Journal of Robotics, Networking and Artificial Life, Vol. 4, No. 4 (March 2018) 317-321___________________________________________________________________________________________________________A Comparison Study on the Vertical Integration and Horizontal Specialization of Chinese ICT
CompaniesYunju Chen

Faculty of Economics, Shiga University,
1-1-1, Banba, Hikone City, Shiga Pref.,522-8522, Japan
Yousin Park

Dept. of Business Administration, Prefectural University of Hiroshima,
1-1-71 Ujina-Higashi, Minami-ku, Hiroshima City, Hiroshima Pref., 734-8558, JapanIori Nakaoka

Dept. of Business Administration, National Institute of Technology, Ube College,
2-14-1 Tokiwadai, Ube City, Yamaguchi Pref., 755-8555, JapanE-mail: yun-chen@biwako.shiga-u.ac.jp, ecventure@pu-hiroshima.ac.jp, nakaoka@ube-k.ac.jp

Abstract
It is said that the decision of vertical integration or horizontal specialization (the boundary of the firm) affects a firm’s
profit and competitive advantage, especially in the ICT industry. This paper focused on top market share Chinese
ICT companies in global smartphone industry, Xiaomi and Huawei, to examine how they design their boundary ofoperation systems in R&D. Patent data analysis is used to investigate Xiaomi’s and Huawei's technology strategies
and technical networks, also to compare their systems with each other. According to the results of analysis, wesuppose that Xiaomi has rough R&D organization structures and hence has low level of integration, which close tohorizontal specialization. On the other hand, Huawei has high weight on internal R&D, and explores technologies
related to core technologies. Its R&D structures are more highly integrated than Xiaomi.

Keywords: patent analysis, social network analysis, Chinese ICT companies, the boundary of the firm, verticalintegration, horizontal specializationFor example, Xiaomi is an internet startup with shortcompany history, and its rapid growth tells a story that it
may grow up by outsourcing. On the other hand, Huawei
has been the giant smartphone firm with long history,
and it is also one of the innovative Chinese firms thathave top class filings of patents.
However, how Chinese ICT companies adopt
different strategies, even the operation systems? It
seems that Chinese ICT companies, like Xiaomi andHuawei, develop their operation systems by either makeor buy. Actually, the decision of make or buy, in otherwords, vertical integration or horizontal specialization

1. Introduction
The global smartphone market has been changed
dynamically during these years. After the year of 2012,
the presence of Chinese ICT companies in the global
smartphone market is getting higher and higher and theyalmost occupy the global top five positions besides
Samsung and Apple.
Although the open source of Android lowers the entry
barrier and benefit many Chinese ICT companies toextend their shares in the global market, they adapt
various strategies, not simply the cost leadership strategy.

Copyright © 2018, the Authors. Published by Atlantis Press.
This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).
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Journal of Robotics, Networking and Artificial Life, Vol. 4, No. 4 (March 2018) 317-321___________________________________________________________________________________________________________affects a firm’s profit and competitive advantage. The
debate between vertical integration vs. horizontal
specialization appears to be reinvigorated, especially in
the ICT industry which added value is difficult to create
due to the commoditization of digital products.
In this paper, we focus on top market share Chinese
ICT companies in global smartphone industry, Xiaomi
and Huawei, to examine how they design their operationsystems in R&D and gain competitive advantages, also
to compare their systems with each other. The patent
information of these two companies is used to visualize
their technical orientations, R&D networks andoperation systems in R&D by text mining.

analysis to reveal the characteristics of Chinese ICT
companies’ R&D management and discuss the meaning
in the R&D strategy.
2.2 The overview of Chinese ICT companies
The global market share of smartphone surveyed byanalyst firm IDC shows a major shakeup in the Chinese
smartphone market from 2013. Fig. 1 shows thatHuawei, Xiaomi and Lenovo, the Chinese ICT
companies occupied the 3rd-5th share in the globalmarket.
Xiaomi (Xiaomi Technology Co., Ltd) founded in2010 by a well-known angel investor Lei Jun, andachieved impressive growth soon after its establishment.
Xiaomi is a mobile internet company and focuses its
businesses on smartphones (Xiaomi Phones), including
the OS of MIUI, MiTalk, the e-commerce platform of
Xiaomi.com etc. On the other hand, Huawei (Huawei
Technologies Co. Ltd.) was founded in 1987, and started
its business by producing private branch exchangeswitches. Now the company has become one of the top
telecommunications equipment suppliers and has active
R&D activities since its existence. Its businesses
comprise mobile and fixed broadband networks,smartphones, tablet computers etc. Fig. 2 shows ROE
and profit margin of Xiaomi and Huawei. Xiaomi
explosively expanded ROE in 2013 and 2014, but has
low profit margin rate instead. On the other hand,Huawei maintains high ROE, and sustain high profit
margin rate after 2009.

