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Reflections on "Effective Strategies to Catch Up in the Era of Globalization".

When I wrote "Effective Strategies to Catch Up in the Era of Globalization" in 2011, I wanted to report a research finding that I believed very important: that globalization was posing huge challenges for local firms in developing countries because those firms suffered from a larger "latecomer disadvantage" that made it harder for them to catch up. Successful Chinese firms in the telecom equipment industry, I reported, were addressing that challenge by pursuing a new "strategy that focuses on innovation-based differentiation, developing core technologies and offering advanced products and excellent service at a lower price than MNEs can offer."

Although several years have passed, the key conclusions of the paper still hold. For example, in the telecom equipment industry, Chinese firms such as Huawei and ZTE have continued their strategy of innovation-based differentiation combined with low cost and excellent service, and they have achieved outstanding performance. In 2013, Huawei surpassed Ericsson to become the largest telecom equipment supplier in the world, and the company has maintained that leadership position. Huawei is not only bigger but also more profitable; in 2016, Huawei's revenue was RMB 522 billion Yuan ($82.3 billion) with a profit of RMB 44.4 billion Yuan ($7 billion), while Ericsson's revenue was just RMB 203 billion Yuan ($32 billion) and its profit RMB 11.2 billion Yuan ($1.75 billion). That performance is matched by the company's investment in R&D (Table 1). Heavy R&D investment has made Huawei one of the most innovative companies in China and the world.

Huawei's story is not unique. ZTE's revenue has grown from RMB 60.3 billion Yuan ($9.5 billion) in 2009 to RMB 101.2 billion Yuan ($16 billion) in 2016. Datang, ZTE, Huawei, and other Chinese firms have been playing increasingly important roles in setting international technology standards, and Chinese firms are playing leading roles in defining the next generation of data network standards, 5G.

Chinese firms in other industries, such as new-energy city buses, heavy-duty trucks, power-generating equipment, metal-forming and metal-cutting equipment, railway equipment, and seamless steel tubes, are using the same strategy to make rapid progress in catching up and even leapfrogging multinational competitors. In the railway equipment industry, for example, CRRC, the world's largest supplier of rail transit equipment, has developed strong technology capabilities and exported products heavily, beginning with developing countries such as Brazil, Malaysia, Sierra Leone, Turkey, and Vietnam, and expanding into developed countries, including Australia, Germany, the United Kingdom, and the United States. In the United States, cities such as Boston, Chicago, Philadelphia, and Los Angeles have decided to buy subway and light rail equipment from CRRC. In fact, CRRC has become an important member of the local communities by localizing production and supporting community development.

Since transferring manufacturing technology from multinational companies in 2004, CRRC has invested heavily in R&D and developed strong design and engineering capabilities. Now the company develops, manufactures, and exports globally the most advanced high-speed trains in the world. In fact, CRRC is now developing the world's fastest maglev train, which could reach speeds of over 600 km/h.

This evolution reflects a major change since the publication of the paper in 2011: local firms are now making rapid progress in approaching the technology frontier, which has made it easier for them to overcome their latecomer disadvantage and implement a strategy focused on innovation-based differentiation. For example, LONGI, a private company in the monocrystalline wafer-making field, is a leader in both technology and market share. Since 2015, LONGI has been the largest monocrystalline wafer maker in the world.

This new strategy has implications for both local firms and multinationals. For local firms, building technology capability based on technology transfer is not enough; these firms must move to developing core technologies internally. This remains as true as it was in 2011.

The car industry offers an illustration of the pitfalls for local companies of relying on technology transfer alone. Since the 1980s, local automotive firms have chosen to form joint ventures with multinationals to transfer technology. Today, although China has been the largest automobile maker in the world for many years, local brand cars account for only about 20 percent of the market. Local firms' technology capability and brand recognition continue to lag. This is in marked contrast to the high-speed rail industry, where local firms like CRRC have invested heavily in R&D both to absorb transferred technology and to develop new technologies.

For multinationals seeking to compete with emerging Chinese firms, new strategies are needed to address challenges from local firms. They cannot rely on technological superiority now that Chinese firms are able to develop their own core technologies. Multinationals still have strong advantages in many technology areas, such as advanced ICs, high-end software, and high-end CNC machines, and they will need to continue to leverage that technology capability. Perhaps more importantly, many multinationals still have stronger brand recognition than local firms, and they can leverage this advantage to form partnerships with local firms in developing new markets. They must, however, recognize that the strategy of relying on technical leadership to win in the China market is not sustainable.

Although the conclusions of the 2011 paper still hold for firms in China, it's important to keep in mind the potential limitations of those conclusions. My conclusions are based on the experiences of local Chinese firms, and the Chinese context--in terms, for example, of market size, science and technology bases, management and work culture, and sociopolitical systems--might be very different from that of other developing countries. Whether the findings of the paper, especially the effectiveness of the strategy of innovation-based differentiation combined with low cost and excellent service, could be applied in other developing-country firms remains an open question.

Xudong Gao is Chief Professor of Schwarzman College, Tsinghua University, and senior research fellow and vice director of the Tsinghua University Research Center for Technological Innovation. He also serves on the Telecom Economy Expert Committee of the Ministry of Industry and Information Technology, People's Republic of China. His major research interests are in technology strategy, management of technological Innovation, and strategic management. He holds a PhD in management from the MIT Sloan School of Management, an MA in industrial economics from the Renmin University of China, and a BE in industrial management engineering from the Harbin Institute of Technology, gaoxudong@sem.tsinghua.edu.cn

DOI: 10.1080/08956308.2018.1445386
TABLE 1. Huawei's R&D spending (Billion RMB Yuan)

                             2009    2010    2011    2012    2013

Sales Revenue                 149     185     204     220     239
R&D Spending                 13.3    16.6    23.7    30.1    30.7
R&D Spending as % of Sales    8.9     8.9    11.6    13.7    12.8

                             2014    2015    2016

Sales Revenue                 288     395     522
R&D Spending                 40.8    59.6    76.4
R&D Spending as % of Sales   14.2    15.1    14.6
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Title Annotation:COMMENTARY
Author:Gao, Xudong
Publication:Research-Technology Management
Geographic Code:0DEVE
Date:May 1, 2018
Words:1144
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