Architecture-based approaches to international standardization and evolution of business models, J Shintaku, K Ogawa, T Yoshimoto

Tags: advanced countries, International Standardization, architecture, technology, DVD player, European firms, Japan, standardization, LCD panels, modular architecture, product architecture, economic growth, Taiwan, developing countries, HONG KONG, market share, digital technology, finished product, modularization, standards organizations, Koichi Ogawa, business model, Korean International Trade Association, Trade Statistics, Ministry of Finance, manufacturing companies, LCD panel, LCD manufacturer, Ministry of Economic Affairs, R.O.C., Korea, China, International Electrotechnical Commission, division of labor, Japanese firms, business CD-ROM, international standard, finished product business, NIEs, finished products, architecture domain, open standard, DVD players, standardization activity, Mini Disc, University of Tokyo, accumulated volume, DVD recorder, The University of Tokyo Junjiro Shintaku
Content: 21COE, University of Tokyo MMRC Discussion Paper No. 96 MMRC-F-96 Architecture-based Approaches to International Standardization and Evolution of Business Models The University of Tokyo Junjiro Shintaku The University of Tokyo Koichi Ogawa The University of Tokyo Tetsuo Yoshimoto September 2006
21COE, University of Tokyo MMRC Discussion Paper No. 96 Architecture-based Approaches to International Standardization and Evolution of Business Models The University of Tokyo Junjiro Shintaku The University of Tokyo Koichi Ogawa The University of Tokyo Tetsuo Yoshimoto September 2006 1. Introduction Standardization has a great impact on economic growth--it accelerates technology transfer and cost reduction. As technology progresses rapidly, the price of a product also quickly falls. Consequently, the efficiency of society as a whole is improved and the benefit to consumers is increased. This chain--standardization, technological progress, price fall, and expansion of consumer benefit--causes growth in global economy. Especially after the 1990s, international standardization had a strong impact on the global 1
Shintaku, Ogawa, and Yoshimoto economy and accelerated collaboration with advanced countries and newly industrialized economies (NIEs). The background to this lies in the rapid development during the 1990s of semiconductors and digital technology. These technologies drove the modularization of product architecture forward. Modularization made it easy for countries with little technological knowledge to enter new industries such as DVD and mobile phone. It can be said that the economic growth of developing countries changed greatly because of product modularization and standardization. The major companies that play a prominent role in developing core technologies and setting international standards have, however, also sought to maximize their profits. These companies ingeniously encapsulate their knowledge and Intellectual Property (IP) into a framework of technological standards. Their persistence to protect their IP apparently contradicts the goals of public standards organizations. The organizations promoting international standards, such as the International Electrotechnical Commission (IEC) and government institutions in each country, are more concerned with social welfare and especially consumer benefit. The purpose of our paper is to provide a general framework for analyzing the economic impact of international standardization. Based on an analytical framework of product architecture, we seek an economic model that can harmonize the benefit of various entities such as the leading firms in advanced countries, the firms catching up technologically in NIEs, consumers in the global market, and public standards organizations. In the following section, we analyze the impact of international standardization in the optical storage industry using the framework of product architecture. We then describe the modularization of products, international standardization, entrants from NIES, sudden fall in price, and rapid market expansion. Next, we suggest a new type of business model based on international standards. The division of labour between advanced companies and developing companies and their collaborative business model is described. Finally, we discuss economic growth based on the modularization and international standardization. A general model and some empirical data are provided. 2. Economic Impact of International Standardization 2.1. Product Architecture and International Standardization Product architecture is a basic design concept for product functions and structures (Fujimoto, 2004). Basic requirement for product designer is how to realize a set of functions. Product is physically structured by some components. Product designer should determine how each function is allocated to some components. These concepts of allocation make the difference in the 2
