21COE, University of Tokyo

MMRC Discussion Paper No. 96

MMRC-F-96

Architecture-based Approaches to International
Standardization and Evolution of Business Models
The University of Tokyo
Junjiro Shintaku
The University of Tokyo
Koichi Ogawa
The University of Tokyo
Tetsuo Yoshimoto

September 2006

21COE, University of Tokyo

MMRC Discussion Paper No. 96

Architecture-based Approaches toInternational Standardization and
Evolution of Business Models
The University of Tokyo
Junjiro Shintaku
The University of Tokyo
Koichi Ogawa
The University of Tokyo
Tetsuo Yoshimoto
September 2006

1. Introduction
Standardization has a great impact on economic growth—it accelerates technology transfer andcost reduction. As technology progresses rapidly, the price of a product also quickly falls.
Consequently, the efficiency of society as a whole is improved and the benefit to consumers isincreased. This chain—standardization, technological progress, price fall, and expansion of consumer
benefit—causes growth in global economy.
Especially after the 1990s, international standardization had a strong impact on the global1

Shintaku, Ogawa, and Yoshimoto

economy and accelerated collaboration with advanced countries and newly industrialized economies(NIEs). The background to this lies in the rapid development during the 1990s of semiconductors anddigital technology. These technologies drove the modularization of product architecture forward.
Modularization made it easy for countries with little technological knowledge to enter new industries
such as DVD and mobile phone. It can be said that the economic growth of developing countries
changed greatly because of product modularization and standardization.
The major companies that play a prominent role in developing core technologies and settinginternational standards have, however, also sought to maximize their profits. These companies
ingeniously encapsulate their knowledge and intellectual property (IP) into a framework oftechnological standards. Theirpersistence to protect their IP apparently contradicts the goals of

public standards organizations. The organizations promoting international standards, such as theInternational Electrotechnical Commission (IEC) and government institutions in each country, aremore concerned with social welfare and especially consumer benefit.
The purpose of our paper is to provide a general framework for analyzing the economic impact
of international standardization. Based on an analytical framework of product architecture, we seek
an economic model that can harmonize the benefit of various entities such as the leading firms inadvanced countries, the firms catching up technologically in NIEs, consumers in the global market,
and public standards organizations.
In the following section, we analyze the impact of international standardization in the opticalstorage industry using the framework of product architecture. We then describe the modularization of
products, international standardization, entrants from NIES, sudden fall in price, and rapid market
expansion. Next, we suggest a new type of business model based on international standards. The
division of labour between advanced companies and developing companies and their collaborative
business model is described. Finally, we discuss economic growth based on the modularization andinternational standardization. A general model and some empirical data are provided.

2. Economic Impact of International Standardization
2.1. Product Architecture and International Standardization
Product architecture is a basic design concept for product functions and structures (Fujimoto,2004).

Basic requirement for product designer is how to realize a set of functions.

physically structured by some components.
is allocated to some components.

Product is

Product designer should determine how each function

These concepts of allocation make the difference in the2International Standardization and Evolution of Business Models

interdependency among components.

Based on the concept of functional allocation andinterdependency, product architecture can be classified into two types, modular and integral
architecture:・integral architecture has complex and strong interdependency among

components. More than

one function is allocated to each component. The design optimization of finished productdepend on the mutual adjustment of component design itself (e.g., automobile).
・modular architecture has simple and very weak interdependency among components. Only one
function is allocated to each component. The design optimization of finished product depends
on each component that is independently developed (e.g., personal computers).

