Study on internationalisation and fragmentation of value chains and security of supply Within the Framework Contract of Sectoral Competitiveness Studies ENTR/06/054 Case Study on Mobile Devices 17 February 2012 Danish Technological Institute In cooperation with Ecorys Cambridge Econometrics Title: Study on internationalisation and fragmentation of value chains and security of supply This report has been prepared in 2011 for the European Commission, DG Enterprise and Industry under the Framework Contract of Sectoral Competitiveness Studies ENTR/06/054. Abstract: The overall objective of the study is to analyse the degree and consequences arising from the internationalisation, fragmentation and security of supply of value chains for European industry. The focus is predominantly on the supply side (i.e. upstream) as opposed to the demand, downstream, side. While globalisation can indeed be a positive development for Europe, there are also risks involved. Key subjects: Value chains, supply chain management, risk mitigation, industrial policy, competitiveness, globalisation, EU, aeronautics, electric vehicles, mobile devices, semiconductors, space… Publisher: European Commission, DG Enterprise and Industry Performing organisations: Danish Technological Institute (Peter Bjørn Larsen, Jeremy Millard, Kristian Pedersen, Benita Kidmose Rytz) with Ecorys (Jan Maarten de Vet, Marc Vodovar (Decision), Paul Wymenga) and Cambridge Econometrics (Graham Hay, Jon Stenning) Project leader: Jeremy Millard, Danish Technological Institute Email: jeremy.millard@teknologisk.dk, phone: (+45) 72 20 14 17 Kongsvang Alle 29, 8000 Århus C, Denmark, Reference: Millard, Jeremy; Peter Bjørn Larsen, Kristian Pedersen, Benita Kidmose Rytz, Jan Maarten de Vet, Marc Vodovar, Paul Wymenga, Graham Hay & Jon Stenning (2012) Internationalisation and fragmentation of value chains and security of supply. Published by the European Commission, DG Enterprise and Industry. Framework contractor: ECORYS SCS Group P.O. Box 4175 3006 AD Rotterdam Watermanweg 44 3067 GG Rotterdam The Netherlands T +31 (0)10 453 88 16 F +31 (0)10 453 07 68 E fwc-scs@ecorys.com W www.ecorys.com Registration no. 24316726 Table of contents 1 Case study Mobile Devices 1.1 Introduction 1.2 The competitive situation of the value chain 1.2.1 Internationalisation 1.3 Critical factors 1.3.1 Justification of critical factors 1.3.2 Critical factor 1: security 1.3.3 Critical factor 2: competition 1.4 Critical regulatory framework conditions 1.5 Strategic outlook 1.6 Annex 1: interviews 1.7 Annex 2: data issues 1.8 Annex 3: literature 5 5 6 14 15 15 17 21 24 24 26 27 28 1 Case study Mobile Devices 1.1 Introduction The mobile device industry in principle encompasses all activities related to the manufacture and assembly of mobile phones as well as the downstream network operators and retailers responsible for distribution and sale of the finished phones to consumers. A graphic overview of the value chain is presented in Figure 8.1, including component and subsystem suppliers, material suppliers and at various stages design and research and development functions, technology licensors and support services. In addition, the figure below highlights the primary focus of the present case study on the consequences of internationalization of component manufacturing, especially of processors, and the increasing importance of software for the development of a marketable phone. Figure 1.1: Outline of mobile phone value chain Source: DTI 5 Sources regularly surveying the industry estimate the value of the entire global mobile phone industry at nearly $1,500 bn in 2010. This figure includes nearly $1,100 bn in voice, messaging and mobile data services to end consumers and $130 bn in network investments (capital expenditures) by operators, as shown in Figure 8.2. Manufacturing of mobile phones alone is estimated to account for about $150 bn, whereas the value of manufacturing of mobile components is estimated at $105 bn. The above figures are only a snapshot of a rapidly evolving industry, however. Thus, 2010 was the first year that the value of 3G phones exceeded the value of 1G and 2G phones, while, for instance, the value of 4G phones and application downloads are expected to double in 2011. Figure 1.2: Global mobile phone industry value in 2010 Source: IHS iSuppli, Gartner, Wireless Intelligence, own calculations 1.2 The competitive situation of the value chain European mobile phone companies historically have been performing well with Nokia (Finland), Ericsson (Sweden) and Siemens (Germany) capturing around half of the global market as recently as 2004-2005. Moreover, French companies Alcatel and SAGEM also held significant shares of the market in the early 2000s. This historic positioning in the global market for mobile phones in large part can be attributed to the successful attempt at defining a European standard for digital cellular networks where none existed during the eighties, which also quickly developed into the first world standard. Importantly, involvement in the development of the GSM (2G) standards enabled European companies to claim approximately two thirds (65%) of the essential patents for technology supporting the standard. Additionally, cross-licensing of patents between Siemens, Alcatel, Nokia, Ericsson and American Motorola in effect created high entry barriers for new competitors into the market (royalty rates for non-cross-licensees are estimated at 10-13% and may have been even higher in the early going) (Bekkers & West, 2008). 6 Similarly, European companies can claim almost two thirds (63%) of the essential patents for technology supporting the most widespread of the subsequent 3G standards (UMTS/WCDMA), due to early research into the next generation of digital cellular networks during the 1990s supported through the EU RACE and FRAMES Programmes (royalty rates for noncross-licensees of these later technologies are estimated at 20%) (Bekkers & West, 2008).1 Yet, despite the competitive advantage of having to pay lower royalty rates through offsetting licenses and despite a rapidly expanding market, European mobile phone companies have been struggling to survive in recent years: Ericsson joined forces with Japanese Sony already in 2001 to form Sony Ericsson and this joint venture is set to be incorporated entirely into Sony by the end of 2011. The joint venture currently holds about 2% of the world market in terms of units sold down from 7-9% just three years ago, but manufacturing of all the brand’s phones are contracted out to ODMs (original design manufacturers) and EMSs (electronic manufacturing services) in Asia. Only part of product development at present takes place in Sweden. Meanwhile, Alcatel formed a joint venture with Chinese TCL in 2004 and was bought out in 2005; the same year that Siemens sold its mobile division to Taiwanese BenQ, which turned around and declared the division bankrupt in 2006. Neither firm currently has any substantial mobile phone related production in Europe. Also SAGEM has had trouble with its mobile division, which was first spun off into a separate entity, MobiWire, and then filed for bankruptcy in 2011. This leaves Nokia as the only remaining European original equipment manufacturer (OEM) to lead the industry. But Nokia too has recently lost market share standing at 24% today down from 40% in late 2007 (slightly lower than for 2010 as a whole, shown in Figure 8.3). Nokia is still the largest individual mobile phone manufacturer in the world in terms of units sold, however, and maintains significant manufacturing capacity in Europe. These struggles of the European OEMs should be seen in light of the increasing competition from long-standing player Samsung from South Korea and a host of new entrants on the market since 2007, including American Apple, South Korean HTC, and Chinese ZTE and Huawei, as well as a range of more or less legitimate local ‘brands’ in emerging markets, each acquiring a global share of 2-5% (latest data are for the third quarter of 2011). Notably, the entrance of these new players has not just affected European OEMs, but also the performance of other market incumbents such as American Motorola, down to a 2-3% market share from as much as 21% in 2006, and South Korean LG, down to a 5% market share from as much as 10% in 2009. In fact, Motorola, like SAGEM, decided to spin off its mobile devices division in 2011, creating Motorola Mobility, which has subsequently been acquired by Google. 1 With regards to the other 3G standard (CDMA2000) used alongside UMTS/W-CDMA in some regions, including USA, Japan, India and China, European companies can claim substantially fewer of the essential patents, likely less than 20% (Goodman & Myers, 2005). 