No AccessPolicy Research Working Papers18 Oct 2022Massive Modularity: Understanding Industry Organization in the Digital Age: The Case of Mobile Phone HandsetsAuthors/Editors: Eric Thun, Daria Taglioni, Timothy Sturgeon, Mark P. DallasEric Thun, Daria Taglioni, Timothy Sturgeon, Mark P. Dallashttps://doi.org/10.1596/1813-9450-10164SectionsAboutPDF (1.4 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract: It is generally accepted that a "global chain"—orchestrated by a lead firm—is the relevant unit of analysis for research on contemporary global industries. However, our research shows that value chains (GVCs) and supply chains (GSCs) are only segments of the massively complex "ecosystem of ecosystems" that produce mobile phone handsets. To define a broader field for analysis, we characterize the industry as a massively modular ecosystem, or MME. The broader analysis presented in this paper requires a broader set of evidence than is typically brought to bear in GVC studies. The analysis presented here is based on a novel longitudinal dataset that contains bills of material of 456 mobile phone handsets produced in the period 2008–2019. The dataset provides information on the identity and location of handset brands as well as the suppliers of subsystems and complex components contained in each handset. Since hardware is only part of the picture, the analysis also relies on a dataset that tracks individual company contributions to Google's Android Open-Source Project (about 10 million since 2008). Since interoperability standards are key to understanding the MME, another dataset tracks company contributions across different generations of mobile telecom standards in the 3GPP standard setting organization (since 2001). Finally, a variety of published industry statistics, as well as trade data from UN Comtrade are also added to trace the path of the industry's organizational and geographic evolution. The results highlight two main features of the mobile handset industry. First, "relational" linkages, where parties develop and exchange tacit knowledge, are key for innovation at the cutting edge, while modular linkages, where standard interfaces for exchanging information and requirements lower cost of using, reusing and repurposing software, sub-systems, and components, facilitate imitative innovation and the participation of many millions "platform complementors" (e.g., app makers). It is the plethora of modular linkages, enabled by a multiplicity of shared standards, that enables the phenomenal increases in scale, complexity and product functionality that we document in this industry. The research presented in this paper reveals three paradoxes in MMEs: 1) they allow for extremely complex products to be produced at scale, unlike more traditional industries; 2) they simultaneously feature high levels of market concentration at the level of complex sub-systems and components, and market fragmentation at the level of the industry overall and at the level of complementors; and 3) they are geographically clustered, but because the MME integrates work is carried out in many specialized clusters in many countries, the system as a whole is geographically dispersed. This leads us to a fourth, policy-related paradox: MMEs generate pressures for decoupling when placed under stress, but the same set of circumstances also create strong strategic and political pressures for maintaining the business relationships and institutions that have come to underpin global integration. Because digitization of business processes is taking place across the broad economy, the implications drawn from this study may be relevant for business strategy, as well as for policies related to industrial development, trade, and innovation across a large and expanding number of industries. Previous bookNext book FiguresreferencesRecommendeddetails View Published: September 2022 Copyright & Permissions KeywordsFIRM ORGANIZATIONINDUSTRIAL DEVELOPMENTFIRM-TO-FIRM LINKAGEDIGITAL INDUSTRY DEVELOPMENTGLOBAL VALUE CHAIN (GVC) CASE STUDYGLOBAL SUPPLY CHAIN (GSC) CASE STUDYMOBILE HANDSET INDUSTRY CASE STUDYBUSINESS STRATEGYMODULARITYOPEN-SOURCE TECHNOLOGYPROPRIETARY TECHNOLOGYMASSIVELY MODULAR ECOSYSTEM (MME) PDF DownloadLoading ...

This chapter examines China’s mixed upgrading and innovation record in the context of the ongoing debate over the role of the state vis-à-vis the market. A key finding that emerges is that sectors that have been most open to competition, in which entry and exit are less encumbered and, more generally, in which firms have been free from the often-distorting hand of the Chinese state, are those that have been most successful in cultivating domestic firms able to compete domestically and globally. Central to our assessment is how firms in these sectors have been better able to leverage China’s rapidly growing domestic market to their competitive advantage in the course of their upgrading and innovation efforts.

