The Restructuring of Global Value Chains: Upgrading Theories and Practices of Chinese Enterprises 9811916926, 9789811916922

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Yunshi Mao

The Restructuring of Global Value Chains Upgrading Theories and Practices of Chinese Enterprises

The Restructuring of Global Value Chains

Yunshi Mao

The Restructuring of Global Value Chains Upgrading Theories and Practices of Chinese Enterprises

Yunshi Mao School of Business Sun Yat-sen University Guangzhou, China Translated by Yangchun Liu and Min Gao

ISBN 978-981-19-1692-2 ISBN 978-981-19-1693-9 (eBook) https://doi.org/10.1007/978-981-19-1693-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Introduction—Rethinking the Global Value Chain (GVC) Theory

In the context of economic globalization, the way in which the Chinese economy is integrating into the world economy is an extremely important issue that will affect future economic patterns around the world. For a long time, the research into this issue is built on the concepts of the GVC and the international division of labour. GVC refers to a global network of multinational enterprises connecting production, sales, recycling, and other activities to realize the value of products or services on a global scale. They involve the whole process from purchasing, selling, and transporting raw materials to producing and selling semi-finished products and then finally consuming and recycling in the market (UNIDO 2002). Based on the GVC framework, it is generally accepted that developed country enterprises have the advantages of technology, research and development (R&D), and intellectual property rights (IPR) so they undertake high value-added businesses such as R&D, key component manufacturing, brand management and so on. Meanwhile, many Chinese enterprises (representatives of emerging economy enterprises) are mainly engaged in low valueadded activities in GVCs. Empirical research has shown that this has been the case of such industries as automobile manufacturing, electronic product, and computer manufacturing, as well as many companies like Nike, Boss, and Apple in developed countries. They dominate the international division of labour and reap high profits by relying on their business model of integrating global resources, while most emerging economies in GVCs earn meagre income. Since the reform and opening-door policy, China has risen to be the representative of emerging economies. Its manufacturing sector has witnessed relentlessly rapid development and greatly contributed to national and even global economic growth. However, in the context of international division of products, many Chinese manufacturers rely on labour cost advantages to engage in original equipment manufacturer (OEM). They mainly produce labour-intensive products and are at the bottom of the GVC, which have low-added value. According to the data provided by Gao Liang, a researcher at the Macroeconomic Research Institute of the National Development and Reform Commission of China, China’s industrial value-added is low. The average industry value-added rate in China is 26% while it is 45% in the United States, 33% in the United Kingdom, and 34% in Japan. The sales profit margin is v

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only 5% while that of Intel is more than 30%. China’s economy is generally at the middle and low ends of the global industrial chain (Gao 2013). The New York Times, Huatai United Securities Research Institute, and other institutions have analyzed the supply chain, value chain, profits, and costs of Apple products. An iPad priced at 499 USD has the average cost of only 260 USD. Foxconn is responsible for its assembly and only got 11.2 US dollars each. As far as the profit distribution of iPhone is concerned, Apple accounts for 58.5% of the total profits in the GVC, while South Korean companies and other US companies have 4.7% and 2.4% of the profits, respectively, and China mainland earns only 1.8% by relying on its cheap labour (Chen 2012). A similar case is that China’s DVD production is the largest in the world, but the average export price is less than 45 USD, while the patent fee paid to foreign manufacturers is as high as 20 USD. Excluding the cost, the profit per unit is less than 1 USD (Mao 2013). There’s another example, the worldrenowned brand handbag is sold for 3000 CNY each, but the price of the bag charged by the OEM manufacturer, Dongguan Huida handbag factory when it is sold to the Hong Kong trading company is only 120 CNY. Deducting 45 CNY for materials and 20 CNY for labour as well as 35 CNY for water, electricity, and rent, the factory earns just 20 CNY from each bag. If the cost is not tightly controlled, the profit of each one can go down to 5 CNY (Yang 2013). The Director of Brand Planning in China Ceramic City Group told a similar story. He said, “Ceramic enterprises generally rely on import and export trading companies for sales abroad with the seller’s brand on the product, or they simply work as contract manufacturers for foreign brands”. With production contracted out, some major brands in the United States and Italy can often obtain 300% of the profits.1 Some multinational companies take advantage of their monopoly on technology or their dominant market position to make excess profits. Qualcomm reported net profit of 1.1 billion USD in the fourth quarter of 2015, 70% of which came from licensing and patent royalties. Chinese mobile phone companies are paying Qualcomm a 5% patent fees on the retail price of their phones, which cost huge pressure on them (Feng and Ye 2014). According to some sales people of Guangdong Dongling Kaiqin Group, the multinational hypermarkets earn 95% of the profits and the several-dollar product made by their company in China is marked up many times in the supermarket chain stores abroad. Meanwhile, the deputy general manager of Shenzhen Christie’s Technology also said that the products selling for 100 USD in China can sell for 300 USD under their brand in India. Thus, multinational enterprises and buyers have taken away most profits and the OEM enterprises only earn modest income. In the new round of global economic change, if China’s manufacturing industry can’t effectively move to the high ends of the industrial chain, it will only continue to serve as the “assembly workshop”, “processing base”, and sales agent for multinational companies. Therefore, an important theoretical and practical question is: how should Chinese enterprises embedded in the lower parts of GVCs break the

1

The information was collected by the author in June 2016, while paying a visit to the Headquarter of China Ceramic City in Foshan, Guangdong.

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constraints of the international division of labour dominated by enterprises in developed countries and choose the appropriate upgrading methods and paths to increase their products’ added value and to gain competitiveness. The subtitle of this book “theory and practice of Chinese enterprises’ upgrading” stems from the above question. The concept of enterprise upgrading was first explicitly proposed in the late 1990s when G. Gereffi (1999) introduced it into the GVC analysis model, arguing that enterprise upgrading is a process by which an enterprise or economy improves its ability to move towards more profitable capital- and technology-intensive economies. S.C. Poon (2004) also pointed out that enterprise upgrading is about making better products, producing them more efficiently, or engaging in activities that require more skills. J. Humphrey and H. Schmitz (2000) claimed that upgrading refers to the acquisition of technical and market capabilities to improve their competitiveness and engage in high value-added activities. For more than 10 years, “transformation and upgrading” has been the theme of China’s economic restructuring and development, and it is a major practice in the field of management in emerging economies mainly represented by China. Research on relevant literature shows that “enterprise transformation and upgrading” and “enterprise upgrading” are frequently used terms in China’s academic research and government documents. Enterprise transformation and upgrading as well as industrial transformation and upgrading have attracted the attention from all walks of life at home and abroad. However, there is no corresponding terminology for corporate transformation and upgrading in the English literature. In 2009, the author made a special elaboration and definition of the concepts of enterprise transformation and upgrading as well as enterprise upgrading. He suggested that enterprise transformation and upgrading is a process of continuous change in improving the competitiveness and added value of products and services and finding new business directions. It is the micro level and final foothold of industrial transformation and upgrading. (Mao et al. 2009). This concept focuses on the business level so it has no essential difference from the concept of enterprise upgrading. We will not avoid using this terminology simply because there is no similar term in the English literature. In this book, both enterprise upgrading and enterprise transformation upgrading have the same meaning. Since 2006, the author’s research team has conducted investigations and follow-up investigations on dozens of enterprises, trade associations, and economic administrative agencies in China mainland and Taiwan. Meanwhile, our team also conducted questionnaire surveys of enterprises in different regions, which initiated our indepth thinking over the transformation and upgrading of enterprises in emerging economies. In the field investigation, we found that Lacquer Craft Group, which was set up in Dongguan (a city in Guangdong Province) in 1992, started as an OEM manufacturer. Since 2001, it has expanded its businesses from OEM to original design manufacturer (ODM)/original brand manufacturer (OBM) and achieved successful upgrading through overseas mergers and acquisitions and market development, and it has grown to be the largest furniture enterprise in Asia. For another example, OEM enterprise Longchang International Holdings Co., Ltd. has acquired strategic assets through two acquisitions and accomplished upgrading from OEM

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to ODM/OBM. Guangzhou Guoguang Electric Co., Ltd. upgraded to be an OBM company by acquiring “Ailang”, “Weifa”, “Aiwei”, and other audio brands. Han’s. Laser Technology Co., Ltd. in Shenzhen has realized product function substitution and expansion to enter the traditional product market by deepening the development of specialized technologies, and at the same time, it has created new markets, which greatly increased the added value of the products. It is now Asia’s largest and world-renowned manufacturer of laser processing equipment. Pacific Textile Holdings Co., Ltd. in Guangzhou is based on the green operation of the entire industrial chain, increasing the added value of its products by green procurement, energy-saving technology R&D, and clean production. Elec Tech International Co. Ltd. in Zhuhai, Guangdong starting with the manufacturing of small household appliances, has achieved upgrading in a brand-new way. By acquiring R&D establishments and branded companies and capturing strategic assets such as core LED technology and patents, manufacturing capabilities, brands, and sales channels, it has built up an entire industrial chain of its own for LED manufacturing and moved to the strategically emerging LED industry while enhancing the technological content and added value in its traditional small household appliances. Taiwan’s bicycle industry is another example. After two major adjustments and transformations as well as by way of strategic alliances and new types of co-competition (cooperation and competition), it has achieved overall industrial upgrading. The average unit price of Taiwan’s bicycle exports has been increasing for consecutive years since it exceeded 200 USD per unit in 2006, which indicates that the bicycle industry has achieved overall industrial upgrading.2 In addition, in 2020 with the influence of the COVID-19 epidemic, the global transportation ecology has undergone tremendous changes. People are encouraged to ride bicycles more often in European countries. The sharp increase in orders from Europe and the United States has contributed to a remarkable recovery of Taiwan’s bicycle manufacturing industry since May. Take Taiwan’s famous bicycle company Giant Machinery Co., Ltd. as an example. Its performance report showed that its revenue in May, 2020 reached a monthly record high of 7.085 billion CNY, an increase of 31.68% year-on-year, and revenue from selling its own brand products increased by more than 50% compared with the same period in 2019. After decades of hard work, the company has cultivated the world’s number one bicycle brand “Giant”, successfully upgrading from OEM to OBM. Taiwan Merida Industrial Co., Ltd. through equity investment, acquired the equity of Specialized, the number one US bicycle brand and the strategic assets of Germany’s Centurion like brands, technology, and sales channels. One of the earliest cases can also be traced back to the acquisition of majority part of Nippon Steel Semiconductor Corp. (NSSC)’s equity in 1998 by United Microelectronics Corp. (UMC), the first Taiwanese Semiconductor company based in Hsinchu, Taiwan. And it was UMC’s first try to enter Japanese Wafer OEM market. Then the two parties jointly operated NSSC’s 8-inch wafer fab in Tateyama, Chiba, Japan; in 2009, UMC planned 2

Source of data collected and compiled from China Economic Information network (CEInet) Statistics Database, Taiwan Bureau of Foreign Trade, Ministry of Economic Affairs (MOEA), Taiwan Bicycle Association.

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to acquire the outstanding shares held by Nippon Steel etc. with at most 6.9 billion yen, and in December, the acquisition was completed and a wholly-owned subsidiary UMC Japan (UMCJ) was established, thereby fully obtaining a major Japanese integrated component manufacturer, and upgrading to OBM based on OEM (Yen and Jin 2009; Zhao 2019). At the same time, many non-foundry companies have achieved transformation and upgrading through great efforts and various methods. For example, Wanxiang Group, based in Zhejiang Province, is a multinational group that grew up from a township enterprise. It has been operating under its own brand in the domestic market and has gradually increased its sales strength over the years. In foreign markets, Wanxiang has undergone a transformation from OEM to OBM. Since 1997, it has obtained sales channels and several internationally renowned brands through a variety of international acquisitions and simultaneously promoted its own “QC” brand. Its products are now sold in more than 60 countries and regions in the world. However, our literature review shows that the number of research papers on corporate transformation and upgrading in China and abroad is obviously small, especially the number of foreign research papers is significantly smaller than that of domestic research ones. Few articles have studied the impact of Chinese enterprises upgrading on the global economic structure. Although there are some studies on the behavioural process, strategy and path, motivation and effect of enterprise transformation and upgrading, they are still placed in the framework of the GVC and have not generated theoretical results. Especially, there is a lack of research and theoretical exploration rooted in the Chinese situation. Moreover, relevant empirical research has yet to be strengthened. As mentioned earlier, many outstanding Chinese companies take the initiative to participate in global competition. They managed to transform and upgrade through the accumulation of resources and the full use of their advantages. They are moving from low value-added links in GVCs to higher value-added links and have even grown from a foundry company to the world’s number one brand enterprise. Their successful practice has shaken the dominant position of developed country enterprises in the international division of labour, changed the competitive landscape of their industries, and finally become leading players in integrating resources across the world. At the same time, their practice and innovation also provide valuable and unique material for the research on the transformation and upgrading of enterprises in emerging economies. Chinese scholars should make greater research efforts in this field, revisit the GVC theories in order to develop a systematic and comprehensive transformation and upgrading theory. Based on a solid extensive literature review and volumes of empirical research, we bet it is time to rethink the existing GVC theory. In this book, we propose the concept of Restructuring Global Value Chains (RGVCs) and attempt to establish the theory of Chinese enterprise upgrading, thus, providing reference for the upgrading of enterprises and industries.

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References Chen J (2012) Market enthusiasm can hardly conceal the embarrassment of the industrial chainDomestic companies get only 2% of profits from Apple products. China Securities J Feng HC, Ye SL (2014) Behind qualcomm’s monopoly 32% net profit margin is even better than apple’s. Daily Economic News. http://finance.sina.com.cn/chanjing/gsnews/20140729/012019 843124.shtml Gao L (2013) Change the growth model through industrial upgrading. South Rev 19:63–6. www.71.cn/2013/0916/734564.shtml Gereffi G (1999) International trade and industrial upgrading in the apparel commodity chains. J Int Econ 48(1):37–70 Humphrey J, Schmitz H (2000) Governance and upgrading: linking industrial cluster and global value chain research. IDS Working Paper 120. Institute of Development Studies, University of Sussex, Brighton Mao YS (2013) How “Made in China” smiles on the smile curve. China Economic Net. http://fin ance.ce.cn/rolling//201303/14/t20130314_224739.shtml. Accessed 24 December 2021 Mao YS, Jiang YX, Mo WJ (2009) Institutional environment, enterprise capability and upgrading strategy of OEM firms—comparative case analysis of Donlim kitchen and jasic technology. Manag World 6:135–145 Poon SC (2004) Beyond the global production networks: a case of further upgrading of Taiwan’s information technology industry. Technol Globalisation 1:130–145 UNIDO (2002) Industrial Development Report 2002/2003: competing through innovation and learning. Vienna. https://www.un-ilibrary.org/content/books/9789210451260/read Yang NY (2013) Taiwanese media: the mainland OEMs profit as low as 5 CNY each from luxurious bags which worth tens of thousands CNY. Reference News. http://finance.cankaoxiaoxi.com/ 2013/0517/210303.shtml. Accessed 24 December 2021 Yen SD and Jin BJ (2009) UMC’s news centre. UMC proposes a public acquisition plan to UMC Japan. https://www.umc.com/zh-TW/News/press_release/Content/csr/20091028. Accessed 24 December 2021 Zhao YC (2019) UMC acquires MIFS (Mie Fujitsu Semiconductor Limited) and wants to be the second in wafer foundry industry again. EE (Electronics Engineering) Times China. https:// www.eet-china.com/news/201909271505.html. Accessed 24 December 2021

Contents

1 Background of Chinese Enterprises Upgrading . . . . . . . . . . . . . . . . . . . 1 Chinese Manufacturing is Big and to Be Strong . . . . . . . . . . . . . . . . . . 1.1 Processing Trade and Pure Assembly Account for a Large Proportion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Branded Assembly Without a Chinese “Core” . . . . . . . . . . . . . . . 1.3 Low Value-Added Parts and Components . . . . . . . . . . . . . . . . . . . 1.4 Weak Capability and Low Technological Content in Manufacturing Specialized Machinery and Equipment . . . . . . 1.5 Joint Venture Manufacturing Aimed at Selling in the China Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 Joint Venture Manufacturing with Self-independent IPRs . . . . . 1.7 Self-independent Manufacturing Based on Imitative Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 Self-independent Manufacturing Based on Original Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Pressure and Background of Enterprise Upgrade . . . . . . . . . . . . . . . . . . 2.1 Global Economic Slowdown and European Debt Crisis Affect Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The Appreciation of CNY and the Fluctuations the Exchange Rate Increase the Pressure on Export Trade . . . . . 2.3 Both Labour Costs and Raw Material Prices are Rising . . . . . . . 2.4 Enterprises are in a Passive Situation When Facing Trade Barriers Such as Anti-dumping, and Quality and Environmental Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Adjustment in Export Tax Rebate Policy of Processing Trade Affects the Structure of Export Commodities . . . . . . . . . . 2.6 The Pressure of Environment Protection has Long Existed . . . . 3 Opportunities and Space for Enterprise Upgrading . . . . . . . . . . . . . . . . 3.1 From “Made in China” to “Sold in China” . . . . . . . . . . . . . . . . . . 3.2 Blurred Industry Boundaries and Cross Industrial Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3.3 The Huge Space for Enterprise Upgrading in China . . . . . . . . . . 4 The Importance for China’s Traditional Manufacturing Enterprises to Upgrade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Re-examine the Current Situation and Problems of China’s Traditional Enterprises Against Multiple Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Need to Profoundly Explore the Motivation and Mechanism for Traditional Enterprises’ Upgrading to the Middle and High Ends Based on the Practices in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Need to Pay More Attention to High Quality Development and Diversified Paths of Enterprise Upgrading in the New Economic Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Learning from the Experience of Developed Countries and Making Suggestions for Enterprise Decision-Making and Government Policy Formulation . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Literature Research into Enterprise Upgrading . . . . . . . . . . . . . . . . . . . 1 An Overview of Research on Enterprise Upgrading . . . . . . . . . . . . . . . 1.1 Literature Review and Frontier Research . . . . . . . . . . . . . . . . . . . . 1.2 Review of the Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Smiling Curve, the GVC and Related Research . . . . . . . . . . . . . . . 2.1 The Smiling Curve and the Antithetic Smiling Curve . . . . . . . . . 2.2 The Fitting of Enterprise Upgrading Types to the Smiling Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Research on GVCs and RGVCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Research on the GVC Perspective and the International Division of Labour Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Relevant Research on Restructuring the GVC . . . . . . . . . . . . . . . 3.3 Review of Existing Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Case Study of Enterprise Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Han’s Laser Technology Industry Group Co., Ltd. . . . . . . . . . . . . . . . . 1.1 Brief Introduction to Case Enterprise and the Investigation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Upgrading Process and Paths of Han’s Laser . . . . . . . . . . . . . . . . 1.3 Key Influencing Factors of Enterprise Upgrading . . . . . . . . . . . . 1.4 Effects of Enterprise Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Pacific Textiles Holdings Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Brief Introduction to the Case Enterprise and the Investigation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2.2 Pacific Textiles’ Transformation and Upgrading Process—Carrying out Low-Carbon Operation in Many Links of the Industrial Chain to Protect the Environment . . . . . . 2.3 Analysis of Factors in Influencing Enterprise Upgrading . . . . . . 2.4 Analysis of Pacific Textiles’ Upgrading Effects . . . . . . . . . . . . . . 2.5 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Alpha Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Upgrading Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Inter-sectoral Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 External Influencing Factors of Upgrading . . . . . . . . . . . . . . . . . . 3.5 Internal Factors of Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Effects of Enterprise Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Guangzhou Shangpin Home Collection Company . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Customized Furniture Industry and the Entry Barriers . . . . . . . . 4.3 External Factors of Enterprise Upgrading . . . . . . . . . . . . . . . . . . . 4.4 Internal Influencing Factors of Enterprise Upgrading . . . . . . . . . 4.5 Findings and Discussions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Lacquer Craft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Upgrading Processes of Lacquer Craft . . . . . . . . . . . . . . . . . . . . . . 5.3 Influencing Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Empirical Study on Overall Industrial Upgrading . . . . . . . . . . . . . . . . . 1 Overall Upgrading of the Air Conditioning Industry in Mainland China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Air-Conditioning Industry in Mainland China . . . . . . . . . . . . . . . 1.3 Upgrading Path Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Upgrading Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Overall Upgrading of the Bicycle Industry in Taiwan . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Comparison of the Bicycle Industry Between Chinese Mainland and Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Upgrading of Taiwan Bicycle Clusters . . . . . . . . . . . . . . . . . . . . . . 2.4 Analysis of the Overall Upgrading of the Bicycle Industry in Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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5 Empirical Study on Enterprise Upgrading . . . . . . . . . . . . . . . . . . . . . . . . 1 Scale Development for Upgrading Ways—Empirical Study on Manufacturing Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Research Methodology, Coding and Preliminary Scale . . . . . . . . 1.2 Pre-test of the Measurement Scale for Enterprise Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Validation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Second-Order CFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Results and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Empirical Research on Motivation, Paths and Performance of Enterprise Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Theoretical Background and Hypotheses . . . . . . . . . . . . . . . . . . . 2.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Assessments and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Conclusions and Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Limitations and Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 RGVCs—Theoretical Framework, Propositions and Cases Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 RGVCs—Theoretical Model and Propositions . . . . . . . . . . . . . . . . . . . 1.1 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Theoretical Construction: Connotation and Propositions of RGVCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Case Study and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Giant—From OEM to the World’s First Brand . . . . . . . . . . . . . . . 2.2 KEDA Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

239 239 240 248 249 255 256 260 261 265 268 274 279 281 285 286 286 287 299 299 311 331

Conclusions—From Enterprise Upgrading to GVC Restructuring . . . . . 335 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

List of Figures

Chapter 1 Fig. 1

Fig. 2

Fig. 3 Fig. 4

Fig. 5 Fig. 6 Fig. 7 Fig. 8 Fig. 9 Fig. 10

China’s processing trade exports, 2015–2020 (Billion USD, %). Source NBS of China, general administration of customs of CHINA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Auto parts exports composition, 2019 (%). Source Sorted out from websites information of general administration of customs of china and forward intelligence . . . . . . . . . . . . . . . . . . Exchange rate of the USD against CNY, July 22nd, 2005– December 31st, 2021. Source Barchart.com . . . . . . . . . . . . . . . . . . . Final consumption expenditure, 1979–2020 (Trillion USD). Source World bank national accounts data, and OECD national accounts data files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Growth of total retail sales of social consumer goods, 2016– 2020 (Trillion CNY). Source NBS of China . . . . . . . . . . . . . . . . . . Three basic types of fuzzy industry boundaries . . . . . . . . . . . . . . . . Traditional value chain model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Value network based on fuzzy industry boundaries . . . . . . . . . . . . . Apple’s inter-sectoral upgrading model . . . . . . . . . . . . . . . . . . . . . . Value distribution of Apple products (iPhone) in the GVC . . . . . . .

3

4 8

13 14 19 20 21 22 23

Chapter 2 Fig. 1 Fig. 2 Fig. 3 Fig. 4 Fig. 5 Fig. 6 Fig. 7

Distribution of GVC links. Source Zhang and Dai (2007) . . . . . . . The new smiling curve formed by superposition . . . . . . . . . . . . . . . The antithetical smiling curve model after the introduction of the cost factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selection model enterprise upgrading paths the fitted model and typical cases of enterprise upgrading path selection . . . . . . . . . Change of the industrial smiling curve in Path One . . . . . . . . . . . . . Change of the industrial smiling curve in Path Two . . . . . . . . . . . . Change of the smiling curve in Path Three . . . . . . . . . . . . . . . . . . . .

37 48 52 53 54 58 59 xv

xvi

Fig. 8 Fig. 9 Fig. 10 Fig. 11 Fig. 12 Fig. 13 Fig. 14

Fig. 15

List of Figures

Change of the antithetical smiling curve and the smiling curve of enterprises in Path Four . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change of the industrial smiling curve in Path Five . . . . . . . . . . . . Change of the product smiling curve in Path Six . . . . . . . . . . . . . . . Change of the smiling curve in Path Seven . . . . . . . . . . . . . . . . . . . Change of the smiling curve in Path Eight . . . . . . . . . . . . . . . . . . . . Change of the antithetical smiling curve and change of the smiling curve in Path Nine . . . . . . . . . . . . . . . . . . . . . . . . . . . Growth rate of developing countries’ participation in the division of labour in GVCs, the increase of domestic value added, and the growth rate of per capita GDP. Source UNCTAD (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potential development paths in the GVC. Source UNCTAD (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60 61 61 62 63 64

75 75

Chapter 3 Fig. 1 Fig. 2 Fig. 3 Fig. 4 Fig. 5 Fig. 6 Fig. 7 Fig. 8 Fig. 9 Fig. 10 Fig. 11

Fig. 12 Fig. 13 Fig. 14 Fig. 15

Structure of product line: 3 special equipment + 3 general laser processing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expansion of Han’s Laser products. Source Han’s Laser Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comparison of income structure of Han’s Laser Products, 2011, 2015 and 2020 (billion CNY) . . . . . . . . . . . . . . . . . . . . . . . . . Application fields of laser marking products continue to expand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses of Han’s laser were reduced after the implementation of after-sales service charges . . . . . . . . . . Domestic and foreign income and composition of Han’s Laser (million CNY). Source Forward Intelligence . . . . . . . . . . . . . Actual energy consumption per unit product decreases, 2005–2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pacific Textiles’ upgrading effects . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue of Alpha Group, 2005–2020 (million CNY). Source The prospectus and annual reports of Alpha Group . . . . . . . . . . . . . Revenue of Alpha Group products, 2010–2020 . . . . . . . . . . . . . . . . Schematic diagram of connections between different products of Alpha Group. Source The author compiled and plotted the data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alpha Group’s investment in R&D, 2006–2020 (million CNY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of Alpha Group, 2007–2020 (million CNY) . . . . . . . . . . . . . Organizational structure of Shangpin . . . . . . . . . . . . . . . . . . . . . . . . China’s furniture production, 2007–2019 (million units). Source Wind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85 86 87 87 92 96 107 119 123 125

126 135 137 143 144

List of Figures

Fig. 16 Fig. 17 Fig. 18 Fig. 19

Comparison of revenue between finished furniture products and customized furniture (million CNY). Source Wind . . . . . . . . . Market share structure of wardrobes, 2009 and 2014. Source Wind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Age distribution of furniture consumption. Source Wind . . . . . . . . Upstream and downstream of customized furniture industry . . . . .

xvii

145 145 159 160

Chapter 4 Fig. 1 Fig. 2 Fig. 3 Fig. 4 Fig. 5 Fig. 6 Fig. 7

Fig. 8 Fig. 9 Fig. 10 Fig. 11 Fig. 12

Fig. 13 Fig. 14 Fig. 15

Fig. 16

Industrial chain diagram of the air conditioning industry . . . . . . . . Cost analysis. Source Research department of changjiang securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in China’s air conditioning capacity, 2008–2015 (10 thousand units). Source Chinaiol.com . . . . . . . . . . . . . . . . . . . . Production scale of air conditioning industry from, 2007– 2015 (10 thousand units). Source Chinaiol.com . . . . . . . . . . . . . . . . Sales scale of air conditioning industry, 2007–2015 (10 thousand units). Source Chinaiol.com . . . . . . . . . . . . . . . . . . . . . . . Comparison of sales revenue in air conditioning industry, 2014 and 2015 (100 million CNY). Source Chinaiol.com . . . . . . . Changes in net profit of air-conditioning listed companies, first half of 2015 (100 million CNY). Source Annual reports of the listed companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brand pattern of China household air conditioning industry, 2008–2015. Source Chinaiol.com . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue of air conditioners by brand, 2014 and 2015 (100 million CNY). Source Chinaiol.com . . . . . . . . . . . . . . . . . . . . . . . . . Value chain of air conditioning industry . . . . . . . . . . . . . . . . . . . . . . Market scale of household air conditioning industry in China, 2014 and 2015 (10 thousand Units). Source Chinaiol.com . . . . . . . Sales of inverter air conditioners in china’s household air conditioning industry, 2009–2015 (10 thousand Units). Source Chinaiol.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China’s RAC export by OEM, 2018–2020. Source Chinaiol.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China’s air conditioning output, 2000–2014 (10 thousand Units). Source NBS of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comparison of the average unit price of bicycles between the Chinese mainland and Taiwan, 2000–2014. Source China Economic Statistics Database, China Bicycle Association website, International Trade Bureau of Taiwan Ministry of Economic Affairs, Taiwan Bicycle Export Industry Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comparison of monthly bicycle export value between mainland and Taiwan, 2008–2009 (Thousand USD) . . . .

189 190 194 196 197 197

198 199 200 200 207

208 209 210

218 219

xviii

Fig. 17 Fig. 18 Fig. 19 Fig. 20 Fig. 21

Fig. 22

List of Figures

Comparison of monthly bicycle export volume between mainland and Taiwan, 2008 -2009 (Thousand Units) . . . . A-Team promotion organization chart. Source Central Development Centre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-Team collaboration pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-Team’s dual-core-network interaction paradigm . . . . . . . . . . . . . A-Team’s value network of co-opetition. Source Li, Junkun. Analysis and Research on Cluster Management Performance — Taking the Taiwan Bicycle Industry as an Example [D], January 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Upgrading of A-Team enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . .

