The rise and rise of China's handset makers

The rise of China's handset manufacturers has been extraordinarily rapid. From having just 5.3% of the Chinese market in 1999, they overtook the multinationals in 2003, and their share of worldwide production rose from 2.3% in 1999 to 35% in 2003.

by Steven White and Wei Xie
Last Updated: 23 Jul 2013

Wei Xie, associate professor of economics and management of technology at Tsinghua University, Beijing, and Steven White, assistant professor of Asian business and comparative management at INSEAD, examine the conditions which allow domestic firms in developing countries to reclaim a substantial share of their own market in technologically advanced goods, and, ultimately, compete globally with the multinationals.

Charting the rise of China's handset industry, with Ningbo Bird as an illustrative case, Xie and White tie together the features of the industry and policy environment with firms' learning strategies and local market knowledge to show how latecomers can catch up at an astounding pace.

Starting with Motorola in the late 1980s, Nokia and Ericsson in the mid 1990s, then Siemens, Samsung, Philips, Alcatel and Sony, the major multinationals had located to China to take advantage of low labour costs and economies of scale. Initially they succeeded in dominating the growing Chinese market - Chinese firms could simply not compete with their high-cost R&D, technological expertise and distribution through the major cities.

In the late 1990s, however, two factors shifted the advantage to the Chinese latecomers. First, the basis of competition switched from core technology and research to product design, which was cheaper and more affordable for the less well-funded Chinese firms.

Second, manufacturing began to be outsourced to emerging independent technology and component suppliers - some supplying entire subsystems - thus firms like Ningbo Bird could source key functional components domestically and from abroad. Thereafter, they could invest in assembly and quality assurance and avoid the high costs of R&D, while at the same time focusing on the larger, though less affluent markets ignored by the multinationals.

The multinationals, meanwhile, made two miscalculations. First, they wrongly assumed that product designs that worked elsewhere-their 'global' models-would also sell in China. Moreover, they took little account of the diversity within the country. In contrast, Chinese firms used their local market knowledge to develop designs that were highly popular with Chinese customers but unknown elsewhere.

Bird also profited from the untapped low-end rural markets in the western provinces of China, which needed greater signal reception capability to cover the greater distances. While the multinationals concentrated their distribution efforts on 10 wealthiest 'tier one' cities, the Chinese firms sold directly to province-level distributors, thus gaining faster market feedback and inventory turnover, and higher margins for salespeople.

Government licences to handset manufacturers also made it easier initially for domestic firms to sell all their production domestically, while foreign firms had to export at least 60% of their output.

Ningbo Bird and others subsequently moved into module-based manufacturing, using cooperative alliances to acquire the skills needed for selecting and testing components, then into chip-based manufacturing, forming a joint venture with Sagem and an alliance with Siemens. Ultimately, Bird was able to undertake its own R&D for the expanding markets in China and abroad, and to threaten the multinationals on their own turf.

Windows of Opportunity: Learning strategies and the rise of China's handset makers

INSEAD 2007

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