Ties That Bind - Bay Area Council Economic Institute

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Ties That Bind
But there is a second industry that shadows the one depicted
above. This second industry is made up of formerly state owned
enterprises (SOEs) that lack the money, the talent, and the basic
management processes to compete on the global stage.
These companies are employing rather obsolete equipment and
inferior technology, and they are serving a largely domestic
market whose requirements are far different from those of the
global market. They are starved for investment funds, they lack
significant management experience in a market economy, and
they are constrained in their employment relations with the
people they have. Indeed, the government remains the largest
shareholder of these companies, and often enjoys majority
ownership. And the Chinese government is far from monolithic.
The national ministries compete with one another for influence,
and there are significant tensions between the provincial and
town governments and the national government. Typically, one
of these entities has ownership in an SOE, but not the other
entities, who have different ownership positions in rival firms.
And while there are a few highly capable design firms in China,
the sheer number of design firms operating in China (over 600
at this point) means that most are facing a likely shakeout, a
process that will be fraught with problems in a single party state
that cares deeply about maintaining social stability.
Within the industry, there are multiple business models in play,
as firms compete in the market with different configurations of
skills and focus. The older firms tend to utilize a quasi-vertically
integrated business model. This model has conferred certain
benefits in China, particularly the ability to employ administrative
means to achieve economic coordination in a context
where intermediate markets are thin or non-existent. But this
model has encountered significant limits in its ability to support
companies able to compete in the global market, because the
products created by these quasi vertically integrated firms do
not fit with global market requirements.
Almost all of China’s 600 integrated circuit (IC) design firms are
new. Culturecom Holdings, maker of China’s V-Dragon Central
Processing Unit (CPU), switched from comic book publishing to
IT in 1999. Comlent, maker of China’s first radio frequency integrated
circuit (RFIC) used in cell phones, is just three years old.
China’s star design house, Vimicro, which has a 60% global
market share in PC multimedia chips, was founded in 1999, an