7 Figure 1.3: Brand market shares by sales volume Source: Gartner. Figures show yearly sales volume of Nokia, Sony Ericsson, Siemens, Motorola, Apple, RIM, Samsung, LG, HTC, Huawei, ZTE, and Others in absolute numbers (left panel) and as shares of total global market (right panel). Others include Chinese and Japanese brands, PC-based OEMS and operator-labelled phones. The inroad of new entrants and especially of Apple into global revenue and operating profit is even bigger than their inroad into units sold as shown in Figure 1.4. While Nokia is still the market leader with regards to sales volume and holds a significant advantage over all other companies in allotted research and development budgets, its share of revenues has been just about half of what its share of units sold would seem to merit (22% compared to 42% in 2010), and operating profit even momentarily turned negative in the second quarter of 2011. In contrast, Apple sells only 5% of all mobile devices, but captures between half and twothirds of all operating profit. LG has had negative or close to negative operating profits for the last eight quarters (losing $1 bn since late 2009), and Sony Ericsson and Motorola for much longer (losing $1.5 bn since early 2008 and at least $4.7 bn since the beginning of 2007, respectively).2 Figure 1.4: Brand revenue and operating profit Source: Asymco, Figures show quarterly revenue (left panel) and operating profit (right panel) of Nokia, Sony Ericsson, Motorola, Apple, Research in Motion (RIM), Samsung, LG, and HTC. No recurrent data available for Huawei and ZTE. The reason for this discrepancy is to be found in the split of the mobile device market into at least three segments: high-end smartphones, low-end entry-level phones and mid-market feature phones. Apple, RIM and HTC compete solely in the high-end market for smartphones, whereas Nokia and Sony Ericsson battle Motorola, Samsung, LG and local brand names primarily in the low-end and mid-markets for cheaper ‘dumbphones’. In these 2 Note that revenue and operating profit figures do not exist for Huawei and ZTE, nor for any of the brands grouped under ‘Others’ in the volume charts in Figure 1.3 – in part due to their legal status. However, inclusion of estimates regarding the value of Huawei and Chinese grey label handsets for 2010 changes revenue shares of other brands by less than 1%. 8 two market segments, competition is stiff, driven by overcapacity built up prior to the financial crisis, combined with a number of outsiders still viewing the mobile device market as a lucrative business due to its size and growth potential and/or complementarity to other business. Hence, Samsung earns a substantial part of its revenue by selling memory chips and displays used in mobile devices (produced by itself and by other brands including Apple), and both Huawei and ZTE are engaged in the roll-out of infrastructure and seek to increase demand through sales of cheap mobile phones. Moreover, PC manufacturers such as Acer and Dell also believe their business models are applicable to the mobile device market. Increasing competition in these two markets has been enabled by the ever decreasing costs of chipsets and the bundling of software and chips introduced by Taiwanese MediaTek, which provides potential new entrants with readymade turnkey solutions and support. Competition is also increasing in the high-end smartphone market, however, as established players as well as new entrants look to move up from the low-end and mid-markets to get their shares of operating profits. This requires not only a smart smartphone, but a passable software and service platform ecosystem to create the right user experience and dynamic content availability, which has been the real strength of Apple. Most contenders, including Samsung and Sony Ericsson, appear to be basing themselves on the Google Android operating system, which entails no upfront license fees, whilst Nokia has teamed up with Microsoft to use their Windows Mobile operating system. Overall, the mobile phone industry, much like the PC industry, has gone through a phase of unbundling and fragmentation followed by partial consolidation and vertical integration as the technology has become both more standardized and sophisticated, and specialisation benefits and cost pressures set in. Thus, most of the established players in the industry at some point were involved in the manufacture of everything from basic components to the wireless networks on which the mobile phones run. This is no longer the case, as the industry has not only split into components, design, assembly, software and networks, but also into an increasing variety of components and software and more layers of manufacturing and assembly functions provided for by different companies. Fragmentation has enabled economies of scale in the manufacture of the most standardized components such as core processors (baseband and application), radio frequency transceivers and amplifiers, power management, memory, displays and batteries. Especially, baseband is becoming increasingly concentrated as American Intel and Nvidia acquired German Infineon Wireless and British Icera in 2010 and 2011, respectively. Further, American Texas Instruments has declared it is exiting baseband, and Italian-French-Swedish ST-Ericsson continues to struggle after merging in 2009 (ST-Ericsson also incorporates the wireless activities of Dutch NXP – previously Philips Semiconductors – merged with those of STMicroelectronics in 2008). Worldwide this appears to leave American Qualcomm, Intel, Nvidia and Broadcom, Taiwanese MediaTek, Japanese Renesas and maybe ST-Ericsson as long-term suppliers of mobile baseband processors (only one of which is European and fabless at that). However, also a number of Chinese companies including Spreadtrum, Leadcore and ZTE are positioning themselves to compete for baseband chips specifically adapted to the Chinese market (i.e., TD-SCDMA and LTE). Moreover, newcomer French Sequans Communications, established in 2003, at the moment is a minor player in the market for 4G LTE baseband. 9 The list of companies offering application processors, whether as stand-alone chips or integrated with baseband, is somewhat more varied counting upwards of a dozen suppliers, albeit here too ST-Ericsson is the only European owned company with substantial production (Irish Movidius, established in 2005, started shipping a 3D video processor in 2010 and is listed among the Red Herring Global Top 100 for 20113). In addition to the companies mentioned above, suppliers of application processors include American Marvell and Freescale as well as Apple and South Korean Samsung. More concentration and less differentiation are expected in this market in the coming years due to the costs of research and development, however. Apple’s decision to make its own application processors should be seen in anticipation of this streamlining of available components. Many of the same companies, including ST-Ericsson, also constitute the primary suppliers of radio frequency chips (transceivers and amplifiers) and power management units, at least in part because integration of transceiver and baseband in a single chip provides one way of minimizing component costs in low-end phones, and because optimization of power usage is critical to the performance of high-end phones. More generally, there are historic reasons for this overlap as much of the research into network standards and technology relates to the transceiver and not just the baseband processor. These companies are not the only suppliers of radio frequency chips and power management units, though. Significant suppliers in addition include American Skyworks Solutions and RF Micro Devices (both providing transceivers and amplifiers), German Dialog Semiconductor (power management) and British Wolfson Microelectronics (power management and amplifiers). All four companies are long-time players having existed at least since the early 1990s in one form or other and are present in the value chains of several brand names. With regards to memory chips, display panels and batteries, most if not all suppliers come from Japan, Taiwan, South Korea or China. The mobile memory market is dominated by South Korean Samsung capturing nearly half the market (IHS iSuppli data). Together with American Micron and South Korean Hynix (previously Hyundai Electronics), this is the only company presently with the capabilities to offer multichip memory combining DRAM and NAND flash by itself.4 Japanese Elpida and Toshiba are other significant suppliers of DRAM or NAND flash memory respectively. The third type of memory, NOR flash, is used for mobile devices in decreasing amounts, which may be part of the reason for Italian-French STMicroelectronics divesting its flash memory activities in 2008, forming Nymonyx together with American Intel (Nymonyx was acquired by Micron in 2010). The mobile battery market is almost as concentrated as the mobile memory market with Japanese incumbents Sanyo (owned by Panasonic (previously Matsushita)) and Sony and upcoming South Korean Samsung and LG Chem accounting for close to three quarters of all rechargeable lithium ion and polymer batteries sold. Chinese BYD, Lishen, Amperex Technology Limited and BAK, and Japanese Hitachi Maxell also hold minor market shares (Research in China data). 