductor, computer and auxiliary equipment, communication, optoelectronics, precision machinery and biotechnology

••

••

••

••

••

••

••

Fig. 5.12 Categories of industrial introduction in Taiwan’s science parks


globally competitive knowledge-economy industry in 10 years. “Two Trillion”refers that the output value of semiconductors and monitors would exceed NT $1trillion in 2006. “Two Stars” refers that the digital content and biotechnology wouldbecome the star industries, with the output value reaching NT $370 billion and NT

Fig. 5.13 Growth of introduced manufacturers in Tainan science park (number of enterprises)

Fig. 5.14 Turnover growth of Tainan science park (NT $0.1 billion)

5.3 Development of Taiwan’s Science Parks 211

$250 billion, respectively, in 2006. In accordance with this development path, HSPand TSP have made great achievements in these four industries, playing a criticalrole in the “Two Trillion and Two Stars” program.

5.3.2 Transformation and Upgrading of Taiwan’s ScienceParks

Throughout the development of Taiwan Industrial Zone, it can be found that alongwith the transfer of industry focus and economic traits, gradual transformation andupgrading also emerge in the business activities in Taiwan’s industrial zones (seeTable 5.1).

In 1940s, Taiwan’s economy relied heavily on import substitution and focused onagriculture, resulting that most industrial parks engaged in traditional processing. In1950s, the economy transformed into export orientation and focused on the people’slivelihood industry, along with the rapid development of scientific parks led by thebooming of export processing zones. In 1960s, the government started to enhanceinfrastructure and develop heavy chemical industries, with petrochemical industriesaccounting for most of the industrial zones. In 1970s, threatened twice by oil crisesand the growing pressure from labor-intensive industries, Taiwan advocatedinnovation-oriented economic development and attached great important to tech-nology industries, contributing to the emergence of scientific parks in real sense. Theestablishment of HSP in 1980 was a typical example of this development stage.

Overall, Taiwan science parks have shifted from initially focusingmore-on-manufacturing and less-on-technology to focusing on both at the end of1990s, indicating its sustainable upgrades. The success of HSP and TSP and thedecline of Taiwan export processing zones reflected the changes in Taiwan’sindustrial structures.

In fact, along with the industrial transfer in Taiwan, its industrial parks also haveexperienced sustainable transformation and upgrading, leading to the leapfroggingdevelopment of HSP and TSP. HSP plays a key role in Taiwan’s first-stagehigh-tech development, while TSP is important in the second-stage high-techdevelopment and the major construction planning and development strategy of TSPare related to industrial upgrades and operation-mode changes.

5.3.2.1 High-Tech Positioning and Industrial Upgrading

The development positioning of TSP is very clear, that is, “introducing high-techindustrial and technological talents”, “encouraging industrial technology innova-tion”, and “promoting high-tech industry”. For this reason, both HSP and TSPattach great importance to the development of several high-tech industries such asIC, optoelectronics, biotechnology and communication. But TSP and HSP aredifferent in their positioning. HSP is famous for the cultivation of R&D and


manufacturing capability of those globally well-known semiconductor corporationssuch as TSMC and UMC, leading Taiwan high-tech industries to develop towardsindustrialization. In the late 1990s, soon after TSP’s foundation, optoelectronicproducts, due to its huge market potential, turned to the highlight in the globalhigh-tech industry, which pushed the industrial development in Taiwan and sub-sequently became the development direction of TSP.

Tracing Taiwan’s industrial development process in these recent two decades,we can find a high-tech-driven path. In 1980s, computer peripherals industrybrought brilliant achievements to HSP, laying a solid foundation for the subsequentgrowth of computer information industry. Then in the 1990s, semiconductorindustry started to develop, driving Taiwan to become a chip foundry base and the2nd largest region of IC design in the world. Its vertical labor-division structurebrought enormous economic benefits, reshaping the management pattern of globalsemiconductor industries. In 2003, HSP witnessed the output value of photoelectricindustry accounting for 1.3% of that in the world and 12.6% of that in Taiwan.Until the end of 2014, TSP housed 53 photovoltaic enterprises with NT $315.82billion of turnover.

Table 5.2 shows the industry distribution of TSP.In fact, Taiwan’s government has taken semiconductor and computer industries

as two strategic development goals in its Science and Technology DevelopmentScheme in the past two decades, which attracted abundant corporate investment inthese two industries. This enabled Taiwan to become the 3rd largest exporter ofcomputer products in the world, trailing the United States and Japan. At that time,these two industries were experiencing the growing phrase in the industry life cycle,reaching a higher level of profitability and expansion. Along with the increasinglymature computer industry in recent years, Taiwan’s government and enterpriseshave started to focus on emerging industries, such as communications, imagingelectronics, precision equipment and biotechnology. For biotechnology industry, inparticular, the government programs the development of agricultural biotechnology,pharmaceutical biotechnology, genomics and other related fields. Due to the lateemergence of biotechnology industry, HSP didn’t put it as the development priority

Table 5.2 Industry distribution of Tainan science park (TSP)

Industrial distribution Tainan science park (2014)

Number of enterprises entering the park Turnover

Photoelectric 53 3158.2

Integrated circuit (IC) 13 2806.2

Computer and peripheral 2 18.9

Biotechnology 50 61.1

Communication 11 50.3

Precision mechanism 46 274.6

Other 5 25.0

Amount 180 6394.3


in the early time, but simply set up a biotechnology park in Chupei (near Hsinchu).TSP, instead, was determined soon after its foundation to set up a core biotech-nology park, which consists of substantial research resources such as ComputerCenter, Second Animal Center, NCKU (National Cheng Kung University)Hospital, QiMei Medical Center and Livestock Research Institute.

5.3.2.2 Enterprise Admittance System and Qualification Upgradingin the Parks

It is generally believed that science parks have far-reaching significance in thedevelopment of high-tech industries. However, limited by space area, introducingsome enterprises with higher efficiency and growth potential in the specifichigh-tech industries became a key issue for the Taiwanese government to consider.At the same time, rising land prices in the park also selected the superior enterprisesand eliminated the inferior enterprises. Enterprises that had the finest qualities anddevelopmental potentials tended to invest and build factories in science parks whichhad better development environment.

HSP, the first large-scale science park built by the Taiwanese government,shouldered heavy responsibilities for heading economic transferring to high-techindustries. Constantly revising operational planning and improving admittancesystem, HSP sets higher requirements for the entry of labor-intensive andresource-intensive enterprises and restricts or rejects those low technology-intensivecompanies. For enterprises meeting admission requirements, they could enjoy taxincentives, preferential land plants and financial incentive policies. Take financialincentives as an example. Manufacturers could first apply for the governmentinvolvement in their corporate investment with the government-funded sharesaccounting for as high as 49%, which could be repurchased by manufacturerspartially or totally. If investors want to become shareholders by means of tech-nology, they could own a maximum of 25% of shares. These preferential policieshave attracted a lot of enterprises to enter HSP, but only those competent andqualified enough can gain approval for admission due to the strict admittancesystem.

Following HSP’s experiences, TSP has clear direction in developing high-techindustries. Its admittance system and qualification requirements reveal three char-acteristics as follows.

(1) The positioning of developing high-tech was quite clear, that is,technology-leading enterprises can be admitted first.

(2) The obligations of admitted enterprises were clarified. First, for example, theymust pay certain amount of deposit for their investment. Second, they can runbusiness including foreign trade but cannot engage in foreign trades solely.Third, they must pass reviews before gaining admittance approval and submitthe management fees (0.2% of operating income) to the park every year.


(3) Limits were set on the number of annual approval. For example, the number ofcompanies approved to settle in TSP was only 20 in 2005. And the man-agement office was rather strict about the admission approval, which could begained by only 20% of the total applying companies, ensuring the industrialquality of TSP in the future.

In addition, the land in TSP can only be rent but not for sale, ensuring com-panies cannot get the added value from the land. This virtually eliminates thoseopportunists who simply chase for the profits from value-added estate of scienceparks, thus guaranteeing the quality of high-tech enterprises in TSP.

5.3.2.3 Extending and Upgrading Towards the High Value-AddedParts of the Industrial Chain to Form a Relatively CompleteIndustrial Cluster

To accelerate Taiwan’s high-tech industry development, TSP promoted economicdevelopment mainly through the revitalization plan. Different from HSP, as aconsequence of global economic integration, Taiwan’s economy is under the threatof rising labor costs, leading to the large-scale transferring of labor-intensivemanufacturing industry into mainland China and Southeast Asia. As far as thecurrent situation is concerned, the development trend of Taiwan’s science parks hasgradually transformed from focusing more-on-manufacturing but less-on-R&D tolaying equal stress on both (see Table 5.3).

Take the IC industry in HSP as an example. Its technological developmentunderwent five phases, that is, technology sprouting ! introduction ! indepen-dence ! diffusion, thereby forming a professional labor-division structureincluding upper, middle and lower-stream. The IC industry is still developing keytechnologies of next generation, in an effort to achieve full-scale development in theareas such as talents cultivation, designing, processing, packaging, testing, mate-rials and equipment. In this period, Taiwan’s semiconductor industry transferred its

Table 5.3 Development process of IC industry in Hsinchu science park

1960s 1970s 1980s 1990s 2000s Equipment

Chips

Layout

Design tools

Chemicals Chemicals

Lead frame Lead frame

Test Test

Mask Mask Mask

Design Design Design Design

Production Production Production Production Production

Packaging Packaging Packaging Packaging Packaging Packaging


focus from labor-intensive and lower value-added assembly sector to the highervalue-added designing and manufacturing sector (see Table 5.3).

The planning of TSP further reveals how Taiwan’s government has developedscience and technology for the sake of solving crises during economic develop-ment, facilitating industrial restructuring, upgrading towards higher value-addedparts in the industrial chain, and thus gaining sustainable competitiveness. TSPaims at the future development of biotechnology industry and actively introducesthis industry into the park, It programs biotechnology core districts and corridorsand sets up biotechnology standard factories, fermentation pilot plant, commoninstrument center, key laboratory and animal center. TSP positions its futuredevelopment of biotechnology industry at healthcare products (including medicine,biological information and genomes, Chinese herbal medicine and medical equip-ment), bio-chip, agricultural biotechnology products and aquatic products. Theoriginal biotechnology companies in TSP engaged in pharmaceutical application,downstream of biotechnology industrial chain, but lacked sufficient investment in“gene biotechnology platform”, the most important part in the upstream.Afterwards, TSP strove to attract genetic technology enterprises in many ways. ByJanuary 2006, 30 approved biotechnology companies have settled down in TSP,revealing the forming of biotechnology industry cluster (see Fig. 5.15).

In addition, TSP also formed a relatively complete IC industrial cluster andoptoelectronic industrial cluster, striving to become the key centers for 12-in. waferfoundry and optoelectronic manufacturing in Taiwan.

5.3.2.4 Integration of Industry, Government and University AroundIndustrial Agglomeration

Along with the gradually disappearing advantages of volume production in Taiwan,the business activities and development modes of science parks also undergo sig-nificant changes. The rapid development of high-tech industries in science parkscan be attributed to industrial clusters, technical support system formed by researchinstitutes and colleges, multi-dimensional financing system, and well-developedintermediary service system. TSP, consisting of a specific area, has formed anindustrial R&D system built jointly by the government, universities and enterprises(see Fig. 5.16). They can share research platforms and lay their focus on basicresearch, applied research and technology development, respectively, so that tal-ents, information and technical resources can flow quickly. TSP is committed tocultivating a rich and diverse high-tech culture, making it different from HSP.

Taiwan’s science parks devoted considerable inputs to the R&D of basic scienceand applied technology, creating a favorable environment for the incubation andcultivation of world-renowned enterprises.

In 2003, HSP invested NT $50.4 billion on R&D (accounting for 5.0% of thetotal turnover), the largest part of which goes to IC industry (about NT $32.2billion). Nevertheless, the highest strength of R&D (the ratio of R&D funds toturnover) was in biotechnology industry (24.1%), reflecting Taiwan’s strong


Pharmaceutical Industry

Chinese Herbal G&E Herbal Biotechnology Co., Ltd. / Biotanico Inc.

Small Molecule DrugsScinopharm Taiwan Ltd. / GeneFermBiotechnology Co., Ltd. / Savior Lifetec Corp. / High Science Co., Ltd. / San Heh Pharmaceutical Corp. / Original BioMedicals Co., Ltd.

Emerging Biotechnology Industry

BiotechnologyDrugs

GenMontBiotechnology Inc.

Regenerative Medical

Sunmax Biotech Co., Ltd. / Life Fusion Inc. / Charsire Biotechnology Corp. / Bionet Corp.

Food BiotechnologyTuck-More. / Biotechnology Co., Ltd. / Synbio Tech Inc. / ProMDBiotech Co., Ltd

Medical Equipment

Medical testingAsiaGen Corp. / Firstep Bioresearch, Inc. / YB Biotech.

/ General Biologicals Corp. / CurieMed Corp.

Eped Inc. / Hung Chun Bio-s Co. Ltd / Codent Technical Industry Co.,Ltd. / Biomate Medical Devices Technology Co., Ltd / Huang Liang Biomedical

Technology Co., Ltd. / Fiberpure Co., Ltd. / Joy Medical Devices Corp. / Jo Corp. /GET-Green Energy Corp., Ltd. / United Orthopedic Corp. / D & Y Intelligence Co.,

Ltd. / Taiwan Caretech Corp. / NanoRay Biotech. / Aurora Imaging Technology. /Taiwan Implant Technology Co., Ltd. / Arix Cnc Machines Co., Ltd. / Coalition

Technology Co., Ltd. / Jianxin Biomedical Technology Co., Ltd. / Matise Instruments Co., Ltd. / CC Bio Co., Ltd. / TricornTech Corp. / Excelsius Medical Co., Ltd. / Pishon

Biomedical Co., Ltd. / MEN Dental Technology Co., Ltd. / MedicalChainInternational Corp. / LightMed Dental Technology Corp. / Mesophase Technologies,

Inc. / Kaiwood Technology Co., Ltd. / Alliance Global Technology Co., Ltd. /Dermacare Co., Ltd. / Meet Tec. Co., Ltd. / Choice Biotech Co., Ltd. / Kangyi

Technology Co., Ltd. / Comdek Industrial Corp. / Taiwan Innovation Biomedec Co., Ltd. / Acro Biomedical Co., Ltd. / Imediplus Inc. /

Fig. 5.15 Biotechnology industrial cluster in Tainan science park


determination to develop new industries. Besides, HSP hosts 10,918 researchers(accounting for 11% of total employees), of which 6,038 people engage in in ICindustry.

TSP, soon after its foundation, has clearly set up the development goal offacilitating Taiwan’s high-tech industry. Management agencies and companies inTSP often launch activities relevant to R&D. It has attracted excellent talents athome and abroad, including 5000 overseas returnees at the end of 2005. Annually itspends 6% of its revenue on R&D, which contributes to a large number of inventionpatents, accounting for 40% of Taiwan’s total patents. Furthermore, TSP encour-ages enterprises and institutions to carry out R&D on innovative technology. Since2001, it has set up R&D rewards, gradually expanding the scope and scale ofrewards (see Fig. 5.16).

5.3.2.5 Building Factor Supply and Service Systems and Speedingup the Incubation and Cultivation of Competitiveness of NewEnterprises

The success of the industrial clusters in Taiwan’s scientific parks can be attributedto the privileges provided by the parks, including a better investment environment,technology development, capital market, efficient and professional intermediaryservices, as well as good community service. For example, Taiwan IndustrialTechnology Research Institute (ITRI) not only undertakes prospective researchprojects commissioned by the Ministry of Economic Affairs of Taiwan government,but also short and medium-term research projects initiated by companies in the

Number of companies Percentage of rewards

Fig. 5.16 Innovation and R&D rewards in the Tainan science park. Source According to theofficial website of Tainan Science Park (www.stsipa.gov.tw)


parks Aimed at the industrial interests of Taiwan, ITRI first scans and tracksglobally leading technologies, then jointly develop technology with companies inthe parks so as to absorb, digest and utilize these new technologies in their projects,and finally drive the commercial process through the output of products, equipmentand technical know-how. UMC and TSMC and other world-renowned enterprisesare spinoff companies from ITRI.

In terms of intermediary services systems in the science parks, the trade asso-ciation is a typical case. It is responsible for planning and management, import andexport operations, financial and accounting management, personnel training, publicwelfare of employees and so on. It also helps to coordinate the relationship amongenterprises and that between enterprises and government. Hence, it is quiteimportant in optimizing the daily operation in the science parks.

Regarding the community construction in TSP, it offers comprehensive servicessuch as dormitories, schools, hospitals, banks, post offices, leisure, and security,playing an important role in attracting talents.

5.3.2.6 Promoting the Development of Local Enterprises

The establishment of the science parks has promoted the development of localenterprises. The settling of many large enterprises pushes forward the transforma-tion and upgrading of local industries, which subsequently drives the local com-panies to transform and upgrade towards high technology. For example, Yishang, acompany once focused on precision machinery, spotting the rapid development ofthe chip industry, shifted to manufacturing chip protection box and developingcleaning equipment and pressurized de-foaming equipment for TFT-LCD manu-facturing process. Changxing Chemical, a company once specialized in chemicalmaterials, also transferred to chip industry and manufacturedsemiconductor-specific grinding fluid. And, thanks to the establishment of TSP,many other companies in southern Taiwan, especially those competent in precisionmachinery industry, have started to set up mechanisms for high-tech R&D and IUR(industry-university-research institutes) cooperation, for the sake of participating inthe future industrial transformation and upgrading.

