GlobalNetworkinginWireless Teletechnology Business

Transcription

1 GlobalNetworkinginWireless Teletechnology Business Lasse Baldauf, Michael Lovejoy, Jarmo Karesto, Laura Paija Technology Review 114/2001

2 Global Networking in Wireless Teletechnology Business Lasse Baldauf Jarmo Karesto Michael Lovejoy Laura Paija Technology Review 114/2001 Helsinki 2001

3 Tekes your contact for Finnish technology Tekes, the National Technology Agency of Finland, is the main financing organisation for applied and industrial R&D in Finland. Funding is granted from the state budget. Tekes primary objective is to promote the competitiveness of Finnish industry and the service sector by technological means. Activities aim to diversify production structures, increase productivity and exports, and create a foundation for employment and social well-being. Tekes supports applied and industrial R&D in Finland to the extent of some EUR 390 million, annually. The Tekes network in Finland and overseas offers excellent channels for cooperation with Finnish companies, universities and research institutes. Technology programmes part of the innovation chain The technology programmes for developing innovative products and processes are an essential part of the Finnish innovation system. These programmes have proved to be an effective form of cooperation and networking for companies and the research sector. Technology programmes promote development in specific sectors of technology or industry, and the results of the research work are passed on to business systematically. The programmes also serve as excellent frameworks for international R&D cooperation. Currently, a total of about 50 extensive national technology programmes are under way. Finpro Finnish business solutions worldwide Finpro is an efficient expert and service organization. Finpro provides services, support and information to help Finnish companies enter the international market as swiftly, safely and efficiently as possible. In addition to Finpro s operations in Finland, Finpro has 48 Finland Trade Centers in 38 countries worldwide. Finpro s global expertise areas focus on the most important industry sectors of the Finnish economy. Finpro s competence focuses on the industry sectors and market areas where Finnish companies have a special competitive advantage or that are interesting as potential markets. ISSN X ISBN Cover: LM&CO Page layout: DTPage Oy Printers: Paino-Center Oy, 2001

4 Foreword Networks, inter-firm alliances and cooperation between companies and the research community are important elements of today s business operations. Networking means not only vertical relationships, i.e. buyer-supplier relationships, but also cooperation in manufacturing, marketing and in research and development. The depth of cooperation varies however, from subcontracting to strategic partnerships. The driving forces behind networking are access to new markets and, increasingly, a tendency among firms to focus on core competence of the firm, thus leading to outsourcing of non-critical activities. Companies are operating in an industrial ecosystem of mutually supporting, and interdependent companies and other partners. To a large extent, today s competition means competition between these networks. For the National Technology Agency of Finland, Tekes networking is a strategic objective and a central element of all R&D projects. The Agency has extensive experience and knowledge of networking and cooperation trough national technology programmes, but its focus has been mainly on strategic R&D partnerships between national players. Although networking is an important element in private and public sector organizations, the impetus behind international networking as well as its mechanisms and benefits are not widely known. This report aims at helping companies initiate international cooperation in the field of mobile communications; it is designed as a networking aid providing vital information about networking environments in the most important mobile communications markets. This report has been prepared by a Finpro working group supported by ETLA, the Research Institute of the Finnish Economy, and other experts in the field of telecommunications. Tekes wishes to express its warm thanks to the project team for excellent work collecting benchmarking information on key players in the telecommunications industry and for analysing international networking mechanisms. Special thanks are also given to the steering group, composed of companies, the Finpro team and the Tekes representative. Through benchmarking visits and highly productive discussions this group contributed to gaining a deep understanding of the key elements of networking. We hope you will find this report useful for your international business development. Tekes, the National Technology Agency of Finland

5 Table of contents Foreword 1 Executive summary 1 2 Introduction 3 3 The ICT cluster in the Finnish economy 6 Laura Paija, ETLA 3.1 ICT cluster identification What is a cluster? The ICT cluster environment The economic relevance of the ICT cluster Domestic market position Foreign trade and international market position The evolution of the ICT cluster Network operation a fragmented monopoly market The emergence of the telecommunications industry The factors of the competitive advantage Firm strategy, structure and rivalry Factor conditions Demand conditions Supporting and related industries Government Coincidental factors Dynamics in the ICT cluster The government as an early catalyst of cluster development Exceptional demand conditions have offered home-base advantage Intense firm interaction has induced upgrading Deterioration in labor supply, improvement in capital supply World-wide liberalization pivotal and perfectly timed for Finland Future opportunities and threats Market positions at stake in the third generation competition Globalization behind most of the opportunities and threats Small firm size limits seizure of opportunities Dynamic cluster relations support specialization and upgrading Electronic business will have implications on firm interaction How to guarantee sufficient supply of skilled labor? Will content production grow into the third base of the ICT cluster? 23 4 Trends in wireless services and products 25 Jarmo Karesto, Finpro 4.1 Drivers in wireless content From mobile phones to wireless devices Customer segmentation Alternative network connections Wireless Internet Programmability 30

6 4.7 Personality Location identity Safety and security 31 5 Promising standards and technology platforms 33 Jarmo Karesto, Finpro 5.1 The evolution of third generation cellular networks G technology strategy plans by operators in major markets CDMA terminology and definitions W-CDMA WAP I-mode and other Japanese 3G approaches Bluetooth Wireless local area networks Operating systems in mobile devices, EPOC, Palm OS, and Windows CE Mobile Internet Protocol Version Major technology suppliers by key categories Useful links to get more free information: 44 6 Trends in The Global business environment 45 Michael Lovejoy, Finpro 6.1 Turbulent times Convergence Globalization Transnationalism Virtual Integration Importance of place New model of production in the ICT industry Globalization of the EMS model Types of outsourcing services offered and utilized Thoughts for the future 57 7 Generic growth strategies for technology companies in the network environment 59 Vipul Chauhan, Helsinki Univeristy of Technology, Jarmo Karesto, Finpro 7.1 Product strategy Strategic roles of collaboration Competence leverage in key customer relationship Key customer-driven growth strategies Key customer risk Managing Intellectual Property IP Rights Protection: Strategic Aspect IP Rights in Relationships 64 8 Getting global, road map for technology firms 65 Lasse Baldauf, Finpro 8.1 Which direction? Needs and requirements for global business The process for establishing a business abroad Wireless telecommunications industry value chain Connections to the business environment Importance of the cluster for SME s Key Success Factors 73

7 9 Benchmarked companies 75 Lasse Baldauf, Finpro 9.1 General Motorola Key figures, major businesses Global map Business strategy Research and development Distributors Contract electronic manufacturers Siemens Key figures, major businesses Global map Business strategy Research and development Distributors Contract electronic manufacturers Matsushita (Panasonic) Key figures, major businesses Global map Strategy Research and development Contract manufacturers Samsung Key figures, major businesses Global map Strategy Research and development Contract electronics manufacturers Nortel Networks Key figures, major businesses Global map Strategy Research and development Outsourcing, suppliers Cisco Systems Key figures, major businesses Global map Strategy Research and development Distributors Contract electronic manufacturers Solectron Key figures, major businesses Global map Strategy Research and development Key customers 84

8 9.9 Celestica Key figures, major businesses Global map Strategy Research and development Key customers Flextronics Key figures, major businesses Global map Strategy Research and development Key customers Conclusion 87 Appendix 1 The NACE codes utilized in the calculation of economic indicators for the ICT cluster 89 Appendix 2 Measuring the export specialization of a country 91 Technology Reviews from Tekes 93

9 1 Executive summary Production of Telecommunications equipment in Finland increased from about 5 Billion Fim in 1990 to nearby 80 Billion Fim in The production incorporates directly several hundred companies in electronics, metal, plastic and software industries and employs approximately people. Major part of the production was exported. This miraculous development is a sum of many factors, which have successfully supported each other. Liberalization of telecom services in early stage, building NMT network jointly with the other Nordic countries, great success of mobile phones worldwide, opening of telecom services for competition globally and growth of Nokia are all factors which have contributed to the success and created a very strong telecommunication industry in Finland. As a result the Finnish telecom technology know-how today is world class. However this blessed situation is extremely fragile and continuous growth is not at all granted. Nokia s role as a locomotive of the whole cluster in Finland will probably not continue forever. Nokia is growing fast outside Finland. More and more decision makers in Nokia s organization are representing other nationalities than Finns and we all know how important personal relationships are in business. At this moment the most critical issue is the internationalization of the cluster. If the smaller technology and service companies in the cluster can expand their business to new customers globally, it reduces their operational risk and the impact on the whole Finnish economy. The companies in telecom business face new type of challenges. Technology is developing fast and the future is not at all predictable. The business is much more innovation driven than capital driven. Merge of Internet, mobile phones and computers may create totally new needs for services and products, which are not identified yet. The business environment is moving fast. Earlier several locally operating companies in each business were sharing the market but the trend is to smaller number but globally operating key players. This is a result of globalization. R&D and production are organized globally according to the rules of the business not by following artificial borders and barriers. This new world map shows how R&D and production are concentrating in few locations. In the R&D map Finland and Sweden are centrally located beside USA and Japan. Manufacturing sites are locating near main markets. The other trend is networking. Companies are outsourcing non-critical activities and enhancing collaboration with partners and even competitors. Nokia is a good example of this. Totally new actors, like global providers of contract manufacturing services, have emerged in the business rebuilding the value chain. Speed has become a crucial competitive edge. Cisco System s famous slogan Innovations by acquisitions describes well the phenomenon. Companies are no longer doing everything by themselves anymore as it was still few years ago. Globalization and networking open totally new possibilities for smaller technology companies but the old strategies do not work any more. Global approach, focus on customer, concentration on core competencies, understanding value networks and the progress in business environment, networking with others, speed and capability to finance the fast growth are raw materials in building a successful strategy in telecom technology business. A key customer relationship can be a springboard to new customers and even to new businesses as many of the Nokia s smaller partners have recognized. Innovations, work processes, references, social competencies among many others are gaining importance beside technical competencies in new business environment. What should then be done to ensure that success continues? As mentioned earlier the most critical issue is the internationalization of the cluster. It is important to capitalize on the success with Nokia when entering new markets. This can translate to a speedier access to new customers and ability to manage the business through international networking. The focus of the national system of innovation should be more on innovativeness, global customer needs and ability to help the smaller companies in organizing their operations in international market environment. The key issue for public supporting organizations involved is to understand the new logic of the global telecom business and develop their services and mutual cooperation accordingly. 1

10 2 Introduction This report is an outcome of the Global Networking in Mobile Teletech business project conducted by the leading technology companies in mobile business in Finland (CCC Group, Elektrobit Oy, Fortel Invest Oy, JOT Automation Oy, Orbis Oy and Nokia Mobile Phones) Tekes (the National Technology Agency) and Technopolis Oyj. Finpro has been in charge of managing the project and producing this report. The goal of the project was to support the strategy process of each participant in the fast transforming business environment. The major focus was on mobile technology business, global business environment, corporate strategies, networking and small and medium-sized enterprise approach. Mobile services and applications were just briefly discussed when they had some relevance with technology business (but otherwise they were left out of this study). The project was carried out between fall 2000 and summer The working methods were workshops, study tours to USA, Germany and Japan and the company benchmarking studies. ETLA (the Research Institute of Finnish Economy) and Helsinki University of Technology were helping by carrying out part of the research work. The chapter ICT Cluster in Finnish Economy is a brief but an important review of the emergence and development of the telecom industry in Finland. The formation of the cluster and the growth of Nokia have mainly taken place in 1990 s but their roots are much deeper in the history. Special focus is put on cluster analysis to help the reader to understand the importance of various elements in the business environment which are discussed in later chapters. The ICT Cluster in Finnish Economy chapter was written by Laura Paija from ETLA. The Chapter Trends in Wireless Services and Products summarizes the various thoughts and views about the emerging customer needs defining the direction for the whole business. The chapter is not a comprehensive study of the subject but rather a summary of the those issues on which the leading people in the industry believe today. Customer needs concerning services and physical products are driving the business but hardware products and software applications make the services possible. The chapter Emerging Standards and Technology Platforms is worked out similar way as the previous chapter. The focus in this chapter has been on identifying those technological standards, either official or de facto, and platforms that are supposed to play important role in the foreseeable future. Standards and platforms create a solid base for fast changing, short time living products and services aimed at end users. They can also be important corner stones in strategies of small technology companies. The chapter Trends in Global Business environment discuss the forces and development trends, which are redrawing the business environment making the old strategies obsolete. Liberalization of global trade and investments makes it possible for businesses to reorganize globally their activities following the laws of business, not according to artificial regulations and boundaries. Fast developing information and communication technologies and logistical services greatly support this trend. Global business networks are emerging. Firms focus on their core competencies and grow their added value through alliances and cooperation. Old value chains are redrawn. Nokia, Elcoteq, JOT Automation and Elektrobit are good examples of companies, which have understood the ongoing change and have been able to quickly utilize the emerging opportunities in their businesses. The chapter Generic Growth Strategies for Technology Companies in Network Environment focuses on corporate strategies. This chapter is an introduction to the following chapter Getting global, Road Map for Technology Firms. The chapter introduces and offers generic strategy alternatives for small and medium-sized technology enterprises in network environment. This part was created together with the Institute of Strategy and International Business of Helsinki University of Technology. In the chapter Getting global, Road Map for Technology Firms the focus is turned to mobile telecom business in global market environment. The chapter introduces business cases and models and is created by studying various Finnish and international companies in Europe, USA and Asia. 3

11 The chapter Benchmarked Companies introduces several leading technology companies, their strategies and activities in mobile business. The companies were selected based on their importance for Finnish industry or based on their interesting business models. The benchmarked companies were thoroughly studied and interviewed. Summary of strategies, business models and other key findings are presented in this chapter. The last chapter Conclusions outlines the key findings of this project and gives recommendations to governmental and public business development organizations working closely with the ITC-cluster. 4

12 3 The ICT cluster in the Finnish economy Laura Paija, ETLA Dynamic interaction between these factors of competitive advantage gives rise to a self-enforcing system either virtuous or vicious, depending on the state of the factors (figure 3.1). 3.1 ICT cluster identification What is a cluster? 1 Clusters are used to describe a network of organizations in which competitive advantage grows from dynamic interaction between actors, both public and private. Cluster relations spur innovation and upgrading through spill-overs and knowledge transfers. There are different environmental determinants influencing the competitiveness of the cluster. These include factor conditions; demand conditions; related and supporting industries; and firm strategy, market structure and rivalry. Clusters are exposed to external forces, like government actions and chance, including changes in firms global operational environment The ICT cluster environment The network environment of the firms related to the information and communications technology (ICT) is depicted in figure 3.2. The ICT term is in general use worldwide but it has different meaning country by country. In Finland the weight is on telecommunication and in this study especially on mobile technology. The ICT infrastructure, terminals and services constitute a complex regarded as the key industries, whose interactions with other industries differ in their dimensions. There are vertical relationships with suppliers in the supporting industries and with customers; horizontal linkages between competitors within the key industries; and diagonal interfaces with third-party sectors, or related industries. Recently, the cluster portrait has become increasingly blurred. Three megatrends, namely convergence of networks, terminals and services, digitalization, and deregu- Government Firm strategy, structure and rivalry Chance Factor conditions Demand conditions Related and supporting industries Figure 3.1. The dynamic system of factors of competitive advantage. Source: Porter (1990). 1 The study is based on one of the most popular cluster frameworks introduced by Porter (1990). 5

13 SUPPORTING INDUSTRIES Parts and components manufacturing Contract manufacturing Education and R&D ASSOCIATED SERVICES Consultancy Venture capital Distribution channels KEY INDUSTRIES ICT EQUIPMENT Fixed and mobile network systems Terminals Hardware and software NETWORK OPERATION Fixed and mobile networks Data networks Internet Cable-TV Digital-TV NETWORK SERVICES AND DIGITAL CONTENT PROVISION Basic voice and data services Content (value added) services RELATED INDUSTRIES Traditional media Entertainment Advertising Booking services Banking Health care Public services Education Consumer electronics Figure 3.2. ICT cluster chart. CUSTOMERS lation have lead to a significant restructuring of the clear-cut telecommunications cluster that we were able to identify a few years ago. 2 The actors of the cluster are penetrating new, and to a large extent one another s business areas. Vertical mergers across traditional sectoral boundaries are used to strengthen new competitive positions. These fundamental changes lie behind the need to expand the previously utilized notion of the telecommunications cluster to the ICT cluster, which encloses a wider array of technology enabling digital services hardly existing in the early 1990s. Owing to the generic nature of the ICT, the cluster has innumerable interfaces with other industrial clusters. Representative crossing points are found in the related industries (figure 3.2), in which new sector-specific applications of the ICT are being developed. In addition, manufacturing industries are actively adopting new equipment developed in the interface of the clusters. 3 The overall economic impact of the ICT is likely to be even more powerful in the demand-side of the technology than in the supply-side, since innovative applications of the technology are about to revolutionize traditional business models in a number of sectors. 2 Luukkainen & Mäenpää (1994) carried out the first telecommunications cluster identification study as part of the initial national cluster research project, coordinated by ETLA (Hernesniemi et al., 1995). 3 Examples of industrial applications of ICT are: remote maintenance of machines in the mechanical engineering, self-supported health monitoring, location techniques in forestry, and intelligent consumer electronics. 6

14 3.2 The economic relevance of the ICT cluster Domestic market position The key figures of the ICT cluster for 1998 are presented in table The gross value of the cluster was EUR 17.5 billion. Manufacturing of equipment and their electronic components dominated the cluster, accruing two thirds of the production value, while the share of telecommunications services was one fifth of the value. The significance of software supply and other IT services is underestimated in the table since ICT equipment include an important amount of software, and the construction of telecommunications networks involves IT services that is included in the sales of equipment manufactures. The value-added generated in the cluster was in average 43 per cent of the gross value, ranging though between the sub-sectors of the cluster (see table). Figure 3.3 reveals the breakthrough of communications products in domestic production. Since Nokia s recovery (from 1992 onwards), the value-added in ICT manufacturing has grown at the average annual rate of 35 per cent. In 1998, the cluster contribution to the GDP was 6.6 per cent. Table 3.1. Key economic indicators of the ICT cluster in Source: Statistics Finland, Ministry of Transport and Communications. ICT Manufacturing ICT Services Cluster (total) Telecom services Software, IT services Euros (millions) Share of prod. Euros (millions) Share of prod. Euros (millions) Share of prod. Euros (millions) Share of prod. Production Value added Labor cost Exports Imports 11,631 3, ,543 1, % 32% 8% 82% 15% 3,408 2, % 60% 20% 3% 4% 2,500 1, % 69% 28% 37% 23% 17,538 7,497 2,339 10,585 2, % 43% 13% 60% 14% 5 % 4 % 3 % Equipment 2 % 1 % Telecom services 0 % Figure 3.3. The share of ICT value-added on GDP. Source: Statistics Finland, Ministry of Transport and Communications. Note: The figure excludes software and IT services as well as computers due to lacking data. There is a slight discontinuity in the data between 1994 and 1995 due a change in statistical classification. 4 Clusters do not follow sectoral boundaries. Sectoral data inevitably includes firms not active in the cluster, and respectively, excludes many important actors. For example, national statistics do not yet enable quantification of digital content production. However, the data on telecom operation and software production include some of these activites. Further, it is necessary to combine the data for electronic components (inputs) and ICT equipment (outputs), since many of the input suppliers are classified under the sector code of their main clients. Despite classification problems, the national data applied here covers the crucial business sectors of the cluster. See Appendix for the NACE codes included. 7

15 With its 75,000 employees, the ICT cluster accounted for 3 per cent of the total national employment in Nokia alone employed 21,000 persons in Finland and thus accounted directly for almost 30 per cent of the cluster employment. According to estimations Nokia employed indirectly an additional 14,000 persons through its first-tier subcontractor firms. 5 As production networks go further to sequential tiers, the employment effect of the major firm is significant, but cannot be readily quantified. However, without the chronic shortage of skilled labor the employment potential of the cluster would allow much higher recruitment Foreign trade and international market position In 1998, the export share of the total ICT cluster production was 60 per cent (table 3.1). In telecommunications services exports represented an insignificant share (3 per cent), while in equipment manufacturing about 85 per cent of the sales was accrued abroad. In 1999, ICT product exports represented 20 per cent of the total exports while 1990, the share was only five per cent. Figure 3.4 of the trade balance in cluster products illustrates the dominance of telecommunications equipment in the Finnish ICT cluster trade. Despite the persistent rise in ICT exports, the current value of non-telecommunications products has remained virtually constant. The growth in imports, in turn, depicts the dependence of the electronics industry of standard components (semi-conductors) rather than a rise in the demand of foreign telecommunications equipment. The pace and intensity of the growth in the Finnish electronics industry has been extraordinary throughout the Cluster imports Cluster exports Telecom imports Telecom exports Figure 3.4. Foreign trade in ICT and telecommunications products (millions of Euros). Source: National Board of Customs Electronics and electrotechnics industry Metal and engineering industries Paper industry Mechanical wood industry Other Figure 3.5. Export shares by industry groups Source: National Board of Customs. 5 Ali-Yrkkö, Paija, Reilly & Ylä-Anttila (2000). 8

16 ICT equipment Telecom equipment Finland Finland Sweden Sweden UK UK Japan USA Japan USA Figure 3.6. Export specialization in 1997 (RSCA index). Source: OECD. Note: The 1998 data was not yet available for all countries. See Appendix 2 for the definition of the RSCA index. 1990s. It has lead to an industrial restructuring in the former forest and metal based economy, in which knowledge has replaced capital, raw materials and energy as the dominant factors of production. During the past decade, Finland became the world leader in high-tech trade surplus (hightech exports/imports ratio) among indigenous high- tech producers. The share of electronics and electrotechnics exports has almost tripled at the expense of pulp and paper and metals, representing close to 30 per cent of the total manufacturing exports in 1999 (figure 3.5). In OECD comparison, Finland ranked the second in ICT exports specialization after Japan in 1997 (figure 3.6 left; see Appendix 2 for the definition). Limiting the comparison to telecommunications equipment 6 reveals that Finland had become the most telecommunications-oriented country in its exports in 1998 (figure 3.6 right). During the 1990s, Japan has lost its lead to the two Nordic countries, which have been racing for the leading position. In absolute terms, Finland accounted for 4.4 per cent of total OECD telecommunications equipment exports, being in the seventh position in cross-country comparison in The evolution of the ICT cluster Network operation a fragmented monopoly market Despite the prominent role the telecommunications manufacturing sector has played in the recent industrial structural change in Finland, a glance at the history reveals that it was the advanced network operation rather than equipment manufacturing that formed the ground for the industry to develop. Since its early days, the Finnish telecommunications market has had a tendency of early adoption of the latest technology both in the manufacturing and operator sector. The first indication of this feature was the introduction of the telephone in Finland only a year after its invention in The first telephone companies were established in 1882, and by the end of the century, all the cities of Finland had a telephone company. 6 SITC rev3 class 764 (Telecommunications equipment n.e.s & parts n.e.s). 7 Shares of OECD telecommunications exports in 1997 (totalling USD 104 billion): 1. USA Japan UK Sweden Germany France Finland Korea Canada Mexico 4.2 9

17 Unlike in most of the European countries, the telephone network ownership was not monopolized by the state. Beside the national public telecommunications operator (PTO) there was a growing number of private local telephone companies that operated in their exclusive concession areas. In the 1930s, their number was no less than 815 (yet it decreased drastically between due to structural regulations). Thus, the market could be characterized as a fragmented monopoly market. Initially the fragmented market structure was a political outcome. In the turn of the 20th century, when Finland was setting the ground for its telecommunications, it was a Russian Grand Duchy. The Tsar authorized the Finnish Senate to grant licenses in telephony operation. However, there was a threat of seizure of the national telephony by the Tsar, which provoked the Senate to decentralize the network ownership to discourage confiscation. In 1921, the private companies founded the Association of Telephone Companies aiming at administrative cooperation and joining forces in face of the PTO, who acted as the regulatory body authorized to redeem poorly performing operators. Indeed, the threat of nationalization worked as an effective means of technical upgrading. Over the years, the Association grew a powerful opponent to the PTO, giving rise to a duopolistic market structure. There were several intentions throughout the decades to nationalize the private operation, but there was nor enough political coherence neither financial means to realize such endeavours. State redemption of the long distance operation in 1934 was one exception to the rule. 8 In 1971, the Nordic Telecom Conference, consisting of national Post and Telegraph Administrations, initiated a research project on an automatic Nordic mobile telephone (NMT) network, which was going to set the foundation for the consumer-oriented mobile communications. The Conference agreed upon the rules on the cross-border roaming, billing and, perhaps most notably, the openness of the technical specifications. Based on their experience, the Conference played an active role in initiating the Groupe Special Mobile (GSM) in 1982, and in designing the pan-european digital mobile network. The introduction of the NMT in made the Nordic countries the largest mobile market. The number of subscribers expanded at an unanticipated rate, exceeding the initial capacity in a short time in all member countries. The mobile market started to attract also private operators, whose license applications were however rejected by the regulator-pto that pleaded to the natural monopoly nature of the market. In fact, the dispute over the PTO s monopoly rights had its roots in the 1960s. The operative Imperial Telephone Decree of 1886 could not provide an unambiguous interpretation of the statutory rights to provide novel network services, such as data transfer, telefax and teletex. As a response to the intensifying dispute the new Telecommunications Services Act was enacted in 1987, reflecting the start of a new era in the telecommunications regulation. For example, it separated the administrative and operational functions of the PTO, transferring the regulatory authority to the Telecommunications Administration Centre, which was established under the Ministry. It also made possible the license of Datatie, a joint venture of private operators and their main corporate clients, in 1988, representing the first major chunk of the public monopolized market allocated to the private sector. The first amendment to the hundred years old Telephone Decree was followed by a gradual but full liberalization of the telecommunications competition, finalized in Having been repeatedly denied a license to operate an NMT network, private operators established with their main corporate customers a joint venture, Radiolinja. It was to operate a GSM network that was constructed and leased by local operators. This was made possible by the new Act that authorized full telecom service provision within concession areas. However, in order to provide nation-wide services Radiolinja needed a license. The license application necessitated fundamental changes in the telecommunications regulation provoking a fundamental political dispute primarily ideological of nature. In 1991, Radiolinja, as the winner of the regulatory battle, was the first operator in the world to launch commercial GSM services. The liberalization meant fundamental organizational and regulatory changes for the PTO. In order to be able to respond to the competition it was changed into a public corporation with no budget obligations to the government. It launched GSM service soon after Radiolinja thus, among the very first in Europe. In 1994, the PTO was demerged, and Telecom Finland became a limited company with the State as the major shareholder. In 1998, the name of the company was changed to Sonera to pinpoint the change in the strategic focus redirected to mobile services and technologies. 9 The company 8 There were also occasional acquisitions of operators by the state, motivated by national defence and technical concerns. 9 In 1999, the digital mobile services represented 60 per cent of the turnover. 10