3 The Red Herring Global Top 100 status is awarded to innovative and promising companies on a yearly basis. Flash memory is used for storage while DRAM memory is used for processing (DRAM is “volatile” in the sense that it requires power to maintain stored information). 44 10 The mobile display market overall is less concentrated than the mobile memory and battery markets. However, in this market too South Korean Samsung is a prominent player, especially when it comes to AMOLED displays for which only a handful of significant suppliers exists. In contrast, there are at the moment over ten suppliers of the more common LCD displays with notable market shares. These include Japanese Sharp, Sony, Toshiba and Hitachi, Taiwanese Wintek, AU Optronics, Chunghwa Picture Tubes, HannStar and Chimei Innolux, Chinese Truly, and South Korean Samsung and LG. Not all companies are faring equally well, though, and both Japanese and Taiwanese governments are working to consolidate their national industries. Thus, Sony, Toshiba and Hitachi have formally agreed to merge their display businesses into an independent company funded by the public-private investment firm Innovation Network Corporation of Japan, while the Council for Economic Planning and Development recently has enquired about the possibility of a merger between AU Optronics and Chimei Innolux. The only active European company in the display market, Dutch Liquavista (spun off from Philips in 2006), was acquired by Samsung in 2010. At the same time, as the range of peripheral functions that a mobile phone, and in particular a smartphone, is expected to encompass broadens (e.g., digital camera, personal assistant, music player, video player, radio, game station, GPS, Bluetooth, Wi-Fi, smartcard), the need for new and advanced, not yet standardized types of, components increases. This creates opportunities for smaller vendors and developers of new connectivity support and microelectromechanical systems (MEMS5), and appears to be where European chip companies besides ST-Ericsson have their main strength. For instance, British Frontier Silicon and Mirics Semiconductor are active in mobile television while STMicroelectronics, British Cambridge Silicon Radio and French Inside Secure offer near field communication solutions (the basis for using the mobile phone for payment in stores). European MEMS suppliers include STMicroelectronics, Spanish Baolab Microsystems, German Bosch Sensortec and Osram Opto Semiconductor (previously Siemens LED division), and British Cambridge Mechatronics and Wolfson Microelectronics. In addition, Austrian SensorDynamics and Finnish VTI Technologies were acquired by American Maxim and Japanese Murata, respectively, during 2011. These companies comprise a mix of old and new (established since 2000), mainly fabless players. Globally, STMicroelectronics was the largest supplier of MEMS for consumer electronics and mobile devices in 2010, capitalising on the company’s delivery of components to Apple’s iPhone 4 and iPad. Also German Bosch Sensortec figured among the five biggest suppliers of MEMS in 2010 (IHS iSuppli data). Other significant suppliers of MEMS for consumer electronics and mobile devices include American Avago Technologies, Knowles Electronics, Texas Instruments, InvenSense, TriQuint and Kionix as well as Japanese Panasonic and Epson. MEMS for mobile phones alone are expected to generate nearly $2 bn in revenue by 2014 while the total MEMS market is expected to be a $10+ bn business. The pressure on traditional OEMs to try to shrink footprints to stay competitive also has resulted in the introduction of EMSs (manufacturing, assembly and testing) and ODMs (design, manufacturing, assembly and testing) in mobile phone value chains. In adopting this 5 MEMS include sensors and audio devices such as accelerometers, gyroscopes, zoom and autofocus actuators and noisesuppression microphones. 11 approach, the mobile phone industry again largely follows the PC industry model. However, Nokia has been different from most other OEMs by maintaining significant in-house capabilities and control, especially with regards to design, platform solutions and final assembly, rather than contracting out the majority of production. Keeping these production stages in-house has been key to stay ahead of competitors with regards to “engine” development (fusing and tuning processors to fit the selected software), and to Nokia’s business model of offering a wide range of phones built on the same base, but adapted to the characteristics of regional markets. Also maintaining in-house design and production capabilities provides Nokia with greater flexibility to change course than competitors completely relying on ODMs and EMSs. Still, as shown in Figure 1.5 to allow the company to sell its products cheaply with an acceptable margin Nokia over the last decade has moved from being a purchasing organisation buying single components directly from a range of individual suppliers varying from region to region, to a sourcing organisation increasingly demanding first tier suppliers to provide whole sub-systems solutions and establish a presence in every region where Nokia itself is present. This process started with the selection of Taiwanese Foxconn to deliver, first, price competitive simple mechanics (plastic and metal) parts and assembly, and second also printed circuit boards and assembly in the Asia Pacific region, and the similar introduction of American Jabil to deliver printed circuit boards and assembly in the Americas, due to their financial resources and willingness to invest in the necessary factory capacity to match the rapid expansion of the mobile phone market in the early 2000s. Later Chinese BYD was added to provide a price balance against growing Foxconn based on their technology portfolio and resources, while Perlos (Finland) was acquired by Taiwanese LiteOn to gain access to the Nokia supply chain.6 6 Meanwhile, Elcoteq (FI) choosing not to vertically integrate (putting their stakes on a horizontal strategy) was squeezed out of the Nokia supply chain and filed for bankruptcy in October 2011. 12 Figure 1.5: Nokia supply chain evolution Source: Seppälä. (2010) According to interviews conducted as part of this case study, the increased fragmentation of the value chain is both positive and negative. On the positive side, it has been possible to concentrate certain activities in specific areas and thereby reap economies of scale. On the other hand, increased fragmentation has implied that barriers for new entrants are lower, as more parts of the value chain are out of the companies’ hands. Some companies have guarded themselves from this risk by only outsourcing non-strategic parts of the value chain. Indeed Apple is hypothesized to be buying its way back into manufacturing its own processor chips partially for this reason. From a European perspective, the fact that only one OEM remains in Europe implies increased risks for the industry as whole (including for the remaining European semiconductor manufacturers for whom the mobile phone market has been one of the major European markets). However, it is not the perception that the structure of the European mobile phone value chain impedes successful entry into the smartphone market by European players. Building a user experience and supporting software and service platform ecosystem that can win over customers from Apple (and Android) is not a straightforward task, though, as evidenced by the relative failure of Ovi. But, Nokia still has a strong position in many emerging markets where first-time smartphone buyers are not already won over by Apple and iTunes. The expectation in the longer term is that the mobile device market will evolve into a split between partly commoditized hardware and high margin software and services (Arete Research). Thus, in 2010 alone consumers spent in excess of $11 bn in mobile application stores (Gartner data). This will likely involve increasing IPR battles around software design and technology as currently seen in the closely related tablet market and as previously experienced in the mobile phone market itself with regards to GSM and 3G technology and increasingly