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There is a Chinese saying, "May you live in interesting times,"
which could be a blessing or a curse. So too with Asia's Computer
Challenge. The rise of Asia's computer industry is viewed
by some as a threat to U.S. interests. This book shows that
there are threats and opportunities for both the U.S. and Asia.
The computer industry has been dominated throughout its
history by U.S. companies that have developed most of the important
innovations, set key technical standards, and still control
over two-thirds of the world's market for hardware, software
and services. Periodic technology shifts such as the introduction
of the minicomputer and personal computer have changed the structure
of the industry, but in each case it was American companies
who were the industry leaders.
The personal computer revolution of the 1980s
led to a new phenomenon in the industry, however. While U.S.
companies remain the leaders in most segments of the computer
industry, the actual production of computer equipment has shifted
away from the U.S., mostly to Asia. U.S.-based companies still
account for 65% of the world's computer hardware sales, but
the percent of the world's computer hardware produced in
North America has declined steadily, from 50%
in 1985 to 28% in 1995. Meanwhile, the share produced in Asia
grew from 23% to 47%, virtually replacing the U.S. production
Ironically, this situation was brought about
by U.S. companies themselves who used Asian countries as low
cost production platforms and suppliers as they created global
production systems in the PC industry, and in the process, transferred
technology and capabilities to Asian firms. Aided by their governments,
Asian companies entered the personal computer (PC) industry
in the early eighties. The lower costs and technical capabilities
of Asian firms enabled them to take on logistics, manufacturing
and distribution of PC components for U.S. multinationals.
By the 1990s, some Asian firms had developed
their own branded computers and peripherals which they aggressively
marketed to global and domestic markets, often in direct competition
with U.S. companies. For the most part, however, Asia's
computer companies are engaged in fierce competition with one
another over production of commodity hardware such as DRAMs,
CD-ROMs and LCDs which are low margin, decreasing returns businesses.
In contrast, the U.S. dominates the high margin, increasing
returns businesses of microprocessors, software and services.
Rather than a threat to these businesses, Asian companies are
both partners who supply components to U.S. PC companies and
customers who buy U.S. chips, software and integration services.
The growth of a huge computer industry production
network in Asia raises a number of questions for companies and
governments in the U.S., Asia and around the world.
Key questions
Why were Asia's countries so successful
in developing computer industries? What are Asia's strengths
and weaknesses? What those of the U.S.?
What are the implications of Asia's
computer industry for the U.S.? What opportunities exist in
Asia? What are the threats? How can U.S. companies maintain
dominance where they lead and bolster competitiveness where
threatened? What measures should the U.S. government take to
assist U.S. companies?
How can other countries participate in the
global computer industry?
These are some of the challenging questions
addressed by this book in the most comprehensive study yet undertaken
of Asia's computer industry.
Keys to Asia's success
Asian companies focused their efforts and found
niches in the global computer production system established
by U.S. multinational corporations. Some of these niches grew
into very large markets that are now dominated those Asian companies.
Asian countries developed diversified portfolios
of companies constituting industry clusters able to adapt to
changing global market conditions. These countries provided
incentives to attract foreign investment, promoted participation
by domestic companies in the global industry, and most importantly,
developed capabilities necessary to support computer production.
The capabilities critical to companies were
cost and cycle-time reduction, strong engineering skills, and
close linkages to the global production system. The key country
capabilities included skilled engineers, computer professionals
and other human resources, excellent infrastructure, and strong
technological capabilities.
The particular character of the computer industry
in each country was strongly shaped by domestic industry structure,
industrial policy, and interaction with global markets and multinational
production networks. These factors shaped the paths that each
country has taken over time, and locked them into, and out of,
different roles in the global industry.
Asia's strengths and weaknesses
The competitive strengths of Japanese and Korean
firms are in high volume manufacturing, giving them strong positions
in commodity products such as floppy-disk drives, DRAMs, monitors
and flat-panel displays. The strengths of Taiwan, Singapore
and Hong Kong are in speed, flexibility and strong ties to U.S.
companies, which have made them leaders in products with short
product cycles such as hard-disk drives, motherboards, PCs and
add-on cards. Despite their remarkable success in hardware,
Asian companies remain non-factors in software and services
outside of their own markets.
Asia's companies are increasingly engaged
in intensive competition with one another throughout the hardware
industry. Japanese companies once dominated in DRAMs, monitors
and LCDs, but now face fierce competition from Korea and Taiwan.
Even tiny Singapore is now gearing up to compete in DRAMs. Profit
margins are being cut to the bone by excess capacity and resultant
price competition.
U.S. strengths and weaknesses
Microsoft and Intel have virtual monopolies
in the key operating system and microprocessor markets, enabling
them to earn huge profit margins. PC makers such as Compaq and
Dell bring innovations in design, marketing and distribution.
Hewlett-Packard and IBM provide the full-service solutions that
large businesses desire. U.S. companies are also leaders in
peripherals such as printers and hard drives (HDD) that are
marked by short product cycles and rapid technological change.
They generally are not competitive in more stable markets such
as floppy drives or CD-ROMs, which U.S. companies are content
to source from Asia.
The most important ingredients of U.S. competitive
advantage are its continued control over the architectural standards
that define the industry, the dynamism of the American market,
and the extraordinary entrepreneurial capabilities of the U.S.
industry. While the U.S. has lost lower-skill manufacturing
jobs to Asia, it has created a large number of high-skill jobs.
