The Dragon vs.

the Elephant
Comparative analysis of innovation capability in the telecommunications equipment industry in China and India
Professor Sunil Mani Planning Commission Chair Professor Centre for Development Studies Trivandrum-695011

Outline

The telecommunications industry in China and India The sectoral system of innovation Innovation Capability

Traditional indicators: (a) R&D investments; and (b) Patents Competitiveness of exports Capability in hardware Capability in telecoms software

Conclusions

Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Research Intensity

Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Patenting performance in the US

Sunil Mani, 3L Lecture Series, CMD, February 8 2006

China: Scientists and engineers engaged in R&D

Sunil Mani, 3L Lecture Series, CMD, February 8 2006

India: Scientists and engineers engaged in R&D

Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Relative technological strengths: China vs. India

China
Telecommunications Mechanical Computer

India
Embedded software Drugs Business software Chip design

engineering

graphics recognition

Handwriting

Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Growth of telecommunications services sector in China and India, 1990-2005

(Million subscribers)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fixed 8 11 17 27 41 55 70 87 109 145 180 214 263 312 325

CHINA Mobile Total 0 8 0 12 1 18 2 29 4 44 7 62 13 84 24 111 43 152 85 229 145 326 206 420 270 533 335 647 349 674

Ratio of mobile to fixed 0.01 0.02 0.04 0.06 0.09 0.12 0.19 0.27 0.40 0.58 0.81 0.96 1.03 1.07 1.07

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fixed 5 6 7 8 10 12 15 18 22 27 32 41 43 45 49

INDIA Mobile Total 5 6 7 8 10 12 0 15 1 19 1 23 2 28 4 36 13 54 34 76 50 95 76 125

Ratio of mobile to fixed

0.02 0.05 0.06 0.07 0.11 0.31 0.79 1.11 1.55

Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Trends in teledensity in China and India, 19912005

(Number of main lines per 100 people)

Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Extent of Digital Divide in China and India, 19782003

(Ratio of urban to rural tele densities)

1978 1980 1985 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2002 2003

China 1.62 1.68 2.35 3.67 3.85 4.07 4.32 4.65 3.52 2.94 2.52 2.19 1.80 1.73 1.67

India

13.33 16.00 14.50 13.80 11.71 10.17 9.53

Source: Economic Research Unit (2002), Telecom Regulatory Authority of India (2005), Department of Telecommunications (2002-03), National Bureau of Statistics of China (2004).

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Chinese and Indian investments in telecommunications, 1975-2001

8 10.00 7 9.00

Rate of Chinese and Indian Telecom Investments

6 7.00 5

6.00

5.00

4.00

3.00 2 2.00 1

1.00

19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 0.2 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.5 1.1 1.2 1.4 2.0 3.1 4.0 4.9 3.9 4.2 5.4 5.4 6.8 6.9 1.0 1.3 1.3 1.0 1.0 0.9 1.1 1.3 1.4 1.4 1.3 1.2 1.4 2.3 2.5 2.2 2.4 2.9 3.1 3.0 2.8 2.5 2.5 2.5 3.0 3.4 3.3

0.00

China RT India RT

Ratio of China to India 0.5 0.4 0.3 0.5 0.5 0.4 0.4 0.2 0.2 0.3 0.4 0.4 0.3 0.4 0.8 0.7 1.0 1.6 3.8 3.6 4.7 4.6 5.3 7.9 6.6 7.6 8.7

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Ratio of Chinese Investments to that of India's

8.00

Growth of telecoms revenues in China and India, 1997-2003

(Value in billions of US $)

1998 1999 2000 2001 2002 2003

China 25.3 29.3 38.5 44.9 51 62

India 6.3 6.5 7.1 7.6 8.2 8.8

Ratio of China to India 4.02 4.51 5.42 5.91 6.22 7.05

Source: World Markets Research Centre (2005)

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Distribution of Telecom revenues: China Vs India (c2004)

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Relative profitability of the Chinese and Indian Telecom Services Industry

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Relative size of the market for telecom equipments, 1992-2003

250.00

200.00

150.00 Ratio of China to India 100.00

50.00

0.00 Ratio Chinese Exports to Indian Exports Ratio of Chinese Imports to Indian

1992 105.07 17.29

1993 94.04 32.26

1994 25.62

1995 22.97

1996 16.37

1997 16.84

1998 18.43

1999 19.11

2000 26.69

2001 19.50

2002 9.06

2003 14.67

119.59 144.16 132.10 152.30 191.40 207.50 238.89 207.41 199.53 195.34

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Digital Access Index: China and India, 2002

1.20

1.00

0.80

Indices

0.60

0.40

0.20

0.00 Sweden Korea Brazil China India

Infrastructure 0.94 0.74 0.29 0.22 0.04

Affordability 0.99 0.99 0.88 0.87 0.78

Knowledge 0.99 0.96 0.90 0.79 0.57

Quality 0.64 0.74 0.32 0.24 0.18

Usage 0.67 0.65 0.10 0.05 0.02

DAI 0.85 0.82 0.50 0.43 0.32

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Sectoral System of Innovation-China

Chinese: Stronger and more closely knit- public labs have been converted to production enterprises Manufacturing enterprises are highly research intensive and two of them have emerged as leading MNCs in their own right; Strong rivalry between domestic manufacturers and indeed between them and western MNCs The state has provided strong and effective strategic direction

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Sectoral System of Innovation- India