An architecture-based definition of standardization is summarized in Figure 1. International
standardization, such as that provided by the IEC, is defined as a form of modular architecture.
Because, in principle, it is open to every firm in many countries, and the design rules of thestandardized layers are open to the public, the finished product has high potential to be extended not
only to advanced countries but also to developing countries, and can thus increase benefits to

Figure 1 Architecture-based definition of standardization
Open international standardization = modular architecture１） Open technology & open design rule⇒ accelerate diffusion and popularization of technology & product２） Remove interdependency between finished product & key components⇒ accelerate international division of labor⇒ support rise of the industry in developing country⇒ popularize very low cost product worldwide３） World wide installed base⇒ provides new value-added business opportunities

Closed local/de facto standard ＝ closed architecture１） Closed technology & closed design rule⇒ capsule technology & IP into product２） Keep strong interdependency between product & technologies⇒ support vertical integration of product⇒ protect source of profit & revenue３） Need open standardized product as partner for market development⇒ accelerate collaboration with advanced countries and NIEs

3

Shintaku, Ogawa, and Yoshimoto

consumers worldwide. In addition, this worldwide installed knowledge base provides new business
opportunities, such as the digital content business as seen in the DVD and mobile phone environment,with further contribution to economic growth.
The local and/or de facto standard can be defined as integral architecture. Because technology
and design rules are largely closed or strictly controlled, firms that drive the standard forward have topromote the finished product themselves. However, history shows that huge marketing andpromotion investment is needed; moreover, the product is restricted to a local and/or a niche market.
A business strategy that has been successful for the integral product is collaboration with the open
standard, which provides various business opportunities for partners. Without open standardization,
the product with integral architecture, that is, a coordination-intensive product cannot enter theworldwide market. This shows that standardization plays a prominent role in the economic growth of
the 21st century.

2.2. Development of Optical Storage Industry through Standardization andModularization
The speed of market expansion depends strongly on the form of standardization, as shown in
Figure 2. The technological standard of DVD families has been standardized in an international open
forum called the DVD forum, of which more than 200 firms from 20 countries are members. Because
it is open to firms from many countries, not only the technology-leading firms of advanced country
but also many firms from NIEs that are catching up with their developed world counterparts(hereafter called catch-up firms) can join the DVD business.

The accumulated volume of sales forthe DVD family—writable DVD drive for PC, DVD player and DVD recorder for audio-visual—has
reached over 300 million units within five years since the market opened up, and it is still growing.
However, as seen in Figure 2, the sales volume of the Mini Disc, which is a small-sized music playerthat was very popular in the Japanese market of the 1990s, has been restricted to be less than 20
million. Because the Mini Disc was standardized in closed form by only a few Japanese andEuropean firms, and because they did not open the key components and the technology, it has notbeen well accepted outside the Japanese market.

In the case of DVD, which was standardized

with many firms in the open international forum only one year after the first product was delivered in
1997, key components of the drive, such as optical pick-up, LSI chipset, control microcode, andelectric motor, became available in the Asian-Pacific arena. Thus, the open standard quickly changed
the product architecture to modular mode and then accelerated the division of labor. The distribution
4

International Standardization and Evolution of Business Models

Figure 2 Market expansion speed of standardized products

160
140
Shipment volume (million)

More than 200 firms(open standard)DVD
Recordable

120

DVD
Player100
Number of firms
In standardization
activity80

CD-R/RW

60
40

VCR

20

Less than
5 firms(closed standard)

Mini Disc

7th

８
年
目

6th

７
年
目

Year

5th

６
年
目

1st year shipment volume: 1 million per year
DVD Recordable: 2001, DVD Player: 1998,
CD-R/RW: 1996, VCR: 1978, Mini Disc: 1995