220 224 226 228

229 232

Chapter 5 Fig. 1 Fig. 2

A conceptual framework. Note Solid lines represent direct impact relationships; Dotted lines indicate mediating effects . . . . . Assessment of the relationships (*, **, *** represent p < 0.1, p < 0.05 and p < 0.01 respectively) . . . . . . . . . . . . . . . . . . . . . . . . . .

265 270

Chapter 6 Fig. 1

A conceptual framework of RGVCs . . . . . . . . . . . . . . . . . . . . . . . . .

298

List of Tables

Chapter 1 Table 1

China’s GDP and growth rate, 2013–2020 . . . . . . . . . . . . . . . . . . .

13

Internal and external factors of enterprise upgrading . . . . . . . . . . Enterprise upgrading practice and upgrading performance . . . . . Theoretical basis and measurement standards of enterprise upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The matching table about the enterprise upgrading path selection model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multilevel patterns of the international division of labour . . . . . .

41 42

Chapter 2 Table 1 Table 2 Table 3 Table 4 Table 5

43 54 68

Chapter 3 Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12

New products launched by Han’s Laser, 1996–2019 . . . . . . . . . . . Several products entering the traditional product market through product function substitution or function expansion . . . . Production capacity of Han’s Laser’s core components . . . . . . . . Core components development of Han’s Laser and its counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Major scientific research achievements of Han’s Laser . . . . . . . . R&D investment of Han’s Laser, 2015–2020 . . . . . . . . . . . . . . . . Sales expenses of Han’s Laser (million CNY) . . . . . . . . . . . . . . . . Operational indicators of Han’s Laser, 2015–2020 . . . . . . . . . . . . Gross profit margin of major laser products of Han’s Laser . . . . . Improvement in social performance of Han’s Laser . . . . . . . . . . . Pacific Textiles’ energy-saving, emission-reduction, and clean production programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pacific Textiles’ performance against local and national standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

84 89 90 90 99 100 101 102 103 104 111 114

xix

xx

Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Table 20 Table 21 Table 22 Table 23 Table 24 Table 25 Table 26 Table 27 Table 28 Table 29 Table 30 Table 31 Table 32 Table 33 Table 34 Table 35 Table 36 Table 37

List of Tables

Pacific Textiles’ total assets and net cash, 2013–2020 . . . . . . . . . Pacific Textiles’ expenditures on the expansion of production facilities, 2013–2020 . . . . . . . . . . . . . . . . . . . . . . . . Government policies related to enterprise upgrading in Chenghai . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resource supply of Chenghai toy cluster . . . . . . . . . . . . . . . . . . . . Capital resources of Alpha Group . . . . . . . . . . . . . . . . . . . . . . . . . Independent innovation capability of Alpha Group . . . . . . . . . . . Production capacity of Alpha Group . . . . . . . . . . . . . . . . . . . . . . . Marketing capabilities of Alpha Group . . . . . . . . . . . . . . . . . . . . . Management capability of Alpha Group . . . . . . . . . . . . . . . . . . . . Value chain upgrading of Alpha Group . . . . . . . . . . . . . . . . . . . . . Improvement of key resources and dynamic capability of Alpha Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of Shangpin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Main businesses of Shangpin and proportion of its sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Main barriers to the customized furniture industry . . . . . . . . . . . . Major products of Shangpin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue and profit of Shangpin in 2014–2016 . . . . . . . . . . . . . . . Comparison of gross profit margin of Shangpin and other companies in the customized furniture industry . . . . . . . . . . . . . . Physical capital of Shangpin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Patents and awards of Shangpin . . . . . . . . . . . . . . . . . . . . . . . . . . . R&D investment of Shangpin, 2018–2020 (million CNY) . . . . . . Utilization rate and production/sales rate of Shangpin . . . . . . . . . Major characteristics of Lacquer Craft . . . . . . . . . . . . . . . . . . . . . . Information on interviewees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lacquer Craft’s acquisition events and obtained strategic assets, and the positive effects on its upgrading . . . . . . . . . . . . . . The evolution of Lacquer Craft’s capabilities due to its seven acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115 116 128 130 134 136 137 138 140 141 141 142 143 146 149 157 157 163 163 164 165 171 172 175 182

Chapter 4 Table 1 Table 2 Table 3 Table 4 Table 5 Table 6

Five categories of air conditioner brands in China . . . . . . . . . . . . R&D fields of Gree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross-border cooperation cases of mainstream air conditioning enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income, net profit and profit margin of Gree, 2004–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Main countries and regions of air conditioning export from China, 2004–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bicycle exports of Chinese mainland and Taiwan, 1995– 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

198 201 206 211 212 217

List of Tables

Table 7 Table 8 Table 9

Comparison of bicycle enterprises across the Taiwan Strait . . . . . Learning mechanism among A-Team members . . . . . . . . . . . . . . Production status of three big bicycle manufacturers in Taiwan in February 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

xxi

222 227 233

Chapter 5 Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17

General information of the interviewed companies . . . . . . . . . . . . Examples of open coding analysis . . . . . . . . . . . . . . . . . . . . . . . . . Axial coding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preliminary coding results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results of EFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Generation information of the surveyed companies . . . . . . . . . . . Assessment of convergence validity . . . . . . . . . . . . . . . . . . . . . . . . Assessment of discrimination validity . . . . . . . . . . . . . . . . . . . . . . Results of second-order CFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Measurement scale for enterprise upgrading ways . . . . . . . . . . . . Variable correlation coefficient matrix . . . . . . . . . . . . . . . . . . . . . . Fitting statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standardized coefficients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relationship of different upgrading ways and financial performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relationship of different upgrading ways and improvement of value chain position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Relationship of different upgrading ways and business improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results of mediation effect of upgrading ways between enterprise capability and performance . . . . . . . . . . . . . . .

241 243 245 246 250 252 254 255 256 266 270 270 271

Stage of Giant’s involvement in the GVC . . . . . . . . . . . . . . . . . . . Eight dimensions and coding analysis . . . . . . . . . . . . . . . . . . . . . . Examples of coding analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Typical quotation examples and coding results . . . . . . . . . . . . . . . Motivation of KEDA: typical quotation examples and coding results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Typical quotation examples and coding results in RGVCs paths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Typical quotation examples and coding results in the effects of RGVCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

300 301 302 312 314

272 273 274 275

Chapter 6 Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8

316 321 323

Chapter 1

Background of Chinese Enterprises Upgrading

Where gross industrial production is concerned, China is the world’s largest industrial country. The data provided by the United Nations Industrial Development Organization (UNIDO) reveal that in 2020 China’s industrial competitiveness index ranked second among 152 countries/economies, and both its share of World Manufacturing Value Added Index and share of World Manufacturing Export Index ranked first (Todorov 2020). ina’s manufacturing value added is close to the total amount of that of the United States, Germany, and Japan. Studies have also shown that China has the world’s most comprehensive industrial system, which provides a vital foundation for it to move from a large industrial country to an industrial power. Since 2010, China’s manufacturing value added has kept ranking first in the world for eleven consecutive years. Among the world’s 500 major industrial products, China’s output ranks first in more than 40% of them, such as key industries like photovoltaics, new energy vehicles, household appliances, and smart phones, etc. (Zhang 2021a). However, these fulsome praises and comments need to be considered in a calm manner. The competitiveness of Chinese enterprises should be evaluated systematically from more different angles. Only in this way can we have a sobering understanding of the background, pressure, opportunities, and space for enterprise upgrading, and of the competitive position of Chinese enterprises in global business community.

1 Chinese Manufacturing is Big and to Be Strong Competition in global manufacturing industry is not based on quantity. Although the output value of “made in China” is large, its added value is by far lower than that of some developed countries. It is documented that the United States accounts for 31% of the world’s largest 500 industrial enterprises, ranking first in the world in terms of comprehensive competitiveness. Its equipment manufacturing industry is the strongest. In contrast, China is a country with the biggest manufacturing volume in © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 Y. Mao, The Restructuring of Global Value Chains, https://doi.org/10.1007/978-981-19-1693-9_1

1

2

1 Background of Chinese Enterprises Upgrading

the world, but its manufacturing sector is not strong. Zhu Gaofeng, academician of the Chinese Academy of Engineering, once said that 80% of China’s high-end chips rely on imports; For a 178.96 USD Apple smart phone, Chinese companies responsible for assembly earn only 6.50 USD; All the engines of China’s self-developed large airliner C919 are imported (Wang 2015). Chinese manufacturing is situated for long in the lower parts of GVC. In addition to the “three highs and three lows” (that is, high commitment of production factors, high consumption of resources, and high pollution of the environment, as well as low quality, low technology, and low added value of offerings), Chinese manufacturers especially lack independent IPR and self-owned brands. Besides, structural imbalance problems have been preying on Chinese manufacturing sectors. Low-end products are overly growing, which leads to overcapacity, while high value-added products are largely imported from overseas. According to data released by the National Bureau of Statistics (NBS) of China, in the first three quarters of 2021, 9 of the 18 major industrial sectors are in a state of overcapacity (capacity utilization rate less than 79%). Regarding the corporate echelon, China has not yet formed a pattern in which large enterprises drive the development of small ones. There is neither a batch of large enterprises or enterprise groups that represent the development level of the industry, control a large market share, and have international competitiveness, nor a group of small or medium-sized enterprises that are strong, specialized, dedicated, and provide supporting products and services. Based on the investigation into dozens of enterprises in the Pearl River Delta and in Taiwan, as well as the examination of some other domestic enterprises in various industries since 2006, the author proposes eight types of “made in China”.

1.1 Processing Trade and Pure Assembly Account for a Large Proportion Although the proportion of China’s processing trade1 exports in total exports is showing a downward trend, it still fluctuates around 30%, as shown in Fig. 1. Thus, Chinese enterprises are greatly affected by import and export policies and international economic situations. They earn a narrow margin of profit. In processing trade production, there are a considerable number of trade ventures involving processing and assembly with supplied materials and parts and compensation trade (namely, commission processing, processing with supplied designs and samples, assembly with supplied parts and compensation trade), and even in industries such as automobiles and mobile phones, there are also some enterprises that do not have their own brands and must undertake pure assembly operations, and their output value contribution rate is extremely low.

1

OEM enterprises mainly produce for multinational companies, so its export is called processing trade, which is different from general trade.

1 Chinese Manufacturing is Big and to Be Strong

3

Fig. 1 China’s processing trade exports, 2015–2020 (Billion USD, %). Source NBS of China, general administration of customs of CHINA

1.2 Branded Assembly Without a Chinese “Core” Although in computer, DVD, TV and many other industries, there have appeared some branded enterprises in China, they can only be regarded as assembly companies with a brand since they completely rely on foreign companies for key parts and components. For example, the operating system, CPU, and graphics card of Lenovo’s U300s-ISE computer are all from Intel. There is a big gap between computer chips manufacturing and branded assembly. According to statistics, the average profit margin from computer technology origin and standard setting is 23.9%, that in R&D, designing and manufacturing of core components is 18.4%, and that from brand marketing and management is only 7% (Li and Ning 2010).

1.3 Low Value-Added Parts and Components The manufacturing of parts and components can be very lucrative, but those made by Chinese companies are basically common ones, which belong to low value-added products. Consider the automobile industry, the major exports of China’s auto parts in 2019 are aluminium alloy system parts, braking system parts, transmission system parts, and steering system parts.

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1 Background of Chinese Enterprises Upgrading

Fig. 2 Auto parts exports composition, 2019 (%). Source Sorted out from websites information of general administration of customs of china and forward intelligence

According to Forward Intelligence’s Analysis of import and export status and development prospects of China’s auto parts industry in 2020,2 in 2019, aluminium alloy system parts were the Number 1 export, with an export value of 4.035 billion USD, accounting for 31.31% of the total export volume; The Number 2 export was the braking system part, whose export value was 3.55 billion USD, accounting for 27.55%; The export proportion of transmission system parts and steering system was 17.91% and 14.46% respectively, ranking third and fourth; The top four products accounted for 91.22% of the total exports, as shown in Fig. 2. However, these products are of low technological content and resource-consuming. They only get marginal profit. Meanwhile, China turns to foreign countries or companies for many key parts and components, even some small parts completely depend on them. For example, though China’s annual production of ballpoint pens accounts for 80% of the world’s total, nearly 90% of ballpoint pen cartridges depend on imports, which costs 200 million USD a year (Jiang 2016). This reflects that China’s pen-making enterprises have hardly mastered the core technology of pen production.

1.4 Weak Capability and Low Technological Content in Manufacturing Specialized Machinery and Equipment China’s reputation as the “world workshop” is true only for the domain of consumer goods. As for specialized equipment, it is still in a weak position. Such equipment used in Chinese enterprises is largely imported from foreign countries. According 2

Forward (Qianzhan) Intelligence, founded in Tsinghua University Park of Beijing in 1998, is China’s leading professional market research firm and a leader in market research of China market segmentation.

1 Chinese Manufacturing is Big and to Be Strong

5

to statistics, two-thirds of equipment in China’s total fixed assets investment comes from imports. The import rate of optical fibre manufacturing equipment is 100%, that of integrated circuit chip manufacturing equipment 85%, that of petrochemical facilities 80%, that of automobile making machinery, numerically controlled machine tools, textile machinery, and offset printing equipment 70% (Zhong 2011). In recent years, there has been progress on China’s specialized equipment manufacturing. Economic data show that in 2020, the added value of China’s equipment manufacturing industry increased by 6.6% over the previous year, higher than the average level of all (Zhang 2021b).

1.5 Joint Venture Manufacturing Aimed at Selling in the China Market Some multinational companies regard joint ventures as production bases and sales outlets, and obtain hidden benefits through technology transfer and parts sales. For example, joint ventures in China’s automobile industry play the role of the assembly workshop and sales agent of multinational car companies. IPRs of core technologies are firmly commanded by foreign parties. Moreover, these joint ventures boost China’s demand for foreign parts. It is estimated that more than 30% of the profits Volkswagen earns annually in China come from its sales of auto parts to China (Pan QS).

1.6 Joint Venture Manufacturing with Self-independent IPRs In joint venture manufacturing, some Chinese enterprises have already had selfindependent R&D capability. For example, the SAIC GM Pan Asia Technical Automotive Centre jointly established by GM and SAIC enjoys independent IPRs for its R&D achievements. If GM, SAIC or any other subsidiary wants to use Pan Asia technology, they must pay technology license royalties.

1.7 Self-independent Manufacturing Based on Imitative Innovation Digestion, absorption, and innovation based on imitative innovation can generate independent IPRs. Huawei is so far a successful model. In the process of technology paradigm transformation from analog switch to SPC switch, Huawei follows advanced foreign technology and mainly engages in imitative innovation, which lays the foundation for its dominant position in China’s domestic market and some

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developing country markets; then Huawei manages to have its own IPRs in wireless access, core network and other fields, which helps it to compete with multinational companies such as Cisco. In addition, integrated innovation based on existing technology or inter-industry combination by capitalizing on fuzzy industrial boundaries can also foster competitive products with independent IPRs. For example. Alpha Animation integrates animation into toy manufacturing. It currently has the biggest market share in the domestic toy market with an annual revenue of more than 2.5 billion CNY.

1.8 Self-independent Manufacturing Based on Original Innovation Original innovation stems from significant and forward-looking science and technology or inventions. This type of innovation gives a company not only the major says, but also contributes hugely to social progress. Although there are differences in the importance and composition of patents, Huawei already has independent IPRs in wireless access, core network and other fields, and can compete with multinational companies such as Cisco. According to the State Intellectual Property Office, Huawei granted 769 patents to Apple in 2015 and Apple to Huawei 98 patents, meaning Apple will must pay Huawei a royalty (Wang 2016). However, the original innovation ability of Chinese manufacturing overall is still relatively weak, and there is much room for advancement in major scientific and technological domains. Big breakthroughs particularly need to be made in R&D and independent IPRs of universal platform-based products such as airplane engines and computer chips. In a word, the number of competitive products with IPRs is still very small. Many Chinese enterprises are in low and middle positions in the GVC. They generally perform parts production and assembly work, and they are not yet well-equipped to conduct core technology innovation and to build self-owned brands. China excels in the size of manufacturing. It is far from being a powerhouse for manufacturing. Chinese enterprises need to move up from the bottom to the high ends of the GVC (smiling curve). In the process of upgrading to “created by China”, “made in China” should continuously accumulate various capabilities from initial manufacturing and design capability to brand building, R&D, and original innovation capability. Only in this way can “made in China” establish its truly global presence.

2 Pressure and Background of Enterprise Upgrade

7

2 Pressure and Background of Enterprise Upgrade Since reform and opening-up, China has advanced from the early phase into the middle phase of industrialization. The level of urbanization is rapidly improving and urban infrastructure has witnessed significant development. Private enterprises have been springing up from nothing. The first 30 years since reform and opening-up saw an annual economic growth rate of 10% on average. However, a variety of studies reveal that there exist quite a few problems in the current growth model. One is the long-term practice of extensive economic growth mode, which leads to excessive resource consumption, environmental damage, low income of workers, poor working conditions and so on. A second problem is that most export products are at the lower parts of the value chain and that many industries and enterprises are caught in the dilemma of relying on foreign companies for core technology. They lack key IPRs, have no ability to conduct independent innovation and are unable to build their own brands. The result is that they get very meagre profit. In fact, the pressure for upgrading has existed long before 2008. The financial crisis is simply exacerbating this pressure. This will be explained from the following aspects.

2.1 Global Economic Slowdown and European Debt Crisis Affect Exports After the global financial crisis, the European sovereign debt crisis broke out. These events have brought uncertainty to the world economy. European Union (EU) is China’s largest trading partner and largest export market. The debt crisis that happened there has produced great negative effect on China’s export trade. The economic slump in the euro area, the fluctuation of euro exchange rate and the appreciation of Chinese Yuan (CNY) lead to declining demand in the European market, which directly affects the growth of China’s exports. Trade protectionism caused by the global economic slowdown further harms the competitiveness of Chinese enterprises and hinders their export.

2.2 The Appreciation of CNY and the Fluctuations the Exchange Rate Increase the Pressure on Export Trade Bank of China (PBOC), the central bank, issued an announcement on July 21st, 2005, announcing the implementation of a managed floating exchange rate system based on market supply and demand, with reference to a basket of currencies for adjustment, and the CNY exchange rate will no longer be pegged to a single US

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Fig. 3 Exchange rate of the USD against CNY, July 22nd, 2005–December 31st, 2021. Source Barchart.com3

dollar, and a more flexible CNY exchange rate mechanism must be formed. At the same time, the US dollar against CNY exchange rate was adjusted from 8.2765 to 8.11 in one go. On August 11, 2015, the exchange rate reform started again. The main content was to improve the quotation mechanism of the central parity rate of the exchange rate of CNY against the US dollar to enhance the degree of marketization and benchmarking of the central parity rate (Ding et al. 2018). Since 2005, CNY has been appreciating against the US dollar for almost 9 consecutive years. While after 2015, the exchange rate started to fluctuate between 6.2–7.2, the flexibility of the exchange rate was further strengthened, with stronger two-way fluctuations, as shown in Fig. 3. Marketization of the CNY exchange rate formation mechanism has been significantly improved, and PBOC’s daily intervention in the CNY exchange rate has gradually faded out. According to China Monetary Policy Implementation Report, Quarter Three, 2021, it is necessary to deepen the reform of interest rate and exchange rate marketization, improve the CNY exchange rate formation mechanism, enhance exchange rate flexibility, and strengthen macro-prudential management. It also states that the CNY exchange rate fluctuates in both directions based on market supply and demand, and says that the CNY exchange rate has remained basically stable at a reasonable and equilibrium level. At end-September 2021, the central parity of the USD against CNY was 6.4854. From the reform of the CNY exchange-rate regime in 2005 to end-September 2021, the CNY appreciated by a cumulative 27.6 percent against the USD. For the enterprises relying on export, the appreciation of CNY has brought great pressure on their profitability, while the fluctuation brought uncertainty. In addition to the decline of product competitiveness in export markets, during 2005–2014, the appreciation of CNY against US dollar directly results in the loss of foreign exchange. 3

https://www.barchart.com/forex/quotes/%5EUSDCNY/interactive-chart.

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9

The rising exchange rate is causing the operating costs of large numbers of exportoriented enterprises to go up in the Pearl River Delta and the Yangtze River Delta. As market volatility intensifies, foreign exchange risk management has gradually become an increasingly severe challenge.

2.3 Both Labour Costs and Raw Material Prices are Rising On January 1st, 2008, the new Labour Contract Law came into effect. Added to it are regulations to protect workers, which help build harmonious relationships between enterprises and employees. But in the short term, it greatly boosts the labour costs of enterprises, such as medical insurance, overtime payment, etc. In recent years, the minimum wage level in China’s coastal, central, southwest, northwest, northeast provinces have increased year by year. For example, in Guangdong Province’s relatively well-developed areas, the minimum wage standard was 1,895 CNY in 2015, and in 2020, it was lifted to 2,100 CNY. Meanwhile, with rising prices of water, electricity, raw materials and fuel, and growing costs of transportation and some other factors, production and sales costs of enterprises are increasing rapidly. The foundation labour-intensive industries rely on for survival has been weakened. China’s manufacturing enterprises are in urgent need of finding new ways of development. They must undertake transformation and upgrading.

2.4 Enterprises are in a Passive Situation When Facing Trade Barriers Such as Anti-dumping, and Quality and Environmental Certification Most export-oriented enterprises in China are of small scale and weak strength. Their ability to resist and avoid various risks is very limited. In the process of development, they are vulnerable to external factors such as policies and economic situations. With the expansion of China’s foreign trade, the number of anti-dumping lawsuits against export enterprises is increasing, and it is difficult for Chinese enterprises to win the lawsuit, which may further stimulate foreign companies to lodge more anti-dumping complaints against China’s export products, causing a vicious circle. In addition to the anti-dumping litigation, Chinese enterprises are obliged to confront the increasingly important international product quality certification and “green” barriers, such as technical barriers to trade (TBT). These increase the costs of non-raw materials. According to the statistics of General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), about 30% of China’s export enterprises are affected by TBT, and in some coastal provinces more than 60% suffer (Chen 2015a, b). TBT has become the biggest export barrier in addition to exchange rate.

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TBT measures in Europe and the United States have changed from setting requirements for the performance and quality of products to setting requirements for the whole life cycle of products. For example, in the 1990s, European countries banned the import of Freon-containing refrigerators, resulting in a 59% drop in China’s refrigerator exports. In 2012, more than 70% of China’s consumer goods exported to Europe, the United States, Canada, South Korea, and Japan were detained and recalled due to possible harm to people and certain chemical properties. China’s toy exports were hit hard repeatedly: in 2007, the United States recalled Chinese toys in succession on the grounds of quality and safety problems. Mattel recalled nearly 21 million toys; In 2009, the United States voluntarily recalled the “super equipment transportation” toy cars made in China; In 2011, the new EU Directive on Toy Safety promulgated very high requirements for the chemical properties and assessment procedures of toys, which increased manufacturing costs of toys by more than 30% (Mao 2014). The green trade barrier may be reasonable but it has become the main obstacle for developing countries to export their products. First, its relevant standards and regulations are flexible and implementation is contingent on the specific situation. Exporting manufacturers face either the rejection of their products or the increase of production costs; second, it covers a wide range of contents, involving basically all industrial products and production links as well as legal matters such as laws, decrees, regulations, requirements, levels, and labour standards; third, it is of complex forms, strict technical requirements, cumbersome testing system and stringent testing standards; fourth, it adopts disguised means. Some developed countries try to protect their own trad under the camouflage of “green”. In view of the above facts, the traditional production mode at the expense of the environment can no longer meet the emerging demands of export trade. It is urgent for traditional industries to carry out transformation and upgrading.

2.5 Adjustment in Export Tax Rebate Policy of Processing Trade Affects the Structure of Export Commodities In order to further balance the export structure of China’s foreign trade and optimize the structure of export commodities, relevant ministries and commissions of China jointly issued a notice, stipulating that from July 1st, 2007, 553 kinds of high energy consumption, heavy pollution, and resource-dependence products in 10 categories would be cancelled; The export tax rebate rate of 2268 items of goods would be lowered in 15 categories that are easy to cause trade frictions. As of 2020, a total of 1,672 ten-digit customs code commodities had been placed on the prohibited list of processing trade.4 Facing continuous tightening of processing trade policy, many low-end processing trade enterprises in the Pearl River delta are in danger of going 4

According to the announcement in 2014, 199 ten-digit commodity codes would be removed in 2020.

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out of business. Nearly 20% of processing trade enterprises no longer enjoy preferential tax policies. Viewed from the positive perspective, the introduction of these policies will help strictly control the export of “high energy consumption, heavy pollution, resource-dependence” products and low value-added, low-tech products and encourage export expansion of high value-added, high-tech products to optimize the industrial structure and export commodity structure, thus promoting the transformation of foreign trade growth mode.

2.6 The Pressure of Environment Protection has Long Existed By performing “three imports and one compensation” processing business, industrialization in coastal areas took off. However, labour-intensive, and seriously polluting industries such as electroplating and shoemaking account for a large proportion. Although China has achieved remarkable results in environmental protection in recent years, the extensive growth mode of “high investment, high consumption, heavy pollution and low yields” has not fundamentally changed. Continued increase of petition caused by environmental pollution has become the third major social concern after social security and labour security. Both deteriorating environmental and resource problems and government’s policy on energy conservation and environmental protection are promoting the upgrading and transformation of enterprises. 1.

Stable and High-quality Economic Growth Puts Forward New Requirements for Industrial Upgrading

Recently, China’s economy has shown a series of new features, including changes in growth rate, structural upgrading, changes in growth forces, pressures of innovation and entrepreneurship, and so on. On the one hand, these changes will generate new opportunities for China’s economic development, which will contribute to more stable economic growth, high quality growth momentums and more stable development prospects; on the other hand, they lodge new requirements for transformation and upgrading. China is promoting new industrialization, informatization, urbanization and agricultural modernization and encouraging collaborative, sharing and green development. This new development trend has brought big challenges as well as new directions to many export-oriented industries and enterprises, thus ultimately promoting the optimization and upgrading of economic structure, the emergence of a new growth model, and a more stable environment for sustainable development.

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3 Opportunities and Space for Enterprise Upgrading 3.1 From “Made in China” to “Sold in China” (1)

(2)

New features of economic globalization: from “made in China” to “sold in China” An important feature of economic globalization is “made in China”. However, since the international financial crisis, another important feature, “sold in China” has emerged (Mao 2010). “Sold in China” was first proposed by the report From Made in China to Sold in China: The rise of Chinese Urban consumers released by McKinsey Global Research Institute in 2006. The report points out that due to the emergence of urban middle-income groups, China is turning into one of the world’s major consumer economies from a large global manufacturing country. Some foreign media comment that multinational companies now regard China as a “market” instead of a “low-wage production base”. Boston Consulting Group (BCG) believes that since China has both a huge market size and great market potential, global companies see China as “the market they must win”. Analysis and forecast about the prospect of “sold in China” a.

5

China’s total economy and total consumption account for a growing global share In the past several decades, China is entering a golden period of consumption. Consumption expenditures are increasing significantly with the economy growing rapidly. From 2017 to 2019, per capita consumption spending in China has increased from 17,111 CNY to 21,559 CNY, and China has become the second largest consumer market in the world after the United States. According to Residents’ income and consumption expenditure in 2020, influenced by a variety of factors, the per capita consumption expenditure of residents in China was 21,210 CNY in 2020, a nominal decrease of 1.6% over the previous year, and a real decrease of 4.0% after deducting the price factor. Despite the current economic slowdown, China will remain the most attractive Asian consumer market in the future (Jiang 2016). Since 2013, China’s economic development has been shifting from high-speed growth to high-quality development. In the first four years of the 13th five-year plan,5 the average annual growth rate of China’s GDP reached 6.6% (see Table 1). In 2019, per capita GDP in China exceeded 10,000 USD for the first time. The forecast of China’s future consumption by international organizations also indicates the importance of the Chinese market. Based on the data of the International Monetary Fund (IMF), the Union Bank of

The 13th Five-Year Plan is a plan formulated by the People’s Republic of China to develop the national economy from 2016 to 2020.

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Table 1 China’s GDP and growth rate, 2013–2020 GDP/Trillion CNY Growth rate (%)

2013

2014

2015

2016

2017

2018

2019

2020

56.88

63.65

68.91

74.41

82.71

91.93

99.09

101.60

7.77

7.43

7.04

6.85

6.95

6.75

5.95

2.30

Source NBS of China, China Economic Net

Switzerland (UBS) predicted in 2005 that China’s household consumption would rise to the world’s second place only after that of the United States by 2015, which has been verified later. In its announcement on August 13th, 2013, Standard & Poor’s (S&P) Rating Services, an international rating agency, revealed that China’s retail sales of consumer goods increased by 14.3% in 2012, reaching about 3.29 trillion USD, while in the same period the number in the United States was 4.35 trillion USD. The gap then between China’s total consumption and that of the United States was small. Therefore, in 2013, S&P predicted that at such a speed, China would quite likely surpass the United States and become the world’s largest consumer goods market within five years (Zhu 2013). Last two decades has witnessed China’s rapid growth. After joining the WTO, China’s final consumption expenditure has been growing rapidly, surpassing Japan in 2013 and ranking third; as of 2020, it has reached 8.07 trillion USD, nearly half of the US final consumption expenditure; it has increased by 9 times compared with 2002, with a compound annual growth rate of 13%. However, the growth rate has slowed down significantly in the last two years (Fig. 4).

