The Global Smartphone Industry as a Case Study of National Competitive Advantage: Striking Lessons and Guidance from China for a Successful ‘Make in India’
Ten years after he proposed the theory of competitive advantage of firms, Professor Michael Porter proposed in 1990 a theory of national competitive advantage. Porter proposed that a nation’s competitive advantage would lie in the capacity of its industry to innovate and upgrade. He held that companies gain advantage against the world’s best competitors because of pressure and challenge. He pointed out the need for a virtuously competitive total industrial ecosystem in a country comprising not only the firms but also their strong domestic rivals, aggressive domestic suppliers and demanding local customers. Trending from the popular economic concept of national comparative advantage, he felt that nations would have sustainable competitive advantage in certain but not all industries. Looking at Japan, he argued that domestic rivalry arguably tends to be the most important determinant of national competitive advantage. He advocated collaboration between governments and industries to widen the ambit of national competitive advantage.
Porter proposed a diamond of national competitive advantage comprising four national attributes, namely, factor conditions, demand conditions, related and supporting industries and firm level strategy, structure and rivalry. According to Porter, these attributes determine the national environment in which companies are born and learn how to compete. He also observed that nations succeed in industries which are good at factor creation. Porter’s theory of national competitive advantage has relevance for India in the context of the NDA Government’s ‘Make in India’ drive. There has been a viewpoint from none other than the governor of Reserve Bank of India that Make for India is more important than Make in India (ie., relying on domestic market is more helpful than relying on overseas markets). Another viewpoint has been that there must be ‘Innovate in India’ as a precursor to ‘Make in India’. This blog post studies the global smartphone industry to establish and extend as well as customize the applicability of the concept of national competitive advantage to India.
Global pecking order
The global smartphone industry is expected to record a shipment level of 1 billion units in 2015 and is expected to grow at CAGR of 16 percent and touch a level of 3.4 billion units in 2020. The industry is dominated by five big players, namely, Apple, Samsung, Lenovo, Huawei and Xiaomi who together account for around 58 percent of the total market. Significantly, three of the top five makers are Chinese in origin, whose share increased from 9 percent in 2011 to 17 percent in 2014. Moreover, of the balance 42 percent of the market, additional Chinese manufacturers such as Gionee, Oppo, ZTE, Konka and Coolpad dominate. If Taiwanese brands such as HTC, Acer and Asus are also considered, the impact of the China region would be more pronounced. Clearly, the trends point to growing dominance of Chinese manufacturers in the global smartphone industry. They are also likely to make greater inroads into other emerging markets such as India and other Asia-Pacific countries. Interestingly, yesteryears’ Western makers like Nokia and Motorola as well as current oriental manufacturers such as Sony and Panasonic are no longer in any noticeable global pecking order.
Many analysts attribute the rise of Chinese manufacturers to their typically Chinese low cost structure and scale-oriented low price structure. In fact, Chinese manufacturers seem to have succeeded in bringing high end specifications to mid-tier budget price range. A Xiaomi phone may cost less than 50 percent of a comparable Apple or Samsung high end phone. In the strictest sense, a Xiaomi phone may not compare equally in elegance or finesse with an Apple phone but in terms of key hardware and form factor, the Chinese brands tend to be comparable or even a notch higher. The low cost cum price structure of Chinese manufacturer is clearly a driver but not the sole reason. If so, Indian low cost smartphone manufacturers such as Micromax, Karbonn, Lava and Zolo should have been in better pecking order. Also, despite its price premium, Apple is able to hold on its own globally, and even outsell the top Chinese brands in the Chinese home market. A more objective analysis would require a broader framework than a “price impact of market share” approach. Porter’s diamond of national competitive advantage provides a base theory but not the whole of explanation; this blog post deploys, extends and customizes the model of national competitive advantage in the smartphone setting.
Smart national attributes
Factor conditions and demand conditions of the national competitiveness diamond are rather self-evident in so far as China is considered. China has one of the lowest cost structures among technologically capable countries, covering not only labour costs but also energy and other infrastructure and overhead costs. Ample availability of high quality infrastructure is a clear win for China. In terms of demand, China with its population of 1.4 billion and per capita income of USD 10,000 is one of the most exciting and self-propelling markets globally, especially for stylistic and high technology products like smartphones (India, in comparison, has a population of 1.3 billion and per capita income of USD 4000). The real competitive advantage to any nation as applicable to the smartphone industry lies in two factors: related and supporting industries as well as firm level strategy, structure and rivalry. The competitiveness of an industry in a global setting depends on the competitiveness of the total industrial value chain relating to that product, end to end. On the dimension of industrial value chain, China scores high in the smartphone industry.
China has an established base in a whole range of smartphone components such as semiconductors, audio components, transmission modules, radio frequency switches, touchscreen controls, camera chips, baseband processors, RF transceivers, IC power management systems, fingerprint sensor components, chassis components and various other electronics. In addition, Foxconn has been the world’s largest electronics contract manufacturer and assembler located in China, whose scale and working efficiencies are simply unmatched by any other manufacturer or assembler in the world. The ability to scale up subcontract operations to meet millions of units of production on a quarterly basis with robust supply chain assurance is a critical differentiator for China over any other country. It is, therefore, no wonder that the leading smartphone of the world designed in California is exclusively assembled in China, largely with components from China, Japan, Taiwan, and Korea.