4th

５
年
目

3rd

４
年
目

2nd

３
年
目

1st

２
年
目

元
年

0

Source: Edited by authors using market
information of TSR & GigaStream Japanof these key components has provided the catch-up firms of NIEs with the opportunity to join the
DVD business. In other words, the open standard has played a prominent role in creating new
business opportunity for NIEs and encouraging their industry to flourish.
The product architecture of the CD-ROM and CD-R drive was initially in integral mode whenthese appeared in the market. Consequently, they could not develop volume market themselves,because there was no opportunity to change the division of labor. According to our investigation, theinnovation of the microcontroller unit (MCU) and microcode technology (firmware) radicallychanged the architecture from integral to modular mode. The digital feedback servo technology of the
CD-ROM since 1994 and microcode technology of CD-R’s write strategy since 1998 are good
examples of the innovation. The former has led the CD-ROM out of the integral mode to modular
mode, because it has removed interdependency between optical pick-up and drive technology, while
the latter has removed the interdependency between recordable media and drive technology. As isshown in Figure 3, the market for the two products has expanded explosively since 1994 and 1998,

5

Shintaku, Ogawa, and Yoshimoto

Shipment volume (million)

Figure 3 Market expansion speed of standardized product after modularization

140
120
100
80
60
40
20
0

Integral Architecture

Modular Architecture

Closed/de facto standard

Open standard
CD-ROM

CD-R/RW
CD-ROM delivered (1986）
CD-R to delivered (1990）
DVD player

DVD Player delivered (1997)

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
97 98 99 00 01 02 03 04 05

86
/
87 90
/
88 91
/
89 92
/
90 93
/
91 94
/
9 2 '9 5
9 3 / '9
/ 6
94 97/9/ 7
95 98/9/ 8
96 99/9/
97 00/ 9/ 0
9 8 '0 1 / 0/ '0
9 9 '0 2 / 1/ '0
0 0 '0 3 / 2/ '0
0 1 '0 4 / 3/ '0 ' 0 4
5/
'05

86
CD-ROM
CD-R/RW 90
DVD Player

Source: Edited by authors using market information of TSR & GigaStream Japan

respectively, because key components of each drive have been available in the market of
Asian-Pacific Arena and this has accelerated the division of labor. These cases in the DVD and CD
family lead to the conclusion that the innovation of the digital technology since the 1990s has
provided international standardization activity a prominent role in the history of industry—it
contributes not only to increase consumer benefit but also to acceleration of economic collaboration
between advanced countries and NIEs. It has been said that more than 50 firms joined the CD-ROM
business in the mid1990s and more than 300 joined the DVD business in the early 2000s from Korea,
Taiwan, Hong Kong, China, India, Dubai, Turkey, and Singapore. Before the 1990s, when digitaltechnology was not so powerful, international standardization could not have played such aprominent role.
As seen in Figure 4, the international standard has popularized the products in the newly
developed markets of developing countries. The number of DVD players sold in the developing
countries was less than 1 million in 1999; however, the number has drastically increased to account6

International Standardization and Evolution of Business Models

Figure 4 Market development of DVD player in developing counties.
160
Worldwide
market growth

120
100

100%
Market size ofdeveloping countries

80
60

80%
60%

40

40%
Market size ofdeveloped countries

20

Ratio of market

Shipment volume (million)

140

20%

0
９９

００

０１

０２

０３

04

０５

０６

Source: Edited by authors using market information of TSR & GigaStream Japanfor up to 63% of worldwide shipments in 2005. This is the power of the open international standard
in the environment of the digital technology. Both digital technology and standardization haveaccelerated modularization of product architecture enabling the division of labor, and popularizationof products in the world.
A similar contribution by the international standard has been observed in the mobile phoneindustry. The cumulative number of the subscribers in China was less than 4 million in 1995;
however, the number has increased well over 400 million in 2005, which is almost the same as forthe expanded European Union or more than twice the number for the USA. The volume of shipments
of mobile phones by Chinese and Korean firms, for example, has been remarkable, rising to over 150
million in 2005. From the above analysis, it is clear that the international standard of the mobile
phone has played a very prominent role in stimulating the economic growth not only of China but
also of the advanced countries that have developed core technologies and set the standard.