Fig. 4 Final consumption expenditure, 1979–2020 (Trillion USD). Source World bank national accounts data, and OECD national accounts data files

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b.

China’s GDP surpassed Japan’s in 2010 and ranked third. However, China’s consumption expenditure only accounted for an average of 53.3% of GDP from 2011 to 2020, which is much lower than that of developed countries and developing countries, which accounted for 80% of GDP and more than 70% separately (Lian and Luo 2021). The Chinese market has great potential for development From 2011 to 2019, China’s average consumption rate was 53.4%. In 2020, despite the impact of COVID-19 epidemic, China’s final consumption expenditure contributed to 54.3% of GDP, which was 11. 2 percentage points higher than the total capital formation. It is the highest level in recent years. Consumption remains the ballast stone for stable economic operation (Ning 2021). Nevertheless, the proportion of consumption in GDP in China is still lower than that in the United States and Japan. In other words, if China’s consumption share is to reach the level of that in the United States or Japan, there is still a lot of room for consumption to drive economic growth. As can be seen from Fig. 5, the total retail sales of consumer goods in China showed a rising trend. In 2019, the total retail sales of consumer goods reached 40.80 trillion CNY. Although the total retail sales of consumer goods in China took on a downward trend in 2020, If only the government continues to deepen social reform and gradually change the consumption structure of residents, the consumption potential can be gradually tapped. From the growth of online shopping and tourism in recent years, we can see the potential of market development in China. It took only half an hour on Double 11 in Tmall in 2020 to exceed the trading volume on the whole day of Double 11 in 2019 (the trading volume on November 11th, 2019 was about 268.4 billion CNY), reaching 372.3 billion CNY. In 2020, the total Double 11 trading volume in Tmall reached 498.2 billion, an increase of 86% over the previous year. From 2011 to 2020, Alibaba’s “Double 11”

Fig. 5 Growth of total retail sales of social consumer goods, 2016–2020 (Trillion CNY). Source NBS of China

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15

turnover increased from 5.22 billion CNY to 498.2 billion CNY, a 95-fold increase in 10 years (Shan 2020). In terms of overseas tourism, statistics from the Japan Tourism Administration show that in 2019, the number of foreign tourists visiting Japan reached about 31.88 million, a 2.2% increase compared with the previous year, breaking the previous record for seven consecutive years (Xu 2020). Among them, 9.594 million Chinese tourists went to Japan, accounting for 33% of Japan’s foreign tourists. The daily consumption of Chinese tourists is about 1 trillion and 770 billion yen, which is about 113.67 billion CNY according to the exchange rate on January 1st, 2020, accounting for 40% of the total consumption (Yu 2020). In addition, the consumption power of Chinese tourists in South Korea is also very strong. According to the statistics of the Korea Tourism Administration, in 2019, foreign tourists to South Korea set a record, reaching 17.5 million, breaking the highest record of 17.24 million in 2016. Among them, 5.51 million tourists came from China, an increase of 26.1% over the same period in the previous year (Wang 2020). Therefore, China’s market potential is still very great. (3)

Analysis of the domestic demand source of “sold in China” a.

6

The market in the cities with the middle-income group expanding and consumption potential tapped The World Bank defines the middle-income group as an ethnic group made up of four-member families with an annual income of 16,000–68,000 US dollars.6 The Chinese government considers “relentlessly expanding the middle-income group” as the new requirement to achieve a well-off society in an all-round way in 2020. The goal of doubling the national income lies in doubling the middle-income group (Chi 2012). In 2019, the urbanization rate of permanent residents reached 60.60%. However, it was far below the average level of 80% in developed countries. And the urbanization rate of registered residence population was only 44.38%. There is huge space for further urbanization in China. Meanwhile, there exist great potential and opportunities for economic development in the process of urbanization (Lin 2020). In the future, the urbanization level will continue to improve. Empirical data show that the average consumption demand of an urban resident is 2.7–3 times that of the rural resident. The would-be

In January 2005, a survey from the urban investigation team of the NBS concluded that “60000500000 yuan is the standard for defining the family income of the middle-income group in China (based on the average number of three people in each family)”. This conclusion was considered by the media as the first definite digital definition of “middle class” in China. However, it later denied that such data had been published and asserted that there was no “middle class income” item in the statistical caliber. The middle class is measured by wealth, rights and prestige, including living and spiritual state. It is more often than not judged in terms of mindset and lifestyle. This book only studies consumption power from the perspective of income, so we use the expression of “middle-income group”.

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b.

c.

d.

urbanized population will be the “reserve force” for the development of the middle-income group. In turn, a bigger middle-income group spells huge potential demand. The market in the backward countryside and west where the demand is growing rapidly China’s rural and western markets have large size and great potential. Marginal consumption there is growing higher and higher than that in cities and eastern regions. From 2016 to 2020, the total retail sales of rural social consumer goods in China showed a steady growth trend. In 2019, the total retail sales exceeded 6 trillion CNY for the first time. With COVID19 epidemic under control in China, retail sales of rural consumer goods in December 2020 amounted to 586 billion CNY, an increase of 5.9% over the same period in the previous year. At the same time, total retail sales of consumer goods in Tibet during the “13th Five-Year Plan” period reached more than 300 billion CNY, an increase of 82.18% over the whole “12th Five-Year Plan” period (Lin 2020). Consumption is increasingly serving as the main engine of economic growth. The market in China with booming high-end products and luxury goods According to the annual report on luxury goods in China released by Bain Consulting Group, the luxury goods market in China was expected to grow by 48% in 2020, reaching nearly 346 billion CNY. With the appreciation of CNY, the purchasing power of Chinese consumers in the international luxury market is enhancing (Bruno and Zhang 2020). In 2020, China’s share of luxury goods consumption in total global luxury consumption doubled. And it is expected to become the largest luxury market in the world in 2025. Therefore, more and more global luxury brands attempt to crack the Chinese market. China is bound to become the world’s largest trading and consumption centre for luxury goods. The market in “trade zones”—the Asian economy and trade zone and China’s free trade zones have been formed Recognizing that Mainland China has been growing into the economic centre of Asia, Asian countries, and regions such as South Korea, Japan, Singapore, and China Taiwan are accelerating their configuration and layout in the Chinese market. They signed bilateral agreements with China, which are providing real facilitations to trade. For example, in January 1st, 2010, the “free trade agreement” between China and ASEAN came into effect, resulting in a new level of economic integration. The Asian economic zone centred around Mainland China is emerging. Inside China, since 2013, four free trade zones have been established in Shanghai, Guangdong, Tianjin, and Fujian respectively. The establishment of free trade zones is bringing new opportunities for China’s consumption growth.

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3.2 Blurred Industry Boundaries and Cross Industrial Integration With the development of modern information technology, the boundary between different industries is getting more and more blurred. In the past, the industrial economy was built on traditional industries. There were clear-cut boundaries and separation between industries, which constituted not only the operation basis of the industrial economy, but also the basis of formulating industrial policies. However, since the 1990s, with the advancement of digital technology and computer technology, the boundaries between many industries supported by these technologies have become fuzzy, thus provoking the blending of telecommunications, culture, entertainment, finance, tourism, retail, hotel, and other industries. Waves of largescale M&A and reorganization have swept across industries in the world, and diversification is becoming the development strategy of large companies. At the same time, structural changes have taken place in the way of resource allocation and integration. New business forms are springing up in response to opportunities in the dynamic environment, turning out to be new economic growth points and directly changing the traditional industrial structure. Hence, a new economy based on information has come into being, producing far-reaching impact. For enterprises, industrial convergence and blurred industry boundaries also generate great opportunities. Firstly, industrial integration enables resources to be reasonably allocated in a wider range, thus dramatically reducing the costs of products and services, resulting in cost advantages. Secondly, the integration expands the scope of network applications and increases the possibility that various resources gain entry to the network, producing network effect. Finally, the openness of the production system caused by industrial convergence integrates consumers as part of the production factors, producing conventional consumer effect. The combination of these three effects will create huge opportunities for enterprises to increase their profits. While industries are breaking the limitation of traditional industrial boundaries, pursue new operation modes and build new industrial chains, the academic and theoretical circles have conducted a series of related discussions and researches on the trend of fuzzy industrial boundaries. For example, in 1978, Negrouponte of MIT’s media lab expressed the technology boundaries of computing, printing, and broadcasting with circles, and pointed out that the intersection of circles would become the fastest growing and most innovative field. In 1994, Harvard Business School held the world’s first academic forum on Industrial Convergence—“the World of Conflict: Computer, Telecommunications and Consumer Electronics Symposium”. In 1997, the European Commission’s “green paper” proposed that the integration of telecommunications, radio and television, and publishing industry is not only a technical issue, but also a new way for service, business model, and even the operation of the whole society. Industrial integration is therefore considered as a powerful engine to promote employment and growth under the new conditions.

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Characteristics and tendencies of blurred industry boundaries With the rapid advancement of technology, it is inevitable for industry boundaries to become blurred and for industries to be integrated. There are three inclinations for industries to blend: between tangible products, between intangible products, and between tangible and intangible products. a.

b.

The blurred industry boundary between tangible products The boundary between tangible products is fuzzy. A case in point is the 3C integration, that is the integration of computing, communication, and consumer electronics. The research by Alfonso and Salvatore in 1998 shows that computer communication, semiconductor and other electronic products industries had obvious industrial convergence during the 1980s and 1990s, and the performance of the combined industry has been significantly enhanced compared with other industries that have no significant convergence. And there is a positive correlation between industrial performance and technological convergence. According to a survey conducted at the end of last century by IDC, an authoritative statistical organization, customers hope that traditional TV, telephone, PC, game, audio-visual entertainment, and other related functions will all be integrated into the digital entertainment device. Today, most IT manufacturers and consumer electronics producers are striving to meet this need, that is, they manage to accomplish the interaction function of all mobile information in the same terminal device and integrate in them as many applications as possible. The vague industry boundary between intangible products The most typical example of the fuzzy boundary between intangible products is the integration of telecommunications, radio and television and publishing industry. Greenstein and Khanna (1997)believe that the integration of these three industries is based on digital integration and that the industrial boundary shrinks or disappears due to the need to adapt to industrial growth. The fusion of telecommunications, radio and television, and publishing industry leads to not only the integration of voice, video, and data but also the improvement of interchangeability and interconnection between different forms of media through unified implementation technology. Because of this, either photos, music, videos, files, or conversations can be transmitted and displayed through the same terminal device and network, so that voice broadcasting, telephone, television, movies, photos, printing and publishing, electronic currency and other information can be integrated into an application or service mode. Another prime example of the fusion of intangible products is the convergence of banking, insurance, and securities industries, which are now growing into a mega-financial industry with a mixture of operations. At present, in developed countries such as European countries, the United States and Japan, due to policy deregulation in the financial industry, large-scale financial companies with mixed operations have gradually become the mainstream.

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The fuzzy industry boundary between tangible and intangible products The fuzzy boundary is also emergent between tangible and intangible products. For example, the concept of “4C integration” reflects this emerging trend. The “4C integration” is based on the 3C fusion, to which a fourth element “content” is added, to meet people’s future needs of computing, communication, and entertainment at any time, in any place and through any device. This indicates that in the information industry, equipment manufacturers, network operators and content providers have increasingly interpenetrated in business. Typical examples of this are IBM, HP, etc. IBM and HP have been concentrated on equipment manufacturing for a long time. But since the 1990s, they have gradually transformed themselves into a provider of information and consulting services with the income from equipment manufacturing keeping decreasing (Fig. 6).

The analysis model of value network based on fuzzy industry boundaries a.

Limitations of the traditional value chain analysis model The concept of value chains was first put forward by Porter in his famous book Competitive Advantage in 1985. Porter thinks that a value chain consists of a series of distinct but interrelated value creation activities. Due to the increasing complexity of product technology, it is almost impossible for a single company to undertake all the production and operation, thus arising a series of activities which are related in sequence, horizontally

Fig. 6 Three basic types of fuzzy industry boundaries

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Fig. 7 Traditional value chain model

b.

extended, and vertically arrayed, ultimately forming the industrial value chain. The traditional value chain model is illustrated in Fig. 7. However, with the development of information technology and the Internet, the connection and application scope of technology, business, operation, and market among industries are expanding; Enterprises and industries are establishing more extensive connections; and the phenomenon of enterprises expanding and penetrating other industries is becoming increasingly common. All these make a point that companies compete in a wider range of fields and it is difficult to tell which industry they belong to. Therefore, the value chain theory is no longer applicable to the situation in which companies integrate into several industries. The analysis model of value network based on vague industry boundaries Based on the fuzzy industry boundary, Mao and Wang (2008) propose an analysis paradigm different from the customer-centred value network. It is an analysis model built on the enterprise-centred value network with infiltration and expansion beyond the boundary into other different industries. As shown in Fig. 8, the value network based on fuzzy industry boundaries is developed around the value chain of a certain. It regards a major enterprise in the industry as the core actor, which sits in the centre of the figure. The upstream companies from which the major enterprise procures supplies involves not only those in its original value chain but also new suppliers in Industry 1, Industry 2, Industry 3… and newly emerging industries (these industries used to have nothing to do with the major enterprise’s industry). The downstream companies (or clients) for whom the major enterprise provides products and services include new ones in Industry 1, Industry 2, Industry 3… and newly emerging industries (these industries used to be unrelated to the major enterprise) in addition to those in the downstream part of the original value chain. The analysis model of value network based on fuzzy industry boundaries assumes an enterprise as the centre and the major actor, which, based on its own resources and capabilities, takes in resources and capabilities from a variety of other industries for the

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Fig. 8 Value network based on fuzzy industry boundaries

purpose of identifying, creating, and meeting customer needs. Therefore, the value network model based on fuzzy industry boundaries provides a new analysis paradigm. (3)

Fuzzy industry boundaries and industrial convergence facilitate enterprise upgrading and industrial upgrading Fuzzy industrial boundaries and industrial integration can foster enterprise and industrial upgrading. Mao and Wang (2006) pointed out in their research on the path of independent innovation based on product upgrading, that technological progress has led to blurred boundaries between industries and industrial integration. This phenomenon has generated both great opportunities and formidable challenges to enterprises. Those with the ability to predict future industrial trends and take decisive action to adapt to changes in the industrial environment can often excel in the tide of drastic industrial pattern changes and become the pioneer and model in the development of brand-new business forms, thus enjoying all kinds of first mover advantages. Chinese enterprises may well capitalize on industrial convergence and choose industries with fuzzy boundaries as the direction for their product upgrading to create products and services that will be able to break the time and space constraints of traditional businesses impacted by the product life cycle, thus developing new business growth points, and cultivating independent innovation ability in the process of upgrading. Shan and Luo (2013)after illustrating the technological integration of electronic information industry and manufacturing industry, calculating the degree of integration between China’s electronic information industry and manufacturing industry, and analysing the relationship between technological integration and industrial structure optimization and upgrading, conclude that the technological integration degree of these two industries in China is at a

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Fig. 9 Apple’s inter-sectoral upgrading model

medium level. Technological convergence will have a great impact on the optimization and upgrading of the industrial structure. As an innovative company, Apple is a typical example of utilizing the value network based on fuzzy industry boundaries. The major enterprise able to integrate resources in the value network will become the biggest winner. In line with the trend of fuzzy industry boundaries, Apple freed itself from the idea of unrelated diversification and combined unrelated functions and technologies into its products, ultimately shaping new business growth points and even new industries. As shown in Fig. 9, Apple’s products span many fields regarding R&D and application. In addition, Apple has a consistent record of integrating global resources. Instead of building subsidiaries for production in the host country, Apple has been outsourcing its manufacturing work to factories with the most production cost advantage in the world, to accomplish the lowest cost and the highest efficiency. For example, Apple’s IC separate device suppliers are largely located in the United States, while display devices are mainly provided by manufacturers in Japan, South Korea, and China Taiwan (as shown in Fig. 10). Apple is, by constructing a unique GVC and utilizing worldwide resources, able to control the two most lucrative links—R&D and marketing in the value chain, and maintain light-asset operation (Mao et al. 2013). Mao and Li 2014) believe that the success of Jobs and Apple reflects the importance of intersection and integration of industries, which greatly enhances the value of products and services. It is a typical case company whose product R&D involves multiple technological fields and whose product functions stem from multiple industries. Based on the trend of cross-industrial integration and Apple’s successful practice of inter-sectoral upgrading, and referring to the theory of fuzzy industrial boundaries and the analysis model of value network,

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Fig. 10 Value distribution of Apple products (iPhone) in the GVC7,8,9,10,11

Mao and Li have proposed the inter-sectoral upgrading model of Apple that spans multiple technological fields in the R&D and multiple industrial fields in product application. The model is generalized as S–O-S (several technologies crossed—one company—several sectors crossed). The model analyses business behaviour and results from two aspects: on the one hand, corporate R&D cuts across multiple technological fields. This practice will often enhance the technical content of products and services and provide new functions and new applications for products and services, therefore promoting product innovation and upgrading and even fostering brand-new products. On the other hand, product applications developed by the company straddle multiple industries. The product supported by a cutting-edge technology or the integration of several technologies will garner enhanced added value in its current industrial field. Furthermore, the application of products in multiple industries will bring about the synergy of several industrial value chains, thus boosting the standing of the company’s overall value chain. 7

Before the invention of Integrated Circuits (ICs), all the individual transistors, diodes, resistors, capacitors, and inductors were discrete in nature. Any system can be constructed by using discrete components and also by an IC. 8 Printed-circuit board. 9 Passive components (include resistors, capacitors, inductances, in fact, radio frequency devices such as antennas are also passive components, but they are included in functional devices for simplicity.). 10 Structural parts (include glass cover, metal middle frame, connector, charger, battery, PCB, FPC, etc.). 11 Functional devices (include acoustic devices, antennas, vibration motors, filters, etc.).

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With the development of knowledge economy and the wide application of the Internet and information technology, the boundaries between the three major industries are becoming more and more blurred. Industrial integration has become a significant trend in industrial development, technological change, and economic growth. There are different forms of industrial convergence. Technologies, products and services, enterprises and markets are all converging in a big or small way. In such a context, it is inevitable for more and more traditional enterprises and industries to undergo fundamental transformation and upgrading.

3.3 The Huge Space for Enterprise Upgrading in China (1)

The gap between Mainland China and other countries and regions Chinese enterprises are still a lot behind those of developed countries and regions in performance and competitiveness. The big gap between them also implies that there is big room for progress and upgrading. This point will be discussed in detail in the following. a.

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The Chinese mainland falls far behind China Taiwan in the bicycle industry What is the value space for the upgrading of Chinese industries and enterprises, especially its labour-intensive industries? The data from Taiwan indicate that the product value can be raised by three to six times. The bicycle industry in Taiwan is a model of overall upgrading (the so-called overall upgrading can be simply understood as the upgrading of most enterprises or the major enterprises in the industry). In 2014, the average unit price of Taiwan’s bicycle exported was seven times that of the mainland and four times that of Taiwan itself 15 years ago.12 However, the bicycle industry in Mainland China is large but not strong. The gap between the two places’ bicycle industry is very big. Taiwan’s traditional industries have gradually moved to Mainland China since its reform and opening-up. Almost all labour-intensive and low value-added industries such as shoe-making, electric fans and hardware parts in Central Taiwan have uprooted themselves and settled in the mainland. But the enterprises in Taiwan’s bicycle industry reacted a little differently. Only about 100 of them transferred to the mainland. Many chose to not to leave. In 1991, the number of bicycles exported by Mainland China surpassed that by Taiwan for the first time. Since 2000, both the mainland’s foreign sales and export value of bicycles have surpassed those of Taiwan. However, the bicycle enterprises remaining in Taiwan have achieved overall upgrading by taking various paths.

The author took his research team to Taiwan and collected the data.

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Both Chinese mainland and Taiwan are the world’s important markets and production basis for the bicycle industry. Taiwan’s bicycle industry has undergone two major adjustments and transformations. In 2003, Taiwan’s two major bicycle manufacturers Giant and Merida jointly initiated the formation of “A-Team”, the bicycle industry’s strategic alliance group. Since then, the bicycle industry in Taiwan has achieved extremely remarkable results and gradually accomplished overall upgrading. The performance differences of the bicycle industry between Mainland and Taiwan are as follows: ➀ In the past ten plus years, the average unit price of Taiwan’s bicycles exported has kept an annual increase of 10.78%, while the average unit price of bicycles exported from Mainland is only 1/7 of Taiwan’s. ➁ The bicycle industry of the mainland is large but not strong. According to Secretariat of China Cycling Association, its annual export volume is 16. 7 times that of Taiwan, while its total export value is only 2.1 times that of Taiwan (Chen 2015a, b). ➂ The bicycles from Taiwan have successfully penetrated the high-end and high value-added market in the world while those from the mainland is mainly sold to developing countries. The difference of the textile industry between Chinese mainland and Taiwan In the 1990s, under the pressure of rising costs and increasingly stringent environmental requirements, many textile enterprises moved out of Taiwan one after another. However, those staying fast in Taiwan have successfully transformed and upgraded the textile industry. The textile industry is a traditional labour-intensive industry in China. Its total output value accounts for a high proportion of the country’s GDP. The export of textiles once contributed greatly to the earning of foreign currency. And this industry has also played an important role in the economic development of China. However, with global consumption demand changing, customers have developed increasingly tougher requirements for textile quality and environmental protection. China’s textile industry is still at the bottom of the value chain with poor product quality, low market position, lack of independent brands, and insufficient investment in environmental protection. This situation is seriously restricting the sustainable development of the industry. Textiles used to be the largest foreign currency earning industry in Taiwan. Later, with the change of the environment inside and outside the Island, downstream production which was then regarded as “sunset industry” was in difficulty and obliged to move out. The textile enterprises that have never left Taiwan have realized transformation and upgrading through lean management, green production, and constant innovation. The overall size of the textile industry in Mainland China is far larger than that in Taiwan. However, in terms of the labour productivity index measured by per capita gross output value, in 2014 Taiwan was twice the mainland (Gao 2015).

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c.

The gap between Chinese enterprises and European and US companies For a long time in the past, “made in Germany”, like the now “made in China” was a synonym for poor quality and low-end products. But today, many German companies have become “hidden champions”. The quality of their products is globally recognized to have risen to a very high level. However, Chinese enterprises are still behindhand in this aspect. They stand in urgent need of transformation and upgrading. So, what are the differences between Chinese mainland enterprises and European and US companies? Germany has such many “hidden champions”. The first important thing is that German companies pay great attention to R&D. In Germany, 65% of small and medium-sized companies undertake R&D activities, and 40% of them have dedicated R&D departments. But in China, enterprises invest very little in R&D. Take the mature automobile manufacturers as an example. There are often dozens or hundreds of suppliers of the same parts, there is serious product homogenization, and low price is the major way of competition. The second important factor for the success of German companies is that they put great emphasis on customer needs. For example, Wurth, a screw making company in Germany, commands the world’s highest sales in its industry. In the construction industry, many screws and screwdrivers are often needed, but it is time-consuming to find a set of the right size. For the convenience of customers, Wurth has labelled screws and screwdrivers of the right size with the same colour to facilitate the match. Although this is not high-tech, it is of great value to customers. The last factor is that German companies have the highly respectable “craftsman spirit”. German small and medium-sized companies are very focused and rely on their own internal strength to achieve the best of their products in a niche field rather than outsourcing. However, in China, many small and medium-sized enterprises prematurely carry out diversification because they worry that the market is too small. Often this practice will prevent them from doing well in any product, ultimately leading to ordinary product quality (Xie 2016). Apple is another example. despite the continuous global economic downturn in the past several years, it is still taking the lead in the global market. With a huge new market, it has created, Apple has grown into the world’s largest company by market value. Apple’s products straddle many fields in terms of functions and R&D designs. Through inter-sectoral upgrading, Apple has occupied the high value-added links in the value chain, and have created new markets and huge value space by way of relentless introduction of innovative products. By contrast, Chinese mainland enterprises are still doing low value-added jobs. The value derived from such low-cost labour is terribly low compared with that earned by Apple.

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New opportunities for the upgrading of Chinese manufacturing enterprises a.

b.

The world’s most industrial clusters and the most complete industrial system, which provide an important basis for Chinese enterprise upgrading China (including Taiwan) now possesses the world’s largest number of industrial clusters. For example, in Guangdong Province there are various light industry clusters, such as lighting cluster in Zhongshan, lighting cluster in Foshan, furniture cluster in Lecong, Foshan and toy cluster in Dongguan; and in Taiwan the bicycle cluster and semiconductor cluster are among the well-known ones. As mentioned earlier, China has the most complete industrial system and industrial chain in the world, which constitutes an important condition for the transformation and upgrading of China’s industries and enterprises. Industrial clusters are making big efforts to transform and upgrade by breaking the constraints of developed countries and multinational corporations. For example, the toy cluster in Chenghai, Shantou provides enterprises with abundant resources and supporting industrial facilities. By staging “toy fairs”, it has built an international sales platform, significantly improving the popularity of the cluster both at home and abroad, and creating good business opportunities for its enterprises. Chenghai toy cluster has won a series of honorary titles such as Toy City of China, Industrial Demonstration Unit of Guangdong Province, Characteristic Industrial Base, etc. By expanding sales channels through the development of e-commerce, the regional brand awareness of the cluster has been further improved. The development of the toy industry is becoming a driving force behind the rise of related industries such as industrial arts, packaging, and decoration. Hence, the upstream and downstream parts in the industrial chain of the toy manufacturing cluster have come into existence, facilitating industry upgrading. Excellent Chinese enterprises are actively and successfully competing on the global stage, signifying great opportunities for upgrading Many outstanding Chinese enterprises (including Taiwan enterprises) have been practicing transformation and upgrading, actively competing on the global stage, and improving their competitiveness. The third chapter of this book is devoted to a fairly large number of enterprises upgrading cases. It shows that the case enterprises such as Lacquercraft Group in Dongguan, Han’s Laser Technology Industry Group in Shenzhen, Pacific Textiles Holdings in Guangzhou, Auldey Animation in Guangdong, GEM in Shenzhen have all achieved transformation and upgrading through a variety of ways. Their success confirms the fact that there are great opportunities for the transformation and upgrading of enterprises in emerging economies.

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c.

The fusion of “Internet +” and modern manufacturing industry opens a new prospect for the upgrading of traditional enterprises “Internet +” was first proposed by Premier Li Keqiang in 2015 in China’s two sessions—the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC). It is a new economic form allowing the Internet to play the important role of optimization and integration in allocating production factors. China’s traditional industries can use the innovative tools and advanced modes of “Internet +” to integrate modern manufacturing with technological means such as mobile Internet, cloud computing, big data, and Internet of things to promote the healthy development of e-commerce, industrial Internet, and Internet finance. The “Internet plus” modern manufacturing will be conducive to the integration of the innovative achievements into all sectors of the economic society, hence enhancing innovation and productivity of the real economy, and finally developing a new form of economic development utilizing the Internet as infrastructure and tools. In 2017, the State Council issued further guidance on deepening the Internet plus advanced manufacturing industry and developing the industrial Internet. The guidance points out that the industrial Internet, being the product of profound integration of the new generation of information technology with the manufacturing industry, is increasingly becoming the key support for the new industrial revolution and the important cornerstone of deepening the “Internet plus advanced manufacturing industry”, which will have a broad-based, deep, and revolutionary impact on future industrial development. Under the guidance of the Council’s opinion, enterprises are supposed to act in the following aspects: consolidate network foundation and promote network transformation and upgrading to speed up the rate and reduce the fees; build platform systems, accelerate the construction of the industrial Internet platform and improve operation capacity of the platform; increase industrial support, intensify efforts to break through common key technologies, build industrial Internet standard systems, and enhance capacity in supplying products and solutions; promote integrated applications, improve the innovation and application level of industrial Internet in large enterprises, and accelerate the popularization of industrial Internet applications in small and medium-sized enterprises; develop ecological systems, strengthen security, promote opening-up and cooperation, and boost the ability of international development. Therefore, with the new trend of “Internet +” around, traditional enterprises and industries can capitalize on Internet technology to enhance the structure and level of future development, and to upgrade to higher parts of the value chain. Shangpinzhaipei Home Furnishing Co., Ltd. introduced in the third chapter of this book is a typical case in point.