5.3.2.7 The Development Direction of Taiwan’s Science Parks—NewGeneration of Soka Park

Viewing the development process of Taiwan’s industry, volume-production is nolonger the industrial leading advantages and enterprises position more on the valuecreation. “New Generation of Soka Park” can better describe the future develop-ment of Taiwan’s science parks. It no longer puts the manufacturing in the firstplace, but focuses more on technology development and basic research. Despite itssmall size, it is highly flexible in mastering the development trend of marketdemand, directing enterprises to develop marketable products, and providing


value-added services. Hence, it can help Taiwan’s industries create more value, thusbecoming the driving force of Taiwan’s new round of economic growth. Flexibility,speed, vitality and efficiency become functional characteristics of Taiwan’s scienceparks. For instance, to provide service platform and more opportunities forhigh-tech enterprises, the “New Generation of Soka Park” has adopted a variety offlexible forms, including cultivation park for startup-business talents, pilot park forresearch and innovation, creative park for software design, and economic andtrading park for intellectual property services.

5.4 ITRI Supports the Development of Taiwan’s ScienceParks

5.4.1 ITRI Specialized Incubation Center Can Providean Effective Business Incubation Source

Founded by ITRI in 1996, the Incubation Center is the earliest unit ofentrepreneurship spirit education in Taiwan with an average of 50 companies set-tled each year. Companies which were set up based on discoveries of potentialprojects through internal R&D have mounted up to 148, of which 36 have beentransferred to the Science Park and 6 have successfully listed on OTC. The amountof manufacturers’ cumulative total investment has been up to NT $47 billion.According to the report of Electronic Engineering Album in 2006, ITRI was grantedthe “Best Incubation Center” by the National Business Incubation Association(NBIA). Companies in this Incubation Center are from various industries, such ascommunications, electronics, medicine, IC design, optoelectronics and materials.Among them, a number of listed companies enjoy high market value, includingPhison Electronics Corp., King Billion Electronics Corp. and Prolific TechnologyInc. Besides, other outstanding companies also settle in the Science Park, involvingJietai Technology Corp., Taiwan Micro-image Corp., RDC Semiconductor Corp.,Handlink Technologies Inc. and Conwise Technology Corp.

The successful operation of ITRI’s Incubation Center attributes to its profes-sional operation mode. First, it strives to raise the working and living standards inareas such as accommodation, transportation, medical, leisure, finance, post andtelecommunication. Second, it provides startup companies with comprehensivehardware facilities, including web facilities, large conference rooms, open labora-tories and technical support equipment. Third, it offers abundant software services,involving library services and data retrieval, information and consultation, technicalcooperation and strategic planning. Further, the Incubation Center has collaboratedwith resources such as venture capital funds, university and intermediary assistancesystem for companies led by government, thereby constructing a multifunctional


service center that consists of commerce services, management training, financialsupports and technical supports. All the above efforts have promoted the rapidgrowth of startup companies.

5.4.2 Establishing Spin-off Companies and CultivatingLarge-Scale Enterprises Through an IntellectualProperty Rights Transfer System

A spin-off company refers to a new independent company set up by some researchstaff who can utilize the scientific and technological achievements created by theoriginal research institute, for the sake of further promoting technological innova-tion and commercializing these research achievements. These spin-off companieshave contributed significantly to the development of semiconductor industry inTaiwan. No matter whether the advanced and new technologies are introduced fromoverseas or developed independently, they are still the so-called “laboratory tech-nology” in the research stage. What the enterprise needs, however, is the industrialtechnology with market-acceptable quality and cost. For this reason, shortly after itsestablishment, ITRI has strived to explore a new transfer mode for technology. Inthe mid-to-late 1970s, the electronic department of ITRI introduced the Americanintegrated circuit (IC) technology into the island and then established its ownexperimental plant for technology improvement and innovation. Afterwards, itcarried out the thorough technology transfer involving mature technology, skilledengineers and managers, on which basis United Microelectronics Corporation(UMC), Taiwan’s first private semiconductor manufacturing enterprise, wasestablished. It laid a solid foundation for the overall development of Taiwan’sinformation and electronics industries.

Subsequently, ITRI adopted this pattern and successively established nearly 100high-tech enterprises such as TSMC, Taiwan Mask and Granville. By the end of2000, 31 Spin-off Companies had been established through staff and technologytransfer from ITRI. In Hsinchu Science Park, the majority of rapidly growingcompanies in the emerging industries such as semiconductor, information, opto-electronics, materials and automation, were set up either by the spinoff technologyfrom ITRI or by the investment and innovation from ITRI’s staff. Such“spinoff-company groups” thus became the leading force in pushing the emerginghigh-tech industry in Taiwan. ITRI itself can also recover the investment cost byeither technology license to spinoff companies or equity participation in spinoffcompanies by pricing the technology.

The emergence of spinoff-company groups and the successful cultivation oflarge enterprises depend on ITRI’s establishment of a series of standardized man-agement systems for intellectual property rights (IPRs), which facilitate thefirm-orientated technology transfer and thus realize technology industrialization.For instance, ITRI’s Technology Transfer and Service Center is responsible for

5.4 ITRI Supports the Development of Taiwan’s Science Parks 221

planning, applying, registering, maintaining and protecting the intellectual prop-erties (IPs) strategy and handling other IPs business for ITRI.

According to ITRI’s Provisions of Intellectual Property Management andApplication, it regulates the ownership of IPRs as follows. First, all IPRs, includinginvention, creation and business secrets, generated by ITRI’s employees duringtheir employment period are owned by ITRI. Second, if the generation of the aboveinvention, creation and business secrets utilizes ITRI’s resources or experience,they can be implemented or utilized by ITRI in priority. Third, when ITRI, nomatter as a consignor, consignee or cooperator, carries out technological R&D, theownership of IPR would be negotiated according to contracts.

The principles when applying the above IPRs management are as follows. First,ITRI should timely license its IPRs to local manufacturers and, if necessary, carryout cross-license with foreign manufacturers so as to benefit local manufacturers.Second, the utilization of ITRI’s IPs aims to maximize its benefits by the means ofnon-exclusive license, exclusive authorization, transferring and so on. Third, toensure the performance of IPs, the pricing of IP license and technology transfershould be separated. Forth, inventors or creators have the obligation to assist ITRIin the promotion and application of their inventions, creations and related IPs.


Chapter 6Factors that Influence EnterpriseTransformation and Upgrading

6.1 Theories About the Influence Factors of EnterpriseTransformation and Upgrading

6.1.1 Enterprise Transformation and Upgrading IsInseparable from Independent Innovation

The factors influencing enterprise upgrading have received some theoretical clari-fications. Amsden (1989) believes that for the newly industrialized countries (re-gions), enterprise upgrading and independent innovation are accomplished througha sequential approach which allows firms to start from simple original equipmentmanufacturing (OEM), and then to progress on to original design manufacturing(ODM), and eventually to launch their own brands and become original brandmanufacturers (OBM). Gereffi (1999) argues that industrial upgrading is a processof improving the ability of a firm or an economy to move to more profitable andtechnologically sophisticated capital- and skill-intensive economic niches. Liu(1998) claims that the three key stages that best reflect the evolutionary process ofenterprise innovation capability are the segments representing “manufacturing”,“R&D” and “sales (brand)” on the industrial value chain. This suggests, from adifferent perspective, that enterprise transformation and upgrading is in essence aprocess of constantly improving innovation capabilities. Liu (2005) also points outthat in order to achieve transformation and upgrading, Chinese enterprises need toprogressively build on their learning ability and independent innovationcapabilities.

These scholars have all pointed out that independent innovation of an enterpriseis closely related to its transformation and upgrading. Therefore, the importantfactors that affect the independent innovation capability will also have a significantimpact on the transformation and upgrading of the enterprises.


223




6.1.2 Theoretical Research on the Factors that InfluenceIndependent Innovation of Enterprises

There exists an extensive amount of foreign research on the influence factors ofindependent innovation capabilities. Cohen and Levinthal (1989, 1990) believe thata firm’s technological innovation strength depends largely on the absorptivecapacity for external technological knowledge. Garud and Nayyar (1994) concludethat independent technological innovation capabilities can be achieved through theaccumulation, storage, maintenance and activation of corporate knowledge and thattechnological innovation occurs as a result of the integration of different knowledgeareas. Nelson (2000) proposes that firms should not neglect exploiting internalresources while they should also keep in mind the role of the external network inthe process of innovative activities.

Oerlemans et al. (2001) likewise point out that the result of a firm’s innovationdepends on the effective use of internal and external resources. Carayannis andWatson(2004) shows that the factors that nurture independent innovation include investmentand commitment, strategic alliances, intellectual property rights, human resources, etc.,while the factors that hinder it are excessive rules, national and international techno-logical development levels, market entry barriers and cultural conflicts. Westphal(1981), from the perspective of organizational behavior, views independent innovationcapability as the synthesis of organizational ability, adaptability, and the abilities toacquire technology and information. He thinks that the levels of these factors influencethe firm’s independent innovation capability. Yam et al. (2004) have studied theinnovation processes. They find that technological innovation capabilities are a com-prehensive manifestation of abilities related to R&D, manufacturing, marketing,organization, innovative decision-making, resource allocation and learning.

Burgelman (2004) regards innovation capabilities as the combination of availableresources, understanding of competitors, understanding of the environment, organi-zational structure and change, and pioneering strategy. Barton (1992) emphasizes thecombination of skills and expertise of technological people and senior technicians,technology system and management knowledge and values. Cyert and March (1963)point out that a firm’s ambition is an important factor that influences the imple-mentation of independent innovation programs and thus foster the transformation andupgrading of the firm. And the level of the ambition is determined by factors such ascorporate culture, entrepreneurship and so on. Winter (2000) agrees with this view.Enterprising and innovative corporate culture and entrepreneurs’ creative spirit canaccelerate the process of transformation and upgrading of enterprises.

Some foreign scholars have studied the factors that influence the ability of inno-vation from the perspective of the firm’s external environment. Gans and Stern (2003)point out that external factors, such as speeding up the construction of informationand communication facilities, providing preferential tax policies for firms’ techno-logical innovation, providing more venture capital and ensuring its effective con-figuration, and strengthening the protection of intellectual property rights can leadfirms to actively carry out independent innovation. Kenneth King (1984) studies the

224 6 Factors that Influence Enterprise Transformation and Upgrading

independent innovation capability of the third world countries in terms of the rela-tionship between the development of science, education and technology and thecapabilities of innovation. He also suggests that in order to improve the capability ofthe nation’s independent innovation, education and training should be promoted.Rycroft (2004) proposes a self-organized network model of technological changemade up of firms, schools, scientific research institutions and other organizations.This model does not need to involve a centralized and detailed micro-management,since it allows innovative strength. Vergragt and Brown (2007) argue that the gov-ernment can stimulate firms’ independent innovation through policies, incentive andsubsidy systems, investment in infrastructure, and guidance and organization.

Domestic scholars have also conducted in-depth research on the factors that affectindependent innovation capabilities. Wang et al. (2005) believe that the key toenhance the strengths involves increasing the firm’s autonomy to take innovativeinitiatives. They further observe that Chinese enterprises’ innovative abilities are weakbecause of the restrictions of their internal conditions such as profit level andinvestment abilities. In addition, gains from innovation, talents for innovation,entrepreneurship, and corporate systems are often not stimulating needed changes.Xu and Chen (2006) have found, based on empirical research, that knowledgeaccumulation, technological learning, and R&D activities are the main factors thatinfluence firms’ innovative strength. Song (2006) believes that the acquirement oftechnological innovation property rights (mainly refers to patents and other technicalintellectual property rights) and of innovation gains (including profits and techno-logical progress obtained from innovation) is the driving force for enterprises to carryout independent innovation. Guo (2005) argues that the idea and strategic innovationare the precursor of a firm’s independent innovation system. Hu (2006) notes that afirm’s investment in technological innovation is of strategic importance for itslong-term development, which also requires strong motivation of the management andgood corporate culture to support change. At the same time, he thinks that entrepre-neurs are the dominant force in enhancing the capability of independent innovation.

Wang et al. (2005) also indicate that a firm’s independent innovation capabilityis not only affected by internal conditions, but also subject to external factors, whichmainly include industrial development stage, market environment, technologychain and innovation chain, national innovation system, and intellectual propertyprotection. Zhou (2002) emphasizes that the establishment of national innovationsystem is a precondition of technological innovation. It is necessary to speed upfirm system reform with a shareholding system as the central ingredient to promotethe formation of technological innovation mechanism. Both Lu and Liu (2005)believe that the macro environment, including policy environment, innovationsystem, and the scientific and technological investment of the country has signifi-cant influence on firms. Mao and Wang (2006) assert that Chinese enterprisesshould take full advantage of the opportunities in international industry transfers,while at same time strengthen cooperation and competition with internationalcompanies, pursue learning of technology and management and cultivate aninnovative culture.

6.1 Theories About the Influence Factors of Enterprise … 225

6.1.3 Other Factors that Influence EnterpriseTransformation and Upgrading

In addition to independent innovation capability, scholars at home and abroad havealso studied the factors that affect the transformation and upgrading of enterprises,focusing on aspects of market competition, capital accumulation, shrinking profitmargins, and the relationships with collaborative companies.

The research findings of Liu (2000) show that low-end manufacturing enter-prises are investing too much in manufacturing at the same technological level sothat “homogeneous” competition evolves in the same industry. This demanding andfierce competition is forcing companies to pursue transformation and upgrading.Mao and Dai (2006) also point out that such rivalry determines that the ultimategoal of independent innovation of emerging economy enterprises is to have theirown intellectual property rights. As for the importance of capital accumulation,Forbes (2001) emphasizes that the implementation of a brand strategy must bebased on a strong financial strength and time accumulation. If the enterpriseundertakes transformation and upgrading, it means it has to invest in both pro-duction and brand development and it has to manage both areas. Mao and Dai(2006) explain that with the economy in emerging countries (regions) developingfurther, raw material prices and local wage levels have greatly improved, and thedisadvantages of low-end manufacturing are beginning to emerge. Multinationalcompanies may shift their production bases to other developing countries, just asthey did from Southeast Asia to mainland China. At that time, it would be too lateto seek transformation and upgrading. Therefore, the development of the enterpriseinnovation strengths is the key factor in industrial transformation and upgrading(Jin 2011).

Zhao and Xu (2013) have found through empirical analysis, that R&D invest-ment is the most important factor in promoting the transformation and upgrading ofenterprises; both sufficient human resources and the increased use of advancedmanagerial skills play significant roles in bringing about this change.

Other scholars expound the factors affecting enterprise upgrading in terms ofexternal factors, organizational learning, firm size, and government policies.

From the perspective of external factors, Reger (1992) argues that organizationalchange is influenced by many factors, such as external environment, scientific andtechnological level, organizational culture, etc. When the external environment isstable, the firm generally chooses the mode of incremental change. But once drasticchanges in the environment occur, it will adopt the mode of radical revolutionarytransformation. Most studies have analyzed the impact of competitive pressures onthe upgrading of enterprises (Gereffi 1999; Humphrey and Schmitz 2000). Fiercecompetition will compel OEM firms to perform innovative activities and enhancecore competence, and eventually become OBM firms with their own intellectualproperty rights (Forbes 2001). Co-located inter-firm cooperation, interpersonalcommunication, labor mobility and other cluster learning methods will help pro-mote the growth and transformation of cluster enterprises (Grabher and Ibert 2006).


In terms of organizational learning, the advanced technology and managementknowledge learned in the process of contract manufacturing will contribute to thetransformation and upgrading of OEM firms (Hobday 1995; Ching and Chen 2008).Mao and Wen (2014) argue that sustained investment in innovation and organi-zational learning are the foundation of enterprise upgrading, and entrepreneurshipand institutional pressure can accelerate the process of such changes.

For the firm size, Kong (2012) proposes a model to study the factors thatinfluence enterprise upgrading, including innovation, firm scale, export trade,market structure, government financial support, industrial agglomeration, branding,educational level of the person(s) in charge, technical level of the industry, andadvanced technology and equipment of the firm. The empirical results show thatfirm innovation capability and firm scale are the major influence factors.

In the aspect concerning government policy, Zhang (2011) emphasizes theimportant role of local government in enterprise transformation. Either the indus-trial generic technology or the regional brand has the attributes of public products.Therefore, the local government should act as the maker of this strategy and theorganizer of the strategy implementation.

6.1.4 Theoretical Framework for Analyzing InfluenceFactors of Enterprise Transformation and Upgrading

On the basis of summarizing previous research results and by means of furtherdecomposition and refinement, the author finally gets the following analysisframework shown in Table 6.1.

6.2 Analysis of the Factors that Influence EnterpriseTransformation and Upgrading

All kinds of concrete influence factors will be analyzed and discussed belowaccording to the above influence factor framework of enterprise upgrading.