7

Shintaku, Ogawa, and Yoshimoto

2.3. Acceleration of Technology Transfer to NIEs
International standardization in open form has accelerated rapid technology transfer of finishedproducts from technology-leading firms to catch-up firms of NIEs. Figure 5 shows sudden drop in themarket share of Japanese and European firms with developed technology and have set theinternational standard. In the case of closed/de facto standards, such as CD-ROM and CD-R/RW,
while product architecture was restricted to the integral mode, the market share of the finishedproduct by Japanese and European firms was more than 90%. However, this share suddenly started todrop after the architecture changed into modular mode. On the other hand, in the case of DVD, thedrop began even in early stages of the market’s opening, because the architecture was alreadymodularized—it was standardized in the late 1990s, when digital technology was in a phase of rapid
innovation. It is very interesting to note that the trend of market share drop for the DVD has been
almost the same as the drop for the modularized CD-ROM drive and the modularized CD-R/RW
drive.
The product architecture of key components, such as the optical pick-up, first appeared in
integral mode and remains in the same integral mode even today. The optical pick-up is a typicalFigure 5 Market share change of standardize product after modularization
Integral Architecture

120

Modular Architecture

Closed/de facto standard

Open standard

Market Share (%)

100
Market share ofJapanese firms + European
firms

80

CD-ROM

DVD Player delivered (1997)

60

CD-ROM delivered (1986）
CD-R to delivered (1990）

CD-R/RW

DVD
Player40
Catch-up countries
joined business

20

CD-ROM

0

91 4
/'9
92 5
/'9
93 6
94 /'97/98
95 /98/9
9
96 /99/0
0
97 /00/098 1/ 0/'0 1
99 2 /' 0/'0 2
00 3 /' 0/'0 3
01 4 /' 0
/'0 4
5/
'0
5

3

/9

/9

90

2

/9

89

1

88

0

87

86

/9

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
97 98 99 00 01 02 03 04 05/986
CD-ROM
CD-R/RW 90
DVD Player

Source: Edited by authors using market information of TSR & GigaStream Japan

8

International Standardization and Evolution of Business Models

Figure 6 Architecture-based positioning of standard leading firms ofadvanced countries and catch-up firms of NIEs
India
Dubai

Modular

DVD Player
DVD Media (OEM)Single DVD Recorder
Digital Chipset
DVD + R/RW, DVD-R/RW Drive

China
TurkeyTaiwanKorea

Slim typed
Super-multi DVD Drive

IntegralOptical Pick-up
Electric motor, Microoptics
Laser, Micro lens, OEIC
Dye, Stamper, Tester,
Manufacturing Equipment

Japan

Germany
Holland

Source: Author’s interviewed DVD industry

product with integral architecture or a coordination-intensive product in which there are strong
interdependencies between the core technologies. Even though the optical pick-up has been
manufactured by factories in NIEs, and has been available in the open market since 1985, the market
share of Japanese and European firms has been over 90% in the innovation-intensive computer
applications and over 80% even in less innovative audio-visual applications.
Figure 6 summarizes the architecture-based positioning of finished products and of key
components in the DVD industry. All the key components developed by technology-leading firms inadvanced countries are positioned in the integral architecture domain. The firms of NIEs cannot join
the key component business, because it is a technology- and coordination-intensive product withintegral architecture, which needs a long-term investment of education, long-term R&D, and a wide
range of industry.
On the other hand, almost all the finished products manufactured by NIEs are positioned in themodular architecture domain. The technology-leading countries find it very hard to join the finishedproduct business, because it is labor-intensive low cost. However, firms in NIEs can join it by taking
advantage of their comparatively small overheads. It can be concluded that each domain needs
9Shintaku, Ogawa, and Yoshimotocollaboration—firms in advanced countries cannot operate without the finished products from NIEs.
The NIEs bring the value-added key components to the worldwide market by providing a finishedproduct at very low cost. If the NIEs do not join the finished product business, then new markets indeveloping countries cannot be opened quickly, and the market size for the DVD player would be
restricted to less than one third of current market or one fifth of the future potential market. Thismeans that open international standards have provided the leading firms of advanced countries with
3–5 time bigger market for value-added key components, and this has encouraged the growth of theirindustry. This is due to the architecture-based division of labor created by international
standardization.
Each country holds a unique and strong position in their product architecture, and this will notchange in the short term because it originates from a country’s comparative advantage based on
culture and history. It must be emphasized that international standardization since the digital
innovation era of the 1990s has created a new economic environment in which advanced countries
and NIEs can be and will be in symbiotic co-prosperity. Because this co-prosperity has been createdby international standardization, it can be said that the role of standardization in world economic
growth will be much more prominent in the 21st century than in the 20th century.