This paper uses the case of China’s mobile telecom industry to illustrate the challenges of pursuing national industrial policy objectives in the context of a highly dynamic and interconnected global industry. The Chinese state deployed a full arsenal of industrial policy tools in its effort to develop a Chinese modem telecom standard (TD-SCDMA) and support the development of domestic firms, yet success has been elusive. This outcome reflects the difficulty of creating a protected industry ecosystem for national firms in an industry that is increasingly dominated by global platforms. The outcome also reflects the rapid rate of change in the industry. While the state was using command-and-control methods to foster the development of core interconnect technologies, the locus of competition in the sector shifted closer to the consumer: toward handset operating systems, applications, and mobile services such as WeChat. The interconnect standards and technologies that had been the focus of China’s industrial policies are now largely generic and take up only the first few layers of handset architecture, and even handsets have become near generic portals to on-line content, platforms and services. The Chinese firms that have thrived in this environment benefited from the protection provided by China’s Great Firewall, but are not otherwise a direct product of state support. They are entrepreneurial firms that understand the local market, and have been able to build novel solutions on top of global technology platforms. Their products and services may not be the big innovations that state planners often favor — services rather than semiconductors, for example — but these firms are highly competitive and have tremendous leverage within the huge Chinese domestic market.

This paper uses the case of China's mobile telecom industry to illustrate the challenges of pursuing national industrial policy objectives in the context of a highly dynamic and interconnected global industry. The Chinese state deployed a full arsenal of industrial policy tools in its effort to develop a Chinese modem telecom standard (TD-SCDMA) and support the development of domestic firms, yet success has been elusive. This outcome reflects the difficulty of creating a protected industry ecosystem for national firms in an industry that is increasingly dominated by global platforms. The outcome also reflects the rapid rate of change in the industry. While the state was using command-and-control methods to foster the development of core interconnect technologies, the locus of competition in the sector shifted closer to the consumer: toward handset operating systems, applications, and mobile services such as WeChat. The interconnect standards and technologies that had been the focus of China's industrial policies are now largely generic and take up only the first few layers of handset architecture, and even handsets have become near-generic portals to on-line content, platforms and services. The Chinese firms that have thrived in this environment benefited from the protection provided by China's Great Firewall, but are not otherwise a direct product of state support. They are entrepreneurial firms that understand the local market, and have been able to build novel solutions on top of global technology platforms. Their products and services may not be the "big" innovations that state planners often favor — services rather than semiconductors, for example — but these firms are highly competitive and have tremendous leverage within the huge Chinese domestic market.

This chapter shows how China's welfare state is partially responsible for its imbalanced economic growth model, characterised by an overreliance on export-led manufacturing industries and the laggard development of the service economy. It argues that the expansive Chinese pension system facilitates the expansion of the manufacturing sector by subsidising the training of workers with industrial specific skills, as this system is designed to do, but it has an unintended consequence. The political-economic logic has shown that China's pension system is dictated by the need of the Chinese economy. Rebalancing the Chinese economy, the overriding priority in Chinese government's post-crisis macroeconomic policy, therefore requires adjustments to the Chinese pension system. The chapter examines the structure of the Chinese economy through the lens of this study's political-economic framework. China's …

While emerging markets are widely seen as a favorable environment for cost innovation, the existing literature has difficulty explaining why in some cases cost innovation provides a solid foundation for upgrading but in other cases it does not. This paper focuses on how different market segments (low-, medium-, and high-end) within an industrial sector each play a unique role in the development process, and how the absence of any segment may inhibit the upward trajectory of emerging market firms. The low-end offers new entrants "natural" protection from foreign firms with higher cost structures, and allows local firms to cultivate their capabilities, engage in cost innovation, and gain scale. The high-end is dominated by foreign firms that have better access to human resources, capital and technology. The middle segment is a crucial pathway for the development of new capabilities because it forces foreign and local firms to combine and re-combine their respective resources in new ways so as to achieve the exact ratio of price and quality demanded by "value for money" customers. Because market segmentation is shaped by a range of state policies that affect both the demand- and the supply-side, the state may inadvertently restrict the growth of segments that contribute crucial ingredients to the process of capability-building, and adversely affect upgrading outcomes.