18 underwent a quick metamorphosis from a national telephony operator to a global pioneer in Internet and mobile applications. 10 The Government has reduced its ownership and indicated further privatization in due course The emergence of the telecommunications industry Unlike in many other countries, in Finland the equipment market has always been open to competition. Up until the 1980s, the market was dominated by leading foreign manufacturers, like Siemens, Ericsson, and ITT. Attracted by the multi-operator market, they had set up production facilities in Finland. The established, capital-intensive foreign companies put a pressure on the emerging domestic industry. To illustrate, in 1970 the turnover of the Siemens Group was EUR 2 billion almost equaling the total Finnish State budget of EUR 2.5 billion. 11 The seeds of the Finnish radiophone industry were planted in three companies, Salora, Suomen Kaapelitehdas, and Valtion Sähköpaja in the 1920s. New radio technology was typically developed in the sideline of main activities by fervent engineers, often under suspicion and opposition of conservative colleagues. During a complex organizational evolution process, finalized in 1987, the three companies merged under Nokia s roof. Salora (originally Nordell & Korhonen Ltd, established in 1928) was a manufacturer of TV and radio sets, whose brand grew strong beyond national borders. The development and production of radiophones initiated in 1964 was based on pioneering experiments conducted aside core activities. Salora s accumulated experience in serial production and marketing proved valuable in the later mobile phone business development. Suomen Kaapelitehdas (lit. Finnish Cable Works, founded in 1917), in turn, was a producer of telecommunications cables. The trade with the Soviet Union, originated during the deliveries of war indemnities, was decisive to the development of the company s technical skills. As a demanding but patient customer, the Soviet Ministry of Communications spurred elaboration of modern digital technology. The radio laboratory of the Ministry of Defence (established in 1925) initiated public development and production of radio equipment. The wars against the Soviet Union revealed the strategic need for national development of radio technology. After the wars, the activities were industrialized by founding Valtion Sähköpaja (lit. State Electric Works), and in 1948, merged with the R&D unit of the PTO. The company was renamed Televa, and in 1976, it became a state-owned limited company serving mostly public establishments for which it was the prime, but not exclusive provider. In 1963, the Army gave a decisive stimulus to the domestic industry by putting out an invitation for tenders for a radiophone. This was the first in a series of impulses by which the Government provoked companies to exceed their capacity to meet demanding technology requirements. For the first time the firms were given an economic motive to develop a radiophone, generally regarded as a toy for a marginal group of users. In fact, rather than a business opportunity, firms regarded the order as a chance to give a physical form to the know-how accumulated in the back stage of core operations. Virtually, the Army did not have the funds to redeem the phone, but for the bidding firms 12 the prototypes served in developing new portable phones, which soon found their way to export markets. In 1966, Suomen Kaapelitehdas was merged with Suomen Gummitehdas (lit. Finnish Rubber Works) and Nokia, a 100 year-old wood grinding mill that gave its name to the new corporation. The merger of Suomen Kaapelitehdas with the companies in stable industries secured sustained R&D investments in telecommunications, which was now regarded as one of the strategic business areas of the company. In the 1970s, it became apparent that the market was too small and resources too scarce for parallel development of digital exchanges in both Televa and Nokia. Consequently, in 1977, the companies combined their R&D and marketing efforts on digital transfer technology in a joint venture, Telefenno. Lengthy and laborious R&D in digital technology led finally, in 1982, to the introduction of the first domestic digital exchange shortly after the leading resource-intensive manufacturers Ericsson, AlcateI, ITT and Siemens. It was the first fully digital exchange installed in the whole Europe, and thus, served in convincing the market of the domestic competence vis-à-vis the foreign manufacturers. For years the exchange was the most successful export article of Nokia. In 1979, Nokia and Salora, in turn, joined their complementary resources. The fifty-fifty owned Mobira was set up to market and develop radio technology and especially the NMT terminal that was under design in the Nordic 10 For example, in December 2000, Sonera was awarded as the best mobile operator in the World Communication Awards Sonera was granted the award in recognition of its high-quality service and technological innovations. The company was also regarded as a European forerunner in developing new mobile communications services. 11 Mäkinen (1995). 12 Televa, Suomen Kaapelitehdas, Salora, Vaisala and Swedish Sonab. 11

19 Telecom Conference. Mobira was the first to launch a terminal approved to the NMT network. The design phase of the NMT standard in the 1970s brought the Nordic telecommunications administrators and companies in close cooperation. While active in terminal development, the Finnish industry was not yet able to contribute to network specifications. Fierce pressure from the PTO s side to engage the industry in cellular exchange development materialized finally, in 1981, in the base station supplied by Mobira. In the retrospect, it turned out to be crucial in maintaining the company s position in the emerging market. The introduction of the NMT in marked the start of a fast-expanding new industry. The specifications were kept open to pursue the objective of the Conference to promote competition in equipment provision. No less than ten manufacturers entered the Nordic market. Following its vision of global mobile communications, Mobira took substantial risks in investing in large development projects and pioneering production techniques and in entering markets all over the world. 13 By 1985, it had obtained a leading position in a number of markets. Between , the average annual growth rate of sales was 50 per cent, owing to both general market expansion and to an increased market share. 14 In order to intensify foreign market penetration, Mobira allied with established local actors. 15 International cooperation taught the company, among other things, the importance of the brand which was later going to distinguish a Nokia from other mobile phones in the challenging consumer market. Mobira became famous for its crazy organizational spirit that referred to the passionate, pioneering and risk-taking style with which is it pursued its ambitious targets. 16 The same kind of stamina and general enthusiastic if not fanatic attitude towards new radio technology has been seen behind much of the technological progress in the Finnish telecommunications industry. Virtually in , the Finnish telecommunications know-how was organized under one management when Nokia got full ownership of Mobira and the State s share of Telefenno. % Electronics Cable Forest Rubber Figure 3.7. The structure of Nokia s sales Source: Lemola & Lovio (1996), updated by ETLA. 13 Mobira manufactured equipment for five standards adopted in different countries. Only Motorola supported an equal amount of standards. 14 Koivusalo (1995). 15 Mobira came ashore the US under an OEM agreement with Tandy Corporation, which offered an extensive distribution channel. The alliance with Alcatel and AEG for marketing and system development opened the doors of the French and German PTOs and gave credibility to the emerging mobile manufacturer. Cooperation was gradually terminated after the company was capable of independent supply of a GSM system in Mobira is a result of enthusiasm and madness. (Kansan Uutiset, a national newspaper in 1986). 12

20 In the search of rapid growth and global market presence, Nokia ran into serious production and financial difficulties that almost destroyed the company. Towards the end of the decade, it started loosing positions in the export markets. The downturn was aggravated by the severe external chocks, the collapse of the Russian bilateral trade and the abrupt economic recession, which put the future of Nokia at stake. The crisis gave a stimulus to a drastic dismantling of business sectors varying from tissue paper and rubber boots to cable machines and consumer electronics preserving exclusively the telecommunications activities. The structural changes were coupled with an important redesign of the company governance. At the same time, however, the world witnessed a wave of telecommunications liberalization. The boost in global demand for digital mobile equipment with Nokia s global position built in the 1980s saved the company from a dive that would probably have destroyed the company. Owing to the recession hitting hard on consumer demand, it was crucial to dismantle the luxurious image of the portable phone. With the softer aesthetic design and the userfriendlier customer interface Nokia was the first manufacturer to invent the key to the consumer markets. Since the first consumer-targeted model in 1994, Nokia has highlighted the life-style feature of communications in brand building a strategy that explains an important share of its breakthrough in the consumer market. In 2000, Nokia was the fifth most valuable global brand. 17 In 1999, Nokia accounted for about a third of the world mobile phone market, and the phones represented almost 70 per cent of the turnover. In network systems, the company holds a market stake of close to 20 per cent. 3.4 The factors of the competitive advantage In order to provide an analysis of the competitive advantage of the ICT cluster as suggested in chapter 3.1.1, the factors involved will be briefly described below Firm strategy, structure and rivalry Nokia dominates the ICT cluster by size and effect. The company accounted for almost 50 per cent of the cluster sales and 66 per cent of the cluster exports in However, there is a number of other ICT companies that have also established their positions in international markets. Moreover, many companies with their roots deep in the Finnish cluster have attracted foreign acquisitions (e.g. LK-Products, Martis, NK Cables, Solitra). In the wake of the ICT boom there has been an intensive emergence of start-ups finding narrow but lucrative niches in the wireless and Internet applications sectors. Important conquests have been made notably in the data security domain. At the other end of the spectrum, there are established companies with accumulated world-class competence particularly in network technology. Despite the global business environment the core activities of companies, namely the headquarters and R&D, are still predominantly located in Finland. 18 Established tradition in cooperation in the local innovation system and advanced R&D activities anchor companies to their home base. The fertile environment has attracted a number of leading foreign companies to base their R&D centres in Finland, too (e.g. ICL, IBM, Siemens, Hewlett Packard, Ericsson). Today, domestic competition has little effect on firm strategy. Competitors, regardless of their origins, operate globally determining the scope and perspective of company strategies. Unlike in a host of monopolized markets, the Finnish equipment industry has evolved under competitive pressure from the outset. In network operation, the fragmented, yet monopolistic market structure has had implications on the market, non-existent in monopoly markets. For example, the preconditions for duopolistic competition were in place at the opening of the market, spurring price efficiency and service improvements that made the Finnish telecommunications very competitive in international comparison. The liberalization has affected the strategic relationships within the private sector, as well. In the Finnet Group (the newly named Association of Telephone Companies), there have emerged regional alliances to form competing camps, while there are still joint ventures in nation-wide service provision Factor conditions Liberalization of the capital market in Finland at around the turn of the 1990s has revolutionized the institutional environment of corporate funding. Established structures of power concentrations and cross-ownership were dismantled, providing firms an access to abundant international resources at market price. 17 Interbrand. 18 Nokia, as an example, spends approximately 60 per cent of its R&D input in Finland (Ali-Yrkkö et al., 2000). 13

21 Between , the value of private capital investments grew tenfold, to EUR 286 million. 19 Perhaps most notably, the weight in risk ownership has been shifting from the public to the private sector. The role of the state is been refocused on carrying the technology risk, while venture capitalists have come to bear the commercial risk of a new company. Unequalled opportunities for innovative start-ups have opened up in the form of intelligent venture capital, which has actually become their most common source of capital. The share of the ICT sector was 30 per cent of the total private capital investments in The level of R&D investments on ICT has been in intensive growth. In OECD comparison, the share of private ICT-related R&D of total manufacturing R&D was the highest in Finland in During the period , Finland turned from a below-average investor into the world leader. In the public sector there was an outspoken objective in 1996 to increase systematically the share of R&D expenditure of the GDP. Today it amounts to over 3 per cent being the second highest share in the world after Sweden. Thus, the critical factor in the development of the cluster is not scarcity in capital but rather in human resources that is virtually impeding full-scale exploitation of the available funds. There is a structural mismatch in available skills not only on the macro level, but also within the cluster, notably in the software industry owing to the fast pace of technological development. Owing to the lengthy lead-time in education, the increased intake in the education system has not yet alleviated the shortage of skills. Worse yet, the lack of employees draws both students and personnel from higher education institutions to the industry, eroding severely future resources Demand conditions Since 1996, Finland has been the world leader in mobile penetration. All in all, households have adopted mobile phones as consumer products: in 1999, they held more wireless terminals (78.5%) than wired (75.8%). 60 per cent of households have both terminals, while no less than 20 per cent rely solely on mobile communications. 21 Also in Internet host penetration rate Finland ranked the second after the US, by 121 per thousand inhabitants in Since the full liberalization in 1994, the telecommunications price level has declined by about 25 per cent in real terms. The sharpest reductions have been witnessed in digital mobile and data services making Finland the leader in low-cost telecommunications services in the OECD in Reasonable pricing together with the cheaper and consumer-oriented handportables, introduced in the early 1990s, boosted swift expansion of the market. Digital value-added services were soon adopted by consumers and have established their role in every-day communications. The national attraction towards technology together with the high level of basic education has been seen behind much of the communications boom in Finland. All the same, the small home market has served as a test laboratory for the development of new products and services despite the fact that its importance to Finnish firms is decreasing in monetary terms Supporting and related industries In the recent years, the domestic supporting sector has evolved very specialized for the needs of the original equipment manufacturers (OEM). Customers growing requirements in production volume and product sophistication have generated a number of new companies, and induced redirection of activities in the existing ones. The strength of the domestic supporting sector is in highly customized inputs. Special competence resides in the production of ASIC, rf-filters, hybrid circuits, silicon wafers, printed circuit boards and their surface mounting technology, as well as in electronic manufacturing services, automation, and precision mouldings. Standard components, in turn, requiring large scale and effective global distribution channels, are practically fully imported. 24 In the wake of Nokia, many of the suppliers have learned fast the requirements of global operation and grasped the opportunity of rapid growth. 25 Domestic partnerships have been stretched to foreign markets to benefit from established operative processes and trust-based relations. Global extensions of domestic partnerships have involved suppliers green-field investments as well as acquisitions of the customer s foreign production facilities. The versatile and world-class supporting sector has greatly enhanced manufacturers possibilities to contract out noncore activities. This has been imperative in the sector in which time-based competition and risks involved in con- 19 Holtron Ltd. 20 Ibid. 21 Ministry of Transport and Communications. 22 EITO OECD (1999) % of the electronic component market value is composed of imports (Hienonen, 2000). 25 Eight suppliers, with Nokia as a prime customer, had gone public by the end of

22 tinuous technology race call for disintegration of the production process. There is a trend towards growing responsibility of suppliers in independent product development by which manufacturers seek to take advantage of specialized external knowledge. Suppliers are being increasingly engaged in early-phase product and production process design to produce more effective and innovative solutions. Indeed, the scope of outsourcing has widened from mere standard outsourcing to R&D activities. The relative size of Finnish suppliers in global perspective is small. Global operations of customers, most particularly Nokia, put tremendous pressure on suppliers capabilities and resources. Any firm aspiring to be connected to the network will have to be able to grow in pace with the customer, which has direct bearing on the firm s risk leverage and management skills required. As a general rule, the presence of a competitive industry contributes to the development of related industries. 26 As a provider of infrastructure technology, the ICT cluster has linkages to a number of industries providing service products, or content, complementing basic network services. 27 The digital content industry is still in its early phase in Finland, yet there are numerous signs of emerging activities. The notion of digital content embraces a whole array of service concepts, from transaction and information services to education and entertainment. Yet the borders of the content industry are difficult to draw, they can be regarded to include the digitized products of a number of traditional sectors (see figure 3.2). Non-fixed definitions severely complicate quantitative valuation of the industry. In 1999, there was a group of some fifty firms in the games and entertainment software production that generated EUR million. Despite advanced technological skills, this group still operates in the fringe of the software sector, lacking sectoral concentration and volume. In addition, the sub-sector tends to have difficulty in attracting professional business skills as it suffers from low credibility as compared with more serious software sectors. 28 However, technology leadership and new business models enabled by the Internet (digital mass distribution) provide great opportunities for the Finnish digital entertainment industry. All in all, it is clear that the most value-adding applications of the Internet and mobile services are still to come. Although entertainment will draw the largest demand volumes, applications in, say, education and health care will be likely among those enhancing the efficiency and well-fare of the economy Government The appropriate role of the government with regard to clusters is to create a context that encourages upgrading, and establishes a stable economic and political environment. 29 Even though all government actions matter for the national competitiveness, competition, technology and education are the domains with most direct effects on the ICT cluster competitiveness. Competition policy. The competitive conditions in the Finnish telecommunications market both in manufacturing and operation have differed somewhat from the international tradition. Not only have both the markets been fragmented in ownership, but also there has not been an exclusive symbiosis between the PTO and a national champion in equipment provisioning. Through the Association of Telephone Companies the private sector grew a counterweight to the national monopoly, non-existent in most markets prior to the worldwide wave of liberalization in the 1990s. Deregulation and the market opening were initiated among the first countries, soon after the UK and the US in the early 1980s. Thereafter, the regulatory approach has based on pro-competitive, light-handed regulation and technology neutrality. The market is subject to general competition and consumer protection legislation. The approach is still less interventionist than in many other OECD countries; some mandatory EU requirements have been regarded as regressive to the liberal market functioning of the Finnish market. 30 Following the fortifying trend in national telecommunications policies, the Finnish government is also looking for an opportunity to withdraw from telecommunications activities. Technology policy. The purposeful orientation in technology policy has a twenty-year history, materializing in e.g. continuous growth in the R&D share of the GDP. Between 1985 and 1999, the share doubled reaching EUR 3.75 billion at the end of the period, of which 30 per cent was public investments. By the 3.1 per cent GDP share Finland positioned the second in the world in R&D intensity after Sweden. 26 Porter (1990). 27 A distinction is made between the industries exploiting the network in digital distribution of service products, and those rationalising their business procedures (electronic business) with the ICT. Related industries refer here to the former case. 28 Autere, Lamberg & Tarjanne (1999). 29 Porter (1998) as in Rouvinen & Ylä-Anttila (1999). 30 Ministry of Transport and Communications (2000). 15

23 In the 1990s, amidst the general cutback objectives in public expenditure, the government decided, in 1996, to systematize the increase in public R&D funding to sustain the positive development of the electronics sector discernible by the time. Part of the proceeds from privatization was earmarked for public funding of technology development. The objective for the period is to connect the increase in public funding to the general growth rate of the economy. Digitized content and enabling software applications, as key factors in the ICT cluster s future success, have been appointed high status on the national agenda. Concurrently, there has been a need to redirect the focus in public funding. From traditional technology-oriented product and process development there has been an extension in focus, towards service products and market-orientation to facilitate the emergence of export-oriented service products. The shift in policy direction has been manifested in a series of digital media technology programs since the mid-1990s. In addition, there has been a need to re-evaluate the role of the public sector in risk funding altogether. The emergence of abundant private venture capital enables a more focused public strategy in technology risk funding, and a clearer role differentiation with the private sector financiers. In addition, through technology programs, the public sector has been active in practicing the role of a facilitator between firms and venture capitalists. Education policy. The threat of exhausted labor resources has been attacked by increasing openings in higher education institutions. Between , the total intake in universities grew nearly twofold and in polytechnics nearly threefold. However, established institutional structures as well as resources lagging behind increased utilization of educational capacity seem to frustrate efficient achievement of policy objectives. The dialogue between the industry and the government on educational issues has been active since the upsurge of the industry. In the early 1998, the government adopted a program for increasing education in the information industry fields between The industry has committed itself to its implementation by providing internships, but avoiding recruitment of under-graduates, and encouraging graduation of employed students. Moreover, companies aim at increased participation in training and education, and donation of equipment for education and research purposes Coincidental factors The turn of the 1990s entailed several external incidents with momentous implications on the Finnish ICT cluster, without which, it is fair to say, the average 30 per cent annual growth rate of the electronics industry would not have materialized. Following the agreements within the EU and the WTO, the traditionally monopolized telecommunications equipment and service markets were gradually liberalized, starting with terminal equipment in 1988 in Europe. The opening of the East European market gave an additional boost to mobile equipment demand. The effects of liberalization were momentous. Between , the value of OECD exports of telecommunications equipment grew almost 2.5-fold, reaching USD 110 billion at the end of the period. 31 Correspondingly, 96 per cent of the OECD market, as measured by telecommunications revenue, was open to competition by the beginning of In contrast, the collapse of the Soviet Union together with the severe recession in Finland hit hard on the ICT cluster demand in the early 1990s. Without the counterbalancing effects of market liberalization, the Finnish economy would have taken a somewhat different and slower path in its revival process. 3.5 Dynamics in the ICT cluster The ICT cluster has been evolving for a hundred years. The cluster as we see it today looks like a product of a master plan: a vigorous industrial innovation system with high national competitive advantage. However, it is an outcome of a dynamic self-reinforcing process in which coincidental factors do not play the least consequential role. In order to get a grasp on the factors behind the ICT cluster development, the most influential dynamic linkages between the factors of competitive advantage will be analyzed within the framework suggested in chapter It is obvious that the causes and the effects of interactive factors become blurred and ambiguous, but the framework helps in providing some systematic in the analysis The government as an early catalyst of cluster development The earliest and perhaps most influential factors on cluster development relate to those government policies that have promoted competitive market structure. The foundation of the developed telephony infrastructure was laid already in the 19th century, under the Tsar s reign. 31 OECD (1999) and OECD trade statistics. 32 ITU (1999). The remaining six countries are committed to liberalisation in coming years. 16

24 By dividing the network ownership between public and private companies, and allowing for a fragmented market structure, the Finnish Senate, yet motivated by foreign-policy objectives, contributed more or less unintentionally to the industry development in a crucial way. The decentralized market catalyzed several dynamic implications. To begin with, the decentralized ownership contributed to the technical improvement of the infrastructure. First, the continuous threat of nationalization of incompetent operators spurred technological upgrading in the private network. There were several intentions, throughout the decades to nationalize the whole private sector in view of improving the technical level of the heterogeneous infrastructure. These proposals were however dismissed due to the lack of political consensus and financial means. 33 Second, as cooperative societies, the telephone companies pursued the interests of their owners through technical improvements and cost-based pricing. Third, as important communal status symbols, telephone companies pursued latest technology to promote community authority. Furthermore, the multi-operator market structure, coupled with another local peculiarity, free equipment supply, had far-reaching dynamic repercussions. The competitive market regarded as a test laboratory attracted contemporary leading manufacturers. Not only did their presence stimulate local economy through local production facilities and know-how spillovers to the emerging industry, above all, it spurred operators skills in interface technology, required in rendering the competing vendors equipment compatible. Indeed, the technical knowledge cumulated in this field was recognized in international circles. The advanced expertise improved the operators bargaining power, enabling them to press the price below the prevailing level in manufacturers monopolized home markets. 34 Virtually, the sophisticated and demanding operator sector proved its significance as a collaborative customer during the evolution of the domestic manufacturing industry. The competitive environment in equipment provisioning was in contrast with the majority of national markets. The competitive pressure from capital-intensive leaders spurred domestic firms from the outset. 35 In addition, the existence of three independent local actors, (i.e. Suomen Kaapelitehdas, Salora and Valtion Sähköpaja) generated complementary skills that, combined in alliances, joint ventures and mergers, gave a boost to the technological development that would not have taken place in a monopolistic market structure. For example, without the joint venture of Televa and Nokia, the creation of the vital digital exchange would hardly have succeeded. Respectively, Mobira, as the joint venture of Nokia and Salora, contributed vitally to the timely launch of the first NMT terminal and to its swift and successful export market penetration. Finally, the public sector proved far-sightedness and non-protectionist attitude in initiating, together with the other Nordic countries, the creation of a cross-border mobile market. The industry, engaged in the standard development, got a valuable first-mover advantage in the new market. The standard spread widely in Europe and Asia in the 1980s and 1990s. In the meanwhile, the national champions in Italy, France, and Germany developed their own technologies with local administrations with meager results: the delayed and poorly functioning services failed to attract users in their home markets, neither was there any success in export markets. The pro-competitive approach of the public sector was manifested again in the 1980s when, among the first in the world, the gradual dismantling of regulatory restraints of telecommunications service provision was started. Yet, the decisive stimulus for liberalization came from the private sector in the form of Datatie in 1985, followed suite by Radiolinja in Had there been no competitive pressure, the PTO would have postponed the introduction of new digital mobile network, since there were still important profits to be reaped from the analogue NMT network investments. By the same token, had the initial application for a second NMT license been granted for the private sector in the 1980s, it would have severely postponed the overall transition to digital technology. Thus, half-incidentally, the two Finnish operators were positioned in the forefront of the exploding global mobile market Exceptional demand conditions have offered home-base advantage The high penetration rate as well as swift adoption of new products and services have provided both the manufacturing industry and service providers a home base advantage through demand conditions that anticipate trends else- 33 Between the 1950s and 1960s operators were required to meet certain technical requirements in view of general network development, in which occasion the number of independent firms fell dramatically through both public and private take-overs. 34 The Finnish operators were heterogeneous in their technical level and knowledge. The operators able to exploit their proficiency in bargaining were predominantly the leading actors, the PTO and the Helsinki Telephone Company (HPY). 35 As a local actor Nokia was relatively flexible in responding to customers requirements, while foreign suppliers had to consult their headquarters prior to any custom-made solutions. Moreover, the established foreign manufacturers had a long tradition in analogue technology, which handicapped their adoption of digital technology. 17