around next generation (4G) standards. To prepare for this battle Nokia has been 13 investing heavily in the acquisition of mobile software companies since 2007, not limited to Symbian Ltd., to build up in-house capabilities and assets in the mobile content area (not least including mapping services). Europe more generally has a strong position in mobile middleware (i.e., software to ensure interoperability between operating systems and to support and simplify application development and delivery) aided by common European standards and public support for research into network and service infrastructures through successive EU Framework Programmes. Europe also has a strong presence in mobile content and applications although of a more entrepreneurial character. Thus, the global gaming success Angry Birds, for instance, is developed by Finnish Rovio Entertainment, a company established in 2003 under the name Relude by three Finnish students. Similarly, another recent mobile gaming success WordFeud was developed by a Norwegian IT-developer in his spare time. 1.2.1 Internationalisation The value chains of mobile phone manufacturers are highly internationalised. For instance, Nokia has design offices in the UK, Finland and the US and production facilities in Finland, Hungary, Romania, China, India, South Korea, Mexico and Brazil. Likewise, Sony Ericsson has product development sites in Sweden, Japan, China and the US while all production is centred in China. In addition, most European suppliers employ a fabless strategy with outsourced manufacturing in Asia. A similar spread is apparent in EU27 trade data regarding the import and export of mobile telephones and parts of telephones (all types). Thus, while 63% of all imported telephone parts in 2010 came from China, 13% came from the Americas, 6% from South Korea and another 8% from other places in Asia and Oceania, not including India, Japan or Taiwan. Moreover, even with some production inside the EU27, in particular in Eastern Europe, the value of EU27 extra trade is 1.8 times larger than the value of EU27 intra trade, indicating the internationalisation of the value chain. At the same time Table 1.1 shows that Europe is increasingly becoming an importer of mobile phones as the value of imported mobile phones was double that of exported mobile phones in 2010 compared to just 1.5 times in 2007. Table 1.1: Relative importance of EU27 extra mobile device related trade partners Mobile telephones Import Parts of telephones Export Import 2007 2010 2007 2010 Europe 2 2 14 North America 1 1 Japan 0 0 Taiwan Export 2007 2010 2007 2010 22 3 1 7 5 4 2 20 8 11 16 0 0 6 3 2 3 5 10 0 0 1 2 1 1 35 14 0 0 5 6 1 1 Russia 0 0 16 14 0 0 6 3 India 0 3 0 2 0 3 6 8 China 46 65 6 13 46 63 12 12 Asia and Oceania 4 2 5 11 12 8 21 13 Middle East 1 0 40 29 3 2 13 15 South Korea 14 Mobile telephones Import 2007 Parts of telephones Export Import 2010 2007 2010 Export 2007 2010 2007 2010 Africa 0 0 11 5 0 0 11 10 Central and South America 0 2 1 1 3 5 8 11 Unknown 6 0 1 0 0 0 1 1 Share of EU27 extra 38 43 28 22 18 22 16 14 Share of EU27 intra 90 86 72 40 112 176 118 121 Value (€ bn) 15 16 11 8 7 8 6 5 Source: Eurostat COMEXT This change largely reflects a 25% decrease in the value of exports, more as a consequence of lower average sales prices than of lower sales volumes in emerging markets. However, note that while the export share to the Americas, Japan, Taiwan, South Korea, India, and Africa combined appears to be no more than 10%, this may possibly reflect direct shipments from manufacturing to purchasing countries. For instance, units of the Nokia N95 for the American market were shipped from China, and similarly, the large import share from China to Europe probably encompasses Apple iPhones given the low import share from North America. In this way the data may be misleading since a recent study of the Nokia N95 shows that even when produced in China and shipped directly to the US, Nokia still retrieved half the value added (Ali-Yrkkö 2011). 1.3 1.3.1 Critical factors Justification of critical factors The critical factors for the mobile device case have been selected based on a literature review, explorative interviews with key experts for the sector and discussions with DG ENTR. It has also been important to try to select different critical factors for the five different cases. In the mobile device value chain, a number of critical factors are apparent. Table 1.2 presents an overview of the critical factors identified. Table 1.2: Overview of critical factors in the mobile device value chain (Source: DTI) Generic critical factor Problems identified in literature Resources Input needs Technology High levels of concentration and density in some component areas Supply chain Structure Supply shortages in some component areas where configuration capacity cannot match demand Relations “Localised” Component supply vulnerable to earthquakes in Natural 15 Selected for further study Generic critical factor risks, high Selected for Problems identified in literature further study Japan density problems Strong investments in and push for next generation Socio-political 4G standards part of Chinese indigenous innovation policy Security “Global” risks, Macroeconomic ubiquitous Global governance problems Counterfeit phones flood low-end market, implying intellectual property rights infringements 9 Unparalleled user experience on Apple iPhone Competitive Nurturing competitors as a result of learning from participation in supply chain and possibly revealing trade secrets 9 For mobile devices, it can be seen that the two critical factors examined in more detail in this case study relate to the generic critical factors of security issues (counterfeit mobiles produced in China account for a significant share of units sold globally) and competitive issues (new successful Chinese labels have emerged since delocalisation of European and American supply chains). For an examination of critical factors related to the supply chain configuration and natural disasters readers are referred to the semiconductors case study as the risks involved are very similar. Assessments of critical factors Table 1.3 presents an overview of the selected critical factors, their risk, impact, risk mitigation strategies and the possible role that the government at national or EU level could play in mitigating the risk. The critical factors are analysed in more detail below. Table 1.3: Overview of critical factor risks and impacts, mitigation strategies and government role Generic critical factor Security Risk Impact Mitigation Government role - Trademark and - Counterfeit phones - Take legal action to - Continuous possibly patent affect ability to sell close manufacturing dialogue with infringements behind own brand phones sites and retail Chinese government flood of Chinese low both in China and in outlets (difficult, and governments in cost mobile phones emerging markets requires an effective outlet countries - Digital piracy of - Digital piracy mobile applications mainly affects ability to derive revenues in protection of intellectual property rights) China from - Lower price or application improve product development quality and services (however, current market potential questionable) 16 - Focus on niche markets not targeted by counterfeits Generic critical factor Competitive Risk Impact Mitigation Government role - Offshoring and - Limited evidence of - Not outsource R&D - Continuous contracting out direct impact of critical importance dialogue with - Emergence of - IPR protection and Chinese mobile protection of know- - Support phone how during development of manufacturers technology transfer, middleware allowing primarily driven by e.g., via non- single application increasingly cheaper disclosure coding to work hardware, and their agreements in across all operating pre-existing employment systems capabilities, and contracts production may be associated with unwanted transfer of capabilities strong financial backing Chinese government - Develop more difficult to copy software capabilities 1.3.2 Critical factor 1: security Despite progressively stronger statutory protection, enforcement of trademarks still lags significantly behind in China due to ignorance as well as local protectionism or outright corruption. Similarly patent and copyright protection is not comprehensive. Thus, companies have to contend with a burgeoning Chinese counterfeiting industry that sells close copies of branded mobile phones and applications at marginal cost. a) Risk: The most important types of intellectual property infringement encountered in China with regards to mobile phones concern illicit imitation of recognized brand products (i.e. counterfeiting), implying copyright, patent and trademark