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Editors at ChinaAnalysis.com are planning a major transformation of our website. In the upcoming ChinaAnalysis.com, we will bring a new model of knowledge sharing as well as more original contents. A brand new look and more useful tools will also be provided to our readers. But, we will continue to focus on the emerging Chinese competitiveness on industry and innovation.

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Chief Editor at ChinaAnalysis.com

About ChinaAnalysis Opinion

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The ChinaAnalysis Opinion page seeks to provide insights into, and generate discussion on, important issues relating to innovation and economic development in China. The intent is to facilitate and encourage knowledge sharing among academics and practitioners with expertise on Chinese innovation, competition, and economic performance.  If you are interested in making your opinions, based on your research and experience, visible to a broad global audience, please contact Yin Li, our Opinion editor at yin_li@chinaanalysis.com.  Submissions to the Opinion page, which should not be more than 1,000 words, will be considered for publication by our Editorial Board.

ChinaAnalysis Opinion Editorial Board:

William Lazonick, the University of Massachusetts and the AIRnet
Yin Li, Georgia Institute of Technology
Yifei Sun, California State University, Northridge
Hao Xie, ChinaAnalysis.com
Yu Zhou, Vassar College

Competition and Collaboration: Impacts of MNCs on China’s Cloud Computing Industry

Since IBM announced in February of 2008 that it would construct China’s first cloud computing center in Wuxi Taihu New City Science and Education Industrial Park (K-PARK), multinational companies (MNCs) have been influencing and shaping China’s cloud computing industry in a number of different ways.

With their strong technological capabilities and first-mover advantages, MNCs have already seized a considerable market share in China. Chinese indigenous cloud firms are under great pressure at their nascent stages. Though Chinese domestic cloud companies have accomplished a great deal in innovating cloud computing application software and datacenter hardware, MNCs are still dominating the markets for high-end cloud computing operation systems, platform software, and large-scale databases.

Today, Chinese domestic firms are facing growing competition from MNCs which are accelerating their strategic rollouts in China. Multinational cloud firms offer highly competitive products for each cloud computing niche market. In the IaaS (Infrastructure as a Service) market, products offered by MNCs include Hyper-V by Microsoft, SmartCloud Enterprise by IBM, vCloud by VMware, CloudSystem by HP, XenServer by Citrix, Unified Computing System by Cisco, etc. In the PaaS (Platform as a Service) market, various platform products offered by MNCs include WebSphere by IBM, Windows Azure by Microsoft, Cloud Foundry by VMware, Force.com and Heroku by Salesforce, etc. In the SaaS (Software as a Service) market, MNCs offer diversified cloud computing applications, including Lotus Live and Tivoli Live by IBM, Dynamics Online and Microsoft Online Services by Microsoft, Salesforce CRM by Salesforce, etc. Furthermore, in the cloud datacenter hardware market, some multinational companies like Intel, AMD, EMC, Citrix, NetApp, Cisco, HP and IBM are also posing fierce competition to Chinese domestic hardware providers.

While MNCs are posing great challenges to China’s cloud computing industry, they have also facilitated the development of this emerging industry through different forms of collaboration with Chinese indigenous cloud firms. According to the forecast by CCID (China Center for Information Industry Development), the Chinese cloud computing market size will increase from 16.7 billion RBM in 2010 to 117.4 billion RMB in 2013, with a compound annual growth rate of about 92% (CCID Consulting, 2011 April). To access the huge potential market, an increasing number of MNCs are actively seeking partnerships with local Chinese governments and domestic cloud computing firms.

The partnership between America’s EMC and China Electronics Corporation (CEC) is a prime example. According to Xinhua News’ report on May 22, 2011, Chenghui Ye, the Senior Vice President of EMC & President of Greater EMC China, stated that “In China, neither government customers nor enterprise customers are willing to completely outsource their cloud computing projects to an American company. Therefore, we have to partner with Chinese domestic firms or establish joint ventures”. On May 19th 2011, EMC and CEC signed a strategic cooperation memorandum under which the two companies will collaborate in the development of next-generation information management and storage systems, information security solutions, and server technology. In the initial stage of the collaboration, CEC will launch its own brand storage product and build a technical support system. As the collaboration deepens, the two parties will establish a joint venture and discuss other forms of collaboration such as ODM (Original Design Manufacturer), technology licensing, joint R&D, etc.

