Seeking direction for transformation: Rising to the high end of the "smiling curve"

Mr. Shi Zhenrong, the founder of Acer group, first proposed the famous smiling curve theory as a value chain strategy for Acer. The smiling curve theory illustrates the potential value of various components in an IT company's value chain. R&D is located on the left side of the chain, with marketing on the right side. Manufacturing is in the middle and has the lowest value-add. According to economist Wu Jinglian, most Chinese enterprises are located at the bottom of the smiling curve, in the manufacturing industry.

Both entrepreneur Shi Zhenrong and economist Wu Jinglian share one common goal: Chinese industries should develop towards the two ends of the smiling curve.

As one of the first group of coastal cities opened to the outside world, Nantong Economic & Technological Development Area (NETDA) had an early development opportunity, but it was forced to transform at an early stage because of the existence of a large number of manufacturing enterprises.

The transformation was not horrible, the lack of planning was. The challenges were dreadful, but the deficiency in answers was worse. Under the severe macroeconomic situation, the experiences of NETDA bring us new lessons and inspiration:

Seeking direction for transformation: Rising to the high end of the smiling curve 　 Working to attain core competency in R&D and marketing to obtain higher added value inspired the regional economy to work towards higher profits. The manufacturing industry at the bottom of the smiling curve became considered an “arduous but fruitless” effort.

NETDA’s reliance on the equipment manufacturing industry was high, reaching roughly 40 percent of all industry. It became a “painful spot” for transformation. Fortunately, NETDA regarded “pursuing ecologic dominance” as its “baseline”. It spared no effort to promote the concurrent development of the advanced manufacturing industry and modern service industry. The regional economy is now continuously rising to the high end of the smiling curve and it has seen a “rebirth” after some “short pains”.

The left side of the curve, transforming from OEM to ODM

NETDA accelerated the process of allocating essential factors such as funds, talent and policies to the advanced manufacturing industry. It also guided enterprises in transforming to ODM (original design manufacture, namely one enterprise designs and produces products according to the specifications and requirements of another manufacturer. The entrusted party has design capability and technical merit, and manufactures products according to authorization agreements) from OEM (original equipment manufacture) models to increase and create new advantages for development. 　 Seven industry research institutions were established and three projects under the national “863 Program” were solely established in the optical fiber cable industry. The electric power superconductor technology R&D center was jointly established with the Institute of Electrical Engineering and the Chinese Academy of Sciences. The annual R&D funds for the company reached 380 million yuan ($61 million).

It is hard to believe that all the above was done by a private enterprise named Zhongtian Technologies, which grew from a brick and tile plant. This year, Zhongtian Technologies successfully exported submarine optical cables to the USA and Italy, marking a breakthrough for “made in China” submarine optical cables that entered the US market for the first time.

Behind a successful breakthrough are thousands of failures. Three years ago, an inquiry from a submarine cable enterprise in the US became an opportunity that helped Zhongtian Technologies transform. Zhongtian Technologies made a total investment of hundreds of millions of yuan to conduct research and development certification. The company took 111 technical documents and European certifications and used them as internal requirements. At present, the company has taken charge of or participated in the formulation of 50 national standards and industrial standards. It has acquired 65 national invention patents. In addition, the company successfully introduced submarine optical fiber composite cables into the domestic market. 　 Zhongtian Technologies acquired influence in international submarine cable technology because of its “D” (design). Similarly, NETDA’s manufacturing industry realized a perfect upgrade because of “D” (design). Thirty-eight city-level and above engineering and technological research centers have helped enterprises realize independent innovation. To date, NETDA has 2,688 patent licenses, including 146 licenses for invention patents, ranking it first in Nantong.

The first Chinese high-precision deepwater riprap leveling ship, Jinping One, which was completely researched and developed by ZPMC was put into service. Wison Group undertook the R&D and construction of the first floating LNG extraction devices in the world. The drugs developed and manufactured completely by Novast Laboratories (China) received approval from the FDA in the US and were sold to the US market, a great breakthrough for Chinese pharmaceutical companies seeking to enter the US. The nuclear grade sponge zirconium project of State Nuclear WEC Zirconium Hafnium was also officially put into production.

The right side of the curve, a business district on the “shoulder” of industry

“One significant development trend for the regional economy is the rapid rise of the service economy. The core of its rise is manufacturing industry servicization.” This is the unanimous opinion of various economics experts. NETDA took advantage of the opportunity and spared no efforts to develop Nengda Business District, a place for headquarters economy, information service and electronic commerce corresponding to the advanced manufacturing industry. The business district on the “shoulder” of industry has helped NETDA acquire new powers for development on the right end of the smiling curve.

On the twelfth-floor office of Ctrip Information Technology (Nantong), looking out the window, visitors can see various high-rises and prosperous business areas: Fortune Building, Nengda Building in the north, Yixing Building and Runhua International Center in the west, and the SYB Outsourcing Service Center in the east. Two years ago, when the Ctrip Information Technology Building was completed, Nengda Business District was still farmland. Although the company has only been in NETDA five years, the old employees of Ctrip still think the changes are quite huge. There were only more than 300 employees from Shanghai in the company previously, now the figure surpasses 4,500. The conditions for the rented workshops were quite simple and crude. The new buildings are tall and spacious. In the past, Ctrip was the only company here, nowadays enterprises in the service industry are popping up like mushrooms after the rain.

Relying on the increasingly stronger manufacturing industry as a foundation, NETDA spared no efforts to establish Nengda Business District by integrating business offices, R&D and financial services. The planning area for Nengda was about 140 hectares. The total building area for development was about 2.05 million square meters, with a gross investment of around 6 billion yuan.

This was the largest estate development project focusing on the developing service industry since the establishment of NETDA. It focused on developing industrial design as well as manufacturing service industries, including research and development services, modern logistics, information service and service outsourcing. In July 2007, the Service Industry Development Leading Group of Nantong City listed it as an aggregation area for the modern service industry of Nantong. Nengda Business District was rated as a provincial aggregation area for the modern service industry