6.2.1 Cost Comparative Advantage Is GraduallyDisappearing, and Profit Margins Are Shrinking

The rising price of raw materials, the increase in labor cost, the tight supply ofenergy, and the appreciation of RMB are the most significant influence factors. Firstof all, the costs of resources like crude oil, coal, electricity, and the costs of rawmaterials in both domestic and foreign markets are on the rise. In 2007,

6.1 Theories About the Influence Factors of Enterprise … 227

international crude oil prices jumped nearly 60%. Rising oil prices stimulated theincrease in chemical fiber costs, electricity prices, coal prices, freight rates, etc.,resulting in rises in the costs of all segments of the industrial value chain. Second,labor costs are also rising. Third, under the condition of nationwide energy short-age, the government has developed energy efficiency standards and implemented

Table 6.1 Framework for analyzing influence factors of enterprise upgrading

Background and motivation of enterprise transformation and upgrading

Background

Cost comparative advantage is gradually disappearing and profit margins oflow-end manufacturing enterprises are shrinking (Mao and Dai 2006, etc.)

In the intense competition at home and abroad, OBM with independentintellectual property rights is an important development direction of independentinnovation of emerging economy enterprises (EEEs) (Liu 2000; Mao and Dai2006)

The benefits are highly unevenly distributed. And the great majority of the profitsgo to branded purchasers (Starck 1970, etc.)

The inherent risks of low-end manufacturing are becoming increasinglyprominent. Enterprises urgently need transformation and upgrading (Pang 2006,etc.)

Motivation Entrepreneurship andbrand awareness

Innovative, aggressive, passionate, persistententrepreneurial spirit, a strong sense of responsibility tothe nation and employees, a strong sense ofindependent intellectual property rights and brandawareness (Cyert and March 1963; Gersick 1994;Winter 2000; Barton 1992; Wang and Guo 2005;Hu 2006; Yang 2010; Kong 2012)

Critical resources Capital accumulation (Forbes 2001; Wang 2005)Human resources (Carayannis 2004; Wang 2005)

Key capabilities Independent innovation capability (Amsden 1989;Gereffi 1999; Liu 1998; Liu 2005, etc.)Marketing and service capabilities (Yam et al. 2006;Lall 1991; Hobday 1995; Schmitz 2007; Qu 2007; Liu2008)Dynamic capabilities (Teece and Pisano 1997)

Market environment The market potential is huge; the consumer psychologyis increasingly mature; and the market competitionorder is more and more standardized (Wang 2005, etc.);Competitive pressure (Gereffi 1999; Humphrey andSchmitz 2000)

Government push The government has worked hard to create a favorableenvironment for technological innovation, boostingrapid transformation and upgrading of enterprises(Gans and Stern 2003; Lu 2005; Liu 2005; Vergrat andBrown 2007, etc.)

Relationship withcooperative enterprises

Good relations with cooperative enterprises areconducive to the “learning by doing” and “learning byusing” of low-end manufacturing enterprises (Pfefferand Salancik 2003; Carayannis 2004; Rycroft 2004;Mao and Wang 2006)


peak electricity policies. These measures have increased the costs of environmentalprotection and power consumption, and are restricting the development of enter-prises. In addition, the accelerated appreciation of RMB has greatly intensified theexport pressure of enterprises. According to the data People’s Bank of Chinaauthorized China Foreign Exchange Trading Center to announce, since 2008, thevalue of RMB has increased 4.32%. At the same time, the reduction of the exporttax rebate rate has increased the burden on enterprises and further reduced theirprofit margins. What’s more, the rise of environmental protection costs caused bypollution from excessive processing production is eroding the profits of low-endmanufacturing enterprises in China.

6.2.2 In the Intense Competition at Home and Abroad,OBM with Intellectual Property Rights Is the MajorDevelopment Direction of the Transformationand Upgrading of EEEs

When the market has a high concentration of branded products, the competitionamong small enterprises is very fierce since they can only fight and compete for asmall share of the market. This forces small enterprises to emphasize the cultivationof a core competitive advantage. They attach importance to manufacturing capacity,and at the same time they pursue technology and market share. OBM with inde-pendent intellectual property rights is the main upgrading direction of emergingeconomy enterprises.

6.2.3 The Benefits Are Extremely Unevenly Distributedand Most of the Profits Go to the Firms at the UpperEnds of the Industrial Chain

As early as the late 1970s, Starck pioneered the idea of transforming OEM intoOBM.1 The statistical data from THE KEY (brand consultancy founded by Starck)show that the “top 100” OEM firms in Asia created profits of near US $4.7 billionwhile the “top 100” global brands created a value of US $448 billion. The hugeprofit gap between the two is no doubt a wake-up call for all Chinese companies:they must consider establishing their own brands, and step up the pace ofupgrading.

1The essence of Starck’s concept of transformation from OEM to OBM is to encourage largemanufacturers (OEM or ODM), by first formulating a clear strategic vision, to develop productbrands and increase the value added of their businesses so that their superior but low-price OEMproducts can climb up the value ladder through the ownership of their own brands.

6.2 Analysis of the Factors that Influence Enterprise … 229

From the perspective of the industrial division of labor, many small andmedium-sized enterprises in China are largely in processing production. They lackR&D strength, core components production capacity as well as market developmentand brand management capabilities. And their products have low added value.Besides, OEM firms are at the bottom of the global industrial value chain and aresqueezed by upstream and downstream companies for profits. Therefore, they havevery small profit margins and can only get the slightest share of the profits in theinternational market. Branded purchasers have been harvesting the great bulk of theprofits while the huge number of OEM enterprises only earn meager income withexceedingly unreasonable output-input ratios.

6.2.4 The Inherent Risks of Low-End Manufacturing AreBecoming Prominent. Enterprises Urgently Needto Upgrade

Pang (2006) points out that the operating mechanism of low-end manufacturerssteers them to unavoidable risks. First, because of the limitation of the productionmode, some processing trade enterprises organize production only according to theorders given by large purchasers. Many domestic enterprises’ orders are highlyconcentrated in the hands of a few large buyers. For the low-end manufacturingenterprises, once the buyer dissolves the partnership, they are likely to fall intobankruptcy. The reason why Taiwan’s Giant Group once almost failed was that theorders from a single US bicycle brand accounted for 75% of its production. Whenthis sales channel goes wrong, the enterprise can hardly avoid a crash.

Second, the enterprises have a weak profitability picture, since they are onlyengaged in the lowest value-added manufacturing activities in the value chain. Themeager profits leave them unable to withstand the ups and downs of raw materialprices and drastic changes in the marketplace. This greatly increases the operationalrisks of such enterprises.

Finally, the low-end manufacturing mode itself also has hard-to-avoid financialand legal risks. Chinese OEM enterprises long rely on imported raw materials andimported technology. Outsourcing firms or foreign buyers control brands and dis-tribution channels. These OEM enterprises are basically in a situation with thetechnology and the market outside them and only have production in-house. Thisprofit model that only seeks economies of scale is not safe and will increase theenterprise’s operational risks. Once the international environment is in turmoil,OEM enterprises will be the first to be affected. For example, the 1997 Asianfinancial crisis impacted on the normal production of large numbers of OEMenterprises. Therefore, only through transformation and upgrading can theseenterprises have the initiative in processing trade, especially in export trade, and canthey effectively avoid the risks inherent in OEM production mode.


6.3 Motivation for Enterprise Transformationand Upgrading

6.3.1 Entrepreneurship and Brand Awareness Arethe Major Driving Force Behind EnterpriseTransformation and Upgrading

Cyert and March (1963) claim that a firm’s ambition is an important factor thatinfluences its transformation and upgrading. And the ambition of the firm is theexternal manifestation of entrepreneurship and corporate culture.

Gersick (1994) believes that changes in internal conditions and the externalenvironment generate the need for shift, but they will not directly produce revo-lutionary change. One of the major reasons for the transformation of firms lies in thesubjective conditions of the leaders’ cognition. Only when the top leaders believethat there is need for a change in the organization’s situation, then the organizationwill change.

Kotter (1995) shows that a firm’s transformation process consists of eight stages,namely creating a sense of crisis, developing a high caliber team, communicatingthe vision, empowering people to act according to the new vision, planning andachieving phased victories, consolidating achievements, promoting more changes,and institutionalizing them. Each stage of the transformation cannot go on withoutthe management abilities of the firm.

Kenichi Ohmae argues that the prime condition for the success of enterprisetransformation is the leaders’ determination to make changes and their accurateunderstanding of the changes needed in the foundation of the firm’s operation. Thenthe organizational structure needs to be adapted to the change. The focus of thetransformation lies in how the organization adapts to changes in the environmentand how it actively taps and develops employee potential and capabilities.

This view was approved by Winter (2000). Innovative, aggressive, passionate,persistent entrepreneurial spirit can speed up the process by which firms build originalbrands. In addition to entrepreneurship, the brand awareness of entrepreneurs alsoplays a very important role in the establishment of original brands in OEM firms.

Top leaders’ entrepreneurship is a key factor in promoting an enterprise toupgrade from ODM to OBM (Yang 2010). Entrepreneurship consists primarily ofinnovation, risk taking (willingness to pursue business opportunities at a reasonablecost of failure), and a strong drive (overcoming difficulties to achieve goals)(Birkinshaw and Fry 1998). Core competence in production and R&D accumulatedover time is path dependent, thus limiting the brand development of OEM enter-prises. At the same time, because of long-term OEM manufacturing and low pricestrategy, appropriate branding limps for lack of funds and talents. Therefore, at thisstage, the senior leaders’ entrepreneurial spirit and their strong will to create theirown brands are essential to develop branding competence (Yang 2010). Theinternal factor of entrepreneur ability is also an important factor that influences theupgrading of enterprises (Kong 2012).

6.3 Motivation for Enterprise Transformation and Upgrading 231

The successful transformation and upgrading of enterprise cases discussed in theprevious chapters of this book are all brought about by innovation originating fromentrepreneurial spirit. For example, ASUS’s four founders, Tong Zixian, XuShichang, Xie Weiqi, and Liao Minxiong, were all Acer’s senior engineers. In1989, they together resigned from Acer and founded ASUS. Specializing indevelopment and design and manufacturing for computer motherboard companiesin the beginning, ASUS has grown to be one of the world’s top 500 companies. Inthe course of development, entrepreneurship has played a huge role. The nearlycrazy “dedicated and pragmatic” engineer culture enabled ASUS to sprint to thecommanding heights of global IT technology at the very beginning, thus laying afoundation for high technology. The adventurous, aggressive, but risk-resistingcorporate culture has helped ASUS to grow fast and steadily, and to upgrade fromOEM manufacturer to first-class own brand manufacturer.

6.3.2 The Ownership of Key Resources and the Acquisitionof Key Capabilities Constitute the Foundationfor Enterprise Transformation and Upgrading

It can be seen, from the theoretical support and the case analysis in the previoussections, that enterprises which have successfully upgraded have rich capitalresources. With abundant capital accumulated, they are able to make largeinvestments in R&D, design and promotion, thus, leading to improved level oftechnological innovation and enhanced product brand image, and ultimatelyestablishing their own brands. In addition, the human resource is also a key factor inthe success of enterprise transformation and upgrading. Enterprises successful intransformation and upgrading have adopted various methods, such as the estab-lishment of internal training centers, the cooperation with external institutions likecolleges and universities, and training agencies, to create pipelines for talentedpeople and develop high-level technological and managerial personnel. They alsoemphasize the introduction of talents, especially management and technologicaltalents from the outside so as to optimize the quality of their human resources.

The key capabilities of an enterprise include innovation capabilities and expertisein marketing and service providing. Innovation capability is embodied in manyaspects, such as innovation achievements, innovation management ability, status ofR&D organization and personnel, and industry-university-research institute cooper-ation. To upgrade successfully, enterprises need to have great innovative power. Onlythrough relentless innovation in R&D and design, and continuous improvement ofproduct technological content and brand image can an enterprise avoid the devastatingprice wars and gradually realize upgrading. Capabilities in marketing and service aremanifested in sales, development of service network, size of the sales team, publicityand promotion activities and so on. Without heavy investment in marketing andpromotion, OBM business is not likely to gain rapid development.

The manufacturer’s strategic opportunities stem primarily from its own skillsand capabilities (Barney 1991). Barker and Irene (1997) believe that the pressure


for change (performance pressure, technological change) and the ability to change(resources) are the two major causes of enterprise transformation. Teece and Pisano(1997) suggest, from the perspective of dynamic capabilities, that enterprises canupgrade their capabilities through skill acquisition, knowledge and know-howmanagement and learning. The resources and capabilities within the organizationand the support of external partners are the basis for the transformation andupgrading of OEM enterprises (Pfeffer and Salancik 2003)

Technology gaps and marketing gaps are the major competitive disadvantages ofdeveloping country enterprises in the international market. Filling these gaps should bethe direction of constructive improvement (Lall 1991; Hobday 1995; Schmitz 2007).Technological capability and marketing capability are the main components of anenterprise’s competitive strength, and therefore the chief driving force behind enterpriseupgrading (Verona 2007). Enhanced technological strength can enable OEM firms toprogressively move from OEM to ODM and finally to OBM (Qu 2007; Liu 2008).

6.3.3 Increasing Consumer Demand at Home Has ProvidedMarket Support for Enterprises to Establish TheirOwn Brands

Low-end manufacturing enterprises are faced with increasingly fierce foreigncompetition and the financial crisis exacerbated the business environment. So howto survive and grow in adversity is the most important issue facing enterprises.China has a large population and growing consumer demand. This provides strongmarket support for China’s enterprises to shift from exporting abroad to expandingdomestic demand. As large numbers of multinational companies have establishedtheir presence in China’s market, Chinese enterprises should also consider trans-ferring their products to the domestic market, cultivating national brands andproducing products that their own country people need, thus promoting the trans-formation and upgrading of enterprises. Furniture enterprises in Dalingshan ofDongguan are actively adjusting their strategic thinking. Some foresighted com-panies have turned their attention to the domestic market, and successfully gainednew competitive advantages through the establishment of their own brands.

6.3.4 Government Policies Promote and EncourageEnterprises to Upgrade

The government may create favorable conditions for enterprises in such aspects asinnovation system, policy support and encouragement, construction of financingenvironment, creation of talent development mechanism, and construction of sup-porting service system, so as to promote the upgrading of enterprises.

6.3 Motivation for Enterprise Transformation and Upgrading 233

In terms of the financing environment, Shenzhen for example has performedvery well. The city has an efficient and well-developed financing market. In order toget over the problems of financing enterprises (especially high-risk high-techstart-ups), the government has made efforts in many aspects: promoting thedevelopment of small and medium-sized financial institutions; using fiscal funds tosupport the development of high-tech enterprises; funding the establishment of“investment services limited company for high tech industry” to provide R&Dspecial-project loans and liquidity loans guarantees for the city’s high-tech enter-prises of different ownership system. Establishing a sound mechanism for the entryand exit of venture capital to attract the inflow of venture capital. With the efforts ofthe Shenzhen government, local venture capital in the area is among the best in thewhole country. China Merchants Technology Group’s total investment in 2006amounted to 60 million Yuan, which was invested in 6 projects; Tsinghua LeaguerGroup invested 70 million Yuan in 7 projects; Shenzhen Innovation Investment in2006 invested in 16 projects with the amount of investment coming to 240 millionYuan; The city has a total of 133 venture capital institutions, more than 10 billionYuan of funds, accounting for one third of the nation’s venture capital.

6.3.5 Good Relationship with Cooperative Partners ProvidesTechnical and Management Reference for Enterprises

Small and medium-sized domestic enterprises can learn advanced business experi-ences through establishing relatively long-term stable partnerships with manywell-known branded companies. Particularly for some processing trade enterprises,long-term partners will send standing QC (quality control) to them to offer technicalguidance and quality control. In the course of cooperating with different professionalmanufacturers in the world, enterprises can accumulate rich experiences. They absorbadvanced knowledge of management and technology from professional manufac-turers through “learning by doing” and “using by doing”. This learning enables themto make products that come up to the level of advanced countries in terms oftechnology, production processes and quality control. In addition, they can exchangehuman resources and expertise with their partners. Good cooperative relationshipswith partners provide not only a stable source of order for low-end manufacturingenterprises, but also an excellent platform for accessing, understanding and learningadvanced technology and management experience from their partners, therefore,greatly accelerating their upgrading process.

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Chapter 7Measurement Standards and Pathsof Enterprise Transformationand Upgrading

7.1 Theoretical Research on Enterprise Transformationand Upgrading

7.1.1 Studies on Enterprise Transformation and Upgradingfrom the Perspective of Core Competenceand Dynamic Capability

Foreign scholars begin the study of enterprise upgrading primarily from the point ofview of core competence and dynamic capability (Zhang 2004). Bell and Albu(1999) believe that to study the upgrading of an enterprise, one should first attachimportance to the study of core competence, which focuses on the ability of anenterprise that other companies can not copy, and that provides end consumers withthe value they need, and that is adaptable, valuable and difficult to imitate. Then,one should follow the study of dynamic capability (Teece and Pisano 1997), whichrefers to the ability that an enterprise has developed to learn, adapt, and change overtime. It emphasizes that enterprises must strive to cope with the changing envi-ronment, update and develop their capabilities. And the ways to improve andupdate ability are mainly through skills acquisition, knowledge and know-howmanagement and learning. Enterprises can accomplish upgrading by developingdynamic capabilities.

The studies with respect to core competence and dynamic capability are largelyconcerned with upgrading from within, and often ignore the environment in whichenterprises operate and the relations and connections between enterprises. Theglobal value chain (GVC) theory is the approach to the study of internationaldivision of labor, regional economic development, industrial upgrading andenterprise upgrading from the perspective of a global network. It offers a new clueto the study of enterprise upgrading and it is the major theoretical basis on whichforeign scholars have built their research.