International Standardization and Evolution of Business Models interdependency among components. Based on the concept of functional allocation and interdependency, product architecture can be classified into two types, modular and integral architecture: integral architecture has complex and strong interdependency among components. More than one function is allocated to each component. The design optimization of finished product depend on the mutual adjustment of component design itself (e.g., automobile). modular architecture has simple and very weak interdependency among components. Only one function is allocated to each component. The design optimization of finished product depends on each component that is independently developed (e.g., personal computers). An architecture-based definition of standardization is summarized in Figure 1. International standardization, such as that provided by the IEC, is defined as a form of modular architecture. Because, in principle, it is open to every firm in many countries, and the design rules of the standardized layers are open to the public, the finished product has high potential to be extended not only to advanced countries but also to developing countries, and can thus increase benefits to Figure 1 Architecture-based definition of standardization Open international standardization = modular architecture Open technology & open design rule accelerate diffusion and popularization of technology & product Remove interdependency between finished product & key components accelerate international division of labor support rise of the industry in developing country popularize very low cost product worldwide World wide installed base provides new value-added business opportunities Closed local/de facto standard closed architecture Closed technology & closed design rule capsule technology & IP into product Keep strong interdependency between product & technologies support vertical integration of product protect source of profit & revenue Need open standardized product as partner for market development accelerate collaboration with advanced countries and NIEs 3
Shintaku, Ogawa, and Yoshimoto consumers worldwide. In addition, this worldwide installed knowledge base provides new business opportunities, such as the digital content business as seen in the DVD and mobile phone environment, with further contribution to economic growth. The local and/or de facto standard can be defined as integral architecture. Because technology and design rules are largely closed or strictly controlled, firms that drive the standard forward have to promote the finished product themselves. However, history shows that huge marketing and promotion investment is needed; moreover, the product is restricted to a local and/or a niche market. A business strategy that has been successful for the integral product is collaboration with the open standard, which provides various business opportunities for partners. Without open standardization, the product with integral architecture, that is, a coordination-intensive product cannot enter the worldwide market. This shows that standardization plays a prominent role in the economic growth of the 21st century.
2.2. Development of Optical Storage Industry through Standardization and
Modularization
The speed of market expansion depends strongly on the form of standardization, as shown in
Figure 2. The technological standard of DVD families has been standardized in an international open
forum called the DVD forum, of which more than 200 firms from 20 countries are members. Because
it is open to firms from many countries, not only the technology-leading firms of advanced country
but also many firms from NIEs that are catching up with their developed world counterparts
(hereafter called catch-up firms) can join the DVD business. The accumulated volume of sales for
the DVD family--writable DVD drive for PC, DVD Player and DVD recorder for audio-visual--has
reached over 300 million units within five years since the market opened up, and it is still growing.
However, as seen in Figure 2, the sales volume of the Mini Disc, which is a small-sized music player
that was very popular in the Japanese market of the 1990s, has been restricted to be less than 20
million. Because the Mini Disc was standardized in closed form by only a few Japanese and
European firms, and because they did not open the key components and the technology, it has not
been well accepted outside the Japanese market.