25 where. However, the favorable demand conditions have been largely a dynamic outcome of public policy measures. Initially, the public decision to allow for a number of operators set the basis for exceptional demand conditions for equipment manufacturing. Operators developed into sophisticated customers through the variety of competing technologies, and as such have contributed to the industry development over time. The PTO s pressure on the reluctant industry to develop the first cellular exchange, critical in the later conquest of international market shares, was one indication of the advanced customer sector. Another vital customer segment was the institutions using closed networks. The public authorities (notably the Army and the national railways) put out invitations for tenders for advanced equipment spurring companies for innovation. Public demand for germinating radio technology knowhow was crucial in bringing forth-physical products, with which export markets were later penetrated. Private users of closed networks (taxis, shipping and transport companies, industrial plants) were also important in testing and developing new applications of radio technology. The turning point in the mobile history was the introduction of the NMT that made the Nordic market the largest in the world (60 70 per cent of all subscriptions) in The home market advantage spurred Mobira to an average 50 per cent annual growth between , during which time the share of exports rose from 50 to 75 per cent. 37 The breakthrough of mobile telecommunications in the consumer market was fuelled by price cuts induced by competition, as well as by consumer-friendlier and cheaper handportables. 38 An additional boost was given by the increasing supply of value-added services that have been swiftly adopted as a natural extension of digital communications. Not surprisingly, the Internet penetration in Finland the second highest in the world. The swift and wide coverage is being supported by the public effort to build an Information Society. 39 Respectively, the production of new Internet applications and especially the integration of mobile and Internet technologies have lifted the Finnish industry in the forefront of international development Intense firm interaction has induced upgrading The Finnish ICT activities cluster heavily around one core company, Nokia. A great majority of firms in the electrotechnics sector, but also in many other supporting industries are positioned at some level of Nokia s multi- layered network. The existence of an ICT cluster as we witness it today would not have developed without the core company s global breakthrough. The origins of the networked Nokia are in the 1980s, when the company had to look for outsourcing to manage growth. Gradually, the interaction between suppliers has moved towards increased joint development of products and processes, in line with Nokia s intensified concentration in core competence areas. As compared with other the leading manufacturers, Nokia has been in the forefront in creating the supplier network and relationships, which has been related to its superior performance. Not only has the company been able to assign an important amount of new business to the supporting industries, as a pioneering actor, it has also importantly contributed to general industry upgrading through collaboration. In addition to joint product development, suppliers have also improved their operative processes as a consequence of customer s proposals. Indeed, as a global player, Nokia has served as a window to international markets, teaching suppliers the requirements of the global environment, and as such, it has been effective as a reference for a number of companies in extending their customer base. 40 Firms have also extended, to an increasing extent, their operations to foreign markets in the footsteps of Nokia. Despite the many challenges firms are likely to encounter in global markets, internationalization with the key customer has provided some security over the initial phase. However, despite the two-digit growth rates of supplier firms, their relative size is still small as contrasted to the demand of the head company, resulting in many cases to high dependence rates. The stream of beneficial effects in network relationship has been, by no means, unilateral. Despite the global manufacturing networks of Nokia, the advanced know-how and es- 36 Pulkkinen (1996). 37 Koivusalo (1995). 38 As compared with some other markets, in Finland the relatively reasonable pricing is coupled with favourable charging practices, including the prohibition of terminal subsidies by operators and the caller pays principle. They have contributed to low operator churn rates and credit losses, and have thus promoted the sound growth in demand (see: Ministry of Transport and Communications, 2000b). 39 The development of e.g. digital learning environments has top priority on the government agenda. An imposing tribute to the policy was the first Bill & Melinda Gates Foundation s Access to Learning Award to the Helsinki City Library for the exemplary provision of Internet access and services to the public. 40 Based on Ali-Yrkkö & Paija (2001). 18

26 tablished supplier relationships in the country of origin have not lost their importance, but instead, they have nailed an important share of the company s product development activities in Finland. The supporting industry has been able to respond fast to the increasing demands of the globalizing customer, especially regarding the variety of advanced customized products. The advanced digital communications infrastructure together with the inspiring cluster environment has inspired the development of applications software required in facilitating Internet-based, mobile and wired, transactions and content service provision. In addition, there have appeared a number of new as well as established companies with services (content and/or its aggregation, digital market makers) designed for digital distribution channels. As these services are necessary in boosting demand for infrastructure, the actors concerned, Nokia and Sonera most notably, are actively cooperating with service developers, which in turn enhances the preconditions for successful innovations and their global distribution. The advanced and new technology-oriented home market, for its part, provides a favorable test field for technology developers Deterioration in labor supply, improvement in capital supply The national innovation system, including the related firms, universities and research units (notably the Technical Research Centre, VTT; founded in 1941) has been a central engine of technological development. This system has been able to generate highly skilled human resources that have been attributed to the innovativeness inherent in the Finnish cluster. Particularly, in the 1960s there were several outstanding persons both in public research institutions and private enterprises that can be named as pioneers in the industry. Informal relations, active cooperation, employee mobility, and the shared interest accelerated spillovers between units, and boosted collective self-esteem. However, emergent exhaustion of labor resources has compelled firms to look for overseas labor markets and to transfer R&D activities closer to foreign labor resources. Despite government actions to meet demand for skilled human resources there are doubts whether the resources directed to this goal are sufficient and efficiently distributed. The liberalization and the consequent growth of the capital market have been one of the most noteworthy contributors to the ICT cluster growth. It has induced versatility in the cluster through new companies that have grasped opportunities opened up by new technologies. It has also provided market-based risk funding for growth companies, non-existent only a decade ago. Cases like Nokia with a 90 per cent foreign stake would not have been possible without foreign capital. Further, it has enabled, in the form of stock options, the creation of new tools for employee compensation and motivation, which have served especially start-up companies with limited liquidity. Moreover, the newly emerged venture capitalists represent intellectual capital for small technology-based companies with limited managerial skills, which has greatly improved the potential of successful international launch at an early phase of business development. The availability of venture capital has reshaped the role of public risk funding traditionally the prime resource for risky enterprises. There has become new kinds of investment syndicates where the public sector carries the technology risk and a venture capitalist the commercial risk of an enterprise. Finally, through foreign ownership it has been possible to the share the risk of a small economy dependent of an unsettled industry World-wide liberalization pivotal and perfectly timed for Finland The 1990s witnessed intensifying liberalization of world trade with powerful implications on the telecommunications sector. First, the entrance of new operators generated new demand for infrastructure, and second, the increased number of operators induced growth in mobile service demand stimulating the demand of terminals and additional network capacity. 41 In Finland, the decade began with severe economic shocks, brought about by the recession and the collapse in the Soviet trade. The previous decade had been a period of large expansion and internationalization of a new business sector in the telecommunications industry. However, towards the end of the 1980s, Nokia run into an organizational crisis, which, coupled with the external economic shocks, nearly destroyed the company. However, the preconditions for a take-off, developed over the decades, were in place in Nokia. With redefined strategies and proficient management the company was able to grasp the opportunity opened up by the liberalized global market place. The European GSM standard met unanticipated success in third countries, providing the Nordic players a first mover advantage. 41 According to the OECD, the number of operators correlates positively with market growth rate (OECD, 2000). 19

27 The successful take-off not only saved the company, but it also set off a fundamental restructuring of the economy. Radiolinja s license application was perfectly but not calculatedly timed in the eve of opening global markets. The first GSM network in the world, operated by Radiolinja and supplied by Nokia, put the Finnish telecommunications in the global stage in The incident promoted efficiently the image of Nokia as an advanced supplier among the new mobile operators appearing around the world in opening markets. In the retrospect, it is astonishing that the political armwrestling stirred up by Radiolinja s license application did not arouse any industrial policy considerations. The focus was primarily on ideological issues and on the economic justification of parallel networks in a small economy. 42 Admittedly, the dynamic restructuring process (both within Nokia and between the factors of the cluster system), required for the take-off could not have been foreseen by any individual. This Finnish ICT cluster case provides an excellent illustration of a self-enforcing dynamic system that enhances the competitive advantage of the cluster and the individual actors within it. 3.6 Future opportunities and threats Deregulation of both world trade and telecommunications, and the technological revolution brought about by digital technology have stirred profoundly the operational environment of firms. Companies seeking for their place in the reorganizing environment are faced with new prospects and threats, as well. In Finland, though, the firms in the middle of this revolution posses certain competitive advantages, evolved over a hundred years: The Finnish ICT sector has evolved into a dynamic self-enforcing system that supports the actors connected to it. As there is a myriad of business areas in the cluster, the opportunities and threats of firms will naturally differ in various sectors. In the following, a general view on the future conditions, critical to Finnish firms, will be considered Market positions at stake in the third generation competition The future of the Finnish ICT cluster is entangled with the development of the global market. The present market positions are at stake as the world is moving over to the third generation of mobile communications technology. It remains to be seen how the excessive sums charged from European UMTS licenses will affect the competitiveness of the European telecommunications sector. The price and variety of services, penetration rates, and virtually, the economic health of licensees are likely to be affected by the tax levied on the technology. There is also a chance that alternative technologies, free of the tax burden, gain superior popularity in transferring third generation services. Indeed, critics have questioned the value-added of heavy UMTS infrastructure investments altogether. 43 Not all third generation licenses require telecommunications-based UMTS technology, allowing a choice by a licensee between alternatives. From the manufacturers perspective there is uncertainty to what extent the UMTS license fees will attenuate operators investment appetite, or to what degree equipment vendors will have to finance their client s infrastructure investments. The launch of third generation mobile technology will erase many of the first mover advantages the Nordic companies got in the second-generation (GSM) technology. Japan, who issued the spectrums free of charge, will have a second chance to take over the mobile market dominance, once unintentionally yielded to the Nordic countries. This time, Japan may have an early-mover advantage gained with the mobile Internet application (i-mode) that has attracted 15 million subscribers since its launch in February The mobile Internet application launched in Europe (WAP) did not prove nearly as successful. In addition, the third generation services will be launched in Japan for testing use in May 2001 while Europe is not expected to follow until the summer of While the US disabled itself in the second-generation mobile market by the fragmented domestic infrastructure, in the next round it will have a competitive advantage in the Internet technology, which offers a gateway to the third generation mobile market. Established IT companies, like Cisco, Microsoft and 3Com can be regarded as new competitors to the traditional mobile equipment manufacturers. 42 See Häikiö (1998). 43 For example, Helsingin Sanomat and the online discussion on Business.fi magazine web site in October ( 20

28 3.6.2 Globalization behind most of the opportunities and threats Many of the future prospects and threats are brought about by the globalization of markets. Firms both can and must access foreign markets, independently or with their globally operating clients; physically, or digitally through the Internet. Finnish firms are in a historical situation by possessing advanced know-how in a boosting market, in which small firms can grab important market shares in some of the myriad of opening segments. In addition, the market is not likely to show signs of leveling down in the foreseeable future. According to an ETLA estimate, the Finnish ICT cluster value-added continues to grow at a 14 per cent annual rate over the period The growth potential lies naturally heavily on global demand. Over the same period, the share of ICT equipment of total OECD manufacturing is estimated to almost double, to over 10 per cent, from the 1997 level. The Finnish share of the global market is anticipated to increase sharply, from 0.9 per cent in 1997 to 3 4 per cent towards Finnish firms reliance on telecommunications industry has aroused wide concern about their ability to survive an unexpected slump in demand. Fortunately, the demand for electronics and software is in strong rise in a number of non-ict industries. Indeed, many of the supplier firms have already various industries in their client portfolios. Importantly, the demand of ICT-related skills is global, and the current supply follows far behind global needs. In other words, the Finnish ICT knowledge has a wide range of alternative uses. Electronic market places and distribution channels will abolish many of the more or less physical obstacles encountered previously by small domestic firms. The knowledge-intensity and digital form of many ICT products makes them most suitable for global electronic trading. Globalization has brought forth the deficiencies in managerial skills that sufficed in domestic operations. Some of the cluster sectors, like software production, with great export potential lack the history in international operations management. Technological innovativeness does not compensate for management and marketing skills, which are in relatively scarce supply especially in small Finnish technology-oriented firms. Management of rapid growth and early-phase international market penetration require skills that are in scarce supply and cannot be created through learning. Fortunately, both public agents and financiers are paying increasing attention to deficiencies in ICT firms skills. Well-coordinated actions between public and private sectors are necessary in overcoming business-related problems to exploit the technological lead residing in Finnish firms. To support sustainable development of the sector, though, the requirements of the industry need to be better reflected in education strategies Small firm size limits seizure of opportunities Globalization, the boost in telecommunications demand, and the networked production paradigm have made topical the relatively small size of Finnish firms. Even though growing demand has pulled firms for growth, the average size of Finnish suppliers is still small. There have been concerns about the suppliers high customer and industry dependence. The small size pertains not only to the production capacity, but also to the ability to bear the risk characteristic to the industry. Product development entails typically R&D investments with lagging and uncertain future revenues. Funding of such investments is the riskier the smaller the firm is. Partnerships serve as a means of redistributing risk among several players, and therefore, suppliers will have to be able to assume increasing risk related to the technological and commercial success of new products. Scarce financial resources limits the scale to which a firm can engage in collaborative development projects with the customer, and to which it can take risk in seeking for higher future revenues. Small firms also typically lack some of the myriad of required managerial skills to qualify as a fullblown partner to global customers. Thus, firms with insufficient resources risk falling in the category of standard subcontractors serving as a capacity buffer for manufacturers. The customer relationship in such a case does not offer an equal upgrading stimulus inherent in collaborative partnerships. In addition, limited resources are easily occupied by one large customer s needs. In order to serve the key client a small firm may have to give up other customers, increasing further customer dependence. 44 The estimate includes the following NACE classes: 30 (Manufacturing of office machines, computers, etc.), 32 (Communications equipment etc.), and (Postal and telecommunications services). Estimates are based on an ongoing ETLA project evaluating the long-term growth prospects of the domestic key clusters. 45 See also Autere et al.(1999). 21

29 However, awareness of customer and industry risk has increased in Finnish firms, inducing purposeful extension of the client base. Firms engage largely in independent product development to increase their own product variety, technological distinctiveness and independence of clients 46. Yet, the ideal balance between customized and own products may be hard to find, since scattering of scarce resources is likely to hamper their efficient use. In addition, with the present growth rates of the customers in the telecommunications, the enlargement of customer range further aggravates the pressure on firms resources. Noteworthy though, firms have indicated their willingness to increase R&D collaboration with their clients and to take more responsibility in the form of larger sub-deliveries 47. Despite the growth in outsourcing, there is still plenty of room for increased allocation of work and responsibility. For example, the share of electronic manufacturing services (EMS) is, at most, 20 per cent of the Finnish original manufacturers production volume Dynamic cluster relations support specialization and upgrading Increased outsourcing has generated business growth and new opportunities to a whole array of firms. This, in turn, has increased firm specialization, and supported companies efforts in focusing on their core activities. Concentrated activities increase firms flexibility in redirecting their focus in case of shifting demand or technological change. Firm networks are supported by a world-class science sector. The intense interaction between firms, universities and research institutes has long traditions, and as such, is regarded as exceptional by international standards. Various studies indicate that customers are the most important external source of firms innovation ideas. 49 In Finland, both the business and consumer clients have provided an important test bed for new applications. To a certain extent, local demand anticipating future trend is a cultural feature, which gives an industry a unique competitive lead. Advanced local innovation systems, consisting of the above actors, are regarded as one of the most valuable factors improving national competitive advantage. In Finland, specialization and close interface between network actors will continue to provide inimitable advantages to cluster firms through increased innovation and efficiency Electronic business will have implications on firm interaction Information networks will provide a kind of a short cut to global markets for many small and medium-sized firms. Firms of different size have an opportunity of equitable access to electronic market places. According to the Confederation of Finnish Industry and Employers, already about 95 per cent of all Finnish industrial companies have adopted some degree of electronic business, and 80 per cent sells its products through information networks. 50 There are no peers in Europe in this respect, and the benchmarks are to be looked for in the US. There are, however, notable differences in networking between firm size categories, small companies lagging behind the industry average. Lack of users know-how and high price of technical solutions are the prime obstacles in small firms entering the electronic business. 51 There is a threat that firms unable to enter the digital market will not only miss the business opportunities offered by the new technology, but they may loose their market position acquired in the physical market. Internet-based firm interaction will have profound effects on supplier chain management. Supplier networks will gain in improved transparency, which will e.g. alleviate fluctuations in production chains. Electronic market places will also increase price bidding through increased information. However, as firms move from bilateral relations to electronic market places, there are concerns as to the implications of e.g. price bidding on supplier innovation. In other words, can firms investing in product development compete with their non-innovative, and thus, lower-cost rivals? 52 Or, to what extent does electronic operating environment support inter-firm knowledge transfer and innovation inherent in physical teamwork? Finally, will increased efficiency requirements outweigh the gradual but perceivable intensification in buyer-supplier cooperation? 46 Ali-Yrkkö & Paija (2001). 47 Ibid. 48 KTM (1999). 49 See e.g. Community Innovation Survey (Statistics Finland, 1998). 50 Confederation of Finnish Industry and Employers (2000). 51 Ibid. 52 In the 1980s, the US automobile industry pursued improvement in competitiveness through supplier price bidding. This strategy damped suppliers R&D activities, further deteriorating manufacturers competitive edge vis-à-vis their Japanese rivals, who instead, put supplier innovation in active use (see e.g. Helper, 1993). 22

30 3.6.6 How to guarantee sufficient supply of skilled labor? The imminent drying up of available skilled labor resources is already limiting the full growth potential of ICT firms and the efficient exploitation of available public and private funds. Fortunately, the dialogue between the government and the industry has been very active. Indeed, the increase in higher education openings has been in expressive rise since However, there is a danger of watering down the education system by excessive intakes coupled with inefficient allocation of educational resources. There has been a call for a whole cultural change in the education sector from technology-orientation towards business-orientation, which requires fundamental changes in established structures. The unforeseeable success of the Finnish ICT industry has made it most attractive for talented people. It is now much up to the public sector to support required institutional changes and to guarantee efficient reallocation of resources to assure optimal substratum for this critical endowment. In order to keep pace with the fast-developing technology, the industry, in turn, has a crucial role in communicating its needs and catalyzing knowledge transfer between the field and the education system Will content production grow into the third base of the ICT cluster? Japanese experience in the mobile Internet (i-mode) implies that successful launch of the third generation service will depend on the content transferred through terminals. 53 Certainly, the next growth sector within the global ICT market will be the content industry. Consequently, favorable development and global competence of the Finnish digital content industry have high rankings on the government agenda. In 1999, the government initiated the Content Finland Programme, an inter-ministerial agenda for the period to improve the preconditions of Finland to develop into a leading country in providing in addition to ICT industrial content products. 54 The history of the Finnish ICT cluster has a chance to repeat itself: In the building project of the Information Society, interaction between the industry and the public sector as a demanding customer has every opportunity to generate content innovations reproducible to export markets. Recent breakthroughs of the Finnish music industry and cinema indicate a sudden positive change in the tradition of domestic entertainment production, and it has consequently created a new atmosphere of enthusiasm and improved self-esteem in the traditional content industry. However, content needs to be understood extensively, beyond traditional definitions limited mostly to media, audio/video production and suchlike. Virtually, content can be regarded to encompass anything that provides valueadded to the ICT terminal user. 55 In this respect, the opportunities are limitless for Finnish firms to enter the digital content market, in which innovation and advanced technology environment may outweigh tradition. References Ali-Yrkkö J., Paija L., Reilly C. & Ylä-Anttila P. (2000), Nokia a big company in a small country. ETLA The Research Institute of the Finnish Economy, Series B162. Helsinki: Taloustieto. Ali-Yrkkö J. & Paija L. (2001). Nokia An embedded company. ETLA The Research Institute of the Finnish Economy. Helsinki: Taloustieto (forthcoming). Autere J., Lamberg I. & Tarjanne A. (1999). Ohjelmistotuotteilla kansainväliseen menestykseen. Teknologiakatsaus 74/99, Tekes. Helsingin Sanomat , Umts on jo syntyessään vanha. Confederation of Finnish Industry and Employers (2000), Electronic business in Finnish Industry. Helper S. (1993), An exit-voice analysis of supplier relations. In Grabher (ed.), The embedded firm. New York: Routledge. Hernesniemi H., Lammi M. & Ylä-Anttila P. (1996), Advantage Finland The future of Finnish Industries. ETLA The Research Institute of the Finnish Economy, Series B113. Helsinki: Taloustieto. 53 See e.g. several articles in the TIME Magazine in November 27, The programme contains eight ministries under which new content products for a wide range of application areas will be developed in cooperation with businesses and financiers. 55 Iobox, one of the early mover start-ups, offers an extreme example of a content provider that refined consumer communications (short messages) into digital content by branding. 23

31 Hienonen R. (2000), Elektroniikan- ja sähköalan kehitysnäkymät Helsinki: VTT Automaatio. Häikiö M. (1998), Alkuräjähdys. with English summary: The Big Bang of GSM Mobile phone revolution. The story of Radiolinja, Finland, Helsinki: Edita. ITU (1999), Trends in telecommunications reform Koivusalo M. (1995), Kipinästä tuli syttyy Suomalaisen radiopuhelinteollisuuden kehitys ja tulevaisuuden haasteet. Espoo: Cetonia Systems. Ministry of Trade and Industry (1999), Elektroniikan sopimusvalmistus. Report of the electronic manufacturing services (EMS) industry. Ministry of Transport and Communications (1999), Suomen telemaksujen hintataso, Publications 14/99.Helsinki. Ministry of Transport and Communications (2000), Televiestintätilasto Helsinki. Ministry of Transport and Communications (2000b), Case Mobile Finland. Publications 16/2000. Mäenpää K. & Luukkainen S. (1994), Teletekniikasta monimuotoiseen viestintään Teleklusterin kilpailukyky. ETLA The Research Institute of the Finnish Economy, Series B96. Helsinki: Taloustieto. Mäkinen M. (1995), Nokia Saga. Jyväskylä: Gummerus. OECD (1999), Communications outlook. OECD (2000), Cellular mobile pricing structures and trends. DSTI/ICCP/TISP(99)11/FINAL. Porter M. (1990), The competitive advantage of nations. London: The Macmillan Press Ltd. Pulkkinen M. (1996), Miten jättiläisiä horjutetaan? In Lemola T. & Lovio R. (1996), Miksi Nokia, Finland. Helsinki: WSOY. Pulkkinen M. (1997), The breakthrough of Nokia mobile phones, Doctoral Dissertation. Helsinki School of Economics and Business Administration, A-122. Statistics Finland (1998), Innovaatiotutkimus Tiede ja teknologia 1998:3. Rouvinen P. & Ylä-Anttila (1999), Finnish cluster studies and new industrial policy making. In OECD, Boosting Innovation the cluster approach. Toivola K. (1992), Poimintoja teletoimen historiasta, vol.4. TELE Matkaviestinverkot. Turpeinen O. (1996), Yhdistämme, vol.1-2. Helsinki: Edita. 24

32 4 Trends in wireless services and products Jarmo Karesto, Finpro Need for services is the driving force of the computer hardware business; the same is true for the wireless telecom business. Innovative services and service content will play critical roles in third generation service take-off and in the wireless hardware business. Figure 4.1 illustrates one example of the possible business models in the third generation mobile environment. There will be several players and functions in the model, each dependent on the other. In order to work properly, the value chain of the business model must be well in balance. Network operators will be facing new challenges. The old business models do not work anymore. It is not feasible for subscribers alone to pay back the huge investments that have been put into operating licenses and network building. The operator business will be even more downsized when they change from time-based invoicing to package-based invoicing in data transfer. New business models are needed. The operators can create new value-added services, they can cooperate with service content providers and they can take a dominant role in m-business transaction management. The network operation will probably be separated from the mobile service business and function within its own business area. The focus of this study is wireless technology development, not service development; however, as stated previously, these two issues can not be separated. Service development is the driving force of technology development. In practice, however, this concept is not at all so simple. All the elements in the value chain must be in balance before the business model works properly. The following diagram (Figure 4.2) shows the complexity of the third generation mobile business. Terminal sale depends on terminal prices and service take-up. If the new services are not attractive or they are high-priced, or the prices of new terminals are high compared to existing prices, the majority of subscribers will be satisfied with the Network Operators and Service Management Payment Subscriber/ User Billing Communications Service Broker Home Environment Service Management (e.g. ISP or Corporate Network) UMTS Value Added Service Providers Accounting Access Network Operator Core network operator Content Providers Figure 4.1. Example of functions in UMTS service delivery. Source: UMTS Forum. 25