The strength of related and supporting industries is not a new discrete foundation only for smartphones in China; China’s dominance in subcontracted component and product assembly operations for a host of Japanese, European and US companies in a whole gamut of electronic goods has been a very relevant precursor for smartphone industrial base in China. The firm level strategy, structure and rivalry, the fourth point of the national competitiveness diamond, also constitute a significant factor. The Chinese companies, with active support from the Government of China, have honed the abilities to become electronics and telecommunication conglomerates. Their technological conglomerate strategy is much like that of Korean Chaebols such as Samsung, LG and Hyundai but with added sharpness of scale ramp-up and cost lever. The Chinese firms have also not fought shy of keen inter firm fight for technological superiority and high-end specifications, reflecting high industry rivalry. Advancements such as bezel-less form factor, superior sensor imaging, and proprietary skin over standard Android skin have become commonplace in China.
The smart national attributes have clearly enabled the Chinese smartphone industry to jostle its way into the global smartphone industry. As of now, the Chinese (together with Taiwan) far outnumber smartphone makers from any other country. The market share in terms of units is also bound to go up. That said, industrial competitiveness does not necessarily mean market competitiveness. If the above smart national attributes were to represent the whole of the competitiveness paradigm, Apple iPhone would not have become the bestselling smartphone in Q1 of 2015 in China. On a related analogy, Korean automotive and electronic manufacturers still trail the Japanese counterparts both in scale and innovation on the supply side, and esteem and equity on the customer side. There is, therefore, a fifth element of the national competitiveness diamond (beyond Porter’s model) that relates to customer connect that happens largely through a bridge laid over several years through sustained product innovation and performance.
It is the quest for absorption and re-innovation that has made Korea a formidable competitor to Japan. Similar quest has enabled China to become a part of the global bullet train club (along with Japan and France) or the telecommunications gear club (along with Europe and USA). The Chinese smartphone saga promises to be the same. By continuously manufacturing innovative products for others, it is possible for the industry to transit a nation to its own orbit of innovation. A bit of help from the government in terms of a tweaked intellectually property regime and legal support also helps the Chinese industries. Despite that, an opaque governance system, and an inadequate judicial system, innovators of other nations, despite getting concerned on these counts, continue to depend on China for outsourced manufacture of innovative products. The Chinese smartphone industry is a striking example of innovating through manufacturing for others, and moving towards global dominance through continuous innovative manufacturing for itself.
‘Make in India’
The case study of Chinese national competitiveness in global smartphone industry has many lessons and guidance for India. In fact, fundamentally, the striking contrast needs to be appreciated before the teachings are absorbed! Viewed from one angle, India does not trail behind China in any respect in providing the market wherewithal for a vibrant Indian smartphone industry. India is the second largest telecommunications market with close to one billion subscribers. The telecom sector has been witnessing a blazing growth rate of 35 percent each year. While the wifi connectivity is low, the Internet connectivity through a combination of wifi and cellular services is expected to touch 700 million by 2025 (currently nearly 250 million Internet subscribers). In terms of new mobile connections, India has been adding a staggering 18 million net additions each quarter, more recently outpacing China by a massive 6 million connections. All this has been in spite of high price of mobile handsets, and lack of communication contract subsidization! If this level of mobile and smartphone growth of a total population of 1.3 billion cannot support a global smartphone industry in India, nothing else would! Another factor of related and supporting factors was also taken care of when Nokia set up a huge park to manufacture handsets and also support the components and accessories industry. In glaring contrast to the immense potential, Nokia had to shut down production and the park itself is now a pale self of itself.
The lesson for India is that the mere presence of certain demand side factors or attributes of the national competitiveness diamond cannot, by itself, lead to blossoming of the domestic manufacture to the full potential. The national ecosystem must be driven by a focus on innovative manufacture and a passion for global scale businesses that can create India’s own Alibabas and Xiaomis. It is somewhat a strange commentary that certain leaders of India’s largest global scale firms and conglomerates could do none of what or Xiaomi did while they were at the helm of the respective firms and conglomerates and are now left to investing in such ventures of others! For India’s development, ‘Make in India’, the mantra of Prime Minister Modiji, is not only an essential and urgent mission but also requires a missionary and binding zeal of all stakeholders, political establishments, governments, banks and financial institutions, policy making and development institutions, businesses, policy makers, regulators, administrators, industrialists, academicians, employees, students, and the Indian people as well as the Indian society at large, whatever be the other differences! Similarly, it need not be a mission for only new ventures or private sector. India has already established a huge industrial base in public sector as well as private sector, and in Indian ownership as well as foreign participation, and every entity should take upon itself to leverage its capabilities to expand and diversify in India. The potential is so huge and the stakes are so high that India as a nation, and all the stakeholders - individually and collectively - can no longer be languid and casual about the ‘Make in India’ Mission.
Posted by Dr CB Rao on May 17, 2015