UC Irvine The Paul Merage School of Business

UC Irvine, The Paul Merage School of Business New Product Development in a Global Knowledge Network: The Notebook PC Industry Kenneth L. Kraemer Personal Computing Industry Center The Paul Merage School of Business University of California, Irvine Seminario Globalizacion March 15 -17, 2006 Mexico City This talk is based on research conducted by Jason Dedrick and Kenneth Kraemer, sponsored by the Sloan Foundation. 1

UC Irvine, The Paul Merage School of Business Globalization: from manufacturing to knowledge work § Computer industry originally concentrated in the U. S. and Japan § Manufacturing shifted from U. S. to Taiwan and SE Asia in 1990 s, then to China since 2000 § Will knowledge work follow? § Case study of new product development in notebook PCs illustrates factors and trends in knowledge-intensive part of the PC industry 2

UC Irvine, The Paul Merage School of Business Leading computer producing countries Hardware production in US$ millions and share of total global production World region 1995 2000 2005 Value Share Value 3, 110 1. 1% 11, 900 3. 1% 10, 156 2. 9% 10 US 76, 284 26. 5% 90, 430 24. 0% 61, 069 17. 3% 2 Japan 72, 678 25. 2% 65, 130 17. 3% 33, 618 9. 5% 3 Singapore 21, 127 7. 3% 22, 209 5. 9% 18, 233 5. 2% 5 Taiwan 16, 007 5. 6% 27, 212 7. 2% 5, 022 1. 4% 7 China 5, 600 1. 9% 27, 500 7. 3% 97, 500 27. 6% 1 Malaysia 5, 280 1. 8% 17, 368 4. 6% 13, 161 3. 7% 6 S. Korea 6, 795 2. 4% 15, 241 4. 0% 20, 244 5. 7% 4 Mexico Share Source: Reed Electronics Research, Yearbook of World Electronics Data Value Share Global Rank 3

UC Irvine, The Paul Merage School of Business Taiwanese companies: key link in PC industry globalization § Manufacturing § #1 makers of notebook PCs, motherboards, scanners, keyboards, add-on cards, optical drives, monitors, some network equipment. § Driving shift of production to China. § New product development § Original design manufacturers (ODMs) develop over half the world’s notebook PCs. § Customers include all major PC vendors. 4

UC Irvine, The Paul Merage School of Business Taiwan’s top notebook ODMs 2003 volume (thousands) Major OEM partners 1. Quanta 8, 500 Gateway, Dell, HP, IBM, Apple, Sharp, Sony, Fujitsu-Siemens (F/S) 2. Compal 6, 000 Dell, HP, F/S Toshiba, Acer 3. Wistron 2, 500 IBM, Dell, Acer, Hitachi, F/S 4. Inventa 1, 800 HP, Toshiba 5. Arima 1, 500 NEC, Gateway 6. FIC 1, 500 NEC, Legend 7. Asus 1, 500 Epson, Canon, Sony, Apple, Trigem 8. Mitac 1, 100 Sharp, F/S, NEC, JVC 9. Uniwill 1, 000 Clone, F/S, Actebis, Samsung 10. ECS 1, 000 Apple Total 23, 900 Name Source: Taiwan Ministry of Economic Affairs, 2003 (table provided to authors) 5

UC Irvine, The Paul Merage School of Business Notebook NPD process New product development is highly modular 6

UC Irvine, The Paul Merage School of Business Interdependencies § Concept design and product planning are linked by need to translate technology and market trends into specific product designs. § Design and development can be separated organizationally and geographically. Product plans are codified and can be handed off. § Development and manufacturing are closely linked by need for manufacturability. 7

UC Irvine, The Paul Merage School of Business Organizational forms § Notebook NPD follows three patterns § Inhouse design/development by PC company (Lenovo, Toshiba). § Joint design/development – (Dell, HP) : PC maker does design, ODM does development and mfg. § Pure ODM design – PC makers choose ODM designs off-the-shelf to sell. § Share of global market: 20% in-house; 60% joint vendor/ODM; 20% pure ODM 8

UC Irvine, The Paul Merage School of Business Joint development model § PC makers retain control of key decisions. § Product management, marketing, brand image § Architecture, standards, key components. Interact with Intel, MS, key component makers. § Decide on specific product features § ODMs § Develop products to match their mfg. processes. § Choose suppliers of many parts, components § Responsible for quality, support 9

UC Irvine, The Paul Merage School of Business Location factors: skill and proximity § Concept design and product planning. § Skill in translating market and technology trends into product concepts. Analytical/managerial skills. § Proximity to lead markets. Access to supplier innovation. § Development § Specialized engineering skills, e. g. board design, thermal, EMI, power management, materials, software. Hands-on skills. § Production engineering and sustaining support § Process engineering skills and proximity to production processes. Hands-on skills. 10

UC Irvine, The Paul Merage School of Business Skills and costs by location § Characteristics § U. S. /Japan: strong analytical and management skills, creative problem solving; leading markets § Taiwan: specialized notebook competencies, strong hands-on but weaker analytical and management skills § China: mixed engineering skills, gaining hands-on experience. Weak analytical, managerial and independent problem solving skills. § Average base salary for electronic engineers § § U. S. : $82 K Japan: $63 K Taiwan: $20 K China: $10 K 11

UC Irvine, The Paul Merage School of Business Production “pull” of NPD activities • Testing equipment can be moved to production site for faster prototype testing. • Pilot production at manufacturing site eliminates need for dual assembly lines. • Need for manufacturability links development & production. 12

UC Irvine, The Paul Merage School of Business Shifting location of NPD activities Design Concept 2003 Product planning Development Design review Prototype Mfg. Pilot Prod. Mass Prod. Sust. support United States Japan Taiwan China Concept 2006 Product planning Design review Prototype Pilot Prod. Mass Prod. Sust. support United States Japan Taiwan China 13

UC Irvine, The Paul Merage School of Business China’s role in NPD § Solve problems related to production process. § Sustaining support for existing products while new product teams move on. § Taking over pilot production and testing, likely to move to prototype and design review in some cases. § Made by Taiwan in China. 14

UC Irvine, The Paul Merage School of Business Implications for developing countries § Production = game over? § Landed cost more important than labor cost. § Assembly close to major markets – Mexico, E. Euro § Production close to use = new game. § Operations – localization, IT, BPO, call centers § Requires low cost, skilled labor and project managers § Innovation – NPD in software, hardware, content § Requires high skilled professionals, entrepreneurs, patient capital § Multiplier effect for support jobs § Investment for upgrading § Education, R&D, technology alliances, market data 15

UC Irvine, The Paul Merage School of Business Impacts of China § Availability and cost of engineering talent can’t be ignored. Experience will provide hands-on skills and work out cross-cultural management issues. § Biggest impact on Taiwan and Japan as development moves. U. S. has lost this already. § China will only take over concept design stages if it becomes a leading market and source of innovation. 16

UC Irvine, The Paul Merage School of Business Global knowledge networks § Global production networks are well known and studied. § Global knowledge networks overlay these production networks for coordination, but they also extend beyond for innovation. § Innovation occurs at the edges of value networks: R&D labs, universities, upstream suppliers, customers in vertical markets. § Knowledge and innovation no longer concentrated in a few countries, but widely distributed. § Firms create competitive advantage through organization of knowledge networks as well as production networks. 17