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Issue 27, October 2010

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

ChinaCompass - China's Technology Standard Strategy: More Than a Standard War?

As a component of its development strategy, China has been creating its own indigenous technological standards. One of the most high profile examples is TD-SCDMA, the Chinese home-brewed 3G wireless network standard, implemented in 2007. Although there were plenty of skeptics, both within China and abroad, of the commercial viability of TD-SCDMA, the Chinese state has demonstrated its strong determination to construct the network based on this standard. China Mobile, the world’s largest wireless carrier in terms of user subscriptions, has been charged with the construction of the TD-SCDMA network. To ensure TD-SCDMA chip fabrication, in 2009, Datang Holding, the primary technology company that is developing this standard, injected USD 171.8 million into financially constrained SMIC, China’s largest pure-play chip fabrication company.

In recent research, Dan Breznitz and Michael Murphree of Georgia Institute of Technology have found that there are thousands of standards being proposed every year in China, and the state enforces hundreds of new standards annually. They argue that the Chinese state has induced domestic corporations and research institutes to join the innovation arms race of technological standard-making with enhanced social visibility, abundant financial support, and lucrative monopoly rents. It seems that the world’s industrial juggernaut is waging a total war on the battleground of technology standards.

Yet some observers have raised doubts about the actual contribution of indigenous innovation to the technology standards war. In several high profile cases of China’s “own” technology standards, foreign technology partners controlled the majority of the patents embedded in these standards. Three global telecommunications leaders contributed up to 66% of all patents used in TD-SCDMA, while Datang, the state appointed national champion, holds only 7.3%. In the case of CHBD, China’s own high-definition blue-ray videodisc technology, the technology alliance formed by Chinese companies purchased 90% of the patents from foreign technology partners, mostly Toshiba, the Japanese consumer electronics giant. Despite the question of whether the Chinese standard is really made in China, researchers like Breznitz and Murphree have also pointed out that competing standards may force Chinese companies to hedge the risk of being marginalized in the market by spreading their already thin R&D expenditure over the development of several lines of incompatible products, which in turn diminishes the possibilities of major breakthroughs.

Does this mean that China’s standard-making efforts are a waste of money? Probably not. The Chinese state and Chinese industry have benefited from this strategy in two ways. The first is the reduced royalties that Chinese industry has to pay to foreign standard owners. Chinese exporters are well known for relying on foreign standardized technology for production, and royalty payments burden their thin profit margins from assembling imported components. A classic example is the Chinese video compact disc (VCD) player industry, which exploded in the mid-1990s, but went into a crash when foreigners tightened their revenue-collecting efforts in the late 1990s. After the introduction of indigenous technology standards, dramatic changes occurred. With the emergence of a credible threat that they would be cut off from the Chinese market, foreign standard owners significantly lowered the royalty payments that they demanded. In some extreme cases such as WCDMA handsets, Chinese manufacturers paid lower royalties than anywhere else. Indeed in most sectors, China does not seek to replace the global standard with the domestic one; instead, it uses the development of an indigenous standard as a source of bargaining power.

The other benefit is the opportunity of engaging in technological learning and technological leverage. The lucrative rewards of holding a state-selected standard have drawn Chinese corporations into the innovation race. For many of these companies, it is necessary for the first time to have a formal structure supporting R&D activities. For fear of losing a large market like China, multinational corporations are also compelled to engage in China’s standard making projects. Local firms thus are provided with ample opportunities to learn from foreign partners by working with them and forming partnerships. A proven example is Huawei, which greatly accelerated its pace of technology development by forming partnerships with global leaders in all three competing 3G-network technologies.

Top News of Last Month
Sep 03 China to create blacklist to enhance quality of "made in China"
Sep 05 China's top 500 enterprises catching up with world's largest businesses
Sep 08 China Beats U.S. on renewable-energy investor ranking
Sep 08 China outlines roadmap in developing emerging industries of strategic importance
Sep 10 China issues white paper on human resources, highlighting employment, innovation
Sep 20 China to boost minimum wage 20% annually for five years, Morning Post Says
Sep 21 China to toughen energy efficiency rules
Sep 23 China Japan tensions escalate over fishing boat captain
Sep 23 China keeps up busy space launch schedule
Sep 29 US House passes bill targeting China currency
New Books
Imitation to Innovation in China: The Role of Patents in Biotechnology and Pharmaceutical Industries (New Horizons in Intellictual Property)

By Yahong Li

“‘Yahong Li’s pioneering study, Imitation to Innovation in China, breaks new ground in closely examining the extent to which the Chinese government’s patent policies and patent activity by Chinese firms are influencing China’s coming transformation from an imitation-oriented country to an innovation-oriented one. Her combination of theoretical and empirical approaches exploring the links between public policy, patenting activity and technological innovation (commercialization) is an important contribution to development studies, not just for China but for other newly innovative countries as well.’
– William O. Hennessey, Franklin Pierce Law Center, US” – from Edward Elgar Publishing

By Tan Wee Theng

“This firsthand and lively account of Intel’s growth in China includes interviews with key officials, a wide range of corporate executives, and expert observers, shedding light on the complexities and idiosyncrasies of doing business in modern China.” – from Marshall Cavendish
Holding China Together: Diversity and National Integration in the Post-Deng Era

By Barry J. Naughton (Editor), Dali L. Yang (Editor)

“Despite repeated predictions of collapse and disintegration, China has managed to sustain national unity and gain international stature since the 1989 Tiananmen crisis. Examining the sources and dynamics of the resilience, this volume’s contributors reveal how China’s leaders have adapted and reinforced key economic and political institutions. They also disclose that implementation of complex policies to regulate economic and social life (employment and migration, population planning, industrial adjustment, and regional disparities) has become more effective over time within a context of growing social and economic diversity.” – from Cambridge University Press
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Oct 28 - Oct 29 China IPO Summit
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