237




7.1.2 Studies on Enterprise Transformation and Upgradingfrom the GVC Perspective

Enterprise upgrading was introduced into the theoretical framework of GVC in thelate 1990s. Gereffi (1999) was among the first to identify the different levels ofindustrial upgrading. He points out that industrial upgrading is a process ofimproving the ability of a firm or an economy to move towards more profitable andtechnologically sophisticated capital- and skill-intensive economic niches.According to the view of resource allocation, he distinguishes industrial upgradinginto four levels of analysis: within enterprises; within inter-firm enterprise net-works; within local or national economies; and within regions. Humphrey andSchmitz (2000, 2002), on this basis, propose four types of enterprise upgradingfrom the micro level of the enterprise: (1) process upgrading. By reorganizing theproduction system or adopting more advanced technology, enterprises can convertinputs into outputs more efficiently, and achieve process upgrading; (2) productupgrading. By moving into more sophisticated product lines and introducing newproducts or improving existing products, enterprises can increase the added value oftheir products and realize product upgrading; (3) functional upgrading. Byacquiring new functions or abandoning existing functions in the chain, such asshifting from production to more profitable design and marketing, enterprises mayrise from original equipment manufacturing (OEM) to original design manufac-turing (ODM) and then to original brand manufacturing (OBM) and achievefunctional upgrading; and (4) inter-sectoral upgrading. By using the knowledge andexpertise acquired in particular functions to move into a different sector or differentsectors, enterprises can accomplish inter-sectoral upgrading. Kaplinsky and Morris(2001) agree with the classification of industrial upgrading under four types. Theyfind, through their empirical study, that many industries have showed a ladder ofsimilar development patterns in the course of upgrading. Generally, enterprisesbegin with process upgrading, then gradually progress to product upgrading and tofunctional upgrading, and eventually achieve inter-sectoral upgrading, though thereare leaps or even regressions. This classification has been widely accepted byscholars, and has been used as a theoretical basis for the study of enterpriseupgrading in developing countries (see Table 7.1).

Poon (2004) also points out that enterprise upgrading is an economic roletransformation process of moving from the production of cheap labor-intensiveproducts to the production of expensive capital- or technology-intensive products.Avdasheva et al. (2005) interprets upgrading as an action aimed at boosting processefficiency, introducing new products or improving existing products, changing thescope of value creation activities, and switching to new value chains. Yang (2006),from the perspective of organizational learning, argues that upgrading means thatlocal firms are inserted into global production networks and learn from internationalfirms to improve their position in the global production networks or global valuechain.

238 7 Measurement Standards and Paths of Enterprise Transformation …

Brach and Kappel (2009) believes that, in terms of technological capability,enterprise upgrading represents enhanced technological, technical and organiza-tional capabilities, as well as heightened positions of enterprises in the global valuechain. Humphrey and Schmitz (2002) points out that, from the enterprise level,upgrading is the ability of an enterprise to improve its competitiveness and toengage in higher value-added activities by acquiring technological and marketingcapabilities. To sum up, enterprise upgrading is a process of improving competi-tiveness and increasing the added value of products and services. Meanwhile,upgrading reflects the ability of an enterprise to innovate and to enhance the addedvalue of products and services (Kaplinsky and Readman 2001; Humphrey andSchmitz 2002).

Domestic scholars Mao and Wu (2009), based on the views of economics,defines enterprise upgrading as a process of improving its competitiveness and theadded value of its products and services. It is upgrading at the micro level ofindustrial upgrading. Cluster researchers mostly link the upgrading of industrialclusters to the global value chain (GVC) and study the role of GVC governancemodels in enterprise upgrading. GVC can be used to study the realization of eachlink’s value added in different value chains, and the impact of governance patterns(Humphrey and Schmitz 2004), that is, the impact of GVC governance model onenterprise upgrading, the dynamic mechanisms and approaches of enterpriseupgrading under GVC.

The studies on enterprise upgrading abroad has not yet developed into anindependent system. Most of them are still theoretical frameworks on core com-petence theory, dynamic capability theory and GVC theory. They have only out-lined the general growth trajectory of enterprises. Few studies point out thatenterprises will adopt a mixed upgrading model according to their own situation inthe process of upgrading.

Domestic scholars have gone beyond the above theories. They are studying theupgrading direction of enterprises by integrating industrial cluster theory, industrialupgrading theory and GVC theory. Cao (2006) applies the view of dynamiccapability to the study of industrial cluster upgrading. He concludes that the

Table 7.1 Process of enterprise upgrading. Source Kaplinsky, R., Morris, M. A handbook forvalue chain research, 2001

Process upgrading

Product upgrading

Functional upgrading

Inter-sectoral upgrading

Trajectory

Demonstration OEA

OEM

ODM OBMMovement in the

chain

Value addedincreased value

7.1 Theoretical Research on Enterprise Transformation and Upgrading 239

dynamic ability of industrial clusters is primarily composed of identification ability,learning ability, network ability and integration ability. After examining theupgrading and development process of Taiwan PC industrial cluster in the past20 years, Mei et al. (2005) suggest that, OEM enterprises in China should followthe example of Taiwan OEM enterprises in the PC industry. They should firstactively insert themselves into the GVCs, and then gradually develop from OEM toODM and OBM. They should change their development direction, moving fromlow cost focus to innovation orientation and gradually rise to the high ends of thevalue chain, thus realizing process, product, and even functional upgrading. Tangand Cheng (2006) have explored the upgrading path of Wenzhou lighter enterprisesfrom the three levels of product upgrading, process upgrading and functionalupgrading. Mao and Wang (2006) put forth the concept of product upgrading, andhave summed up five upgrading paths based on product upgrading: upgrading bysubstituting for multinational companies’ products; upgrading by utilizing fuzzyindustry boundaries; upgrading for taking over internationally transferred indus-tries; upgrading because of changes in industry standards; and upgrading byaccelerating imitative innovation.

According to the above literature review, it can be seen that the research aboutenterprise upgrading in China is still in the early stage. The researchers are pri-marily learning and putting to use foreign theories. Systematic theoretical frame-work has not come into being. Their knowledge of enterprise upgrading is still onthe basic level. The research tends to emphasize the imperative of enterpriseupgrading, and in a certain degree, induces and sums up the upgrading direction andpaths of enterprises, but lacks comprehensive and systematic analysis of the mea-surement and path choice of enterprise upgrading. As for the foreign research, theGVC theory, the core competence theory and the dynamic capability theory providea sound theoretical basis for the study of enterprise upgrading, and they have veryimportant reference significance. However, careful observation shows that thesetheories do not distinguish between stock and increment of enterprise upgrading. Interms of the stock, enterprise upgrading means enhanced ability and increased valuein the enterprise; in terms of the increment, enterprise upgrading is manifested inthe enterprise’s innovativeness. It is a process of developing new products, newservices, new brands, and new markets based on the improvement of technologyand capability.

On the basis of referring to the existing literature and considering the incrementand stock factors of enterprise upgrading, this book puts forward the measurementstandards of enterprise upgrading, and develops a systematic analysis framework ofenterprise upgrading path.


7.2 Measurement Standards of EnterpriseTransformation and Upgrading

Based on the analysis of GVC theory, core competence theory and dynamiccapability theory, this book summarizes and analyzes the measurement standards ofenterprise transformation and upgrading.

The theoretical basis and measures for enterprise transformation and upgradingare shown in Table 7.2.

7.2.1 Improved Product Technological Contentand Increased Value Added

To increase the technological content and the added value of products, enterpriseshave to develop and use advanced technology to improve product quality and toreplace low value-added products with high value-added products. For example, inthe domestic market, color TV manufacturers in the home appliance industry havefollowed the pace of foreign-funded companies, upgrading their product from tra-ditional color TV to flat panel TV of slightly higher technological content, then tothe sunrise products of rear-projection TV and plasma TV. Domestic enterprisesactively and constantly upgrade their products, and improve the products’ tech-nological content. They position their products at high added value, facing head-onthe products produced by multinational companies in China and gaining marketshare. These products have higher added value than processed export products orexports of low-value products.

7.2.2 Enhanced Product Function

The enhancement of product function is also a form of enterprise upgrading. Forexample, the product upgrading of Microsoft and many other companies is built onthe product function upgrading. In 1985, Microsoft’s Windows Version 1.0 cameout, and then followed Windows Version 2.0. In May 1990, Windows Version 3.0was put into commercial use. In April 1992, Windows Version 3.1 was launched,and in 1993, it was upgraded to Windows 3.2. These operating systems, shortenedas Windows 3.X, ran on DOS and were limited by the DOS operating system. InAugust 1995, Windows 95 came into existence and it changed the DOS operatingmode. In 1998, Microsoft launched a more powerful operating system—Windows98. Windows 2000 (Chinese version) and Windows XP Home and Profes-sional were officially released respectively in March 2000 and November 2001.The interface is more flexible and convenient, covering digital multimedia, home

7.2 Measurement Standards of Enterprise Transformation and Upgrading 241

Tab

le7.2

Theoretical

basisandmeasurementstandardsof

enterprise

upgrading

Relevant

theories

Definitio

nof

upgrading

Measurementof

upgrading

Practiceof

upgrading

GVC

Processup

grading:

transforminginpu

tsinto

outputsmoreefficiently

byreorganizing

the

prod

uctio

nsystem

Improv

ementin

prod

uctio

nefficiency

and

prod

uctqu

ality

Invalue

chain

segm

ents

R&D;im

prov

ementin

logisticsor

quality

;introd

uctio

nof

new

machines

Between

value

chain

segm

ents

R&D;supp

lychainmanagem

ent

processim

prov

ementandlearning

;e-commerce

capabilityadvancem

ent

Prod

uctup

grading:

mov

inginto

more

soph

isticated

prod

uctlin

es,acceleratingthe

laun

chof

new

prod

uctsandincreasing

the

prod

ucts’addedvalue

Improv

ementof

existin

gprod

uctsandthe

rapidintrod

uctio

nof

new

prod

ucts,

shortenedprod

uctlifecycle,

increased

prod

ucttechno

logicalcontent,enhanced

prod

uctfunctio

nandincreasedprod

uct

unitprice

Invalue

chain

segm

ents

Exp

anding

design

andmarketin

gdepartments;establishing

orstreng

theningcross-functio

nalteams

fornew

prod

uctdevelopm

ent

Between

value

chain

segm

ents

Working

with

supp

liers

and

custom

ersto

developnew

prod

ucts

Acquiring

new

functio

nsor

abando

ning

existin

gfunctio

nsin

thechain

Shiftin

gfrom

prod

uctio

nto

more

profi

tabledesign

andmarketin

g,mov

ing

from

OEM

toODM

andthen

toOBM

Invalue

chain

segm

ents

Takingin

new,high

ervalue-added

functio

nsin

thevaluechain;

outsou

rcinglow

value-added

activ

ities

Between

value

chain

segm

ents

Mov

inginto

new,high

ervalue-addedactiv

ities

Inter-sectoral

upgrading:

usingthe

know

ledg

eacqu

ired

inon

efunctio

nto

mov

einto

adifferentsector

Enh

ancedprod

uctfunctio

nincreased

prod

ucttechno

logicalcontent,and

increasedprod

uctun

itprice

Enteringthenew

valuechainandorganizing

prod

uctio

n;adding

new

features

orfunctio

nsin

thenew

valuechain

(con

tinued)


Tab

le7.2

(con

tinued)

Relevant

theories

Definitio

nof

upgrading

Measurementof

upgrading

Practiceof

upgrading

Core

competence

The

ability

that

isdifficultforothers

toreplicateandthat

prov

ides

endconsum

ers

with

thevaluethey

need

Develop

mentof

core

competencein

techno

logy

,talent,branding

,managem

ent,etc.

Dyn

amic

capability

The

ability

thatan

enterprise

hasdeveloped

tolearn,

adapt,andchange

over

time,

and

theability

tocope

with

thechanging

environm

ent,andto

update

anddevelop

theirow

ncapabilities.to

update

and

developtheircapabilities

Skillsacqu

isition

,kn

owledg

eand

know

-how

managem

entandlearning

Source

(1)Kaplin

sky,

R.,&

Morris,M.A

hand

book

forvaluechainresearch,20

01(2)Mao

andWu.

Researchon

enterprise

upgradingpathsandanalysismod

el.Journalof

SunYat-Sen

University

:So

cial

ScienceEditio

n,thefirstissueof

2009


networking and communication functions.1 Although the core part of these prod-ucts has not changed fundamentally over a fairly long period of time, by contin-uously improving its products and upgrading their functions through patches andupgrades, the company has expanded its production and sales and market coverage.This upgrading path helps the company reduce competitors, enhance its dominanceand monopoly advantage in the market and obtain higher profits. Companies thathave successfully implemented the strategy of product function upgrading are ableto maintain desirable profit margins in fierce competition.

7.2.3 Developing from OEM to ODM and then to OBM

OEM means that companies with superior brands outsource the processing andproduction of their products to other enterprises. They themselves provide productdesign parameters and technical and equipment support to the manufacturers inorder for them to meet the requirements of product quality, specification and model.The branded company will sell the products on its own brand when they have beenproduced. Original design manufacturing (ODM) refers to the partnership in whichthe principal (the branded company) entrusts the production and all or part of thedesign of its products to the agent (the manufacturer) while selling the products onits own brand. Original brand manufacturing (OBM) means that the enterprisedevelops its own independent brands and participates in domestic and internationalmarket competition.

In the process of conducting OEM business for developed country companies,the enterprise is gradually accumulating manufacturing experience through learningin production. At the same time, by way of reverse engineering, the enterprisestudies, explores, imitates and improves imported equipment and technology andincrementally develop their own design and preliminary R&D capabilities, movingstep by step to ODM, the upstream of the industrial value chain. With its strengthfurther increasing, the enterprise can establish its own brands, and become an OBMmanufacturer. The independent intellectual property rights developed in ODM stageprovide the necessary support for the establishment of its own brands. As a matterof fact, the enterprise has successfully upgraded its technology and product whileevolving from OEM to ODM and to OBM.

1Mao Y.S., Shu Z.P., Wu Y. Business Global Competition Built around Standards—Based on theCase Analysis of Microsoft [J]. Economic Theory and Business Management, 2008(2).


7.2.4 Shifting from Single Products to Product Lines,from Single Businesses to Business Solutions, Leadingto New Products, New Services and Even New Markets

7.2.4.1 Moving from a Single Product to a Range of Products

In the context of industrial convergence and fuzzy industry boundaries, movingfrom a single product to diversified products and even to a whole range of productsis the key to dealing with intense competition and achieving product expansion andenterprise upgrading. Although the range of products may have similarities with theoriginal single product, both their features and functions have changed dramatically,thus, extending the business area and scope and creating a new market. Forexample, Taiwan’s United Group has expanded well beyond its roots as a producerof flour, gradually moving to feedstuff, oil, food and beverages, dairy, and thecomprehensive food industry related to people’s livelihood. The company’s busi-ness area now spans many different sectors, including foodstuff, pharmaceuticals,electronics, biotechnology and it has developed different ranges of product. Withproduct diversification, the company’s brand has been strengthened. Although thisexpansion approach has much to do with the original business, business expansionbuilt around product upgrading in many cases can be regarded as an entirely newproduct development. This mode of expansion has become increasingly importantin many industries, especially in the high-tech and information industries.Microsoft, Intel, and IBM in the information industry, and companies in thepharmaceutical industry are growing and expanding by relentlessly upgrading theirproducts and developing product ranges.

7.2.4.2 Expanding from Single Businesses to Business Solutions

The ultimate winner of modern business competition is the customer. In return,understanding customers and providing better service for them can lead toimproved response ability and sustained competitiveness, and customers are thesource of impetus for the upgrading of enterprises. In the high-tech community,many companies capture new markets through the growth of new businesses cre-ated by new products and services. Atotech Taiwan Ltd. is a precision chemicalcompany, which mainly produces printed circuit boards and chemical liquidsneeded in the IC manufacturing process and provides technological solutions forrelated customers. The company is very strict with the development of new prod-ucts. Each year, it introduces to the market one forth of the new products accordingto the needs of customers. The company sends special teams to work closely withthe customers and direct their technology development and production. AtotechTaiwan Ltd. has grown from a product seller into an integrator of products andservices. This change has brought about huge profits, which enable the company toincrease R&D expenditure and maintain high growth rate against the financial


crisis.2 Taiwan’s United Microelectronics Corporation (UMC) has become aleading company in wafer manufacturing also because of its ability to providesystematic solutions for customers.

7.2.5 Developing Strategic Assets and Creative Assetsto Enhance Competitiveness

The resource-based strategic management view suggests that assets that generatesustained competitive advantage for a company are strategic assets. In order toobtain sustained competitive advantage, companies need to develop strategic assetswhich are specific to them and rivals have difficulty imitating. Creative assets are aconcept proposed by Dunning, referring to the assets developed on the basis ofnatural assets (natural resources and untrained labor). They can be tangible assets,such as physical and financial assets, or intangible assets, such as proprietarytechnology, trademarks, organizational capability, management ability, institutionand culture.

The development of strategic assets and creative assets is essential for companiesto enhance their competitiveness. Enterprises in less developed countries canimprove their competitiveness by entering foreign markets through foreign directinvestment to increase international competition experience, or by acquiring firmsin developed countries through merger and acquisition to learn and absorb theiradvanced technology and management experience. For example, the purpose ofLenovo’s acquisition of IBM’s PC business is to obtain the IBM brand value, coretechnology in the PC business, foreign markets, human resources, and enhance thelevel of its international operations. Lenovo’s acquisition is a typical example ofenterprises seeking assets to improve competitiveness.