Many such examples of market and technology collaborations between multinational and domestic firms have been seen in China’s cloud computing industry over the past several years. Through these interactions and partnerships, Chinese indigenous cloud computing firms have not only gained valuable technology know-how but also learned advanced management experiences from MNCs.

The impacts of MNCs on China’s cloud computing industry are complicated and the dynamics of competition and collaboration between multinational and domestic firms will continue to influence and shape the industry’s evolution. Through the strengthening of international technology collaborations and the growing innovative capability of indigenous firms, the outlook for the competitiveness of China’s cloud computing industry is very optimistic.

Yu Zhou: Bring Fair Trade to Electronics

Authorized by the author to crossed-post from the Huffington Post.

Reports about the inhumane or dangerous working conditions in Chinese factories that manufacture the innovative products for Apple, Inc. – most recently by the New York Times – have brought publicity Apple probably does not want. For this student of China’s high-tech industry, however, the revelations are not surprising. In fact, the Chinese media has reported on many of the problems ever since the 2010 spate of suicides at the factories of the Foxconn Technology Group, the Taiwan-headquartered conglomerate that assemble products in China for Apple and many other foreign high-tech companies.

Debates in the United States in response to these disclosures have been how to assign blame or whether consumers can force Apple to be more ethical. This is not enough. The problems are certainly not limited to Apple or Foxconn. The case highlights the evident flaws of the model of corporate social responsibility standards, enforced almost entirely by the global companies bent on maximizing their profits.

Here is the global structure of the electronic industry: Supply chain has shifted largely to Asia, and is dominated by the Original Equipment Manufacturing (OEM) model, in which the lead western companies focus on design and marketing while Asian contractors manufacture high quality and quantity of the products, with extreme flexibility and speedy delivery. The largest OEM is Foxconn, with more than 300,000 workers at its Shenzhen site alone. In this system, pricing power resides primarily at Apple, which could shift or divide orders to other OEM manufacturers in Asia with relative ease. Given that OEM profit margins are razor thin, reduced scales would seriously hurt the OEM companies. In addition, to have such a demanding company as Apple being its clients provides the “seal of approval” for the manufacturers. So they do their best to satisfy Apple. The “breath-taking” flexibility cited by the Times article comes not just from the hard driving OEM manufacturers; it is also achieved by the subcontracting system which can be mobilized quickly when demand grows and contracts just as quickly if particular parts or procedures become obsolete. This makes it extremely difficult for Apple, or anyone, to monitor the entire networks of subcontractors.

While the system clearly has worked for consumers and shareholders, the impact on workers and the environment is much less sanguine. To avoid negative publicity, the current model of corporate social responsibility requires leading companies to demand the practices in their supply chains be improved. Companies such as Apple or Wal-Mart Stores have adopted codes of conduct and audit their suppliers frequently for ethical behavior. Some suppliers have mended their ways; Foxconn, for example, has increased salaries and provided more social support. Yet the relentless pressure to cut costs has not changed, nor have the bargaining positions for the suppliers. With Apple allowing suppliers “only the slimmest of profits” and demanding cost cuts year after year, it is not surprising that suppliers “often try to cut corners, replace expensive chemicals with less costly alternatives, or push their employees to work faster and longer, ” according to the Times.

Improved human and environmental responsibilities involve increased costs. Yet the enforcement of corporate social responsibility standards by lead companies essentially shifts such costs down the supply chain. Suppliers are forced to fulfill existing conditions of the orders as being larger, better, faster and cheaper, while also meeting strict ethical and environmental standards. Hence consumers can have guilt-free use of the products without paying higher prices, and — in the case of Apple — not sacrifice a profit margin which according to an estimate by researchers at Asian Development Bank was a staggering 64 percent for the iPhone in 2009.

While the largest OEMs, such as Foxconn, have some bargaining power with Apple, the same cannot be said for its own downstream suppliers. Among these subcontractors, there are bound to be recurring rules violations concerning workers’ health, working conditions and environmental protection when the pressures on price and timing remain so intense. And when audits do find violations, it is entirely at Apple’s discretion to decide what action, if any, to take. It can punish suppliers if it chooses, but likely will drop them only if the overall supply system isn’t affected and substitutes are available.

So what to do? Fundamentally, the current model of corporate social responsibility system is flawed. Critics could demand that Beijing apply its own labor and environmental standards more rigorously. Yet monitoring millions of factories with expertise and vigilance is a challenging task, even under the best circumstances. China is a vast developing country with huge variations in regional economies and law enforcement. Most Chinese officials at the local level are not interested in giving factories there a hard time. Western ethical standards took decades, if not centuries, to establish; Chinese practices won’t change quickly no matter how hard domestic or foreign critics insist.

