GlobalNetworkinginWireless Teletechnology Business

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

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

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 1239-758X ISBN 952-457-044-0 Cover: LM&CO Page layout: DTPage Oy Printers: Paino-Center Oy, 2001

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

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 6 3.1.1 What is a cluster? 6 3.1.2 The ICT cluster environment 6 3.2 The economic relevance of the ICT cluster 7 3.2.1 Domestic market position 7 3.2.2 Foreign trade and international market position 8 3.3 The evolution of the ICT cluster 9 3.3.1 Network operation a fragmented monopoly market 9 3.3.2 The emergence of the telecommunications industry 11 3.4 The factors of the competitive advantage 13 3.4.1 Firm strategy, structure and rivalry 13 3.4.2 Factor conditions 13 3.4.3 Demand conditions 14 3.4.4 Supporting and related industries 14 3.4.5 Government 15 3.4.6 Coincidental factors 16 3.5 Dynamics in the ICT cluster 16 3.5.1 The government as an early catalyst of cluster development 16 3.5.2 Exceptional demand conditions have offered home-base advantage 17 3.5.3 Intense firm interaction has induced upgrading 18 3.5.4 Deterioration in labor supply, improvement in capital supply 19 3.5.5 World-wide liberalization pivotal and perfectly timed for Finland 19 3.6 Future opportunities and threats 20 3.6.1 Market positions at stake in the third generation competition 20 3.6.2 Globalization behind most of the opportunities and threats 21 3.6.3 Small firm size limits seizure of opportunities 21 3.6.4 Dynamic cluster relations support specialization and upgrading 22 3.6.5 Electronic business will have implications on firm interaction 22 3.6.6 How to guarantee sufficient supply of skilled labor? 23 3.6.7 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 27 4.2 From mobile phones to wireless devices 27 4.3 Customer segmentation 29 4.4 Alternative network connections 29 4.5 Wireless Internet 29 4.6 Programmability 30

4.7 Personality 30 4.8 Location identity 30 4.9 Safety and security 31 5 Promising standards and technology platforms 33 Jarmo Karesto, Finpro 5.1 The evolution of third generation cellular networks 33 5.2 3G technology strategy plans by operators in major markets 36 5.3 CDMA terminology and definitions 38 5.4 W-CDMA 39 5.5 WAP 39 5.6 I-mode and other Japanese 3G approaches 40 5.7 Bluetooth 41 5.8 Wireless local area networks 41 5.9 Operating systems in mobile devices, EPOC, Palm OS, and Windows CE 41 5.10 Mobile Internet Protocol Version 6 42 5.11 Major technology suppliers by key categories 43 5.12 Useful links to get more free information: 44 6 Trends in The Global business environment 45 Michael Lovejoy, Finpro 6.1 Turbulent times 45 6.2 Convergence 45 6.3 Globalization 46 6.4 Transnationalism 47 6.5 Virtual Integration 47 6.6 Importance of place 50 6.7 New model of production in the ICT industry 52 6.8 Globalization of the EMS model 53 6.9 Types of outsourcing services offered and utilized 55 6.10 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 60 7.2 Strategic roles of collaboration 61 7.3 Competence leverage in key customer relationship 62 7.4 Key customer-driven growth strategies 63 7.5 Key customer risk 64 7.6 Managing Intellectual Property 64 7.6.1 IP Rights Protection: Strategic Aspect 64 7.6.2 IP Rights in Relationships 64 8 Getting global, road map for technology firms 65 Lasse Baldauf, Finpro 8.1 Which direction? 65 8.2 Needs and requirements for global business 65 8.3 The process for establishing a business abroad 68 8.4 Wireless telecommunications industry value chain 69 8.5 Connections to the business environment 72 8.6 Importance of the cluster for SME s 73 8.7 Key Success Factors 73

