The Upgrading Resistance and Countermeasures of Chinese Manufacturing Industry
Foundry Mode
Ying-chun Song
Business School of Shandong University
No.180 West Culture Road Weihai, 264209,China
(songyingchun@sdu.edu.cn)
Abstract-With the global economic competition
aggravating, the problem of China manufacturing foundry
enterprise transformation upgrading is imminent. To
successfully implement the transformation and upgrading, the
manufacturing foundry enterprises must have the profound
and comprehensive understanding of the various resistances
encountered in their upgrading process and its influence.
Different from the most exiting studies, this article firstly
elaborates the upgrading mode and possible path of the
foundry enterprises, and then analyses detailedly the
diversified resistance which different upgrading paths might
encounter, and put forwards the coping strategies separately
from the enterprises and government point.
Keywords - foundry; upgrading; resistance; dissolve.
I. INTRODUCTION
How Chinese manufacturing foundry enterprises realize
their strategic transformation to achieve new developments
is the focus of the public concerned. Scholars have made a
lot of researches on the upgrading of the foundry mode.
From the existing researching results, the majority primarily
focused on researching its upgrading need and the path,
seldom research the resistance maybe encountered in the
process of the transformation and upgrading. For
manufacturing companies, the upgrading resistance of the
foundry mode is the first factor to be considered and if this
factor is ignored, the upgrading target and the corresponding
countermeasures will be the empty talk.
II. THE MAIN FOUNDRY MODE AND UPGRADING PATH
A. The major foundry mode
According to the different nature of the business which
the foundry enterprises undertakes, the foundry model can
be divided into three levels [1], namely:
I)original equipment manufacturing(OEM).
II)original design manufacturer(ODM).
III)original brand manufacture(OBM).
The main difference between OEM, ODM and OBM is
the controlling of designing, manufacturing and marketing
value activities. In the context of the international division
of labor, different links of value chain generate different
added value, so the profitability of the three foundry mode
is also different. To use the industry value distribution
"smile curve" as analysis tool, you can find that OEM only
exists in the bottom of the smile curve and makes the least
profit; ODM can obtain the value and profits of the middle
part at the left side of the curve; OBM occupies the highest
part of the right side of the curve and gains the largest part
of the industry profits[2].
B. The upgrading path of foundry mode
Enterprises growth is the process of value creation
capacity promoting [3], so the upgrading purpose of foundry
mode is to promote the value chain upgrading , enhance the
value creation ability to achieve its competitive advantage
sustained and strengthen. In reality, there are two available
upgrading paths for foundry companies to choose, namely:
I)OEMODMOBM.
In this upgrading path, enterprises need to go through
twice transformations. OEM companies need to start with a
single OEM producer gradually upgrade to the ODM mode
including OEM and ODM ; secondly ,ODM companies
need to design products to meet the demand of contract
providers and product these products according to the order.
After their R&D design and production function have
become mature and their products been adapt to the market
environment, the foundry enterprises could get rid of the
brand of contract providers and establish their own brands,
through the above two steps, they upgrade to OBM mode.
II)OEMOBM.
In addition to the foundry enterprises which use ODM
mode as transition, companies can also choose to conduct
independent R&D design and self-marketing, to upgrade
from OEM to the OBM directly. Of course, considering the
cost and efficiency, the OBM manufacturers may outsource
assembling, manufacturing and even R&D design business
to other OEM or ODMs, and they focus on brand, channel,
and after-sale service areas [4] to highlight its own core
competitive advantage.
 III. ANALYSIS ON UPGRADING RESISTANCE OF FOUNDRY
MODE
Selecting upgrading paths, foundry enterprises mainly
consider the two following factors. The first is the purpose
of the upgrading, which usually depends on the strategic
objectives of the enterprises. The second is the feasibility of
the upgrading, the size of the difficulty of upgrading will
directly affect the feasibility of the upgrade program. Here,
the word "difficulty" can be understood the resistance in the
process of upgrading: the greater the resistance, the greater
the difficulty for the OEM mode. Because different
upgrading paths of foundry mode have the different nature
resistances, and the corresponding solving strategies are
different. Having a definite object in view enterprises can
realize their strategy targets smoothly. So it is necessary to
research the resistance may be encountered in the
OEMODMOBM and OEMOBM these two
upgrading paths. In order to facilitate the study, we name
the path, OEM ODM OBM for path A, especially part
OEMODM is named path A1, ODMOBM is named
A2we name OEM-OBM for upgrading path B.
A. The resistance that path A1 may encounter
ODM success or failure depends on whether company's
products can be implemented differentiation on the basis of
low-cost, accordingly, the bargaining power of upstream
suppliers and product R&D capabilities become the major
resistance that enterprises upgrading may encounter.
I)The bargaining power relative to the upstream
supplier's is weak and thus affects the enterprises to reduce
production and operating costs.
Under normal circumstances, ODM have an ability to
grasp independently the suppliers raw materials, raw
materials prices directly affect the cost of ODM products,
thus affect the competitiveness of the ODM enterprise. In
the same seller's market conditions of the raw materials,
OEM companies can take advantage of the relationship
between the agent and raw material suppliers to enjoy a
cheap and stable supply of raw materials, but ODM
companies are limited by their influence, they often lack of
bargaining dominant position. Since the outside factors have
great influence on their cost , their profitability ability is
more instable.
II) Passive product R&D resistance to differentiate.
ODM, in essence, is still based on the Principal Order-
oriented, so the focus of ODM companies will continue to
operate on the completion of orders rather than take the
initiative to develop core technology. The biggest obstacle
of the product R&D comes from the configuration of the R
& D team, the development based on the innovative
products often rely on an independent, full-time R & D
team [5], the design aimed to complete the order is to rely on
a cross-sector temporary team. Although the latter is more
suitable to complete the order task and cost less money, it is
still not conducive for enterprises to foster core technology,
which will be the resistance to upgrade to OBM.