In the case of DVD, which was standardized
with many firms in the open international forum only one year after the first product was delivered in
1997, key components of the drive, such as optical pick-up, LSI chipset, control microcode, and
electric motor, became available in the Asian-Pacific arena. Thus, the open standard quickly changed
the product architecture to modular mode and then accelerated the division of labor. The distribution
4
Shipment volume (million)
International Standardization and Evolution of Business Models
Figure 2 Market expansion speed of standardized products
160 140
DVD Recordable
More than 200 firms (open standard)
120 100 80 60
DVD Player
CD-R/RW
Number of firms In standardization activity
40
VCR
20
Less than
Mini Disc 5 firms
0
(closed standard)
1st
2nd
3rd
4th
5th
6th
7th



Year



1st year shipment volume: 1 million per year
Source: Edited by authors using market
DVD Recordable: 2001, DVD Player: 1998,
information of TSR & GigaStream Japan
CD-R/RW: 1996, VCR: 1978, Mini Disc: 1995
of these key components has provided the catch-up firms of NIEs with the opportunity to join the DVD business. In other words, the open standard has played a prominent role in creating new business opportunity for NIEs and encouraging their industry to flourish. The product architecture of the CD-ROM and CD-R drive was initially in integral mode when these appeared in the market. Consequently, they could not develop volume market themselves, because there was no opportunity to change the division of labor. According to our investigation, the innovation of the microcontroller unit (MCU) and microcode technology (firmware) radically changed the architecture from integral to modular mode. The digital feedback servo technology of the CD-ROM since 1994 and microcode technology of CD-R's write strategy since 1998 are good examples of the innovation. The former has led the CD-ROM out of the integral mode to modular mode, because it has removed interdependency between optical pick-up and drive technology, while the latter has removed the interdependency between recordable media and drive technology. As is shown in Figure 3, the market for the two products has expanded explosively since 1994 and 1998, 5
Shintaku, Ogawa, and Yoshimoto Figure 3 Market expansion speed of standardized product after modularization
Integral Architecture Closed/de facto standard 140 120
Modular Architecture Open standard CD-ROM
Shipment volume (million)
100 80 60 CD-ROM delivered (1986 CD-R to delivered (1990 40 20
CD-R/RW DVD player
0
DVD Player delivered (1997)
CCDDDVSD--oRRuPrO/cRelMa:WEy8dei6tre/d989b0y608a7u/th989o1r871s8u/si9n89g2882m9a/rk989e3t993in0fo/r9m9949a04t1io/n'9o99f9515T2S/9R'39&99/6G269ig79a/S49999t/r7e3779a8m9/5J9999a/p84889an99/69999/95990907//0900'0060019/8'/9000'0171192
/ 9
/'9000'0282230/0'/0900'30933041/
/'0000'040445/
'
000515 05
respectively, because key components of each drive have been available in the market of Asian-Pacific Arena and this has accelerated the division of labor. These cases in the DVD and CD family lead to the conclusion that the innovation of the digital technology since the 1990s has provided international standardization activity a prominent role in the history of industry--it contributes not only to increase consumer benefit but also to acceleration of economic collaboration between advanced countries and NIEs. It has been said that more than 50 firms joined the CD-ROM business in the mid1990s and more than 300 joined the DVD business in the early 2000s from Korea, Taiwan, Hong Kong, China, India, Dubai, Turkey, and Singapore. Before the 1990s, when digital technology was not so powerful, international standardization could not have played such a prominent role. As seen in Figure 4, the international standard has popularized the products in the newly developed markets of developing countries. The number of DVD players sold in the developing countries was less than 1 million in 1999; however, the number has drastically increased to account
6
Shipment volume (million)
International Standardization and Evolution of Business Models
Figure 4 Market development of DVD player in developing counties.
Ratio of market
160
140
Worldwide
market growth 120
100
100%
Market size of
80
developing countries 80%
60
60%
40
40%
Market size of
20
developed countries
20%
0 04
Source: Edited by authors using market information of TSR & GigaStream Japan
for up to 63% of worldwide shipments in 2005. This is the power of the open international standard in the environment of the digital technology. Both digital technology and standardization have accelerated modularization of product architecture enabling the division of labor, and popularization of products in the world. A similar contribution by the international standard has been observed in the mobile phone industry. The cumulative number of the subscribers in China was less than 4 million in 1995; however, the number has increased well over 400 million in 2005, which is almost the same as for the expanded European Union or more than twice the number for the USA. The volume of shipments of mobile phones by Chinese and Korean firms, for example, has been remarkable, rising to over 150 million in 2005. From the above analysis, it is clear that the international standard of the mobile phone has played a very prominent role in stimulating the economic growth not only of China but also of the advanced countries that have developed core technologies and set the standard.