2. Research Background
2.1 Open innovation and patent analysis
In order to carry out various activities, companies
inevitably cooperate with others to use externalresources. At the same time, companies face the issue ofwhat to outsource and how to manage their own systems
while cooperating with other companies. The decision
making of what and how to outsource from others refers
to the issue of boundary of the firm.
To make or buy in the vertical flow of production isthe typical issue of the boundary of the firm, however,
not only in production, but also in R&D. Theoretically,much attention has been drawing to the use of external
resource in R&D to drive innovation, which is defined
as open innovation. Open innovation is the use of
purposive inflows and outflows of knowledge toaccelerate internal innovation, and expand the markets
for external use of innovation, respectively. This
paradigm assumes that companies can and should use
external ideas as well as internal ideas, and internal andexternal paths to market, as they look to advance theirtechnology [1].
Horizontal specialization-oriented
companies tend to outsource and cooperate with othercompanies, hence benefit from open innovation in R&D.
The boundary of the firm in R&D also concerns thenational innovation system. The national innovation
system is the network of institutions in the public andprivate sectors whose activities and interactions initiate,import, modify and diffuse new technologies [2].
To examine the boundary of firm in R&D, patent
analysis can be an effective visualization tool. The
patent is one of the indicators to measure the capacity fortechnological development. The previous researches
concentrate on visualizing and analyzing patents, orproposing efficient text-mining approaches for creating
patent maps. However, there are few researches that use
text-mining analysis of patents in the field ofmanagement to examine the R&D management
strategies of firms. In this paper we use the patentFig.1. Global market share by vendors

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Journal of Robotics, Networking and Artificial Life, Vol. 4, No. 4 (March 2018) 317-321___________________________________________________________________________________________________________G06

Interprogram
Communication
orInterprocess
Communication(IPC)(ElectricalComputersandDigital
Processing Systems)

4. Analysis
4.1 An approach based on the number of patentpublications
The numbers of patent publications related tosmartphone of Xiaomi and Huawei are shown in Fig. 3.
Each company obtains related patents to a certain extent
and the number of patents of all of them kept on
increasing during the years except for 2016.

Fig.2. ROE of Xiaomi and Huawei
3. Methodology and data
In the following sections, the R&D strategies/
operation systems of Chinese ITC companies areanalyzed. In order to examine target companies’ R&D
strategies and the change of core personnel in their R&D
projects, we visualize their patent information by 3 types
of approaches: the number of patent publications,correspondence analysis (categories of IPCs,correspondence analysis, and social network analysis(R&D networks and core rigidity).
About the data, we use the IPC (International PatentClassification) code for analyzing the smartphoneindustry. IPC, established by the Strasbourg Agreement
1971, provides for a hierarchical system of language
independent symbols for the classification of patents andutility models according to the different areas oftechnology to which they pertain.
Table 1 is the most frequently used IPC in smartphoneindustry. Based on these IPC related to smartphone,patents related to smartphone published by eachcompany are extracted and collected from the patent
information. In addition, the data was collected from2010 to 2015.
Table1
IPC
H01, H02
H03, H04
G02
H02, F21
H04,G01, G06, G08
H03, H04
H04
G02, H04
H04
G06, G10

G06
G06
G06

2500

2024

2000

1667

1500

1667
884

1039

1000

569

500
01963

1
2010

0636

114

2011

2012

2013

2014

193
2015

66
2016

HUAWEI INVESTMENT & HOLDING CO., LTD
XIAOMI COMMUNICATIONS CO., LTD.

Fig.3. The number of patents of Huawei and Xiaomi
4.2 An approach by correspondence analysis
We use the correspondence analysis to disclose thetechnical trends and characteristics based on IPC codes
associated with smartphone.
In the analysis, the reference data is the number of theirpatent document in each year. These figures are madebased on dates of patent publication. Fig.4 is the resultof correspondence analysis of both companies.
Although Xiaomi has few patents, the technologies it
developed have low similarity with each other. Contrast
to Xiaomi, there is technological continuity from 2011
to 2015 in Huawei, especially in the IPC code of H04.