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Advanced manufacturing modes of developed countries such as Germany’s “Industry 4.0” provide a useful reference for the upgrading of Chinese industries Premier Li Keqiang proposed the “Made in China 2025” plan in his 2015 government work report at the Third Session of the 12th National People’s Congress. He indicated that China should learn from the German “Industry 4.0” plan, strengthen the industrial areas which are expected to be robust, promote the industrial structure to rise to the middle and high ends, and strive to grow from a large industrial country into an industrial power in 2025. “Industry 4.0” is one of the ten future projects identified in the German government’s High Technology Strategy 2020, and has been lifted as the national strategy aimed at supporting R&D and innovation of a new generation of revolutionary technologies in the industrial field. Unlike the assembly line of “Industry 3.0”, which has been used for mass production, the “Industry 4.0” assembly line can achieve mass customization with small production runs and multiple production lots. The smallest production run can go down to one unit. Traditional manufacturing enterprises will become users and beneficiaries of the new generation of smart production technology as well as creators and suppliers of advanced production technology. “Industry 4.0” embodies the conversion from centralized control to tighter decentralized control. The goal is to establish a highly flexible production mode for personalized and digital products and services. In this mode, traditional industrial boundaries will disappear, and various new activity domains and cooperation forms will emerge. The process of creating new value is changing, and the division of labour in the industrial chain will be reorganized. These changing trends provide a useful reference for China’s industrial sectors to break through the deadlock at the lower parts of the value chain or industrial chain and realize transformation and upgrading.

4 The Importance for China’s Traditional Manufacturing Enterprises to Upgrade It has moved up the nation’s strategic agenda for industrial structures to transform to the middle and high ends. This provides the direction for the transformation and upgrading of China’s traditional industries. The transformation to the middle and high ends has two meanings. On the one hand, from the perspective of the GVC, China’s traditional industries or manufacturing enterprises need to free themselves of the constraints of developed countries or multinational corporations, reduce their dependence on the latter, and actively participate in global competition. On the other hand, regarding resources and capabilities, China’s traditional industries or manufacturing enterprises need to gain momentum to move upward through the exercise of endogenously cultivated resources and entrepreneurship and with the help of

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favourable institutional factors in order to crack the medium- and high-end markets, achieve economic growth and profit improvement, and realize transformation and upgrading. The importance of Chinese traditional enterprises’ transformation and upgrading to the middle and high ends can also be illustrated from the following aspects.

4.1 Re-examine the Current Situation and Problems of China’s Traditional Enterprises Against Multiple Perspectives China’s traditional manufacturing enterprises are generally large but not strong. They are at the lower links of the value chain or industrial chain, and have been producing environmental problems. However, in China there have emerged the world’s largest industrial clusters and many excellent enterprises are competing actively and successfully on the world stage. And some industries have even realized overall transformation and upgrading. In addition, in recent years, developed countries are launching the “reindustrialization” strategy characterized by returning to the real economy, which is bound to aggravate the technological blockade of developed countries against China and further impact the survival and development of China’s traditional enterprises. In view of these reasons, it is necessary to provide a full picture of China’s traditional enterprises and industries and bring home “what is it”. By re-examining the development status of China’s traditional enterprises, discussing their problems and crises, and exploring their opportunities and prospects, we hope to provide objective, clear and basic information and material for future transformation and upgrading research.

4.2 Need to Profoundly Explore the Motivation and Mechanism for Traditional Enterprises’ Upgrading to the Middle and High Ends Based on the Practices in China We should explore the motivation and mechanism for enterprises’ moving towards the middle and high ends based on depicting the overall picture of China’s traditional enterprises and industrial transformation and upgrading and by examining the excellent practical experience of emerging economies. Many excellent Chinese enterprises (including Taiwan enterprises) have expanded well beyond their roots as OEM manufacturers, developing into the world’s leading-rate brands or companies. And some industries have accomplished overall transformation and upgrading. Based on their rich experience, an in-depth discussion on the motivation and mechanism for transformation and upgrading will enable us to provide important guidance for traditional enterprises to improve their competitiveness. Therefore, after answering

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the first question of “what is it”, we then need to probe the next question of “why does it change”.

4.3 Need to Pay More Attention to High Quality Development and Diversified Paths of Enterprise Upgrading in the New Economic Situation The new economic situation reflected in the nine new features required to improve the quality of development. The nine characteristics are as follows. First, the stage of wave-style imitation consumption has virtually come to an end, and personalized and diversified consumption is becoming the mainstream. Second, investment opportunities for connectivity infrastructure and some new technologies, new products, new industrial patterns, and new business models are springing up. Third, China now does not have a comparative advantage in low cost, so high-level bringing in foreign capital and products and large-scale going global are taking place simultaneously. Fourth, newly emergent industries, service industries, and small and tiny enterprises are playing an increasingly prominent role. Miniaturization, intelligence, and specialization in production will become the new traits of industrial organization. Fifth, the aging population is growing, surplus people in agriculture are decreasing, factor- and scale-driven development has slowed down, hence economic growth will rely more on the quality of human capital and technological advancement. Sixth, market competition has come to depend upon quality and differentiation. Seventh, the bearing capacity of the environment has reached or approached the upper limit, so new ways of green circular development should be fostered. Eighth, economic risks are under control overall, but it will take some time to resolve the high leverage risks and bubble risks. Ninth, China must solve the problem of overcapacity in a comprehensive way as well as to explore future directions for industrial development by giving full play to the role of market mechanism. By the same token, the six characteristics of “Internet +” provide diversified enlightenments for traditional enterprises’ transformation and upgrading. These characteristics are: inter-industry integration, innovation drive, structure reorganization, respect for human nature, open ecology, and connection with everything. Therefore, enterprises should keep a close eye on diversified paths for transformation and upgrading and solve the problem of “how should it be done”.

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4.4 Learning from the Experience of Developed Countries and Making Suggestions for Enterprise Decision-Making and Government Policy Formulation The advanced manufacturing modes and policy support experience of some developed countries are very helpful to our government in providing support and guarantee for the transformation and upgrading of traditional enterprises. For example, Germany’s manufacturing sector is among the most competitive in the world. This is, to a large extent, due to the country’s concentration on the scientific R&D of innovative industrial products and technologies and the management of complex industrial processes, which is inseparable from the important role played by the German government in creating a good industrial environment. In the environment of global economic cooperation, the Chinese government has been learning from Germany’s advanced experience. At present, the first set of Industrial 4.0 assembly line has been displayed in the 16th China Industrial Expo. This shows that learning from the experience of developed countries will help the government develop right policies to promote the transformation and upgrading of traditional enterprises to the middle and high ends. In addition to governmental support measures, enterprise decision-making also affects the acquisition of economic rent, which will determine whether the enterprise can carry out transformation and upgrading. Whether it is the Ricardo rent generated by utilizing the enterprise’s unique resources or the Schumpeter rent derived from the enterprise’s dynamic ability, the enterprise itself can have an impact on transformation and upgrading on various levels Therefore, after examining the above-mentioned three questions of “what”, “why”, and “how”, we will consider providing suggestions for enterprises and the government.

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Jiang Y (2016) China is entering the golden age of consumption, predicted to become the world’s second consumer market. China News Service. http://finance.qq.com/a/20160513/047275.htm Li J, Ning YM (2010) An analysis of the local competitiveness of the computer industry’s global production network—also of the development of China’s computer industry. Shanghai Econ Res Lian P, Luo HJ (2021) Broaden minds in promoting consumption development. China Business Network. https://www.yicai.com/news/101134379.html, Accessed 13 Feb 2022 Lin HC (2020) The urbanization rate of China’s permanent population exceeds 60%: there is great potential yet to be tapped. Economic Daily. http://finance.china.com.cn/news/20200618/ 5298695.shtml Mao YS (2010) From “made in China” to “sold in China”. China Business Daily. http://kns8.zh. eastview.com/KCMS/detail/detail.aspx?filename=GJSB201005210040&dbcode=CCND&dbn ame=CCND2010&v, Accessed 1 Jan 2022 Mao YS (2014) Export companies must make changes on their own to deal with trade barriers. International Business Daily. http://chinawto.mofcom.gov.cn/article/jsbl/zszc/201410/201410 00760406.shtml Mao YS, Chen T, Li W (2013) Apple: a logical analysis of previous transformation and success. Econ Manag 35(6):62–71 Mao YS, Li T (2014) Cross-industry upgrading and S-O-S model under the background of fuzzy industry boundaries: theoretical refinement based on the successful practice of Jobs Apple. J Sun Yat-Sen Univ: Social Sci Edn 54(2):184–191 Mao YS, Wang JC (2006) Research on independent innovation path based on product upgrading. Manag World 5:14–20 Mao YS, Wang H (2008) The analysis mode of value network based on the blur of industrial borderlines: a comparison with the value chain mode. J Sun Yat-Sen Univ: Soc Sci Edn 1:156– 161+207 Ning JZ (2021) Final consumption expenditure hit record high during recent years and will account for 54.3% of GDP in 2020. State Council Information Office, Sohu. https://www.sohu.com/a/445 201147_561670 Shan L (2020) China’s e-commerce industry overview and data analysis of top live streamers’ hawking products on double 11 in 2020. iiMedia Research. https://www.iimedia.cn/c1020/75203. html Shan YY, Luo W (2013) An empirical study on the effect of industrial convergence on the optimization and upgrading of industrial structure—taking the integration of electronic information industry and manufacturing technology as an example. Enterp Econ 8:49–56 Todorov V (2020) Competitive industrial performance report. United Nations Industrial Development Organization. https://stat.unido.org/content/publications/competitive-industrial-perfor mance-index-2020%253a-country-profiles Wang HR (2015) How does China’s manufacturing surpass the United States, Japan, and Germany? The gap lies in the low quality and added value. China Economic Weekly. http://finance.qq.com/ a/20150609/011976.htm Wang WK (2016) Huawei licenses 769 patents to Apple. Apple may need to pay Huawei patent fees. Nanfang Daily. http://jingji.cctv.com/2016/05/10/ARTIgDLRgIjYFpzEAXRseZRT 160510.shtml Wang YB (2020) South Korea expects to have 20 million tourists in 2020. China Tourism News. https://www.traveldaily.cn/article/135203 Xie DD (2016) Revealing the “hidden champion” enterprises in Germany. Sino Foreign Management. http://bschool.hexun.com/2016-05-05/183679711.html Xu WJ (2020) The number of foreign tourists visiting Japan in 2019 increased by 2.2%, hitting a record high for the seventh consecutive year. People’s Daily Online. http://japan.people.com.cn/ n1/2020/0114/c35421-31547602.html Yu Q (2020) Last year, Chinese tourists spent 113.67 billion yuan in Japan. What is the trump card of Japan’s tourism industry? TPTPost. https://www.traveldaily.cn/article/140017

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Zhang XX (2021a) The manufacturing added value of china has ranked first in the world for 11 consecutive years. Xinhua News Agency. http://www.gov.cn/xinwen/2021a-09/13/content_5637 023.htm Zhang SQ (2021b) China’s industry and informatization development in 2020 released: the added value of the equipment manufacturing industry increased by 6.6% year-on-year. China National Broadcasting Corporation. http://www.ce.cn/xwzx/gnsz/gdxw/2021b01/26/t20 21b0126_36260996.shtml Zhong S (2011) Made in China, don’t be burdened by fake fame. China Youth Daily. http://zqb. cyol.com/html/2011-12/27/nw.D110000zgqnb_20111227_1-05.htm Zhu ZL (2013) China will become the world’s largest consumer goods market within five years. Shanghai Securities News. http://www.cnstock.com/v_industry/sid_zxk/201308/2699672.htm

Chapter 2

Literature Research into Enterprise Upgrading

1 An Overview of Research on Enterprise Upgrading 1.1 Literature Review and Frontier Research The concept of enterprise upgrading was first put forward in the late 1990s. Gereffi (1999) introduces it into the GVC analysis model and believes that enterprise upgrading is a process in which enterprises or economies improve their ability to move towards a more profitable capital- and technology- intensive economy. Poon (2004) also points out that enterprise upgrading is a process in which manufacturers successfully transfer their economic role from producing labour-intensive low value products to producing higher value capital- or technology- intensive products. Kaplinsky and Morris (2002) believe that enterprise upgrading implies that enterprises manufacture better products, manufacture them in a more effective way, or engage in activities that require more skills. Humphrey and Schmitz (2000), from the perspective of the corporate level, suggests that upgrading means enterprises improve their competitiveness and undertake high value-added activities through the acquisition of technical and market capabilities. When enterprises encounter bottlenecks in development, they may change their strategic direction, return to the original place, rethink the situation, and quest actively for transformation direction. There are scholars who understand enterprise transformation as organizational change and reengineering, and emphasize that transformation is the organization’s complete change in cognition, mindset, and behaviour (Blumenthal and Haspeslagh 1994). As enterprises face drastic changes in the business environment, they will quite likely change their organizational structure and objectives, and create a new business model to adapt to the future so that they can overcome the difficulty and continue to survive and develop.

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Research on enterprise upgrading strategy based on the GVC

Porter (1985) suggests that a company’s operations can be considered as a value chain consisting of various value creation activities such as design, production, sales, distribution, and support activities. The purpose of a company is to create value. The value creation process involves two categories of activities: primary activities and support activities. These distinct but interrelated operations constitute a dynamic process of value creation, that is, the value chain. In the context of economic globalization, the segmentation of production process and the international dispersion of production tasks and activities have led to the gradual formation of borderless production systems (UNCTAD 2013) and the development of a global production network among countries (regions) participating in the organization of production (Ernst and Kim 2002; Ernst 2004). Consequently, a GVC based on product value creation and realization has also come into existence among participating countries (regions) (Gereffi 1999; Humphrey and Schmitz 2000). The GVC refers to a global multinational enterprise network organization that contains the whole process from procurement and transportation of raw materials, to production and sales of semi-finished products and finished products, and to final consumption and recycling to realize the value of products or services around the world, (UNIDO 2002). It involves all participants, organizations of value creation activities, such as production and sales, and the value and profit distribution mechanism, and sustains the ability and efficiency of enterprises through automatic business processes and the interaction of suppliers, competitors, partners, and customers. The GVC concept provides a network-based method for analysing the geographical and organizational characteristics of international production, reveals the dynamic traits of global industries, and demonstrates where the value lies and who distributes it (Wang and Hou 2007). According to the source of driving forces, GVCs can be classified into producer driven and buyer driven GVCs (Gereffi and Korzeniewicz 1994; Ponte and Sturgeon 2014). In the producer driven GVC, the major strategic links are R&D and production. Producers represented by multinational manufacturers from developed countries have established a vertical labour division system of global production network through investment, while developing country enterprises become their suppliers through joint ventures, cooperation or M&A; The buyer driven GVC refers to the international commodity circulation network organized by buyers represented by international brand manufacturers and international retailers through global procurement or OEM and ODM (Gereffi 1999). In the international labour division system, developed countries are mainly in the upstream and downstream parts of the value chain and control high value-added R&D and marketing links. Most developing countries are using their own cheap labour and low-cost manufacturing capacity to participate in the GVC by undertaking the manufacturing of low-end products. Figure 1 illustrates the GVC constructed by developed country firms for integrating global resources. Foreign scholars began their study on enterprise upgrading mainly from the perspective of core competitiveness and dynamic capability (Zhang 2004; Zheng

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Fig. 1 Distribution of GVC links. Source Zhang and Dai (2007)

and Chen 2020). Bell and Albu (1999) believe that to study enterprise upgrading, one first needs to have a good understanding of the concept of core competitiveness and analyse the enterprise’s competence that is applicable, valuable, and difficult to imitate and able to provide the required value for final consumers; then one should give emphasis to the idea of dynamic capability (Qin et al. 2017). Dynamic capability refers to the organization’s ability of learning, adaptation, change, and transformation developed during a long period of time. It emphasizes that enterprises must strive to cope with the changing environment and update and develop their own capabilities. The methods to enhance and update capabilities are mainly through learning, acquisition of skills, management of knowledge and know-how (Teece et al. 1997). For example, Cao (2006) studied the upgrading of industrial clusters from the perspective of dynamic capability. He believes that the dynamic capability of industrial clusters is largely composed of identifying capability, learning capability, network capability and integration capability. However, the perspectives of core competence and dynamic capability put more emphasis on the role of internal capabilities played in enterprise upgrading, and often ignore their external environment and their relationships with other firms. The GVC framework is based on the perspective of global network. It is a theory applied to the study of international division of labour, regional economic development, industrial upgrading, and enterprise upgrading. It offers a new clue to the analysis of enterprise upgrading. The GVC framework is also the major theoretical foundation for foreign scholars’ research on enterprise upgrading. Based on the research into Asian textile and garment industry, Gereffi (1999) concludes that upgrading occurs at four levels: ➀ within enterprises—upgrading from producing cheap to high-priced goods, from simple to complex products, from small to large orders; ➁ within inter-firm networks—upgrading from producing standardized products to personalized products; ➂ within local or national economies— upgrading from simple assembly to complex OEM or even OBM production,

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entailing greater degree of forward or backward links locally or nationally; ➃ within regions—moving from bilateral, asymmetric, and inter-regional trade to more welldeveloped intra-regional division of labour and cooperation in all value creation activities along the commodity value chain. Based on Gereffi’s research, Humphrey, and Schmitz (2000, 2002) put forth four types of enterprise upgrading from the micro perspective: ➀ process upgrading. Through the reorganization of the production system, the input can be transformed into output more efficiently; ➁ product upgrading. This indicates launching new products or improving existing products faster than competitors, and increasing the added value of products; ➂ functional upgrading, which refers to obtaining new functions or giving up existing functions, such as climbing from production up to more profitable value chain links such as design and marketing; ➃ intersectoral upgrading, which implies applying the knowledge in one sector to another. This upgrading classification has been accepted by many scholars. Kaplinsky and Morris (2002) further explored the internal relationship between the four types of upgrading. Through case studies, they found that many enterprises showed a similar step-by-step development route in the upgrading process. That is, enterprises in general start from process upgrading, then gradually realize product upgrading and functional upgrading, and finally achieve intersectoral upgrading. This gradual upgrading mode can be confirmed by the industrialization process of many East Asian countries or regions. With research going deeper, scholars have successively identified many different upgrading paths, such as “OEA → OEM → OEM+” and “OEM → ODM → ODM + OBM”. However, some scholars point out that globalization and technological breakthroughs will enable companies to break through the conventional upgrading trajectories (Zhang 2004). Later, some scholars believe that compared with the other three types of upgrading, functional upgrading will bring more lasting and stable competitive advantages because competition is much fiercer in the production link than in the links that require intensive knowledge and profound organization and coordination ability (such as product design and innovation, supply chain management, distribution, and retail, etc.). And functional upgrading can also reduce the vulnerability in production specialization (Giuliani et al. 2005). Amsden (1989) believes that for enterprises in emerging industrial countries (regions), the path to upgrading and independent innovation is to move from OEM to ODM, and finally to OBM. Zhu et al. (2006) suggest that OEM enterprises may follow three ways to achieve upgrading: the first is developing technology so to shift from OEM to ODM; the second is building brands. The enterprise begins with OEM, then moves to ODM, and later to OBM or it may omit the middle phase, and upgrade directly from OEM to OBM; the third is undertaking diversified OEM based on technological connectivity through which it moves into industries with greater value-increasing potential. Yu and Lv (2006) put forward a relatively wide selection of paths for Chinese OEM enterprises’ strategic transformation. For example, companies may transform from OEM to ODM and to OBM, conduct reverse OEM, carry out diversification, or climb to upstream links of the value chain. However, OBM is not the goal of enterprise transformation and upgrading. It is theoretically

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wrong to consider OBM as the highest level of industrial vertical upgrading (Chen 2012). Many enterprises have already enjoyed considerable brand awareness, but they still engage in OEM or ODM, for the purpose of capitalizing on their production capacity or expanding the market. Becoming the national and/or international standard setter is the goal some OBM enterprises seek after, which can greatly enhance their international competitiveness and promote their continuous upgrading (Mao 2010). The contingency theory holds that there is no universally-accepted model for enterprise upgrading. Amsden (1989) believes that each enterprise will adopt different operation strategies for actual innovation and upgrading according to the specific situation it is faced with. Sturgeon and Lester (2004) emphasize that the OEM enterprise’s capabilities and factors in the external environment determine what strategy it will take for upgrading. Enterprises in GVCs have different modes of governance and their upgrading strategy depends on their position in the GVC. Through a comparative case study, Mao et al. (2009) concludes that enterprises with different capabilities and organizational preparations will choose the upgrading strategy that is suitable for them. Chen (2012) believe that enterprises should adopt differentiation strategy for their upgrading Regarding their own capabilities and industry characteristics. The producer driven industry ought to put the focus on technological advancement, the buyer driven industry should develop marketing flair, while both producer and buyer driven industry (the hybrid type) need to emphasize both technology and the marketing side. (2)

Research on the motivation of enterprise upgrading

Scholars at home and abroad mostly investigate motivating factors of enterprise upgrading from both internal and external aspects. Studies about internal determinants are mainly based on resource-based view, while research on external determinants is largely built on the contingency theory. Wang et al. (2008) think that enterprise transformation is driven not only by exogenous drives, such as changes in the external environment and corporate status change in the industry, but also by endogenous drives, such as attraction of other industries or resource redundancy. Mao (2010) points out that Chinese enterprises are under several kinds of pressure: adjustments to export tax rebate policy on processing trade, appreciation of CNY, price rises in raw material, low added value of products, as well as trade and technical barriers such as anti-dumping, quality, and environmental certifications. For developing country enterprises embedded in GVCs, there are three driving forces behind their upgrading: the agglomeration effect of enterprise clusters, the promotion of GVC leaders, and the technological innovation of the enterprise. While agglomeration effect indirectly facilitates enterprise upgrading, the latter two directly promote it (Gong 2010). Barrientos et al. (2016) asserts that when facing big unexpected external risks, enterprises will embrace upgrading to adapt to drastic external changes (Barrientos et al. 2016). The resource-based view puts the emphasis on the source of a firm’s competitive advantage. Enterprises can obtain competitive advantage through the allocation of its valuable, scarce, and inimitable resources (Barney 1991). The possession of key

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resources and the acquisition of key capabilities makes the foundation for enterprise upgrading (Makadok 2001). Key resources include accumulated capital (Forbes and Wield 2004) and human resources (Carayannis and Laget 2004). Enterprises that have successfully upgraded often have sufficient funds. With abundant capital, they can invest in R&D, and publicity and promotion. As a result, they are very much likely to improve the level of technological innovation and mould the brand image of their products, thus finally establishing their own brand. In addition, human resources are also a key factor in enterprise transformation and upgrading. Successfully upgraded enterprises often have in-house training centres. They also cooperate with universities and outside training establishments to develop their staff’s technical and management talents. Meanwhile, they attach importance to the introduction of external talents, especially management and technical talents, to enhance the quality of their human resources. The key capabilities of enterprises include independent innovation capability and marketing and service capability (Amsden 1989; Gereffi 1999). Independent innovation capability is embodied in the achievements of independent innovation, the ability of innovation management, the status of R&D organizations, the profile of R&D personnel, and the collaboration between industry, university, and research institutions. Successful upgrading requires strong independent innovation capability. Only through upgrading and continuous improvement in product technological content and brand image can an enterprise avoid the cruel cost and price competition (Reddy et al. 2020). Marketing and service capability is reflected in sales and service networks, the size and strength of sales force, and publicity and promotion activities etc. Heavy investment in marketing and promotion can contribute to the rapid development of OBM business (Song and Wang 2017). The contingency theory considers the influence on enterprise upgrading of external environment changes and internal entrepreneurship. On the one hand, great market potential, increasingly mature consumers, and more institutionalized market competition have developed broad external space for enterprise upgrading. And the government is making great efforts to create a good external environment for technological innovation, which will help promoting the rapid upgrading of enterprises (Gans and Stern 2003; Vergrat and Brown 2006). On the other hand, entrepreneurship and brand awareness can accelerate the process of establishing independent brands. The ambition of enterprises is an important factor affecting the transformation and upgrading of enterprises. It is the external expression of entrepreneurship and corporate culture (Cyert and March 1963). It also includes the entrepreneurial spirit of innovation, initiative, passion and perseverance, strong sense of responsibility for the nation and employees, strong sense of independent IPRs, and brand awareness (Winter 2000; Hu 2007), which will influence the enterprise’s choice of upgrading paths. In addition, the good relationship with cooperative enterprises is conducive to low-end manufacturers’ “learning by doing” and “learning by using” (Carayannis and Laget 2004; Mao and Wang 2006; Fritsch and Holger 2015). The above conditions provide a variety of templates and paths for enterprises to implement upgrading. In the era of economic globalization and the rapid development of information technology and the Internet, it is desirable to apply the contingency theory to the

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analysis of enterprise upgrading. Now the theory is widely used in the research on enterprise upgrading. Table 1 lists the relevant literature about internal and external factors of enterprise upgrading. (3)

Research on the measurement of enterprise upgrading

Kaplinsky and Morris (2002) have first distinguished and explained upgrading practice and upgrading performance from the GVC perspective. As shown in Table 2, some empirical studies on enterprise upgrading mostly use the innovation and upgrading indicators provided by Kaplinsky and Morris (2002) or the indicators adjusted in accordance to these indicators. Mao and Wu (2009) have summarized the measurement standards of enterprise upgrading based on the GVC theory, core competence theory and dynamic capability theory, and by referring to the meaning of upgrading (see Table 3). Gong (2007, 2010) suggests that upgrading performance of enterprises in GVCs includes three aspects: enhancement of core competence, rise of status in the value chain, and improvement of social benefits. Based on these aspects, he advances an index system for evaluating upgrading performance, which contains three primary indicators and 11 secondary indicators. However, some of these indicators lack direct connections with enterprises. In addition to performance, some scholars have studied the upgrading process and the risks associated with it. Gereffi (1999) believes that the upgrading of local enterprises in developing countries is a rapid and natural process: importing spare parts for assembly—independently completing the whole production process—independently developing and designing products—selling products with independent brands in Table 1 Internal and external factors of enterprise upgrading First level item

Second level item

Related research

Internal factors influencing upgrading

Corporate resources

Barney (1991); Wang and Hou (2007)

Corporate capabilities

Barney (1991); Teece et al. (1997); Mao et al. (2009); Song and Wang (2017); Zheng and Chen (2020)

Entrepreneurship

Miller and Friesen (1983); Chen (2008)

Market changes

Mao and Dai (2006); Zhang (2006); Barrientos et al (2016)

GVC environment

Humphrey and Schmitz (2000)

Industrial cluster environment

Bell and Albu (1999); Liu (2009);

Government policy

Liu and Luo (2008); Zhou and Du (2012)

Institutional environment

Mao et al. (2009); Zhang et al. (2019)

External factors influencing upgrading

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Table 2 Enterprise upgrading practice and upgrading performance Type of upgrading

Upgrading practice

Upgrading performance

Within value chain links

R&D; improvement in logistics or quality; introduction of new machines

Cost reduction; improvement of quality and distribution efficiency; enhancement of profitability; increase in the number of patents applied and obtained

Between value chain links

R&D; improvement in supply chain management process and learning; enhancement of e-commerce capability

Cost reduction and quality improvement; shorter time to the market; better profitability through upward movement along the value chain; increase in the number of patents applied and obtained

Process upgrading

Product upgrading Within value chain links

R&D; improvement in supply Rising proportion of new product chain management process and sales; growing sales of branded learning; enhancement of products e-commerce capability

Between value chain links

Expansion of design and marketing departments; development of new products promoted by strengthened ties between departments

An increase in brand products; a rise in the unit price of products at the same market share

Functional upgrading

Undertaking new activities with higher added value (such as ODM / OBM)

New key functions added to; profitability boost; improvement in employee skills and salary

Intersectoral upgrading

Entering and operating in a Profitability boost; increased new value chain; Adding to proportion of product sales in new new functions in the new value markets chain

Source Kaplinsky and Morris (2002)

regional or global markets. However, some scholars represented by Schmitz (2004) believe that enterprises in developing countries are restricted by the value chain governance model, which makes them difficult to have this “automatic” upgrading process. As enterprises in developing countries are often embedded in GVCs driven and controlled by large international buyers or multinational corporations, they are obliged to engage in low-end manufacturing tasks, it is very hard for them to obtain independent innovation ability, let alone climb to the upper ends of the value chain. Enterprises captured and locked in GVCs tend to make rapid progress in production, but they rarely improve in non-manufacturing areas. Zhang (2006) agrees with Schmitz that although enterprises incorporated into GVCs have opportunities to learn and reinforce themselves, the road to the destination of upgrading is bumpy.

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Table 3 Theoretical basis and measurement standards of enterprise upgrading Theory

Implications of upgrading

Measurement of upgrading

GVC theory

Process upgrading: converting inputs into outputs more efficiently through the reorganization of the production system

Production efficiency and product quality enhancement

Product upgrading: introducing advanced production lines, launching new products faster and increasing products’ added value

Improvement of existing products, rapid launch of new products, shortened product life cycle, increased product technical content, stronger the product function, and higher product unit price

Functional upgrading: developing new functions or discarding existing functions

Moving from production to design and marketing, for example, from OEM to ODM and OBM

Intersectoral upgrading: applying More product functions, the knowledge derived from one increased product technical industry to another content, and higher product unit price Core competence theory

Formulating a unique competitive strategy that is difficult to replicate and providing value for end consumers

Development of core competitiveness in technology, talent, brand, and management

Dynamic capability theory Ability gradually developed to Acquisition of skills, learn, adapt, change, and management of knowledge and transform and ability to respond know-how, and learning to the changing environment and to conduct updating Source Mao and Wu (2009)

Embedding into GVCs brings opportunities and poses difficulties for the upgrading of developing country enterprises. Upgrading risks of industrial clusters in GVCs can be categories into two types: endogenous risk and exogenous risk. Endogenous risk refers to internal obstruction of upgrading, reflected in the lack of motivation for innovation and upgrading, itself-locking in low value-added links, overemphasizing external linkages, and ignoring the construction of internal network relations inside industrial clusters. Exogenous risk refers to external obstruction of upgrading, embodied in the fact that the upgrading of developing country industries and industrial clusters is being carried out in GVCs controlled by developed country firms, who will try every means to restrict and block their upgrading activities, especially those that infringe on the lead firms’ core competitiveness (Knorringa and Schmitz 2000; Sturgeon and Lester 2004).