In fact, the industry has been so successful that it has created
a shortage of computer professionals that threatens future growth.
Implications for the U.S. computer industry
The threats:
Asia's computer companies launched a
renewed attack on the U.S. computer industry and markets beginning
in 1996. Japan's producers re-entered the U.S. market
following earlier failures in the 1980s, and have been joined
by Korean and Taiwanese companies. Toshiba continues to be remarkably
successful in notebook PCs, vying with Compaq and IBM for market
leadership. NEC has bought Packard-Bell, Fujitsu and Hitachi
have established U.S. subsidiaries, and consumer electronics
giant Sony has targeted the U.S. PC market. They have been joined
by Korea's Samsung and Trigem, and Taiwan's Acer.
These companies see success in the U.S. market as key to competing
globally and have signalled that they are in the game for the
long run.
The opportunities:
Asian countries will provide a large, rapidly
growing market for U.S.-made systems, software, services and
entertainment content. In spite of the present Asian financial
crisis, Asia's demographics make it a highly attractive
long-term market opportunity.
Asia also will continue to be a key production
base and a reliable, cost-efficient supplier of parts, components,
peripherals and OEM systems. R&D, design, distribution and
marketing will continue to be done by U.S. firms, while their
Asian partners provide engineering, manufacturing and logistics
support. This symbiotic relationship allows U.S. firms to concentrate
on knowledge-intensive activities while providing Asian companies
with access to global markets.
Strategic responses for U.S. companies
Selling in Asia requires finding suitable local
partners, building relationships, developing distribution channels,
and understand different markets. U.S. companies must consider
each country's market potential separately because the
realizable potential often is at odds with popular perceptions.
Companies need to employ an "experimental strategy"
towards Asian markets rather than developing a rigid, full
blown strategy in advance of being in these markets. This means
developing a best initial strategy, but being prepared to change
and adapt as experience is gained.
Competing against Asian companies requires
innovative approaches that apply knowledge-intensive, increasing
returns strategies to what appear to be commodity product segments.
Sometimes that involves adapting and improving upon business
practices first made popular by Japanese companies, such as
lean manufacturing. U.S. PC companies have mastered just-in-time
manufacturing, but have also expanded the concept of lean production
throughout the company. Their innovative approaches to marketing,
customer service, finance, and inventory control have enabled
them to withstand repeated challenges from Japan and Asia. Likewise,
Micron Technology has improved its production processes to stay
competitive against much larger Japanese and Korean DRAM makers.
The U.S. government's role
Sustaining the U.S. advantage requires continual
government effort to promote adoption and implementation of
intellectual property laws globally. Government efforts are
also necessary to enforce the WTO agreement for global deregulation
of information technology products and services by the year
2000 and to lower informal trade barriers.
Also, while the computer and information industries
will rely on intellectual capital more than ever before, the
U.S. is in danger of losing its key competitive advantage in
this critical resource. U.S. government action is urgently required
to increase the nation's human resources for both the
computer and information-intensive user industries. The U.S.
government can do so through education and training of engineers,
technicians, computer scientists, and business professionals.
Implications for Companies and Countries
Companies with strengths in manufacturing and
process engineering need to leverage them to become suppliers
for the global industry. Given that the greatest returns to
investments are in the creative, knowledge-intensive businesses,
it is important for companies to increase the knowledge content
of decreasing returns businesses by innovating in logistics,
marketing, distribution and product development.
Countries should promote computer use and production
close-to-use of software and services. These are largely untapped
markets in most countries and markets where domestic producers
have the advantage. Skillful producers can also develop products
and services for export.
Network Era: New Competition Emerges
The network era, exemplified by the exponential
growth of the Internet, is causing dramatic changes in the nature
of computing, as the focal point of intelligence shifts from
the individual computer to the network. The Internet has brought
about the long-expected convergence of computing and communications,
expanding the competitive arena beyond the boundaries of the
computer industry.
The network era presents new and unpredictable
challenges for both companies and countries. Companies must
be more flexible than ever and must form alliances in order
to establish and capitalize on new standards platforms. Countries
must shift their emphasis from production to use and promote
competition in the telecommunications sector if they are to
exploit new opportunities in the network era.
The U.S. is leading the network era, with U.S.
companies competing to establish key Internet standards and
define new network-based markets. Some U.S. companies will enjoy
the rewards of increasing returns businesses, but others will
face tough competition in decreasing returns markets. Here,
low-cost, information appliances will compete with the PC in
the end user market, leading to even tighter margins in hardware.
U.S. companies will compete in hardware even more by focusing
on design and marketing and tapping the Asian production network
for manufacturing.
Asian companies will enjoy a boom in hardware
opportunities, but will have to scramble even harder than before
to sustain profits. They will find new opportunities in software
and services that target local languages and cultures. In particular,
the Chinese language market has great potential, and the China
Circle countries and populations have a chance to define a large
and dynamic market. But to move beyond decreasing returns businesses,
the Asian countries and companies will require a change of perspective
in order to value software, services and computer use as much
as they now value hardware production.
The greatest danger
On balance, the findings of this research are
positive for the U.S. computer industry. And herein lies the
greatest risk for the future of the industryall this good news
might cause U.S. policy makers and the computer industry to
take their eyes off Asia as a source of serious competition.
The consequences could be disastrous, reminiscent of mistakes
made earlier by the U.S. consumer electronics and automobile
industries
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