Moving from OEM to OBM? Upgrading of the Chinese Mobile Phone Industry

Abstract

Introduction More and more developing countries have been directly or indirectly integrated into global production networks. Despite being at the low end of global value chains (GVCs) and exposed to the risk of being replaced by other countries with lower production costs, it is believed that these developing countries are capable of industrial upgradation (Gereffi, 1999, 49–55). For developing countries, the model of upgrading from being an original equipment manufacturer (OEM) to becoming an original brand manufacturer (OBM) is considered to be a practical one (Gereffi, 1999, 55–57; Leonard-Barton, 1995; Hobday, 1995). As far as the four types of economic upgrading (Gereffi, 1999, 2005, 171; Barrientos, Gereffi and Rossi, 2011, 323–24) are concerned, developing countries generally encounter far less difficulty in process and product upgrading than in functional and chain upgrading (Humphrey and Schmitz, 2002, 1023). However, in other literature on this issue, it is argued that integration into the GVC contributes little to industrial upgrading for developing countries, not only because over-dependence on trade with a couple of multinational companies (MNCs) would hinder the process of upgrading and transformation for a firm in less developed economies, but also because MNCs tend to prevent their suppliers in developing countries from catching up with them (Humphrey and Schmitz, 2002, 1024). Besides the reluctance to undertake the risk of upgrading (Barrientos et al ., 2011, 333–34), there are still other difficulties for OEM firms in developing countries seeking to fill the gap between the requirements for being an OEM and an OBM, such as the lack of sales channels, and very limited knowledge spillover from MNCs which occupied the high end of the value chains (Schmitz and Knorringa, 2000). Conversely, companies with successful experiences of upgrading in developing countries are domestic-market oriented or export their products to other less developed economies (Bazan and Navas-Aleman, 2001), by manufacturing cheaper products with inclusive innovation to occupy the subsistence marketplaces and build up their brand value (Weidner, Rosa and Viswanathan, 2009).