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Zhou and Du (2012) believes that the success of enterprise transformation and upgrading depends to some extent on the policy and legal environment the enterprise is faced with, its transformation positioning, the force and speed of transformation, the change of its employees’ mindset and the right allocation of human resources and financial resources. If these factors are not effectively coped with, they will turn into potential risks to its transformation and upgrading. He further indicates that the major risks OEM enterprises are exposed to come from the pressure of overcapacity, falling prices of products, fierce red sea competition, and the mismatch between innovation ability and production capacity. Chen (2012) through the empirical analysis of 221 listed manufacturing companies in China, conclude that due to weak capabilities in technology and marketing, most Chinese enterprises are unable to achieve higher-level upgrading and therefore, are “locked” in low value-added manufacturing and processing links. Because of difficulties in acquiring core technology and very limited learning opportunities, they are caught in a vicious circle of inability to upgrade and the dilemma of being locked in the low parts of the value chain. Therefore, the transformation and upgrading of enterprises in developing countries is conditional on risk-taking entrepreneurial spirit and active cultivation of core competence in the process of participating in the division of labour in GVCs. Zhao and Xu (2013) examine the upgrading performance of enterprises from several aspects: expansion to R&D, brand building, extension to sales service, movement to the industry’s upstream and downstream activities, enterprise management transformation and green transformation. Zheng and Chen (2020) believe that enterprise upgrading will eventually be reflected in the improvement of product added value and sales profit margin. (4)

Co-competition mechanisms, industrial clusters and enterprise upgrading

The economic globalization since the 1990s has resulted in increasingly volatile domestic and foreign markets in which enterprises compete fiercely for survival and development. Now more and more managers realize that only competition without cooperation can no longer effectively maintain their long-term development. Enterprises must adjust their business strategy in accordance to the changes of the external environment and the situation of internal resources. Meanwhile, they also need to pursue both competitive and cooperative relationships with other enterprises. The emergence of strategic alliance signals those enterprises are shifting from antagonistic competition to co-competition (cooperation and competition). The cocompetition relationship between enterprises in industrial clusters is in stark contrast with the traditional competition model that competitors should never exchange information with each other. It allows for information sharing, hence, reducing transaction costs and information asymmetry between enterprises in the industry and facilitating value creation and common development (Muller and Peres 2018; Kong and Zhang 2019). Though the concept of co-competition was first put forward by Ray Noorda, CEO of Novell in 1989, it was not until 1996 that this idea was introduced into the domain of management when Brandenburger and Nalebuff (1996) advanced the concept of co-competition in their book co-competition. Seeing from the perspective of strategic

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model, Lado and Hanlou (1997) argue that co-competition is an organic and unified rent-seeking behaviour and a strategic orientation for enterprises to achieve dynamic balance between competitive strategy and cooperative strategy. Loebecke et al. (1999) define co-competition as a both competitive and cooperative relationship between organizations. Their cooperation, such as “knowledge sharing” between them, will increase partners’ knowledge and therefore, improves their competitiveness. Dagnino and Padula (2002) develop the concept of “co-competition advantage” meaning that enterprises co-create interests and profits and held that the game between enterprises is neither “zero sum” nor “positive sum” game, but “variable positive sum” game. Galvagno and Garraffo (2010) believe that when direct competitors have both high degree of resource similarity and market identity, there is potential for them to develop a co-competition relationship. By pooling resources, they can achieve economies of scale and market control. Dagnino and Padula (2002) divide the co-competition relationship into two basic modes according to two dimensions: the number of enterprises and the number of links in which an enterprise performs activities in the value chain. This classification method gives birth to four categories of co-competition: the dyad co-competition between two enterprises and the network co-competition among multiple enterprises; the simple co-competition among enterprises in the same link and the complex co-competition among enterprises in different links. Dagnino and Padula (2002) also put forward the idea of “value creation of co-competition system”, involving economic value stemming from reduced costs and increased benefits, knowledge value derived from increases in knowledge stock, and implying that co-competition strategy can bring significant economic and knowledge value to clusters of different industries, enterprises in the same industry, functional departments, or employees in an enterprise. Concerning the performance of co-competition relationship, Gnyawali and Park (2009) believe that co-competition among small- and medium-sized enterprises can bring forth economies of scale, reduce uncertainty and risk, and accelerate product development; However, the co-competition between enterprises will also incur certain costs, including technological risks, management challenges, and the loss of control. (5)

Enterprise upgrading experience and case study

Enterprise upgrading is majorly a unique practice of emerging economies in recent years, both domestic and foreign scholars mostly focus their study on emerging economies and traditional manufacturing industries. In terms of questionnaire research, the number of research and the scope covered are relatively small. As mentioned above in the literature overview, there were only 12 questionnaire empirical studies on enterprise transformation or enterprise upgrading in CSSCI and only 8 in SSCI in the 14 years from 2002 to 2015. Representative studies majorly probe the motivation of enterprise upgrading. Zhang and Zhuo (2010) based on the questionnaire survey of 99 multinational purchasers, China’s domestic purchasers, and manufacturers in seven industries, study the relationship between GVC governance mode, enterprise upgrading, and enterprise performance. Exactly they examine the degree of importance and support purchasers have attached to the upgrading of OEM enterprises under different GVC governance modes, and the

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upgrading of OEM enterprises, and the connection between GVC governance mode and domestic OEM enterprises’ performance. Zhou and Du (2012) select a sample of 500 manufacturing enterprises from Kunshan City, Jiangsu Province, which is significantly characterized by international OEM manufacturing, and empirically study the possible influencing factors of OEM enterprises’ transformation and upgrading. Gu and Yang (2012) have investigated 134 enterprises in Jiangsu Province. They explore the impact of external resources in the process of enterprise transformation against the background of the global financial crisis and the moderating effect of senior management heterogeneity on the relations between external resources and enterprise transformation. After a questionnaire survey of 369 foreign trade enterprises in Guangdong Province, Zhou and Yang (2013) adopt structural equation model to analyse the difficulties in the transformation and upgrading of foreign trade enterprises in this Province, their willingness to carry out transformation and upgrading, and the supporting policies they need. With respect to case studies, though there is a quite large number, they are not sufficient overall. Representative case studies focus on exploring the paths of enterprise upgrading. Mei et al. (2005), based on their research into the 20-year upgrading and development process of Taiwan’s PC industry cluster, they suggest that OEM enterprises in mainland China should follow the example of their counterparts in Taiwan’s PC industry. They should first actively embed in GVCs, then gradually develop from OEM to ODM and OBM, meanwhile, change from low-cost orientation to innovation orientation, and through the accumulation of capital and technology, gradually climb up to the high-end links of the value chain, and finally leap from product and process upgrading to functional upgrading. Huang et al. (2006) systematically analyse the upgrading obstacles faced by China’s textile and garment enterprises, and put forward three upgrading paths based upon basic technical capability, market expansion capability and the combination of these two. Yang (2010) compares and analyses the core capabilities, problems and upgrading strategies of Giant, Galanz and Wanxiang Group in the three stages of OEM, ODM and OBM. She finds that cooperative R&D is an effective avenue for small- and medium-sized enterprises to go further beyond the OEM stage; the entrepreneurship of senior leaders is the key factor to develop from ODM to OBM and IBM (international brand manufacturing). Mao et al. (2009) makes a comparative case study of two OEM enterprises, Donlim Kitchen Group and Jasic, both of which have pursued different upgrading strategies. They aim to explore the impact of institutional environment and organizational resources and capabilities on the upgrading process of OEM enterprises.

1.2 Review of the Research (1)

Summary

Enterprise upgrading is a popular phenomenon in emerging economies in recent years. China (including Taiwan) have many successful and failed enterprise

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upgrading cases, which provide unique research materials for this book. However, our literature research shows that before 2015 the number of research papers on enterprise upgrading both at home and abroad was quite small and foreign researchers obviously paid inadequate attention to this actively ongoing practice in emerging economies (Mao and Zheng 2016). However, since then, the number of studies has increased significantly. Many scholars have conducted in-depth research into upgrading motivation, the GVC, strategies, upgrading risks and so on; some others have studied the four types of upgrading: process upgrading, product upgrading, functional upgrading, and intersectoral upgrading. This upgrading typology is fundamentally different from the upgrading path. For example, most existing studies on enterprise upgrading paths are based on the dynamic capability view and the GVC framework. They only summarize enterprises’ general growth trajectories and point out their traditional path of moving from OEM to ODM or OBM. They have not yet advanced influential theoretical views. The research quality must be improved. A lot must be done in how to conduct research Regarding China’s specific situation. With respect to research methodology, both foreign and domestic scholars accentuate empirical research and have applied empirical methods to their studies on enterprise upgrading. but their work is still in the initial stage. Many problems need resolution. For example, there is neither accepted scale for the measurement of enterprise upgrading nor a set of quantifiable evaluation criteria; extant case studies only examine some enterprises in some industries, enterprise upgrading in many other industries are not covered at all; research into industrial clusters is rather inadequate; and there is little research about the overall industrial upgrading in China. A second shortage is that existing case studies lack depth, neither probing the unique qualities of case enterprises, nor identifying the specific upgrading paths or making theoretical thinking and discussion. In addition, existing case studies mainly investigate successful enterprises. There is a lack of research on upgrading failures, especially there is no study comparing successful upgrading and failed upgrading cases. Therefore, it is necessary to further explore the influencing factors and mechanisms of enterprise transformation and upgrading by comparing successful and failed cases to develop upgrading theories that are more explanatory and applicable. (2)

Rethinking the GVC theory and exploring and developing upgrading theories based on the practice of Chinese enterprises

The GVC theory has been widely applied in the research on enterprise upgrading. However, the value chain (VC) advanced by Porter in 1985 originally only reflected the composition of value-creation activities. The GVC concept developed from the VC idea is intended for the description of corporate activities that are scattered around the world, not for the explanation of enterprise upgrading. Few studies use the GVC concept to show the added value of different GVC links. So, it is unable to measure the effect of enterprise upgrading and its ability in explaining enterprise upgrading in emerging economies is very limited. The smiling curve model proposed by the Taiwan entrepreneur Shi Zhenrong (2010) can more truly embody emerging economy enterprises’ upgrading practice

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and their efforts to move to higher value-added links of the value chain. It vividly portrays the corresponding relationship between value chain links on the horizontal axe and the added value on the vertical axe. Therefore, it can better explain the phenomenon of enterprise upgrading in emerging economies. There is need to rethink the GVC theory and base our research on enterprises’ upgrading practice in China. Only in this way is it possible to make theoretical contributions and provide valuable policy suggestions.

2 The Smiling Curve, the GVC and Related Research 2.1 The Smiling Curve and the Antithetic Smiling Curve (1)

The smiling curve

As pointed out earlier, the smiling curve—a visualized GVC—was proposed in 1992 by Shi Zhenrong, founder of Acer computer in Taiwan. It is a curve with the two ends facing upward and consisting of three major parts: R&D, manufacturing, and sales. The curve’s two ends, that is, design and sales, command the highest added value, while manufacturing in the middle part has the lowest added value. For example, Fig. 2 shows the value distribution of Apple’s iPhone in the GVC, which is a schematic diagram of the smiling curve. This model has been widely used. Later, it has developed into the “industrial smiling curve” and is regarded as an important reference by Taiwan’s different industries in formulating medium- and long-term development strategies. Kaplinsky and Morris (2002) and Humphrey and Schmitz (2002) by analysing the logic behind the smiling curve from the perspective of value chain

Fig. 2 The new smiling curve formed by superposition

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governance, suggest that leading multinational corporations occupy the key links at the two ends of the value chain because of their own proprietary advantages and obtain most the value through GVC governance, thus determining the profit distribution of all links in the GVC. Some scholars have further developed the smiling curve and examined its future development trend. They believe that the added value of different industries is different. The higher capital- and technology-intensity the industry has, the higherpositioned the industrial curve is and the greater the curvature. Ji (2007) thinks that with the emergence of “modular” technology, the intensification of competition and the changes in the world’s political and economic situation, the curve radian is becoming steeper. Hence, the profit space of Chinese enterprises in the link of manufacturing is getting smaller and smaller. The added value in the same industry varies with the development stage of the industry. The smiling curve may not exist in the whole process of a product’s life cycle and its shape in each stage may also be different. The smiling curve is not a universally applicable theory. Value distribution varies with the industry and the market structure of an industrial chain’s different links. All these show that enterprises should not blindly pursue R&D or sales. Many Chinese enterprises still lack strength. If they are eager to expand to the R&D and marketing links with high added value regardless of their actual capability, they may not be able to maintain their core viability in product manufacturing. However, it is generally accepted that the smiling curve can be used to illustrate the general characteristics of profit distribution in each link of the value chain. Therefore, in order to get out of difficulties, Chinese manufacturing enterprises must climb up to the two ends of the smiling curve, that is, they not only must enhance upstream capability in technology, R&D, and product design, but also to build brands and expand downstream marketing channels, logistics and distribution, and after-sales service etc. (Wang and Li 2015; Hu and Wang 2016). (2)

Introduction of a spatial dimension to the smiling curve—a graphical GVC model

As discussed in the first section of this chapter, the GVC provides a web-based method for analysing the geographical and organizational characteristics of international production. If the spatial dimension (location) is introduced to the smiling curve and used as the abscissa of the curve, a value creation activity on the smiling curve will correspond to a country (region) or an enterprise in a country. This addition of location to the smiling curve gives birth to a graphic GVC model. This model can be applied to analyse the country distribution (division of labour) of each activity link along the GVC, as shown in Fig. 2.1. It can also be used to examine the country distribution of each business link of a specific industry or an enterprise or a product, so it has significant application value. For example, we can use this model to describe the basic pattern of Apple’s global integration of resources, as shown in Fig. 2.2. Added value varies with the technology, which is displayed in Fig. 2.2 as Technology 1, Technology 2, and Technology 3 on the left; Different industry applications also have different added value, which are marked as Industry 1, Industry 2, and Industry 3 on the right. When technology is

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applied to a single industry, its added value is only on one curve. The curve on the top in Fig. 2.2 indicates that it comes from the superposition of the three smiling curves (Suppose R&D spans three technologies/fields and applications also span three industries). This smiling curve is generally above the other three, that is, the added value is significantly higher than the initial added value. Technological innovation is an effective way for enterprises to achieve sustainable development. Through constant innovation, the smiling curve of an enterprise can move up from Technology 1 in Fig. 2.2 to Technology 2 or Technology 3. Based on its core technology, Apple keeps expanding product functions and improving product performance. By applying the core technology to multiple product domains and market segments, Apple has successfully replaced existing product markets and developed new markets. When Jobs returned to Apple, he increased R&D investment, strengthened core technology, and expanded application fields, thus, generating new profit growth. After the success of Apple II, Macintosh, and iPod, Apple creatively applied human–computer interaction technology to the smart phone. More than 200 patents and technologies were applied to the iPhone such as multi-point touch screen, gravity sensor, light sensor, and even three-axis gyro. These technologies have together contributed to an extremely popular product in the market. In 2010, Apple extended human–computer interaction technology to the tablet computer and launched iPad, creating new market demands. Product function expansion means adding new functions and new elements to the original ones so that the product has more functions than their traditional ones with its application scope expanding and application occasion increasing, thus, leading to higher user value and added value. As a result, the enterprise’s smiling curve moves from Industry 1 in Fig. 2.2 to Industry 2 or Industry 3. Apple is constantly committed to expanding product functions. Its products straddle a variety of sectors, such as traditional communication, computing application, culture, entertainment, media, finance, securities, art and so on. For example. iPhone is the upgraded version of iPod. It combines the functions of mobile phones, widescreen iPods, Internet, cameras, personal digital assistants, media players and wireless communication devices. Through iPhone’s embedded download platform (App store + iTunes Store), users can also fully enjoy music, film and television entertainment and other services closely related to people’s work and life. iPad also integrates functions such as games, video, reading, network, photography, GPS navigation, electronic compass, and even voice call. And its portability has been greatly improved. By expanding product functions, Apple’s products in the original value chain have gone up. In the process of upgrading its products, Apple conducted R&D that spans multiple technological fields, resulting in the superposition of Technology 1, Technology 2 and Technology 3 at the left end of Fig. 2.2; since product applications span multiple industries, there is a superposition of Industry 1, Industry 2 and Industry 3 at the right end of Fig. 2.2. Because of the superposition of the left ends and that of the right ends, the entire smiling curve has moved up. Apple’s MacBook, iPhone and iPad are designed to share many parts and components, including human–computer interaction and other technologies to obtain some economies of scope and reduce the costs of R&D and labour. Due to the sharing

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of parts and components, products are produced in larger volumes, hence, creating economies of scale. Every year, Apple launches various new products based on different product lines. Just consider iPhone. In 2007, Apple first introduced iPhone to the market that combined a creative phone, a visual iPad, and online media tools. New products can bring forth higher revenue. Meanwhile, Apple’s production and assembly are outsourced and its products are stored in suppliers’ warehouses, which in turn speeds up the inventory turnover of products, finally achieving economies of speed. From 2001 to 2011, Apple’s inventory turnover remained no more than one week. This competitive advantage based on the time factor enables Apple to gain consumer loyalty, lower production cost, and rapid growth opportunity. Because of the convenience of the Internet, many industries converge in Apple’s products. The more people adopt Apple’s application system, the more independent software developers will introduce applications software; the more applications, the more likely people are to use Apple’s products. The integration of multiple industries has brought greater differentiation and higher added value to Apple’s products, reduced dramatically the costs of operating in a variety of industries, and consolidated Apple’s leading position in the market. The cost and the corresponding location of each link of the value chain can also be indicated in Fig. 2.2 to obtain the product cost structure and regional distribution. (3)

The antithetical smiling curve with respect to the introduction of the cost dimension

Enterprise upgrading is not only reflected in increased added value and profit level of corporate activities, but also in improved production efficiency and input–output ratio. Enhancing manufacturing capacity and reducing various inputs to reduce costs can also enhance value. The antithetical theory of production and cost (i.e., income and cost) in economics holds that there is a correlative and opposite relationship between production and cost. Mao and Xiong (2011) proposes the antithetical smiling curve model based on the upgrading practice of Pacific Textile Corporation in Guangzhou, which is illustrated in Fig. 3. The horizontal axis in the left figure and the right figure represents the value chain; the vertical axis in the left figure indicates costs; and the vertical axis in the right figure signifies added value. When the cost of enterprise activities (mainly the cost of the manufacturing link) decreases, the smiling curve in the left figure moves downward from the position of the solid line to the position of the dotted line; In contrast, the smiling curve in the right figure moves upward from the position of the solid line to the position of the dotted line. Enterprises can increase added value by reducing costs in the value chain, which represents another effective upgrading path besides the way of upgrading to the two ends of the smiling curve. (4)

Functions of the antithetical smiling curve

The antithetical smiling curve is a popularization of the smiling curve, hence, expanding the latter’s explanatory power The antithetical smiling curve is an input–output relationship model based on the duality theory of production and cost (i.e., income and cost). It is a popularization

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Fig. 3 The antithetical smiling curve model after the introduction of the cost factor

of the smiling curve, giving the smiling curve more explanatory ability. Low carbon operation can reduce costs of all value chain links through such means as technological upgrading and process reengineering, achieving the result of higher added value. Therefore, the antithetical smiling curve model can explain not only the enterprise’s enhanced value due to upgrading to both R&D and marketing, that is, the two ends of the smiling curve, but also its heightened value by reducing costs through low-carbon operation and technological upgrading. The antithetical smiling curve is a useful model for the study of some types of enterprise and industrial upgrading Chinese enterprises and industries are in a period of transition. Many traditional labour-intensive and resource-intensive industries are characteristic of large investment, high consumption, and heavy pollution, such as the steel industry, coal industry, building materials industry, construction industry, and shipbuilding industry. The variable investment of enterprises in these industries accounts for a big proportion in the total investment. As a result, there exists huge potential to reduce costs and improve the value of products and enterprises. The smiling curve model with the antithetical smiling curve added to has greater application value for studying the transformation and upgrading of such industries and enterprises.

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(5)

Selection model of enterprise upgrading paths

a.

The development of enterprise upgrading path selection model

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As discussed in the above literature review, the motivation for enterprise upgrading includes both internal and external influencing factors. And the relevant strategic management theories mainly involve two aspects: corporate resources and capabilities views and contingency theory. Internal factors affecting the choice of upgrading paths are mainly judged by the resource-based theory, while the external determinants are majorly gauged by the contingency theory. By integrating the smiling curve and the antithetical smiling curve, analysing corporate resources and capabilities theory, dynamic capability theory and contingency theory, and examining the various paths enterprises have taken in their upgrading, (the author and his research team members visited Taiwan twice in 2006 and 2008 respectively to investigate Tainan Science Park, Industrial Technology Research Institute and more than a dozen representative enterprises, including Ato Tech, TSMC, Acer, ASUS and other enterprises; they also visited dozens of enterprises in the Pearl River Delta from 2006 to 2011, such as Guangdong Donlim Kitchen Group, Jasic Technology, Lacquercraft Group, Guangzhou Pacific Textiles, etc.), Mao and Zheng (2012) put forward the selection model of enterprise upgrading paths. This model shows that enterprises take different upgrading paths according to their own resources and capabilities and their judgment of changes in the external environment. These paths can be matched with the smiling curve and the antithetical smiling curve. The upgrading path selection model is shown in Fig. 4. b.

The fitted model and typical cases of enterprise upgrading path selection

Referring to the upgrading path selection model illustrated in Fig. 5, generalizing the upgrading paths selected by the above mentioned dozens of enterprises in the Pearl River Delta and Taiwan, taking into account such variables as corporate resources and capabilities, and changes in the external environment, and delineating changes of the corresponding smiling curve (and the antithetical smiling curve), we have finally arrived at a matching table about the upgrading path selection model and typical case enterprises, as shown in Table 4. This model has been applied in quite a few case studies and empirical studies.

Fig. 4 Selection model enterprise upgrading paths the fitted model and typical cases of enterprise upgrading path selection

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Fig. 5 Change of the industrial smiling curve in Path One Table 4 The matching table about the enterprise upgrading path selection model Corporate resources and capabilities

Changes in the external environment

Upgrading paths

Changes of the smiling curve (or the antithetical smiling curve)

Typical cases

Capital accumulation makes it possible to invest in R&D, design, advertising, and promotion

increase of income and changes of consumer ideas; Innovative entrepreneurship

Repositioning different value chain links such as R&D, manufacturing, marketing

The entire curve has risen upward

Taiwan’s bicycle industry and textile industry have achieved Overall upgrading

Enterprises’ technological upgrading is path dependent

Specific consumer market has great potential; entrepreneurs have both perseverance and a strong sense of responsibility for the nation

Substituting for multinational corporations’ products

The entire curve has gone up by way of three types of substitution

Haier, Galanz, Changhong, Jiguang electronics, China’s air conditioning industry, ZTE

Independent innovation capability fosters persistent innovation in R&D and design

Industrial boundaries are getting blurred and industries converge; entrepreneurs are aggressive and full of passion

Creating new products and new demands, and achieving intersectoral upgrading

The superposition of two industries’ smiling curves results in a higher positioned smiling curve

Taiwan’s Uni-President, Guangdong LCToys, Guangdong Alpha Animation, GUAGNDONG Hayidai TOYS (continued)

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Table 4 (continued) Corporate resources and capabilities

Changes in the external environment

Upgrading paths

Changes of the smiling curve (or the antithetical smiling curve)

Typical cases

Technology accumulation and capability evolution

New market demand and product upgrading

R&D serves as a driving force to break through barriers to key components

The links of R&D and key components have moved up (the left part of the curve has moved up)

Taiwan Hsinchu Science Park, and Tainan Science Park, Taiwan’s bicycle industry, Wanxiang Group, and China’s variable frequency air conditioning

Enhanced marketing and service capabilities such as the development of service networks and sales forces

Earnings from production services of a specific industry account for a high proportion of the industry’s profits; entrepreneurship and brand awareness

Stepping up investment in production services

Expanding to production services leads to the upward movement of the marketing end (the right side of the curve has moved up)

The automobile industry and the elevator industry

Scarce corporate resources and saving costs

Improvement of international quality and environmental protection standards

Low carbon operation, inputs reduction, and improved standards

The entire antithetical smiling curve has moved downward; The smiling curve has risen twice because of reduced inputs and International environmental protection standard certification

Guangzhou Pacific Textiles and Taiwan Hongyuan

(continued)

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Table 4 (continued) Corporate resources and capabilities

Changes in the external environment

Upgrading paths

Changes of the smiling curve (or the antithetical smiling curve)

Upgrading of key resources like human resources and Resource sharing

Making use of external experience, “learning by doing” and “learning by using”, and passionate entrepreneurship

Strategic alliances and new co-competition relationship

All smiling A-team of the curves within the bicycle industry cluster are in Taiwan tangent at the highest point (internal tangent); Each antithetical smiling curve in the cluster is tangent at the lowest point (envelope curve)

Planning and coordinating domestic and foreign markets; simultaneously developing OEM, ODM and OBM

Rising from the Jasic Technology bottom to the two and Donlim ends of the Kitchen Group smiling curve

Independent Independent innovation IPRs and brand capability awareness promotes constant improvement of products’ technological content and brand image Reallocating and consolidating key resources to match the enterprise’s businesses

Contingency Spinning off and theory reveals reorganization that there are many alternatives in a specific environment

Accumulation Entrepreneurship Acquiring OBM of abundant and brand enterprises’ capital; strategic awareness brands needs of target enterprises

Typical cases

The original Taiwan’s Acer smiling curve has fallen into two parts: one is the enterprise that engages in OBM / ODM with higher added value, the other is the enterprise that still conducts OEM with relatively low added value The smiling curve has moved up after obtaining the target enterprise’s strategic assets

Taiwan Merida, Wanxiang Group, Lacquer Craft International

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2.2 The Fitting of Enterprise Upgrading Types to the Smiling Curve From the path choice model of enterprise upgrading proposed by Mao and Zheng (2012) and the literature review, we have inferred four types of upgrading and nine paths for enterprises and industries to upgrade, and graphically fit them to the smiling curve model. (1)

Type 1: Upgrading from the bottom to the two ends of the smiling curve sequentially or simultaneously

a.

The first path: achieving upgrading through technology accumulation and capability evolution and by breaking through the barriers to and restrictions of key components

The key components of many industries are controlled by developed country companies who command high added value and the major say. Breaking through the barriers to and restrictions of key components has become an important way for enterprises to upgrade, which requires product and technological innovation. However, innovation is increasingly dependent on capital and technology accumulation, especially technology accumulation. The development of technological capability is a long and arduous learning process (Gil et al. 2003; Chen and Qu 2003). In order to build and develop technological capabilities, enterprises need to actively pursue systematic learning to improve persistently their professional skills in various technological functions and deepen their technological knowledge (Bell and Pavitt 1995). An (2004) suggests that there are five stages of technological development: technology selection, acquisition, digestion and absorption, improvement, and creation. Boosting products’ added value and the brands of enterprises relies on huge capital investment and technological accumulation. Kim (1997) put forward a general model for late developing country’s technological capability development: introducing mature technology—digestion and absorption—product innovation. Technological growth is a process of continuous evolution. When late-moving enterprises make use of latemover advantages and follow the above process to enter a relatively advanced and high-growth industry, they are in a relatively favourable competitive position, thus, facilitating them to realize upgrading. This upgrading path is reflected in the “technological leap” in materials and processes or the breakthrough in key components through the triggering effect of R&D activities. The corresponding change of the smiling curve is displayed in the shift of business activities from manufacturing to key components and R&D on the upper left, as is shown by the dotted line in Fig. 5. b.

The second path: achieving upgrading and enhancing added value by extending to production services through increased investment

Many studies indicate that the added value of production service links in the GVC, including logistics and distribution, marketing, and after-sales service, is much higher than that of the manufacturing link. And these production service links have long

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Fig. 6 Change of the industrial smiling curve in Path Two

been controlled by multinational companies. The experience of the developed country automobile industry shows that new car profits account for 20% of the total industry profits, parts and components profits about 20%, while after-sales service has the bulk of profits, about 60%, which includes second-hand car replacement, maintenance, and other related services (Liu 2009). Japanese elevator manufacturing giants survive on annual orders of 5000 new elevators because there exists great demand for maintenance, renewal or replacement of elevators and elevator parts (Lang 2010). Therefore, in some industries, especially in durable goods industries that face rather saturated markets and have high requirements for follow-up maintenance, the potential for after-sales service is great. Consequently, enterprises in such industries can upgrade from production-to-production services and enhance added value by increasing investment. The change of the smiling curve in this path lies in that by moving from manufacturing to marketing and after-sales service on the upper right, the enterprise has realized upgrading, as is shown by the dotted line in Fig. 6. c.