infringements, and copying of applications (i.e. ‘digital piracy’). Manufacturing and selling of shanzhai or shanzhai-ji (literally “bandit”) mobile phones has become a booming cottage industry in China, especially since Taiwanese MediaTek started to offer integrated system-on-chips including both the necessary hardware and software in 2004-2005. Numerous smaller manufacturers now replicate popular mobile phone designs – sometimes using components from the same suppliers as the real producers if located in China and often with added features like dual SIM card slots – and sell them under names such as Nckia or Somsung (“grey label” phones) or simply without logo (the less damaging “white label” phones) for substantially lower prices. Shanzhai phones are also exported to other countries in South East Asia as well as to India, the Middle East and Africa, and today constitute an estimated 15-20% of the global market in terms of units sold and about $9 bn in revenue. Thus, Shanzhai manufacturers are believed to have produced in the vicinity of 170-200 million phones in 2010 – up 70% from 2008 compared to 30% for regular mobile brand sales (iSuppli data). Moreover, as shown in Figure 1.6, export sales of these illicit phones are believed to have outsized Chinese domestic sales ever since 2008, where the Chinese grey market itself appears to have begun to shrink although this is not the case regarding smartphones. 17 Figure 1.6: China grey mobile phone shipments for domestic and export markets Source: IHS iSuppli Especially Nokia, which traditionally has held a strong position in the low-end market for mobile phones, has been affected by this new competition. This is corroborated by the trends depicted in Figure 1.7, which show that Nokia in the last few years has experienced growth rates at or below the global market average in all regions including Greater China, the AsiaPacific and the Middle East and Africa where Nokia has traditionally outperformed the global market by a significant amount. Figure 1.7: Nokia regional sales volume Source: Nokia (regional sales volume), Gartner (global market) Application developers on their side see their products hacked and copied/translated into Chinese almost as fast as they develop them in tune with the increasing prevalence of smartphones among Chinese consumers. This can imply not only copyright infringements, but also affect potential patent rights and trademarks. Given the typically low retail price of applications, this comes as a surprise to many European (and American) developers and particularly entrepreneurial pro-ams. However, it is a question whether current Chinese consumers would ever pay even €4-5 for an application, and since these pirate copies generally are not offered for sale on foreign markets, nor have any interest for the original developers’ home market consumers, the threat to developers of application digital piracy, in contrast to device counterfeiting, may be marginal. b) Impact: The success of the grey label (the Nckia’s and Somsung’s) and white label (no logo) mobile phone manufacturers, starting as a cottage counterfeit industry and today responsible for as much as 15-20% of mobile devices sold worldwide or some 170-200 million units per year, is not a trivial issue. This development is one of the reasons behind Nokia’s current struggles 18 in the low-end market, and illicit manufacturers in some instances are experiencing a transition to brand name status in emerging markets based on their combination of price and features. While these practices have come to the attention of Chinese authorities (not least as valueadded and sales taxes are not paid), actions to limit shanzhai-ji manufacturers generally have been ineffective due to the sheer number of companies and the profit to be made on these products. Moreover, while governments in, for instance, India and Kenya have taken or are planning to take action to close down counterfeit mobiles without IMEI (International Mobile Equipment Identity) numbers, such actions are proving difficult in practice due to the problem of properly distinguishing counterfeits from genuine phones based on IMEI readings alone.7 However, their development may be constrained somewhat by the current lack of a stable and affordable turnkey solution for the 3G market. Furthermore, consumers in emerging markets are expected to slowly turn away from counterfeits as they gain experience with their lower quality and lack of after-sales services and as purchasing power increases. It is difficult to discern the precise impact of the surge in counterfeit mobile phones on the value chains of legitimate mobile phone manufacturers as it primarily is a ripple effect of lost sales in end-user markets by OEMs and largely coincident with the impact of the current economic downturn. However, one estimate regarding the value of Chinese grey handsets tentatively suggests that at a global scale, sale of these mobile phones in 2010 was associated with a loss of component sales of approximately $6-7 bn (equivalent to 6% of estimated actual component revenues), assuming that the same share of mobile phone revenues went to cover components in counterfeit mobile phones as in legitimate mobile phones. This estimate is at the low end for a number of reasons, though. First, the estimated $9 bn value of counterfeit mobile phones only includes grey handsets and not the white label industry (IHS iSuppli data). Moreover, the $9 bn value reflects the average selling price of the counterfeit mobile phones and not the higher average selling price of the legitimate phones that would have been sold instead. Finally, the overall ratio between component revenues and mobile phone revenues does not reflect that the profit margin on the mobile phones for the low-end market that are being replaced is lower than the average profit margin for all mobile phones. All of these factors suggest that the incurred loss of component sales in reality is much higher although probably not equivalent to the share of units sold estimated to be counterfeits (15-20% or a component value of $16-24 bn) due to lower average selling price and the likelihood that some counterfeit mobile phone owners would choose not to buy a legitimate mobile phone if the counterfeit version was not available. In addition, it is estimated that some suppliers actually deliver components to the counterfeit mobile phones, working unregistered ghost shifts during off-hours. With regards to the issue of digital piracy of mobile applications, it is a problem, but as noted above, it is also unlikely that much of the copied material could be monetized at present. At least it would require an investment in translation and an entirely different pricing strategy to 7 http://phonesinkenya.com/196/counterfeit-mobile-handsets-to-be-switched-off/ 19 make the applications affordable. However, there is little doubt that much of the future added value in smartphones will come from mobile applications, and that it consequently is an area of uncertainty for European application developers that needs to be rectified. c) Mitigation: There is not much individual companies can do about the burgeoning cottage industry around counterfeit mobile phones except demand the closure of manufacturing sites and retail outlets whenever and wherever they are found, and if possible try to sue for liabilities. However, it is the impression that any such action has limited overall impact. Although protection of intellectual property (IP) through courts and others in China is still a challenge, it is highly important that companies protect all their intellectual property rights in China via registration as early as possible, and in any case before any transfer of know-how or trade secrets. IP rights should be filed, regularly maintained and/or updated. Several additional pro-active actions can help to protect from counterfeiters, including the raising of IP-consciousness of employees and business partners as well as staff training on IP, the monitoring of patents filed by competitors and regular trademark searches in order to detect 'copycat'-registrations, the control of access to IP at each stage of production, sourcing and sale, the creation of trustworthy business relations and preparation of necessary reactions in case of infringements. In such cases, it is necessary to take anti-counterfeiting action in order to deter counterfeiters from continuing to infringe relevant products. The China IPR SME Helpdesk provides free information, advice and training support to European SMEs to assist them in protecting and enforcing their IPR in China.8 Retrospectively, a decision by OEMs not to outsource or offshore to China might have had a mitigating effect on the size of the problem, since the