33 Service usability (interfaces) Service variety Service utility Service attractiveness Technology Service prices Terminal prices Regulation Entry of service providers Cost of network access Service take-up Terminal volume Technology Access network regulation Global standards Figure 4.2. Market dynamics model of UMTS. Source: UMTS Forum. existing services. This is considered to be a risk especially in the case of UMTS. High prices paid for UMTS licenses will slow down the service take-up by keeping the service prices high. The majority of subscribers will wait for prices to come down and this will cause financial problems for operators. The counter-statement from the operator side is that this will not happen because they can keep the basic service fees low in a number of ways; for instance, by moving the cost burden from subscribers to content providers and to the prices of new sophisticated services, and by implementing new earning models like selling advertising space etc. The business logic mirrors that of the Internet. The competition, by improving the services of existing operators and challenging technologies like wireless local networks, cause sleepless nights for UMTS investors. What will the services of the future actually be? Figure 4.3 provides a useful classification of different wireless services. Service provision depends on the target customer, whether it is a consumer or business user. Regardless of customer, the service can be either transaction-based or it facilitates a process. B2C/C2C m-transactions Personal life management/ Mobile office Mobile transaction services aimed at consumers: Stock trading Mobile banking Location-based advertising M-tailing M-wallet Micro payments Consumer Transactions B2C/C2C m-transactions Process facilitation Personal life management Services providing true mobility of everyday activities: Wireless PDA Voice mail Entertainment Remote operation Instant messaging Access to databases B2B m-transactions Services aimed at businesses to do B2B m-transactions: Access to existing B2B e-commerce market places Business versions of current B2C m-commerce services e.g. Banking services, real-time trading Fully wireless B2B market places e.g. wireless portal for a big construction project Business B2B m-transactions Mobile office Business process enhancement Business process enhancement Supporting services to improve business process efficiency and effectiveness: Sales force support Field service management Fleet management Remote monitoring Figure 4.3. Categories of wireless services. Source: Helsinki University of Technology. 26

34 DoCoMo s i-mode service has set trends in third generation mobile services. The huge success of i-mode has been a very positive sign for other operators. The whole i-mode value chain is managed, however, entirely by DoCoMO. The company s strategy has been to keep the basic service fees and terminal prices at the same level as ordinary mobile service to guarantee fast service take-off. For subscribers this means enormous improvements to services at a low price. Outside Japan, DoCoMo s model does not apply because the players in the value chain are independent companies. There is no one to manage the entire value chain. In some markets the terminal prices can be subsidized by operators, but as is the case in Finland, this is not possible everywhere. 4.1 Drivers in wireless content There are hundreds of different estimations available in literature and studies about the major applications of wireless networks. It is important to understand what those applications are to understand their implications to terminal design. The following list is a basic summary of the most common services and service content for consumers. M-Commerce and services Shopping Banking Other financial services Entertainment Music Films Games Sports Chatting Information News Traffic Information Weather information Health information Databases Mobile office, group management Communication services (voice, SMS, , video conferencing, access to Internet) Group management services (shared calendars, group management tools etc) Remote control It is noteworthy, but not surprising, that the above list is almost identical with the list of current Internet content. Mobility, however, will provide important additional factors to the content. The most important mobility-specific factors are location identity and personality. The location of the user determines what services are useful for her or him at that moment. The mobile terminal is a personal thing and is basically available all the time. In terms of service and content provision, this marks the difference between the mobile terminal and the Internet. These factors are discussed in more detail in the following chapters. 4.2 From mobile phones to wireless devices The development of wireless devices will be fast, but probably not as predictable as one might imagine. The most feasible scenario at the moment is that there will be a wide variety of different types of wireless devices available for different uses. The functionality of today s PDA s (Personal Daily Assistant), personal computers and mobile phones will merge. I-mode phones in Japan have been trendsetters in this area. The phones are equipped with a large color display with good graphics features. They have on-line Internet connection with well-designed and easy-to-use user interface. A wide variety of add-on features are available, including video cameras, earphones etc. Not everyone will need all the technical features that are being developed by engineers. Customer segmentation will take place. Investments in existing networks, politics, and competition will mean that there will not be only one network connection in the future, but many. Mobile Internet will one day be as important a service as voice is today. When wireless devices become a personal thing, functionality of the device, service offering, and content can be personalized. Location of the user will be a dominant factor in personalized service offering. When service content gets personal, the importance of security will grow, and when the basic technology gets smaller in size, additional functions can be added. Designers of wireless devices must take into account many different requirements. These requirements are summarized in figure 4.5. The functionality of the new devices is such that they can utilize the advanced features of computers, the Internet, mobile phones, and PDA s to fulfill the requirements of the new types of services. 27

35 Database Information Services Business Sphere Videoconferencing Mobile Videophone Traffic Information System Car Navigation Mobile Communication Networks for Multimedia Personal Security Public Sphere Disaster Information System Remote Supervision System Information Services for Pagers News Weather forecast Financial Information Video-Based Karaoke on Demand Music on Demand Portable Television Interactive Television Interactive Games Video on Demand Electronic Newspapers Electronic Books Televised Shopping Home Schooling System Private Sphere Figure 4.4. Business and service segmentation by NTT DoCoMo. Convergence of current technologies Requirements for 3G mobile devices and services Service drivers Personal computers Internet PDAs (Personal Daily Assistant) Mobile phones Multimedia Customer segmentation Alternative network connections Wireless Internet Programmability Personality Location identity Safety and security M-Business Entertainment Information, education Mobile office, group management Figure 4.5. Requirements for 3G wireless devices. 28

36 4.3 Customer segmentation When a business reaches the maturity phase and competition leads to a reduction in sales margins, suppliers switch the focus from technology to serving customer needs. Nokia Mobile Phones has seen tremendous success, in part by understanding the importance of customer segmentation. The younger population prefers different product features than business people. According to Nokia, the consumer business is beginning to resemble the fashion business. Design, colors, and changing models (at least twice a year) are becoming important considerations in this business segment. Easy-to-use user interface and Internet browsing capabilities are appreciated in this category. Fashion ideology creates enormous problems for production, where investments are very capital-intensive and are made for the long-term. Elderly people create a growing consumer segment and their needs differ from those of younger generations. The special needs of handicapped people and other minority groups certainly rouse the interest of device manufacturers. Health monitoring features can be added to guarantee the owner s well-being. Niche markets can be found everywhere. Hobbies, professions, cultures etc. set different needs. The car industry will create a very interesting market. When cars are equipped with an on-line Internet connection, maps, weather, and traffic information can be easily offered to drivers. The demanding car environment sets special technical and ergonomic requirements for devices. Businesspeople prefer functionality, good service quality, and global coverage. Communicator-type devices, which combine the functionality of computers and mobile phones will increase in popularity among businesspeople and other advanced users. It is matter of personal taste whether these devices are called mobile phones, palm computers or PDAs. Easy-to-use text and graphics entry are important features regardless of interface. The interface can be a keyboard, a mouse, or a pen all common interfaces of PDA models. Sophisticated needs require a large screen with good graphics. The third category of users, in addition to private and business users, is public users. Public organizations, police, taxi etc. have special needs for terminals and are ready to pay a premium price for them. This might open business opportunities for specialized small companies, not only for the big ones. 4.4 Alternative network connections Today s dualmode and triplemode phones will not disappear in the future. For financial and political reasons, a fragmented network environment with multiple standards will exist, even in the era of 3G networks. Building new UMTS or CDMA2000 networks and establishing service take-off will take at least a few years. The existing networks will continue working until they are forced to be shut down because of decreasing customer space or because the spectrum does not give room for capacity expansion or for any other number of reasons. Smaller and more compressed technology make it possible to build wireless devices with several network connections. Connection to wireless lan (W-lan) is an interesting new feature of PDAs and communicator-type devices. It provides fast and economic access to the Internet in offices and also increasingly in public places such as airports and hotels, where businesspeople spend a lot of time. W-lan connection compensates for the slower speed and more expensive cellular connection to the Internet, but does not have the same coverage and functionality. Bluetooth technology is widely accepted as the standard to replace the connection cables connecting peripheral devices to office computers and mobile devices in the office environment and at home. The capabilities of Bluetooth are so powerful, however, that its use can easily be expanded beyond its original scope. Using a mobile phone as a cash register when filling up the car at a gas station or when paying a parking fee are examples of the innovative uses of Bluetooth technology. 4.5 Wireless Internet Wireless Internet connection seems to be a self-evident feature for consumers. Once fixed-line Internet consumers are familiar with the system, their expectations are high. I-mode in Japan has already proved that the mobile Internet concept works. The mobile Internet opens the door to a large supply of services. The Internet is a service in itself for users who don t care whether the connection is based on W-lan or a cellular network. 29

37 According to Ericsson (Market Study UMTS, Ericsson Consulting 2000), the success of i-mode is built on the following factors: Content NTT DoCoMo s i-mode service had sufficient content since its service launch (67 partners at launch, now 320 alliance partners) Attracting partners Success in attracting partners using simple technology: C-HTML Open to the Internet The i-mode gateway is fully open to the Internet, where most of the i-mode web page development is done (almost 5500 voluntary i-mode pages today, free content) Shared value chain The value chain is effectively shared with content providers so that business can grow exponentially -> Win-win situation Handsets Several different small and light handsets available. Handsets are subsidized, therefore no more expensive than regular phones Always connected Packet data allows users to always be connected Packet data allows for better tariffs (per packet rather than per minute) 4.6 Programmability The increasing capacity of wireless devices will move them closer to computers. Like computers, the devices will include an operating system for running application programs. A battle is going on as to who will be the Windows of mobile terminals. The main candidates are Epoc from Symbian, Microsoft Windows CE and Palm OS. Nokia, Ericsson, and Motorola who actually own the company support Epoc. The user interface of Palm OS has become almost the industry standard among PDAs because of Palm Computer s strong position in the market and large application supply. Companies like Nokia, Sony, and Qualcomm are partnering with Palm. It will be interesting to see what happens when Palm OS s user interface and wide variety of applications are ported to other manufacturers terminals. Nokia is already showing signs of moving in that direction. Regardless of operating system, wireless devices will be programmable and there will be an increasing supply of application programs from third parties. The Internet provides an easy way to download the applications into terminals. 4.7 Personality Mobility, programmability, configurability, user identification, and increasing penetration all imply that wireless devices are considered to be a personal thing; when those features are implemented, services can be offered tailor-made to individual users. This development has already started on the Internet and will extend to mobile terminals when the mobile Internet is available. 4.8 Location identity The location of a person is considered to be one of the most important factors when characterizing the user s personality. It has even been suggested that all the mobile services of tomorrow will be location specific. For example, someone looking for a barbershop is most probably interested only in those shops that are in the near vicinity. To allow the user to target the right service, the terminal must fulfill some technical requirements: either it must know its location, or the operator should be able to provide that information to the service provider; data communication speed must be high enough to guarantee reasonable service quality; and the terminal screen must be good enough to show a map or other information to guide the customer to the right location. There are basically two methods of determining the location of a wireless device. The service operator can locate the terminal by measuring the strength of the signal that it transmits to nearby base stations. The accuracy of the location depends on the number of base stations involved and the cell size of the network. The smaller the cell size, the better the accuracy. One advantage of this method is that no extra functionality is needed in the terminals; the other advantage is that the location can be measured inside buildings, which is not the case with satellite navigation. Satellite navigation is the other method of determining the location of a wireless device. Currently only GPS (Geographic Positioning System) is available for this purpose. GPS service is provided and maintained by the US government and was originally planned for military use only. GPS navigation requires a GPS receiver in each terminal. Navigation is a much more accurate method than bearing by base stations. The location can be determined within a few meters accuracy. GPS navigation has its limitations too. The GPS receiver is an additional and expensive feature to add to terminals, and GPS navigation works only outdoors. Walls, roofs, and high buildings block the signal. The system is vulnerable, so many business operators might hesitate to rely solely upon it. An initiative for the European satellite navigation system Galileo is under development but will only be in use by 2005 at the earliest. 30

38 4.9 Safety and security The transfer of confidential information in an open Internet environment calls for safety and security solutions. Demand for security solutions will increase dramatically when wireless Internet opens the door to mobile commerce. The whole concept is very complex and raises many questions: how should invoicing technically be handled and who should be in charge of the process, how can a customer s identity be guaranteed, and how can data integrity and confidentiality be secured? The answers lie partly on the terminal side, partly on network technology, and partly on systems. Most of the problems are similar to those of fixed line Internet. Mobility creates new challenges but also new possibilities. Innovative solutions are needed to certify the user of a mobile terminal. Third generation wireless device as a personal tool is much more than just a phone and its misuse can create severe problems for its owner. Mobility opens the possibility of using the terminal as a payment method. Small amounts of money can be loaded from a bank account to a purse located inside the terminal. The owner can make micro payments online from an m-wallet, for example, when ordering goods or services through the Internet. A combination of the purse and Bluetooth connection opens new opportunities to pay for purchases in shops and in other situations where it is technically possible. Especially convenient is paying for services in unmanned service stations like parking lots and gas stations. Safety and security solutions and applications are still under development. New solutions, whether software or hardware, are definitely needed. 31

39 5 Promising standards and technology platforms Jarmo Karesto, Finpro The focus of this chapter is on those platforms and standards which are expected to form the cornerstones of third generation wireless technology. The main purpose of this chapter is to help small and medium-sized electronics and software companies find a solid base for their business strategies. Investing in wrong technologies might lead to disaster. Selection of the topics in this chapter is based on discussions with managers of leading technology companies in Finland and abroad. However, it s wise to keep in mind that forecasting is always a risky business. Third generation mobile networks have taken much of the attention away from other developments in the wireless technology world. Cordless phones, pagers, satellite mobile phones and private mobile radio systems also belong in the category of wireless technology. It is also good to remember that wireless technology is not a synonym for mobile technology. In this chapter the main emphasis will be on UMTS and wireless local area networks (w-lan). In Europe the focus is clearly on mobile phones and their successors. The course of this development is towards communicators and Internet terminals. In the U.S. the approach seems to be slightly different. The mobile phone is not considered the only option for creating a data terminal. Vital development is taking place around palm computers, personal assistants (PDA) and wireless local area networks. A hand-held computer with fast w-lan access is a challenger to mobile WAP phones. It is clear that computer companies such as HP, Compaq, Dell, Palm and many others are active in developing devices for future mobile needs. Software will play an increasingly important role in these devices of the future. Companies developing user interfaces, Internet browsers and operating systems are increasingly being seen actively partnering with hardware producers. Operating system providers like Microsoft, Symbian, and Palm are mentioned often in these talks. It is very likely that the new wireless information devices will have several alternative connections to voice and data networks. For example, in an office environment the device can be connected to a wireless local area network and outside the office to a mobile cellular network using WAP. Digi TV will cause a revolution in the broadcasting industry. The jump from analog technology to the digital world will offer two-way communication and many more individualized customer services than today s technology. The TV set has established its position as the principle medium in almost every household in the developed part of the world and is quickly gaining popularity in developing countries. The TV set can be the media device of the future, providing access to entertainment, education, news and data independent of time. The traditional TV program supply will be combined with Internet content. 5.1 The evolution of third generation cellular networks The following table shows the evolution of the major cellular telecommunications systems. Many of the first generation networks have already made room in the radio band spectrum for the second generation networks and emerging third generation networks. The jump from first generation networks to second generation networks was a jump from analogue to digital communication. The jump from second to third generation networks will be a jump from voice communications to multimedia and Internet communication. What will fourth generation technology bring us? Any similar giant leap in technology and services is not visible. Standardization work on fourth generation technologies has already begun, but the focus is more on improving third generation technology than on specifying anything new and revolutionary. According to Ericsson (Financial Times ), 4G would be operational from around 2011, and would build on a second phase of 3G when all networks become based on Internet protocol telephony. Fourth generation speeds could be as high as 100 megabits. 4G could be built on the 3G telephony spectrum, but higher capacity demand is likely to create a need for even more spectrum. The standardization of 3G mobile networks is by far the most comprehensive development effort in cellular technology to date. Work was started in the early 1990 s, at a time when the first mobile networks of the second generation were emerging. The emphasis of the development is on speeding up the data transfer capacity to enable mobile Internet access. The key objectives of 3G development are as follows: 33

40 1st generation systems 3rd generation systems 4th generation systems Systems AMPS NMT 450 TACS NMT 900 GSM 900 DAMPS (TDMA) PDC IS95 GSM 1800 W-CDMA CDMA 2000? Operational Use ? Figure 5.1. Development of cellular technology Subscribers (thousands) TDMA PCD GSM Analog PHS CDMA 0 North America Europe Asia/Pacific Latin America/ Caribbean Africa/ Middle East Figure 5.2. Regional cellular/pcs subscribers by technology, 1Q Source: The strategic group. To provide multi-standard user terminals that operate effectively for all types of service, in all radio environments Service quality comparable to the current fixed public network Flexible new capabilities and services such as WWW, high bit-rate data, multimedia Network air interface flexibility Compatibility with second generation, e.g. GSM / DCS Future proof systems to accommodate added capabilities easily The standardization, led by the International Telecommunications Union (ITU), is focused on two 3G standard families, W-CDMA and CDMA2000. W-CDMA is a European initiative and is based on GSM network structure but utilizes wide band CDMA transmission method communication between base stations and mobile terminals. Parallel with W-CDMA standardization is the UWC-136 working group. UWC-136 is an American initiative for third generation networks. It is supported by the existing DAMPS (TDMA) operators and hardware vendors. Technically the initiative is very close to W-CDMA. 34

41 GSM Association UWCC CDG ETSI T1 TIA 2G GSM TDMA (IS-136) cdmaone GPRS IS-95B 2.5G W-CDMA EDGE UWC-136 Cdma2000 1x 3x 3G 3GPP UWCC 3GPP2 Figure 5.3. Standardization of 3G. Source: ITU. CDM2000 is more or less an American initiative. It provides fast data transfer capabilities to the existing CDMA (IS-95) networks. The conversion of existing networks to the CDM2000 network can be done quite easily. The major intellectual property rights of CDMA technology belong to the company Qualcomm. The license fee and royalty disputes between Qualcomm and other vendors have been problematic. These disputes have delayed the take-off of CDMA networks on a larger scale. CDMA networks are in commercial operation only in North America, South Korea, Australia and Hong Kong. CDMA network infrastructure technology is supported mainly by North American manufacturers. The major suppliers are Nortel, Lucent, Motorola, and Ericsson. Terminals are manufactured by a much larger number of companies, including Nokia, Korea s Samsung, and LG. At the moment it looks like W-CDMA will be the real universal mobile technology standard of the future for third generation mobile networks. It is supported by all the existing GSM operators, including those dominating the market in Europe, Southeast Asia, the Near East, and many other parts of the world. A big win for W-CDMA was when the major Japanese operator DoCoMo announced its support. However, it is far too early to forecast the death of CDMA2000; it has strong support in North America from operators such as Sprint and Verizon. Also, when discussing strategic technologies like telecommunications, the importance of technology and trade politics should not be underestimated. North American manufacturers are actively pushing CDMA2000 in China with the full support of the U.S. government, but so far without results. The Korean market is also an option. U.S. influence forced Korea to adopt the second generation CDMA technology in the mid 90 s. After the liberalization of the market in Korea, the major mobile operators SK-Telecom and Korea Telecom announced their support for W-CDMA technology in their third generation networks. Korea plays an important role as a technology supplier in Asia. Korean manufacturers Samsung, LG, and Hyundai have been active in developing CDMA technology and only CDMA technology. They are clear leaders in the domestic market. Network technology is primarily imported from the U.S. Samsung has a foothold also in the U.S. terminal market. Operators willingness to move to W-CDMA networks threatens their market position. However, it looks like Korea will follow the Japanese example and grant both W-CDMA and CDMA 2000 licenses to soon-to-be-selected third generation mobile operators. Japan has so far been a closed market with its own mobile standards. Japanese manufacturers have not been able to gain a bigger market share outside Japan. The situation will probably change now that NTT DoCoMo has adopted W-CDMA and has expanded its operations beyond Japan by purchasing minor shares of other operators in the U.S. and Europe. Japanese manufacturers like Panasonic, Sony and together with Ericsson might challenge Nokia and Motorola in the world market. There is no doubt that Japanese companies would have advanced technology. 35

42 Europe Southeast Asia GSM W-CDMA USA CDMA TDMA GSM CDMA 2000 UWC 136 W-CDMA Japan PDC CDMA W-CDMA CDMA 2000 China GSM W-CDMA? Korea CDMA W-CDMA CDMA 2000 Figure 5.4. Summary of 3G development by major markets G technology strategy plans by operators in major markets Information from European operators is excluded because the European GSM operators all use W-CDMA technology. USA Operator Numbers of users (M) Market share (%) 2G standard 2.5 G/ 2.75G/ 3G Wireless web now AT&T % TDMA GRPS/EDGE/W-CDMA Yes ALLTEL 5 5% CDMA 1XRR/HDD/ CDMA2000 No Nextel % IDEN Yes SBC-BellSouth % TDMA GPRS/EDGE/W-CDMA No & GSM Sprint PCS % CDMA 1XRR/HDD/ CDMA2000 Yes US Cellular 3 3% No VoiceStream 2 2% GSM GRPS/EDGE/W-CDMA No Verizon % CDMA 1XRR/HDD/ CDMA2000 Yes Source: Los Angeles Times, July 24,

43 Canada Operator Numbers of users (M) Market share (%) 2G standard 2.5 G/ 2.75G/ 3G Wireless web now Clearnet Communications (Telus) ESMR & CDMA 1900 MHz ESMR CDMA2000 Yes Microcell Telecommunications Inc. GSM 1900 MHz GPRS/EDGE/W-CDMA No Bell Mobility AMPS & CDMA 800 & 1900 MHz 1XRR/HDD/ CDMA2000 Yes Rogers Cantel AT&T AMPS & TDMA 800MHz & 1900 MHz GPRS/EDGE/W-CDMA No Source: Finpro Toronto Japan Operator Numbers of users (M) Market share (%) 2G standard 2.5 G/ 2.75G/ 3G Mobile Internet, Number of users (M) NTT DoCoMo % PDC Skip 2.5G/2.75G W-CDMA KDDI % CdmaOne(6.6M) cdmaone 1x PDC(7.4M) HDR/cdma2000 3x J-Phone % PDC Skip 2.5G/2.75G W-CDMA i-mode 14,0 EZ Web 4,2 J-Sky 3,5 China Operator Numbers of users (M) Market share (%) 2G standard 2.5 G/ 2.75G/ 3G Wireless web now China Mobile GSM GPRS/? Yes China Unicom GSM/CDMA GPRS/? Yes 3G has not yet been defined. The alternatives are CDMA2000, W-CDMA or China s own TD-SCDMA. Subscribers by end Sep 2000 Source: Finpro Peking Korea Operator Numbers of users (M) Market share (%) 2G standard 2.5 G/ 2.75G/ 3G Wireless web now SK Telecom CDMA W-CDMA Yes (3,626,000) (Shinsegi Telecom) CDMA CDMA2000-1X / W-CDMA or CDMA2000 Korea Telecom (KT Freetel) Yes (542,000) CDMA W-CDMA Yes (3,480,000) (KT M.com) CDMA CDMA2000-1X / W-CDMA or CDMA2000 Yes (1,315,000) LG Telecom CDMA CDMA2000 Yes (3,230,000) Source: Korea Times, October 4,

44 5.3 CDMA terminology and definitions CDMA is a generic term that describes a wireless air interface based on code division multiple access technology. CDMA technology is used both in W-CDMA and CDMA 2000 networks. cdmaone is a trademarked brand name reserved for the exclusive use of CDG (CDMA Development Group) member companies, that describes a complete wireless system that incorporates the IS-95 CDMA air interface, the ANSI-41 network standard for switch interconnection and many other standards that make up a complete wireless system. cdma2000 is a name identifying the third generation technology that is an evolutionary outgrowth of cdmaone, offering operators who have deployed a second generation cdmaone system a seamless migration path that economically supports upgrades to 3G features and services within existing spectrum allocations for both cellular and PCS operators. IS-95A is a specification currently in use in the U.S., Canada, South Korea, Hong Kong and Australia. A special CDMA 800 MHz version with different channel specifications is in use in Japan. IS-95B supports high-speed data transmission services. IS-95B can allocate up to eight wireless channels to a single terminal to provide a maximum of 64 Kbps Circuit Data service and Kbps Packet Data service. The current 14.4 Kbps service can only support the message-based data. cdma2000 has been divided into 2 phases. The first phase capabilities are defined in a standard known as IS-95 1X or IS-95C. Completed in July 1999, this phase of cdma2000 carries the TIA standard name of IS-2000 and the ITU standard name of MC-1X. 1X introduces 144 Kbps packet data in a mobile environment and speeds beyond this in a fixed environment. Features available with 1X are: a two-fold increase in both voice capacity and standby time, advanced packet data services, extended battery life, and improved sleep mode technology. These capabilities will be available in an existing 1.25 MHz channel. The second release of 1X, CDMA2000 1xHDR (High Data Rate), is being worked on in the TIA and will support faster data speeds with peak rates up to 614 Kbps. The HDR system is optimized for packet data services, with a flexible architecture based on IP protocols. HDR can overlay an existing wireless network or work as a stand-alone system. cdma2000 phase two, known as 3X, incorporates the capabilities of 1X, supports all channel sizes (5 MHz, 10 MHz, etc.), provides circuit and packet data rates up to 2 Mbps, incorporates advanced multimedia capabilities, and includes a framework for advanced 3G voice services and vocoders, including voice-over packet and circuit data. As noted above, the 3G solution based on cdmaone technology is known by many different names, but they are all related to a single technology solution. The various names are a result of the naming conventions of different standards organizations or phases in the standards process: IMT-CDMA Multi Carrier 1X/3X (ITU standards name) MC-1X and MC-3X (abbreviation of ITU standards names) cdma2000 phase 1 (1X) and phase 2 (3X) 1XRTT and 3XRTT IS-2000 (Telecommunication Industry Association (TIA) standards name for 1X). nd th rd 2 Generation 2.5 Generation 3 Generation HDR 614 kbps IS-95(A) 14.4 kbps IS-95B 64.4 kbps IS-95C 1X 144 kbps 3X 384 kbps Figure 5.5. Evolution of CDMA IS-95. Source: Bank of America Securities. 38

