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The Dragon vs. the Elephant

Comparative analysis of innovation capability in the

telecommunications equipment industry in China and IndiaProfessor Sunil Mani

Planning Commission ChairProfessor

Centre for Development Studies

Trivandrum-695011

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Sunil Mani, 3L Lecture Series,CMD, February 8 20062

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

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Research Intensity

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Patenting performance in the US

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China: Scientists and engineers engaged in R&D

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India: Scientists and engineers engaged in R&D

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Relative technological strengths: China vs. India

China India

Telecommunications Embedded software

Mechanical engineering Drugs

Computer graphics Business software

Handwriting recognition Chip design

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Growth of telecommunications services sector inChina and India, 1990-2005(Million subscribers)

CHINA INDIA

Fixed Mobile Total Ratio of mobile to fixed Fixed Mobile Total Ratio of mobile to fixed

1991 8 0 8 0.01 1991 5 5

1992 11 0 12 0.02 1992 6 6

1993 17 1 18 0.04 1993 7 7

1994 27 2 29 0.06 1994 8 8

1995 41 4 44 0.09 1995 10 10

1996 55 7 62 0.12 1996 12 12

1997 70 13 84 0.19 1997 15 0 15 0.02

1998 87 24 111 0.27 1998 18 1 19 0.05

1999 109 43 152 0.40 1999 22 1 23 0.06

2000 145 85 229 0.58 2000 27 2 28 0.07

2001 180 145 326 0.81 2001 32 4 36 0.112002 214 206 420 0.96 2002 41 13 54 0.31

2003 263 270 533 1.03 2003 43 34 76 0.79

2004 312 335 647 1.07 2004 45 50 95 1.11

2005 325 349 674 1.07 2005 49 76 125 1.55

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Trends in teledensity in China and India, 1991-2005

(Number of main lines per 100 people)

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Extent of Digital Divide in China and India, 1978-2003

(Ratio of urban to rural tele densities)

China India

1978 1.62

1980 1.68

1985 2.351990 3.67

1991 3.85

1992 4.07

1993 4.32

1994 4.65

1996 3.52 13.33

1997 2.94 16.00

1998 2.52 14.50

1999 2.19 13.80

2000 1.80 11.71

2002 1.73 10.17

2003 1.67 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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Chinese and Indian investments in

telecommunications, 1975-2001

0

1

2

3

4

5

6

7

8

RateofChineseandIndianTelecom

Investments

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

RatioofChineseInvestmentstothatofIndia's

China RT 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

India RT 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

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

19

75

19

76

19

77

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78

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80

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81

19

82

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83

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84

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85

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86

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87

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88

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89

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90

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91

19

92

19

93

19

94

19

95

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96

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97

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98

19

99

20

00

20

01

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Growth of telecoms revenues in China andIndia, 1997-2003(Value in billions of US $)

China India Ratio of China to India

1998 25.3 6.3 4.02

1999 29.3 6.5 4.51

2000 38.5 7.1 5.42

2001 44.9 7.6 5.91

2002 51 8.2 6.22

2003 62 8.8 7.05

Source: World Markets Research Centre (2005)

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Distribution of Telecom revenues: China Vs India

(c2004)

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Relative profitability of the Chinese and Indian

Telecom Services Industry

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Relative size of the market for telecomequipments, 1992-2003

0.00

50.00

100.00

150.00

200.00

250.00

Ratio of China to India

Ratio Chinese Exports to Indian Exports 105.07 94.04 119.59 144.16 132.10 152.30 191.40 207.50 238.89 207.41 199.53 195.34

Ratio of Chinese Imports to Indian 17. 29 32.26 25. 62 22.97 16. 37 16.84 18. 43 19.11 26. 69 19. 50 9 .06 14. 67

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

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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 leadingMNCs in their own right;

Strong rivalry between domestic manufacturers andindeed between them and western MNCs

The state has provided strong and effective strategicdirection

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Sectoral System of Innovation- India

Indian

Weak and fragmented- the public laboratory has strong

research capability- successfully transferred generatedtechnologies to local enterprises- helped to jump start adomestic equipment manufacturing industry

