1. Development of technology innovation platforms in China Xudong GAO Tsinghua University Research Center for Technological Innovation

2. Agenda The importance of technology innovation Supporting technology innovation through innovation platforms Experiences and lessons

3. The importance of technology innovation Results of relying on external technology from late 1970s: before and after WTO – Buy technology The consumer electronics industry Sony, Samsung vs. Local firms – JV The automobile industry 30% local firms – Technology integration The VCD/DVD industry High royalty: $26/unit – Innovation based on dominant design/International standard : PC The situation is better Results of internal development of technology – ZTE – Huawei – ZPMC – BROAD

4. ZTE and Huawei ZTE – Established in 1985 – More than 70,000 employees – #1 in SDR – The 4th largest base station supplier in the world. – In 2008, sales from market outside China accounted for more than 60%. – 2011 sales: 86.2 b RMB Huawei – Established in 1988 – The second largest telecom equipment supplier in the world. – In 2008, market outside China accounted for more than 75% of sales – 2011 sales: 203.9 b RMB ， Net profit 11.6 b RMB; China: 65.6 b RMB; International: 138.4 b RMB 。

5. ZPMC Shanghai Zhenhua Port Machinery Co., Ltd. (ZPMC), was established in 1992 by Mr. Guan, Tongxian at the age of 59 with $1 million. The largest large-size port container crane maker in the world, and captures more than 70% of the world market. One of the leaders making spiral bevel gears, making it well positioned in the ocean engineering equipment industry

6. BROAD Established in 1988 One of leading Central Air Conditioning systems makers in China – Price 30% higher than competitors

7. Supporting technology innovation through innovation platforms Program 863 (1986) – High tech research and development program Program 973 (1997) – Fundamental research program Program “Xing Huo”(Sparks) (1986) – Rural area technology application program Program “Huo Ju” (Torch) (1988) – High tech commercialization and industrialization program – High tech industrial zones (53) National science and technology major project (2006) SME innovation service platform (2005)

8. Program 863: 1986—2005 Investment: 33Billion RMB 150,000 +SCIENTISTS AND ENGINEERS 500+ RESEARCH INSTITUTES, 300+ u. 1000 Firms 120,000 articles

9. SME innovation service platform Zhejiang province – Pharmaceutical: University – Automobile: University/firm Shanghai – Textile: University/firm Beijing – Textile: Research institute

10. Experiences and lessons Platforms are important – Impressive achievements CIMS/ERP; HPC; IC; 3G/4G Space technology – CAS Balance universities, research institutes, and firms – Short term vs. long term, ESPECIALLY core technology Division of labor between universities, research institutes, and firms – The ideal situation: division of labor between universities, research institutes, and firms – High tech: CAS, Tsinghua U., Beijing U. Balance internal capability development and external support – Too much reliance on U. and research institutes – ZTE and Huawei

11. 11 Thank you! 谢谢各位 !

12. Key success factors Technological capability – R&D investment – Talented people – NOT only technology transfer and manufacturing Clear understanding of advantages and disadvantages – Latecomer disadvantage – Low cost + differentiation strategy Complementary capabilities Early globalization Work harder than competitors MNEs

13. R&D investment at Huawei (Billion RMB) Year2000200120022003200420052006200720082009 (I): Sales Revenue 2223223246456694125149 (II): R&D Spending 2.1 3.03.1 3.2 4.04.75.97.110.513.3 (II)/ (I) (%)9.51314 10 8.710.48.97.88.48.9

14. Talented people ZTE: 18,000 Master/Ph.D.

15. Eastcom Bigger than Huawei and ZTE in 1997 Struggling since late 1990s

16. Clear understanding of advantages and disadvantages Advantages: Low cost + differentiation strategy When the former China Unicom decided to build its CDMA network, it invited bids from a group of MNEs in 2000. However, the prices offered by these equipment suppliers were extremely high and the investment would exceed China Unicom’s budget (RMB 20 billion Yuan) dramatically. China Unicom had to have a new biding in 2001. In the new bidding, ZTE became a big winner – the equipment offered by ZTE got higher technical evaluation scores than that of most MNEs; – the low cost structure made it possible for ZTE to offer low price products to China Unicom, and helped China Unicom to save 40% of investment (the real investment was RMB 12.1 billion Yuan, about 8 billion lower than China Unicom’s original budget); – offering customized technical solutions to China Unicom based on its deep analysis of China Unicom’s business and network

17. Low cost + differentiation strategy Multiple networks ZTE’s SDR base station is able to realize co- existence and smooth evolution between GSM/WCDMA dual model, GSM/WCDMA/LTE multi-mode, and CDMA/LTE dual mode, and could reduce service providers’ Total Cost of Ownership (TCO) about 30%.

18. Complementary capabilities Better customer relationships than MNEs through a “comprehensive” approach. While MNEs and other firms usually focus their customer relationship management on developing close working relationships with managers, especially high level managers of customer firms, Huawei emphasizes the development of close working relationships with ordinary employees such as ordinary engineers of customer firms, believing that ordinary employees of customer firms can also play critical roles.

19. Complementary capabilities Great Dragon Datang

20. Early globalization Accept forced early globalization – GSM: 5% – CDMA: 10% Be willing to accept short term loss – Huawei began to spend resources on developing the Russian market in 1996, and it took 6 years for Huawei to begin to benefit from this globalization effort Have a clear understanding about their competitive advantages.