45 5.4 W-CDMA GPRS (General Packet Radio Service) is a packet-based wireless communication service that promises data rates up to 100 Kbps and continuous connection to the Internet for mobile phone and computer users. The higher data rates will allow users to take part in videoconferences and interact with multimedia Web sites and similar applications using mobile hand-held devices as well as notebook computers. GPRS is based on Global System for Mobile (GSM) communication and will complement existing services such circuit-switched cellular phone connections and the Short Message Service (SMS). GPRS opens up new opportunities, but also introduces challenges, the most significant of which are changes in the tariff model and introduction to the new IP infrastructure. Implementation of EDGE (Enhanced Data rates for Global Evolution) is a major step in the evolution of GSM. It will allow GSM operators to use existing GSM radio bands (800, 900, 1800 and 1900 MHz) to offer wireless multimedia IP-based services and applications at speeds up to 384kbit/s. Introducing EDGE will have little technical impact, since it is fully based on GSM, and will require relatively small changes to network hardware and software. Operators do not have to make any changes to the network structure, or invest in new licenses. For example, EDGE uses the same TDMA (Time Division Multiple Access) frame structure, logic channel and 200kHz carrier bandwidth as today s GSM networks, which allows existing cell plans to remain intact. This makes the technology particularly beneficial to existing operators seeking a way to roll out wideband services rapidly and cost-efficiently across large areas of existing networks. Many GSM operators will implement GPRS in For those who run out of capacity early, they can either convert some of their GSM spectrum to EDGE (GSM and TDMA operators) or move onward to a new 2GHz spectrum and build a new W-CDMA base station. In the U.S., the W-CDMA spectrum is reserved for other use at least until 2006, and even then its availability for 3G mobile networks is not secured. The U.S. government has not yet made plans to auction new 3G spectrums. This means that the TDMA operators, of which AT&T Wireless is by far the largest, cannot move to W-CDMA in the U.S. 5.5 WAP WAP (Wireless Application Protocol) is a global, open, standard protocol for wireless devices that allows users to access on-line services. Similar to web browsers in an Internet network, WAP browsers enable mobile Internet access. WAP will work across many mobile network technologies, and is intended to attract new subscribers and open up the mass market for mobile data services. Despite the huge fuss around WAP services and terminals, the commercial take-off has not yet taken place. This is mainly because of the limited availability of end-user ser- nd th rd 2 Generation 2.5 Generation 3 Generation W-CDMA GSM GPRS EDGE TDMA (IS-136) UWC Figure 5.6. Evolution of GSM and TDMA. 39

46 vices, and because of poor service quality due to the slow data transmission capability of ordinary GSM networks. Terminals that are more user-friendly and faster communication connections will help in this matter. So far the high terminal prices of communicators and other WAP phones have limited the use mainly to business users. WAP is, however, an extremely important standard on the route to mobile Internet services and technology. Availability of packet-switched GPRS service will improve the service quality substantially. The other major benefit of GPRS is that customers are charged based on the amount of data transmitted, not on connection time, as is the case today. Users can have an on-line Internet connection with a small fixed monthly fee. Additional fees will be charged for data transactions and services. This model is in use in DoCoMo s i-mode service in Japan. By using a simplified version of HyperText Markup Language (HTML) called Wireless Markup Language (WML), WAP enables ordinary Internet pages to be modified to fit a hand-held computer or a mobile phone. It will eliminate the need for a portable computer in many applications, as it enables interactive access to data services from the handset. 5.6 I-mode and other Japanese 3G approaches I-mode is the most well-known mobile Internet service of the three services currently available in Japan. The two others are J-Sky from Japan Telecom and EZ Web from KDD. I-mode is a packet-based service for mobile phones offered by NTT DoCoMo. Unlike most of the key players in the wireless arena, i-mode eschews the WAP protocol and uses a simplified version of HTML, Compact Wireless Markup Language (CWML), instead of WAP s Wireless Markup Language. NTT DoCoMo has said that eventually it will support WAP and WML, but is not sure when this exactly will happen. First introduced in 1999, i-mode was the world s first smart phone for Web browsing. I-mode is tailor made to work with DoCoMo s phones. It does not allow the same hardware independence as WAP does. I-mode wireless data service offers color and video for many phones. Its mobile computing service enables users to do telephone banking, make airline reservations, conduct stock transactions, send and receive , and access the Internet. By the end of 2000, i-mode had about 15 million users. See also chapter 4.5, Wireless Internet, for an analysis of the success factors of i-mode. nd 2 Generation rd 3 Generation 4 th Generation WML compact HTML security function (SSL) money transaction certification function Java purchase & payment (ex, ITS) visual communication music delivery MPEG7 MP3 Multimedia High Speed Access internet mail web access game Internet Access short message P D C 1999 P D C+i-mode cdmaone+wap 3G JAVA terminal (Docomo) WCDMA 2000 service in (Docomo) cdmaone wide band (KDDI) 3G WCDMA service in (J-Phone) IMT G CDMA2000 service in (KDDI) Digital Data Access? technical event Figure G technology path in Japan. Source: Finpro Tokyo. 40

47 5.7 Bluetooth Bluetooth technology is an initiative of telecom equipment and computer and chip manufacturers to develop a two-way digital radio standard for short-range connections between different devices. Bluetooth is becoming a global de facto standard for wireless connectivity. Based on a low-cost, short-range radio link, Bluetooth cuts the cords that used to tie up digital devices. Bluetooth operates on a public 2.45 GHz ISM (Industrial, Scientific and Medical) band. When two Bluetooth-equipped devices come within 10 meters range of each other they can establish a connection together. And because Bluetooth uses a radio-based link, it doesn t require a line-of-sight connection in order to communicate. A laptop could send information to a printer in the next room, or a microwave oven could send a message to a mobile phone informing that a meal is ready. In the future, Bluetooth is likely to be standard technology in tens of millions of mobile phones, PCs, laptops and a whole range of other electronic devices. As a result, the market is going to demand innovative applications, valueadded services, end-to-end solutions and much more. Bluetooth technology opens up limitless possibilities, and because the radio frequency used is globally available, Bluetooth can offer fast and secure access to wireless connectivity all over the world. 5.8 Wireless local area networks The wireless lan concept originates from local area networks. The major producers of w-lan cards and access points are companies like Lucent and 3Com Corporation, but there are also many small companies involved in the production. W-lan concepts are aimed at replacing the existing network cabling with wireless access, thereby providing the users mobility within the limits of the network. IEEE radios share common spectrum of the 2.45 GHz ISM band, the same band as Bluetooth. The data transmission speed is 11 Mbps, which is about one hundred times that of ISDN. W-lan can create a mobile extension to wired networks in large enterprise installations. It can replace wired infrastructure entirely in Small Office/Home Office applications. The technology also interests operators who want to offer w-lan service in hotels, airports, and other hot spots frequented by businesspeople. Operators are also interested in expanding w-lan service to private homes. The w-lan market is estimated (by the Venture Development Group) to grow from 745 million dollars U.S. in 2000 to 3025 million dollars U.S. in 2004 an increase of 42% a year. Several wireless equipment vendors including Lucent, 3Com, Nortel, Cisco, and Apple have a significant investment in wireless LAN products based on b. Intel, Ericsson, and many others are actively developing their own w-lan products. At the same time there are plans for products that operate on the 5GHz band. The w-lan concept offers a cheap way of networking computers and connecting them to the Internet. It does not provide the freedom and mobility of the 3G network but will clearly compete with or complete 3G solutions in office environments. Portable computers and communicator-type devices can have connections to both mobile networks and wireless lan. 5.9 Operating systems in mobile devices, EPOC, Palm OS, and Windows CE The main competitors in the area of operating systems in third generation mobile devices are EPOC from Symbian, Palm OS from Palm and Windows CE from Microsoft. In each case the philosophy and approach behind the development differs. Microsoft s Windows CE is basically a reduced version of the Windows operating system and is designed to work in palm computers. Currently, for example, Casio, HP and Compaq have licensed Windows CE for their small devices. Windows CE turned out to be too heavy for use in smaller mobile devices. Windows CE development has been stalled but Microsoft will certainly not give up on developing new concepts for the mobile environment. EPOC is based on a previous operating system from Psion, the first major manufacturer of personal digital assistants. The name derived from the company s belief that the world is entering a new epoch of personal convenience. EPOC adds wireless communication and architecture for adding application programs to previous systems. Psion declared its first version of EPOC to be an open operating system and licensed it to other equipment makers. In 1998 Psion formed a new company with Ericsson and Nokia, called Symbian, which now licenses EPOC and continues to develop it. Later, Motorola joined the consortium. This partnership will drive the development of the EPOC operating system, optimized for mobile multimedia communica- 41

48 tions. Its aim is to set the standard for mobile operating systems and create and open up a mass market for mobile information devices the next generation of palmtop computers, PDAs, smartphones, and communicators. Symbian refers to the class of hardware that EPOC serves as wireless information devices. EPOC is a 32-bit operating system that supports a pen-based graphical user interface. It is written in the C++ programming language using an object-oriented programming design. The code is very compact so that it can fit on a small memory chip. In addition to basic services, the operating system comes with an application suite that includes a word processor, handler, spreadsheet program, a scheduling application, general purpose database, sketch program, world clock, voice recorder, spell checker, calculator, communication programs, and a WEB browser. EPOC can be scaled down from relatively large configurations for a fully functional hand-held computer to small configurations for embedded systems programming applications. Symbian provides development kits for C++, while Java is under development. Palm is the market leader in hand-held computing, with a 78.4% market share worldwide (IDC, 1999), and Palm OS has gained an important position among operating systems for hand-held devices. Palm Inc. has partnered with a very diverse family of companies to make Palm OS products. Handspring, QUALCOMM, Symbol, and TRG all create their own hand-helds based on the Palm OS. IBM sells specially-configured Palm systems. In November 1999, Nokia and Sony signed on to lead Palm OS in new directions Nokia and Palm, Inc. are partnering to create Palm OS smart phones, and Sony and Palm, Inc. are working together to combine the Palm OS with Sony s world-leading multimedia technology Mobile Internet protocol version 6 The current Internet protocol version 4 (IPv4) was developed to connect stand-alone computers to form a web. In the future there will be a huge number of new mobile devices connected to the Internet. The key arguments for developing the next generation Internet protocol, IPv6, are summarized as follows (Nokia): Future Internet is largely wireless/mobile IPv6 needed for billions of new wireless devices Mobile IPv6 is more efficient Autoconfiguration suitable for the mobile Internet Security is a key component for success Authentication, Authorization and accounting play big roles in cellular rollout Leverage from current cellular interest IPv6 is now included as part of IP support in many products including the major computer operating systems. IPv6 has also been called IPng (IP Next Generation). Formally, IPv6 is a set of specifications from the Internet Engineering Task Force (IETF). IPv6 was designed as an evolutionary set of improvements to the current IP Version 4. Network hosts and intermediate nodes with either IPv4 or IPv6 can handle packet formatting for either level of Internet Protocol. Users and service providers can update to IPv6 independently without having to coordinate with one another. IPv6 s most obvious improvement over IPv4 is that IP addresses are lengthened from 32 bits to 128 bits. This extension anticipates considerable future growth for the Internet and provides relief from what was perceived as an impending shortage of network addresses. IPv6 describes rules for three types of addressing: unicast (one host to one other host), anycast (one host to the nearest of multiple hosts), and multicast (one host to multiple hosts). 42

49 5.11 Major technology suppliers by key categories The following list organizes the major technology suppliers by key categories and their Internet addresses. The companies are not listed in any specific order. Company: www site: Mobile Phones Nokia Motorola Ericsson Siemens Samsung Panasonic Alcatel GSM, W-CDMA Networks Ericsson Nokia Nortel Networks Alcatel Motorola Siemens CDMA, CDMA-2000 Networks Lucent Nortel Networks Ericsson Motorola Samsung Qualcomm Internet network technology Cisco Nortel networks Lucent Wireless lans Lucent 3Com Cisco lin0 Symbol Breezecom Enterasys Nokia Ericsson

50 PDAs Palm Handspring Compac HP Psion Casio Mobile operating systems and web browsers Symbian Palm Microsoft Electronic contract manufacturers Solectron, USA SCI Systems, USA Celectica, Canada Flextronics International, USA Jabil Circuit, USA Sanmina NatSteel Electronics, Singapore C-MAC Industries, USA Elcotew Networks, Finland Useful links to get more free information Topic: IPv6 Navigation w-lan Bluetooth IMT-2000 UMTS CDMA WAP i-mode www site:

51 6 Trends in The Global business environment Michael Lovejoy, Finpro 6.1 Turbulent times It seems as if turbulent times, to borrow a phrase from a popular management book of the first half of the 1980s, have been a part of the global business environment for a long time. 56 The turbulence is the result of profound changes in the economy, and information and communication technologies are at the root of these changes. As Jean-François Rischard, a Vice President at the World Bank, wrote in the foreword to one of the bank s technical papers in : Information technology is demolishing territorial boundaries today, and bringing nations together in a single global community but a community more fiercely competitive than ever before The increasing pressures from the global markets are forcing everyone to adopt these trade practices and standards. The following sections present some of the major trends in the business environment that are having a significant impact on the shape and direction of trade practices and organizational standards in the information and communication technology (ICT) sector of the global economy. Among them are convergence, globalization, transnationalism, virtual integration and outsourcing. Suppliers and subcontractors must be aware of these trends and develop their business and organizational strategies accordingly, both within their existing production networks as well as within production networks that they wish to join. anywhere. Or at least that s what they tell us we will have someday. What is going to make all of this possible is convergence; the melding together of all the facets of ICT, as depicted in Figure 6.1. Unfortunately, the early stages of this major technological trend are creating great uncertainty in the marketplace. This reality was best captured in Business Week magazine s 7th of August 2000 cover. Atop images of various mobile electronic devices, the headline read: CHOOSE YOUR WEAPON, perhaps indicating both the consumer s array of choices as well as industries range of uncertainty. Multimedia Network Equipment Computer Industry Computers Software Interfaces Communications Industry PSTN Cable Satellite Broadcasting Mobile Networks Interactive Multimedia Off-line Multimedia Online Multimedia Information/ Content Industry Data Bases Information Services Audio Visuals Films Music Photos Figure 6.1. Convergence of ICT technologies. Source: Devotech; OECD, Convergence It s all about interactive real time multimedia at your fingertips. The device in your hand is not just a computer, a telephone, a television or a radio. It is a portal to a rich array of information that you can shape to your needs, anytime, Winners and losers Convergence may underscore the possibilities that today s winning technology may be tomorrow s failed technology and that the current leading business model may be next year s business disaster. As Ernst (1997) writes: 56 Drucker, P (1984), Managing in turbulent times. 57 Schware R and Kimberly P (1995), Information technology and national trade facilitation, World Bank Technical Paper Number 316 (The World Bank, Washington D.C.) 45

52 Rapid technological change has acted as a doubleedged sword. In some sectors, trajectory-disrupting innovations have dismantled entrenched entry barriers and acted as a powerful equalizer by eroding the competitive advantages of erstwhile market leaders. The history of the electronics industry is replete with examples supporting Ernst s statement e.g., IBM in personal computers, Motorola in mobile phones, etc. To avoid such an end, the ICT-related firm must look beyond the myopia of current product lines and be positioned to anticipate technological change and innovate accordingly. Innovation Dicken (1998) states: Innovation the heart of technological change is fundamentally a learning process. Such learning depends upon the accumulation and development of relevant knowledge of very wide variety. What innovative strategies hope to accomplish at the organizational level is: Being the pioneer of ideas, services and products. First to do, others follow. Thinking beyond the traditional. 58 These strategies contribute to the building of intellectual capital. Building intellectual capital As the trend toward convergence accelerates, no one company will possess all of the intellectual capital in-house that will be required to develop and market innovative ICT products that are fully proprietary. Access to external sources of expertise must be obtained. In this regard, The Industrial Research Institute (IRI) found in its R&D Trends Forecast for 2000 for the USA that R&D is becoming more externally collaborative. Results from an IRI survey showed a greater emphasis on alliances, licensing and outsourcing. This has certainly been part of the Nokia success story, as evidenced by ETLA s recent publication: Nokia s Network Gaining Competitiveness from Co-operation. (Ali-Yrkkö, 2001) Links to the best available intellectual capital may involve collaborative relationships beyond the firm s home base, since technological leadership has tended to shift over time, both nationally and regionally. (Dicken,1998) Perhaps in recognition of this fact, one Silicon Valley executive said: Sometimes people here don t like me to say this, but not all the world s talent resides in the state of California. 6.3 Globalization Globalization, fueled by the pace and reach of ICT, is the overriding trend that effects the business environment today. What is it? François Chernais credits the initial ideological usage of the word globalization to the business management schools in the USA such as Harvard, Stanford and Columbia (Sjolander, 1996). A good example of this view can be found in Professor Theodore Levitt s article in the September October 1982 issue of the Harvard Business Review titled: The globalization of markets. Professor Levitt states: A powerful force drives the world toward a converging commonality, and that force is technology. It has proletarianized communication, transport, and travel. It has made isolated places and impoverished peoples eager for modernity s allurements. Almost everyone everywhere wants all of the things they have heard about, seen or experienced via the new technologies. Much of what has been written about globalization since Professor Levitt s article, however, is confusing, because there is not a clear enough distinction between its use and the use of the term internationalization, and in some instances the two terms are used interchangeably to describe the same thing (Sklair, 1999). Dicken (1998) helps to clarify the situation by making an important distinction between internationalization processes, which involve the simple extension of economic activities across national boundaries, and globalization processes, which involve not only an extension across national boundaries but also the functional integration of such internationally dispersed [economic] activities. Partial vs. Systemic Functional integration on an international basis is one of the keys to comprehending the evolution and structure of global industrial organizations. Merely being present in many international markets is not enough in itself. As Ernst (1997) suggests in his description of partial and systemic globalization. 58 Innovation and outsourcing a partnership driving success 46

53 Partial globalization is characterized by a loose patchwork of stand-alone affiliates, joint-ventures, and suppliers that are scattered across the globe and that co-exist without much interaction. It is partial in the sense that the firm cannot reap the full benefits of international specialization. In essence, this is due to an absence of interaction across functions and locations and to inadequate coordination approaches. Systemic globalization, on the other hand, implies that a company attempts to network its operations and inter-firm relationships worldwide, both across functions and locations. It is systemic, as the firm can now generate closer, faster, and more cost effective interactions between the different nodes of these international production networks. By providing more cost-effective ways of coordinating these interactions, systemic globalization enables the firm to internalize, on an international scale, resources and capabilities without running into the constraints of excessive centralization. Companies are integrating their domestic and overseas R&D facilities into global R&D networks. We see [the] move from simple geographic expansion to integration as representing a new stage in the global management of R&D, defined in a 1996 study by the Industrial Research Institute and the Massachusetts Institute of Technology as the ability of the technology development organization to recognize and respond to technology from all strategically important locations. 59 For a practical example of the influences that have led to this new stage of global R&D, the following may be ascribed to the German TNC, Siemens AG: Customer orientation the key to innovation management Access to current innovative hot spots Local content requirements International cost differentials Mergers & acquisitions Transnationalism The Transnational Corporation Dicken (1998) believes that the transnational corporation (TNC) is the key actor in the globalization of economic activity. He defines the TNC as: a firm which has the power to co-ordinate and control operations in more than one country even if it does not own them. Dicken (1998) writes that the importance of the TNC can be found in three basic characteristics: its coordination and control of various stages of individual production chains within and between different countries its potential ability to take advantage of geographical differences in the distribution of factors of production (e.g., natural resources, capital, labour) and in state policies (e.g., taxes, trade barriers, subsidies, etc.) its potential geographical flexibility - an ability to switch and to re-switch its sources and operations between locations at an international, or even a global scale. Global R&D TNC operations abroad involve more than just the manufacture of products. In line with Ernst s description of partial and systemic globalization, IRI states: 6.5 Virtual integration Vertical Integration The modern corporation as it has been called in the industrial age was a self-contained, hierarchal, multi-layered organization. The vertically integrated value chain, which is simply shown in Figure 6.2, was wholly owned to as great an extent as possible, supported by the belief that in-house capabilities minimized uncertainty and maximized profitability. Behemoths of this ilk became the models of industrial organization on a multinational scale. Sales and Marketing Purchasing and Manufacturing Design Related Figure 6.2. Vertical integration. Source: Sturgeon (1997). 59 Globalization of R&D enters new stage as firms learn to integrate technology operations ( 60 Chasing talent (1 August 2000) ( 47

54 Table 6.1. Rewards and risks of vertical integration. Source: Electronic Business, September 2000; Chase H&Q. Rewards Improved control/coordination Potentially faster response time Opportunity to further improve/harmonize Larger revenue opportunity Higher margin Risks More organizational complexity Compromised solution Slower asset turn, lower ROIC Erosion of valuation Higher earning volatility In its heyday, the modern corporation s far-ranging operations functioned in an era that did not experience the same pace of technological change that is encountered today. The environment changed more slowly; it was easier to model in corporate plans and easier to control through administrative systems. The rewards and risks of such an organization are found in Table 6.1. To be fair, it must be noted that the modern corporation was never truly an entity unto itself as can be observed in Figure 6.3. Other organizations and stakeholders outside of the corporation s proprietary holdings exerted their influences; although, some would argue that it worked the other way when giant multinationals were concerned. But that is another story. For the purposes of this chapter, these influences help shape the identities of production chains or systems, and they are explored at the national level in section 6.6, below. The turbulence created by the forces of globalization brought the vertical model of business organization into question as original equipment manufacturers (OEMs) strove to innovate and compete in the global marketplace. The so-called modern corporation appeared sluggish in its response to competition. Sturgeon (1997) finds evidence to suggest that a new model of industry organization emerged in the 1990s. This model may be described as follows: It focuses on functional specialization versus vertical integration. It is the result of the shift away from mass production and mass consumption to flexible production and customized consumption. It takes advantage of external economies by subcontracting with outside suppliers that possess core competen- FINANCIAL SYSTEM Technology / Research & Development (product design, process technology, logistics of procurement / distribution) Materia Procurement Transformation Marketing & Sales Distribution Services Transport and Communications Processes (movement of materials, products, people and information) REGULATION, CO-ORDINATION, CONTROL Figure 6.3. Levels in the production (value) chain. Source: Dicken,

55 cies which exceed those that were previously kept in-house, thus freeing the OEM s resources for doing what it does best satisfying the customer s ever changing needs, wherever they may be in the world, through the development and marketing of innovative products. Sturgeon (1997) states: The totality of the external linkages created by contracting relationships in larger amalgams of firms have been described as production networks. These production networks represent a split between innovation and production Figure 6.4 graphically represents both the shift toward the production network of functional specialization as well as the split between innovative processes and production processes. In Sturgeon s (1997) model of a production network, the OEM, now referred to as the Brand Name Firm, has the ability, as described earlier by Dicken (1998), to co-ordinate and control operations even if it does not own them. Nortel Networks describes this as virtual integration. Key examples of how the above model is put into play can be found in the public filings of two firms in the USA that offer lines of personal digital assistant (PDA) products i.e., Palm Pilot and Visor, respectively. Palm We currently outsource all of our manufacturing operations to Manufacturers Services Limited and Flextronics. This outsourcing extends from prototyping to volume manufacturing and includes activities such as material procurement, final assembly, test, quality control and shipment to our distribution centers. These distribution centers are outsourced functions operated by Manufacturers Services Limited in Salt Lake City, Utah and IEC in Dublin, Ireland. Manufacturers Services Limited currently assembles Palm devices for us at its Utah facility which it purchased from 3Com in November Flextronics currently assembles Palm devices at its facilities in Mexico, California and Malaysia. Our outsourced manufacturing strategy allows us to: minimize our capital expenditures; conserve the working capital that would be required to fund inventory; adjust manufacturing volumes quickly to meet changes in demand; and operate without dedicating any space to manufacturing operations. 61 Handspring All of our Visor handheld computers are currently manufactured on a purchase order basis either by Flextronics at its facilities in Malaysia or by Solectron at its facilities in Mexico. Flextronics and Vertical Integration Administration Traditional Manufacturing Firm Product R& Process R&D Product Definition Functional Design Form Design Prototype Fabrication Parts Purchasing Manufacturing Testing Packaging Marketing Market Channel Distributor Sales Reps. Systems Integrators Retail E N D U S E R Functional Specialization [Virtual Integration] Brand Name Firm Turnkey Contractor Market Channel Administration Product R&D Product Definition Functional Design Form Design Prototype Fabrication Marketing Administration Process R&D Design for Manufacturing Parts Purchasing Manufacturing Testing Packaging Distributor Sales Reps. Systems Integrators Retail E N D U S E R Figure 6.4. Shift toward the production network form of industry organization. Source: Sturgeon (1997). 61 Palm s 10-K Annual Report (16 August 2000) 49

