**_Global Value Chains in the Electronics Industry                       Sturgeon and Kawakami_**

In 2003, Intel again used its power as a platform leader to “encapsulate” another bundle of hard-to-integrate PC functions. This time their “Centrino” chipset added key power management features that made it suitable for mobile applications. Taiwanese ODMs provided the design expertise needed to generate a flow of new products based on the chipset, and soon dominated world production of notebook PCs.

To summarize, Intel has repeatedly used its platform leadership position in the PC GVC to capture a larger portion of the industry’s profits. The emergence of readymade technological solutions with well-defined external interfaces encapsulated the most difficult electrical engineering problems, and the rewards for solving them, within Intel, and created a swarm of low-cost competitors to Japanese producers. Intel’s platform strategies have repeatedly devalued the core competencies of lead firms in the notebook PC industry, especially Japanese lead firms, which have developed and relied on in-house system integration competencies more than U.S. firms have. A secondary effect, intended or not, was to create a larger role for Taiwanese ODMs in the industry, along with an ongoing set of opportunities for them to expand their competencies. Less system-level design work was required to create notebook PCs overall, but Taiwanese ODMs have taken on many new tasks, gained many new competencies, and grown rapidly—if not profitably.

# **_China: Modularity and Competitive Outcomes in Mobile Phone Handset Industry_**

Despite China’s attempts to nurture a group of former state-owned enterprises as national champions (or a “national team”: cf. Nolan 2001; Sutherland 2003),<sup>16</sup> and recent announcements of a renewed focus on government purchases of “indigenous technology,” little progress has been made. Rather, China’s development in technologically intensive sectors such as electronics has been driven by close engagement in GVCs, with its export sector dominated by foreign financial, technological, and organizational resources. The success of this approach is underscored by the fact that nearly two-thirds of China’s manufactured exports come from foreign-invested firms.<sup>17</sup> But what does this reliance on outside capabilities mean for development? On one hand, it has resulted in an unprecedented acceleration of industrialization. However, as was the case with Taiwan, once engaged, it can be difficult to move beyond low-value niches and to gain the autonomy and profits that can come with lead firm or platform leader status in GVCs. Song (2007) has shown how profits in China’s electronics industries have become very thin, despite massive increases in labor productivity, in what he calls a “Chinese-style modularity trap.”<sup>18</sup> Imai and Shiu (forthcoming) provide an example of this from the domestic Chinese mobile phone handset industry. From 1999 to 2003, the market share of local firms soared from 5 to 55 percent, but subsequently—and very suddenly—local handset firms lost this ground to

> 16 This section is drawn from Imai and Shui (2006 and forthcoming).

> 17 Four Asian economies—Japan; Republic of Korea; Taiwan, China; and Hong Kong, China— account for 70 percent of foreign direct investment in China (Hamilton and Gereffi 2009, 145). We should not forget that many mainland Chinese firms are small and localized. They produce a portfolio of highly commodified goods and services and engage in intense price competition with other local firms (Steinfeld 2004).

> 18 Linden, Kraemer, and Dedrick (2007) estimate that China captures only a few dollars of the $300 retail price of every Apple video iPod exported to the United States.

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