Ma Jun, Enterprise Research Institute of DRC

Research Report No.241, 2007

The communications equipment manufacturing industry in China made its start-up in the mid-1980s, and has experienced an innovation development process featuring "imitation", "following innovation" and "active following innovation". Today, Huawei and ZTE have become the leading producers of communications equipment in the world. The next 5~10 years will be a crucial period for the communications equipment manufacturing industry in China to make breakthroughs in independent innovation. Their innovation strategy will move from "active following innovation" to "active following innovation and seeking breakthroughs in key areas". In other words, they will actively follow the foreign leading enterprises in the areas where the latter are competitive and concentrate efforts to seek breakthroughs in the areas where the latter are less competitive. By seeking breakthroughs in key areas, these enterprises will gradually grow and enter the leading group of global communications equipment makers.

I. Chinese Enterprises Have Built up Capacities for "Active Following Innovation"

The Chinese enterprises have built up their innovation capacities in conformity with their "active following innovation" strategy. In essence, the "active following innovation" strategy is a mode of reformative innovation, which means the enterprises swiftly grasp the world’s most advanced technologies through active learning and then create cheaper and more customer-tailored products and services in light of market demands and by taking advantage of local human resources. The Chinese communications equipment makers began to pursue technological breakthroughs in the mid-1980s and gradually built the capacities for following foreign technologies. As a result, their gap with the foreign advanced technologies has become increasingly narrower, with the difference in the commercial application of key products being shortened from 20 years at first to only 1~2 years at present (see the table below).

Commercial Application of Key Products

Source: Compiled by this author.

Compared with the foreign leading enterprises, the Chinese leading enterprises have the following features in terms of their innovation capacities.

They have a fairly wide gap with foreign enterprises in terms of R&D input. According to the data for 2005, a foreign leading enterprise generally spent several dozen billion yuan on R&D, while a Chinese enterprise spent only several billion yuan. The R&D input of a Chinese leading enterprise, such as Huawei and ZTE, was only one-ninth and one-twentieth respectively of that spent by Nokia. While the Chinese and foreign enterprises spent similar amount of their sales revenue on R&D, the difference between the two came mainly from their gap in scale.

The R&D forces of the Chinese leading enterprises are close to those of the foreign leading enterprises. First, Huawei and ZTE have as many R&D personnel as the foreign leading enterprises do, about 10,000~20,000 people. Second, in terms of the proportion of R&D personnel to total corporate employees, Huawei and ZTE have surpassed the foreign leading enterprises. Third, there is a wide gap in terms of the absolute value of per capita R&D spending. But the gap in relative value is not so wide. It is found that in terms of two major indicators, namely the per capita R&D spending of a foreign leading enterprise and the per capita R&D spending of its R&D personnel, a foreign leading enterprise are 5~7 times higher than Huawei or ZTE. But as the cost of an ordinary R&D engineer of a foreign enterprise is about 5~6 times the cost of a Chinese enterprise, the gap between the Chinese and foreign enterprises in terms of R&D forces is not wide on the whole.

The Chinese leading enterprises have preliminarily established their global R&D systems. All the foreign leading enterprises have established their global R&D systems, including the global layout of their R&D institutions and the globalization of their R&D management. Huawei and ZTE have also completed the basic global R&D distribution, by establishing their subsidiaries in the main communications R&D bases around the world and by establishing their international R&D management systems. For example, most of their R&D institutions have introduced the CMM (capacity maturity model) and IPD (integrated product development) modes of process management.

They have established highly efficient R&D incentive mechanisms, mostly targeting short and medium-term R&D. With regard to personnel incentive mechanism, the Chinese leading enterprises such as Huawei and ZTE can compare favorably with their foreign counterparts. For example, ZTE has established a personnel incentive mechanism, which is result-oriented and features the two-dimensional evaluation based on performance and value, the mandatory distribution of evaluation grades and the close links between evaluation result and remuneration. As regards incentive mechanism for product R&D, there is a major gap between the Chinese and foreign leading enterprises. The foreign leading enterprises employ an incentive mechanism, which is oriented toward key technologies, intellectual property rights and technological standards. They concentrate their R&D forces mainly on long and medium-term product R&D. They only devote a limited part of their R&D forces to current products, and their R&D evaluations are not closely linked with the market efficiency of the products. Their R&D is primarily designed to win the leadership over the next-generation products. On the other hand, the Chinese leading enterprises employ a market-oriented incentive mechanism. They concentrate their R&D forces in the product departments, and their evaluation of R&D efficiency is highly related to the market efficiency of the products. Their R&D is primarily designed to win the market shares for their current products.

They have established the marketization capacities for the following innovation technologies, but their marketization capacities are weak for the leading technologies. The Chinese enterprises realize the marketization of their following innovation technologies by relying on the "low-cost and quality services" and by resorting to the swift reformative innovations in light of market demands. However, the Chinese enterprises have yet to establish their marketization capacities for the leading technologies. Because communications products are highly network-based, the leading technologies for marketization is a complex process. The practical experience of the foreign leading enterprises is that they first acquire patent rights for their leading technologies and embed their technological patents in the technological standards before relying on the powerful market forces to promote the internationalization and global market application of the technological standards. As the Chinese enterprises are weak in their capacities for original innovation and in market forces, they are still unable to establish the marketization capacities for the leading technologies.

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