Domestic manufacturing enterprises do not have strong in-house R&D capabilities

Leading state-owned equipment manufacturer have become amere trader. Deregulation of telecoms equipment industry hashad adverse consequences for the leading domestic equipmentmanufacturer

Growth of R&D outsourcing deals

FDI into telecom equipment manufacturing

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Growing importance of local producers in the

market for telecom switches in China, 1982-2000

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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

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

Huawei ZTE Datang NingBo Bird Beijing Capitel Total China C-DOT

1999 5138 4794 9932

2000 6061 6240 12301

2001 7996 7020 400 15416

2002 9662 9010 435 300 19407 1109

2003 10000 9900 1840 612 360 22712 1045

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

0

100

200

300

400

500

600

700

800

900

1000

R&D

expenditure(inmillionsofUS$)

0

5

10

15

20

25

30

35

40

45

RatioofChinatoIndia

China 294 .48 583. 56 733 .7 950. 11

India 8.63 11.29 16.11 13.33 17.36 18.02 23.45 22.22 23.36

Ratio of China to India 16.34 24.89 33.02 40.67

1995 1996 1997 1998 1999 2000 2001 2002 2003

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Number of patents granted to Chinese and IndianInventors in Telecom technologies in the US,

1991-2004

China India

1991 1 1

1992

19931994 2

1995 1

1996 1

1997

1998 1 1

1999 3

2000 1 1

2001 1 2

2002 4 6

2003 5 7

2004 20 11

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Profile of the Largest Chinese Telecom

Equipment Manufacturer

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Huawei-Exports

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Growing market share of Huawei in China

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Number of US patents granted to Huawei

Technologies (China) in the US, 2000-2004

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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

anything-

dependence on

foreign

technology

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Competitiveness of telecom exports, 1992-2003

China India

1992 1.06 0.04

1993 1.02 0.05

1994 1.20 0.05

1995 1.30 0.04

1996 1.50 0.05

1997 1.41 0.05

1998 1.54 0.04

1999 1.70 0.04

2000 1.64 0.04

2001 1.96 0.06

2002 2.26 0.07

2003 2.35 0.08

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China has innovation capability in 3G Mobile

Telephony Technology

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China introduces its own standard for 3G Mobile

technology

Chinas Ministry of Information Industry (January 2006) formallyapproved TD-SCDMA, a local standard for third-generationwireless service. The move signals an important step towardsthe development of the countrys telecommunication industry.Following confirmation of the commercial viability of the local3G standard, Beijing is expected to start issuing 3G wireless-operation licenses as early as March or by mid-2006. Domesticand international telecommunications companies, includingHuawei Technologies Co, Lucent technologies, Motorola Incand Nortel Networks Corp, welcome the move.

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Diffusion of TD-SCDMA Technology in China

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Market PerceptionBased on 2005 Wireline Telecom Equipment Market Perceptions Study by Heavy Reading

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Share of C-DOT designed switches in Indiastelecom network(As on March 31, 2004)

Number of exchanges Number of equipped lines (in

millions)

Rural automatic exchanges/accessnetwork rural automatic

exchanges

32,993 5.25

Single base module-rural

automatic exchange

9971 9.40

Main automatic exchange 2117 10.78

Total 45081 25.43 (57*)

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Telecoms software exports from India (Millionsof US $)

Software exports from India Estimated telecoms software

exports from India

1998-99 2626 262.60 (10)

1999-2000 4015 461.73 (11.5)

2000-01 6341 883.09(14)

2001-02 7174 993.83 (14)

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Sunil Mani, 3L Lecture Series,CMD February 8 200636

Conclusions

China is a later entrant to telecommunications research andmanufacturing. 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 andmanufacture of telecom equipments. Later on through carefully craftedpolicies it engineered positive technology spillovers to localcompanies. Currently the Chinese market is dominated by these localcompanies

Further it has built up considerable innovation capability in wireless

telecommunications equipments- development of the TD-SCDMA 3GMobile standard for instance;

India has built up some capability in telecom software, accesstechnologies and in R&D outsourcing

Chinese telecom sector has undergone better strategic direction thanIndias

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