3. New Alliance Business Model based on International Standardization
Although the catch-up firms in NIEs have a high presence in the optical storage industry, theinternational division of labor between Japanese and the catch-up firms has become very important
for the continuation of their business.

The firms in the advanced courtiers focus on the integral

products and components such as the optical pick-up and LSI chipset.

On the other hand, the firms

in NIEs have competitive advantage only in the final modular product.

These two parties have had

the large transaction of key components in the market.
In the optical storage industry, for example, the market share of a typical integral product, suchas the optical pick-up, is more than 80% for Japanese and European firms, while NIEs take more than
70% of the market share of such a finished product as the DVD player with modular architecture. A
similar phenomenon has been observed in the mobile phone industry, where almost all key
components with integral architecture, such as baseband chip and optical modules, have been
supplied by advanced countries (for example, Nokia, Texas Instruments, etc.).
It is very difficult for NIEs to enter the market for technology-intensive key components,
because these components require long-term investment in education and basic R&D, also require a10International Standardization and Evolution of Business Models

wide rage of industry infrastructure in the country. The firms in advanced countries invest in thetechnology development, product development, and market development of the technology-intensive
integral products. On the other hand, it is very difficult for the firms in advanced countries to join themarket of modularized low-cost products, such as the DVD player, because the gross profit margin of
the low cost-product is very small and they cannot absorb the large overheads for investment. That is,
the firm in advanced country is week in the low cost operation of modularized products.
Recently, this international division of labor has evolved to the new alliance model.

We canobserve several successful alliances between technology-leading firms in advanced countries andcatch-up firms in NIEs.

These alliances are designed based on architecture—this may defined as“architecture-based alliance model.”A successful example of the alliance is a joint-venture company called HLDS where Hitachi ofJapan takes a portion of integral architecture, while LG Electronics of Korea takes a portion ofmodular architecture. Hitachi is one of the firms that led the international standardization of the DVD
and has provided IP to the technological standard. While Hitachi has transferred technologies of the

Figure 7. Architecture-based alliance model
Firm B in NIEs

Finished Products
Mass
Production

Product
DesignTechnology Transfer ofModular Products

Do notactiveTransfer of Mass
Production Technology

ActiveJoint Venture
between A and B

Product
DesignFinished Products

Mass
Production

Technology Transfer ofModular Products
Firm A in advanced country
Finished Products
R&D

Product
DesignSupply Key Components( with Integral Products)

Key Components
Mass
Production

modularized products, the DVD drives, to HLDS.

11

R&D

Product
DesignMass
Production

Shintaku, Ogawa, and Yoshimoto

Table 1 Architecture based alliance in DVD industry

Establish
ment(year)Name of Joint Venture

Investment

2000

Hitachi LG Data Storage (HLDS)

Hitachi 51%

LG 49%

2001

JVC Light-on Manufacturing &Sales (JLMS)

JVC 51%

Light-on 49%

2003

Philips BenQ Digital Storage(PBDS)

Philips 51%

BenQ 49%

2004

Toshiba Samsung Storage
Technology (TSST)

Toshiba 51%

Samsung 49%

However, Hitachi does not transfer technologies of key components to HLDS. Key components
with integral architecture, such as the optical pick-up and the LSI chipset with microcode, have been
provided to HLDS from Hitachi of Japan. Figure 7 shows the concept of the architecture based
alliance model. Since 2003, only three years after the collaboration started, HLDS has become theleading optical storage manufacturer in the world. Many similar alliances have been seen between
not only Japan and NIEs but also between Europe and the NIEs (see Table 1).

