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 Thank you for inviting me. I’d like to talk about how a country with almost no computer industry in 1990 became the world’s biggest producer of computers by 2005, and the implications of China’s success for other countries. Overview -Evolution of the global computer industry -Explaining China’s ascendance -Issues facing China -Implications for US, Mexico, other countries

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 Recent trends Kenney and Curry focused on clockspeed in PCs, with shorter product cycles Now PCs have 3 month lifecycle for a specific product, about 1 year for a new platform (chipset, motherboard). Direct sales is over half of US market, but Dell model doesn’t travel so well. Outsourcing moved from subassembly to final assembly, services and product development. Production has shifted in response to these trends.

Evolution of Production Shift from North America and Europe to Asia-Pacific starting in 1980s Emergence of regional hubs in 1990s: Ireland, Scotland, Singapore, Taiwan Shift to lower-cost locations in late 1990s: Eastern Europe, Mexico, China Shift from everywhere to China since 2000. Production has moved in response to several dynamics. Low cost labor (E.Europe, Mexico) Proximity to key markets (Mexico, Ireland, Scotland) Government incentives (Singapore, Ireland, Malaysia, others) China has all of these, plus a large domestic market

Computer Hardware Production by Region Looking at the trends in the data, we start at regional level. A-P passes Americas by late 80s, grow in parallel till after 2001 tech crash. Then A-P resumes growth Source: Reed Electronics, Yearbook of World Electronics Data

Leading Computer Producing Countries World region 1990 1995 2000 2005 Value US$ mil Share Americas   US 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% Asia-Pacific Japan 52,428 29.2% 72,678 25.2% 65,130 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 27,500 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% Note U.S. and Japan combined share falling from over 50% to 27%. Total production drops from $150 billion to $94 billion in five years. Taiwan grows until 2000, then most production shifts to China. China’s growth includes Taiwan production, but also U.S. and Japanese production moving to China. Via MNC production and also via outsourcing to Taiwanese companies in China. Mexico peaks in 2000, but retains a sizeable industry in 2005. Source: Reed Electronics, Yearbook of World Electronics Data

Explaining China’s Ascendance Evolving IT policy Role of MNCs Role of Taiwanese firms Growth of indigenous industry How can we explain China’s dramatic growth?

China’s IT Policies 1970s-1980s: Policy aimed at developing self-sufficiency. Early 1990s: Shift to pragmatic approach Focus on PCs and peripherals Joint ventures with foreign MNCs Export promotion Late 1990s (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 China’s policy trajectory has been similar at a general level to Mexico, Brazil, India, albeit important differences Nationalism---partial liberalization---broad liberalization As part of shift to ‘market-based’ socialism, moved closer to model of other Asian economies. -JVs for technology, export promotion for cash. -Partial market opening. 1990s: Upgrading capabilities, more domestic content, economies of scale for domestic PC makers. Biggest effort was network infrastructure via Golden projects. Since 2001, further liberalization, promoting domestic companies, move into chips, software

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 Key drivers of MNC investment in China Low cost export platform: Not big in PC industry, only Dell, Toshiba and IBM/Lenovo exporting much. Domestic market: Now the #2 PC market in the world. Overall, MNC role is not as important in PCs as in other sectors Much bigger factor is Taiwanese companies, who have taken over much of the industry’s production

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 ODMs and CMs: Foxconn, Quanta, Compal, Wistron, Asustek. Not familiar names but make PCs for HP, Dell, Lenovo, Acer etc. Huge facilities: Foxconn over 70,000 employees in Shenzhen. Quanta campus with multiple product lines and suppliers co-located. R&D in Taiwan: Quanta building R&D labs for 6000 engineers

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 $2.7B in 2002 to $8.2B in 2005, half for export Domestic companies dominate local PC market, but lag MNCs in servers, high-end networking China has many domestic companies in the computer industry, but their role is limited. Only a few are linked to global economy, either as suppliers or by selling for export.

China PC market Desktop market share (Q3 2005) Lenovo 32.4% Founder 12.3% Tongfang 8.5% Dell 7.5% HP 6.8% TCL 3.6% Hasee 3.5% Note: foreign companies do better in notebooks and dominate in servers

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 ThinkPad brand strong in corporate notebook market. Targeting global consumer markets with Lenovo brand PC industry acquisitions have poor track record. Can Lenovo do better? Complex management and ownership structure.

Issues for China Greater China Climbing the technology ladder Taiwan’s design, manufacturing and management skills, China’s low-cost 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., 3G cell phones, wireless. Could hurt MNCs and isolate China from global market. Greater China: Will MNCs eventually bypass Taiwan altogether? Not in forseeable future. Will either Chinese or Taiwanese companies become competitors to MNCs? Acer and Lenovo are challengers. Innovation: Engineering grad numbers look impressive, but quality very mixed. Lack of indigenous entrepreneurs in computer industry. Policy: Ambition is to reduce dependency on foreign technology and standards. Risk is isolation from global tech standards.

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. Competition with China is a big issue in U.S. Not the focus of this panel, so just a few comments.

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 and 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. Diversify: semiconductors, SW, biotech Upgrade: R&D, product development, chip design

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 time-sensitive 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 Example: Sanmina-SCI moved BTO production to Monterrey.