56 Solectron procure components and other supplies, manufacture, assemble and test our products. By outsourcing the entire manufacturing process, we are able to focus on our strengths, including product development and design, minimize capital expenditures, rely on a third party with more manufacturing expertise than ourselves and avoid the need to find and maintain facilities for manufacturing operations. 62 Palm s and Handspring s revenue and unit volumes are very small when compared to Nokia s. But as relative newcomers to the electronic products scene, they are at the focal point of convergence in the handheld ICT industry, and they demonstrate the logic that supports the split between innovation processes and production processes. 6.6 Importance of place Regardless of what may be said about globalization, geography still matters. Regional identities Borrus (1993) states: International competition in electronics has always been a story about market rivalry between firms with distinctive national identities. Since economic activity is still defined by distance and place (Dicken, 1998), production networks have a regional cast (Borrus, 1993), because during their formative periods networks tend to consist of a high density of relations between actors within the same nation (Kogut et al., 1993). As a given production network actualizes internationalization or globalization strategies, it almost certainly meets competitors whose formative periods occurred in other countries. In line with the above comment by Borrus (1993), Sturgeon (1997) has charted differing organizational forms that have been observed in Japan, Germany and Italy, as shown in Figure 6.5. Competing network cultures Until recently, the USA had a strong tradition of vertically integrated production chains not just in automobiles, but also in electronics, with the IBM of twenty-odd years ago being one of the best examples. Intense competition from Japanese production systems altered the competitive landscape, and American firms in the electronics industry developed their own production network model, as described in the above, to better meet the Asian challenge. Part of this involved the location of production in low-cost Asian countries, where firms from the USA stood beside networks from other countries. Table 6.2 presents the typology of US-owned, Japaneseowned and Taiwanese-owned production networks operating in Asia. The Japanese Model: Hierarchal Captive Network The German Model: Self-Reliant Network The Italian Model: Egalitarian Cooperative Network Sales and marketing Sales and Marketing Sales and Marketing Sales and Marketing Design Related Manufacturing Purchasing and Manufacturing Purchasing and Manufacturing Purchasing and Manufacturing Design Related Design Related Design Related Purchasing & Manufacturing Design Related Sales and marketing Design Related Figure 6.5. Country specific models of production networks. Source: Sturgeon, Handspring s 10-K405 Annual Report (29 September 2000) 50

57 Table 6.2. Typology of electronics production networks in Asia. Source: Borrus, Characteristic US-owned Japanese-owned Taiwanese-owned Accessibility Open Closed Insular Responsiveness Fast/Opportunistic Cautious Fast/Flexible Governance Decentralized Centralized Hierarchal Permanence Disposable Long-term/Stable Fluid Supply Base Anyone meeting price, quality, delivery constraints Domestic and affiliate Guanxi-preferenced Product Mix Sophisticated industrial electronics Low-end, especially consumer audio visual PC electronics Division of Labor Off-shore high value-added especially in components and manufacturing, and maximizes Asian valueadded High value-added products/ processes at home, low offshore, but minimizes Asian (i.e., non-japanese value added) Off-shore low-end products/ processes and exploits non- Taiwanese value-added there and where otherwise necessary Broadened scope of national systems of production As implied graphically in Figure 6.5, above, production networks involve more than the various firm-specific processes that support the production of final products. Finance and science play a major role in influencing the direction of production networks and can be viewed as networks in their own right, supporting national production systems. Examples of the differences in the broader domain of country-specific networks are presented in Table 6.3, below. These differences are part of the regional cast of production networks of various national origins. National orientation While there is ample reason to believe that national production systems are being homogenized through integration into the global economy and the evolution of TNCs, there is still reason to believe that the national make-up of networks persists to some degree (Castells, 1996). The talk about networking and virtual integration may be the current lingua franca in the wireless equipment industry, as it is in other industries, but Nokia s internal corporate culture owes its present character as much to its roots in Finland as Siemens or Motorola owe theirs to Germany and the USA, respectively. Table 6.3. Variations in the broader national systems of production. Source: Kogut et al., Country Finance Production Science Germany National-dominant bank Relational Joint firms/institutions Japan Group-dominant bank Satellite Firm-based USA Regional-dominant bank Contractual University-based 51

58 Technology Centers It is apparent that industries tend to cluster in a select number of high-tech centers or regions (Dicken, 1998). These centers are specialized; although, some centers may address multiple segments of a particular industrial sector e.g., ICT in Silicon Valley. 63 Geographers refer to agglomeration economies when describing the spatial clustering of production networks in technology centers or industrial districts. (Sturgeon, 1997) Krugman (1991) describes the process: Because of economies of scale, producers have an incentive to concentrate production of each good or service in a limited number of locations. Because of the costs of transacting across distance, the preferred locations for each individual producer are those where demand is large or supply of inputs is particularly convenient which in general are locations chosen by other producers. Thus concentration of industry, once established, tend to be self-sustaining As globalized production networks of differing national origins cluster around the same technology centers for example the Dallas-Fort Worth area of Texas in the USA for wireless networks it is logical, to a certain degree, that best practices in the industry would be shared and/or imitated. A successful business model or organizational paradigm builds a momentum of its own, helped along by corporate peers, academics, consultants, financiers, suppliers, distributors, trade publications and newly hired employees from competitors organizations. 6.7 New model of production in the ICT industry In writing about a new model of industrial organization in the electronics industry, Sturgeon (1997) states: external scale economies are coming to reside in a cadre of specialized merchant suppliers that offer access to a functionally coherent set of production functions as a service to their customers, the brand name firms. These production functions, or rather electronics manufacturing services (EMS), have been commodified, according to Sturgeon, and they can be shared industry-wide, as shown in Figure 6.6. Evidence to support the industry-wide sharing of EMS can be found readily enough in the mobile phone business. Alcatel, Ericsson, Motorola and Siemens have announced decisions to outsource. Simple economics is the reason. And there is just a small pool of EMS companies Solectron, Celestica and Flextronics that have the ability to do the big deals, according to Flextronics chairman and chief executive. 64 In line with this view is that of Solectron s vice president of strategic marketing, who believes by there will be three-to-four megacompanies that will control 70% of the EMS business. 65 That being said, will the above model become truly ubiquitous? Sales and Marketing Design Related Purchasing and Manufacturing Sales and Marketing Design Related Figure 6.6. Shared EMS. Source: Sturgeon, See The Wall Street Journal (Tuesday, 23 November 1999), The Globe And Mail (Thursday, 24 February 2000), Kauppalehti (Friday, 26 January 2001) 64 EMS providers see $10 billion windfall from cell phones (1 May 2001) ( 65 See Electronics 2000 ( 52

59 6.8 Globalization of the EMS model Worldwide market The large EMS provider Sanmina reports on its website that the global EMS industry will grow by 25% during the coming year, reaching $122 billion by Figure 6.7 provides another forecast, showing the industry will further increase its revenues to $200 billion by Control over the EMS industry, in terms of revenue and geography, is highly concentrated. Banc of America Securities estimates the top ten EMS companies had a 61% market share in 2000, assuming $100 billion in sales, and this share could grow to 75% by While there are many companies that offer EMS, when the large market share of a few companies is considered, it is obvious that a significant amount of the EMS industry is managed from North America, as indicated in Table 6.4. Table 6.4. Headquarters locations: Top 50 EMS companies. Source: Purchasing Magazine, 19 October EMS Sales OEM Assembly Market Country Canada Finland Singapore Taiwan Thailand USA Company HQs * Note: Flextronics headquarters is in Singapore, but it is managed from California Figure 6.7. Worldwide EMS market (US $ in billion). Source: Electronic Trend Publications, October The worldwide EMS market makes up only a small portion of the overall OEM assembly market less than 20%, and the share is no better in wireless. An analyst at Deutsche Bank Alex. Brown was reported to say in January 2001 that less than 10% of wireless products are produced by EMS companies. 67 Technology Forecasters predicts that this will rise to only 14.5% in There have been major outsourcing announcements by Alcatel, Ericsson, Motorola and Siemens, which calls the above modest market shares into question. Nevertheless, these estimates are understandable, given the growing market share by Nokia and the current impenetrable nature of many Asian production networks. Who controls the model? Growth of Electronics Outsourcing Technology Forecasters presents what they believe to be the Five Waves of Electronics Industry OEM Outsourcing : 1. North American Computer OEMs 2. North American Communications OEMs 3. European OEMs 4. Japanese / Asian OEMs 5. Comprehensive Full Assembly 70 North American OEMs The October 1999 issue of Circuits Assembly stated that the North American industry grew by 20% per year from 1984 to 1998, when revenues reached $22.5 billion. Frost & Sullivan find that North American EMS revenues grew by 47%, from $30 billion in 1999 to $44 billion in Frost & Sullivan note, however, that consolidation has played an important part in this dramatic increase. Figure 6.8 shows that the majority of EMS services flow to the computer and communications industries. 66 See 67 Big three move toward outsourcing handsets (22 January 2001) Wireless Week 68 Wireless outpaces other equipment outsourcing ( 69 California Technology Stock Letter (16 March 2001) 70 Ibid. 71 Executive Business Briefing headlinewatch.com (9 April 2001) 53

60 % Computer Communications Industrial 7.5 Instrumentation 4.5 Automotive 4.3 Business Retail 3.2 Consumer Electronics 0.9 Government/Military Figure 6.8. Industrial markets served by the North American EMS industry. Source: Circuits Assembly, October % Over $300 Million $100 $300 Million $50 $99.9 $20 $49.9 $5 $19.9 Under $5 Million Million Million Million Figure 6.9. Share of North American EMS market by company size (1998). Source: Circuits Assembly, October Figure 6.9 shows that large companies dominate the North American EMS market just as they do in the global EMS market. European OEMs The European EMS market is not as big as North America s, but it is growing. Reed Electronics Research predicts that EMS in Europe will reach $28.9 billion by This is almost double the estimate for 2001, as shown in Figure Figure 6.11 shows Germany and the United Kingdom to be the biggest users of EMS, followed by France, the Scandinavian countries and Italy. US $ Figure Growth of the European EMS market (US $ in billions). Source: Electronics Industry Yearbook, 2001 Edition. 54

61 Scandinavia 11% Italy 7% France 16% Other 15% In Figure 6.12, Reed Electronics Research provides an estimate of the top industrial markets served by the EMS industry in Europe during Again, announcements by Alcatel, Ericsson and Siemens point to the future role EMS will play in the wireless segment of the European ICT industry. Japanese / Asian OEMs Germany 28% UK 23% Figure Top European EMS markets by location (% of total market). Source: The Electronics Industry Yearbook Consumer Electronics 10% Industrial 16% Other 15% Automotive 16% Computer 28% Telecommunications 15% Figure Top European EMS by markets by sector (% of total market). Source: Electronic Business, September Asian production networks have traditionally relied on indigenous sources of supply with complex linkages to affiliates and subcontractors. By their very structure they have been closed to outside suppliers. 72 In Japan at least, there is evidence that may offer slim support for Technology Forecasters prediction of Asian OEM outsourcing. For example, Electronic Business News reports in its 20 October 2000 issue that Sony Corporation agreed to sell a plant in Japan and a plant in Taiwan to Solectron, thus figuratively opening the door for other Japanese OEMs to outsource to EMS companies. Also, in a press release, NEC America announced on 9 February 2000 that it was selling its Hillsboro, Oregon, facility in the USA to the Singapore-based EMS company, NatSteel Electronics Ltd. Whether or not these two examples represent a wave of change in a country that controls approximately 30% of the cost-of-goods sold in global electronics hardware remains to be seen. Sony, for example, plans to sell only seven of its 62 plants to the EMS industry. 73 Is the EMS model truly global? The EMS model, as represented by the contract manufacturers (CMs), has only captured a small portion of the global electronics manufacturing business, as indicated in the above. Not all OEMs or brand-named companies have adopted a strategy that involves a full divorce from manufacturing, and some, such as Nokia, have been quite successful in doing so. There must be more to outsourcing than what is presented in the trade publications and academic articles about the growing strength of CMs and the EMS model in the electronics industry. Perhaps the study by Gartner Research and its affiliated unit, Dataquest, to determine the real scope of the EMS market will give a clearer picture of the real reach of the model Types of outsourcing services offered and utilized Ernst (1997) found that outside purchases of components, software and services, as a percentage of total ex-factory production costs for the typical PC company had increased from less than 60% in the mid-1980s to more than 80% by Taking into account estimates for EMS market shares in global markets, perhaps there is more depth to outsourcing than otherwise indicated in EMS market forecasts. Companies offering outsourcing services Technology Forecasters Inc. announced in a 2 March 2001 press release that the results of a survey it had conducted showed that EMS companies account for the majority of outsourcing by OEMs because they provide more value added services. However, OEMs also outsource to other types of companies as well. 72 Borrus M (no date) Riches and rivalry: production networks and the industrial integration of Asia (BRIE Background paper #3) 73 California Technology Stock Letter (16 March 2001)

62 While the survey sample size was not stated, 89% of the respondents said they currently outsource and of the 11% who said they were not currently outsourcing, 60% said they would do so in the future. For those OEMs that currently outsource, the types of companies they outsource to, on a percentage basis, may be roughly stated as follows: EMS companies between 80 to 90% Original design manufacturers (ODMs) approximately 20% Single function assembly houses between 20 to 30% Other less than 10% Single function assembly is simple enough to understand. There may be confusion, however, over the difference between EMS companies and ODMs, because the latter may be seen as an effort by some firms in the EMS industry to highlight the breadth and depth of their services offering. In order to clarify the situation, an EMS or contract manufacturing company manufactur[es] products according to a design owned by the name brand customer, even when helping to design the product. Whereas an ODM manufactur[es] a product of one s own proprietary design for sale to name brand companies. 75 The total ODM market for GSM mobile phones was 4 million units in 2000, and Acer in Taiwan a 75% market share. 76 Real reasons for outsourcing In the 10 October 2000 issue of Purchasing, the magazine published the results of its survey of OEMs on their reasons for outsourcing. Multiple responses were allowed and the percentage of replies for each reason are as follows: Manufacturing cost savings 81% Avoid capital equipment investment 57% Improve time to market 38% Increased demand for product 38% Obtain technical expertise 32% Design assistance 16% Improve quality 16% Interestingly, the traditional reasons money, time and capacity still lead the list of OEM reasons to outsource. What is not identified is the level of globally integrated supply chain management and purchasing expertise that may be behind the major reasons for outsourcing. Services such as these are part of an expanding manufacturing capability. 77 Expanded EMS offering The Electronics Industry Yearbook 2000 states: Essentially the goal of [EMS companies] is to develop their business so that OEM companies never see their products. Such a goal requires that the EMS company offer an entire suite of services from design to full systems (box build) assembly to after sales services. The major EMS companies are starting list all of these as service options for their clients. Table 6.5 provides a view of recent utilization and planned offerings. Table 6.5. EMS services sampling (as a %). Source: Electronic Business, September Service 1998 OEMs Using Design 1998 CMs Offering 2003 CMs Plan to offer Product definition Product design Design for manufacturing Design for test Final systems Mechanical Assembly Subassembly Final product assembly Final product test Gordon P (September 2000) CEM and ODM distinction blur, especially in Taiwan ( 76 See 77 See Electronics 2000 ( 56

63 Design outsoucing Design outsourcing has become a big issue in EMS. In a survey by Cahners Research, senior executives in the electronics industry were queried about their firms utilization of contract manufacturers (CMs) design-related services. 78 The results of the survey indicted the following: Thirteen percent (13%) of the respondents said their firms always use CMs, and 63% said they occasionally use them, with the remaining 24% saying never. Nine percent (9%) of the respondents said that their firms always use CMs to help with their designs, and 57% said they occasionally use CMs, with the remainder 34% saying never. Fifty-nine percent (59%) answered yes to the question as to whether over the next five years they would use CMs for product development, and 41% answered no. Ninety-nine percent (99%) answered yes to the question as to whether over the next five years their firm would use CMs for design, and only 1% said no. Questions still remain as to the extent EMS companies will become involved in the design of OEM products. As one periodical stated, Flextronics design capability was not the reason Motorola signed an outsourcing contract worth potentially $30 billion. 79 The core area of design expertise that EMS companies will be called on to provide will be in the area of manufacturing, which is where they are supposed to be the most qualified. One area of outsourcing that does not seem to be captured in the trade literature is the role of component suppliers in the outsourced design of proprietary components for OEMs. Also, there is a need for more information on the role of the pure contract design house in OEM outsourcing plans. Since these areas are obviously the most critical in OEM innovation strategies, details as to firms, practices and spending are closely guarded secrets. Nevertheless, as earlier stated, we know that OEMs are very active in these types of relationships. After sales service After sales service e.g., warranty repairs and logistics could be a $300 billion business for EMS companies. 80 With all of the headaches associated with warranties, this is probably the in-house responsibility that OEMs do not want, and yet it is at the center of providing specialized and customized service to the customer as well as foremost in preserving hard-earned brand recognition. Firms that hope to offer a full-scope outsource solution will have to invest heavily in this area, which may have liabilities that are unforeseen Thoughts for the future Convergence and globalization are givens in today s business environment. Also, it is clear that outsourcing is a trend in the electronics industry. What is not obvious is whether or not the split between innovation and manufacturing will result in a shared pool of commodified production resources, and whether this is what the electronics industry really needs in the long run. It is true that EMS companies are growing through outsourcing contracts and acquisitions, and on the surface a few firms seem to be developing massive global economies of scale in a wide array of services. However, in order to maintain control over such vast organizations, aren t the mega EMS companies mimicking what was known as the modern corporation, with all its hierarchy and vertical layers? 81 It is no secret that EMS companies operate on very thin margins. When this reality is juxtaposed with the investment required to create the mega EMS company and the resulting cost of capital, there is little room for error. A heavy concentration of manufacturing resources in the hands of just a few companies can be costly in both good times and bad times. In an ongoing age of rapid change and blurred futures, it may be all too easy to grasp onto what appears to be the logical model, only to later discover that all was lost. Therefore, careful attention must be given to the whole issue of networking in the global teletech business; appropriate strategies considered and proper steps evaluated. 78 Carbone J (19 October 2000) Growth means more consolidation, more services ( 79 Designing for dollars (1 September 2000) ( 80 Serant, C (22 June 2000) On-on-one: CEMs find after sales market offers profitable opportunities ( 81 Flextronics is a case in point with their acquisitions for the purpose of creating their own enclosure company. 57

64 7 Generic growth strategies for technology companies in the network environment Vipul Chauhan, Helsinki Univeristy of Technology Jarmo Karesto, Finpro Technology companies throughout the world have felt the need for strategic planning and choosing an alternative course of action. The strategic planning and strategic choices between various alternatives now more or less decide the enterprise s future. In cutthroat economies of the world, the survival rate of young technology companies is fairly low. Those who manage to get through the blizzard need to devise future courses of action and must review their competency standards in order to stay in the game. The turbulent telecom industry has emphasized the need for an open and inquisitive approach to understanding the business environment. This means having the skills to analyze the drivers and trends of the business and the ability to recognize signs, which might be weak today but gain in importance very fast. This chapter discusses some generic strategies for telecommunications and software companies, including product strategy, determining a company s own role in the network, competence leverage in key customer relationships and key customer-driven growth strategies. The concentration is around the telecluster and network relationships. Management of information and knowledge Domestic market Subcontractor, Tech. Supplier Technology, Services Competence, Technology, Services Global market Growth Opportunities Key customer pull Country specific regulations, Availability of resources, Market size Value chain estabilishment, Operations management, Logistics Country specific competance, Technology, Services Company A Company A Company B Company C Services Needs Services Needs Customers Figure7.1. Internationalization scenario of a technology company. 59

65 7.1 Product strategy The most infallible and precise strategy, particularly in the case of technology-based companies and software houses, is to concentrate on product development. After improving the critical management process and operational efficiency, the key area to focus on is growth. In developing a successful strategy, companies face challenges from the complexity of products and customer needs, which are technologically driven. The challenges can be broken down into categories like developing new products, product life cycles, exploiting new and emerging technologies, and pursuit of competing technologies. Product strategy, on the other hand, can be explained as an integral part of the critical management process. 82 The following picture demonstrates the structure of product strategy. The figure shows a four-level structure of product strategy. The first level indicates that the strategy starts with a clear strategic vision; this helps the companies to determine the course of action and planning for the time to come. Clear vision helps to communicate where the company is heading and what it is doing. It also paves the way to get there. The product platform level is perhaps the most important and critical of strategy decisions. Open platforms are common agreements between business actors in order to organize and rationalize the technological complexity of business. The aim is to speed up development and make savings in product development. Open platforms boost business. They make it easier for customers to use the technology that is available if they don t have to limit themselves to a single technology provider. On the other hand, by sharing open platforms the technology suppliers actually support their own business as well. For example, Bluetooth, Epoc, and many other platforms were jointly created by major mobile phone and computer producers. The platform concept is becoming more common also in in-house product developing. Well-specified platform functionality and interfaces help in reorganizing the development work. Decentralized development work and use of subcontractors would hardly be possible without platforms. Some car manufacturers and lately Nokia Mobile Phones have announced implementing the platform concept in their product development to help foster new product creation. Audi, Volkswagen and Skoda are distinctive brands of Volkswagen GmbH but the cars use the same bases, engines, and components. For car manufacturers it is much faster to change the look of a car than design a new engine or base. By offering several engines, colors, and interior options, the manufacturer can flexibly fulfill the changing needs and tastes of the end customers. The third level illustrates the desired structure of product line, whereby companies can decide over a span of time what can be introduced into the market. Moreover, product line strategy eases the development of individual products in a certain product line. Product Strategy Structure Vision Where to Go (Innovative approach) Long Platforms Product Line Product Focus (Setting of game) Adoption and Action Development Life cycle Short Figure 7.2. The structure of strategy process. 82 Grant R.M 1996: Toward a knowledge based theory of the firm, Strategic management Journal, Vol

66 Product strategy as process The research conducted by the PRTM 83 suggests that product strategy should be considered an ongoing management process rather than just another managerial activity: a process that has a defined and explained structure is easier to understand and manage. The process may differ from company to company, depending on the type of business, but will have common constituents like execution, timing, and responsibility distribution. It is suggested here that a wiselydesigned and properly-structured process of product strategy helps enterprises to propel their success factors further. 7.2 Strategic roles of collaboration Researchers like Kanter 84 and Kay 85 have highlighted the advantages and strategic roles of collaboration in technology-based companies, and how they aggregate as key building blocks in adding corporate value. Collaboration and relationships are gaining focal attention in analyzing how companies behave in the market and how they compete. The following figure demonstrates the kinds of relationships that can exist in contexts of intensiveness of partnership and supply/demand orientation. The discrete form of relationship is the weakest relationship model. A relational agreement exists but none of the involved are in a governing role. This kind of relationship or collaboration is based on opportunity. If there is an opportunity, then there is a tie between the parties. Larger companies might seek new technology or skills and give a small company the opportunity to show what it can offer. The supplier s impact on the relationship is weak. The relationship can grow from opportunity-based business to a recurrent-type of relationship, where the elements of reciprocity and temporal duration creep into the picture. Partnership bonds are strong, but the parties do not share the same visions. The partners focus on operational issues rather than foreseeing a possibility for strategic alliance. Economic efficiency and mutual trust are the driving forces behind the co-operation. Most component manufacturers fall in this category. Companies that have selected clear service strategy instead of product strategy generally begin cooperation with the customer assuming the dominant role. Focus is clearly on Intensiveness of partnership LOW HIGH RECURRENT (Economic efficiency/ reliability) DISCRETE (Opportunity-focussed, supply-oriented) STRATEGIC (Shared visions and values, common goals, focus on innovations) CO-OPERATIVE (Flexibility, price criteria, demand orientation) Supply/Demand orientation Figure 7.3. Explaining the categories of relationship forms. 83 Conclusions References: 84 Kanter, Rosabeth Moss 85 Kay, John M Performance measurement in Business Process re-engineering, By. Cranfield University, Cranfield, Bedfordshire, UK. 61

67 the demand side, i.e., customer need. Suppliers are in the defendant position and the customer dominates the relationship. The subcontractor role is a good example of this. The dominant partner in the trade specifies the nature and kind of interaction between the partners. The dominant partner determines specifications, quality, price and other terms. Companies in this category are very exposed to competition and try to increase their negotiation power by increasing their competence, which in turn, means added value for the customer. 86 Strategic relationships are ones in which the companies have a solid collaborative relationship. Parties or firms in this category join hands towards the fulfillment of their common objectives. The cooperative effort covers many areas, such as the development of new products and technologies, constant input into research and development, and innovative approaches towards new opportunities. Partners cooperate for the realization of mutual benefits. Information is shared and collaboration is based on common visions and values. Electronic contract manufacturers Elcoteq, Flextronics, and others are trying to shift from the dominant category to a more strategic partnership by assuming more responsibility for their clients business. JOT Automation has taken a path from automation component manufacturer to system integrator, then to automation capacity provider and finally to a partner who carries responsibility for developing production automation together with key customers. 7.3 Competence leverage in key customer relationship The networked smaller companies in the telecluster are, in one way or another, associated with supplying technology and services to the big system integrators like Nokia, Ericsson, Sonera etc. When the supplier firms integrate with the vital value system of a big system integrator, they learn about complex and demanding business processes. As illustrated in Figure 7.4 (adapted from Laamanen and Puruskainen, ), once a smaller technology company manages to create a mutually beneficial relationship with a big system integrator, it might be able to shift itself to such a high competence level that it starts attracting other potential customers. The supplier can use competence leverage to link itself to other customers. Without a key customer relationship it is extremely difficult for a small technology company to gain such a high competence standard that it starts attracting major customers. A successful key customer relationship can be a strategic tool for smaller com- International market position HIGH Emergence of new clients Competence Knowledge and skills Social capital Gaining competence LOW LOW HIGH Figure 7.4. Competence leverage in key customer relationship. 86 Ollus, Martin Ranta, Jukka Ylä-Anttila, Pekka (ed.) (1999) Verkostojen vallankumous. Miten johtaa verkostoyritystä? Taloustieto Oy. 87 Tomi Laamanen, Mia Puruskainen: 1999: Competence leveraging in the Telecommunications sector: Governance and supplier evolution, work paper 62