The third path: achieving upgrading by planning and coordinating both the domestic and foreign markets and engaging in OEM, ODM and OBM simultaneously

OEM is the major way for enterprises in late developing countries (regions) to integrate into the international division of labour. Many OEM enterprises have managed to upgrade to ODM and OBM through capital accumulation and technology following strategy. In recent years, with the rise of raw material prices, the increase of labour costs, the shortage of energy supply, the appreciation of the Chinese currency (CNY), the constant reduction of export tax rebate rate and the boost of environmental protection costs, the profit margin for OEM enterprises is increasingly shrinking. They must implement upgrading in time in order to sustain their survival and development. On the other side, fierce competition at home and abroad forces emerging economy enterprises to target ODM and even OBM businesses with independent IPRs through independent innovation.

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The general upgrading path of OEM enterprises is from OEM to ODM and then to OBM. However, the actual path depends on the situation. In some enterprises, OEM, ODM and OBM may coexist, and for other enterprises, the way for upgrading in the domestic market is different from that in the foreign market and their ways may also differ with the stage. The change of the smiling curve in this path is reflected in that enterprises move from OEM to ODM on the upper left or to OBM on the upper right, or move to both ODM and ODM to realize upgrading, as is illustrated by the dotted line in Fig. 7. (2)

Type 2 and the fourth path: the antithetical smiling curve partially or totally moves downward

As the lines about the functions of the antithetical smiling curve discussed earlier show, many enterprises have reduced costs and accomplished upgrading through lowcarbon operation and environmental protection. Protecting the environment does not necessarily imply only cost without benefit. By investing in environmental protection equipment and process optimization and promoting green technology and product upgrading through R&D, it is not only conducive to protecting the environment and reducing costs, but also has a direct and obvious effect on improving the profit margin of products and enterprises. The change of the smiling curve in this path manifests itself in two aspects. Firstly, enterprises can cut down costs by reducing energy consumption through the instalment of green equipment and production process, recycling and reusing resources, pursuing green and environmental protection procurement. As a result, the antithetical smiling curve partially or totally moves down. Secondly, the smiling curve partially or entirely moves up, as is shown by the dotted line in Fig. 8. (3)

Type 3: the whole smiling curve moves up

a.

The fifth path: achieving upgrading by identifying new characteristics and new needs in traditional industries and repositioning the products

Fig. 7 Change of the smiling curve in Path Three

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Fig. 8 Change of the antithetical smiling curve and the smiling curve of enterprises in Path Four

With the external environment changing, such as the change of consumer ideas and the increase of income, in some traditional labour-intensive industries there have emerged new characteristics and new needs, which lead to the shift of product nature. Many enterprises are trying to adapt to these changes and reposition their products (for example, change from providing ordinary consumer goods to high-end consumer goods), thus, achieving upgrading. Besides, traditional labour-intensive industries can also upgrade to be high-tech industries by widely adopting and integrating with new technologies. By repositioning R&D, manufacturing, marketing and other value chain activities, the enterprise has accomplished improved brand value and added value. Consequently, the whole smiling curve has moved upward, as is shown by the dotted line in Fig. 9. b.

The sixth path: achieving upgrading by first replacing products imported from abroad, then products produced by multinational companies in China, and finally products of multinational companies in foreign markets

Mao and Li (2005) after studying the upgrading of some successful household electrical appliance enterprises in China, put forward an upgrading path, that is, to replace

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Fig. 9 Change of the industrial smiling curve in Path Five

the products of multinational corporations by actively cultivating enterprises’ technological strength. And they find that enterprises’ technology advancement is in a degree path-dependent: introducing mature technology, digestion, and absorption— imitative innovation, cooperative innovation—independent product innovation. This contributes to the accumulation of technology and the upgrading of enterprises. This path shows that enterprises achieve upgrading through three levels of product substitution by first implementing an actively following strategy: imitating imported products produced by multinational corporations in China and absorbing advanced technology, and then adopting the catch-up strategy: undertaking innovative R&D and emphasizing IPRs. The smiling curve in this path moves up, as is shown by the dotted line in Fig. 10. c.

The seventh path: achieving leapfrog upgrading by acquiring branded companies’ brands and other strategic assets

As late-movers, Chinese enterprises lack strategic assets, such as well-known brands, advanced technology, and well-developed distribution network. Assuming the conventional following strategy will forever put themselves in a passive situation. Awaking to this, some enterprises seek to realize leapfrog upgrading by acquiring

Fig. 10 Change of the product smiling curve in Path Six

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strategic assets through mergers and acquisitions in some industries or technological fields (Li et al. 2017). The change of the smiling curve in this path is reflected in that by acquiring strategic assets such as R&D and brands, the acquiring enterprise has got a new smiling curve, which is the integration of its original smiling curve with that of the acquired company, but high up over its original one. The upgrading path is illustrated in Fig. 11. (4)

Type 4: The smiling curve moves up after the superposition of multiple industrial smiling curves

a.

The eighth path: achieving intersectoral upgrading by creating new products and new demands based on blurred industrial boundaries and industry convergence

Since the 1990s, with the rapid development of communication technology and computer technology, industrial boundaries tend to become blurred, and industries tend to converge. This trend represents opportunities for enterprises’ expansion and innovation, especially for information technology-related enterprises’ development. Achieving product expansion by shifting from producing a single product to diversified products and then to a whole series of products is essential to enterprise upgrading. Although the series of products are still related to the original one, their characteristics may have been substantially different, and their functions may have increased a great deal, which will broaden the scope of the enterprise’s business, thus creating a new market. Many enterprises have followed this path to accomplish upgrading. The smiling curve of the enterprise was originally in a very low position because of its low added value. Due to fuzzy industrial boundaries and industry convergence, the smiling curves of industry 1 and industry 2 became superimposed. As a result, a higher positioned smiling curve of new products has come into being, as is shown in Fig. 12.

Fig. 11 Change of the smiling curve in Path Seven

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Fig. 12 Change of the smiling curve in Path Eight

b.

The ninth path: industrial clusters achieve upgrading by establishing strategic alliances and new co-competition relationships and with large enterprises leading and supporting small ones

The establishment of strategic alliances between enterprises or the pursuit of new co-competition relationships in industrial clusters can provide a good platform for independent innovation and industrial chain improvement, facilitating technological and management innovation in enterprises and industries. These relationships enable enterprises to share resources or reduce transaction costs and encourage large enterprises to lead and support small ones or to push the upgrading of industrial clusters. The cost of the industrial cluster is the lowest tangent point of each enterprise in the cluster, so the antithetical smiling curve of the industrial cluster is the envelope curve of the antithetical smiling curves of all enterprises in the cluster. The added value of the industrial cluster is the highest tangent point of each enterprise’s added value in the cluster. Therefore, the smiling curve of the industrial cluster is the inner tangent of each enterprise’s smiling curve in the cluster. By making use of the industrial cluster platform, the added value of enterprises in the cluster comes to the highest level and the cost of enterprises in the cluster amounts to the lowest level. The entire cluster has accomplished upgrading. The change of the smiling curve in this path is illustrated by the dotted line in Fig. 13.

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Fig. 13 Change of the antithetical smiling curve and change of the smiling curve in Path Nine

3 Research on GVCs and RGVCs 3.1 Research on the GVC Perspective and the International Division of Labour Theory (1)

Evolving from value chain to GVC: spatial decentration and extension

In the context of economic globalization, the division of production processes and the separation of production activities around the world have led to the gradual formation of “borderless production system” (UNCTAD 2013) and the formation of a “global production network” (Ernst and Kim 2002; Ernst 2004). Therefore, a “GVC” based on product value creation and realization has also come into being among participating countries (regions). In the 1990s, Gereffi (1994) first provides the concept of the “global commodity value chain” (hereinafter referred to as GVC for short). He believes that the “global commodity value chain” is not only the result of transnational production and operation of companies, but also the result of the integration of companies’ international

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production and trade. Based on Porter’s value chain theory, Gereffi (1999) has developed the analytical GVC framework, directly linking the value chain concept with the global organization of industries. In the context of economic globalization, the production process of goods is divided into many different stages. A transnational production organization system built around the production of a certain product integrates enterprises and institutions of different sizes all over the world into a production network, thus giving birth to a GVC. Kaplinsky and Morris (2002) refers to it as the “industrial chain” and believes that the countries in various value chain links of the product can fully play upon their comparative advantages. The GVC refers to a global multinational enterprise network organization that connects value creation links such as production, sales, and recycling in order to realize the value of products or services around the world, involving the whole process from procurement and transportation of raw materials, production and sales of semi-finished products and finished products to final consumption and recycling (UNIDO 2002). It includes all participants, organizations of production, sales and other activities and the value and profit distribution mechanisms and consolidates the ability and efficiency of enterprises through automated business processes and the interaction of suppliers, competitors, partners, and customers. The GVC framework provides a network-based method for analysing the geographical and organizational characteristics of international production, reveals the dynamic traits of global industries, and sheds light upon where value is generated and who creates and distributes it (Wang and Hou 2007). However, not every link in GVCs produces value. Only strategic links are valuable (Kaplinsky and Morris 2002). The GVC reflects the characteristics of economies and the division of labour from both the pattern and background perspectives. With the deepening of production and trade globalization, the value creation system is vertically separated and restructured around the world. Developed countries have gradually offloaded manufacturing activities and put their focus on high value-added links such as R&D, marketing, and sophisticated production. Developing countries undertake the low value-added links such as assembly and manufacturing transferred from developed countries (Su and Gao 2019; Shen et al. 2020). In short, the international division of labour has shifted from the division of labour by product to the division of labour across borders by factors, and from the horizontal division of labour among industries to the division of labour along the value chain. This is not only a pattern for the international division of labour, but also a social background. The evolution from value chain to GVC reflects the spatial separation and extension of the value chain in the world. Porter’s value chain focuses on analysing value creation activities from the standpoint of a single enterprise. Kogut (1985) believes, “the value-added chain is the process by which technology is combined with material and labour inputs, then processed inputs are assembled, marketed, and distributed.” “A single firm may consist of only one link in this process, or it may extensively vertically integrated.” Kogut’s view better reflects the relationship between the chain’s vertical separation and its spatial reconfiguration globally. Therefore, it contributes to the GVC theory and the understanding of the operation mechanism of international division of labour in products.

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Krugman (1995) studies firms’ ability to put their value creation links in different geographical locations. Hence, the relationship between the value chain governance model and the spatial transfer of industries has emerged as an important research field. Arndt and kierzkowski (2001) use “fragmentation” to describe the segmentation of a production process. All links along the value chain are organized through crossborder production network, which can be developed and controlled by one firm or by many firms (Zheng 2020). The above discussion shows that the GVC has come into being due to value chain fragmentation and extension. The GVC production mode has provoked the international division of labour by products. (2)

Evolving from sectoral, to intra-sectoral and to intra-product international division of labour

The international division of labour is the sectoral division of labour and the division of labour in the process of product production between countries in a broad sense. It is a social division of labour that transcends the boundaries of the national economy. In the past 200 plus years since the international division of labour was gradually emergent in the 1860s, it has developed from sectoral international division of labour to intra-sectoral international division of labour, and then to intra-product international division of labour. With the development of information technology, the liberalization of investment policies, and the advancement of globalization, the international manufacturing division of labour has shifted from taking place in industries with well-marked boundaries to the value-added links of an industry or a product value chain and is increasingly dominated by companies, especially multinational companies instead of by countries (Hummels et al. 2001; Los et al. 2015). Fröbel et al (1980) propose the new international division of labour (NIDL), which holds that the low wage factor resulting from abundant labour resources in developing countries is promoting the transfer of manufacturing activities from developed countries to the former, thus changing the traditional pattern of international division of labour. In the late 1990s, the theoretical research on intra-product international division of labour in the framework of traditional international trade theory gradually matured. “Intra-product specialization” is a special evolution process or expansion structure of economic internationalization. Its core connotation is that different processes or stages of a specific product production process are expanded into a cross regional or transnational production chain or system through spatial decentralization, Thus, more and more national, or regional enterprises participate in the production or supply activities in different sections of a specific product’s production process. Jones(2001) refer to the division of labour as “fragmented production” that separates the production process and spreads to different spatial locations. Their research unfolds the fundamental motivation of the intra-product international division of labour: costs decrease. The purpose of cutting costs drives the development of transnational vertical specialization. It follows that production links are carried out in different countries. Specialized production in different countries, on one hand, incurs additional transaction costs from the coordination and organization of production activities; on the other hand, compared with the original "one-stop production",

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the benefits from country specialization are obvious. It can greatly reduce the sum of production costs in various production links (Gereffi & Fernandez-stark 2011). Only when the savings in production costs exceed the additional transaction costs can vertical specialization be carried out in various countries. Table 5 illustrates the multi-level patterns of international division of labour. (3)

The relationship between the GVC and the intra-product international division of labour

Kaplinsky and Morris (2002) think of the GVC as the process of realizing the value of all links from concept to product, including R&D, production, marketing, sales, and after-sales service. Global multinational corporations determine the location and positioning of each link. Their advanced home country-based companies mostly focus on high value-added links such as design, R&D, management services, marketing, and brand management of knowledge intensive products. They transfer low value-added links overseas, ensuring that they are always in a favourable dominating position. This is also the reason why many host countries are trying hard to lure multinational R&D centres and regional headquarters. The GVC division of labour is a form of international division of labour in which different links of the product are carried out in multiple countries or regions, and there is import of intermediate products and export of final products (Cao and Li 2006). Zhang (2006) believes that the GVC is the internal operation mechanism of the intraproduct international division of labour. Although all value links in the GVC can be seen as an organic continuum in value realization, under the condition of global production, this integrative value chain shows a high degree of spatial fragmentation in actual operation. The intra-product international division of labour led by multinational corporations belongs on the vertical type. Branded manufacturers in developed countries, newly industrialized countries, and regions command core value chain links. On one hand, they have set up jointventure or wholly-owned processing and manufacturing subsidiaries in developing countries, undertaking production for local or global markets under the integrated technological and management control of the headquarters and ensuring timely supply of parts and components through intra-firm trade. In addition, large numbers of local suppliers provide supporting processing services for their subsidiaries. On the other hand, through non-equity investment such as global outsourcing and OEM, they have offloaded processing and manufacturing activities to developing country contract manufacturers and subcontractors with cost and quality advantages (Mudambi and Venzin 2010). In the modular value chain, there exist opportunities for developing country enterprises to grow and develop because, through specialized and large-scaled operations, contract manufacturers in latecomer countries and some newly industrialized countries and regions are gradually able to perform comprehensive activities and services including low-end processing, manufacturing, medium- and high-end design and development, and logistics, and in the course of global operation and supplying global companies, their capabilities have been further consolidated, which allows them to

International division of labour in different industrial value chains

Vertical

Definition based on the value chain

Basic structures division of labour

Basic Inter- sectoral division categories of of labour the international division of labour

Horizontal

International division of labour in different product value chains of the same industry

Vertical intra-product\intra-sectoral division of labour

Horizontal intra -sectoral division of labour

Vertical

Horizontal

(continued)

International division of International division of labour in links (or processes) of the labour in the upstream and same product value chain which have similar technology downstream value links (or level and intensity processes) of the same product value chain

Horizontal intra-product international division of labour

Intra-product international division of labour

Intra-sectoral division of labour

Table 5 Multilevel patterns of the international division of labour

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Country structures of division of labour

Between developed countries and many developing countries

Basic Inter- sectoral division categories of of labour the international division of labour

Table 5 (continued)

Between developed countries; between developed countries and newly industrialized countries (regions); between developed countries and some developing countries

Between developed countries and newly industrialized countries (regions); Between developed countries and some developing countries

Vertical intra-product\intra-sectoral division of labour

Horizontal intra -sectoral division of labour

(continued)

Between developed countries; Between developed countries and newly industrialized countries (regions); Between developed countries and some developing countries

Horizontal intra-product international division of labour

Intra-product international division of labour

Intra-sectoral division of labour

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General intra-sectoral international trade, intra-firm trade, foreign direct investment, etc

Vertical intra-product\intra-sectoral division of labour

Horizontal intra -sectoral division of labour

Basic evolution trends of division of labour

Economies of scale theory, competitive advantage theory, transaction cost theory, internalization theory

General international trade, General international trade, global contract outsourcing, processing trade, global foreign l direct investment, intra-firm trade, strategic outsourcing, OEM, ODM, alliance, etc foreign direct investment, intra-firm trade, etc

Horizontal intra-product international division of labour

Intra-product international division of labour

Intra-sectoral division of labour

Rationale for Comparative advantage Economies of scale division of theory theory, competitive labour Factor endowment advantage theory theory

Major ways General intersectoral and means of international trade division of labour

Basic Inter- sectoral division categories of of labour the international division of labour

Table 5 (continued)

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obtain a large share of some modular markets and even get direct reverse control over the branded manufacturers, thus, establishing themselves as indispensable players in the value chain (Tong et al. 2017). Humphrey and Schmitz (2002) argue that in the modular value chain, due to the complementarity and equivalence of the parties involved in the relationship, contract manufacturers can climb to the middle and high-end links of the value chain. If developing country manufacturers can embed themselves in such chains, they will be in a favourable position to achieve upgrading. At present, in typical modular manufacturing sectors such as electronics, automobile, and communication, global suppliers are mainly from developed countries such as the United States, Japan and Western Europe. However, with accelerated transfer of GVCs, enterprises from newly industrialized countries in East Asia, Eastern Europe, and South America and some developing countries are embedding into the modular GVC and growing to be contract manufacturers and even branded manufacturers with comprehensive capabilities (Azmeh and Nadvi 2014).

3.2 Relevant Research on Restructuring the GVC (1)

From value chain restructuring to restructuring the GVC

The concept of value chain restructuring has emerged with the development of the Internet economy. Beck et al. (2001) put forward the idea of value chain restructuring of the network economy era. They believe that with the network’s wide application in all links of the value chain, aspiring companies begin to capitalize on the network and conduct e-commerce, rethink customer value, attach importance to partnerships with suppliers and channel providers, explore the use of global intellectual resources, restructure the value chain, tap potential value for themselves, and create more value for customers. Restructuring value chain requires enterprises to take deliberate, proactive, and effective measures and cultivate a series of core competencies. With the advent of the knowledge economy, the rapid development of information technology and the accelerated progress of globalization, profound changes are taking place in GVCs. For example, the division of labour is further specialized, various types of middlemen agencies are springing up, and the length of the value chain is increasing. At the same time, enterprises must keep on improving innovation capability and shorten innovation time in order to maintain their competitive advantage and position in the value chain. To get better understanding of the major changes of work in the knowledge society, the EU has set up a special research project “Work Organization and Restructuring in the Knowledge Society” (WORKS for short). It assigned 17 research institutions in 14 European countries to study, in a period of four years starting from 2005, how organizational structures of companies in GVCs were going to change, how people should see these changes, and what impact these changes would have on social organizations and employees in the background of economic integration and technological changes.

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The term “restructuring” in the title of the special research project WORKS indicates that the project aims to examine the changes of company structures, especially the changes of business functions along the value chain and the relationship between business functions. Business functions include not only primary activities such as R&D and production, but also support activities such as human resources and information system. In short, specific functions can be integrated in one hierarchical organization, or put out to contract. Therefore, enterprises ought to not only decide what to do and where to do in the operation process, but also choose whether to do it by themselves or outsource it to other entities with the result of making use of global resources to improve production efficiency and maximizing enterprise value. (2)

The impact of RGVCs on developed or developing countries viewed from the perspective of organizational behaviour

Restructuring the GVC may give birth to both opportunities and challenges to the employment in developed country companies. The pessimist says that the extension and complexity of GVCs will have a significantly negative impact on employment and the working environment. Ramioul (2008) points out that in order to move to higher positions in the value chain, European companies seek to create an innovative atmosphere inside, stage activities conducive to innovation, select employees with learning ability and knowledge sharing mind, and use a variety of information technologies to enhance coordination ability in the value chain. However, with the global extension of the value chain, the working environment and employment security in the links of the same value chain are becoming unfairly different, which will produce a profound impact on employment and employees. Most the employees surveyed in European companies said that, while work complexity was decreasing, work intensity was increasing and sense of job security was falling. Value chain restructuring exerts pressure on all nodes of the whole value chain. The optimistic view is that restructuring the GVC will benefit developed countries. For example, when the value chain is extended globally, it will increase employment in developed countries (Gereffi and Lee 2014). Huws et al. (2009) pointed out in the report The Restructuring of the European Value Chain in the Global Economy that the segmentation and cooperation between different units in the value chain have prolonged and complicated the chain, which requires large numbers of intermediaries to participate in the work, including supply chain coordination or logistics management, subcontractors recruitment and screening, negotiation and drafting of legal contracts, site selection, training, consultation with local institutional stakeholders, and a series of other consulting services. In information technology services, logistics, marketing and sales of retail trade, financial and legal services industries, employment of the senior EU member states has increased significantly. In the food industry, the number of employees from the new EU member states is increasing, but the number of employed people from the senior EU member states remains unchanged. In the textile and garment industry, most EU production is outsourced to countries with lower costs and only high added value business functions such as design, branding, and retailing are retained. The production outsourcing and business

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reconfiguration has l weakened the influence of trade unions and led to compromise negotiations between labour and capital (Meil et al. 2009). There are also scholars who are concerned with the organizational and human resources changes to and impacts on developed and developing countries as well as their enterprises that the GVC restructuring has provoked. First, specific groups of people are impacted, such as highly skilled professional workers. According to Huws and Dahlmann (2009), who have analysed the impact of the GVC restructuring on highly skilled professional workers in Europe’s developed countries, work restructuring will not only cause drastic changes at the corporate and regional levels, but also change individual workers’ professional identity, class positioning and class consciousness. A series of tools and technologies defined by traditional occupation groups in developed countries of Europe have been eliminated and replaced by information and communication technologies; The demand for emerging occupations requiring multilingual ability and transnational communication skills is growing significantly. Global outsourcing has reduced the sense of job security and job satisfaction of highly skilled professional workers in Europe’s developed countries. However, new job opportunities provided by new service centres have improved the situation of some workers who used to be at a disadvantage. Second, organizations and employees in specific industries are affected. Khara and Lund-Thomsen (2012), after studying the effect of GVC restructuring on the organizational forms and employees of the Indian football manufacturing industry, the logic behind developing countries’ choice of internalizing or outsourcing labourintensive businesses, and the impact of internalization / outsourcing process on the working environment of export-oriented industries, they find that demand changes in international markets, working environment standards, and technological upgrading are the major determinants for the Indian football manufacturing industry to shift from family organization to production-based organization and then to factory organization. (3)

The impact of RGVC on emerging economies seen from the standpoint of moving up the value chain

Scholars have also discussed the effect and influence of GVC restructuring on emerging economies and their enterprises. Frederick and Gereffi (2011) apply the GVC framework in the analysis of the restructuring of the global garment supply chain and conclude that China and other Asian suppliers are the winners in supply chain restructuring. Diversified terminal markets, strong demand in Asia’s emerging economies, and regionally integrated production networks have enabled Chinese garment suppliers to keep on upgrading and enlarging market share globally. Pananand (2013) analyses the development of developing country multinationals’ subsidiaries in Thailand and points out that these latecomer multinationals are not contented to stay forever at the bottom of the value chain, they make constant efforts to cultivate R&D and innovation capabilities in their own countries and acquire strategic assets through direct investment in developed countries, climbing up to the high ends of the value chain.

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The initiative of emerging economy enterprises to restructure the GVC has also attracted the attention of some scholars. Manufacturing enterprises in developing countries/regions are long settled at the lower parts of the GVC, they have a strong desire to break through the control and squeeze over them (Sun et al. 2016). Azmeh and Nadvi (2014) find that Asian multinational garment manufacturers are transforming the GVC structure of the garment industry. Primary suppliers from emerging economies, especially from “Greater China” and South Asia, are gradually participating in a much wider range of functional activities in the value chain. On one hand, Asian multinational manufacturers can effectively identify production and trade opportunities and lay out production networks around the world so that they can make ready use of the international reciprocal trade agreements signed between the United States and the European Union or other countries and regions. And they constantly re-choose and change host countries and dynamically adjust and relocate production bases according to market changes to reduce costs, improve efficiency, and effectively manage complex international production networks. On the other hand, Asian multinational manufacturers work closely with their international buyers (i.e., leading companies in western countries) to provide them with new functions and services such as R&D and design, market forecasts, and logistics and warehousing. They are playing an increasingly important role in large brands’ supply chain organization and management. Besides, some manufacturers start to establish their own brands and retail stores. This shows that the position of Asian multinational manufacturers in the GVC has already shifted from being subordinate to western leading companies to cooperating with them to share responsibility for leadership. They are now performing strategically important tasks such as the GVC’s geographical distribution and organizational structure adjustment. UNCTAD (2013) pointed out that, in the research report The GVC and its Development, the higher the growth rate of developing countries’ participation in the GVC division of labour and the higher the domestic value added in export products, the higher the growth rate of that country’s per capita GDP (details shown in Fig. 14). By and large, there are six development paths for developing country enterprises in GVCs, as is shown in Fig. 15 below. First, it is to participate in the GVC, that is, to enter manufacturing contracts with multinational companies and process imported materials for export. Second, it is to prepare for entry into the GVC, that is, not to integrate into the GVC for the time being and put priority on raising products’ added value in the home country, China, and substitute for imports. Third, it is to accomplish upgrading in the GVC. This path shows that for countries that are highly integrated into the GVC, they can increase domestic added value in export products or participate in more business functions in the value chain. Fourth, it is to compete in the value chain, that is, to participate in competition in the GVC by exporting products with high added value and integrate into the global production network through mergers and acquisitions by foreign companies. Fifth, it is to switch over to the GVC, that is, to abandon the production of export products and undertake processing business with more imported components to further integrate into the GVC. Sixth, it is to leapfrog in the value chain, which means that a few developing

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Fig. 14 Growth rate of developing countries’ participation in the division of labour in GVCs, the increase of domestic value added, and the growth rate of per capita GDP. Source UNCTAD (2013)

Fig. 15 Potential development paths in the GVC. Source UNCTAD (2013)

countries, by way of introducing foreign direct investment, have soon managed to export high value-added products.

3.3 Review of Existing Research (1)

Lack of research on GVC restructuring initiated by enterprises of emerging economies

At present, only a very limited number of studies have dealt with the phenomenon of industrial competition pattern changes caused by the rising status of emerging economy enterprises in GVCs.

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The above literature review reveals that there is little research on the restructuring of GVCs. Although a few studies have used the term of restructuring the GVC, there is no clear definition of it. Therefore, the research purpose, research object, and concept connotation have yet to be clarified. Indeed, there are scholars who have started to give attention to the phenomenon that many enterprises are moving up the GVC and have enhanced their status. Yet they still analyse the issue based on the original GVC framework and fail to notice or explain the structural changes of the GVC. They hardly recognize and discuss the fact that quite a few outstanding Chinese enterprises we mentioned in this book’s introduction have raised their position in GVCs, are actively participating in global competition, and playing important strategic roles in GVCs through successful transformation and upgrading. Besides, there is a serious lack of research on the restructuring of GVCs initiated by emerging economies. In the following passages, we summarize the major points contained in the small number of relevant studies. First, the studies focus on organizational structures and human resources, but fail to link these with the GVC structure changes. They mainly try to expound, in the context of global economic integration and drastic technological changes, organizational structure changes of enterprises in GVCs, employment and working environment (Ramioul 2008; Meil et al. 2009; Huws et al. 2009), and the situation of specific employee groups such as highly skilled professional workers (Huws and Dahlmann 2009). These studies also probe macro-level employment problems as well as micro-level organizational and human resources changes caused by the globally distributed value chain (Ramioul 2008; Huws and Dahlmann 2009). Second, the studies approach the GVC restructuring from the aspect of value chain links’ upward movement (Pananond 2013; Lechner et al. 2013). A couple of scholars have conducted research into emerging economy multinational production enterprises that are striving to change the GVC structure of specific industries (Azmeh and Nadvi 2014), (Pananond 2016). But overall, their concern is on the enterprises’ transformation from “being subordinate” to “sharing some responsibility for leadership”, and their initiative action to restructure the GVC is not discussed. There are studies that identify supply chain restructuring with value chain restructuring. However, they do not reflect the initiatives of enterprises in emerging economies, nor do they reflect the GVC structural changes these enterprises have made, nor their leading role in international division of labour, nor the structural changes in the global competitive landscape. (2)

Strengthening theoretical and empirical research on the restructuring of GVCs

To sum up, it is necessary to rethink the GVC framework based on the upgrading practice of Chinese enterprises and the structural changes of GVCs. Specifically, there is need to explore both the rise of Chinese enterprises and how they come to take the leading role in the GVC and the international division of labour that were originally dominated by developed country multinational corporations. Only in this manner can the development trends of contemporary enterprises be revealed and a theoretical system of the GVC restructuring be established.