counterfeit industry to some extent is premised on the existence of a value chain with surplus capacity, experience and ideas to draw on. Yet the decision to outsource and/or offshore was made in order to stay competitive, and it is questionable how much of an option it would have constituted, at least from a short term financial perspective. Given the unfeasibility of this option, enterprises must either lower their prices in emerging markets as Nokia has done with some success based on the latest quarter market share figures available (Q3 2011), or look to improve product quality and related services so much as to make the price difference acceptable or cater to a less price sensitive segment (e.g., the high-end market for smartphones). In addition, there would appear to be some potential for niche phones aimed at affluent markets, such as the mobiles made for elderly sold by Swedish Doro, which do not at the moment look like obvious counterfeit targets. d) Government role: A risk mitigation strategy at EU level mentioned by one of the interviewees is to continue discussions with China at governmental level on intellectual property rights issues and reach a common understanding of what can be done. Much is already being done, but it is important that the strategy continues, as the problem is expected to persist in the foreseeable future. Also governments of other outlet countries for counterfeit mobile phones and digitally pirated applications could be targets for such discussions. 8 www.china-iprhelpdesk.eu 20 1.3.3 Critical factor 2: competition A number of new Chinese mobile phone manufacturers have emerged since the delocalisation of European and American supply chains, including Huawei and ZTE, but also less known manufacturers internationally such as Ningbo Bird, TCL, Konka, and Haier. The timing of these companies’ entry into the Chinese and global markets suggest that their success may be based on learning from participation in existing value chains and can be linked to a leak of trade secrets. a) Risk: An inherent risk associated with extending the value chain beyond national or regional borders is inadvertently helping some of the companies tied into the value chain acquire the capabilities to move up the value chain and ultimately challenge the outsourcing company. One known example of this in the mobile device area is Taiwanese BenQ first hired by Motorola to design and manufacture some of their mobile phones, but which in 2004 began selling competing mobile phones in the Chinese market under its own brand name. Although BenQ more recently has exited the mobile phone market altogether after its failed acquisition of Siemens’ flailing mobile unit, this shift from ODM (Original Design Manufacturer) to OBM (Own Brand Manufacturer) at the time led Motorola to stop all further collaboration with the company. Similarly, the decision by Taiwanese HTC to launch its own brand smartphones in 2006 led to the loss of a number of ODM contracts, including with Palm (an American brand of personal digital assistants converged into smartphones, acquired by HP in 2010) and now defunct i-mate (a small-scale ODM based vendor of pocket PCs and early Windows mobile phones established in 2001 and closed in 2009). However, in this case it is less clear whether improved capabilities were derived from this collaboration per se, or whether the collaboration was a result of HTC’s already strong design capabilities for the Windows Mobile operating system. Yet as shown in Table 1.4, the extent of outsourcing by leading mobile phone brands to ODMs and EMSs already in 2005 suggests the availability of more or less open opportunities for learning from participation in existing value chains. In addition, by establishing in-house manufacturing capabilities in various regions, including in China, the brand name OEMs have for a long time themselves employed significant numbers of local workers and engineers. Table 1.4: Global outsourcing of brand names (OEMs) Extent of outsourcing, 2005 (% of production) EMS ODM Nokia 15 0 Sony-Ericsson 40 60 Siemens 30 30 Motorola 10 50 Samsung 0 0 21 Extent of outsourcing, 2005 (% of production) LG EMS ODM 0 0 Source: Newport Technologies Furthermore, Chinese mobile phone manufacturers’ acquisition of the capabilities to move up the value chain has been facilitated by: • government requirements early on for foreign companies to invest in joint ventures involving advanced technology in order to gain access to the Chinese market; • an intricate tiered patent system designed to let Chinese enterprises have an opportunity to block patent awards to foreign companies through application for lesser patents applying a very lenient definition of invention. Indeed Chinese enterprises are encouraged to do this through government subsidies and/or preferred treatment based on the number of patents obtained. As defined in the most recent Medium- and Long-term Plan for the Development of Science and Technology (2006-2020), the overall aim of these policies is to enhance “original innovation through co-innovation and re-innovation based on the assimilation of imported technologies” (as translated in McGregor). b) Impact: In terms of impact, it may be argued that Chinese mobile phone manufacturers have been very adept at acquiring the necessary capabilities to assemble their own mobile devices and acquire a substantial global market share (Huawei and ZTE alone accounted for 6% of all units sold in the third quarter of 2011 whether under their own name or an operator’s name, e.g. Orange or Vodafone). For instance, Huawei has, at different times, formed alliances with companies up and down the value chain such as Texas Instruments, Motorola, Intel, Nortel, Agere, Altera, Sun Microsystems, NEC, Lucent and 3Com, while ZTE and Ningbo Bird at critical points have joined forces with, for instance, Japanese Kyocera and French SAGEM respectively. In addition, several of the firms have actively employed engineers from stateowned Beijing Capital Telecommunication involved in the very first joint ventures with Nokia (Xie & White, Xielin & Dalum). Yet, at the same time, it may also be argued that the technology involved in manufacturing mobile phones is quickly becoming commoditized, enabling the increase in suppliers with the capabilities to manufacture and assemble a mobile device (this is especially so with the ready availability of turnkey solutions providing the necessary integrated software). Moreover, none of the above Chinese manufacturers, Huawei, ZTE, Ningbo Bird, TCL, Konka, and Haier, started exactly from scratch. Thus, each of the companies had pre-existing advantages in the form of manufacturing capabilities and distribution channels established in relation to related products such as telecom equipment (Huawei, ZTE, Ningbo) and home appliances (TCL, Konka, Haier). In addition, each had money or at least government backing – even if the implementation of and adherence to Chinese national innovation policy is unpredictable in practice – and some had strong R&D capabilities (the telecom equipment companies in particular). 22 Ultimately, it thus may turn out that the learning experience drawn from manufacturing grey and white label phones discussed above has a bigger impact on the mobile phone industry, already having resulted in a 20% global market share (although profits are unknown). The presence of many big suppliers with reserve capacity and a host of independent design houses has unexpectedly created an amenable environment for experimenting with and optimizing a new breed of highly marketable mobile devices. In short, the problem for Nokia and other manufacturers in the low-end and mid-markets is that these phones are no longer very complicated, high-tech products (although neither are they low-tech) and that they therefore can be relatively easily imitated and sold at prices which are not sustainable for the original manufacturers. More speculatively, the shady activities of the grey and white label manufacturers may even have been treated with some leniency by Chinese law enforcers insofar as this type of sandpit might develop the necessary capabilities to build large legitimate taxpaying companies (at the moment the 20% global market share is distributed across a lot of small-scale manufacturers). c) Mitigation: The risk mitigation strategies identified are to keep strategic knowledge as close as possible and to protect intellectual property rights, in this context particularly know-how and trade secrets before, during and after technology transfer. This involves an alert approach to IP when choosing the right partners and structuring technology transfer in order to prevent IP from being inadvertently leaked or intentionally misappropriated or misused. A