Rapport Titel]

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: [email protected], 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 [email protected]
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
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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
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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
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