9 Benchmarked companies 75 Lasse Baldauf, Finpro 9.1 General 75 9.2 Motorola 75 9.2.1 Key figures, major businesses 75 9.2.2 Global map 75 9.2.3 Business strategy 76 9.2.4 Research and development 76 9.2.5 Distributors 76 9.2.6 Contract electronic manufacturers 76 9.3 Siemens 77 9.3.1 Key figures, major businesses 77 9.3.2 Global map 77 9.3.3 Business strategy 77 9.3.4 Research and development 78 9.3.5 Distributors 78 9.3.6 Contract electronic manufacturers 78 9.4 Matsushita (Panasonic) 79 9.4.1 Key figures, major businesses 79 9.4.2 Global map 79 9.4.3 Strategy 79 9.4.4 Research and development 80 9.4.5 Contract manufacturers 80 9.5 Samsung 80 9.5.1 Key figures, major businesses 80 9.5.2 Global map 80 9.5.3 Strategy 80 9.5.4 Research and development 80 9.5.5 Contract electronics manufacturers 80 9.6 Nortel Networks 81 9.6.1 Key figures, major businesses 81 9.6.2 Global map 81 9.6.3 Strategy 82 9.6.4 Research and development 82 9.6.5 Outsourcing, suppliers 82 9.7 Cisco Systems 82 9.7.1 Key figures, major businesses 82 9.7.2 Global map 82 9.7.3 Strategy 82 9.7.4 Research and development 83 9.7.5 Distributors 83 9.7.6 Contract electronic manufacturers 83 9.8 Solectron 83 9.8.1 Key figures, major businesses 83 9.8.2 Global map 83 9.8.3 Strategy 83 9.8.4 Research and development 84 9.8.5 Key customers 84

9.9 Celestica 84 9.9.1 Key figures, major businesses 84 9.9.2 Global map 85 9.9.3 Strategy 85 9.9.4 Research and development 85 9.9.5 Key customers 85 9.10 Flextronics 85 9.10.1 Key figures, major businesses 85 9.10.2 Global map 85 9.10.3 Strategy 86 9.10.4 Research and development 86 9.10.5 Key customers 86 10 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

1 Executive summary Production of Telecommunications equipment in Finland increased from about 5 Billion Fim in 1990 to nearby 80 Billion Fim in 2000. The production incorporates directly several hundred companies in electronics, metal, plastic and software industries and employs approximately 40 50.000 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

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 2001. 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

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

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 3.1.1 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. 3.1.2 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

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

3.2 The economic relevance of the ICT cluster 3.2.1 Domestic market position The key figures of the ICT cluster for 1998 are presented in table 3.1. 4 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 1998. 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 3,728 951 9,543 1,694 100% 32% 8% 82% 15% 3,408 2,045 682 110 150 100% 60% 20% 3% 4% 2,500 1,724 706 932 578 100% 69% 28% 37% 23% 17,538 7,497 2,339 10,585 2,422 100% 43% 13% 60% 14% 5 % 4 % 3 % Equipment 2 % 1 % Telecom services 0 % 1975 1980 1985 1990 1995 2000 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

With its 75,000 employees, the ICT cluster accounted for 3 per cent of the total national employment in 1998. 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. 3.2.2 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 9 8 7 6 5 4 3 2 1 Cluster imports Cluster exports Telecom imports Telecom exports 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Figure 3.4. Foreign trade in ICT and telecommunications products (millions of Euros). Source: National Board of Customs. 14 23 25 12 28 Electronics and electrotechnics industry 31 42 40 30 25 Metal and engineering industries 27 16 16 19 15 26 31 23 8 6 18 18 Paper industry Mechanical wood industry Other 1960 1970 1980 1990 1999 Figure 3.5. Export shares by industry groups 1960 1999. Source: National Board of Customs. 5 Ali-Yrkkö, Paija, Reilly & Ylä-Anttila (2000). 8

ICT equipment Telecom equipment Finland Finland Sweden Sweden UK UK Japan USA 1997 1990 Japan USA 1998 1997 1990-0.2 0 0.2 0.4 0.6 0.8-0.2 0 0.2 0.4 0.6 0.8 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 1997. 7 3.3 The evolution of the ICT cluster 3.3.1 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 1876. 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 20.5 2. Japan 14.5 3. UK 9.7 4. Sweden 9.5 5. Germany 8.6 6. France 6.1 7. Finland 4.4 8. Korea 4.4 9. Canada 4.2 10. Mexico 4.2 9

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 1950 65 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 1981 82 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 1994. 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

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. 3.3.2 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 2000. 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

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 1981 82 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 1982 87, 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 1986 87, the Finnish telecommunications know-how was organized under one management when Nokia got full ownership of Mobira and the State s share of Telefenno. % 100 90 80 70 60 50 40 30 20 10 0 1967 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 Electronics Cable Forest Rubber Figure 3.7. The structure of Nokia s sales 1967 1999. 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 1991. 16 Mobira is a result of enthusiasm and madness. (Kansan Uutiset, a national newspaper in 1986). 12

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. 3.4.1 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 1998. 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. 3.4.2 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