IPC classes of smartphone
Description
Electricity: Battery or Capacitor Charging orDischarging
Coded Data Generation or Conversion
Liquid Crystal Cells, Elements and Systems
Electricity: Electrical Systems and Devices
Multiplex Communications
Pulse or Digital Communications
Telephonic Communications
Optical Communications
Telecommunications
Data Processing: Speech Signal Processing,
Linguistics, Language Translation, andAudio Compression/Decompression
Data Processing: Artificial Intelligence
Data Processing: Database and FileManagement or Data StructuresData Processing: Presentation Processing ofDocument, Operator Interface Processing,and Screen Saver Display Processing

Fig.4. Results of correspondence analysis
4.3 An approach by the social network analysis
4.3.1. R&D network
Fig. 5 is the patent of core applicant network of Xiaomi,and Fig.6 is Huawei’s case.

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Journal of Robotics, Networking and Artificial Life, Vol. 4, No. 4 (March 2018) 317-321___________________________________________________________________________________________________________In Xiaomi’s case, several islands that connected only torelated patents are observed. It seems there is little
relationship between technologies that Xiaomideveloped every year. Co-research inside Xiaomi seems
started at 2010, and organizational collaboration can beseen at 2015. On the other hand, the technology networkof Huawei concentrated on several core patents andtechnologies are expanded based on these core patents.
Core applicants constantly exist during the period, andcollaboration network of core applicants form from2011.

Fig.7. The core rigidity of Xiaomi and Huawei
The core rigidity of human resource and the change of
R&D area the personnel involved in Xiaomi and Huawei
are shown in Fig. 7.
Core personnel changeddynamically in recent years in Xiaomi, while Huawei’spersonnel retained for several years, in about a span ofevery 3 years.
5. Conclusions
This paper focused on Xiaomi and Huawei, the twomajor Chinese ICT companies to examine how they
design their boundary of operation systems in R&D.
Patent analysis were used to investigate Xiaomi’s andHuawei's technology strategies and technical networks.
The results of analysis are summarized in Table 2 below.

Fig.5. R&D Networks of Xiaomi

Table 2 The summary of the analysis results

Fig.6. R&D Networks of Huawei
4.3.2. The evaluation of core rigidity in R&D
We define that patent applicants are key persons
attaining high scores calculated by centrality of social
network analysis. Freeman proposed three distinct
conceptions of the most important index of centrality:
degree, betweenness and closeness [3].
Core rigidity is defined in this paper as the equationthat shows the degree of reallocation of personnel
engaged in R&D projects (Core Rigidity =Conditional
Probability ((upper rank j% of person at i+1 year)/ (upperrank j% of person at i year))). When such probability
scores are high, core rigidity exist [4]. Results obtainedby calculation are visualized in the form of heat-maps.
Where the color is dark red in heat-map, it indicates anun-executed reallocation of core members; otherwise,
the color is light red, which means radical changes ofcore members in that year.

Based on the results of analysis, we supposed that
Xiaomi probably acquires external related patents rather
than develops its own technologies. Xiaomi has roughR&D organization structures and hence has low level ofintegration, which close to horizontal specialization. Infact, Xiaomi has few manufacturing facilities of its own.
On the other hand, Huawei has high weight on internal
R&D, and explores technologies related to coretechnologies. Its R&D structures are more highly
integrated than Xiaomi. Huawei is increasing its
emphasis on R&D to become more innovative in ahighly competitive and rapidly consolidating industry.
Being able to continuously and successfully innovate
through vertical integration, Huawei struggles forcreating competitive advantages.
References
1. H. Chesbrough (2006) Open Innovation: Researching aNew Paradigm, Oxford University Press

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Journal of Robotics, Networking and Artificial Life, Vol. 4, No. 4 (March 2018) 317-321___________________________________________________________________________________________________________2. Christopher Freeman (1987) Technology and Economic
Performance: Lessons from Japan, Pinter, London
3. L. C. Freeman (1978) Centrality in Social Networks
Conceptual Clarification, Social Networks, vol.1, pp.215239
4. Leonard-Barton, D. (1992). Core Capabilities and Core
rigidities: A Paradox in Managing New ProductDevelopment. Strategic Management Journal, vol. 13:
111-125.

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