7
Shintaku, Ogawa, and Yoshimoto 2.3. Acceleration of Technology Transfer to NIEs International standardization in open form has accelerated rapid technology transfer of finished products from technology-leading firms to catch-up firms of NIEs. Figure 5 shows sudden drop in the market share of Japanese and European firms with developed technology and have set the international standard. In the case of closed/de facto standards, such as CD-ROM and CD-R/RW, while product architecture was restricted to the integral mode, the market share of the finished product by Japanese and European firms was more than 90%. However, this share suddenly started to drop after the architecture changed into modular mode. On the other hand, in the case of DVD, the drop began even in early stages of the market's opening, because the architecture was already modularized--it was standardized in the late 1990s, when digital technology was in a phase of rapid innovation. It is very interesting to note that the trend of market share drop for the DVD has been almost the same as the drop for the modularized CD-ROM drive and the modularized CD-R/RW drive. The product architecture of key components, such as the optical pick-up, first appeared in integral mode and remains in the same integral mode even today. The optical pick-up is a typical
Figure 5 Market share change of standardize product after modularization
120
Integral Architecture
Closed/de facto standard
Modular Architecture Open standard
Market Share (%)
100 Market share of
Japanese firms + European
80
firms
DVD Player delivered (1997)
60 CD-ROM delivered (1986 CD-R to delivered (1990 40
CD-R/RW
CD-ROM DVD Player
Catch-up countries
20
joined business
CD-ROM 0 CCDDDVD--RRPO/RlMaWy8e6/r90898607/91898718/92898829/93899930/94999041/'95999152/'96999263/'9947999/93778/9958999/94889/9969999/05990/9070900/06001/9081/900'07112/9'90/2900'08223/0'00/9003'09334/0'10/4000'00445/'05000155 Source: Edited by authors using market information of TSR & GigaStream Japan
8
International Standardization and Evolution of Business Models
Figure 6 Architecture-based positioning of standard leading firms of
advanced countries and catch-up firms of NIEs
China
India
Turkey
DVD Player
Dubai
Modular
DVD Media (OEM) Single DVD Recorder Digital Chipset DVD + R/RW, DVD-R/RW Drive
Taiwan
Korea
Slim typed Super-multi DVD Drive
Integral
Optical Pick-up Electric motor, Microoptics Laser, Micro lens, OEIC Dye, Stamper, Tester,
Manufacturing Equipment Source: Author's interviewed DVD industry
Japan Germany Holland
product with integral architecture or a coordination-intensive product in which there are strong interdependencies between the core technologies. Even though the optical pick-up has been manufactured by factories in NIEs, and has been available in the open market since 1985, the market share of Japanese and European firms has been over 90% in the innovation-intensive computer applications and over 80% even in less innovative audio-visual applications. Figure 6 summarizes the architecture-based positioning of finished products and of key components in the DVD industry. All the key components developed by technology-leading firms in advanced countries are positioned in the integral architecture domain. The firms of NIEs cannot join the key component business, because it is a technology- and coordination-intensive product with integral architecture, which needs a long-term investment of education, long-term R&D, and a wide range of industry. On the other hand, almost all the finished products manufactured by NIEs are positioned in the modular architecture domain. The technology-leading countries find it very hard to join the finished product business, because it is labor-intensive low cost. However, firms in NIEs can join it by taking advantage of their comparatively small overheads. It can be concluded that each domain needs 9
Shintaku, Ogawa, and Yoshimoto collaboration--firms in advanced countries cannot operate without the finished products from NIEs. The NIEs bring the value-added key components to the worldwide market by providing a finished product at very low cost. If the NIEs do not join the finished product business, then new markets in developing countries cannot be opened quickly, and the market size for the DVD player would be restricted to less than one third of current market or one fifth of the future potential market. This means that open international standards have provided the leading firms of advanced countries with 3­5 time bigger market for value-added key components, and this has encouraged the growth of their industry. This is due to the architecture-based division of labor created by international standardization. Each country holds a unique and strong position in their product architecture, and this will not change in the short term because it originates from a country's comparative advantage based on culture and history. It must be emphasized that international standardization since the digital innovation era of the 1990s has created a new economic environment in which advanced countries and NIEs can be and will be in symbiotic co-prosperity. Because this co-prosperity has been created by international standardization, it can be said that the role of standardization in world economic growth will be much more prominent in the 21st century than in the 20th century. 