7.3 Paths of Enterprise Upgrading

The literature review shows that the research about the measurement and path ofenterprise upgrading is based on the GVC, and is concerned about how enterprisesmove from commissioned processing (OEM) to research, development and design(ODM) and finally to the establishment of original brands (OBM).

Many scholars have explained the upgrading path of OEM-ODM-OBM in termsof the enterprise’s technological capability and marketing capability (Amsden 1989;Gereffi 1999; Mei et al. 2005; Zhu et al. 2006; Yang 2010). For example,OEM-ODM follows the technological path while 0EM - OBM entails the brand andmarket path. The studies on the upgrading path indicate that enterprises change

2Based on the author's investigation into Atotech Taiwan Ltd. on November 17, 2008.


from low cost focus to innovation orientation, gradually rise to the high ends of thevalue chain through accumulation of capital and technology, and ultimately switchto functional upgrading from process and product upgrading.

Nie and Zhong (2010) argue that enterprises should take the path of upgradingfrom simple OEM production (such as manufacturing with foreign supplied partsand designs) to complex OEM production (taking on a broader range of manu-facturing functions, including the designing of parts, the sourcing of inputs, andlogistics functions) within the OEM stage on the basis of process and productinnovations. Some scholars claim that enterprises can realize economies of scale byenlarging the size of OEM manufacturing, and that they can develop supportingbusinesses (Hu et al. 2005). Yang (2006) emphasizes that domestic OEM enter-prises can achieve upgrading through the extension and expansion of OEM busi-ness. Mao (2009, 2012) uses the smiling curve and dual smiling curve to analyzevarious paths of enterprise upgrading from the perspective of the value added andcosts that enterprises have in the value chain. The object of the research onupgrading is extended from OEM enterprises to general types of enterprises.

Through the combination of large numbers of phenomena observed and caseanalysis, a path selection model of enterprise upgrading is proposed. The smilingcurve and dual smiling curve are integrated to analyze ten major upgrading pathsand the corresponding changes of the smiling curve. Field investigation and liter-ature research into the enterprises have verified that the framework has strongexplanatory power and expansibility for the upgrading of enterprises in emergingeconomies and it provides research directions for probing new upgrading paths.

7.3.1 Achieving Overall Transformation and Upgradingby Recognizing New Features and New Demandsof Traditional Industries and Repositioning Them

With the economic environment and ideas changing and the income increasing,new features and new demands have emerged in some traditional labor-intensiveindustries, and they are changing the nature of the traditional products. Forexample, Taiwan’s bicycles have upgraded from traditional vehicles to high-endfitness and leisure products and household toys. As a result, the average price ofbicycle exports of Taiwan in 2009 was 6 times that of the Mainland China (300:50US dollars). Because of this upgrading, there appears a new demand for bicycleproducts in both developed countries and emerging economies, and several newconsumer market segments have developed. In addition, traditional labor-intensiveindustries can widely use highly advanced technology, and even become high-techindustries by integrating with new technologies. Taiwan’s clothing, fabrics andother textiles have upgraded from the basic necessities of life to high-end productswith high technological content and deodorant and antibacterial functions. Theaverage price of Taiwan’s exports of cloth and garments is 6 times that of Mainland

7.3 Paths of Enterprise Upgrading 247

China (US $18:3). This shows that traditional industries can achieve overallupgrading by recognizing the new features and new demands and repositioningtheir products in the market.

The successful upgrading of Taiwan’s bicycle industry is based on renewedknowledge and deep understanding of the bicycle’s features, functions and con-sumer characteristics in the “post-industrial society” and “leisure society”; Withindustries transferred to Mainland, Taiwan’s bicycle manufacturers repositionedTaiwan as the location for research and development and automated production ofhigh priced bicycle models, which have been exported to Europe, the United Statesand other developed countries. They moved the production of medium and lowpriced models to mainland China, which are mainly exported to the Middle Eastand other developing countries. Taiwan’s three major bicycle manufacturers allhave set up factories in Mainland. Pursuing different production and marketingmodes on both sides of the Taiwan Strait, Taiwan’s bicycle manufacturers are ableto avoid low price competition with mainland China bikes.3 And their commitmentto innovation, premium quality, upscale market, and high value-added allow themto become the world’s leading suppliers of exclusive bicycles.

This upgrading path causes the whole smiling curve to move upward because therepositioning of R&D, production and marketing has boosted the brand value andadded value (shown in Fig. 7.1).

Fig. 7.1 Change of theindustry smiling curve due torepositioning

3Analysis of competitive advantages of Taiwan’s bicycle industry, Chen Yinxuan, July, 2008; Astudy on the performance of all enterprises in the industrial cluster—an analysis of Taiwan’sbicycle industry, Li Junkun, Feb., 2009; Key success factors in promoting the A-team in Taiwan’sbicycle industry and performance evaluation, Li Qiongyao, June, 2007.


7.3.2 Achieving Transformation and Upgradingby Substituting First for Imported Products, thenfor Multinational Companies’ Products in Chinaand in Foreign Markets

Technological capability enhancement of developing country enterprises follows amulti-step technological catch-up route of introduction, digestion and assimilation,imitation, overtaking, and independent innovation. The active follower strategypursued by enterprises has provided strategic foundation for substitution formultinational companies’ products. They have progressively realized upgrading inthe course of replacing multinationals’ products, and finally achieved technologicalleaps.

7.3.2.1 Making Use of Late-Mover Advantage and Pursuing ActiveFollower Strategy to Replace Multinationals’ Products

The follower strategy is a strategic choice to learn and imitate the lead firms’superior qualities and excellent methods of doing things in order to more efficientlyuse resources and time than independent innovation. It can fall into product fol-lower strategy, regional follower strategy, and marketing follower strategy inaccordance with the type of lead firms. For Chinese enterprises in a weak positionin the international market, the follower strategy represents that they search for andstudy good market performance products and technologies of foreign orforeign-funded companies who are or are not in direct competition with them, thenproduce products to take the place of imported products or products made bymultinationals in China so as to substitute for products made in foreign countries orby foreign-funded companies in China, and finally gain domestic market share andpenetrate the international market. Some research findings show that developingcountries, especially China, are in a better position to implement the followerstrategy and get better results. One reason is that China has a vast domestic marketthat many other developing countries do not possess, which is a good condition forthe implementation of this strategy. On the other hand, many enterprises in Chinahave strong technical power and deep technological accumulation, which providesthe possibility of implementing the follower strategy. In the start-up stage or when itis not strong enough, the enterprise usually imitates and follows the existingproducts and technologies of multinational companies. This approach has been usedby most Chinese manufacturing enterprises. For instance, 90% of China’s com-munication enterprises are followers.


7.3.2.2 Adopting a Progressive Way of Upgrading and AchievingTechnological Leaps in the Course of Substitutingfor Multinational Companies’ Products

The Japanese comparative technology historian Takeshi Hayashi (1986) put for-ward the theory of “five stages of technology from dependence to independence”:grasping operating techniques; maintenance of imported machinery and equipment;making repairs and a series of minor improvements; designing and planning; andlocalization. This seminal research provides a clear exposition of the technologicalcatch-up process of latecomer countries.

Mao and Li (2006), based on the study of upgrading paths of some successfulhome appliance enterprises in China, propose the idea of enhancing the enterprise’stechnological strength through the replacement of multinationals’ products. Theypoint out that the upgrading of the enterprise’s technological capability ispath-dependent and undergoes three stages: introduction of mature technology anddigestion and absorption—imitative innovation and cooperative innovation—in-dependent product innovation. This sequential pattern contributes to technologicalaccumulation and enterprise upgrading. They further point out that product sub-stitution follows a path of replacing products imported from foreign countries—replacing products produced by multinational companies in China—replacingmultinational companies’ products in foreign markets. China’s Haier, Galanz andChanghong have achieved technological innovation and independent research anddevelopment, and accomplished product upgrading by moving along this path.Take Changhong as an example, in the early 1980s, it introduced Panasonic’sproduction line and produced color TV TA movements (the stage of introduction,and digestion and absorption); In the early 1990s, it worked together with Toshibato develop NC-2 and NC-3 color TV movements (the stage of imitative innovationand cooperative innovation); In 2000, Changhong accomplished the developmentof digital high-definition television and digital high-definition rear projectionproducts (the stage of independent innovation).

The overall upgrading of China’s air conditioning industry reflects the accu-mulation of technology and the evolution of manufacturing, management andmarketing capabilities. Air conditioning manufacturers, Gree, Haier, Midea, andother domestic brands have moved to upscale market mainly through two steps. Thefirst step is to shift from replacing imported foreign products to the substitution forproducts made by multinationals in China. In 2009, LG had only 2.18% of themarket share in China. And Toshiba, Sanyo, Hitachi and other foreignair-conditioning companies all lost ground in the Chinese market. In the field offrequency conversion air conditioning whose technology had been controlled byforeign manufacturers, domestic air conditioners nabbed a whopping 75% share.The second step is to replace multinationals’ products in foreign markets. China’s


home-grown air conditioners are exported to more than 200 countries and regions,accounting for 70% of the global output.4

By imitating products of multinational companies, ZTE conducted technologicallearning and gradually narrowed the technological gap between itself and foreigngiants, thus, achieving product upgrading and replacing multinationals’ products inboth domestic and international markets. In 2009, ZTE won a 35% share andranked first in the Chinese 3G wireless equipment market. It also received largeorders in emerging markets such as Indonesia, Turkey, Vietnam and Saudi Arabiaand made a breakthrough in the European market by collaborating with DeutscheTelekom’s affiliated T-Mobile, ranking third among the world’s DSL broadbandaccess equipment providers.

This upgrading path also causes the whole smiling curve to move upwardbecause enhanced R&D, production and marketing capabilities have increased theproducts’ value added. By pursuing active follower strategy, Chinese enterprisesimitate imported goods and products produced by multinationals in China andabsorb advanced technology. At the same time, they adopt catch-up strategy,attaching importance to intellectual property rights, carrying out innovative researchand development, and finally accomplishing three types of replacement: replacingimported products—replacing products made by multinationals in China—replac-ing multinationals’ products in the international market.

7.3.3 Creating New Products and New Demandson the Basis of Blurred Industrial Boundariesand Industry Convergence, and AchievingInter-sectoral Upgrading

Since 1990s, with the rapid development of communication technology and com-puter technology, the boundaries of industries tend to be blurred, and industriesbegin to converge. There is intersection and convergence between tangible prod-ucts, between intangible products, and between tangible and intangible products.Especially for some high-tech companies related to information technology,industry convergence and blurred boundaries caused by information technologyprovide an opportunity for their expansion and innovation.

Apple is the world’s model of inter-sectoral upgrading. In terms of productresearch and development, Apple spans traditional manufacturing, IT, culturalcreativity, art and other fields. In terms of product functions, Apple’s iPad combinestraditional communication, computer applications, culture, entertainment, media,

4GREE is No. 1 for 13 consecutive years in the air conditioning industry because of its paranoia,Documentary, He Dazhuo and Dong Mingzhu, Issue 16,2009; Pride and prejudice led to the bitterfailure of foreign air conditioning companies in China, IT Time Weekly, Issue 21, 2010.


finance, securities, art and etc. Apple has created a huge new market in the worldand has recently become the world’s most valuable company.

Inter-sectoral upgrading can be applied either to the convergence betweenmanufacturing industries or to the convergence between traditional and newlyemergent industries, and even to the fusion between traditional manufacturingindustry, newly emerging industry and service sector. It not only increases the valueand total output, also fosters the change of industrial structure and upgrading. Theprocess of the enterprise moving from producing a single product to producingdiversified products and then to developing product ranges is the key to productexpansion and enterprise upgrading.

The blending of toy industry, aesthetics, sports, education, media, IT, and manyother sectors is offering traditional toy manufacturers new ways to develop. Theymay launch new products and establish new channels and new models. Forexample, Lungcheong Toys Co. Ltd. have combined traditional toys with electronicproducts, giving birth to wireless remote control products and electronic products,with radio-controlled toys accounting for 57% of its turnover. Auldey AnimationGroup, through the integration of animation and toy production, has launched manyanimation-related toy products to which the market respond very well, while pro-ducing and broadcasting animation works. Hayidai Co. Ltd. takes advantage of thechannel integration of supermarket chains. Its sales outlets are distributed aroundmany provinces and cities through different supermarket chains such as Lotte,Wal-Mart, Carrefour, Trust-Mart, etc. It also provides plush toys for large brandedcompanies, such as FAW Volkswagen, Brilliance Auto, Construction Bank, ChinaMobile and so on.5

The enterprise originally produced products of low value and was situated on thelower smiling curve. Owing to blurred industrial boundaries and industry conver-gence, the enterprise may realize product upgrading and produce products withhigher value added. This upgrading path, by superimposing the smiling curve of

Industry 1

Industry 2

Fig. 7.2 Change of thesmiling curve due tointer-sectoral upgrading

5Based on the author’s investigation into Lungcheong, Alpha Animation and Culture, and Hayidaiin Jan. 2008 and Nov. 2011.


Industry 2 on the smiling curve of Industry 1, has raised the new product smilingcurve to a higher level (see Fig. 7.2).

7.3.4 Removing Barriers to Key Components and AchievingOverall Upgrading Through TechnologicalAccumulation and Capability Evolution

In the environment of global competition, companies in developed countriescommand the majority of the world’s cutting-edge and key technologies. And theyhave the major say in the development of technological standards. Key componentsof many industries are controlled by foreign firms. Breaking down barriers to andrestrictions on key components has become an important way for enterpriseupgrading in developing countries, which requires product innovation and tech-nological innovation. Product and technological innovation are increasinglydependent on capital and technology accumulation, especially technology accu-mulation. The accumulation and development of technological capabilities is a longand arduous learning process (Gil et al. 2003; Chen and Qu 2003). In order tocultivate and develop technological capabilities, enterprises need to take the ini-tiative to pursue systematic technological learning so that they can enhance con-tinuously their professional skills in various technological functions and keep ondeepening technological knowledge (Bell and Pavitt 1995). An (2004) points outthat there are five stages in the development of technological capabilities: tech-nology selection, technology acquisition, digestion and absorption, technologyimprovement, and technology creation. Increasing the products’ added value andstrengthening the brand requires strong support from the accumulation of funds andtechnology. Linsu Kim (1997) proposes a general model for the growth of devel-oping countries’ technological capabilities: introduction of mature technology—digestion and absorption—product innovation. The growth of technology is anevolutionary process. Since enterprises in developing countries usually do not havegreat independent R&D capability, it is difficult to develop all on their own.However, by taking advantage of late-mover advantages and introducing the latestproduction equipment and technology, latecomer enterprises are in a relativelyfavorable competitive position compared with established companies when theyenter a rather advanced and high-growth speed industry. To illustrate, consider thecase of Lungcheong Toys Co. Ltd. (Lungcheong) in Changping, Dongguan.Though the global financial tsunami has badly affected China’s manufacturingenterprises, Lungcheong, which has more than 8,000 employees, is currently wit-nessing both production and sales booms. Its hit product, the intelligent robot, soldat home and abroad, sells at as much as 2,000¥ apiece. And its production orders


lined up to next year.6 Lungcheong started with OEM manufacturing for toybrands. By improving its own R&D and design capabilities, acquiring dedicatedR&D and design organizations, proactively introducing talented people, it hassuccessfully achieved technological accumulation and enterprise upgrading. In1998, Lungcheong created the high-tech product R&D department; in 2000 itestablished the high-tech intelligent product R&D department; in the same year, itacquired the Taiwanese-founded Chuangyi Precision Machine Co. Ltd. (Dongguan)for HK $18 million; and it has cooperated with external research institutions anduniversities to develop technologies and new products. In 1997, it floated shares,raising capital to support its upgrading. Meanwhile, Lungcheong values the intro-duction of external technology and knowledge. Through cooperation with theChinese University Hong Kong, it obtained the technology for the remote-controltumbler; it also worked together with Wuhan University of Technology, TsinghuaUniversity, and Harbin Institute of Technology to develop intelligence-relatedtechnology.7

There are quite a few successful cases of achieving enterprise upgrading byremoving barriers to and restrictions on key components. For example, Lu Guanqiu,founder of Wangxiang Group (Wangxiang) said in the 1990s that Wanxiang shoulddevelop high value-added and high technology content activities, and focus on keycomponent and key process development and give up preliminary low value-addedprocessing and assembly. For the auto parts it was making, Wangxiang set a cleardirection of product upgrading: single components—a variety of components—systems modules. Initially manufacturing components like ABS and sensors,Wangxiang later entered the field of automotive electronics and gradually devel-oped key components such as lithium-ion power battery and created its ownelectric vehicle along the way of “battery—electric motor—electric control—electric vehicle”. At present, it is the only enterprise in China that has the ability toproduce key components for electric vehicles like battery, motor, control, andpower system, establishing itself as a leading player in the industry.