Indian Weak and fragmented- the public laboratory has strong research capability- successfully transferred generated technologies to local enterprises- helped to jump start a domestic equipment manufacturing industry Domestic manufacturing enterprises do not have strong inhouse R&D capabilities Leading state-owned equipment manufacturer have become a mere trader. Deregulation of telecoms equipment industry has had adverse consequences for the leading domestic equipment manufacturer Growth of R&D outsourcing deals FDI into telecom equipment manufacturing

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Growing importance of local producers in the market for telecom switches in China, 1982-2000

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Innovation Capability

Definition: Ability to conceptualise, design, manufacture, and sell state-of-the-art-telecommunications equipment both at home and abroad; Measurement is not easy- no single indicator captures the above definition; Following four indicators are employed Traditional indicators: (a) R&D investments; and (b)patents Competitiveness in exports Capability in hardware design Capability in telecoms software
Sunil Mani, 3L Lecture Series, CMD, February 8 2006

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Traditional Indicators
Human resource devoted to telecom R&D in China and India (Number of R&D scientists and engineers)

1999 2000 2001 2002 2003

Huawei 5138 6061 7996 9662 10000

ZTE 4794 6240 7020 9010 9900

Datang

1840

NingBo Bird Beijing Capitel Total China C-DOT 9932 12301 400 15416 435 300 19407 1109 612 360 22712 1045

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Ratio of Chinese to Indian investments in Telecom R&D, 2000-2003

1000

45

900

40

800

35

R&D expenditure (in millions of US $)

700 30 600 25 500 20 400 15 300 10

200

100

0 China India Ratio of China to India

1995 8.63

1996 11.29

1997 16.11

1998 13.33

1999 17.36

2000 294.48 18.02 16.34

2001 583.56 23.45 24.89

2002 733.7 22.22 33.02

2003 950.11 23.36 40.67

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Ratio of China to India

Number of patents granted to Chinese and Indian Inventors in Telecom technologies in the US, 1991-2004
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 China 1 India 1

2 1 1 1 3 1 1 4 5 20 1 1 2 6 7 11
Sunil Mani, 3L Lecture Series, CMD, February 8 2006

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Profile of the Largest Chinese Telecom Equipment Manufacturer

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Huawei-Exports

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Growing market share of Huawei in China

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Number of US patents granted to Huawei Technologies (China) in the US, 2000-2004

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Comparison between the largest Chinese and Indian telecom equipment manufacturers
China India

Huawei (Commenced operations in 1988)

ITI (Commenced operations in 1950)

1. Annual turnover (millions of US dollars in 2003)

3830.12

26.07

2. Annual R&D expenditure (millions of US $ IN 2003)

385

0.94

3. Number of scientists and engineers in 2003

10000

about 50

4. Exports of telecom products (millions of US $ in 2003)

1050

Negligible

5. Cutomer base

87 telecom operators in 31 countries

2 state-owned telecom operators in India

6. New technologies developed 3G phones, Next Generation Networks, and internet gear Hardly anythingdependence on foreign technology

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Competitiveness of telecom exports, 1992-2003

China 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1.06 1.02 1.20 1.30 1.50 1.41 1.54 1.70 1.64 1.96 2.26 2.35

India 0.04 0.05 0.05 0.04 0.05 0.05 0.04 0.04 0.04 0.06 0.07 0.08

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

China has innovation capability in 3G Mobile Telephony Technology

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

China introduces its own standard for 3G Mobile technology

Chinas Ministry of Information Industry (January 2006) formally approved TD-SCDMA, a local standard for third-generation wireless service. The move signals an important step towards the development of the countrys telecommunication industry. Following confirmation of the commercial viability of the local 3G standard, Beijing is expected to start issuing 3G wirelessoperation licenses as early as March or by mid-2006. Domestic and international telecommunications companies, including Huawei Technologies Co, Lucent technologies, Motorola Inc and Nortel Networks Corp, welcome the move.

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Diffusion of TD-SCDMA Technology in China

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Market Perception
Based on 2005 Wireline Telecom Equipment Market Perceptions Study by Heavy Reading

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Share of C-DOT designed switches in Indias telecom network

(As on March 31, 2004)

Number of exchanges Rural automatic exchanges/access network rural automatic exchanges Single base module-rural automatic exchange Main automatic exchange Total 32,993

Number of equipped lines (in millions) 5.25

9971 2117 45081

9.40 10.78 25.43 (57*)

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Telecoms software exports from India (Millions of US $)

Software exports from India 1998-99 1999-2000 2000-01 2001-02 2626 4015 6341 7174

Estimated telecoms software exports from India 262.60 (10) 461.73 (11.5) 883.09(14) 993.83 (14)

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006

Conclusions

China is a later entrant to telecommunications research and manufacturing. But it has already evolved as a major world player; The Chinese and Indian innovation systems presents exactly the opposite picture. China first allowed MNCs in the design and manufacture of telecom equipments. Later on through carefully crafted policies it engineered positive technology spillovers to local companies. Currently the Chinese market is dominated by these local companies Further it has built up considerable innovation capability in wireless telecommunications equipments- development of the TD-SCDMA 3G Mobile standard for instance; India has built up some capability in telecom software, access technologies and in R&D outsourcing Chinese telecom sector has undergone better strategic direction than Indias

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Sunil Mani, 3L Lecture Series, CMD, February 8 2006