But there is another possibility, a version of the fair trade system developed for coffee growers and some other agricultural products. In this system, a third-party investigation sets floor prices based on responsible humane and environmental protection methods. In the electronics industry, the suppliers could use such reference pricing to increase their bargaining positions, and buyers could pay above the fair prices to claim meeting ethical standards. This should not be difficult in the electronics industry, where those in the trade know very well the prevailing prices and costs of particular products. And prices could be revised regularly to reflect technological innovation or wage increases. If some suppliers try to cheat the system by charging the fair price, but with substandard practices, their competitors will soon find out and the negative publicity could lead to contract cancellation. The beauty of the system is to use the subcontracting networks to monitor the contractors as competitors would always be on the lookout for cheating. Fair trade price does not eliminate market competition but curb its worst excesses and reward the responsible players.

One barrier is the electronics industry’s prevailing secrecy; its executives are reluctant to describe their supplier networks. However, the corporate responsibility movement already has eroded such secrecy, even for tight-lipped companies like Apple. This barrier should not be insurmountable.

Regardless of whether a fair trade system is the best alternative, it is important to recognize that we must move beyond the existing corporate social responsibility system monitored entirely by profit-maximizing corporations. If they are part of the problem, they cannot be counted on to fix it.

 

Yu Zhou is a professor of geography at Vassar College, author of “The Inside Story of China’s high-tech industry: Making Silicon Valley in Beijing.” She is a member of the ChinaAnalysis Opinion Editorial Board.

Indigenous Innovation Drives China’s Cloud Computing Industry

Since the concept of “Cloud Computing” was introduced in 2007, the cloud computing industry has become a new source of economic growth in China. With a growing number of cloud computing service providers, solution providers, system integrators, infrastructure and devices providers, a dynamic cloud computing ecosystem is gradually forming. Chinese indigenous innovators have played a critical role in leading this technological transformation. In the process they have built up a participatory cloud computing industry chain in China.

The Chinese government has placed great emphasis on the development of indigenous cloud computing. In 2010, cloud computing was listed as one of the new strategic industries in China’s 12th Five-Year Plan. The Chinese government has initiated several cloud computing bases in Beijing, Shanghai, Shenzhen, Dongguan, Suzhou, Hangzhou, Wuxi, Chengdu, Chongqing, Ningbo, Qingdao, Jinan, Tianjin, Langfang and Foshan. To provide financial support, China’s National Development and Reform Commission established a Cloud Computing Special Fund which, as of October 2011, had made an initial investment of 660 million RMB in 15 pilot projects in Beijing, Shanghai, Shenzhen, Hangzhou and Wuxi. Local governments are also providing active financial support to indigenous companies. Shanghai city government, for example, has established Yunhai Venture Capital which will invest 70% of the fund in cloud companies.

With the favorable political and financing environment, the growth of indigenous startups looks unstoppable. INTPLE, founded in 2008 by Sudong Yang, is one of the outstanding examples. Within three years, INTPLE has already applied several patents for technological innovations and has developed three core cloud platform products – AppOne, EngineOne and MasterOne . In August 2010, the National Innovation Fund gave INTPLE an award for its achievements in cloud computing technology innovation.

Skycloud Technology is another example of a fast growing start-up. The company was established in 2009 by Dr. Suning Tian, a PhD from Texas Tech University and also the founder and chairman of China Broadband Capital (CBC). Today, Skycloud has branches across 16 provinces all over China. Through active participation in the open-source community and prompt market response, Skycloud has developed its core competence in the open and cross-platform cloud technology.

Meanwhile, lured by the huge potential market, established indigenous technology companies with stronger capabilities are also entering the cloud computing field. Domestic firms are even outcompeting multinational companies in some niche markets with their competitive prices and localized products. UFIDA, for example, has been consistently recognized as the TOP1 management software enterprise in China and the largest ERP provider in Asia since it was founded in 1988. One of the early movers in the cloud computing business, UFIDA won the award of “China’s Representative Cloud Innovation Company” in 2011. Independent innovation has always been regarded as a key principle of UFIDA’s R&D strategy. After the launch of its SaaS (Software as a Service) product Wecoo.com, UFIDA has introduced its new PaaS (Platform as a Service) product Weiku platform, which serves as an online development platform for ISVs and developers.

