[VIEWPOINT]China could learn from Korea

A revision is underway in our understanding of how Korea grew to the forefront of the high-performance electronics industry. This new appreciation highlights the growth of companies like Samsung, Lucky Goldstar, and Hyundai as contract manufacturers for foreign multinationals, and has important implications for Chinese strategists who want to replicate the Korean accomplishments.
Conventional wisdom about the dynamics of Asian tiger development has tended to contrast Hong Kong, China and Singapore as economies that utilized multinational investors as the catalyst for growth, with Korea taking a more closed approach ― restricting foreign direct investment in order to launch indigenous infant industry electronics manufacturers ― leaving Taiwan somewhere in between.
The new revisionist view points out that there is greater similarity than the conventional picture suggests because all four nations relied more heavily on contract manufacturing relationships between host country electronics firms and foreign multinationals than is generally acknowledged.
In each of the four countries, indigenous firms got launched as suppliers to foreign-owned plants selling finished products in international markets. This relationship enabled the local companies to achieve the economies of scale needed to make use of high precision production techniques, utilize advanced composite materials, and employ sophisticated quality control procedures, often orchestrated under the direct supervision of the foreign buyers.
The more industrious of the indigenous firms qualified as Original Equipment Manufacturers, or OEM, within the international corporate networks. Over time, the foreign purchasers of OEM inputs began contracting out for design as well as manufacture of components and sub-assemblies, with engineers from the foreign buyer and the supplier working on the projects together.
In Korea, there has been a tendency to overlook the fact that the great national champion participants in the electronics industry grew up via subcontracting arrangements with foreign multinationals, or MNCs. As late as the end of the 1980s, 60 percent to 70 percent of all Korean electronics exports ― including 60 percent of Samsung, Lucky Goldstar, and Hyundai exports ― left the country via OEM contracts. Even while the Korean government began to restrict foreign direct investment within the domestic economy, the ever more sophisticated Korean firms used the MNCs as trainers and teachers to penetrate foreign markets.
In Taiwan, firms in the electronics sector graduated from selling components for calculators, clocks and VCRs, to contract manufacturing of power supplies, printed circuit boards, and monitors to IBM, Philips, and Hitachi. The Taiwanese computer makers, such as Acer, Tatung and Mitac, originated as OEM suppliers of subassemblies, before learning how to design PCs for sale in international markets under the buyer’s brand.
The experiences of Korea and Taiwan therefore have more in common with Hong Kong and Singapore than is generally acknowledged. The model is to exploit the guidance and discipline imposed by multinational corporations to move from contract manufacturing to OEM and thence, with a combination of imitation and incremental innovation, to Original Design Manufacturing (ODM) and, in the most successful cases like Samsung, to Own Brand Manufacture (OBM) in competition with the leaders in the industry.
This model of allowing wholly-owned foreign affiliates to build up steadily more advanced supply relationships with indigenous firms contrasts sharply with the old-fashioned Chinese development strategy of trying to force technology transfer through mandatory joint venture requirements, and to build industrial capacity through formal and informal pressure for high domestic content.
The debate within China today over trying to create Chinese multinational competitors via mandatory joint venture requirements versus allowing 100 percent foreign-owned firms to which Chinese firms may become suppliers is particularly important, because the first approach is proving to be counterproductive.
A survey by Dr. Long Guoqiang of 442 multinational firms operating in China, to be published by the Institute of International Economics this year, shows that foreign wholly-owned and majority-owned affiliates are much more likely to deploy technology as advanced as used by the parent firm than affiliates that have 50-50 shared ownership or affiliates with majority indigenous ownership.
Thirty-two percent of the wholly-owned affiliates and 40 percent of the majority foreign-owned affiliates use technology as advanced as in the parent firm, whereas only 23 percent of the 50-50 shared ownership affiliates and 6 percent of the majority indigenous Chinese-owned affiliates use technology as advanced as in the parent firm.
The reluctance of foreign multinationals to use the most advanced technology in affiliates where they must share ownership with local partners is most pronounced in the semiconductor, computer, and telecommunications industries.
Chinese success in high-performance electronics is likely therefore to take longer than is commonly thought and will depend upon Chinese emulation of the newly-appreciated dynamics of the Korean development model.

* The writer is a professor of international business and finance at Georgetown University.

by Theodore H. Moran