3. New Alliance Business Model based on International Standardization Although the catch-up firms in NIEs have a high presence in the optical storage industry, the international division of labor between Japanese and the catch-up firms has become very important for the continuation of their business. The firms in the advanced courtiers focus on the integral products and components such as the optical pick-up and LSI chipset. On the other hand, the firms in NIEs have competitive advantage only in the final modular product. These two parties have had the large transaction of key components in the market. In the optical storage industry, for example, the market share of a typical integral product, such as the optical pick-up, is more than 80% for Japanese and European firms, while NIEs take more than 70% of the market share of such a finished product as the DVD player with modular architecture. A similar phenomenon has been observed in the mobile phone industry, where almost all key components with integral architecture, such as baseband chip and optical modules, have been supplied by advanced countries (for example, Nokia, Texas Instruments, etc.). It is very difficult for NIEs to enter the market for technology-intensive key components, because these components require long-term investment in education and basic R&D, also require a 10
International Standardization and Evolution of Business Models wide rage of industry infrastructure in the country. The firms in advanced countries invest in the technology development, product development, and market development of the technology-intensive integral products. On the other hand, it is very difficult for the firms in advanced countries to join the market of modularized low-cost products, such as the DVD player, because the gross profit margin of the low cost-product is very small and they cannot absorb the large overheads for investment. That is, the firm in advanced country is week in the low cost operation of modularized products. Recently, this international division of labor has evolved to the new alliance model. We can observe several successful alliances between technology-leading firms in advanced countries and catch-up firms in NIEs. These alliances are designed based on architecture--this may defined as "architecture-based alliance model." A successful example of the alliance is a joint-venture company called HLDS where Hitachi of Japan takes a portion of integral architecture, while LG Electronics of Korea takes a portion of modular architecture. Hitachi is one of the firms that led the international standardization of the DVD and has provided IP to the technological standard. While Hitachi has transferred technologies of the
Figure 7. Architecture-based alliance model
Firm B in NIEs Finished Products Product Design Technology Transfer of Modular Products
Mass Production Transfer of Mass Production Technology
Do not active Active
Joint Venture between A and B Finished Products
Product Design
Mass Production
Technology Transfer of Modular Products
Firm A in advanced country Finished Products
R&D
Product Design
Mass Production
modularized products, the DVD drives, to HLDS.
Supply Key Components ( with Integral Products)
Key Components
R&D
Product Design
Mass Production
11
Shintaku, Ogawa, and Yoshimoto Table 1 Architecture based alliance in DVD industry
Establish ment (year)
Name of Joint Venture
2000 Hitachi LG Data Storage (HLDS)
2001 2003 2004
JVC Light-on Manufacturing & Sales (JLMS) Philips BenQ Digital Storage (PBDS) Toshiba Samsung Storage Technology (TSST)
Investment
Hitachi 51%
LG 49%
JVC 51% Light-on 49%
Philips 51% BenQ 49%
Toshiba 51% Samsung 49%
However, Hitachi does not transfer technologies of key components to HLDS. Key components with integral architecture, such as the optical pick-up and the LSI chipset with microcode, have been provided to HLDS from Hitachi of Japan. Figure 7 shows the concept of the architecture based alliance model. Since 2003, only three years after the collaboration started, HLDS has become the leading optical storage manufacturer in the world. Many similar alliances have been seen between not only Japan and NIEs but also between Europe and the NIEs (see Table 1). 4. Economic Growth through International Standardization 4.1. Trade structure in East Asia The international standardization has accelerated the modularization of the product. Product modularization has promoted the international division of labor and the alliance model described in section 3. We can confirm the development of this new business model in macro by observing the current trade structure in East Asia. Figure 8 illustrates the trade structure among Japan, Korea, Taiwan, and China. In Korea and Taiwan, there is an excess of exports from Japan, while in China, there is an excess of exports from 12
International Standardization and Evolution of Business Models Figure 8 Trade in East Asia (2004)
Korea 68
China: Mainland & Hong Kong
30 96
44 22
109
19
7 10
42
Japan
64
17
Taiwan
Unit: Billion $
Sources: Prepared by JETRO from Trade Statistics, Ministry of Finance, Japan. Also data from Bureau of Foreign Trade, MOEA (Ministry of Economic Affairs, R.O.C.) and Korean International Trade Association. both Taiwan and Korea. There is a chain of manufacturing flow from Japan to Korea and Taiwan, and
further to China. Korea and Taiwan import key components and manufacturing equipment from
Japan, manufacture products using the imported materials, and export their products to China.
