China and the Art of (Standards) War

Yes I do; sometimes I shop at Wal-Mart where prices are low and almost everything is made in China. In fact, the ubiquitous "Made in China" sticker is so common place that one wonders if anything made in the U.S.

What the U.S. does make is Standards, rules and regulations. China is developing its own rules and regulations for technological products, banking on the fact that the internal market is so large that the rest of the world will eventually be forced to tag along.

In the afternoon of January 10, Huang Ju, China's vice premier, made a videophone call from the Science and Technology Innovation Achievements Exhibition that was then being held in Beijing. For the residents of Bijie county, to whom this call was made, it was a simple call from the vice premier that conveyed New Year greetings. But for the global telecom industry, it was an end to several years of anxious waiting. 

"I am impressed with the quality of the call," Huang said, and with those words he put the Chinese government's official stamp of approval on the locally developed third-generation (3G) technology that was used for the demonstration. China's operators and global equipment makers had been waiting for years for Beijing to roll out 3G licenses and make a final decision on the technology that it would use for 3G services, expected to start in mid-2006.

The video call also ended another uncertainty: whether China would adopt its "home-grown" 3G technology standard, known as time division-synchronous code division multiple access (TD-SCDMA), and not the globally accepted and European-backed wideband code division multiple access (W-CDMA) or the US-backed CDMA-2000. According to global technology experts who assisted China in developing TD-SCDMA, "development of this technology was a prestige issue".

On its face, this statement might seem curious. There are many sources of prestige for countries - strong economies, five-star hotels, powerful militaries, gold medals at the Olympics - but technical electronics standards, which are mostly invisible to the devices' users? After all, what difference does it make whether a mobile phone is GSM (global system for mobile communications), CDMA or some other standard, as long as it works?

Clearly, something important is going on here, because the TD-SCDMA case is not an isolated example. Over the past several years, China has been making a systematic effort to develop its own standards in a host of other areas ranging from mobile phones to next-generation digital video discs (DVDs) to digital television to nanotechnology, and even trying to wrest control of the personal-computer (PC) operating system standard away from Microsoft by openly supporting Linux.

Evidently, China's government considers the development of indigenous technical standards a strategic priority. To understand why, we have to discuss two business concepts: first-mover advantage, and the experience curve.

First-mover advantage refers to the fact that the first company to develop a new product or technology has the greatest chance of becoming the dominant player as that industry develops and consolidates - basically because it has a head-start both in terms of the product or technology itself and in terms of consumer identification. While being first certainly does not assure long-term success (how many MITS Altair computers have you seen on the market lately?), empirically, first movers have a greater chance of hanging around for the long haul than their imitators...

There is another factor as well: license fees for intellectual property rights (IPR). Although it would be easy enough, in most cases, for a country to reverse engineer and copy standardized technology from abroad, the world trade system makes it difficult for countries that do this to export the products to the country where the technology originated. And modern production technology is so efficient that IPR fees can make up a shockingly high percentage of the cost of the product.

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