4. Economic Growth through International Standardization
4.1. Trade structure in East Asia
The international standardization has accelerated the modularization of the product.

Product

modularization has promoted the international division of labor and the alliance model described in
section 3. We can confirm the development of this new business model in macro by observing thecurrent trade structure in East Asia.
Figure 8 illustrates the trade structure among Japan, Korea, Taiwan, and China. In Korea andTaiwan, there is an excess of exports from Japan, while in China, there is an excess of exports from12

International Standardization and Evolution of Business Models

Figure 8 Trade in East Asia (2004)

Korea

68

44
30

22
96

China:
Mainland &Hong Kong

Japan

109
19

7

10
42

64

17

TaiwanUnit: Billion $Sources: Prepared by JETRO from Trade Statistics, Ministry of Finance, Japan. Also data from Bureau of Foreign Trade, MOEA
(Ministry of Economic Affairs, R.O.C.) and Korean International Trade Association.

both Taiwan and Korea. There is a chain of manufacturing flow from Japan to Korea and Taiwan, andfurther to China. Korea and Taiwan import key components and manufacturing equipment fromJapan, manufacture products using the imported materials, and export their products to China.
Low-cost, final products such as the internationally standardized DVD players are assembled in
China and exported to the US and European markets.
Although some Chinese manufacturing companies export to advanced countries, theforeign-affiliated firms in China export to the global market from China. Japanese, Korean, andTaiwanese companies have made a huge investment in China (see Figure 9). With the advance ofChina, the hollowing of the manufacturing industry has become a serious problem even in Korea andTaiwan. However, high-tech products such as LCD panels and semiconductors are still produced in
Korea and Taiwan, and exported to China.
LCD and semiconductor companies in Korea and Taiwan depend on foreign companies,
especially Japanese companies. For example, major equipment and materials for LCD panels, such aspolarizer and color filters, are supplied to Korean and Taiwanese LCD manufacturer by Japanesefirms (see Table 2).

13

Shintaku, Ogawa, and Yoshimoto

Figure 9 Cumulative amount of direct investment in East Asia (2004)

10,965

Korea
10,993

895
1,014
60

China

Japan
31,487
7,774
951
41,249
Unit: Million $TaiwanSources: JETRO. Figure for Taiwan from Monthly Statistics of Exports, The Republic of China.
Data of Taiwan is cumulative dollars from 1991 to 2004.

Table 2 Top 3 countries imported from Japan in 2004

Category

IC

LCD

Steel

OthersTop 3share in
total
exportItem (6 digit HS code)

First

SecondThird

Monolithic IC（Digital）

CHINA (18.3%)

HONG KONG (16.3%)

R KOREA (13.5%)

48.1%

Other MIC

HONG KONG (17.2%)

R KOREA (14.4%)

CHINA (14.0%)

45.6%

Photoelectric semiconductor and LED1)

HONG KONG (21.4%)

CHINA (18.1%)

GERMANY (11.7%)

51.2%

Element doped for electronics industry （discotic and wafer） 2)

TAIWAN (28.5%)

U S A (28.1%)

R KOREA (19.8%)

76.4%

Pattern etching machine for semiconductor material

TAIWAN (45.6%)

R KOREA (17.9%)

U S A (15.9%)

79.4%

Stepper

TAIWAN (31.5%)

R KOREA (20.0%)

U S A (13.4%)

64.9%

Sheet and board made by polarized material

R KOREA (36.8%)

TAIWAN (26.7%)

CHINA (21.5%)

85.0%

Glass （processed）

R KOREA (49.9%)