The Developing EconomiesVolume 54, Issue 3 p. 257-260 Book Review The Disintegration of Production: Firm Strategy and Industrial Development in China edited by Mariko Watanabe, Cheltenham, Edward Elgar, 2014, vii + 347 pp. Eric Thun, Eric Thun University of Oxford, Oxford, UKSearch for more papers by this author Eric Thun, Eric Thun University of Oxford, Oxford, UKSearch for more papers by this author First published: 30 August 2016 https://doi.org/10.1111/deve.12107Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Volume54, Issue3September 2016Pages 257-260 RelatedInformation

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Previous articleNext article No AccessReviewsThe Political Economy of State-Owned Enterprises in China and India, edited by Xu Yi-chong. Basingstoke: Palgrave Macmillan, 2012. xiv + 277 pp. £60.00/US$95.00 (hardcover).Eric ThunEric ThunOxford University Search for more articles by this author PDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by The China Journal Volume 74July 2015 Published on behalf of the Australian Centre on China in the World at the Australian National University Article DOIhttps://doi.org/10.1086/681721 Views: 93Total views on this site Copyright 2015 by The Australian National University. All rights reserved. For permission to reuse, please contact [email protected]PDF download Crossref reports no articles citing this article.

Indigenous firms in developing countries with large domestic markets have unique advantages: the low end provides "natural" protection from foreign competition, while higher-end segments provide incentives for foreign firms to localize activities and develop channels for future capability building. Paradoxically, in their eagerness to support development efforts of local firms, states often nullify these advantages and limit the opportunities and capabilities that local firms can leverage in the upgrading process. Using the case studies of three large industrial sectors in China that faced similar prospects but had widely different outcomes, this paper develops a framework for understanding how policy shapes the growth and segmentation of markets, and thus the opportunity for industrial upgrading of indigenous firms. The cases show how restrictive demand-and supply-side policies often inadvertently limited the opportunities for upgrading through their effect on the availability of know-how, inputs, and resources required for industrial upgrading (the supply side), and through their effect on the incentives for upgrading (the demand side). Given that each segment is a crucial rung on the development ladder, industrial upgrading efforts stall when state policy inadvertently knocks out rungs on the development ladder. (C) 2015 Elsevier Ltd. All rights reserved.

Theories of disruptive innovation predict that new entrants should have an advantage over incumbents in market segments that demand products with different attributes than established markets. Such differences are common in emerging markets, yet the ability of emerging market firms to disrupt global incumbents varies. The purpose of this paper is to construct a framework that allows us to explain this variation. We focus on how the availability of successive segments of a quality ladder within the domestic market for a product shapes the development of firm capabilities over time. The structure of a quality ladder influences capability building through two dynamics. The incubation effect is shaped by the length of the ladder. Longer ladders enable indigenous firms to cultivate their capabilities in a low-end segment that offers ?natural? protection from foreign firms selling at the high end. The competition effect is influenced by the relative size of each market segment on the ladder. When demand is present throughout the ladder, domestic and foreign firms competing at opposite ends of the ladder have strong incentives to invest in the capabilities that will allow them to fight for the rapidly growing middle segments of the market. This dynamic expands the necessary channels for capability-building for local firms on both the demand side and the supply side. In short, each segment serves as a rung on the development ladder for indigenous firms.

This paper examines the question of how a shift in the end point of a global value chain alters the prospects for industrial upgrading in a developing economy through an analysis of the mobile telecom sector in China. Over the last decade, China has become the world's largest market for mobile phones, and domestic Chinese firms have been able to take advantage of both increasing modularity (to outsource components that they lacked the technology to produce) and their superior knowledge of low-end market segments to expand sales vis-à-vis foreign firms. But these advantages are temporary: high levels of modularity lead to intense competition and low-profits among domestic firms and foreign firms rapidly improve their market knowledge. The key to long-term success for domestic firms is investment in design capabilities, and a shift away from purely modular relationships, but the rapid rate of technical change in the industry complicates this process.

There was a time when Hong Kong was associated with cheap manufactured goods such as toys, low-end electronics, and garments, but this was well over two decades ago. In the last two decades, Hong Kong has undergone a remarkable transformation. The factories moved north when rising costs in Hong Kong made manufacturing uncompetitive, and the territory became a high-end service center dominated by gleaming office towers and shopping malls. Although the transformation of Hong Kong has been remarkably successful, the ever increasing capabilities within Mainland China create the potential that the competitive advantage of Hong Kong will decline over time.