Indigenous companies have contributed to the growth of Chinese innovative capabilities in each layer of cloud computing. The largest number of cloud companies are in the SaaS layer, providing diversified cloud applications. Some commercialized SaaS products include: Wecoo.com by UFIDA, youshang.com by Kingdee, Alisoft.com by Alibaba, 800APP CRM by 800APP, Xtools by Beijing Volitation, Leadong.com by Focus Technology, Qitongbao by Infobird, iFLY Voice Cloud by iFLYTEK, etc.

In the PaaS layer, leading Internet firms have started the transformation to the platform provider business model. But most of the efforts are still in the testing phase and not yet commercialized. Some published PaaS products include: BC-MapReduce by China Mobile, Sina App Engine by Sina, Baidu App Engine by Baidu, Weiku by UFIDA, cBOS by Kingdee, Aliyun Cloud Engine by Alibaba, QQ Cloud Platform by Tencent, 800APP PaaS platform by 800APP.
In the IaaS (Infrastructure as a Service) layer, Chinese companies are just in the exploration phase and very few of them have capabilities in conducting IaaS research and providing relevant public services. China Mobile, a state-owned company, has moved one step forward in this research field. The BC-EC product – which is part of the Big Cloud System launched by China Mobile in 2010 – is an IaaS product with independent IPR.

Cloud computing has aroused a technology and business revolution in China. While a national strategy of indigenous innovation is charting the direction of industrial development, it is indigenous Chinese companies that are bringing new products to the market. Cloud computing represents one of the latest cases of progress along “China’s path to indigenous innovation”.

New competitors from China’s hinterland

For a long time, the image of China’s high-tech exports has been linked with consumer electronics assembled in the country’s export processing zones. Within a global production network controlled by multinationals, components made by US, Japanese and Korean companies gathered in China’s coastal cities have been processed, assembled, and exported to the world market. This system is exemplified by the famous iPod model, “designed in California” and assembled in China. Today China continues to assemble iPods, but the overall pattern of China’s high-value-added export has vastly changed in the past few years.

According to a white paper produced by Economist Intelligence Unit (EIU), a consultancy, China is rapidly expanding the exports of technology- and capital-intensive products. In particular, the Chinese are invading the capital equipment export market, the traditional stronghold of US, Japanese and Korean multinationals. Between 2007 and 2010, China’s share of global export increased from 14.4% to 28.4% in shipbuilding, from 18.6% to 26.3% in motorcycles, and from 16.9% to 22.4% in derricks and cranes. As the Chinese export lower costs and higher quality products, they have become even more competitive in the markets of the developing world. In sectors like electric trains, tractors, and construction equipment, virtually all Chinese exports are going to non-OECD countries where the market shares of incumbent multinationals are shrinking rapidly.

While China’s share of world manufactured exports is steadily increasing, the share of China’s exports produced by foreign-invested manufacturers is declining after reaching its peak of around 60% in 2005. Thus, it is the indigenous Chinese companies that are making inroads into the mid- and high-end export market. More surprisingly, the new competitors are increasingly coming from China’s inland provinces instead of the developed coastlines. Take the construction equipment segment as an example. Formidable Chinese competition comes from three companies, Sany, Zoomlion, and Xugong. While the long-running national champion Xugong from coastal Jiangsu province was the first to enter the global top ten in 2009, the private company Sany and Zoomlion from inland Hunan province both leapfrogged Xugong to become the world’s 7th and 9 thlargest in 2010. The domestic leader, Sany is now not only ramping up its production bases in Brazil and India, but also tapping into the German engineering talent pool to produce in the heartland of Europe.

Compared with the electronic assembly lines in the coastal provinces, new competitors in the capital goods segments have developed entire supply chains. Their strong growth is rooted in abundant skills and industrial infrastructure developed in the Mao era. From the 1950s to the 1970s before the economic reform, China’s central planners overwhelmingly favored investment in heavy industry, particularly in inland China. Though most of the state-owned enterprises created at that time ran into difficulties with subsequent mass lay-offs in the 1990s, the significant improvement in business management and the abundant supply of machinists and metallurgists has transformed the industry. As inland China has gained access to the world market by the improvement of transportation infrastructure in the last decade, these indigenous firms quickly took advantage of the demand opportunities provided by first the booming domestic market, and now the whole developing world.

The rapid growth of these new competitive firms is now contributing to an economic boom in China’s hinterland. And indeed, the prosperity of the Chinese economy will be ultimately dependent on the innovativeness of these companies.