TAIWAN (25.0%)

CHINA (10.0%)

84.9%

LCD

CHINA (43.0%)

HONG KONG (11.7%)

R KOREA (11.4%)

66.1%

Hot rolled and other sheet steel over 10 mm thickness

R KOREA (61.9%)

CHINA (20.3%)

INDONSIA ( 3.6%)

85.8%

Hot rolled and other sheet steel between 3-4.75 mm thickness

R KOREA (62.3%)

THAILAND (24.4%)

INDIA ( 6.1%)

92.8%

Hot rolled and other sheet steel less than 3 mm thickness

R KOREA (37.6%)

TAIWAN (20.6%)

THAILAND (19.5%)

77.7%

Other machinery （aimed for specific usage）

TAIWAN (27.7%)

R KOREA (21.3%)

CHINA (20.4%)

69.4%

Other electric quantity meter (no recording device）

R KOREA 27.6%)

TAIWAN (26.9%)

CHINA (10.3%)

64.8%
48.4%
62.0%

Printed circuit

CHINA (22.0%)

R KOREA (15.6%)

HONG KONG(10.8%)

Prisms and other optical devices （uninstalled and polished）

HONG KONG (23.3%)

CHINA (22.7%)

R KOREA (16.0%)

Note: 1) CCD solar-electric generated element 2) semiconductor wafer, etc.

Source: Based on figures provided at JETRO web page.

14

International Standardization and Evolution of Business Models

Figure 10 Trade structure of Taiwan
160

Total Export (US Bill. $)150

1989-2000

140

2001-2003

130
120

Regression
line
shapeline(1989-2000)

110
100
90
80

y = 3.781x + 4E+09
R2 = 0.9577

70
60
10

15

20

25

30

35

40

Import from Japan (US Bill. $)Source: Based on figures provided at MOEA (Ministry of Economic Affairs, R.O.C.)web page.

Taiwan has had a consistent trade deficit with Japan even though it has enjoyed a trade surplus
for years. The export industry in Taiwan depends on imports from Japan. Figure 10 shows therelation between the total amount of exports from Taiwan, and the amount of imports from Japan.
There is a positive correlation between these two.
Similar dependence on Japan is also observed in Korean exports. Korea depends on Japan for theequipment and materials for LCD panels and semiconductors. Korea automakers import the outer
steel panels from Japan. The leading export companies in Korea, such as Samsung Electronics, LG,
and Hyundai, are also the top importing companies.

4.2. Market Growth and Change of Value Chain
As already mentioned in this paper, product architecture has a huge impact on the speed ofcatch-up of latecomers. Akamatsu (1962) and Vernon (1966) claimed that the production of new
products started in advanced countries and later production was transferred to the low-costdeveloping countries, as the technology matured. However, they did not mention the effect ofmodularization or the effect of international standardization on production transfer. As is mentioned
in section 2, modularization radically accelerates this transfer process to developing countries and15

Shintaku, Ogawa, and Yoshimoto

Figure 11

Change of catch-up process(2) Catch-up Model for Modular Products(1) Traditional Catch-up Model

Advanced Countries

Advanced Countries

NIES

NIES

•Products get modularized•Exported components andequipments

Shorter time lagof catch-up

Figure 12 Change of vertical structure: price fall and market growth

Price

LCD
panel

$

•Shrink of Vertical Shareof Japanese Firms•Radical Price Fall
•Rapid Market Growth

Price

Market

time
-％

60
70

Components
Japan
Korea
Taiwan

LCD panelComponents

Material
Japan

Materials

Market GrowthMarket16

International Standardization and Evolution of Business Models

Figure 13 Shift of added value on DVD

1998
Market: 1B US$
2004：
Market： US$19,4B

Added value
on DVD drive

Monopoly by
Japanese andEuropean firms
Added value
on corecomponents

Distribution channel$3,850M (20%)
Distribution cost and margins

Added value created bydeveloping countries$6,400M (33%)