Low-cost, final products such as the internationally standardized DVD players are assembled in
China and exported to the US and European markets.
Although some Chinese manufacturing companies export to advanced countries, the
foreign-affiliated firms in China export to the global market from China. Japanese, Korean, and
Taiwanese companies have made a huge investment in China (see Figure 9). With the advance of
China, the hollowing of the manufacturing industry has become a serious problem even in Korea and
Taiwan. However, high-tech products such as LCD panels and semiconductors are still produced in
Korea and Taiwan, and exported to China.
LCD and semiconductor companies in Korea and Taiwan depend on foreign companies,
especially Japanese companies. For example, major equipment and materials for LCD panels, such as
polarizer and color filters, are supplied to Korean and Taiwanese LCD manufacturer by Japanese
firms (see Table 2).
13
Shintaku, Ogawa, and Yoshimoto Figure 9 Cumulative amount of direct investment in East Asia (2004)
10,965 895
Korea 10,993 1,014 60
China 41,249
Japan 31,487 7,774 951
Taiwan
Unit: Million $
Sources: JETRO. Figure for Taiwan from Monthly Statistics of Exports, The Republic of China. Data of Taiwan is cumulative dollars from 1991 to 2004.
Table 2 Top 3 countries imported from Japan in 2004
Category Item (6 digit HS code)
IC LCD Steel Others
Monolithic ICDigital Other MIC Photoelectric semiconductor and LED1) Element doped for electronics industry discotic and wafer2) Pattern etching machine for semiconductor material Stepper Sheet and board made by polarized material Glass processed LCD Hot rolled and other sheet steel over 10 mm thickness Hot rolled and other sheet steel between 3-4.75 mm thickness Hot rolled and other sheet steel less than 3 mm thickness Other machinery aimed for specific usage Other electric quantity meter (no recording device Printed circuit Prisms and other optical devices uninstalled and polished
First CHINA (18.3%)
Second
Third
HONG KONG (16.3%) R KOREA (13.5%)
Top 3 share in total export 48.1%
HONG KONG (17.2%) R KOREA (14.4%)
CHINA (14.0%)
45.6%
HONG KONG (21.4%) TAIWAN (28.5%) TAIWAN (45.6%) TAIWAN (31.5%) R KOREA (36.8%) R KOREA (49.9%) CHINA (43.0%) R KOREA (61.9%) R KOREA (62.3%)
CHINA (18.1%) U S A (28.1%) R KOREA (17.9%) R KOREA (20.0%) TAIWAN (26.7%) TAIWAN (25.0%) HONG KONG (11.7%) CHINA (20.3%) THAILAND (24.4%)
GERMANY (11.7%) R KOREA (19.8%) U S A (15.9%) U S A (13.4%) CHINA (21.5%) CHINA (10.0%) R KOREA (11.4%) INDONSIA ( 3.6%) INDIA ( 6.1%)
51.2% 76.4% 79.4% 64.9% 85.0% 84.9% 66.1% 85.8% 92.8%
R KOREA (37.6%) TAIWAN (27.7%) R KOREA 27.6%) CHINA (22.0%)
TAIWAN (20.6%) R KOREA (21.3%) TAIWAN (26.9%) R KOREA (15.6%)
HONG KONG (23.3%) CHINA (22.7%)
THAILAND (19.5%) CHINA (20.4%) CHINA (10.3%) HONG KONG (10.8%) R KOREA (16.0%)
77.7% 69.4% 64.8% 48.4% 62.0%
Note: 1) CCD solar-electric generated element 2) semiconductor wafer, etc.
