Enter the Dragon China and the Global Computer

Enter the Dragon: China and the Global Computer Industry Jason Dedrick and Kenneth L. Kraemer Personal Computing Industry Center and Center for Research on Information Technology and Organizations (CRITO) University of California, Irvine Presented at Seminario Globalizacion Mexico City, March 15 -17, 2006 Based on research supported by the Sloan Foundation and National Science Foundation 1

Trends in the Global Computer Industry • Historical – Mainframe era: vertical integration – PC era: Dominance of Wintel standards, rise of global production networks • Recent – Extreme price and time competition – Shift to build-to-order and direct sales in U. S. – Outsourcing of manufacturing and product development 2

Evolution of Production • Shift from North America and Europe to Asia-Pacific starting in 1980 s • Emergence of regional hubs in 1990 s: Ireland, Scotland, Singapore, Taiwan • Shift to lower-cost locations in late 1990 s: Eastern Europe, Mexico, China • Shift from everywhere to China since 2000. 3

Computer Hardware Production by Region Source: Reed Electronics, Yearbook of World Electronics Data 4

Leading Computer Producing Countries World region 1990 1995 2000 2005 Value US$ mil Share Value US$ mil 48, 559 27. 0% 76, 284 26. 5% 90, 430 24. 0% 61, 069 17. 3% Brazil 4, 634 2. 6% 6, 500 2. 3% 7, 000 1. 9% 7, 180 2. 0% Mexico 1, 161 0. 6% 3, 110 1. 1% 11, 900 3. 1% 10, 156 2. 9% 52, 428 29. 2% 72, 678 25. 2% 65, 130 17. 3% 33, 618 9. 5% Singapore 6, 974 3. 9% 21, 127 7. 3% 22, 209 5. 9% 18, 233 5. 2% Taiwan 5, 886 3. 3% 16, 007 5. 6% 27, 212 7. 2% 5, 022 1. 4% China 645 0. 4% 5, 600 1. 9% 27, 500 7. 3% 97, 500 27. 6% Malaysia 381 0. 2% 5, 280 1. 8% 17, 368 4. 6% 13, 161 3. 7% S. Korea 3, 073 1. 7% 6, 795 2. 4% 15, 241 4. 0% 20, 244 5. 7% Americas US Asia-Pacific Japan Share Value US$ mil Share Source: Reed Electronics, Yearbook of World Electronics Data 5

Explaining China’s Ascendance • • Evolving IT policy Role of MNCs Role of Taiwanese firms Growth of indigenous industry 6

China’s IT Policies • 1970 s-1980 s: Policy aimed at developing self-sufficiency. • Early 1990 s: Shift to pragmatic approach – Focus on PCs and peripherals – Joint ventures with foreign MNCs – Export promotion • Late 1990 s (Ninth Five-Year Plan, 1996 -2000) – Promote domestic PC manufacturers – Increase domestic content – Golden Projects to modernize infrastructure, stimulate IT use and support domestic IT industry • 2001 -present – Liberalize under WTO rules – Promote software and semiconductors – Promote but regulate Internet use 7

Role of MNCs • China required MNCs to take local partners – IBM-Great Wall, Compaq/Stone, HP/Legend, Toshiba/Tontru • Now local partners not required. Dell and HP operate independent subsidiaries. • Foreign PC makers producing in China to gain market access. Some are exporting, e. g. , Dell, Toshiba. • MNC role is greater in other sectors, e. g. servers, mobile phones, network equipment 8

Role of Taiwanese firms • Taiwanese firms leaders in notebooks, motherboards, scanners, monitors, keyboards, add-on cards. • Original design manufacturers (ODMs) develop and manufacture notebooks for all major PC vendors. • Most of their production now in China – MNCs have pushed Taiwanese suppliers to China. – Shenzhen for desktops, components, peripherals, Shanghai/Suzhou for notebooks. • Current division of labor – Taiwan: HQ, R&D, early new product development (NPD) stages – China: Manufacturing, process engineering, later stages of NPD 9

Role of Chinese domestic companies • Limited role in global production networks – Domestic companies are mostly absent from the supply chain. Taiwanese suppliers have moved to China. • Local firms exporting in some niches, e. g. low-end networking. – Huawei sued by Cisco for stealing technology, but settled. – Has grown from $2. 7 B in 2002 to $8. 2 B in 2005, half for export • Domestic companies dominate local PC market, but lag MNCs in servers, high-end networking 10

China PC market • Desktop market share (Q 3 2005) – Lenovo 32. 4% – Founder 12. 3% – Tongfang 8. 5% – Dell 7. 5% – HP 6. 8% – TCL 3. 6% – Hasee 3. 5% 11

Lenovo: A Global PC Company • Lenovo dominates domestic market. • Purchase of IBM’s PC business in 2005 gives them global reach. Now #3 PC vendor worldwide. • Complex management structure – Top executives are North American. Chairman is Chinese. Largest shareholder is Chinese Academy of Sciences – Global HQ in New York. Major operations in North Carolina, Beijing, Shenzhen • Dual brand product strategy – Think. Pad brand strong in corporate notebook market. – Targeting global consumer markets with Lenovo brand 12

Issues for China • Greater China – Taiwan’s design, manufacturing and management skills, China’s lowcost labor and engineering skills and large market make a formidable combination. – Will they become competitors to each other or to MNCs? • Climbing the technology ladder – Can China become a center of innovation and entrepreneurship? – Quality of engineering graduates is mixed, experience limited. • Government policy – Targeting R&D, want to move beyond role as global workshop – Promoting domestic standards, e. g. , 3 G cell phones, wireless. Could hurt MNCs and isolate China from global market. 13

Implications for the U. S. • Substantial job losses in manufacturing. Smaller losses in IT services, software, other “knowledge work” • Focus is on R&D, product management, software architecture and design, marketing, branding. Can these also be moved offshore? • Concern about disappearing bottom rungs on career ladder. 14

Implications for other ‘peripheral’ countries • East Asia losing manufacturing to China. – Taiwan, Singapore, Malaysia and others trying to diversify or upgrade. • Production moving from Ireland Scotland to Eastern Europe. – Proximity to EU for bulkier and more time-sensitive products. • India far ahead in software and services, strong in chip design. Starting to move into manufacturing • Others looking for niches – Software (Israel, Russia), call center (Philippines, Costa Rica) • Everyone avoiding direct competition with China. 15

Implications for Mexico • Loss of high volume manufacturing to China, but overall production only down a little. – Disadvantage in labor costs and lack of supplier base – Proximity to U. S. still valuable for bulkier items and for timesensitive production. • Growth opportunities in specialized segments, e. g. software, chip design, IT services, Spanish language content. • Government policy mostly hands-off. – Liberalization has increased IT use – Lack of promotion a disadvantage against other countries 16