modular strategy implying different Chinese suppliers, so that no single supplier can produce the product, or a phased implementation that allows testing of the Chinese partner before transferring more technology, can be valuable. Confidentiality agreements, non-competition agreements for certain employees or provisions limiting or prohibiting the Chinese party from reverse engineering should be applied where possible. The registration of patents, trademarks, designs and copyright remains a prerequisite for an effective protection of IP in the context of technology transfer. More information, advice and training on IPR issues and technology transfer can be found in the China IPR SME Helpdesk.9 Nokia has only indirectly had problems with nurturing competitors in China in the form of shanzhai manufacturers exploiting existing supplier capacity and cheap technology and know-how, while not being directly involved in Nokia’s value chain. However, Nokia has also kept a strict strategy of offshoring and retaining design and platform solutions in-house. This means that responsibility for R&D can be carried out near production sites with minimum risk of knowledge leaving the company. In addition, if outsourcing has been necessary, it has mainly been routine tasks that are not key to the company’s core business. McGregor (2010) suggests two other more generic mitigation strategies: “Some figure that they may be better off entering into technology partnerships with Chinese government companies to have their products qualify as indigenous innovation and reap the profits for a few years before unloading those divisions as it becomes apparent their global prospects are likely doomed by the China deal. Others are looking to tap into Chinese indigenous innovation funds and partner with Chinese companies to enter into adjacent businesses where 9 www.china-iprhelpdesk.eu 23 they aren’t real players. Aerospace, telecoms and transportation are seen as the ripest opportunities under this scenario.” Finally, provided that hardware manufacturing capabilities are no longer as big a differentiating factor as before, companies must look to develop unique software and/or software supporting capabilities, also as a necessary building block in order to feed into growing smartphone value chains. d) Government role: It is very difficult to mitigate this risk at governmental level. However, as this risk is closely connected with the critical factor of security, one way of indirectly affecting this critical factor could be through engaging in talks with the Chinese government on how the issues could be solved. In addition, it might be considered supporting with public research funding the development of middleware allowing for interoperability between various operating systems and software environments – not least if HTML5, currently under development, fails to provide such ubiquitous solutions to the problem of versioning of applications specifically tailored to the functioning of each operating system. Also coordination of application development in areas of general interest, such as healthcare could be an option. 1.4 Critical regulatory framework conditions China is party to international agreements to protect intellectual property. Nevertheless, a company must register its patents and trademarks with the appropriate Chinese agencies and authorities for those rights to be enforceable in China. Copyrights do not need to be registered but registration may be helpful in enforcement actions.10 This means that, in theory, trademark registration is enough to protect a company, but in practise, this is less so as the section on security as a critical factor shows. This clearly affects the value chain both upstream and downstream, as it impacts European companies’ ability both to outsource and to enter the Chinese market. 1.5 Strategic outlook The different actors have different objectives: • The objective of companies is profit: large corporations looking closely at quarterly profits and shareholder satisfaction while, at the other end, small companies look for cash and survival. • The EC and Member States, despite the pressure of short-term events, look at the development of Europe (and states) with longer-term objectives of growth, employment, welfare, etc. These differences are reflected in the ranking of various risks, in terms of probability as well as in terms of impact from a time perspective, as summarized in Figure 3.6. 10 http://www.mac.doc.gov/china/docs/businessguides/intellectualpropertyrights.htm 24 Figure 1.8: Impact and probability of risk Source: DTI. ST = Short Term (within three years). LT = Long Term (three to ten years). It is extremely difficult to quantify both the probabilities and the impact value. It is easier to determine whether, over time, the probability of a risk to happen and the cost of it happening is increasing or decreasing. This graph is thus not intended to give any ‘real’ value impact of the various risks but only to rank them in the short-term and longer-term as well as show how the probability might evolve. Security: The likelihood of security issues in the mobile device value chain decreases slightly over time as companies get accustomed to doing business in China. Also the impact of security issues is expected to decrease, as the market for grey and white label mobile phones decreases, due to a lack of new features and as some grey and white label manufacturers turn into regular competitors. Competitive: The likelihood of nurturing competitors in the mobile device value chain is relatively constant over time. In contrast, the impact is likely to increase if the price of hardware continues to decrease and the distinction between companies becomes more and more design and software related. The ‘best’ risk is the one in which both probability and cost are decreasing. The ‘worst’ is where both probability and cost are increasing. If we follow this assumption, the competitive risk should be tackled more urgently. To strengthen the European value chain and increase its competitiveness the following is suggested: 25 EU and Member State level: • Continue discussions with China and outlet markets for counterfeit phones at governmental level on intellectual property issues • Support development of software and components allowing for interoperability between various operating systems and software environments • Support/coordinate application development in areas of general interest Company level: • Refrain from outsourcing key competences • Develop the necessary software and/or software supporting capabilities to differentiate from competitors and become relevant for smartphone value chains • Anticipate intellectual property rights protection and avoid leakage of trade secrets A SWOT on the key issues is presented in Table 1.5: Table 1.5: SWOT for European mobile devices value chain Strengths Weaknesses Opportunities Threats - Traditionally strong - Too conservative in - Attract foreign - Success of grey and white sector in Europe devices segment companies and venture label manufacturers, IPR compared to especially capital to maintain strong infringements US sector in selected MS - Strong performance especially in the (and perhaps European middleware segment level) - Success and backing of legitimate Chinese mobile phone companies - Identification of smartphones with iPhones 1.6 Annex 1: interviews Name Title Organisation Country Petri Liuha Software architect, former Director of Embedded Systems Technologies Initiatives at Nokia Research Centre Nokia Research Centre Finland Jari Vaario Director of IPR Strategy Programs Nokia Group Finland Claudio Feijoo (recommended by the JRC) Faculty member, affiliated with the JRC Universidad Politécnica de Madrid, CeDInt Spain Thomas Pattloch Councel, former IPR officer for the European Commission in Beijing Taylor-Wessing Germany (deep knowledge of China) Simon Cheetham Team leader China IPR SME Helpdesk UK (deep knowledge of China) Simon Forge Owner, SCF Associates and Telecommunications Consultant SCF Associates UK Marc Laperrouza (recommended by the JRC) Professor, affiliated with the JRC École Polytechnique Fédérale de Lausanne Switzerland 26 1.7 Name Title Organisation Country Pieter Hientjens CEO and former key member of ESOMA (European Software Market Association) iMatix Corporation The Netherlands Annex 2: data issues Relevant data used Primary data sources for this case study were: PRODCOM Eurostat’s PRODCOM database contains data on total production in current price Euros by just under 3900 product codes, giving some scope to identify detailed products which form part of the Mobile Devices sector, over the period 1995-2009 (although often there is missing data for some years). This data provides detailed production