Source: Based on figures provided at JETRO web page. 14
International Standardization and Evolution of Business Models
Figure 10 Trade structure of Taiwan
Total Export (US Bill. $)
160 150 140 130 120 110 100 90 80 70 60 10
1989-2000 2001-2003 lRineegresshsaiopneline (1989-2000)
y = 3.781x + 4E+09 R2 = 0.9577
15
20
25
30
35
40
Import from Japan (US Bill. $)
Source: Based on figures provided at MOEA (Ministry of Economic Affairs, R.O.C.)web page.
Taiwan has had a consistent trade deficit with Japan even though it has enjoyed a trade surplus for years. The export industry in Taiwan depends on imports from Japan. Figure 10 shows the relation between the total amount of exports from Taiwan, and the amount of imports from Japan. There is a positive correlation between these two. Similar dependence on Japan is also observed in Korean exports. Korea depends on Japan for the equipment and materials for LCD panels and semiconductors. Korea automakers import the outer steel panels from Japan. The leading export companies in Korea, such as Samsung Electronics, LG, and Hyundai, are also the top importing companies. 4.2. Market Growth and Change of Value Chain As already mentioned in this paper, product architecture has a huge impact on the speed of catch-up of latecomers. Akamatsu (1962) and Vernon (1966) claimed that the production of new products started in advanced countries and later production was transferred to the low-cost developing countries, as the technology matured. However, they did not mention the effect of modularization or the effect of international standardization on production transfer. As is mentioned in section 2, modularization radically accelerates this transfer process to developing countries and 15
Shintaku, Ogawa, and Yoshimoto Figure 11 Change of catch-up process
(1) Traditional Catch-up Model Advanced Countries NIES ·Products get modularized ·Exported components and equipments
(2) Catch-up Model for Modular Products Advanced Countries NIES Shorter time lag of catch-up
Figure 12 Change of vertical structure: price fall and market growth
LCD panel
·Shrink of Vertical Share of Japanese Firms ·Radical Price Fall ·Rapid Market Growth
Price Market
60 Components 70
Japan
Korea Taiwan
Material
Japan
time LCD panel Components Materials
Market
Market Growth 16
$ - Price
International Standardization and Evolution of Business Models Figure 13 Shift of added value on DVD
1998 Market: 1B US$ Added value on DVD drive Monopoly by Japanese and European firms Added value on core components
2004 Market US$19,4B
Distribution channel Added value created by developing countries
$3,850M (20%) Distribution cost and margins $6,400M (33%) DVD drive assemblygeneral parts
Added value created by Japanese and European $9,180M (47%)
firms
Mainly core components
modularization is one of the key drivers for the recent remarkable growth of the Chinese manufacturing sector. Figure 11 shows these changes in the catch-up process. The left side of the figure shows the catch-up model explained by Akamatsu (1962) and Vernon (1966). The right side of the figure shows that NIEs catch up and overtake the advanced countries. However, as we mentioned, their catch-up is supported by components and equipment from advanced countries in which IP and technical expertise are encapsulated. However, these changes in the catch-up process do not mean that the economic gain of advanced countries decreases. Figure 12 illustrates the change in economic gain between advanced countries and NIEs in LCD panels. Japanese LCD companies such as Sharp commercialize LCD panels and dominate all business in a vertical chain in the early phase of industry. Technological progress drives the modularization of production and technical expertise is encapsulated production equipment. This modularization makes it easy for Korean and Taiwanese companies to enter the LCD panel industry. One of the most important factors for success in LCD industry is huge investment for large plants. Their entries caused fierce price competition. The price of LCD panels radically 17
Shintaku, Ogawa, and Yoshimoto
Figure 14 Content market generated by DVD
1998: US$1B (6M unit)
2004 US$70B (285M unit)
content DVD drive Monopoly by Japanese & European firms Core component US$ 19.4B
DVD digital contents provided mostly by Hollywood approximate sales 4B: $50,000M (72%)
Distribution channel Added-value created by developing countries
$3,850M (5.5%) Distribution cost and margins $6,400M (9.2%) DVD drive assemblygeneral parts