Added value created by
Japanese and European
firms$9,180M (47%)

DVD drive assembly＋general parts

Mainly core components

modularization is one of the key drivers for the recent remarkable growth of the Chinese
manufacturing sector.
Figure 11 shows these changes in the catch-up process. The left side of the figure shows thecatch-up model explained by Akamatsu (1962) and Vernon (1966). The right side of the figure showsthat NIEs catch up and overtake the advanced countries. However, as we mentioned, their catch-up is
supported by components and equipment from advanced countries in which IP and technicalexpertise are encapsulated.
However, these changes in the catch-up process do not mean that the economic gain ofadvanced countries decreases. Figure 12 illustrates the change in economic gain between advanced
countries and NIEs in LCD panels. Japanese LCD companies such as Sharp commercialize LCD
panels and dominate all business in a vertical chain in the early phase of industry. Technologicalprogress drives the modularization of production and technical expertise is encapsulated production
equipment. This modularization makes it easy for Korean and Taiwanese companies to enter the LCD
panel industry. One of the most important factors for success in LCD industry is huge investment forlarge plants. Their entries caused fierce price competition. The price of LCD panels radically17

Shintaku, Ogawa, and Yoshimoto

Figure 14 Content market generated by DVD

2004： US$70B (285M unit)

1998: US$1B(6M unit)
content

DVD digital contents
provided mostly by Hollywood

DVD drive

approximate sales 4B: $50,000M (72%)

Monopoly by
Japanese &European firms
Distribution channel $3,850M (5.5%)Corecomponent

Distribution cost and margins
Added-value created by $6,400M (9.2%)
developing countries
DVD drive assembly＋general parts

US$ 19.4B

Added-value created by
Japanese and European
firms$9,180M (13.2%)
Mainly core components

decreased and a huge market emerged. Recently the share of Japanese firms in LCD panels has been
decreasing, while the share in equipment and materials still quite large. The share of Japanese firms
in the vertical chain has decreased. However, the total amount of Japanese economic gain is still
increasing because of the total market growth.
These changes in economic distribution between the advanced countries and NIEs have been
observed in various industries. Figure 13 gives a concrete example of the DVD. The DVD market
was only 1 billion dollars in 1998, when Japanese and European firms dominated the market. Afterthe entry of NIEs companies, the market grew rapidly to 19 billion US dollars in 2004. In the verticalvalue chain, the portion of components is estimated at 47%. The market for components (9 billion US
dollars in 2004) is still dominated by Japanese and European firms and is almost nine times the total
market in 1998.
Additionally, the large installed base of DVD players has generated an even larger content market,
as illustrated in Figure 14. Around four billion pieces of DVD media containing content such as
movies were officially sold in 2004. This content market, equal to about 50 billion US dollars, ismore than double the DVD hardware market. The DVD content business was dominated by US
movie companies. DVD sales are up to 47% of their total sales in 2004 and DVD division is the18International Standardization and Evolution of Business Models

biggest sales division for US movie companies. They are very interested in the international standard
for the next generation of DVDs, although they have never manufactured DVD players. They are also
a key player in the industry and enjoy the large economic gain.

5. Concluding Remarks
We have described the economic impact of international standardization using a framework ofarchitecture. Focusing on the optical storage industry, we have described in detail the process bywhich the modularization of products and international standardization induce many entrants from
NIEs and that entry causes fierce price completion and rapid market expansion. Next, we suggest a
new type of business model based on international standards. The division of labor between
advanced companies and developing companies and their collaborative business model is described.
Finally, we have discussed the economic growth model based on the modularization and international
standardization. Advanced countries and NIEs have been able to share the economic gain andcollaboratively generate a larger market. International standardization could contribute to global
economic growth. However, an adequate process of international standardization would be needed
for this economic gain to be fully realized.

19

Shintaku, Ogawa, and Yoshimoto

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