68 panies to expand their business to new customers outside the home market and even to new businesses. When a supplier firm aligns with a system integrator for fulfillment of some common goal, the supplier becomes an important part of the integrator s value system. The relationship between a supplier and system integrator is such that the supplier now becomes an integral part of the system integrator s operation, business processes, and value creation. The system integrator injects technical and managerial resources and competencies into the supplier firm. Through this mutually beneficial relationship the supplier firm gets to raise its competency standards to a higher level. It is important to understand that competence does not mean only technical capabilities and skills, but also social capital 88. Social capital refers to interaction with people, systems, and organizations. Suppliers that are superior in technology but are incapable of organizing cooperation are in the clients eyes uninteresting. 7.4 Key customer-driven growth strategies At least from a theoretical point of view, small technology suppliers should seek cooperation with big world-class system integrators to leverage its competence to a worldclass level. The Finnish companies Perlos, Electrobit, JOT Automation, Orbis, and many others have successfully utililized relationships with Nokia as a springboard for entering the global market. Key customer relationships are multiform and not at all safe. They open a lot of opportunities but the final success depends on the managerial skills of the small technology supplier. 1. Key customers benefit small technology suppliers the most by providing money to finance R&D and production, especially during the supplier s infancy stage. The company is then able to concentrate the limited resources on essential matters. 2. Key customer relationships help technology companies that are in the early stages find their business focus. The customer gives the supplier direction in its product and service development and the burgeoning company does not need to waste its limited resources finding its place in the market through trial and error. Early access to emerging business guarantees that the company will be ready when the main market opens Key customers in the telecommunications business organize their operations on global bases. Both R&D and production are networked following the global rules of the business. Once becoming part of the value system of a key customer in one location say, in Finland or Sweden it seems to be rather easy to expand operations and serve the key customer in global bases. Ease is, however, a rather relative issue. Fast growth and establishment of foreign operations are a challenge even for larger companies. Key customer service strategy has been the main strategy for most of the successful smaller technology companies in the telecommunications business. Nokia s role as a driving force behind the internationalization of the Finnish teletechnology industry has been extremely important. After establishing international operations based on the key customer relationship, the supplier is in a better position to start looking for other customers. 4. Learning opportunities that arise from key customer relationships, social capital, and competence leverage were discussed previously. All these issues are related to people and organizations and thus to culture. It is understandable that it is easier for a Finnish company to build intimate relationships with Nokia or Ericssson both of which are culturally more familiar than Motorola in the U.S., or Japanese companies. The importance of cultural issues, whether corporate or national, should not be underestimated. 5. Reference is an essential advantage a key customer relationship can provide and is valid globally. A smaller technology company using Nokia as a customer reference gives the potential new customer three important pieces of information about itself: it can offer interesting technology or services, it fulfills world-class quality standards, and its organization is capable of working with an extremely demanding partner. In a business like telecommunications, it is almost impossible nowadays to approach big companies without a good reference. 6. The last but not least-important aspect of key customer relationships is the vision of the development of the business. Close relationships with leading companies in the business provide timely access to information. Clear trends and radical changes in the business environment are easy to recognize. However, it is much more difficult to spot weak signs of development ones which might grow in importance later. Examples of such signs are changes in customer needs, market environment, technology, other businesses or companies etc. This information can help the company s management build alternative development scenarios and consider appropriate strategy options. The earlier the information is received, the greater its strategic importance and the lesser the potential for wrong decisions. 88 Helena Yli Renko 1995: Social capital, Knowledge Acquisition and Competitive advantage in Technology based young firms, Strategic Management Journal. 89 Geoffrey A. Moore (1995) Inside the Tornado: Marketing Strategies from Silicon Valley s Cutting Edge. 63

69 7.5 Key customer risk All previous arguments emphasized the benefits of key customer relationships. A well-functioning partnership can be a springboard to new customers and the international market. However, there are also risks involved, as Elcoteq and Ericsson proved earlier this year. Dependency on one or a few customers is a financial risk. Expanding a company s customer base is difficult because resources are limited, and also because serving existing customers is usually a full job in itself. If the key customer is satisfied with the service in one location it might suggest expanding the service to cover all its other locations too. Failing to cope with this challenge might endanger the whole business. Global customers seek partners who can serve them globally. During a company s infancy phase they are extremely vulnerable to the rapid changes of their dominant customers. Early access to information will allow time for adapting to the new situation, but will not remove the risk. What makes a customer a key customer? One that is financially important at the moment but is not one of the leading companies in the industry does not fulfill key customer criteria. This type of customer does not support competence-building for the long-term and it is not a respected reference among the industry leaders. Working with customers in only one industry adds to the risks. Rather than company risk, the supplier is dealing with industry risk. Economic trends and cycles, new technologies and other similar challenges affect all companies in that specific business. From a risk management point of view, it is good to have customers in several non-correlating businesses. How to manage that in practice is another question. 7.6 Managing intellectual property Managing intellectual property rights is no longer an administrative burden but a vital source of competitive advantage in the knowledge economy where value flows from ideas, innovations, knowledge, and skills. Ideally, IP rights deliver a main source of competitiveness in addition to a commercial advantage over competitors IP rights protection: Strategic aspect Strategic management of IP rights can enhance or reform the competitiveness of a firm in the marketplace. In order to gain optimum value from knowledge-based innovations, it is critical to position IP protection strategy as a key component of overall business strategy. IP rights should not be limited only to technology patents but should also cover the securing of competitive customer services in an extraordinary manner. A case in point is Dell computers. Its implementation of IP protection bestows a proprietary market advantage. Dell achieves success in the computer business not only by developing sophisticated terminals but also through its remarkable build to order business model, which provides direct sales to the consumers. Overall, Dell owns more than 40 patents, which helps the company sustain a competitive advantage. The strategic value of IP rights is dependent on a number of factors such as the potential for licensing to other businesses, quality, and the scope of the market covered. Organizations and countries which commit most of their resources to research and development tend to seek broad geographical patent coverage. Countries with large market potential tend to be popular targets for patent applications. In technological markets, products must be backed by patent rights so as to give optimum return on its research and development investments IP rights in relationships Nokia has a strategic R&D partnership with Texas Instruments. Both companies have agreed to engage in the development of future generation technologies through a shared vision. Both companies have a similar strategic intent of being market leaders in their respective businesses. Technological pioneering and development are the key success factors in this regard. In questions of IP rights, it is understood that a rule commonly developed is commonly owned. Both should have maximum returns from the innovation or innovations. Mutual faith and long-term partnering intent allow both companies to enjoy the freedom of using the innovation to get optimum returns. Contrary to the above, most of the smaller technology suppliers to big companies like Nokia are in a subcontractor role, and IP rights policy is an important part of the co-operation agreement. The big company might have made substantial investments in funding the project and transferring knowledge, and wants control over the IP rights to those innovations created during the co-operation. However, it is not in the best interest of the big company to block the smaller company s capacity to sell the technology to other customers. A financially healthy and innovative partner reduces operational risk. The key question here is how to balance IP rights and long-term business goals. There is not a simple or single solution available. Common practice is to limit the IP rights to a particular time frame. 64

70 8 Getting global, road map for technology firms Lasse Baldauf, Finpro 8.1 Which direction? Because information and communication technologies are the major drivers of modern globalization, it is not a surprise that the ICT industry is global in reach. The Finnish ICT cluster has benefited from the global demand for wireless ICT and the success of Nokia s offering. Finnish ICT companies have been able to enter foreign markets based on Nokia s demand for their products and services. However, the commercial benefit derived from Nokia s successful penetration of global markets has a potential downside. It has been reported in the Finnish business press that much of the service and supply network supporting Nokia is too heavily dependent on Nokia. The Finnish ICT cluster s heavy dependence on Nokia exposes the firms that make up the cluster to a significant degree of risk in an uncertain technological landscape. The overall health of the Finnish economy is also exposed. Therefore, the primary reason behind the initiation of this study has always been to enable the Finnish ICT cluster, or rather network, to offset its risk through participation in other global ICT-based networks that are centered on leading wireless ICT companies. Any roadmap to getting global must be focused on these networks and the companies that lead them. 8.2 Needs and requirements for global business Nokia operates in all three major continents Americas, Asia and Europe in its wireless business. Being part of that network, Nokia s Finnish partners have entered these major markets one way or the other if they wanted to maintain their close relationship with Nokia. In this case Nokia has made the business of its subcontractors global even though the subcontractors might not have been otherwise entering these new markets. Company level considerations Becoming global creates new demands on the companies operations, the main ones being: Personnel, the operations know how has to be transferred from the home country to a totally new operating environment. This issue is perhaps one of the most demanding aspects of becoming a global company. There has to be a right mix of the core knows how from the parent company with adequate new country knowledge. Financial commitments; global operations will increase the operating budgets Strategy evaluation; Companies should look into what other business opportunities they could accomplish by following their business network to the global markets Business environment considerations Some fundamental changes are occurring in the production networks of today as result of the demand for more flexible production networks and the drive of companies to focus on their core competencies. Ericsson has graphically presented the shift away from vertical integration with respect to the telecommunications equipment value chain (Figures 8.1 and 8.2). Perhaps the best case for analyzing the shift away from vertical integration in order to achieve flexibility in the telecommunications equipment industry is found in Nortel Network s strategy. In its 1999 annual report, Nortel announced that the company was creating seven global systems houses which link customers, design centers, internal manufacturing, suppliers, contract manufacturers and other parts of the supply chain. Nortel defines the shift as a move toward virtual integration. Nortel states: The operations strategy involves the divesting and/or outsourcing to contract manufacturers all but Nortel Network s most complex printed circuit board assembly, most of Nortel Network s electromechanical subsystems manufacturing, and a significant part of the repair business. 65

71 Component Supplier Telecom Supplier Telecom Operator End user Figure 8.1. Telecommunications Value Chain, Traditional model. Source: Ericsson. Content Content & Services Packaging Distribution Services & Applications Presentation Gateway End-User Devices E n d Systems & Platforms Components & Sub-systems U s e r s Figure 8.2. Telecommunications Value Chain, New Content & Service Model. Source: Ericsson. Geographical considerations In chapter 9 of this study some major wireless companies are benchmarked. Their global locations are shown in the enclosed maps (Figures 8.3 to 8.4). USA Scandinavia IRELAND Germany UK E E Hungary Spain E China Japan MEXICO Korea Ericsson Motorola Nokia Panasonic Samsung Siemens BRAZIL Malaysia Singapore Figure 8.3. Top six wireless companies manufacturing locations. 66

72 Scandinavia Canada UK Germany USA Spain Italy Hungary China Japan Ericsson Motorola Nokia Panasonic Samsung Siemens Korea India Malaysia Singapore Australia Figure 8.4. Top six wireless companies research and development locations. One more aspect of reviewing the geographical location of major wireless telecommunication company s geographical locations is where the Contract electronic manufacturers are; the top 100 locations globally are shown enclosed. Canada = 5 Finland = 1 USA = 81 UK = 1 France = 1 Germany = 1 Thailand = 2 Taiwan = 2 Hong Kong = 2 Philippines = 1 Singapore = 3 Figure 8.5. National identities of top 100 contract electronics manufacturers. 67

73 8.3 The process for establishing a business abroad The basic process of establishing a business abroad involves such elements as Initial analysis of the new business and market environment Analysis of the company s business potential Identification of business alternatives abroad (strategic business area, selection of target segments, operation models) Identification of competition, potential partners, financing, personnel, facilities, market communication and market entry plans Practical implementation of all these plans made While the details of establishing a business in a particular foreign country are important, the most important task is to identify global ICT production networks that offer opportunities to the Finnish-based ICT company that go beyond Nokia. One of the prime reasons for a Finnish ICT company to establish its operations abroad has been the proximity to Nokia in that particular country. In moving beyond the Nokia network to other market opportunities, one might identify similar networks in the wireless telecommunications equipment industry. Perhaps the best place to start is to look at Nokia s competitors. Fortunately this industry is concentrated globally in a few selected countries as can be seen in this report findings also. Some global market share data of Nokia s competition and their strategic positioning as seen by some wireless market analysts will also help in determining the market potential outside of Nokia. Estimates (rounded) for the current global mobile phone market are shown in Figure 8.6a, and Ericsson s (2000) estimates for the wireless infrastructure equipment market follow in Figure 8.6b. Setting targets in wireless equipment alone may not be the best strategy for linking up with networks holding the greatest promise. Instead, one might look to the projected leaders in next generation wireless technology, as evaluated by the Yankee Group in Figure 8.7. Contract electronics manufacturing The role of the contract electronics manufacturers is becoming more important also in the value chain for wireless devices manufacturing. Motorola, Ericsson, Nortel, Siemens, Alcatel and even Nokia (but to a lesser degree) have increasingly outsourced their manufacturing needs. It will be important for the Finnish ICT supply network companies to be aware of this trend, as it will substantially change the networking environment for them. While not accounting for a majority of electronics manufacturing activity, contract electronics manufacturers are forecast to gain a larger share of the worldwide electronics assembly market, as shown in Figure 8.8. Outsourcing s share of the worldwide assembly market is forecast to increase from 25% in 1999 to 38% in % 6% 5% 5% 6% 11% 16% 32% Nokia Motorola Ericsson Siemens Panasonic Alcatel Samsung Other Lucent 13% Other 21% Motorola 14% Nokia 11% Nortel 11% Ericsson 30% a) b) Figure 8.6. a) Mobile handset market share, year Source: Financial Times. b) Wireless infrastructure equipment 1999 market share (net sales). Source: Ericsson. 68

74 Vendor End-to-End Systems Approach Position in Air Interfaces Position in the Handset Markets Position in IP Markets Position in ATM Markets Coverage of Service Provider Markets Coverage of Enterprise Markets Articulation of NG Wireless Network Architecture Average Ericsson Lucent Motorola/ Cisco Nokia Nortel Averages Figure 8.7. Projected market leaders in the third generation technology. Source: The Yankee Group, Scale 1 to 5. 1 = poor or no participation, 2 = below average, 3 = average, 4 = good and 5 = excellent Billion USD Outsource In-house Figure 8.8. Worldwide assembly market. In-house production vs. Outscore. Source: Electronics Business Magazine. The business networks tend to be dominantly nationalistic in that sense that the company s part of the networks is from the same country of the parent company of the network. This is the case of Nokia in Finland as well as Samsung in Korea or Matsushita in Japan. It is perhaps easier for a Finnish company to become a part a new production network in third countries, for example to work with the Japanese in Europe or USA. 8.4 Wireless telecommunications industry value chain The value chain in telecommunications manufacturing has evolved into a matrix where every party has its own distinctive role; when you are a supplier to this network it is important to understand the role of each of these parties because you cannot by-pass the appropriate channels. A simple model for understanding the current business environment is shown in Figure

75 Component Maker (CM) Franchised Distributor (FD) Contract Manufacturer (CEM) Original Equipment Manufacturer (OEM) Other Resale (OR) Figure 8.9. Telecommunications equipment production model, British Telecom s view. Source: British Telecom, It becomes important to understand the process of each of these parties for selecting their vendors and subcontractors and eventual partnerships. Quality standards, such as ISO, limit the number of alternative vendors usually to three in each product category so it is not easy for a new company to become a new vendor into an existing network. Most companies are trying to reduce and simplify their operating principles and also to reduce the total number of companies they are working with or purchasing from. To become a vendor and eventually develop that to a higher degree of cooperation between companies, basically every company has to go through various levels of cooperation levels before one becomes first an approved vendor and eventually a partner; building the trust and reputation to become even more significant part of the company s network. The vocabularies from one company to the other might differ, but the levels of cooperation between companies could be listed as follows starting from the preliminary steps to a closer level of cooperation between them. Information exchange Co-operation Collaboration Supplier, vendor Subcontractor Distributor Contract manufacturer Joint venture Alliance Synchronized supply chain management Acquisition Cooperation intensifies A basic questionnaire a prequalification process- to any new vendor candidate will usually include such items as Company introduction and vision; how can they benefit the client Personnel information Financial data Industry references Assessment of the company s operations principles, logistics and in some cases of how confidential information is handled A Company needs to excel in these very basic categories in order to be successful in creating a new business relationship and earn the possibility to enter a new network. It is worth mentioning that also the Finnish companies who have worked in the Nokia network in Finland basically need to go through this prequalification process also for Nokia in any other country than Finland. Regarding the role of the different parties in the wireless telecommunications value chain, it is apparent that the power of contract electronics manufacturers will increase. Nokia has not adopted an outsourcing strategy that is as aggressive as other mobile phone manufacturers but an increasing share of mobile devices will be manufactured by contract electronics manufacturers in the future. This transition in the manufacturing chain might offer new opportunities also for the Finnish companies in their efforts to offer their services to other mobile phone makers. Distributors can offer a raw material, electronic component, manufacturing equipment and service provider a marketing and distribution infrastructure that covers a wider sales area than what many ICT companies could develop alone. However, with the initiation by original equipment manufacturers and contract electronics manufacturers of simplified purchasing schemes that are compliant with ISO 9000 views on competitive bidding, some distributors are becoming quite large. Many manufacturers would rather deal with two or three distributors that distribute a wide range of products, rather than hundreds of individual vendors. As these distributors grow in size and reach, there can be the obvious fear that the distributor will determine which companies are included in a given ICT production network. 70

76 Basic Materials Electronic Components Fabricated, Forged & Cast Metal Products Fabricated Plastic Products Assemblies Captive Equipment Manufacturing Equipment & Systems Testing Equipment & Systems Packaging Supplies, Equipment & Systems Franchised Distributors Contract Manufacturing Major Brands Figure Transition of the value chain. When dealing with global distributors it is again important to look at nationality. As in the case of CEMs, it is important to note that most of the top electronics distributors are headquartered in North America (Figure 8.11), and by-far-and-away the two largest, Arrow and Avnet, are owned and managed in the USA. Many original equipment manufacturers (OEM) and contract electronics manufacturers (CEM) bypass the distributor on certain key components and reach global supply agreements with the component maker, as indicated in the electronics industry money trail, Figure Unfortunately, these agreements are often between very large companies. For small and medium size companies this type of arrangement is usually not possible and working through a distributor might be the only avenue to a CEM or OEM. Canada: Future Electronics USA: Arrow, Avnet, Pioneer, Bell Micro, TTI, Richardson, Sager, Digi Key, California Eastern, Master Distributors, A.E. Petsche, Air Technics, Century Fastener, PEI, Taitron Germany: VEBA (now split between Arrow & Avnet) UK: Premieer - Farnell Figure Nationality of the major electronics distributors. 71

77 $43+ 3 $540 5 CM FD CEM OEM $363 2 $2+ 4 OR $ COG = Cost of Goods Sold 2. The Electronics Industry Yearbook 3. FTC estimate; NEDA 4. Independent North American -based Distributors only 5. Dataquest Figure Electronics industry money trail (1999 figures, in billions of dollars). Another resource that should not be overlooked is the professional sales representative, which is included in the Other Retail (OR) box in the first graph of this chapter. These firms and individuals are located in a given region or regions and they act as the selling arm for OEMs, CEMs, component makers and even distributors. They are paid on a negotiated commission basis, and they are a cost efficient way of maintaining a presence in a given market. 8.5 Connections to the business environment Successful internationalization business models and strategies appear to center around varying types of formal collaborative relationships. Dicken in Global Shift (1998) offers a view of the different types of collaborative relationships in Figure Internationalization Externalization Arms-length transaction Acquisition Merger Collaborative agreements Formal Informal MODES OF COLLABORATON Research Oriented Technology Oriented Market Oriented Cooperative R&D Equity Technology sharing Licensing Regulatory Assistance University-based Universityindustry -Government Venture capital R&D Corporations Cooperative Production Customer-supplier Agreements Distribution Promotion / Marketing Service Maintenance Source: Dicken, Global Shift Figure Types of inter-firm collaboration. 72

78 8.6 Importance of the cluster for SME s Nokia s network in Finland consists of 300 companies; majority of these are from the SME sector. Nokia s network is about 10% of the total number of ICT companies in Finland. Nokia s share of the Finnish exports is 20% and its share of the Finnish GDP close to 4%. Due to Nokia having become a global leader in its business sector, there is a unique opportunity for the Finnish ICT cluster to grow along with Nokia globally. For an SME sector company the importance of a major company such as Nokia to take its network overseas is truly unique; otherwise the conditions of operating in an unknown new market might not be feasible. To be able to use Nokia as a reference is extremely helpful in opening new doors with new clients. Many if not most of Nokia s Finnish network companies depend heavily on Nokia as a share of their company turnover. Moving to other markets with or because of Nokia should be a booster to expand the client base and reduce the dependence on Nokia. 8.7 Key success factors Practical experience at least from the United States has shown that those Finnish companies from Nokia s network, who started from the early stages of their presence in the U.S. marketing also to others, have been successful in their efforts. Relationships cost time and effort to establish; there are no shortcuts. When a company enters a new market because of Nokia in this case, there is usually limited capacity personnel or otherwise to do anything else than to establish a good working relationship with Nokia in the new country. It is for those reasons that marketing to other companies is usually delayed and accordingly it will take that much longer to succeed. The possibility to use Nokia as a reference is very helpful in marketing particularly for SME sector companies. Being an approved Nokia supplier should simplify the process of becoming a vendor to others in the same business. Companies operate in different ways in different countries. Learning to adapt into the new environments is therefore crucial. Having been successful with Nokia in Finland is a good starting point but the operations in the new country will certainly be somewhat different, even to work for Nokia there, but definitely for any new clients. Whether it is in the mobile phone companies, contract electronics manufacturers or distributor business segments of wireless telecommunication business value chain, the top 3-5 companies have a major share of the global market. To be able to work in any of those companies networks creates the possibility to be a truly global company. Working for companies that are not in those top segments of their industries means definitely a more narrow, typically just one country or region, business opportunity in geographical terms. 73

79 9 Benchmarked companies Lasse Baldauf, Finpro 9.2 Motorola Key figures, major businesses 9.1 General Leading mobile phone companies and contract electronic manufacturers (CEMs) were benchmarked in this study. The handset companies chosen were Motorola, Siemens, Matsushita (Panasonic) and Samsung. The contract electronic manufacturers chosen were Flextronics, Solectron and Celestica. Also, Nortel Networks and Cisco were added to the list of benchmarked companies to reflect some additional operating modes of leading global players in the communications industry. This chapter summarizes the global presence and some network partners of these benchmarked companies. Motorola is one of the leading providers of wireless communications, semiconductors and components, advanced electronic systems and services. In year 2000 Motorola revenue totaled $38 Billion with 150,000 employees worldwide. About 39% of the revenue comes from the Personal Communications segment, 21% from the Network Systems segment, 19% from the Semiconductor business segment and 13% from the Commercial, Government and Industrial Systems segment and 8% from others. United States represents 37% of Motorola sales, Europe about 21%, China 10%, 10% other Asia-Pacific, 8% Latin America, 7% Japan and 7% other markets Global map USA: 10 locations Mexico UK+ Ireland Germany France Israel India Korea Japan China Taiwan Philippines Brazil Singapore Figure 9.1. Motorola Global manufacturing locations. 75

80 Alcatel Sun Microsystems Nokia Ericsson Psion Siemens Symbian Eastcom Motorola Nextel Sprint PCS Microsoft Netscape British Telecom Nortel Cisco Compaq Unwired Planet Hewlett- Packard Intel Qualcomm MCI Worldcom EDS Figure 9.2. Motorola strategic alliances matrix. The primary locations within Motorola in the wireless sector are in Libertyville, Illinois (sector headquarters) and manufacturing locations in Libertyville and Harvard in Illinois, USA, Easter Inch in Scotland, Flensburg in Germany, Tianjin in China, Singapore, Chihuahua in Mexico and Jaguariuna in Brazil. In the software sector Motorola operates in China, India, Malaysia, Australia, Singapore, South Korea, Poland, Russia, Italy, Canada and the U.S. Motorola announced in 2000 major deals both with Flextronics and Celestica. According to these arrangements, Motorola would sell most of its handset manufacturing facilities and outsource the telephone manufacturing to these CEMs Business strategy Outside of its own vertical integration of component and semiconductor production, Motorola partners through various strategic alliances. Some major ones are shown in the enclosed matrix (1999 data), Figure 9.2. One of the major strategic initiatives of Motorola is its alliance with Cisco to develop the wireless Internet infrastructure. As part of its cost cutting strategy, Motorola started a major outsourcing of its own manufacturing by selling its manufacturing facilities to both Flextronics and Celestica Research and development In the past few years Motorola has announced major expansion to its already major extensive presence in its global Research and Development area: New design center in San Diego, California (1999) New combined research center in Deer Park, Illinois (2000) Opening of Japan R&D center (1999) New development center, Israel (2000) New European R&D center for 500 persons in Turin, Italy (2000) New GPRS R&D center in Berlin, Germany (2000) New R&D center in Taiwan (2000) New R&D Center in Bangalore, India, 150 persons (2000) 18 R&D centers in China, 25 by 2001 Application Development Center in Boynton Beach, Florida Some of the announced technology areas Motorola works in are WAP, Bluetooth, Java, VoxML, SyncML, GSM, CDMA, GPRS and iden. In 1999, Motorola had about 20,000 of its employees working in the R&D sector Distributors Motorola s distributor chain includes these main parts distributors: Avnet, Arrow, Future, Wyle and Newark Contract electronic manufacturers Worldwide Motorola has worked with over 20 CEMs in the past. The major ones are Flextronics, Celestica, Acer (Taiwan), Taiwan Semiconductor manufacturing Co. (TSMC) and DBTEL (Taiwan). 76

