The resurgence of US electronics Asian production networks and the rise of Wintelism

The electronics industry of the late 1990s bears only a passing resemblance to that of a decade earlier. Some of the names are the same—IBM, NEC, Toshiba, Digital Equipment Corporation (DEC), Matsushita, Siemens—but those big, vertically integrated assemblers of electronic systems no longer control the industry. In their stead a new generation of firms has arisen, mostly but not exclusively American owned, who exercise the kind of market power (and have attained the market capitalization) that is but a passing memory for more traditional firms: Microsoft, Intel, Cisco, Oracle, Netscape, Cadence, Dell, Applied Materials, 3COM, SAP, Sun, Qualcomm, Octel. The new firms look nothing like the old leaders. Most are specialists operating within one (occasionally more) horizontal slice of the electronics industry value-chain rather than full-line systems firms who vertically integrate the value-chain. Most control key technical specifications that have been accepted in the market as de facto standards. Most operate with network forms of production organization. Almost all produce software, albeit often embedded in a hardware product. All deliver value added services. Despite the similarities, they also differ in important respects. For example, Intel invests heavily in fabrication and assembly, whereas Cisco and Dell rely exclusively on contract manufacturers. Netscape and Sun widely license their technical standards; SAP and Cadence do not.

As the names have changed, so has the global competitive game. The early 1980s saw a widely heralded battle for dominance of world electronics markets between Japanese and American industries. Through innovations in processes and manufacturing, Japanese producers had taken over consumer electronics and a range of component technologies including displays, precision mechanical parts, and semiconductor memory. US firms have been increasingly forced to rely on Japanese rivals for the supply of the underlying technologies, processes, and manufacturing know-how necessary to produce electronics systems. In consumer electronics, such thoroughgoing technology dependence had been a first step toward market exit even for such powerhouses as General Electric (GE) and RCA. Dependence has meant that US firms were far enough removed from the technological state of the art to impede new product development, and that their principal competitors could dictate time-to-market, product cost, and feature quality. US leadership in computers, communications, and professional electronics was threatened with a similar, debilitating, dependence.

A decade later things looked decidedly different. The new generation of US firms was almost everywhere ascendant and the Japanese were on the defensive and seeking alliances with the new market leaders. This breathtaking reversal of industrial fortunes was not the result of careful planning. Built in equal parts of serendipity, entrepreneurial innovation, desperate experimentation, inter-firm cooperation, and policy intervention, the competitive strategies pioneered largely by American firms were rather surprising. US firms constructed an alternative supplier base in Asia to the Japanese for components, processes and manufacturing know-how, in effect commodifying their areas of greatest dependence. Simultaneously, they reasserted control over new product development by decoupling the key technical standards that defined new products from commodity technology inputs, and then aggressively guarded those standards through strengthened intellectual property protection. This strategy relied on the development of cross-border production networks (CPNs) concentrated in Asia coupled with the re-emergence of the United States as the principal launch market for new information technology products. In combination, these efforts defined a new form of competition: “Wintelism.”

Wintelism is characterized by several major elements. The vertical disintegration of the industry’s value-chain is the first element, one partly induced by government policy. Vertical disintegration had the effect of shifting market power from traditional, vertically integrated system assemblers to suppliers of hardware and software technologies, product definition, and producer services. The second element was increased specialization by independent producers in each segment of the value-chain, with American firms exercising market power through development and evolution of key technical specifications that are accepted as de factomarket standards. These firms utilize strategies of continuous innovation (incremental increases in functionality, performance, features, or quality within generations, and radical increases between generations) to lock in an installed base of customers. In turn, they leverage that installed base by broadening outward from their core area of value-chain specialization to seize increasing value-added opportunities in neighboring parts of the value-chain or in related industries. Thus, for example, Cadence moved from being a seller of integrated circuits (IC) design tools to integrated electronics design systems and services; Microsoft moved from PC operating systems to applications, server operating systems, network services, information services, transactions, and even content.

CPNs are the organizational counterpart to Wintelism, a new organization of production in which lead firms exploit the increasing technical specialization throughout the value-chain by producers in disparate geographic locations around the world. Wintelism could not have succeeded without the extensive inter-firm relationships with Asian-based producers that comprised the CPNs of Americanowned firms. Those cross-border ties permitted US-owned firms to exploit the growing technical sophistication and competitive strength of indigenous producers initially in Taiwan, Singapore, and Korea, and later throughout Southeast Asia, in selected cities of India, and along the coastal provinces of mainland China. The unique heterogeneity of Asia’s regional economy, with different tiers of nations (Japan, Four Tigers, ASEAN, and coastal China, interior China, and India) at different stages of development provided the fertile ground for technical and production specialization that enabled the creation of CPNs; e.g. software in Bangelore, process engineering in Singapore, component assembly in Malaysia, printed circuit board (PCB) assembly in coastal China, semiconductor memory in Korea, digital design and final assembly in Taiwan. This article explores the development of American-led CPNs in greater detail, outlining the rise of Wintelist business strategies and the development of the CPN organizational form.