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Based on the investigation of dozens of Chinese enterprises in emerging economies and a renewed understanding of GVCs, the author developed the concept and theoretical model of restructuring the GVC in 2016 (Mao and Zheng 2016), Since then, more scholars have started to conduct research into the restructuring of the GVC by adopting the theoretical model proposed by the author. However, this research area needs in-depth theoretical examination and exploration to develop sound theories for explaining the upgrading behaviour of enterprises in emerging economies. Meanwhile, we should also do case studies and empirical research to verify the academic value and application value of the theories.

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Chapter 3

Case Study of Enterprise Upgrading

1 Han’s Laser Technology Industry Group Co., Ltd. 1.1 Brief Introduction to Case Enterprise and the Investigation Process Han’s Laser Technology Co., Ltd., (hereinafter referred to as “Han’s Laser”) was established in 1996 in Shenzhen China and listed on the Shenzhen Stock Exchange in 2004. In 2020, the total operating income of Han’s Laser was 11,942 million CNY, with total assets of 21,345 million CNY, and a net profit of 1,034 million CNY. The number of employees of the company has reached 14,174. At present, Han’s Laser is the largest laser processing equipment manufacturer in Asia and well-known in the world. It is also a leading enterprise in the laser processing equipment industry of China. In 2004, the company changed its market strategy and began to sell to the global market. With an annual production capacity of 3,000 sets of laser processing equipment and more than 90 types of laser equipment, Han’s Laser is one of the companies with the most complete range of products in the laser industry of China. The new products launched by Han’s Laser over the years are shown in Table 1. Each major product occupies a large share and has a leading position in the domestic market. The company has mastered the world’s leading technology in UV laser, semiconductor pumped laser and fibre laser. In addition, Han’s Laser has formed an R&D team with varied talents in laser, automatic control, computer software and mechanical control, which has obvious advantages in technology R&D. Han’s Laser mainly engages in R&D, manufacturing, and sales of laser processing equipment, which belongs to the laser processing equipment manufacturing industry under the large-scale Opto-electromechanical integration equipment manufacturing sector. At the initial stage, the product lines of Han’s Laser were majorly composed The original data or information of the relevant figures, tables are collected from the annual reports, prospectuses, official websites, interview records or field investigation of the relevant enterprises, unless otherwise specified. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 Y. Mao, The Restructuring of Global Value Chains, https://doi.org/10.1007/978-981-19-1693-9_3

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Table 1 New products launched by Han’s Laser, 1996–2019 Year

New products

1996

Laser information marking equipment

2000

laser beam welding machine

2001

Laser cutting machine

2003

Mechanical PCB (production circuit board) drilling machine

2004

Harmonic laser application equipment

2006

Laser PCB equipment (equipment for producing PCB)

2007

Laser printing equipment

2008

Laser plate making, laser heat treatment

2009

CNC machine parts, laser medical equipment, LED equipment, imaging equipment

2013

Small-sized combined plate cloud printing system

2014

New CNC deep drilling machine, large table laser drilling machine, MH700 double table high-precision testing machine, arm type eight times density testing machine, etc.

2015

Single-mode fibre laser, 30 W fibre laser, 50 W fibre laser

2016

8 KW ultra-high power fibre laser cutting machine

2017

G3015HF fibre laser cutting machine

2019

20 KW optical fibre laser cutting machine, new generation automatic laser pipe cutting machine intelligent welding line, LION series “ China Red” version optical fibre laser cutting machine

of three types of special equipment for photovoltaic, PCB and LED packaging and three types of general processing equipment for laser marking, cutting, and welding, as shown in Fig. 1. The current literature has few case studies on Han’s Laser. Liu and Luo (2008) through analysing its rapid growth, find that Han’s Laser has developed a marketoriented path and established the top brand in the industry in China by relying on technological innovation, system innovation and market innovation. The data of this case are mainly from corporate websites, annual reports, websites of industry associations, and newspapers.

1.2 Upgrading Process and Paths of Han’s Laser (1)

Product innovation and new market development through the extension of product functions

Han’s Laser started with laser marking machines, which has steadily had 70% of the domestic market share since 2001 and once rose to 85% in 2010. The rapid growth stems from expanding applications of laser marking machines and the growth of market demand.

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Fig. 1 Structure of product line: 3 special equipment + 3 general laser processing equipment

In developing the market, the company has adopted strategies such as the expansion of product functions, technology integration and functions integration, and successfully developed a series of brand-new markets. Sticking to its core business of industrial laser equipment, Han’s Laser has been continuously developing new products, entering different sub-markets of laser equipment, expanding the application fields of laser technology and equipment products, which has enabled the company to have new growth points and maintain high-speed growth of revenue and profit. Since 2001, Han’s Laser’s active layout in the field of laser equipment has expanded the company’s development space. From the production of laser information marking equipment, the company has gradually developed several high-tech product lines including marking, welding, cutting, heat treatment, drilling, printing, medical equipment, etc. The rich product lines have diversified its customers, reduced its reliance on a single industry, enhanced its risk resistance capability, and realized high-speed growth. At the same time, it has effectively entered the fields of microprocessing, laser medical equipment, printing equipment, LED equipment, image equipment, etc., creating a space for the company’s long-term growth (Fig. 2). Han’s Laser has developed new applications and new demands for its products, expanding the industrial application fields. Through the development of new products with stronger functions, better performance, higher cost performance and core product functions that significantly surpass the traditional products, the company has

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Fig. 2 Expansion of Han’s Laser products. Source Han’s Laser Company

successfully developed a brand-new market for ultra-high precision and special information marking, ultra-high precision material cutting, high-definition laser scanning imaging typesetting and laser numerically controlled lathe processing equipment. The product family has expanded from a single laser marking equipment to a variety of laser processing equipment such as laser welding, laser cutting, laser printing and heat treatment. Han’s Laser has also enlarged the scope of its product applications. It initially targeted small-scale enterprises in such industries as clothing processing, hardware, plastic, and packaging, and then sequentially entered the market in leather industry, handicrafts industry and other industries. With its technology getting more mature and production and sales scaling up, Han’s Laser developed application markets in the integrated circuit industry and food industry. At the same time, it conducted in-depth R&D on products so that they were better adapted for largescale production lines and for many different industries. Through unremitting efforts, Han’s Laser has gradually entered the application markets in medical devices, precision machinery, communications, and the automobiles industries. The increase of product application markets and sales regions has provided a broad space for the company’s growth (Fig. 3). In the long process of expanding product application field, Han’s Laser has come up with a set of effective methods in market development. For example, to enter one related but new industry, Han’s Laser would acquire an existing company in this industry to get knowledge of that industry’s technical details, markets, and customer demand, etc., laying the foundation for the promotion laser applications. Apart from technology, the most important thing is to establish a trust relationship with customers, and then improve the application of the laser equipment and promote it to them (Fig. 4).

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Fig. 3 Comparison of income structure of Han’s Laser Products, 2011, 2015 and 2020 (billion CNY)

Fig. 4 Application fields of laser marking products continue to expand

Han’s Laser has always attached great importance to the active cultivation of the market. Over the years, it has invested a lot of funds, participating in many exhibitions, launching product advertisements, preparing training materials for laser applications, and organizing professional seminars, in order to spread laser application knowledge

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and attract potential customers to the maximum extent. The company also attracts new customers through product trials and other means to develop the customer base. (2)

Entering the traditional market through product function substitution or function expansion

The laser processing equipment produced by Han’s Laser has an impact on various traditional instruments and equipment. First, the equipment has gradually replaced the traditional processing methods in their respective areas. Second, using this new processing technology, Han’s Laser continues to explore new areas that cannot be processed by the original traditional processing methods, expanding the application scope. The company has adopted strategies such as product performance improvement, product function replacement or expansion, successfully infiltrating into the market of traditional processing equipment. In the following we will explain the strategy by taking laser information marking, laser cutting, laser welding and laser drilling as examples. a.

Laser information marking: entering the market of traditional information marking equipment with advantages of high quality and high speed

The marking equipment developed by Han’s Laser has the advantages of high engraving precision, marking on regular or irregular appearance, durable anticounterfeiting information marking, high processing efficiency, fast information marking speed, etc. Therefore, its marking equipment has successfully entered the market dominated by the traditional industrial marking method, and successively entered the application market of leather, clothing, electronics, building materials and hardware, craft gifts, machinery, etc. b.

Laser cutting: entering the traditional cutting machine market with advantages of no deformation and low cost

In 2001, Han’s Laser successfully developed a laser cutting machine, which has advantages such as high cutting accuracy, small heat-affected zone, no deformation, fast cutting speed, low running cost and maintenance cost, and high-cost performance. Therefore, Han’s laser cutting machine has successfully entered the markets dominated by traditional cutting machines such as sheet metal processing, manufacturing of high and low voltage electrical cabinets, mechanical parts, kitchen utensils, automobiles, machinery, metal crafts, saw blades, electrical parts, glasses industry, etc. c.

Laser welding: entering the traditional welding machine market with advantages of non-contact and weldable refractory materials

Before the emergence of laser welding machines, electron beam welding machines and resistance spot welding machines had been occupying the whole material welding market. In 2000, Han’s Laser was the first to launch the laser welding machine in the domestic market. The equipment can weld in air, vacuum, certain gas, or transparent materials, and can weld refractory materials such as titanium, quartz, and the like, and

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can also perform micro, remote, large-depth and space–time beam splitting welding with high power density. These outstanding advantages quickly shook the dominant position of the electron beam welding machine in the market. d.

Laser drilling: replacing the mechanical drilling machine with advantages of high speed, large depth diameter, and group hole processing

In 2002, Han’s Laser learned the technology of PCB (Printed Circuit Board) laser drilling machine by exporting mechanical drilling machines to Japan and China Taiwan, and finally developed the PCB laser drilling machine. The laser drilling machine has advantages of high speed, large depth-to-diameter ratio, drilling holes on hard, brittle, soft materials and difficult-to-machine materials, no tool loss, highdensity group hole processing and the like. With these remarkable advantages, Han’s Laser drilling machine has gradually replaced the market occupied by the mechanical drilling machine in electronics, electrical appliances, automobiles, tools and measuring tools, and has realized the import substitution of the laser drilling machine. By continuously deepening its technological capabilities, Han’s Laser has developed new products with similar or better functions than traditional products and successfully entered the market of traditional products. Replicating this development paradigm to multiple industries, Han’s Laser has expanded in multiple product markets and application fields, as shown in Table 2. This process reflects the important role of product core functions in technology substitution.

Table 2 Several products entering the traditional product market through product function substitution or function expansion Han’s products

Traditional market products

The application industries

Laser marking

Pneumatic marking, inkjet printing, chemical corrosion, electrical discharge machining and mechanical stamping, etc.

Clothing, hardware, plastics, packaging, packaging, medical products, household appliances, keyboards, panels, advertising signs and daily necessities

Laser cutting

Mechanical cutting, oxygen cutting, arc cutting, plasma cutting, laser cutting, wire cutting, high-pressure water jet cutting

Sheet metal processing, high and low voltage electrical cabinet manufacturing, mechanical parts, kitchen utensils, automobiles, machinery, metal crafts, saw blades, electrical parts, glasses industry, etc.

Laser welding

Electron beam welding, resistance spot welding

Aerospace, atomic energy, automotive and electrical electricians, etc.

Laser drilling

Mechanical drilling

Electronics, electrical appliances, automobiles, tools and measuring tools, etc.

90

(3)

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Continuous investment in R&D of laser technology and processing equipment to break through the core technology

Over the years, Han’s Laser has maintained a steady investment in technological R&D to enhance its technological innovation capability. Before 2006, Han’s Laser acquired core components of laser equipment-the laser through purchasing from outside suppliers, but the cost was extremely high. Since 2006, Han’s Laser has invested a large amount of money in independent production, and successively developed high-power laser, ultraviolet laser, and green laser. The company broke through the key technologies and got rid of the heavy dependence on imported core parts, which reduced the cost of products and increased the gross profit margin. For instance, the cost of complete sets of products was reduced by about 60% as compared with that of purchased products at the same price. Since 2006, the core components of Han’s Laser have been gradually produced by itself or by its subsidiaries, as shown in Table 3, freeing itself from heavy reliance on upstream industries (Table 4).

Table 3 Production capacity of Han’s Laser’s core components Core components

Produced in-house or sourced from its own subsidiaries

Laser devices

Produced in-house various laser devices (including high-end high-power lasers)

Dc motor

From Shenzhen Han’s Motor Technology Co., Ltd.

Numerical control system

From Han’s CNC Technology Co., Ltd.

Machinery accessories

From Han’s Supporting production bases

Control software

Developed in-house

Table 4 Core components development of Han’s Laser and its counterparts Key components

Han’s Laser HG TECH

JinFangyuan

Trumpf (Germany)

Bystronic (Switzerland)

Laser devices

Made in-house

Imported

Imported

Made in-house

Made in-house

Numerical control system

Made in-house

Imported

Imported

Made in-house

Made in-house

Linear motion actuator

Made in-house

Imported

Imported

Made in-house

Made in-house

Cutting head

Made in-house

Made in-house Made in-house Made in-house

Independent

Made cooperatively

Made in-house

Large parts and Processed precision in-house processing parts

Made cooperatively

Made in-house

1 Han’s Laser Technology Industry Group Co., Ltd.

a.

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Producing high-power laser in-house and getting rid of import dependence

In 2006, Han’s Laser developed high-power CO2 laser, but it had a defect in stability. To solve this problem, Han’s Laser cooperated with a Swiss company. The cooperation helped it solve the problem of unstable output power. It became the only domestic manufacturer of this laser device. This technological breakthrough in high-power CO2 laser strengthened its competitive advantages in high-power laser cutting machines and other related types of laser equipment resulting in broader application scope of high-power products and significant improvement in profitability. b.

Continuous laser product upgrading has boosted the added value

In terms of low-power laser, Han’s Laser applied its self-developed green laser and ultraviolet laser to the low-power laser equipment. The introduction of green and ultraviolet laser products has greatly expanded the market of low-power laser processing equipment. For example, the marking equipment can be used in the marking of some special materials; the cutting equipment can be applied to fields such as thin-film solar cells, LED epitaxial wafer cutting, and the like; the laser drilling has entered more sophisticated high-end fields. These newly developed segments provide higher added value, which promises large space for Han’s future development in low-power laser equipment. In addition to laser, Han’s Laser was the first domestic company to develop supporting software for laser marking machines that can be debugged according to the customer’s requirements. Its independently developed control software with IPRs can support the production of customized equipment. Since 1997, Han’s Laser’s supporting software has been well ahead of its domestic rivals. It wrote all the core code of its light source production technology and software control technology. As of December 31, 2020, Han’s Laser has 5250 valid IPRs, which contain 3,811 patents, 1,157 copyrights and 282 trademark rights. Han’s Laser owns core laser technologies, including the key components such as laser, PA controller and linear motor, which are all made in-house and produced in a modular way. All the key components of laser processing equipment and relevant supporting software can be developed and produced by itself independently, therefore, the value of the entire industrial chain can be fully obtained. Han’s Laser has excellent performance in cost efficiency and product application promotion, which has promoted its core competitiveness and profitability. (4)

Upgrading from equipment manufacturer to solution provider and providing value-added services

Before 2008, the business model of Han’s Laser was to design high-performance laser processing equipment by relying on its strength in research. When designed, the whole equipment would be broken down into hundreds of design drawings according to the material or part needed in manufacturing it. Then the activity of making the material or part would be outsourced to hundreds of specialized manufacturers in different industries, countries, and regions. After purchasing raw materials and

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components from specialized component manufacturers, Han’s Laser integrated them into high-tech optomechanical integrated laser processing equipment according to the final product design and obtained added value from technological integration. With continuous improvement in product structure and the synergy between equipment sales, as well as the accumulation of industrial experience in various product application fields, Han’s Laser has gradually transformed into an integrated solution provider, developing industrial equipment and services according to the requirements of specific industries and specific customers. In terms of organizational structure, Han’s Laser has established a customer-oriented business development framework, switching from product divisions to customer-oriented divisions and aiming at deeply tapping the market potential of system equipment in various industries. Up to 2020, Han’s Laser had provided industrial solutions to a long list of industries including electronics, household appliance hardware, kitchenware and bathroom, new energy lithium battery, electric automobile, LED, packaging, and solar energy. Before 2008, in order to develop the market, Han’s Laser offered after-sales service for free, which resulted in high operating expenses. However, r years of free service led to a good sales result. By 2008, 30,000 units of laser marking and welding equipment had been sold, which met the conditions for service charge. In 2009, Han’s Laser began to implement extended warranty service charges, which was also in line with the long-term development trend of equipment manufacturing enterprises. Improving the quality of after-sales service helped reduce manpower inputs for equipment maintenance and ensure the continuity of production. After the implementation of the after-sales service charging system, the company’s operating expenses were reduced effectively, as shown in Fig. 5.

Fig. 5 Operating expenses of Han’s laser were reduced after the implementation of after-sales service charges

1 Han’s Laser Technology Industry Group Co., Ltd.

(5)

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Acquiring strategic resources through mergers and acquisitions and strategic cooperation to realize inter-sectoral upgrading

Many laser equipment manufacturing enterprises starting with the production of single special equipment have developed into multinational companies with standardized and large-scale production capacity. Such huge enterprises have not only promoted the application of laser technology to industries but also gained economies of scale, constantly improving cost performance of their own products, and dominating the market. In developing laser technology and laser processing equipment, Han’s Laser actively uses “external avenues” such as technical cooperation and strategic investment to enhance the key technological capabilities and expand the market in addition to independent R&D. Since 2006, Han’s Laser has continuously upgraded from a single laser marking machine manufacturer to the fields of laser printing equipment, laser heat treatment equipment, numerical control equipment and LED equipment by means of capital operation. It has achieved strategic cooperation and technology sharing with several powerful enterprises in the industry. a.

Acquiring Shenzhen Tete Laser to enhance the market advantage of laser marking equipment

In February 2007, Han’s Laser invested CNY 22,505,000 to acquire 50.69% equity of Shenzhen Tete Laser Technology Co., Ltd. Tete Laser’s business scope includes R&D, production, and sales of surface treatment systems such as laser marking and related optical and electromechanical products. The unaudited total assets of Tete Laser in 2006 amounted to 41.61 million CNY, with the main revenue of 58.57 million CNY, a net profit of 8.2 million CNY and a net asset of 29.49 million CNY. The acquisition of its equity increased Han’s Laser absolute advantage in the domestic laser marking market and provided a favourable competitive environment. b.

Laser printing equipment

In November 2006, the company invested CNY 51 million to set up Han’s Guanhua. Han’s Laser and its subsidiaries held 52% of its equity interest, thus successfully entering the printing equipment industry and adding another important profitcontributing sub-industry since 2007. In October 2007, Han’s Laser and Yu Tao Baoma Printing Devices Co., Ltd., jointly established Ningbo Han’s Derun Digital Printing Materials Technology Co., Ltd. to invest in printing equipment. Up to now, Han’s Laser has basically established a complete industrial chain from the terminal colour printer to laser direct plate making and then to upstream plate materials. c.

Laser heat treatment equipment

On December 6, 2007, Han’s Laser and Wuhan Jinshikai Laser Company signed an agreement on equity transfer and unilateral capital increase. Han’s Laser acquired 25% of Jinshikai’s shares through a cash contribution of 12.5 million CNY and unilaterally increased its capital by 30 million CNY. After the capital increase, Han’s

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Laser held 53.125% equity interest of Wuhan Jinshikai Company. Wuhan Jinshikai Laser is in the leading position in high-power laser in China and is the first commercial supplier of 10,000-W transverse-flow CO2 laser in China. By investing in Wuhan Jinshikai Laser, the company entered the laser cladding and heat treatment fields, which also indicated that the strategic layout of the company’s products in the laser industrial processing equipment field has been basically completed. d.

Numerical control device

In June 2007, Han’s Laser and Shenyang Machine Tool Group jointly invested in the establishment of Shenyang Machine Tool-Han’s Laser Numerical Control Technology Co., Ltd. The new company focuses on the development of core functional components of numerical control machine tools, with a total planned investment of 200 million CNY, of which Han’s Laser accounts for 60% of the equity and Shenyang Machine Tool Group accounts for 40%. Since then, Han’s Laser has been able to cooperate with the largest machine tool group in terms of numerical control equipment and entered the numerical control laser equipment industry. e.

LED equipment

In 2007, Han’s Laser established Shenzhen Han’s Optoelectronic Equipment Co., Ltd., mainly engaged in independent R&D and production of a complete set of automatic LED packaging and testing equipment. In 2010, the sales revenue of the leading products of Han’s Optoelectronics was CNY 101,764,800, representing a year-onyear increase of 337.00%. In February 2010, Han’s Laser established Shenzhen Han’s Photovoltaic Technology Co., Ltd., which is mainly engaged in the research and production of solar photovoltaic production equipment. Through the introduction of first-class R&D management teams at home and abroad, Han’s Laser has made rapid breakthroughs in this business area, realizing the plan of completing research and mass production in the established year and realizing positive profit in the same year, which completed the normal three-year plan in one year. In 2010, the sales revenue of Han’s Photovoltaic products, namely the new generation diffusion furnace and PECVD, amounted to CNY 29,384,600, and valid orders amounted to CNY 204 million. The fields of new energy and new light sources indicate broad market space, and the above investment gradually became the company’s new business growth point. In 2010, Han’s Laser launched a new generation of solar cell manufacturing equipment, which was well received by customers for its leading technology and stable product quality. In only one year, Han’s Laser has become a major supplier of domestic photovoltaic cell equipment and an important partner of many foreign listed companies. f.

Investing in foreign giants to achieve strategic cooperation and technology sharing

In the third quarter of 2008, Han’s Laser successively purchased the equity of Italian PRIMA in the capital market and held 677,000 shares, accounting for 10.6% of the total equity. PPIMA is the world’s top three manufacturers of high-power laser

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cutting equipment and is also the largest domestic supplier of high-power laser cutting equipment. The investment in PRIMA can make up for the shortage of Han’s largescale laser in high-power cutting equipment. The goal of Han’s Laser’s investment in PRIMA equity is to achieve a controlling interest, thus realizing the company’s great leap in high-power cutting equipment. Since February 2009, Han’s Laser has acquired 642,200 shares of IPG Company in the secondary market of NASDAQ, holding 1.42% equity interest in IPG Company. At present, the company is actively carrying out strategic cooperation with IPG. IPG Company is the major developer and manufacturer of high-performance fibre lasers in the United States and is also the leading company in the laser industry in the world in recent years. Fibre laser is regarded as the next generation laser because of its excellent performance and convenience. This is of great significance for the Han’s to develop new generation laser products, seize the high-end market, and enter high-power welding for automobile and other industries in the future. g.

Laser measurement service

In December 2013, Han’s Laser acquired an 80% equity interest in Nextec Technologies 2001 Ltd., an Israeli laser measurement company. Established in Haifa, Israel’s “Silicon Valley” in 2001, Nextec is a high-tech company specializing in highprecision and high-speed laser scanning, measurement, and geometric inspection. It has a unique 3D laser scanning measurement technology patent and has installed more than 200 sets of laser three-coordinate measuring equipment for customers in the automotive and aerospace industries worldwide. The acquisition of Nextec Company by Han’s Laser, with the help of foreign advanced technology, is beneficial to comprehensively improve the level of non-contact measurement technology, develop laser measurement business, and increase the market share of the measurement equipment in the automotive, aerospace and consumer electronics industries.

1.3 Key Influencing Factors of Enterprise Upgrading (1) a.

Market changes Changes in corporate costs

Since the promulgation of the new “Labour Contract Law” in 2008, the minimum wage standard in different parts of China has been raised, resulting in significantly increased labour costs in enterprises. At the same time, the accelerated appreciation of CNY has reduced the competitiveness of enterprises’ products in the world, which has brought huge pressure on enterprises’ export trade and forced enterprises to value technological innovation and build their own brands. For this reason, Han’s Laser strengthened the development of the domestic market during the period of CNY exchange rate rise, and the proportion of the domestic market has increased. In addition, the prices of key raw materials such as laser optical materials are also rising. Taking advantage of the international division of labour, Han’s Laser has

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Fig. 6 Domestic and foreign income and composition of Han’s Laser (million CNY). Source Forward Intelligence

implemented global procurement, signed long-term contracts with suppliers, and strengthened cooperation with domestic research institutions to gradually promote the process of localization of optical materials. b.

Changes in market demand

In the period of the financial crisis, the global market changed suddenly and external demand decreased sharply. Many processing trade enterprises in China closed. The export of Han’s Laser plunged sharply in 2009, but recovered in 2010. The recovery of the macro-economy led to a rapid rise in overseas orders. Han’s Laser’s overseas sales volume hit record high, 1207 million CNY, in 2018. With the export scale of its laser products expanding, the risk of exchange rate fluctuations became more prominent, which had a certain impact on the operation of Han’s Laser (Fig. 6). In the domestic market, the improvement of China’s manufacturing position has driven the growth of demand for laser processing equipment. Domestic industrial consumption has accelerated, and the demand for substitutes and new application areas have been expanding. In the next decade, China’s manufacturing and processing industry will complete the transformation to energy saving, environmental protection, high efficiency, and high precision, so the demand for high-end processing equipment such as laser processing will accelerate. At the same time, due to the strong pull of the European photovoltaic market, the production capacity of China’s solar photovoltaic industry has expanded significantly, with the output of solar cells firmly ranking first in the world, accounting for more than 50% of the global market share (according to the data provided by SEMI). As a result, China has also become the world’s largest photovoltaic equipment market, and the focus of the photovoltaic equipment industry is gradually shifting to China. In order to adapt to the changes in market demand, Han’s Laser has continuously adjusted its product structure, applied laser processing technology to different industries, and developed new applications, new demands, and new markets to replace the traditional processes and technologies. In February 2010, Han’s Laser invested in the establishment of Han’s Photovoltaic, focusing on research, development, manufacturing, and production of high-end photovoltaic

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equipment. Its future product range covers production equipment in all aspects of the photovoltaic industry. (2)

Government policy

The Chinese government attaches great importance to speeding up the development of laser processing technology. Han’s Laser has benefited from a series of preferential policies of the state for a long time. Policies like National Medium-and Long-term Science and Technology Development Plan (2006–2020), Guide to Priority Areas of High-tech Industrialization for Current Priority Development (2007), Plan for Adjustment and Revitalization of the Electronic Information Industry and Plan for Adjustment and Revitalization of the Equipment Manufacturing Industry are all conducive to supporting domestic high-tech laser equipment manufacturing enterprises with international competitiveness and providing policy support for these enterprises to participate in international competition. In terms of tax policy, laser processing equipment has always been high-tech equipment that the state encourages imports. With the cancellation of relevant trade barriers, it is not only beneficial to the laser enterprises but also beneficial to the enterprises in the laser processing equipment manufacturing industry because the price of raw materials decreases and the production cost of products is reduced as a result of the tariff reduction. At the same time, because the local government supports high-tech enterprises, Han’s Laser has received a certain degree of tax incentives. (3)

Value chain environment

In the 1990s, many multinational companies have entered China. However, the price of products was very high (on average three times that of domestic similar products) and the sales service network was not perfect, and it is difficult for domestic small and medium-sized enterprises to accept it. On the other hand, China’s laser processing equipment application industry is mainly the mechanical processing industry, while most foreign countries are mainly integrated circuits and electronic industry, indicating the sales patterns of domestic and foreign products are quite different. Therefore, the total market share of foreign enterprises in China is less than 10%. China’s laser processing equipment manufacturers, relying on their better product performance-price ratio and sound sales and service network, have occupied a relatively high market share in the domestic market. At the beginning of its establishment, Han’s Laser focused on the domestic market and was a born OBM enterprise growing up under the background of the huge domestic demand market. When the products were exported to foreign countries, Han’s Laser used its own brand, and then continuously developed and built domestic and foreign channels. In terms of product R&D, except for key components that need to be imported, Han’s Laser has independently developed all other necessary parts. In its more than ten years of growth, it has been relying on independent R&D to continuously break through core technologies, to achieve independent production of components to replace imported parts, and finally to occupy a favourable position in the upstream of the value chain.

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Cluster environment

Enterprises in industrial clusters can get help from external economies of the cluster, learning and innovation platforms, factor resources attraction and other aspects, to drive enterprises to achieve upgrading. Industrial clusters can not only provide effective resources for the upgrading of enterprises, but also regional cluster brands can help enterprises to share knowledge and develop markets. Shenzhen, where Han’s Laser is located, is the frontier of reform and opening-up. At present, it has formed an industrial development pattern in which both high-tech industries and advantageous traditional industries are prospering. Shenzhen is an important R&D and manufacturing base for advanced new technologies in southern China. Its industrial supporting system is perfect. The emerging high-tech industry, modern logistics industry, financial service industry and cultural industry are the four pillar industries. In early 2006, Han’s Laser, with the support of the Shenzhen municipal government, obtained a piece of land use right in the Shenzhen Science and Technology Park for the company’s laser equipment production and research base. Being in an active market environment, it has also greatly improved its market capability. (5)

Key resources

In terms of key resources, first, Han’s Laser has great capital strength, which allows it to increase investment in production, R&D, marketing, and other aspects. These increased investments have promoted its technological innovation capability and brand image, and finally facilitated its transformation and upgrading process. Second, Han’s Laser has accumulated rich intellectual capital. It possesses 3,811 domestic and foreign patents and 1,157 computer software copyright, as shown in Table 5. 6)

Key capabilities

a.