Taiwan’s bicycle manufacturers are also concentrating their efforts on makingtechnological leaps in new materials and processes. They actively develop, designand manufacture key components. Meanwhile, they emphasize the learning andintroduction of foreign advanced technologies. They have introduced the modulartechnology from the United States and the supply chain model from Japan. On thebasis of independent innovation and digestion and assimilation of importedadvanced technology, from 1983 on, the material for making bicycles in Taiwanhas changed from steel pipe to titanium alloy and magnesium alloy and then even tocarbon fiber, reducing the weight of the bicycle from 30 kilos to the present 7 kilos;and the manufacturing technology has developed from brazing to argon welding,

6Based on the report in Xinhuanet on Nov. 21, 2008 http://www.gd.xinhuanet.com/dg/2008-11/21/content_14984941.htm.7Based on the author’s investigation into Lungcheong on Jan. 27.


http://www.gd.xinhuanet.com/dg/2008-11/21/content_14984941.htm

http://www.gd.xinhuanet.com/dg/2008-11/21/content_14984941.htm

from integral forming to non-oxidizing arc welding. Their bicycles have becomelight, rigid, tough and strong.8

Beginning as systems assembler, Taiwan’s Hsinchu Scientific Industrial Parkand Tainan Scientific Industrial Park have gradually grown to be key componentdevelopers and producers. For example, in the photoelectric industry, under thetrend of continuous expansion of corporate size and development of the nextgeneration panels, enterprises in the parks have a great magnetic absorption effecton key component and raw material suppliers, and have “competition—exclusion”and “spillover—connection” effect on the area’s industry structure. The “compe-tition—exclusion” effect indicates that emerging industries in the park payemployees much better than traditional industries, which makes it difficult for thelatter to recruit or puts them under the pressure of substantial labor cost increase, somany traditional manufacturers are forced to relocate elsewhere; The “spillover—connection” effect shows that, with industries in the park growing, manufacturers inthe park will enter into close partnership with those on the outside owning tocontracted processing and raw material supply. With the park’s technology dif-fusing, high-tech enterprises will gather in the vicinity of the park.9

This upgrading path causes the left side of the smiling curve to slope upwardbecause the industry can achieve technological leaps in material, process, or keycomponents through technological innovation and acquisition, thus raising theproducts’ value added (see Fig. 7.3).

Fig. 7.3 Change of industrysmiling curve due to thedevelopment of R&Dcapability

8Analysis of competitive advantages of Taiwan’s bicycle industry, Chen Yinxuan, July, 2008.9Based on the author’s investigation into the Science Park in southern Taiwan and the TaiwanInstitute of Industrial Technology in May 2006 and November 2008 respectively.


7.3.5 Achieving Upgrading by Increasing Investmentin Production Services and Boosting Value Added

According to the experience in the automotive industry, the profit ratio of used cartrading, after-sales service and new car sales in Europe and the United States is3:2:1; the experience in the elevator industry shows that Japanese elevator giantssurvive on orders for 5,000 elevators because there is huge demand for elevatormaintenance and renovation. Obviously, for some industries, especially those inrelatively saturated markets, producing large durable goods of rather long servicelife, and having high maintenance requirements, there is much room for after-salesservice. Therefore, in these industries, traditional marketing can be extended toproduction services. By increasing investment in production services the industrycan raise its value added and achieve upgrading.

This upgrading path causes the right side of smiling curve to slope upward. Asmarketing is extended to production services, the enterprise can create higher valueadded and achieve upgrading (shown in Fig. 7.4).

7.3.6 Achieving Enterprise Upgrading by Reducing Inputsand Consumption, Lowering Costs, and EnhancingEnvironmental Standards and Value Added

Low-carbon operation is not something that only requires investment but reaps noprofits. By purchasing environmental protection equipment, changing processes,and developing green technology, enterprises can reduce environmental impact,lower costs, improve product quality and enhance corporate value.

Pacific Textiles Printing and Dyeing Co. Ltd. (Pacific Textiles) is a typicalenterprise which has moved away from high energy consumption and large emis-sion to green operation. In 2007, it spent 100 million Yuan and installed an airflowdyeing machine to save energy and reduce waste; in 2009, it began purchasing

Fig. 7.4 Change of industrysmiling curve due to servicefocus


phosphorus-free dye additives; in 2008, the enterprise invested 40 million Yuan in aRO reverse osmosis waste water treatment and recycling project. The wet openwidth setting process adopted by the enterprise has yielded an annual savings of3,000 tons of standard coal. It obtained the International Oeko-Tex Standard 100certification for ecological textile products in 2003, and Swiss GOTS GlobalOrganic Textile Standard certification in 2008. Moreover, Pacific Textiles activelyparticipates in the formulation of environmental standards in the industry. Theaverage unit price of its products has doubled within 10 years, ranking first inChina’s textile industry. Production costs have fallen by almost 5%. Energy savingprojects have generated annual revenues of about 35 million Yuan. In 2008, PacificTextiles’ operating income was 3.4 billion Yuan, with a total profit of 152 millionYuan. In 2009, its revenue increased to 3.8 billion Yuan.10

Hongyuan Industrial Inc. Ltd. (Hongyuan) has achieved upgrading throughenergy saving and emission reduction, and through the development of ecologicallyfriendly products. In 2009, its gross profits rose to 20%, and fuel costs fell 39%compared with 2008. Taiwan’s textile enterprises mostly have low carbon operationawareness. And the majority of them have obtained international certificationsabout environmental standards while in Mainland China only a small number oftheir counterparts have obtained them. In 2007, the percentage of qualified clothingproducts from Mainland was below 70%.11

This upgrading path induces the smiling curve to move upward twice. On onehand, by installing equipment and processes that improve resource productivity andreduce emissions and by purchasing green materials which lower operating costsand reduce or even eliminate pollution, the enterprise’s dual smiling curve hasmoved downward because its total costs have dropped, as shown on the left side ofFig. 7.5. On the other hand, the smiling curve has jumped twice. First, by devel-oping green technology and products and redesigning production processes, theenterprise has improved its value added, so the smiling curve rises to the position ofCurve 1. Then it continues to go up to Curve 2 (the New Curve) because obtaining

Fig. 7.5 Changes of the enterprise’s dual smiling curve (left) and smiling curve (right)

10Based on the author’s investigation into Pacific Textiles in March and April, 2011.11Based on Hongyuan’s annual reports, the company website and other related public information.


international certifications about environmental standards can enhance the enter-prise’s product value and competitiveness, as shown on the right side of Fig. 7.5.

7.3.7 Achieving Upgrading Through the Establishmentof Strategic Alliances Between Cluster Enterprisesand with Large Enterprises Promotingthe Development of Small Ones

Industrial clusters provide a good platform for independent innovation of enter-prises and improvement of industrial chains. An individual enterprise usually lacksthe funds and R&D capability to make technological breakthroughs. Therefore,through the establishment of strategic alliances between cluster enterprises andcompetition (cooperation and competition) between them, and with large enter-prises promoting the development of small ones, the entire industrial cluster canachieve upgrading.

In 2003, Taiwan’s bicycle industry association A-Team was established. Two ofthe industry’s three major manufacturers “Giant” and “Merida” and parts manu-facturers formed a center-satellites system. Central manufacturers focus oninspection, assembly, research and development, and marketing; satellite manu-facturers, with a steady source of orders and no need for marketing, are dedicated toproduction. And they keep on improving productivity owing to the assistance andcontractual requirements of central manufacturers. Large enterprises foster smallenterprises and central manufacturers nurture satellite factories. This finally facili-tates the whole industry to rise to the higher levels of the technological andvalue-added ladder. In terms of performance, A-Team manufacturers perform sig-nificantly better than non A-Team manufacturers. First, the product unit price ofA-Team manufacturers is US $140 higher than their peers (350:210). Second,95.2% of A-Team members use their own brands to sell products, while the averagepercentage of the industry is 55.46%. This shows that A-Team has effectivelypromoted the overall upgrading of the industry.12

In order to improve their technological level, narrow the technological gap withadvanced manufacturers, and eventually achieve upgrading, Taiwan’s enterprisesactively allied themselves with developed country companies in related industries.For example, TSMC and UMC sought alliances with established companies in theearly development stage. The licensed technology they obtained has laid a solidfoundation for their leading position later in Wafer OEM manufacturing technol-ogy. Atotech Taiwan Ltd. also enhanced its technological strength by creating astrategic alliance with the dominating company Compeq in the industry. Buildingup industrial chains through alliances can improve the overall R&D strength of the

12Key success factors in promoting the A-team in Taiwan’s bicycle industry and performanceevaluation, Li Qiongyao, June, 2007.


allied companies, and facilitate industrial and enterprise upgrading. Consider theexample of the communications industry. China has a large-scale communicationsindustry, but it is not a country with powerful communications technology. Thetechnological standards of the first and second generation mobile communicationwere dominated by European and US companies. China’s communication tech-nology enterprises were in a passive position in the process of their development.However, the third generation mobile communication standard, TD-SCDMA,independently developed by Chinese enterprises, has successfully become theinternational standard. It is a typical example of technological leaps. The success ofTD-SCDMA reveals that developing country enterprises can use their late-moveradvantage to attain capability leaps in new technological fields by standing on theshoulders of others, which will help them to narrow the technological gap with oreven leapfrog incumbent companies. The TD-SCDMA standard resulted from thejoint efforts of nearly 50 enterprises. Equipment manufacturers, terminal manu-facturers, chip developers, and testing instruments enterprises etc. created theindustrial alliance, spending four years in researching, developing, and testing, andjointly accomplishing the development of the TD-SCDMA standard.

Fig. 7.6 Change of industry dual smiling curve (above) and smiling curve (below)


The cost of an industrial cluster is the lowest point of tangency of each enter-prise’s cost in the cluster. So the dual smiling curve of the industrial cluster is theenvelope curve of each enterprise’s dual smiling curve. The added value of theindustrial cluster is the highest point of tangency of each enterprise’s added value inthe cluster. So the smiling curve of the industrial cluster is the inner tangent of eachenterprise’s smiling curve. This upgrading path changes both the smiling curve anddual smiling curve. Since by relying on the platform of the industrial cluster, theadded value of enterprises in the cluster has reached the highest level (above), andthe cost of enterprises in the cluster is at the lowest level (below). The industry inthe cluster has achieved overall upgrading (see Fig. 7.6).

7.3.8 A Large Diversity of Upgrading Paths from OEMto ODM and then to OBM

This book presents a descriptive model on the transformation and upgrading ofOEM enterprises. This model is used for the comparative analysis of the upgradingpath choices of two enterprises in Guangdong Province: Donlim Kitchen Group(Donlim) and Jasic Technology Company (Jasic). Of these two enterprises, one isthe “hidden champion” in the domestic small electrical appliance sector, the other isthe leading enterprise in the domestic welding industry. Both enterprises havesuccessfully upgraded from OEM to ODM and then to OBM, but they differ in theprocess of upgrading. The book also details the upgrading processes of twoDongguan toy enterprises: Lungcheong and Hayidai. Through the analysis of thesecases, we find that the descriptive model developed in this book can well illuminatethe specific trajectory of OEM enterprises’ transformation and upgrading. And withthe help of Table 3.3, which shows the judgment criteria for the descriptive modelon OEM enterprises’ transformation and upgrading, one can readily make a ratherobjective evaluation of the transformation and upgrading results of OEM enter-prises. Moreover, the research into the upgrading paths of OEM enterprises revealsthat they display a large diversity in the choices of upgrading paths: in terms of thegeneral direction, OEM enterprises follows the path of upgrading from OEM toODM, and then to OBM. But for a particular enterprise engaging in actual trans-formation and upgrading, it should adopt different strategies according to specificsituations.

7.3.8.1 Achieving Upgrading by Coordinating Both Domesticand Foreign Markets, and Conducting OEM, ODM and OBMConcurrently

OEM Manufacturing is an effective avenue for late-mover countries or regions toprofit sharing, technological catch-up and even the attainment of OBM. However,


changes in the external environment have forever disrupted this economic devel-opment in China. Raw material prices have risen; labor costs are increasing; energysupplies fall short; RMB appreciates; the export tax rebate rate keeps on declining;and environmental protection costs are rapidly increasing. As a result of these badchanges, OEM enterprises’ profit margin is increasingly shrinking. To survive anddevelop, they must implement upgrading in a timely manner. Figure 7.7 shows theupgrading path of OEM enterprises.

In the process of upgrading, enterprises will gradually develop independentdesign capability and product innovation capability, thus moving to the highersegments of the value chain. In order to catch up with foreign advanced companies,they develop their own core technology and R&D capability through continuouslearning and innovation. And on this basis, they cultivate independent globalbrands, achieving upgrading from OEM to ODM and then to OBM. However,travelling up the value ladder from OEM to ODM and then to OBM imposes heavyrequirements on OEM enterprises. It demands long-term commitment and invest-ment in R&D capability and the configuration of global marketing networks anddistribution channels. Moving from OEM to ODM and then to OBM is an incre-mental learning and phased technological and experience accumulation process.This gradual development process keeps late-mover enterprises from venturing intothe wrong path in their early stage of product and technology innovation and helpsthem reduce development costs and accumulate technological capability.

The development course of Donlim and Jasic has illustrated the diversity of pathchoices for OEM enterprises’ transformation and upgrading.

In 2003, the OEM enterprise, Donlim entered into the domestic market byestablishing its own brand, as is often called a “born OBM” path, while in theoverseas market, it began performing ODM in 2000. Since then, it focuses on ODMbusiness over there and has not pursued OBM business. So its upgrading pathoutside the home country is progressing from OEM to ODM (OEM-ODM). Jasic’sstrategy for opening the domestic market is similar to Donlim. But they acteddifferently in the overseas market.

Though it followed the “born OBM” path in the domestic market, Jasic switchedbrands in the overseas market. Part of its products exported to the overseas market

Fig. 7.7 Path of upgrading from OEM to ODM and then to OBM. Source Wang and Mao (2007)


began to take on its own brand “JASIC” (including the “JASIC” brand placed onthe back of OEM/OBM products). However, in the overseas market Jasic assumed amixed pattern. It still performs OEM tasks, manufacturing to precise buyer-suppliedspecifications and drawings, not changing anything. Or it only produces internalparts of the product and outsources the production of the product shell to otherOEM manufacturers. Meanwhile, it initiated ODM business. The customer onlygives basic product concepts and requirements. Jasic designs everything fromoutside appearance to inside parts and manufactures complete final products for thecustomer, holding all the intellectual property rights except the brand.

This upgrading path lands the enterprise in higher value-added segments on thesmiling curve (see Fig. 7.8). In the foreign and domestic markets, enterprises mayfollow three upgrading paths: first is to upgrade from OEM to ODM; second fromOEM to OBM; and third is to be able to afford OEM, ODM, and OBMconcurrently.

Fig. 7.8 Change of positionsin the smiling curve

Fig. 7.9 Transformation andupgrading paths of OEMenterprises


7.3.8.2 Achieving Upgrading and Conducting OEM, ODM, and OBMConcurrently Through Spinning-off and Restructuring

There are two major ways for OEM enterprises to become truly large and strong:one is transformation and upgrading (product and technology innovation), includ-ing progressing from OEM to ODM (technological path) and upgrading from OEMto OBM (branding path); the other is to expand and diversify the OEM business(business model innovation). The transformation and upgrading paths of OEMenterprises are summarized and shown in Fig. 7.9.

As Fig. 7.9 shows, the first type is OEM-ODM, which takes the technologicalroute; the second type is OEM-OBM, which takes the branding route. The essenceof these two upgrading paths lies in climbing to higher value chain segments inpursuit of higher value added. ODM-oriented progressing to higher segments of theleft side of the value chain involves technological upgrading. Superior ODMmanufacturers should not only have industry-leading scale to effectively reducemanufacturing costs, but also strong R&D and design capabilities to constantlyprovide new products to meet the needs of the market, thus enhancing their com-petitiveness. OBM-oriented upgrading to higher segments of the right side of thevalue chain involves building brands and/or acquiring other companies’ brands,expanding to forward value chain activities, thus increasing the enterprise’s profitlevel. This is actually to develop branding and marketing capabilities on the basis ofthe enterprise’s existing manufacturing capability.

V1-V2 represents the diversification of the OEM enterprise. It is essentially ahorizontal leap across the value chains for the sake of securing higher added valueon one hand and spreading risk on the other.

Economies of speed and economies of networks explain corporate restructuringwhich consolidates the core business through merger and acquisition, and spin-offfrom the angle of factors flow speed and integration of external resources respec-tively. By way of spin-off and reorganization, large enterprises or corporate groupscan be divided into several discrete companies so as to separate the differentbusinesses and set up dedicated organizations to manage them, which is conduciveto the overall upgrading of the enterprises. Therefore, instead of upgrading fromOEM to ODM and then to OBM sequentially, enterprises can achieve upgradingfrom OEM to ODM or OBM while retaining their existing OEM manufacturingadvantage by splitting into OBM, ODM and OEM firms so that OEM, ODM, andOBM coexist.

Acer started as an OEM manufacturer, but later created its own brand. In 2002, itwas split into two independent firms through spin-offs: one takes on OBM businessand the other takes on OEM business. Acer is an OBM firm specializing in desktop,notebook computer and display, and electronic service. And Wistron is dedicated toOEM manufacturing.13

13Based on the author’s investigation into Hongyuan in October, 2008.


This upgrading path causes the original smiling curve to fall into two (seeFig. 7.10). The new curve above the original one represents the OBM or ODM firmwith enhanced added value; the smiling curve below the original one represents thededicated OEM firm. Through spin-off and reorganization, the OEM enterprise hasupgraded to ODM and/or OBM while still keeping its OEM.