for the EU (at an individual member state level) although does not include any non-EU countries. With respect to the Mobile Devices case study, the data covers telephones for cellular networks and other wireless networks, meaning that smartphones cannot be differentiated from feature phones. The use of production data is also questionable given that one of the key issues with mobile devices is where value is added, as preferred to where production takes place. COMEXT Eurostat’s COMEXT database contains data on trade (imports and exports) between EU member states and major trading partners, by value and volume, on a country by country basis across 1995-2010 (although some data points are missing), with data split across over 28,000 product codes. This data, unlike PRODCOM, does include military as well as civil aeronautics. The following product codes were used in the case study; The COMEXT data captures on a (relatively) consistent basis the trade between various states (and, more significantly, between the EU27 and major trading partners) across detailed product codes. However the product code for mobile devices covers all type of telephone, and as such is of very limited use. The gaps in the data also lead to some inconsistencies, with certain years including some product codes but not others, which is not always apparent in the final aggregated data. UN COMTRADE UN COMTRADE includes data on imports and exports in value (US dollars) and volume (kgs) terms on a product-by-product basis, and provides a similar level of detail to the COMEXT database (albeit on a different classification system, which presents an issue of having to map from PRODCOM or Combined Nomenclature codes to the SITC or HS system used by UN COMTRADE) for non-EU countries, so helping to complete the global picture/comparison. However, data is only available for a very limited number of years (2007-2009). Eurostat R&D This data, only available by broad sector and for limited countries, provides total R&D expenditure (in millions of Euros) at a national level. For the sectors of interest 27 (Telecommunications and Publishing of software) data was only available for the US and China (only Telecommunications). While the data can provide some broad insight into R&D activities, the non-specific nature of the categories make it difficult to draw out details, while the lack of data for the EU (in a dataset that is provided by Eurostat) is also problematic. Asymco Firm-specific data was used from Asymco, including information on sales volumes, revenues (in US dollars) and profit (US dollars), as well as providing some direct comparisons between the firms (such as share of total profits generated by the combined firms). These quarterly data covered the period 2007Q2 to 2011Q2 and included the largest eight firms in the industry (Nokia, Sony Ericsson, Motorola, Apple, Research in Motion, Samsung, LG and HTC). Gartner Data from the research firm Gartner, on a quarterly basis, was also used. At a firm-specific level, this data covered share of worldwide mobile device sales to end users and also showed the growth in the market for mobile devices (albeit with some missing values) over the period 2000Q1 to 2011Q1. Data gaps and requirements The two sides of the Mobile Devices market (hardware and software) both suffer from difficulties in sourcing accurate data. On the hardware side there is a lack of product differentiation, in some cases (e.g. COMEXT) between mobile devices and fixed telephones and in others between smartphones (i.e. those for which the vast majority of software development takes place) and feature phones (e.g. PRODCOM). This can at least in part be attributed to the relatively new nature of the market (particularly for smartphones); it is likely that future revisions of data classifications will lead to greater segregation in this sector. This problem is even more acute for software design – there are no official categories in the Eurostat databases covering software development, let alone a differentiation between development of software for traditional formats (e.g. PCs) and mobile devices. One further issue is the lack of data on the large counterfeit markets in Asia. 1.8 Annex 3: literature • • • • • Ali-Yrkkö et al (2011): Who captures value in the global supply chain? Case Nokia N95 Smartphone Anderson & Jonsson (2005) The mobile handset industry in transition. Article available online at http://www.jamieandersononline.com/uploads/The_Mobile_Handset_Industry_in_Transi tion.pdf Arete Research (2009) Handsets: Demolition derby. Investment note available online at http://www.arete.net/download.aspx?id=3222 Arete Research (2010) Mobile devices: Fight club. Investment note available online at http://www.telco2.net/blog/Mobile%20Devices%20-%20Fight%20Club%20%20240610.pdf Asymco (2011) A motion chart for the mobile phone market. Blog post 14 Aug 2011. Available online at http://www.asymco.com/2011/08/14/a-motion-chart-for-the-mobile- 28 • • • • • • • • • • • • • • • • • • • (links to vendor data spreadsheet available at phone-market/ http://www.asymco.com/hire-me/vendor-bubbles/) Bekkers & West (2008) IPR standardization policies and strategic patenting in UMTS. Draft of paper (to be) presented at the DRUID 25th Celebration Conference on Entrepreneurship and innovation – Organizations, institutions, systems and regions in Copenhagen, June 17-20 2008. Available online at http://www2.druid.dk/conferences/viewpaper.php?id=3722&cf=29 Biztech Africa (2011) Counterfeit handset crackdown to be ‘humane’. Biztech Africa 30 Aug 2011 Bloomberg BusinessWeek (2005) Outsourcing innovation. Bloomberg BusinessWeek 21 Mar 2005 Bloomberg BusinessWeek (2010) Nokia’s share slips as unbranded phonemakers, Apple gain ground. Bloomberg BusinessWeek 10 Nov 2010 Dittrich (2005) Nokia’s strategic change by means of alliance networks. A case of adopting the open innovation paradigm?. Article available online at http://www.openinnovation.eu/download/KDNokiacase20openinnovationNov2005KDittr ich.pdf Feng-Hsu, Lu-Jui & Hsiang-Heng (2011) Sustaining client relationships in the contract manufacturer own-brand building process: The case of a smartphone firm. International Journal of Business and Management, Vol.6, pp.59-68 Forge, Simon and Colin Blackman (2009): OLEDs and E-Paper – Disruptive potential for the European display industry, Joint Research Centre Ganea et al (2005): Intellectual property law in China Gartner Quarterly press releases on worldwide terminal sales to end users. Available online at http://www.gartner.com/it/section.jsp?type=press_releases&format=xhtml&year=2011& show_archived=true Goodman & Myers (2005) 3G cellular standards and patents. Paper submitted for presentation at Wireless2005, June 2005. Available online at http://frlicense.com/wirelesscom2005.pdf IHS iSuppli (2010) Gray-market cell phones impacted by Chinese government investigation. Market watch 8 July, 2010 IHS iSuppli (2011) China smartphone shipments rise. Press release 14 July, 2011 Lubman (2010) China’s ‘indigenous innovation’ policy creates obstacles for foreign business. Article in the Wall Street Journal 7 April 2010 Lubman (2010) China modifies government procurement policies, but foreign concerns remain. Article in the Wall Street Journal 19 April 2010 McGregor (2010) China’s drive for ‘indigenous innovation’ – a web of industrial policies Newport Technologies (2006) Developing business with Greater China handset vendors. Presentation available online at http://www.newporttechnologies.biz/GreaterChinaHandsetmarket.pdf Nokia Quarterly and annual information. Available online at http://www.nokia.com/about-nokia/financials/quarterly-and-annual-information Lesser (2008) Trade and innovation project – Case study No.1: Market openness, trade liberalisation and innovation capacity in the Finnish telecom equipment industry. OECD Trade policy working paper No.73 Phones in Kenya (2011) Counterfeit mobile handsets to be switched off. Phones in Kenya 26 Aug 2011 29 • • • • Research in China (2011) Global and China lithium battery industry report, 2010-2011. Report abstract available online at http://www.researchinchina.com/Htmls/Report/2011/6218.html Sepälä (2010) Transformations of Nokia’s Finnish supplier network from 2000 to 2008. In Ali-Yrkkö (ed.) Nokia and Finland in a Sea of Change. ETLA (Research Institute of the Finnish Economy) Xie & White (2005) Latecomer strategy: Leveraging and learning by China’s handset makers. INSEAD Working paper series Xielin & Dalum (2008) Path-following or leapfrogging in catching-up: The case of the Chinese telecommunications equipment industry. Article available online at http://vbn.aau.dk/da/publications/pathfollowing-or-leapfrogging-incatchingup(0068dfc0-af49-11de-a179-000ea68e967b).html 30