Production capacity

In 2013, Han’s laser’s total production capacity for marking equipment was 10,000 units/year, and the actual production was 3,916 units. The new production capacity accounted for 66.00% of the planned production capacity, and the profit generated by the new production capacity was 43,333,300 CNY. The production capacity for laser welding equipment was 2,000 units/year, with the actual production of 1,146 units. The profit generated by the new production capacity was 60,092,300 CNY. b.

Innovation capability

Han’s Laser has completed experimental equipment, R&D infrastructure, and a strong R&D team. The company has applied for 2,883 patents in the past two years. Up to the end of 2020, a total of 3,811 patents have been granted, and more than 600 models of laser equipment and automation products have been developed. It is one of the companies in the world that has “Purple Laser Patent”. In 2020, there were 4,825 researchers in Han’s Laser, accounting for 34.04% of the total number of employees.

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Table 5 Major scientific research achievements of Han’s Laser Category

Product

Serial

Application

Laser marking machines

Lamp pumped YAG marking

YAG-M505

Electronics, clocks, communication products, auto parts

Semiconductor-pumped marking

DP-R50

Plastic surface, medical equipment, food packaging

Semiconductor-pumped green marking

532-D20

Line coding, anti-counterfeiting technology

CO2 laser marking

C02-25/50/100

Sculpting non-metallic materials, such as wood and paper

LINDA laser marking

LINDA10T/10

Electronic, handicraft, material industry

Laser welding machines

Laser cutting machines

JET STAR laser code printer

Packaging in food, beverage, medical, tobacco industries

3D Laser interior carving ANGEL200

Interior carving and anti-counterfeiting of crystal and glass material

Keyboard laser

YAG-K50S

Computer keyboards

Button laser

CO2-B50/100

Clothing

On-line marking for electronic components

CREARE-CO2

Electronics

YAG Laser welding

W150A/W150S

Precision welding of metal materials, widely used in batteries and sensors

Laser welding

W50

Assembly welding of micro components, such as integrated electrical leads, picture tubes, electron gun assembly

Laser cutting

CUTTING-30/100

Wood processing, packaging, and printing, leather clothing

Sheet metal cutting

SCRATCH-50

Silicon semiconductor industry (continued)

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Table 5 (continued) Category

Product

Serial

Application

Laser/mechanical drilling equipment

PCB laser drilling

HD500A

Printed circuit board

BLASTER laser drilling (*)

BLASTER

Printed circuit board

Driller laser (*)

DRILLER-266/666

Printed circuit board

Miller milling machine (*)

MILLER266

Note Products with * are developed by Han’s CNC (one subsidiary of Han’s Laser)

Table 6 R&D investment of Han’s Laser, 2015–2020 R&D expenses (million CNY) Percentage of sales revenue (%)

2015

2016

2017

2018

2019

2020

427.80

585.33

850.29

992.99

1047.14

1287.48

7.66

8.41

7.36

9.00

10.95

10.78

They work in a variety of R&D fields such as laser, automation control, computer software and mechanical control. Han’s Laser has pursued industry-university-research institute cooperation It signed a “Cooperation Agreement” with the Engineering and Technology College of Shenzhen University. The two sides have agreed to cooperate in the fields of laser devices and technology, laser engineering and intelligent measurement and control technology, optical information technology and fibre laser/amplifier, computer control and intelligent network monitoring. In the process of cooperation, both parties have established a good technical cooperation relationship, which has laid a strong foundation for the company’s further R&D (Table 6). c.

Marketing

Han’s Laser’s sales and service network has obvious competitive advantages. After years of development and improvement, ‘it has specially set up a marketing management centre with a nationwide sales and service network and more than 100 offices and contact points across the country, which can provide customers with 24-h response services. In addition, it has set up more than ten overseas branches with resident technical service personnel to provide customers with comprehensive pre-sales, in-sales and after-sales support and services, and has opened 800 toll-free service telephone numbers. With good product performance, service and leading position in the laser processing equipment market, Han’s Laser has drawn a good market image and won several provincial and national honorary titles. It keeps investing in sales. Its sales expenses of Han’s Laser from 2015 to 2020, accounted for an average of about 10.49% of the operating income, far higher than the same industry level (Table 7).

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Table 7 Sales expenses of Han’s Laser (million CNY) 2015

2016

2017

2018

2019

2020

Management cost

833.95

1,067.23

676.92

572.88

570.36

795.58

Cost of sales

608.06

771.37

1,135.46

1,090.70

1,001.79

1,293.72

11.61

−6.72

221.87

−4.38

58.84

280.29

5,587.34

6,958.89

11,560.09

11,029.49

9,562.63

11,942.48

Percentage of administrative expenses (%)

14.93

15.33

5.84

5.18

5.96

6.65

Percentage of sales expenses (%)

10.88

11.08

9.81

9.88

10.47

10.83

Financial expenses Operating income

Source Han’s Laser’s annual report

d.

Management capability

Han’s laser has rich management experience and high management level. The company has established a management team with chairman Yunfeng Gao as the core member, and most the team are around 40 years old and have strong cohesion and daring spirit. At the same time, the company has also developed a group of professional talents who have expertise, practical and enterprising spirit, and modern business philosophy. It insists on reform and innovation, actively carrying out modern management, establishing and improving a set of scientific management modes in combination with the actual situation it faces. Han’s Laser has proactively built-up internal control standard systems, continuously strengthened internal management, and strived for “refined” management. After it went public, the top 10 shareholders comprise eight institutional investors, the founding team, and the senior executive team. This shareholder structure is conducive to the establishment of efficient corporate governance. From the operational indicators between 2015 and 2020, the average business cycle of Han’s Laser is 265.76 days, and the average inventory turnover rate remains at 2.53 (Table 8). (7)

Entrepreneurship

Enterprise upgrading depends on the entrepreneur’s judgment on the internal and external environment of the enterprise, his entrepreneurial spirit, and the choice of a suitable upgrading path. Yunfeng Gao, founder and chairman of Han’s Laser, was born in 1967 and graduated from Beijing University of Aeronautics and Astronautics with a major in laser guidance. After graduation, he was engaged in the research of laser marking machines in Hong Kong Trade and Development Bureau and met the earliest foreign customers of Han’s Laser in Hong Kong, which motivated him to found Han’s Industry Co., Ltd., in Shenzhen in 1996. Every time the company encountered a shortage of funds, Gao contributed his assets and even gave up his controlling stake for one time in order to get funding. All the senior managers of Han’s Laser have a technical background. For example, general manager Fuzheng Zhou once presided over the development

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Table 8 Operational indicators of Han’s Laser, 2015–2020 Operational capability indicator

2015

2016

2017

2018

2019

2020

Business cycle (days)

273.27

256.15

204.26

268.86

313.8

278.22

Inventory turnover days (days)

162.72

148.31

109.64

135.56

155.05

156.38

Average collection period

110.55

107.84

94.62

133.30

158.75

121.84

Inventory turnover rate (times)

2.21

2.43

3.28

2.66

2.32

2.3

Turnover rate of accounts receivable (times)

3.26

3.34

3.8

2.7

2.27

2.95

Turnover rate of current assets (times)

1.21

1.37

1.6

1.02

0.8

0.92

Turnover rate of fixed assets (times)

4.34

4.89

7.93

7.84

6.65

8.56

Total assets turnover rate (times)

0.76

0.78

0.94

0.67

0.52

0.61

of high-efficiency and high-power harmonic laser generation technology, which was one of the few U.S. invention patents in the laser field in China. Therefore, in the early stage, every new project and product was decided by the founder and the group of technicians with specific technological capability and some market inspiration. The technical background, strategic foresight and pragmatic style of the senior management have contributed a lot to the continuous upgrading of Han’s Laser over the years.

1.4 Effects of Enterprise Upgrading Successful enterprise upgrading will result in improved performance in various ways, for example, enhanced position in the value chain, heightened core capabilities and dynamic capabilities. (1)

Improvement of Value Chain Position

From the perspective of the value chain, Han’s Laser has upgraded from a manufacturer of laser processing equipment to an enterprise with independent innovation, various R&D achievements, breakthroughs in core technologies and self-owned brand. The independent innovation and production freed itself from heavy dependence on upstream players. Through the transformation from an equipment manufacturer to a solution provider, it has created more added value in production services and strengthened its control over the value chain. Regarding the added value, the major products of Han’s Laser, including laser and automation equipment, PCB, and automation equipment, maintained a high gross profit margin from 2008 to 2015. Its cost advantage is also obvious. Take the company’s PCB equipment as an example, the selling price is about 30% lower than the competitors’ costs on average, and the maintenance cost is less than half of the competitors’ costs (Table 9).

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Table 9 Gross profit margin of major laser products of Han’s Laser Main products

2015 (%) 2016 (%) Main products

Low power laser and automation equipment

41.54

42.74

Laser and 41.71 automation equipment

37.02

32.63

40.75

High-power laser and automation equipment

30.93

29.40

PCB and 37.97 automation equipment

34.76

36.46

36.63

Laser plate-making and printing equipment

8.9

3.60

36.3

37.64

PCB and automation equipment

2017 (%) 2018 (%) 2019 (%) 2020 (%)

Source Company data

(2)

Improvement of key resource capability and dynamic capability

Different enterprises can acquire different core competencies in the upgrading process. Gong (2007) believed that in the process and product upgrading, the core competence is based on production, while in functional upgrading, the core competence is based on R&D, design, and marketing. And in the process of cross-industry upgrading, the above-mentioned core competencies could be enhanced. From the point of view of key resources, Han’s Laser has advantages in entrepreneurship, capital resources, and production advantage and management capability before upgrading. Through upgrading, Han’s Laser has acquired a good brand, technology, talents and channels and networks, and the marketing capability has been greatly improved. From the perspective of dynamic capability, Han’s Laser can develop different applications in various industries based on the core technology of laser technology, demonstrating a strong initiative. (3)

Improvement in social performance

The realization of enterprise upgrading, i.e., conducting higher value-added activities and enhancing profitability to improve the capital status, is helpful for the enterprise to obtain sustainable and rapid development. The good operation and development of Han’s Laser has provided employees with stable employment, career development space, and income increases. Its good operation has also generated positive externalities, especially in environmental protection. Therefore, the attitude towards staff and environmental protection should be included in the consideration of enterprise upgrading performance. Socially responsible enterprises will perform more prominently, especially in special times (such as financial crises).

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Table 10 Improvement in social performance of Han’s Laser Han’s Laser Labour income

Per capita salary increased from 45,600 CNY in 2007 to 155,600 CNY in 2018, with an average annual growth rate of 21.93%

Environmental protection Han’s Laser has a complete set of perfect quality management systems On August 7, 2001, Han’s Laser passed the ISO9001:2000 international quality certification system On September 18, 2007, Han’s Laser passed the ISO14001:2004 environmental management system certification In 2016, ISO14001:2004 was changed to ISO14001:2005, and the Environmental Management Manual was formulated and implemented according to the system requirements Han’s Laser has set up a special environmental management organization to strictly control the quality of R&D, incoming materials, production process and delivery of products with scientific methods. The main products have passed the EU CE certification and China Environmental Mark certification

Han’s Laser has performed well in terms of labour income and environmental protection, which reflects the effect of enterprise upgrading, as shown in Table 10. During the financial crisis, Han’s Laser did not lay off staff, and it continued to attract new staff and talents to ensure the steady growth of its domestic business. It maintained an average annual growth of about 20% in the benefits for the workforce. In addition, Han’s Laser pays attention to the concept of environmental protection and sets up a good image of responsibility in society.

1.5 Findings (1)

Broadening the application field of products is one of the effective ways in enterprise upgrading.

Based on the core technology, broadening the application field of products, creating new product applications, shaping new markets, and moving from the original value chain to the new one is one of the effective ways to realize enterprise upgrading. The case of Han’s Laser confirms this belief. The company applies its laser technology to many industries such as printing, medical treatment, and aerospace, adds new functions and elements based on the original functions of the products, breaks through the traditional sectors, and gradually develops several high-tech product lines including marking, welding, cutting, heat treatment, drilling, printing, and medical equipment beyond the early laser marking equipment, and continuously moves up to value chains with higher added value. The expansion of functions fosters the application of its technology and products in different industries, thus promoting inter-sectoral upgrading of enterprises.

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Breaking through the core technology to produce key components in-house is one of the effective ways in enterprise upgrading.

Breaking through the limitation of core technology and realizing independent production of key components can break the upstream monopoly on technology, reduce manufacturing costs and effectively broaden the space for product upgrading. For example, the launch of green and ultraviolet laser products has greatly expanded the market space of Han’s low-power laser processing equipment, and the newly expanded areas are all high added value. In the process of upgrading technological capabilities, Han’s Laser, based on the market environment and its own technological capabilities, uses both endogenous and exogenous technological channels to promote the technological deepening, replaces or expands product functions through key technological innovations, implements technological and functional integration, erects strong technological support, and helps enterprises enter different market segments through applied technological innovations. (3)

Upgrading from a simple manufacturer to a solution provider with more value-added services is one of the effective paths in enterprise upgrading.

Equipment manufacturing enterprises could upgrade from simple manufacturers to solution providers with more value-added services, which is also one of the effective ways to upgrade. Han’s Laser has traditionally focused on providing laser processing equipment. With the improvement of product structure and the synergy between different equipment sales, and the accumulation of industrial experience in various product application fields, the company has gradually transformed into an integrated solution provider of industrial equipment for customers. Based on an in-depth exploration of the system equipment market in various industries, Han’s Laser has incrementally gained the ability to provide complete equipment solutions. (4)

Equipment manufacturers should pay attention to the combination of marketing and R&D capabilities to promote upgrading.

The equipment manufacturing industry belongs to the middle stream of the value chain. The upstream is the production of basic components and raw materials, while the downstream is specific finished products. Being in the middle stream of the industry, enterprises should place special importance on understanding the upstream and downstream markets and undertake targeted technological innovations. Therefore, equipment manufacturing enterprises should promote upgrading by focusing on the combination of marketing and R&D capabilities. Having profound understanding of the market and flexible development approaches, Han’s Laser has ceaselessly developed and upgraded its technology according to the market, and finally become a No. 1 player in several segments of the laser industry. (5)

The internal and external environment affects the upgrading path of equipment manufacturing enterprises and further brings about differences in upgrading performance.

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In terms of resources and capabilities, Han’s Laser has great capital strength and strong R&D capability. It has a wide range of product applications, comprehensive business scope and product structure. With the ownership of capital and technological strength, Han’s Laser keeps improving its resource integration ability, management ability and marketing ability, finally achieving superior upgrading performance.

2 Pacific Textiles Holdings Limited 2.1 Brief Introduction to the Case Enterprise and the Investigation Process Pacific Textiles Holdings Ltd. (Pacific Textiles for short), located in Nansha Development Zone of Guangzhou, is a wholly-owned Hong Kong enterprise. Founded in 1997, it has 4,933 employees by March, 2021 and produces and sells a wide variety of medium and high-grade textile fabrics. 95% of the products are sold to America, Europe, and Japan. In the past two decades, Pacific Textiles has grown to be one of China’s top 500 foreign trade enterprises. The products it produces is of leading grade. Its economic benefits and export earnings are among the best in the industry. The net export volume and export unit price rank first in the industry. And the export quantity (ton) ranks second in the industry. In 2008, when the financial crisis swept across the world, the order for its products reached an all-time high. Operating income came at 3.454 billion CNY with a total profit of 152 million CNY. In 2009, operating income continued to grow to 3.822 billion CNY, with high-tech product sales accounting for 65% of the total income, and total profit rising to 222 million CNY. By 2009, Pacific Textiles was 25 times as large as its initial size in 1998. According to the company’s 2020–2021 annual report, the total revenue in 2020 was 4.534 billion CNY, and the total profit reached 609 million CNY. Pacific Textiles has cherished the environmental protection idea since it was founded. It is the first textile enterprise that voluntarily organized clean production, the level of which has reached advanced international standard. Its cumulative investment in energy conservation and emission reduction is running at 200 million CNY. Pacific Textiles has taken a series of measures to reduce cost and energy consumption. In 2010, the company’s energy consumption per unit product decreased by 25% compared with that in 2005, and the proportion of energy in production cost decreased from 9% in 2005 to 5% in 2010, as shown in Fig. 7. The company adopts cleaner production, energy conservation and environmental protection projects, saving 102,700 tons of standard coal every year, and the direct cost saved in energy-saving projects is more than 90 million CNY per year. Pacific Textiles has won many awards and regional and national recognition because of its outstanding performance in clean production and environmental protection. In March 2015, it was recognized as a national high-tech enterprise. In

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Actual energy consumption per unit product Year on year change of actual energy consumption per unit product %

Fig. 7 Actual energy consumption per unit product decreases, 2005–2010

May 2019, it was awarded “Bank of China (Hong Kong) Corporate Environmental Leadership Award—Eco Challenger” by the Federation of Hong Kong Industries and Bank of China (Hong Kong). In November of the same year, it was designated as “Exemplary Enterprise in Green Design of Industrial Products (of the 1st batch)” by the Ministry of Industry and Information Technology of CHINA In November 2020, its project “Key Technology and Applications for printing and dyeing wastewater treatment optimization and cloud control”” was granted the second prize for scientific and technological progress by China National Textile & Apparel Council (CNTAC). In February 2021, its project “20,000 t/d Phase 5 Wastewater Treatment” was awarded the Outstanding Demonstration Project of 2020 by the Environmental Protection Association of Guangdong Province. At present, there are few case studies on Pacific Textiles. The data of this case mainly comes from two sources: ➀ First-hand data. Our research team visited the case enterprise many times and conducted field investigations and interviews during the time from February to December 2011. The interviewees included the firm’s general manager, managers of the procurement, marketing, R&D, production, and other functional departments as well as departmental managers responsible for energy conservation and environmental protection. ➁ Second hand data. They mainly cover the enterprise’s annual reports, online news reports, relevant publications, and its official website.

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2.2 Pacific Textiles’ Transformation and Upgrading Process—Carrying out Low-Carbon Operation in Many Links of the Industrial Chain to Protect the Environment As a traditional labour-intensive enterprise, Pacific Textiles had to change in order to sustain its development. By implementing low-carbon in many links of the industrial chain, it has successfully realized transformation and upgrading. (1)

Purchasing green raw materials to ensure low carbon operation from start

Pacific Textiles conducts green procurement to control pollution at source. It chooses to use the low sulphur coal of 0.64% of sulphur content, thereby reducing the amount of sulphur dioxide in emissions. In 2009, Pacific Textiles began purchasing phosphorus-free dye additives. Daily consumables such as dyes, additives, and others from suppliers must undergo strict phosphorus concentration tests. This ensures that the company can keep out the raw materials with high phosphorus concentration and chemicals banned by key customers, therefore, facilitating process control and reducing emissions. Green purchasing will result in higher raw material cost. However, reduced emissions of sewage, waste gas, and waste solid can lower the cost of waste treatment. For example, when the sulphur content of coal is reduced by 0.1%, 10 tons of caustic soda can be saved from consumption in the desulphurization process. Therefore, the relatively high production cost is offset. The result is that Pacific Textiles now can provide high quality products that meet the requirements of customers and the environment. (2)

Reengineering the process for clean production

In Pacific Textiles, traditional processes were transformed. The wet opening rate setting process is adopted. The new process shortens the original “dyeing-drying cloth-setting” process to two steps of “dyeing-setting”. So, 0.2 CNY is saved for each pound of fabric printed and dyed because of the eradication of the drying cloth step, improving productivity by nearly 30%. Now 40% of the products in Pacific Textiles are processed in the new method, which annually saves 3,000 tons of standard coal. In addition, the staple rayon pilling process and the pre-dyeing treatment process of cotton and other fabrics have been applied to production. Overall product quality and product competitiveness have greatly improved. Among them, the pre-dyeing treatment process of cotton and fabrics obtained the national patent in 2012. The technology of “Heather Effect Dyeing Process on Polyester/Modified Polyester by One Bath Method” was included in the recommended catalogue of the 14th batch of advanced technologies in energy conservation and emission reduction in China’s dyeing and printing industry in October 2020. (3)

Increasing investment in energy-saving technologies and equipment and R&D

Pacific Textiles possesses complete sets of sewage treatment and smoke and gas treatment systems. Waste water and gas from its factories are in full compliance with

2 Pacific Textiles Holdings Limited

109

local environmental standards. 40,000 tons of sewage is treated daily in their own sewage treatment plant. The sewage recycling equipment, which was built for 40 million CNY, can treat 25,000 tons of waste water a day. In 2008, Pacific Textiles spent 5 million CNY building the desulphurization tower project of the power plant, reducing 527 tons of sulphur dioxide emissions. Sewage sludge is a substance used in sewage treatment. When the thermal power plant is set up, sewage sludge is burned mixing with coal, which reduces emissions of 3,500 tons of solid sludge each year. Waste control systems disposing of waste gas from the production process can remove 85% of sulphur dioxide, 99% of dust, and 50% of oil in waste gas with the installation of special pipes and oil removal devices. Average concentration of sulphur dioxide from the power plant is about half of the new local standard in Guangdong Province. In 2011, Pacific Textiles upgraded its waste gas treatment technology which enables it to get rid of 90–95% of waste gas. Pacific Textiles is equipped with highly automated machines. The rate of successful one-time dyeing and finishing is far above that of other companies in the same industry, and water and energy consumption per kilogram of cloth is only half of that of others. In order to better control cloth intensity and yard tension, and to enhance the quality of dyeing and printing, Pacific Textiles introduced advanced foreign spandex warping machine, cloth temperature control instrument, digital printing machine, automatic dye transmission and distribution system, and so on. In 2007, Pacific Textiles spent 100 million CNY in introducing airflow dyeing machine, reducing 40% of sewage discharges, with heat energy and chemical additives decreasing in the same proportion, total energy consumption falling 12%, saving seven million tons of water each year, and production cost dropping 25%. Pacific Textiles has its own dedicated exhaust treatment devices, such as circulating fluidized machine tool and industrial electrostatic dust removal system. It uses leftover heat exchangers to enhance energy efficiency. Meanwhile, in this company, thermal insulation coating used in aerospace and shipbuilding industries is applied to the dye vat to minimize heat loss, saving 18% of the steam, thus saving 6,000 tons of standard coal each year. In addition, Pacific Textiles has on its own developed stenter frame, double-roller system, heavy iron fabric framework, which have been used in production. In 2010, Pacific Textiles took out a patent for these self-developed devices. (4)

Recycling resources and improving resource utilization rate

Pacific Textiles recycles waste hot water of dyeing and exhaust of setting machines, saving 14 thousand tons of standard coal each year. In 2008, Pacific Textiles invested 40 million CNY in an RO reverse osmosis waste water treatment and recycling project. The waste water which comes up to standards after being treated will be directed into that RO system again to have further treatment for production, with a recycling rate of 70%, and an annual saving of seven million tons of water. Pacific Textiles is the first in China to recycle printing and dyeing waste water for the production. It has set up dyeing waste hot water recycling project to recycle waste hot water, saving 10 thousand tons of standard coal a year. Setting machine exhaust recycling project, where a heat exchanger routes exhaust of up to 140 °C to re-enter the setting

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machine, saves four thousand tons of standard coal each year. Overall, in Pacific Textiles, heat energy recycling rate comes at 78%. Overall energy consumption is equivalent to Level III standard for clean production. Since 2016, environmental, social, and regulatory reports have been added to the annual report of Pacific Textiles, which is intended to call on the whole society to supervise its green operation. In terms of energy conservation, its plant in Panyu, Guangzhou saves 13,000 tons of coal per year, and the energy consumption per unit product decreases by 6.1%; on average it saves 20,000 tons of water a year, and water consumption per unit product decreases by 2.2%. In addition to energy conservation, Pacific Textiles also pursues clean energy. It takes the lead in using solar energy in the industry. In 2014, solar photovoltaic power generation, LED energy-saving lamps and solar medium temperature steam were put into operation, reducing the use of petrochemical energy, which directly resulted in an emission reduction of 23,524 tons of greenhouse gas. So far Pacific Textiles has established 22 energy-saving and clean production programs, bringing in considerable environmental benefits. A total of 102,700 tons of coal is saved annually which can produce a direct economic benefit of 92.57 million CNY each year, as shown in Table 11. (5)

Enhancing product value through the international environmental certification

The European Union (EU), the United States, Japan and other developed countries have extremely strict standards against the chemicals applied to textile products and chemical content of cloth. Pacific Textiles selects internationally best-known suppliers for raw materials. It pursues green procurement and conducts early testing to ensure that the raw materials are green. It takes the initiative to have its products tested by international-level testing agencies. Testing results are completely in line with the requirements of the EU eco-textiles. In 2003 Pacific Textiles obtained the International Oeko-Tex Standard 100 certification for ecological textile products. In 2008 it passed the Swiss GOTS Global Organic Textile Standard certification. In 2010 it began to seek ISO 14064 and GB/T 2333-1 certification. The environmental standards that Pacific Textiles has been adopting is obviously higher than national or local standards. The company has more stringent control of waste discharges, as shown in Table 12. Pacific Textiles is also actively involved in the development of industry environmental standards. Currently, it is a setting unit of the national FZ/T 01105–2010 “method of calculating water consumption in knitting and dyeing products and basic quotas of per unit product consumption” and “evaluation standards of clean production level in dyeing and finishing industry”. With the improvement of quality and environmental functions, the average unit price of products of Pacific Textiles has doubled in 10 years, ranking first in China’s textile industry.

Wet opening rate setting process

Lithium bromide hot water air conditioning project

Workshop sewage recycling equipment

Constant pressure 2009 transformation project of air compressor

Green lighting project

Environmental protection weaving and printing programs

Installation of frequency 2009 converter for major energy consuming equipment

Air compressor waste heat recovery project

2

3

4

5

6

7

8

9

2009–2010

2008–2009

2007–2011

2009–2010

2008–2009

2008–2009

2008–2009

Dye vat thermal insulation and energy saving project

1

Construction period

Programs

No

0.63

0.81

3.50

1.56

0.25

12.00

10.20

16.00

6.42

Investment million CNY)

2.47

1.88

1.00

2.25

0.53

8.29

1.04

2.32

1.94

Environmental/energy-saving efficiency (thousand tons of standard coal per year)

Table 11 Pacific Textiles’ energy-saving, emission-reduction, and clean production programs

3.46

2.64

1.40

3.15

0.75

11.61

1.46

3.25

2.72

Adjusted to coal burned in Pacific Textiles (thousand tons per year)a

3.11

2.37

1.26

2.84

0.67

10.44

1.31

2.92

2.45

(continued)

Economic benefits (million CNY per year)

2 Pacific Textiles Holdings Limited 111

Energy-saving 2010 transformation project of boiler return water internal circulation

Transformation of split air conditioning into central refrigeration system in power plant

Sludge drying engineering system

Airflow dyeing machines 2007–2010

Setting machine exhaust recycling project

Boiler energy-saving transformation project

Energy-saving 2010–2012 transformation project of power supply system

11

12

13

14

15

16

17

2010–2012

2010–2012

2008–2010

2010–2011

Thermal valve insulation 2010–2011 project

10

Construction period

Programs

No

Table 11 (continued)

5.60

2.38

22.07

212.40

4.89

0.67

1.20

0.64

Investment million CNY)

0.80

6.85

13.53

18.55

1.60

1.01

1.32

1.93

Environmental/energy-saving efficiency (thousand tons of standard coal per year)

1.11

9.59

18.94

25.97

2.25

1.42

1.85

2.70

Adjusted to coal burned in Pacific Textiles (thousand tons per year)a

1.00

8.63

17.04

23.37

2.02

1.28

1.66

2.43

(continued)

Economic benefits (million CNY per year)

112 3 Case Study of Enterprise Upgrading

RO reverse osmosis waste water treatment and recycling project

Desulphurization project 2007–2008

Procurement of EC for To be continued environmental protection

20

21

22

2007–2009

362.58

4.76

35.41

13.69

7.50

Investment million CNY)

Source Data collected through field investigation into Pacific Textiles a The coefficient of Pacific Textiles coal to standard coal is 0.7143 b The standard formulated during the Asian Games

Total

4 × 75t/h coal fueled steam boiler denigration transformation project

19

2009–2010

Technical transformation 2004–2007 and energy saving project of heat source for shaping machine

18

Construction period

Programs

No

Table 11 (continued)

–

–

Daily water recycled: 22,000 tons

Annual emission reduction of nitrogen oxides: 234.528 tonsb

6.04

Environmental/energy-saving efficiency (thousand tons of standard coal per year)

102.70

–

–

–

8.46

Adjusted to coal burned in Pacific Textiles (thousand tons per year)a

92.57

–

–

0.15

7.61

Economic benefits (million CNY per year)

2 Pacific Textiles Holdings Limited 113

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Table 12 Pacific Textiles’ performance against local and national standards Parameters

Emission concentration of Pacific Textiles

Local standards of Guangdong Province

300

400

National standards

Air pollutants Sulphur dioxide (mg/Nm3 )

Smoke (mg/Nm3 ) 40

50

Ringelmann blackness