7.3.9 Leapfrogging to Advanced Technological Levelsand Achieving Enterprise Upgrading by AcquiringStrategic Assets

The willingness of some advanced country companies to sell their strategic businessunits because of operational difficulties or the adjustment of strategic objectivesmakes it possible for developing country enterprises to acquire sophisticatedtechnology and other strategic assets. When entry barriers are low, latecomerenterprises can achieve technological leaps through the acquisition of advancedcountry companies (Xiong and Tang 2008). For example, in order to leapfroggingto advanced technological level, China’s Goldwind Science and Technologyacquired the German company VENSYS.

Latecomer enterprises barely have the strategic assets such as proprietary tech-nology, brands, and distribution networks. The enterprises that only adopt theconventional follower strategy will forever be in a passive position. Therefore,mobilizing resources for the acquisition of strategic assets in certain sectors is animportant way for latecomer enterprises to achieve upgrading. Here, strategic assetscomprise technology, natural resources, brands, management capabilities, servicecapabilities and so on.

In 2002, Taiwan’s bicycle manufacturer Merida acquired up to 48% equity stakein the top U.S. bicycle brand Specialized, and the German brand Centurion.Through these two acquisitions, it gained advanced technology, R&D capability

Before spin-off

Value chain

Value-added

After spin-off (OBM)

After spin-off (OEM)

Fig. 7.10 Change of the smiling curve due to spin-off and reorganization


and market opportunities in developed countries at relatively low cost and in a shortperiod of time. Its order control ability, production scheduling efficiency andhigh-end bicycle market share in Europe and the United States increased signifi-cantly. The sales revenue of Merida’s own brand products accounted for more than90%.14

With roots as an OEM manufacturer, Lacquer Craft Mfg has successfullyupgraded from OEM to ODM and OBM through accumulation of resources andcapabilities and acquisition of high-end European and US furniture brands.15

This upgrading path causes the smiling curve to move upward since through theacquisition of technology, brands and other strategic assets, the acquirer hasenhanced both capability and added value and achieved upgrading (see Fig. 7.11).

7.3.10 Achieving Upgrading with the Facilitationof Industrial Clusters and Parks

In the environment of fierce market competition, industrial clusters and parks havebecome an important platform for enterprise development. The development ofindustrial clusters and the establishment of industrial parks play a key role inpromoting the upgrading of enterprises. For example, Silicon Valley in the UnitedStates is not just a science and technology park, it is also an ecosystem and amechanism. Under the Silicon Valley mechanism, small companies and individualinventors whose technological achievements are rapidly commercialized andlaunched to the market soon grow into world-class companies. This mechanismprovides sufficient nourishment and fertile soil for the upgrading of enterprises. Forlack of the Silicon Valley mechanism, many clusters and parks simply represent thegeographical agglomeration of enterprises, and they hardly give full play to the

Fig. 7.11 Change of thesmiling curve due toacquisition of strategic assets

14A study on the performance of all enterprises in the industrial cluster—an analysis of Taiwan’sbicycle industry, Li Junkun, Feb., 2009.15Based on the author’s investigation into Lacquer Craft in July, 2009 and in September, 2009.


scientific research and network advantages. Such examples are countless.Therefore, it is both the industrial clusters, parks and the ecological environmentthey create that foster the innovation.

7.3.10.1 The Ecosystem of Industrial Clusters and Parks Involvesthe Development of Well-Structured Factors Supplyand Service Systems

As the platform for enterprise innovation, industrial parks provide good investmentenvironment, technology development, capital market, efficient and professionalintermediary service, and good community service. Take Taiwan’s industrial parks asan example. Their success in nurturing enterprises is down to the good environmentcreated for attracting investors to set up plants and well-structured factors supply andservice systems. For example, Taiwan Industrial Technology Research Institute(ITRI) undertakes both forward-looking research projects of Taiwan’s Ministry ofEconomic Affairs and medium- and short-term research projects initiated and spon-sored by enterprises in the park. Aiming at Taiwan’s industrial interests, ITRI scansand tracks global leading-edge science and technology, organizes joint developmentof technology, and applies the newest technology to projects in the enterprises of thepark and ultimately drives business processes through products, equipment, andtechnological know-how. ITRI has served as an incubator of world known enterprisesincluding UMC and TSMC.16

7.3.10.2 Big Companies in Industrial Clusters and Parks Arethe Driving Force Behind the Development of LocalEnterprises

The establishment of the industrial park has promoted the development of localenterprises. First of all, on the industrial level, large companies’ presence in thepark has driven the upgrading of local industries; Secondly, this industrialupgrading has led the local enterprises to shift to and develop high-tech businesses.For example, as mechanisms related to high technology, R&D and cooperationbetween industry and university were in place in Tainan Science and TechnologyPark, many enterprises in southern Taiwan, especially those in the deeplyembedded precision machinery industry eagerly hoped to upgrade their capabilityand become subcontractors of big companies.

16Based on the author’s investigation into Taiwan Institute of Industrial Technology on November18, 2008.


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Chapter 8Conclusion

8.1 Be a Prepared Enterprise

Manufacturing enterprises in China are mostly low-end small and medium-sizedones with an extensive growth mode. Many of them were immediately swept awayby the strike of the global financial crisis. Chinese enterprises have long relied onabundant supplies of labor force and other low-cost advantages. But, only relyingon low cost inputs will certainly spell serious trouble for them down the roadbecause comparative advantages in inputs never last. However, some enterpriseshad attempted to upgrade before the financial crisis happened, so they were able tosurvive the crisis, and to grow fast even in tough times. For example, Taiwan’sAtotech in the presence of the financial crisis, increased their R&D expenditure andwitnessed a rapid revenue growth. Another example is Lungcheong Toys Group inDongguan. Since it has consciously developed independent R&D capabilities andestablished its own brand from very early on, it was able to withstand the crisis,though many others did not succeed in surviving. And some high-tech enterprisesin Shenzhen also showed an ability to resist risks. Toyota is a high-growing andhigh-performing company. Professor Fujimoto at University of Tokyo, Japan,conducted decades of research into Toyota and published the book “Evolution ofManufacturing Systems at Toyota”, which analyzes its capability building processand draws the conclusion that Toyota is a prepared organization. Enterprises thatmake preparations are not only forethoughtful and plan ahead, but also have theability to defend themselves against crises. And in the long run, this is also key tothe creation of sustainable competitive advantages and the change towards growth.


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8.1.1 Change Mindset and Actively Implement the Strategyof Transformation and Upgrading

With the deepening of reform and opening-up, accession to the WTO and thesurging tide of globalization, Chinese enterprises are facing enormous challenges oftechnological change and fierce competition in a fully open market. How to rapidlyaccumulate technological capabilities and effectuate technological advancement tocope with the global economic integration is a severe test for most enterprises inChina, especially for small and medium-sized ones, which account for 99.6% of thetotal number of enterprises. China’s “11th Five-Year Plan” has clearly put forwardthe initiative of independent innovation. So it is essential for Chinese enterprises toimprove rapidly their technological capability and develop their innovative per-formance. Enterprises situated in the lower segments of the value chain, especiallythe OEM firms, should wake up to the necessity and urgency of transformation andupgrading. They need to change their mindset by actively implementing the strat-egy of transformation and upgrading, and gradually shifting the business focus tohigher value-added R&D and marketing segments.

8.1.2 Use a Variety of Ways to Achieve Upgradingfrom Manufacturing to R&D

Technology is the foundation of enterprise transformation and upgrading. Butenterprises need to find a suitable approach to the development of technologicalcapabilities based on comprehensive consideration of multiple factors includingtheir own industry environment, business strength, human resources, technologicalcapability and so on. The analysis of a number of real world cases in the previouschapters allowed us to detect several paths for upgrading from manufacturing toR&D. Enterprises can choose one or more paths to improve their technologicalstrength.

Firstly, for enterprises with considerable technological strength and innovativecapability, it is necessary to continue to make big R&D investments, and carry outinnovation activities so that they can achieve continual upgrading. And forIT-related high-tech enterprises, there is much need to speed up infiltrating andextending into relevant industries and achieve product upgrading, since the con-vergence and blurred boundaries of industries brought about by IT has created goodopportunities for expansion and innovation of enterprises.

Secondly, if the enterprise does not have technological capabilities, it had betterin the early stage import foreign advanced technology, imitate foreign products, andimplement the product imitation and substitution strategy. This does not mean oneshould only focus on the introduction of complete sets of equipment. One shouldalso try to introduce relevant product designs and production technology anddevelop abilities to decompose and imitate the equipment. Otherwise, it will have

270 8 Conclusion

no way to digest and assimilate the imported technology, and may fall into a viciouscircle of “introducing—falling behind—introducing more—falling farther behind”.Statistics show that in 2004, the ratio of technology import and assimilation byChina’s large and medium-sized industrial enterprises is 1–0.07, and this ratio inboth Japan and South Korea remains at about 1–10. Therefore, Chinese enterprisesshould increase their absorptive capacities and enhance their ability to innovate onthe basis of digestion and absorption.

Thirdly, latecomer enterprises can speed up the development of new productsand achieve upgrading by means of cooperative R&D and strategic alliances. Thisincludes technological cooperation with transnational companies as well as jointdevelopment efforts with universities and research institutions. Whatever cooper-ation is adopted, it is doubly important for enterprises to have a clear positioningand accomplish complementary advantages for both sides and accelerate thetechnological development and upgrading process.

8.1.3 Expand Beyond the OEM Roots to ODM and thento OBM

Well-known companies, including South Korea’s Samsung, Taiwan’s ASUS, andAcer, all started with OEM manufacturing for developed country firms. This ismainly because these emerging market companies in their early stage of develop-ment lacked the needed production technology, though they had low cost advan-tages in manufacturing. With the economy developing in these countries, laborcosts and raw material prices began to rise. The disadvantages of OEM manufac-turing will surface if companies still stay at the lower part of the value chainconducting unskilled assembly activities. Actually independent intellectual propertyrights have now become key to the success of business competition. Without them,latecomer enterprises would be forever performing low level processing activitiesand earn razor-thin margins, while developed country companies at the high ends ofthe value chain are reaping most of the profits and added value due to their own-ership of core technology and global brands. In order to catch up with advancedcompanies, latecomer enterprises have no choice but to develop their own coretechnologies and R&D capabilities through continuous learning and innovation,and on this basis cultivate their own global brands. Specifically, in the process ofconducting OEM business for developed country companies, they should accu-mulate manufacturing experience through learning by doing, and at the same time,probe, study, imitate and improve the imported equipment and technology throughreverse engineering. This is actually a process of technology introduction, assimi-lation, absorption and innovation. Once the enterprise has developed its own designand preliminary R&D capability, it should gradually move to ODM, expanding tothe upper reaches of the industrial chain. With its strength augmenting further, itmay move to OBM, since intellectual property rights developed in the ODM stage

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can provide necessary support for the development of its own brands. Therefore, inthe course of evolving from OEM to ODM and then to OBM, the end result is thatthe enterprise has succeeded in achieving technological and product upgrading.

8.1.4 Put a Premium on Entrepreneurship and Cultivatethe Entrepreneur’s Crisis Awareness and Foresight

The ideas and values of entrepreneurs play a decisive role in the development of anenterprise. The entrepreneurs with a sense of crisis and foresight typically will beable to get the enterprise ahead of others and formulate strategies in line with thetrends of industrial development, so that they come out first in the competition.There is simply no way the enterprises included in this book would have becomesuccessful without the wisdom and courage of their decision-makers. It’s theentrepreneurs’ determination and ambition that continually push the enterprises tonew heights.

The entrepreneur’s crisis consciousness and foresight are reflected in strategy,organization, and every other aspect of the enterprise. Farsighted entrepreneursmake preparations of technology, management, talent pool, and so forth long beforethe crisis. Therefore, crises offer good opportunities for these individuals toimplement transformation and upgrading. For example, when the financial crisisswept across the world, TSMC in Taiwan was contemplating improving its com-petitiveness through the acquisition of some companies at a discount. And some bigconglomerates in South Korea were planning for change at the depth of the crisis,becoming poised for further expansion.

8.2 Be an Efficient Service-Oriented Government

In the waves of industrialization, the development model of the so-called “fourtigers in Asia” (Singapore, Korea, Hongkong and Taiwan) is most striking. Withina couple of decades they accomplished industrialization that many developedcountries had spent more than a hundred years to do. The industrial transformationand upgrading in Singapore has followed the development path of import substi-tution—export—labor intensive—capital and technology-intensive—knowledge—intensive. The industrial structure has been transformed five times. And the gov-ernment has played a leading role in each of these brilliant transformations. Underthe guidance of the government, Singaporean companies made changes andadjustments to improve the technological content and the added value, and they alsobegan to go international and seek development opportunities in vast overseasmarkets. In addition, the Singapore government went to great lengths to fosterhigh-tech industries as well as the supporting service sectors, thus striking a

272 8 Conclusion

structural balance between the three industries. The governments of Singapore,South Korea and Taiwan have played an important role in promoting enterprisetransformation and upgrading. Their experience can furnish very instructive lessonsfor China.

China is an emerging economy in transition. The market economy here is farfrom being perfect. Therefore, the government should take it as the goal to provideefficient support. It ought to provide efficient service in the following four aspectswith reference to the experience of Singapore and South Korea, and the currentworld environment and the overall goal of China’s industrial transformation.

8.2.1 Foster Enterprise Upgrading on the Basis of ValueChain Upgrading

In the new round of international industrial transfer, China, especially the PearlRiver Delta and Yangtze River Delta regions, should consider both undertakinginternational industrial transfer and downgrading activities in certain industries. Theupgrading of the value chain may provide a good opportunity for China’s relativelydeveloped areas to change the unfavorable low technological content and low valueadded conditions so that it can truly take over the core part of the value chain, andrealize the transformation from “made in China” to “created in China”. They canimprove their position in the international division of industry and enhance com-petitiveness, and foster the upgrading of local enterprises. For example, inGuangdong Province, which was the worst hit by the financial crisis, there are twomajor ways of upgrading:

8.2.1.1 Achieve Technological Upgrading in the Processof Undertaking International Industrial Transfer

Most industries in China’s coastal areas are operating in a globalized environment.The transfer of international industries and the influx of foreign investors havebecome a primary impetus behind China’s industrial growth. With the rapidadvancement of information technology, the pace of R&D globalization is accel-erating. Industrial innovations in various countries exhibit geographical featuresthat transcend national boundaries due to the easy flow of R&D personnel acrossborders and the sprouting up of international technological alliances. The transfer ofinternational industries provides learning opportunities for Chinese enterprises. Forthem, the multinational companies in China are both powerful competitors andbenchmarks. They may cooperate with the multinationals while competing withthem and follow their example, and consciously improve the learning ability so that

8.2 Be an Efficient Service-Oriented Government 273

they can learn advanced technology and management experience from them, andmanage to develop their own independent innovation capability. In this way, OEMenterprises can gradually move from OEM to OBM and then to OBM.

8.2.1.2 Improve Positions in the Division of Industry ThroughGradient Transfer of Regional Industries

China’s Pearl River Delta and Yangtze River Delta regions and other coastal citiescan not only be the undertaker of industrial transfer, but also serve as the transferorof industries. With the continuing economic expansion, costs in these regions are onthe rise. In order to pursue new space for development, traditional resource- andlabor-intensive industries and even some capital- and technology-intensive indus-tries in coastal areas, by virtue of their existing advantages, are carrying out a newround of relocation. First, they continue to fan out to the east and west wings,Guangdong’s mountainous areas and inland provinces; and second, textile,shoe-making and many other resource- and labor-intensive industries and somehigh-tech industries speed up the outward movement to ASEAN.1 Under this trend,enterprises in China’s coastal areas can selectively carry out regional industrialtransfer so as to make room for international advanced industries, and promoteindustrial upgrading through better resource allocation.

8.2.2 Promote Industrial Upgrading by Taking the ModernService Industry as the Locomotive

In the traditional industry-based economy, the boundaries between industries areclearly marked. However, since the 1990s, the rapid development of communica-tions technology and computerized technology has blurred and extended theboundaries of industries, and the intersection and convergence of industries havebecome the characteristics and trends of the contemporary economy. Among thesetrends, the most notable is the convergence of information technology, services andculture, which has become the fastest growing modern service industry in theworld. The US scholar David Moschella (2002) points out that the synergy of costadvantage, network effect and consumer effect arising from industrial convergencewill provide huge opportunity for enterprise to increase revenue.2 The economic

1Report on China’s Regional Economic Development in 2006–2007 [M]. Social ScienceAcademic Press 2007.2The US scholar David Moschella (2002) points out that industrial convergence enables resourcesto be rationally allocated in larger scope, thereby greatly reducing the costs of providing productsand services and generating cost advantages. Meanwhile, the convergence expands the reach ofnetwork applications, and leads to greater possibilities that various resources gain entry to thenetwork, resulting in network effect; Moreover, the openness of the production system resulting

274 8 Conclusion

focus of major developed countries has shifted to the service sector, leading theirindustrial structure to transform from an “industrial economy” to a “service econ-omy”. Global service sector value added is now accounting for more than 60% ofGDP. The development experience of Singapore suggests that in the process ofmoving to capital- and technology- intensive economic niches, it is necessary to putemphasis on the development of the service industry so that the country can grow tobe a global center for commerce, telecommunications, finance, and service from aprocessing production base. Therefore, the modern service industry, integratinginformation and culture, will act as the locomotive that drives the upgrading oftraditional industries and injects new impetus to their development.