81 9.3 Siemens Key figures, major businesses Siemens is one of the world s largest electronics and electrical engineering companies. It operates worldwide, delivering advanced solutions for e-business, mobile communications, manufacturing, transportation, health care, energy and lighting industries. In year 2000 Siemens net sales was 78.4 Billion Euros with employees worldwide. 40% of those employees are based in Germany, 26% elsewhere in Europe, 23% in the Americas and 10% in Asia-Pacific. The business portfolio of Siemens comprises the following business segments (net sales in %): Information and Communications (IC) (34,1) Information and Communication Networks (ICN) (14,9) Information and Communication Mobile (ICM) (11,7) Siemens Business Services (SBS) (7,5) Automation and Control (24,9) Power (15,1) Transportation (10,2) Medical (6,6) Lighting (5,6) Infineon Technologies AG (9,5) Global map The headquarters of Siemens IC is Munich. Manufacturing plants are located in Bocholt, Germany, Leipzig, Germany and Kamp-Lintfort, Germany and in 36 other countries. R&D is done mainly in Munich, Ulm and Berlin, but also in Asia, Africa and America. Siemens Mobile Applications Business Management is located in: Germany Finland Sweden Belgium Around of Siemens R&D people work on software, much of which is embedded in products and solutions provided by Information and Communications, Automation and Control, Power, Transportation, and Medical segments Business strategy Outside of its own vertical integration of component production, Siemens partners through various strategic alliances. Some major ones are shown in the enclosed matrix (Figure 9.4). Sales Manufacturing Figure 9.3. Siemens global sales and manufacturing locations. 77

82 NEC ADC Toshiba Yahoo! Flextronics Brokat Casio Compaq F-Secure Portal Software Blue Pumpkin Siemens CPS Hewlett Packard Intel Kodak Quintus RADVision AltiGen 3com Symbian Kodak Microsoft Proxim SAP SUN Harmonic Ericsson Motorola Figure 9.4. Siemens (ICN and ICM) partners and strategic alliances matrix. Siemens has major alliances and partnerships with following companies: phone.com (WAP gateway) Yahoo (Content and markets) Setrix (Telemetry solutions) GAP (GSM vending machines) Brokat (mobile payment) One of the major strategic initiatives of Siemens is its alliance with Kodak to bring mobile imaging solutions to the mass consumer market. Siemens has also announced strategic alliance with Toshiba to develop 3G technology. The companies will combine their respective R&D expertise, capabilities, and resources to ensure the availability of 3G terminals in early Toshiba and Siemens also see the long-term prospect for cooperation in future 3G terminals. As part of its investments in mobile communication strategy, Siemens took over the Bosch mobile phone business and started a strategic cooperation with Flextronics who took over the mobile phone manufacturing from Bosch. Siemens Corporate research is located in several R&D centers: in Munich, in Erlangen and in Berlin in Germany and Princeton NJ, Berkeley in USA. R&D of Siemens IC is primarily concentrated in Munich, Ulm and Berlin Distributors Siemens s mobile phone distribution is done mainly through net and service operators (in Germany Vodafone, DeTe-Mobil, E-Plus, Debitel etc) In the U.S. market Siemens has announced a distribution cooperation with Cingular Wireless Contract electronic manufacturers The major Siemens partner as a contract manufacturer is Flextronics, who in the year 2000 also took over the Siemens production plant in L Aquila in Italy. Flextronics is also producing Siemens mobile phones on their plant in Denmark Research and development Siemens R&D: worldwide about 57,000 employees, thereof 25,000 outside of Germany in 31 countries at 66 major development sites. 78

83 9.4 Matsushita (Panasonic) Key figures, major businesses Matsushita Electric Industrial from Japan has three major business segments: Consumer products, Industrial products and Components. The revenue totaled 68 Billion $ in 2000, out of which 41% was consumer products, 38% industrial products and 21% from components. Domestic sales were 51% and overseas 49% of the total. The wireless phones, which are marketed under the Panasonic brand name, belong to the Industrial products group under Information and communications equipment category (now named Matsushita Communications). That category represents about 28% of Matsushita s total sales. Matsushita is the leading producer of wireless phones in Japan. The total number of employees worldwide is 280, Global map Matsushita operates in over 40 countries. The enclosed map shows the manufacturing locations for the wireless phones only Strategy Matsushita s goal is to increase market share in the wireless phone market for instance with the announced new manufacturing locations in the Czech Republic and Mexico (or South America). Matsushita has a 30% market share in its home country Japan and it aims for 10% global market share by In 2000, Panasonic had a market share globally of about 5%. Matsushita has formed various alliances in the area of wireless communication and networks: Microsoft (Internet business development) Nortel (Next generation mobile communications) Sun Microsystems (Java technology) Qualcomm (Radio circuit modules for CDMA) Philips (software development to link different networks) Symbian (mobile info terminals) AT&T (music software) Oracle (content production) Also, Matsushita has joint ventures with other Japanese companies particularly in display production (Toshiba, Mitsubishi) and in Europe with Siemens in the area of components production. UK Czech** Mexico China Japan Phillippines **Planned Figure 9.5. Matsuhita wireless phones manufacturing locations. 79

84 9.4.4 Research and development Globally Matsushita has 34,000 researchers and engineers doing its research and development work. The key areas in the mobile business development for Matsushita are Japan, China, Europe and USA. In Japan Matsushita runs several research laboratories and product development centers as well as three separate R&D companies. In the U.S. Matsushita operates R&D facilities in Silicon Valley, California and Secaucus, New Jersey. In Europe, Matsushita operates a Mobile R&D center in Berkshire, United Kingdom. In Germany, Matsushita opened in 2000 a new laboratory in Luneburg to develop infrastructure systems, particularly base stations. Also in 2000, Matsushita established Matsushita Research and Development (China) focusing on the development of next generation phones mainly for the Chinese market Contract manufacturers Matsushita has not used Contract electronic manufacturers in its wireless phone production. 9.5 Samsung Key figures, major businesses In 1999, Samsung worldwide revenue totaled 83.5 Billion dollars. The main business sectors of Samsung are Electronics, Chemicals, Machinery & Heavy Industry and Financial Services. About 53% of the total revenue was from Korean operations and 47% from overseas activity. The Electronics segment totaled 22.8 B$ in Samsung Electronics Company includes Information & telecommunications, Semiconductors and Major Products (PC:s, TV:s etc.) business divisions. Worldwide Samsung Corporation employs 161,000 people Global map Samsung corporation has extensive operations all around the world. Samsung Electronics has 25 production bases, 36 marketing subsidiaries and 23 overseas offices in 46 countries. Samsung manufactures wireless phones in Korea, Spain and Brazil Strategy Samsung has set ambitious goals to be one of the top three companies in the world in the era of digital convergence. In the wireless telecommunications area Samsung emphasizes the mobile multimedia applications built on the CDMA platform. In year 2000 Samsung started new phone producing plants both in Spain and Brazil to be closer to the markets in the past all phone production took place in Korea. Samsung intends to build the best R&D capability in the business and to globalize its network of operations Samsung has formed strategic alliances with some major companies such as: Intel (Joint venture with Samsung Austin semiconductors) Microsoft (Next generation wireless phones) Compaq (Microprosessors) Siemens (B-CDMA)) IDC (B-CDMA) Sun Microsystems (Java software) Commquest (semiconductors) Yahoo (e-commerce) Also, Samsung and Japan s NEC have formed a joint venture to research and produce organic electroluminescent displays which use less electricity than current LCD displays on phones and handheld devices Research and development Samsung does not yet have an extensive R&D network outside of Korea. It has operated a small Research Institute in United Kingdom since 1996 and in 2000, Samsung established a Mobile Communications R&D Center in Beijing, China. The Chinese center will concentrate on the next generation systems such as the 3G market in China. Samsung has about 11,000 R&D personnel worldwide Contract electronics manufacturers Samsung manufactures its own phones. 80

85 9.6 Nortel Networks Key figures, major businesses Nortel Networks is a global supplier of networking solutions for Internet and other public data over both the wired and wireless infrastructure. Year 2000 revenue was 30 Billion $, which consisted of Local Internet (11.3 B$), Optical Inter-City (6.9B$), Wireless Internet (5 B$) and Photonics Components (2.4 B$) main business segments. Nortel had 94,500 employees at the end of year Global map Nortel has operations in about 100 countries. Its head office is in Canada. In 1999, Nortel announced the formation of seven global Systems Houses. These systems houses are expected to bring together product design, manufacturing, new product introduction and client support under one roof with all these functions mostly done by Nortel s partner companies Strategy Nortel has done about twenty acquisitions for a total cost of over 20 B$ in the past three years along with its alliances and partnerships, in order to increase their speed and reach in their business expansion. List of major acquisitions: JDS, Uniphase Switzerland (Laser chips, optical networks) Sonoma Systems California (Carrier managed services) Alteon WebSystems California (Content aware switching) EPiCON Massachusetts (Application service provider software) Photonic Technologies Australia (Optical component technology) Architel Systems Corp. Ontario (Software to provide IP services) CoreTek Massachusetts (Strategic optical components) Xros California (Photonic switching) Promatory Communications California (DSL platforms) Qtera Florida (Optical networking systems) Clarify California (ebusiness solutions) Periphonics New York (Interactive voice solutions) Shasta Networks California (Gateways for IP networks) Cambrian Systems Ontario (Speeding of network traffic) Bay Networks California (Data networking market) Aptis Communications Massachusetts (Remote access data networking) Broadband Networks Manitoba (Design and manufacture broadband wireless networks) Calgary, Alb St.Laurent, Que Billerica, MA Raleigh, NC Monkstown, N.Ire. Calway, Ire. Chateaudun, Fr. Figure 9.6. Nortel Networks global systems houses. 81

86 Nortel s strategic alliances: Accenture (Tailored solutions for service providers networking needs) Microsoft (Integration on voice and data networks) Intel (Developing high performance Internet) IBM (End-to-end solutions in the Business to Business market) HP (Combining networking and computing environments) EMC (Optically enabled enterprise storage networks) Sun Microsystems (High performance unified networks) Research and development Nortel s research and development activities focus on its Service Provider and Carrier and Enterprise businesses. Nortel also conducts network planning and systems engineering on behalf of, or in conjunction with, major customers. Although Nortel s products are derived from substantial internal research and development activities, these activities are supplemented by technology acquired or licensed from third parties. Research and development activities are conducted at approximately 40 primary locations, 20 of which are predominately research and development locations. Geographically these research and development locations are in North America (19), Europe (14), and Asia Pacific (4). Nortel employs approximately 22,500 research and development personnel. In addition to the in-house labs listed above, Nortel maintains R&D partnerships with organizations in Austria, China, France, Germany, India, and Russia Outsourcing, suppliers Until 1999 Nortel manufactured its products in-house. Then it chose seven contract manufacturers for its manufacturing needs: SCI Systems Inc., headquartered in Huntsville, Alabama; C-MAC Industries Inc., headquartered in Montreal, Quebec; Sanmina Corporation, headquartered in San Jose, California; Communications Test Design Inc., headquartered in West Chester, Pennsylvania; and United Tri-Tech Corporation, headquartered in Cornwall, Ontario. As far as Nortel s own supplier network goes, companies have to qualify in one of four categories as classified by Nortel: Reseller, Consultant, Developer or Supplier. 9.7 Cisco Systems Key figures, major businesses Cisco Systems revenue for year 2000 totaled 23.8 Billion dollars. Cisco s head office is in San Jose, California. Worldwide Cisco employs about 43,000 people. Cisco is the leading company in the networking environment for the Internet. Cisco provides both the hardware and software for the entire end-to-end information network infrastructure. Cisco serves its customers in three target markets: Enterprises (large corporations, government agencies, utilities etc.), Service Providers (telecommunications companies, Internet service providers, cable and wireless companies) and Commercial (Companies with own data network needs) Global map Cisco sells its products in 115 countries through a network of 225 sales and support offices in 75 countries. Through its acquisitions and its own business expansion overseas, Cisco is expanding to various overseas locations Strategy Cisco has moved a major share of its operations into the Internet environment and is probably the leading company in that area setting up benchmarks of the new networked operating mode for other businesses to follow. Cisco has acquired a major portfolio of companies in business areas complementing its own service offerings, what Cisco calls platform acquisitions. The main business areas Cisco has moved into are optical networking, network capacity improvement, network service management and voice over packets technology. In addition to the acquisition route, Cisco has formed strategic alliances as follows: Netigy (speeding network performance applications) Motorola (end-to-end wireless solutions for Internet) Microsoft (linking applications and networks) KPMG Consulting (infrastructure consulting) Oracle (develop network enhanced database technology and applications) Thrupoint (internetworking solutions) Cap Gemini Ernst&Young (Internet based solutions for business development) Compaq (Internet business solutions and services) EDS (Innovative Internet ebusiness solutions) HP (reduce network complexity) IBM (neworking applications) 82

87 USA, 53 Acq Canada, 1 Acq UK, 1 Acq Ireland Sweden, 1 Acq Danmark, 1 Acq Italy, 1 Acq Israel, 1 Acq China India Figure 9.7. Cisco Recent acquisitions and own new global location announcements Research and development Cisco operates two primarily research and development focused sites in the U.S: the New England Development Center in Chelmsford, Massachusetts (service provider line of business and software) and in Research Triangle Park in North Carolina. Cisco has announced plans to establish its wireless business unit in Richardson, Texas and major software development sites in India and Ireland, possibly in Israel. Otherwise, Cisco follows its major principle of operations by doing research and development by acquisitions. 9.8 Solectron Key figures, major businesses Solectron is the largest Contract electronics manufacturer in the world. Its revenue was 14.1 Billion dollars in 2000 and it had 38,000 employees at the end of Almost 90% of Solectron revenue come from manufacturing operations and about 10% from components such as memory modules. Solectron provides manufacturing services to a variety of industries: Avionics, computer industry, medical equipment, semiconductors, telecommunications, network equipment and control systems Distributors Cisco s main distributors are Arrow and Avnet Contract electronic manufacturers Cisco uses five major contract manufacturers: SCI, Jabil, Celestica, Solectron, and Flextronics. Cisco has truly perfected its internet based supply chain: 80% of Cisco equipment never gets routed through Cisco personnel but the Distributors order the equipment from these designated Contract manufacturers and handle all the logistics involved for Cisco Global map Solectron operates in 56 locations worldwide. 22 of those locations include New Product Introduction centers meaning that Solectron does new product design and engineering for its customers in those locations Strategy Solectron has acquired manufacturing facilities from Nortel in various locations, IBM s plants in Brazil. Alcatel s plant in Puerto Rico, two of Ericsson s plants in France and Sweden. 83

88 NORTH AMERICA: MF, 13 locations NPI, 8 locations MEXICO: MF, 2 locations EUROPE: MF, 11 locations NPI, 8 locations ASIA: MF, 5 locations NPI, 5 locations BRAZIL: MF, 2 locations NPI, 1 location MF = Manufacturing NPI = New Product Introduction Center Figure 9.8. Solectron global locations. Solectron has also acquired other contract manufacturers like Bluegum in Australia. Acer and Solectron have formed a strategic alliance to provide global design, manufacture and service of computers. Solectron acquired in 2000 four Computer Aided design facilities from Nortel. Finally, Solectron has acquired SMART Modular technologies, a leading designer and manufacturer of memory modules and memory cards. Solectron is thus growing its service portfolio by acquiring existing facilities, other smaller contract manufacturers and strengthening its engineering and design capabilities. The component manufacturing sector is also growing Research and development Solectron s New Product Introduction centers offer a full range of electronics product development services, including design and layout, concurrent engineering, test development and prototype engineering. Company s research and development activities have been focused primarily on the development of prototype and engineering design capabilities, fine pitch interconnecting technologies, high reliability environmental stress test technology and the implementation of environmentally friendly assembly processes Key customers The largest customers have been Cisco (12%), Hewlett- Packard (11%) and IBM. Others include Alcatel, Ericsson, Marconi, Mitsubishi, Motorola, Nokia, Nortel, Qualcomm, Compaq and Dell. 9.9 Celestica Key figures, major businesses Celestica revenue was 9.8 Billion dollars and it had 31,000 employees in 2000; it is the third largest contract electronic manufacturer after Solectron and SCI. Celestica is headquartered in Toronto, Canada. Celestica s business segments in the contract manufacturing include computer servers, workstations, peripherals and communication devices. 84

89 9.9.2 Global map CANADA: MF, 2 locations DC, 1 location USA: MF, 13 locations DC, 3 location MEXICO: MF, 1 location EUROPE: MF, 8 locations DC, 1 (UK) ASIA: MF, 7 locations BRAZIL: MF, 2 locations MF = Manufacturing DC = Design Center Figure 9.9. Celestica global locations Strategy Celestica is originally a spin-off from IBM. From that time onwards Celestica has grown by acquiring existing operations also from such companies like Motorola, NEC, Nortel, IBM and Avaya. Each of these deals includes a multi-year supply agreement between Celestica and the acquired company previous owners. One third of year 2000 growth of Celestica was from acquisitions. One of Celestica goals is to build a network of 15 global partners, all of which would be about 1 Billion $ worth of revenue for Celestica Research and development Celestica R&D is built around its five Design Centers (one in Canada, three in U.S. and one in U.K.) where Celestica offers its customers a full range of product design services from system design, software design, testing to new product introduction range Flextronics Key figures, major businesses Flextronics is headquartered in Singapore but operationally run from its San Jose, California offices. The company divisions are Flextronics Design (industrial, electrical and mechanical product development), Flextronics Enclosure Systems (full range of integrated custom electronic housings), Flextronics Semiconductor (design and manufacturing services), Flextronics Network Services (copper and fiber optic telecommunications switch installation, engineering and testing), Flextronics Photonics (photonic packaging design and optical manufacturing) and Multek (full range of PCB fabrication). In year 2000, Flextronics revenue totaled 5.8 Billion dollars and the number of employees was 49,000. Out of the sales, Europe represented 45%, Americas 40% and Asia 15% Key customers Key customers include Cisco, Dell, EMC, HP, IBM, JDS Uniphase, Juniper Networks, Lucent, Motorola, NEC, Nokia, Nortel, Sun Microsystems and Sycamore Networks Global map Flextronics has structured its operations worldwide under four different operation categories: Regional manufacturing locations: 39 in Europe, 23 in Americas and 11 in Asia 85

90 NORTH AMERICA: MF, 2 locations PIC, 6 locations DE, 5 locations MEXICO: MF, 2 locations IP, 1 location EUROPE: MF, 39 locations PIC, 9 locations IP, 5 locations DE, 6 locations ASIA: MF, 11 locations PIC, 1 location IP, 1 location DE, 4 locations MF = Manufacturing PIC = Production Introduction Center IP = Industrial Park DE = Design & Engineering Center BRAZIL: MF, 2 locations IP, 1 location Figure Flextronics global presence. Industrial Parks, a network of particularly plastics related production: 2 in Americas, 5 in Europe and 1 in China. Product introduction Centers, located close to Original Equipment Manufactureres (OEMs) to join their engineering resources: 6 in the U.S., 9 in Europe and 1 in China Design & Engineering centers, product development: 5 in The U.S., 6 in Europe and 4 in Asia Strategy Flextronics has built its global reach to provide its customers an end-to-end solution for their product needs. In the past few years Flextronics has invested heavily into its product design and engineering capabilities and also the component end of the business, for instance the enclosure business including acquisistions of those material suppliers. Also the Industrial park concept expand Flextronics capabilities into a larger scope than just the typical assembly type of operations of contract electronics manufacturers. Flextronics has acquired various plants from Original equipment manufacturers, most notably from Motorola. These companies announced a long satnding outsourcing agreement where Motorola would have Flextronics manufacture a major part of their products in the former Motorola plants Research and development The backbone of Flextronics research and development activities are structured around its Product introduction Centers and Design and Engineering Centers. In the Americas, all of these 11 centers are in the United States. The 15 European centers are in 10 countries (Austria, Czech, Ireland, England, Finland, Hungary, Germany, Italy, Sweden and Switzerland) and the 5 others are in Israel, China, Malaysia, Singapore and Taiwan Key customers By offering its customers comprehensive services including engineering, manufacturing and distribution, Flextronics has eneterd into multiple partnerships with companies like 3Com, Compaq, Handspring, Cisco, Ericsson, Nortel, Grundig, HP, IBM, Lucent, Microsoft, Nokia, Philips, Sony, Motorola and Siemens. Flextronics has for instance eight program managers coordinating Flextronics global activities for these key clients. Five of these program mangers are U.S. based and three in Europe. 86

91 10 Conclusion We are living in the middle of an information technology revolution and a globalization of the world economy. Old structures in telecommunication business are rapidly changing and new structures continue to emerge. No one knows the end results but the effort is strong and the speed is fast. Finland has been able to gain a very strong position as a user and supplier of information technology and especially mobile telecommunications technology. Nokia s importance for the industry in Finland and for the whole economy is unquestionable. However this situation is extremely fragile and continuous growth is not at all granted. Nokia s role as a driver of the whole cluster in Finland will probably not continue forever. At this moment the most critical issue for Nokia s network partners is to take full advantage of its market leadership posititon and to diversify at the same time when serving Nokia s global needs. Nokia has not only been a good customer for Finnish smaller companies in Finland but it has also taken its key suppliers abroad. Smaller companies in Nokia s supply chain have been able to elevate their technology standards and other skills to a much higher level. Nokia s reference value is extremely important for small technology companies going overseas. Based on the benchmarking findings of this study, Nokia is the most global and networked company among its competitors and a trendsetter in this sense. This gives an extra advantage for Finnish companies. Key customer relationship in internationally networked business is crucial but the phenomenon is not thoroughly studied and understood. Outsourcing trend has been very obvious in mobile phone production. However hardly anyone seems to make any money in that trend at the moment. Companies working in those networks will get squeezed and many if not most in Nokia s networks have been more profitable than may ever be possible in working for the major contract electronics manufacturers. How will the value chain be shaped and where is the profitability in the future handheld device business? The profit margins on the hardware side will probably be shrinking but the content side will be more and more valuable. Diversification and convergence trend; merging of Internet, mobile phones and computers has started. A glut of devices and gizmos are being introduced in the market most of them will probably have small production runs but which devices will survive? The appearance of not only the computer industry players HP, Compaq, Dell into the handheld business is obvious but also Microsoft is coming out strong. Its advantage is that almost all computers run on MS platforms; many consumers might want their handhelds to be as easily as possible compatible with their desktop tools rather than have a series of non-compatible devices for their future communication needs. The telecommunications business is very much innovation driven and the main players are focused on a few selected locations worldwide. A new business model has emerged, which separates innovation process from production process. Production and R&D networks are integrated globally following different logic. In the Americas the United States is dominant. In Asia most of that action is in Japan, Korea and China. In Europe there are still very diversified operations in well over half a dozen countries. Will one or two countries in Europe emerge as winners seems difficult to maintain a high profile in all of those current country locations in the long run? For instance the contract electronics manufacturer Flextronics is known to pack and go rapidly if they cannot accomplish their goals or they find another location with lower labor costs. R&D activities are locating where innovative and skilled people are available. What should then be done to ensure that the success for the Finnish telecommunications industry continues? Most critical issue is the internationalization and diversification of the cluster. This means access to new customers and ability to manage the business through international networking, which will also reduce the dependency on Nokia. The focus of the national system of innovation should be more on the emergence of innovations, global customer needs and ability to help the smaller companies in organizing their operations in international market environment. The key issue for the public supporting organizations involved is to understand the new logic of the global telecommunications business and continue to develop their services and focus accordingly. 87

92 Appendix 1 The NACE codes utilized in the calculation of economic indicators for the ICT cluster ICT Manufacturing Manufacture of electronic components Manufacture of computers etc Manufacture of insulated wire and cable Manufacture of radio transmitters etc Manufacture of radio receivers etc ICT Services Telecom services Telephone communication Other telecommunications Data transmission services Software and IT services Hardware consultancy Software consultancy and supply Data processing Maintenance of office machinery etc 89

93 Appendix 2 Measuring the export specialization of a country Specialization of a country in product exports can be measured by RCA (Revealed Comparative Advantage) index, which is calculated as follows: RCA ij = Xij / Xij i, X / X j ij i j ij Where X ij is the exports of the cluster i from the country j, and X ij is total exports from the i country. The nominator calculates the share of the OECD cluster i (the sum of the cluster i exports from all the OECD countries) of total OECD exports. RSA can be scaled between 1 and 1, which yields RSCA (Revealed Symmetric Comparative Advantage) index. If RSCA index equals zero, a country is as specialized in the cluster i exports as the OECD in average. If RSCA index exceeds zero, the country is specialized in the cluster exports. 91

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