China’s technology standard strategy: more than a standard war?

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

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

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

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

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

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About Yin Li

As a graduate student of economic development, my interest is in understanding innovation, which in my belief, the key dynamism of a modern economy. Through visionary strategy, mobilized organization, and committed resources, successful industrial enterprises generate innovations that have shaped national economy and the world we are living in. Since the beginning of 20th century, innovative enterprises have played the central role in the rise of the American, European and Japanese economy. Now a similar process is inevitably happening in China, which I am devoting this blog to.

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