8.2.3 Promote Industrial Upgrading by Using IndustrialClusters and Parks as the Platform for FosteringTechnological Development

Science parks sprang up in Mainland China in the middle and late 1980s. Up to now,53 state-level high-tech industrial development zones have been set up, distributedall over the country. And nine of them have joined IASP (IASP, InternationalAssociation of Science Park).3 Science parks have played a key role in the devel-opment of science and technology and in promoting economic development andindustrial transformation and upgrading. However, further observation reveals thatthere exist some major problems that are restricting their development: vaguepositioning of the high-tech parks; mediocre enterprises in the parks; low industrialvalue added; and a lack of clear orientation in the parks. Chinese industrial parks canlearn from the development model of Tainan Science Park in Taiwan, and promotethe upgrading of the enterprises in the park trough the upgrading of the science park.

8.2.3.1 Determine the Positioning of the Science Parks, MakeAdjustment and Transformation in the Parks, and EnhanceTheir Overall Independent Innovation Capability

For a long time, various parks have emerged in China, bearing many differentnames, such as science parks, industrial parks, development zones, processingzones and bonded zones. Although these parks have been adjusted and rectified

from the convergence integrates consumers as part of the production factors, producing conven-tional consumer effect. The combination of these three effects will create huge opportunities forenterprises to increase revenue.3Currently, IASP is the only worldwide association regarding science parks, business incubatorsand other innovative institutions. Founded in 1984, with the headquarter in Spain, it hasAsia-Pacific Chapter, European Chapter, North American Chapter and Latin American Chapter,attracting more than 200 members from 54 countries. IASP holds a worldwide meeting each year.


several times, there remain lots of problems. In fact, a number of provinces andcities have begun to make investigations and adjustments. It is reported that theinvestigation made by four Anhui provincial government counselors reveals that atpresent, in Guangdong’s development zones, enterprises focus on “enclosure”,there is a gathering of miscellaneous industries. Land resources are in urgent needof planning again as a whole. Beijing City applied to the State authorities for theretention of 28 development zones. After the national audit, it has been officiallyapproved to retain 27. Among them, photoelectric, mechanical and electrical base,national environmental protection industrial park, Badachu hi-tech park and Daxingbiological medicine base merged into Zhongguancun science and technology park.Li Shufan, deputy director of the Beijing Municipal Bureau of Industrial Promotionsaid that they would press fundamental change to the mode of attracting investmentin the development zones so that the zones can shift from the mode of “attractingcompanies” with the emphasis on the size and the quantity of investment to themode of “attracting industries” focusing on the improvement of industrialagglomeration.

In order to get over the problems such as scattered resources, overlapped con-struction and low-level competition, etc., the government, after taking into accountindustrial development trends, the parks’ overall strategic positioning, functionalpositioning, industrial positioning and industrial planning, should make adjustmentsto the parks accordingly so that each park has its own focus in the direction ofindustrial development, and some parks transform to high-tech ones, thus, ulti-mately enhancing the total independent innovation capabilities of enterprises in theparks.

8.2.3.2 Improve the Qualification Level of the Enterprises Admittedinto the Parks and Foster Distinctive High-Tech EnterpriseClusters

At present, many high-tech parks in China regard investment promotion as a toppriority, and almost have no requirements for the qualifications of enterprises.Those that basically meet the requirements of industrial planning will be admittedinto the park if they apply. Therefore, the quality of the admission enterprises ismixed. Some of them have only the minimum technological innovation capability.Real high-tech enterprises simply account for half of the total number in a park. Inthe end, the high-tech parks are not able to play a major role in the dissemination ofadvanced technology and in industrial upgrading. So the parks should place moreemphasis on the screening of enterprises, and formulate the qualifications andstandards for admissions consistent with the positioning of parks, which will beconducive to the generation of high-tech agglomeration effect and innovationnetwork.

276 8 Conclusion

8.2.3.3 Encourage Enterprises in the Parks to Climb to High ValueAdded Segments of the Industrial Chain and AchieveUpgrading

Beginning as systems assembler, Taiwan’s Hsinchu Scientific Industrial Park andTainan Scientific Industrial Park have gradually grown to be key componentdevelopers and producers. For example, in the photoelectric industry, under thetrend of continuous expansion of corporate size and development of the nextgeneration panels, enterprises in the parks have a great magnetic absorption effecton key component and raw material suppliers, and have “competition-exclusion”and “spillover-connection” effect on the area’s industry structure. The“competition-exclusion” effect indicates that emerging industries in the park payemployees much better than traditional industries, which makes it difficult for thelatter to recruit or puts them under the pressure of substantial labor cost increase, sotraditional many manufacturers are forced to relocate elsewhere; The“spillover-connection” effect shows that, with industries in the park growing,manufacturers in the park will enter into close partnership with those on the outsideowning to contracted processing and raw material supply. With the park’s tech-nology diffusing, high-tech enterprises will gather in the vicinity of the park.

Mainland China should also make use of the “competition-exclusion” and“spillover-connection” effect to influence the enterprises in and around the park toparticipate in the development of key parts and components, increase theself-sufficiency rate of key components, and to move to technology-intensiveeconomic niches, finally leading to the transformation of the local economy.

8.2.3.4 Strengthen Service Functions for the Enterprises in the Parksand Create an Environment for Small Businesses to GrowRapidly

Investigations into the parks show that many parks put emphasis on attractingenterprises to enter into the parks, but lack service consciousness for them after theyhave entered there. Some other parks were established quite early on so that theirinfrastructure and service systems are not in good condition. Still some do not havea dedicated service system and usually rely on social resources. To a certain extent,this is not favorable to the incubation and growth of enterprises, and also makes itdifficult to cultivate competitive new enterprises. This is also the reason whyGuangdong’s science parks “have no moon but stars” (big famous companies likeHuawei, ZTE, TCL, etc. in different parks grew up before the establishment of theparks). Therefore, two suggestions emerge:

First, further strengthen the planning and construction of basic supportingfacilities and service systems in the science parks, give more support to enterpriseswith respect to research and development, financing channels, and cultural life, andprovide intermediary services such as information, training, and counseling.


Second, improve the market system and set up sound intermediary servicesystems in the entire society; give greater support to R&D-oriented enterprises inthe aspect of resource allocation and policy; encourage the parks to cooperate moreclosely with scientific research institutions, universities and enterprises by formu-lating right policies, jointly incubate scientific and technological achievements inthe parks, help enterprises to expand rapidly, and change the situation of “havingonly stars but no moon”.

8.2.4 Foster Enterprises’ Technological Strengthby Creating an Effective Platformfor the Industrialization of Scientific ResearchAchievements

8.2.4.1 Improve the Ability to Integrate Resources in DifferentDomains and Establish Systematic Scientific and TechnologicalIntermediary Service Platforms

ITRI (Industrial Technology Research Institute of Taiwan) has attained effectiveutilization and circulation of resources by melding original ideas, technology,knowledge, service and R&D arising from different technological areas, industriesand regions through the establishment of the five linking centers. Mainland Chinaalso has similar scientific and technological intermediary agencies. But they lacktalented people, important links and service ability. Therefore, the funds planned forsome scientific and technological platforms should be pooled and the focus shouldshift to the construction of systematic scientific and technological intermediaryinstitutions and the enhancement of their capabilities, developing managementconsulting services according to the demands of enterprises, and looking for anumber of promising technological enterprises to carry out pilot consultancy servicewhile providing on-site training.

8.2.4.2 Consolidate the Scientific Research Function of the IncubationCenter in the Parks and Set up an Effective Platformfor Enterprises

Specific policies should be developed to run the incubation center in the scientificpark. There should be definite rules and regulations on the employees, the enter-prises, the scope of their business, and the assessment of their operating perfor-mance in the park’s incubation center. An operational prospectus should besubmitted in advance in order to avoid blind establishment of an incubation centre.Applicants should be required to submit their business plans and relevant docu-ments, and the qualifications of admission enterprises and their management teams

278 8 Conclusion

should be rigorously reviewed and defined. The time length for an enterprise to stayin an incubation center should be stipulated, and it has to move out of the centerafter graduation. The operational results of the incubation centre should be evalu-ated periodically, and it should be accordingly rewarded or punished. And it isimportant to give the incubation center preferential policies, cheap land, and taxbreaks, and so on. The service scope of the incubation centre needs to be specifiedand its scientific research function consolidated so that it is better positioned toprovide for enterprises technological research and development, service support,financing, information and forecasting.

8.2.4.3 Strengthen Government Support and Guidance to the SelectedResearch Institutions to Intensify Their Incubating Functionand Advance the Development of New Ventures

ITRI is a public research institution founded and dominated by the government. Inthe beginning it was not run with a market orientation, but funded and administratedby the government. Later, its wholly government-funded model shifted to thejointly funded model through the government’s project plans and enterprises’entrustment. However, scientific research institutions in Mainland China pursuedfree enterprise from inception and made blind investment without any knowledge ofmarket demands. As a result, many of them suffered premature death in the middleof industrializing scientific research results for lack of industrialization funds andmanagement personnel. In view of this, the government should make use of the richscientific and technological resources of the research institutions to develop pro-fessional incubators of enterprises and meanwhile provide strong financial andpolicy support to them. It is also important for the government to plan and createincubators dedicated to providing supporting services for high-tech enterprises withregard to the development requirements of the country’s high-tech industry. Somekey universities or research institutions may be delegated to establish businessincubator research centers and entrepreneurship programs so that forward-lookingand insightful research into the business incubator sector can be conducted andspecialized talented people can be nurtured and provided for various businessincubators, the venture capital sector and start-up enterprises.

8.2.4.4 Establish Market-Oriented Open R&D Institutionsand Provide Services for Enterprises

Establishing market-oriented open laboratories with a focus on providing servicesfor enterprises can contribute to their upgrading. Open laboratories may chargeusers the cost for using their creative offerings, and see themselves as businessesselling products or services when providing services to different sectors.


8.2.4.5 Create Effective Systems for the Transfer of IntellectualProperty Rights and the Diffusion of Technology and Specifythe Rights and Interests that R&D People and InstitutionsHave Claim to

The government may establish property rights trading centers to help price tech-nological products, stipulating specific steps for the transfer of scientific andtechnological achievements, ownership of their property rights, share of interestsand responsibilities, and ways of usage. Scientific research institutions should set uptechnology transfer service centers, and define the ownership of their intellectualproperty rights and the principles for transferring them. There are two ways totransfer technological products: license and transfer. The government mayencourage research institutions to pursue more technology transfers so that theirscientific results can benefit more enterprises.

8.2.4.6 The Public Technology Development Platform Should Createa Sound Mechanism for the Flow of Talents and HelpResearchers to Start Businesses with Their Own ScientificAchievements

It is difficult to mobilize the enthusiasm of scientific research people simply throughtechnology transfer. Besides, transferred technology need the researcher’sfollow-up study, without which technological development may be readily inter-rupted and there will probably appear low transfer rate and difficulties in indus-trialization. It is more likely for transferred technology to generate the desired effectif scientific research people throw themselves into business and become a memberof the enterprise. For example, in the 1980s and 1990s, some scientific researchersleft research institutions and started new ventures, some of which have grown intosuccessful high-tech enterprises, as exemplified by Lenovo and Sugon.

The government can facilitate researchers to go into business through policies.Permanent scientific researchers in research institutions, colleges and universities,and other institutions who leave the post with scientific results should be allowed tocompete for a post in their original organization within the prescribed time limit.Once they have secured the post, the time spent outside should be added to theirlength of service years. Researchers who resign formally from universities andinstitutions and set up high-tech ventures or join enterprises to help the transfer ofadvanced technology should be granted certain level of policy welfare if they canshow the certificate of successful technology transfer.

280 8 Conclusion

8.2.4.7 Establish Technological Innovation Systems that MeldGovernment, Industry, University and Research InstitutionWhile Highlighting the Major Role Enterprises Playin Innovation

The government should offer strong support to the development of public researchinstitutions such as universities, research institutes and so on. In their initialdevelopment stage, the government needs to play a guiding and organizing role andprovide support with regard to policy, land, funds and service to help them growrapidly; when these institutions are on the right operation track, the governmentmay point them in the direction and give them financial support by means ofentrusting them with national and provincial key research projects.

In addition, research institutions should not be isolated ones. They can form abridge between enterprises and the scientific world and take the lead in the estab-lishment of industrial R&D alliances by virtue of their advantages in R&D and ininformation. In the alliance, the research institution, through the collection andanalysis of the latest technological and industrial trends in the world, may giveR&D offers to enterprises and conduct technology development, technologytransfer and personnel training for them. Enterprises that have joined the alliancemay participate in different stages of the R&D activities according to their ownsituation, thereby obtaining a corresponding share of the research results.


Epilogue

My research on Chinese enterprises’ transformation and upgrading dates back to theautumn of 2005, when I was having a three-month lecture visit on the invitation ofthe Institute of Innovation Research in Takahashi University, Japan. At a seminar inthe University of Tokyo, the chief executive of UMC’s (United MicroelectronicsCorp of Taiwan) Japanese subsidiary told the story of UMC’s development and itsacquisition of a Japanese listed company in 1999. It struck me that UMC was atypical case having upgraded from its OEM base. And I also started to wake up tothe fact that transformation and upgrading would be the major practical and theo-retical problems enterprises in mainland China will have to face. Returning toChina, I began the research on enterprise upgrading in China.

During the time period from then (2005) to the outbreak of the financial crisis,we conducted intensive field investigations into enterprises and governmentagencies in both the Pearl River Delta and Taiwan. In the spring of 2006, I wasinvited for a lecture visit in Taiwan’s National Sun Yat-sen University. While inTaiwan, I, together with my two Ph.D. candidates, Yuan Jing and Dai Yong. madelong visits to Atotech and Taiwan Science Park. From their development experi-ence, I began to know more about the upgrading paths of enterprises and the greatsignificance the upgrading of a science park had generated, which is home to plentyof enterprises. In 2007 and 2008, I visited many companies located in differentcities of the Pearl River Delta, including Shenzhen’s JASIC Technology Co., Ltdand JICON Technology Co., Ltd, Shunde’s Donlim Kitchen Group, Dongguan’sLung Cheong International Holdings Ltd and HaYiDai Toys CO., Ltd, andDongguan’s Dalingshan furniture industrial cluster and the Dalingshan districtgovernment. etc. In November 2008, I went to Taiwan once again with my doctoralstudents Jiang Yuesun, Wu Yao and Zhang Chenzhi for the purpose of deeper andwider investigation. We paid visits to Taiwanese Industrial Technology ResearchInstitution, Atotech, Acer Inc., Asustek, and the Innovation and Incubation Centerof National Sun Yat-sen University there.

Our research based on these investigations gave birth to a number of advisoryreports, which are appreciated and valued by senior officials in Guangdong

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Province government, some municipal governments in the Pearl River Delta,and inthe government agencies in charge of scientific and technological development, andhave aided them in making relevant policies by providing them a frame of refer-ence. we have also written and published a series of academic papers on this topic.

Thanks to the long time investigations, interviews, and research on enterprisetransformation and upgrading, our book “Chinese Enterprises: Transformation andUpgrading” came into being and were published in March 2009, when the financialcrisis raged across the world and hit the Chinese enterprises hard. It is a timely bookwinning praises from different walks of life. Later, it was revised and updated. Andthe second edition came out in 2010. The book is an important achievement of themajor project I presided over for the Ministry of Education emergency program“Study on the Upgrading of Chinese OEM Enterprises under the Financial Crisis”.I am convinced that the publication of this book will provide useful reference forChinese enterprises’ transformation and upgrading and for the government whoaims to be efficient and service-oriented.

In the process of writing the first edition of the book, many Ph.D. candidates andpostgraduates assisted me in performing various tasks such as the collection andorganization of information, investigation into enterprises, the drafting of somesegments, and the drawing of some figures. I express my sincere appreciation tothem for their contributions. They are Mo Weijie, Cao Yuchun, Wang Qiuxiao,Liang Wenyan, Yu Kezhuang, Yuan Jing, Wen Siya, Wu Yao, Dai Yong, JiangYuxin, He Jun, Zou Hong Xing. Particularly, Wu Yao did a lot of work in helpingme formulate the first draft of the manuscript.

Since the publication of the second edition in 2010, the global economic envi-ronment in the post-crisis era has changed dramatically. However, economicstructural adjustment, industrial upgrading, and enterprise transformation andupgrading are still the major and frontier subjects in China at present and willcontinue to be in the next 5–10 years. With this in mind, and at the suggestion ofSun Yat-sen University Press, I made a drastic revision to the book again, which ledto the third edition. This latest edition involves revisions and updates in the fol-lowing six aspects: Firstly, added to the book is an account of changes in theeconomic environment in over five years after the financial crisis. Secondly, thenew edition features changes and progress in all the case companies, science parks,and industrial clusters through our revisiting and reinvestigation into them.. Thirdly,I deleted the cases which were not based on first-hand information. Fourthly, I gaveup the content about Singapore’s transformation and upgrading, which was notdirectly related to the theme of this book. Fifthly, a few new research cases areincluded. Finally, on the basis of our recent research, the book has a much morein-depth analysis of the influence factors and paths of enterprise transformation andupgrading in the book.

In the course of preparing the third edition, one of my postgraduates, ChenYuting, assisted me in collecting and sorting out parts of the information andmaterials. The publication of this book has been strongly supported by Sun Yat-senUniversity Press and the copy editor Cai Haoran. I am grateful to them.

284 Epilogue

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