Added-value created by Japanese and European firms
$9,180M (13.2%) Mainly core components
decreased and a huge market emerged. Recently the share of Japanese firms in LCD panels has been decreasing, while the share in equipment and materials still quite large. The share of Japanese firms in the vertical chain has decreased. However, the total amount of Japanese economic gain is still increasing because of the total market growth. These changes in economic distribution between the advanced countries and NIEs have been observed in various industries. Figure 13 gives a concrete example of the DVD. The DVD market was only 1 billion dollars in 1998, when Japanese and European firms dominated the market. After the entry of NIEs companies, the market grew rapidly to 19 billion US dollars in 2004. In the vertical value chain, the portion of components is estimated at 47%. The market for components (9 billion US dollars in 2004) is still dominated by Japanese and European firms and is almost nine times the total market in 1998. Additionally, the large installed base of DVD players has generated an even larger content market, as illustrated in Figure 14. Around four billion pieces of DVD media containing content such as movies were officially sold in 2004. This content market, equal to about 50 billion US dollars, is more than double the DVD hardware market. The DVD content business was dominated by US movie companies. DVD sales are up to 47% of their total sales in 2004 and DVD division is the 18
International Standardization and Evolution of Business Models biggest sales division for US movie companies. They are very interested in the international standard for the next generation of DVDs, although they have never manufactured DVD players. They are also a key player in the industry and enjoy the large economic gain. 5. Concluding Remarks We have described the economic impact of international standardization using a framework of architecture. Focusing on the optical storage industry, we have described in detail the process by which the modularization of products and international standardization induce many entrants from NIEs and that entry causes fierce price completion and rapid market expansion. Next, we suggest a new type of business model based on international standards. The division of labor between advanced companies and developing companies and their collaborative business model is described. Finally, we have discussed the economic growth model based on the modularization and international standardization. Advanced countries and NIEs have been able to share the economic gain and collaboratively generate a larger market. International standardization could contribute to global economic growth. However, an adequate process of international standardization would be needed for this economic gain to be fully realized. 19
Shintaku, Ogawa, and Yoshimoto Bibliography Akamatsu, Kaname (1962) "A Historical Pattern of Economic Growth in Developing Countries," The Developing Economies, Preliminary Issue No. 1, pp. 3-25.
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International Standardization and Evolution of Business Models Shintaku, Junjiro, Koichi Ogawa and Tetsuo Yoshimoto (2006) "Hikari-disuku Sangyo no Kyoso to Kokusai-teki Kyogyo Moderu: Suriawase Yoso no Kapuseru-ka ni yoru Mojurah-ka no Shinten. [The Competition and Architecture Based Alliance in Optical Disk Industry: Process of Modularization by Encapsulation of Integral Based Technology]," in Inobeshon to Kyoso-yui [Innovation and Competitive Advantage], edited by Kiyonori Sakakibara and Susumu Kouyama, Tokyo: NTT Shuppan (in Japanese). Shintaku, Junjiro, Jing-Ming Shiu, Shih-Ting Su (2006) "Taiwan Ekisho-sangyo no Hatten to Kigyo-senryaku [The Growth and Corporate Strategy of Taiwanes LCD-Panel Industry]," Akamon Management Review, 5(8), pp. 519-540. (in Japanese). http://www.gbrc.jp/GBRC.files/journal/AMR/AMR5-8.html Shintaku, Junjiro and Tetsuo Yoshimoto (2006) "Hikari-disuku no hyoujunka niyoru Kokusai kyoso to Kokusai Kyocho Senryaku [Global Competition and Strategy of Cooperation by Standardization of Optical Disc Products]," in Kokusai Kyoso to Gurobaru-standado[International Competition and Global Standard], edited by Keizaisangyosho Hyoujunka-keizaisei Kenkyukai, Tokyo: Nihon Kikaku Kyokai (in Japanese). Vernon, Raymond (1966) International Investment and International Trade in the Product Cycle, Quarterly Journal of Economics, 80(2), 190-207. 21

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