B. The resistance that A2 Path may encounter
Excellent brand enterprise needs to have two
characteristics: first, have a powerful brand; second, the
brand is continuously and effectively propagandized. Major
resistance of A2 path lies in lack of brand building and
brand promotion.
I) Resistance of the experience accumulation exerts on
brand building.
From the world foundry industry, Latin American
countries, Japan, South Korea and other countries have a
better foundry development history [6], especially Samsung
Electronics, Hyundai Motor and other international famous
brands are typical enterprise brand building case. By
contrast, the enterprises successful transition to OBM in
China is very seldom ,except as "the galanz ", and" the
giant as the international brand enterprises are fewer,
Chinese foundry enterprises lack of the accumulated
experience on the brand building.
II) Resistance of the marketing ability exerts on brand
promotion.
Marketing 4P theory suggests that product, pricing,
channels, promotion determines the enterprise's marketing
ability, and the foundry enterprises are disadvantage in these
links, it is not conducive to brand Propaganda. First, the
foundry enterprises operate their own brand with a limited
production capacity, their product quantity and specification
only covers a small part of the market segments, consumer
awareness is lower; Second, the foundry Enterprise
compared to the international brand enterprises lack of the
scale economies and the cost leadership due to no price
advantages to the raw material suppliers, product price
disadvantages affect their market demand. Third, the fewer
number of distribution channels, lack of sales and product
support, consumers cannot enjoy the products and services
in time, it is difficult to build brand loyalty. Fourth, limited
to the foundry nature and their business capacity, effective
promotion type is single and does not provoke potential
consumers desire to buy, it is difficult to establish extensive
and good social image.
C. The resistance that path B may encounter
Because the ultimate goal of the A Path and B Paths is
reached OBM mode status, there is no denying that the
resistance nature of the B Path and A encountered in the
upgrading process has a lot of similarity, due to the above
two path have the same final value chain, which contains
the complete value chain of the R&D, production and
marketing systems. Difference between B Path and A Path
is B Path missing the ODM transition phase, its value chain
almost at the same time to extend to both high profitable
ends of the smiling curve, and this feature will highlight the
resistance which is not apparent in the A Path.
I) Resistance from the client.
In the Path B, the foundry enterprises directly get rid of
the client and create their own brand, their relationship
become direct competition from the division and
cooperation. In the intense competitive industry,
relationship change between the competitors is likely to
impact on their market share, clients with strong advantages
may realize their interests will be reduced in advance and
would limit the foundry enterprise's own ability. The
entrusting enterprises want the OEM enterprises cooperated
with them to enhance their own power to meet the principal
enterprise requirements for manufacturing products with
low cost and differentiation, but they prefer OEM Enterprise
be limited in the original design or manufacturing stage
rather than a brand independent stage [7]. Therefore, they
pay particular attention on protecting their competitive
advantage barriers, they usually take the frequent
replacement of cooperation OEM enterprise or severely
limited OEM cooperation areas to make OEM enterprise
hard to overcome barriers to learning to improve their own
ability. This behavior also can explain why B Path has
greater risk than A Path. In addition, the upper reaches can
control the cooperation relationship with suppliers due to
having negotiation position compared with OBM under the
situation of the resource scarcity. If OBM products and
supply channels have a strong competition with their
clients, clients may participate in limiting the relationship
between the vendors and OBM Enterprise, and this situation
will be deteriorated due to the raw materials scarcity.
II) Resistance formed by the foundry enterprises lower
management ability.
The foundry enterprises upgrading through B Path would
encounter greater change than the enterprise upgrading by
the A Path, if management capabilities are not
accommodate with the rapid changes timely enterprise
encounter a range of management issues. First of all, from
the perspective of strategic management, Enterprise at any
time are in a dynamic environment, corporate culture, type
of strategic leadership, control systems are in the change,
which is huge challenge to enterprises on a growth path of
transformation. Second, from the perspective of the
business management, cost and human resource
management are the two major challenges. (a) Enterprise
production cost structures change is most obvious in the
path B and most difficult to control. The initial cost of the
new business is very small, but with the changes of the cost
structure, its growth rate will accelerate rapidly, such as
research and development continued investment costs,
maintenance costs of the marketing channel, if business
cannot control these factors, costs will be out of control. (b)
With the function department increasing, companies must
reserve human resource through internal promotion or
external recruitment, if continuously using the older
employees , enterprises will face the problem of lack of
professional knowledge to the added function department, if
greatly absorbing people from outside, enterprises can meet
new business needs, but will face the problem of lack of
management experience.
D. common resistance of the path A and B
I) The intellectual property rights management is in a
mess.
In recent years, China has intensified its efforts to protect
intellectual property rights, but the cases of piracy torts
happens frequently, especially high-tech industries such as
electronics, software, intellectual property is damaged
severely, accelerated the recession of industry product and
technology that are frequently updated. The main reason is
relevant laws and regulations are not perfect, poor
execution, illegal business units and individuals cannot be
bound in time, deliberately disrupt the market environment.
The worse intellectual property right management has
reduced the product life cycle significantly profit ability
within their investment period which enjoys the intellectual
property right. On the other hand, the threshold of the
Chinese patent application was too low and the review is
not strict [8], which lead to invention flood, serious patented
homogenization, smaller difference between many patent
product form, characteristic and utility, division markets and
pessimism market prospects.
II)The industry barriers limit entry and exit.
The entry barriers of the foundry industry is core
technology, channel blockade and fund investment. (a) For
high-tech industries, patents directly limits the potential
competitors from entering the industry, channel blockade
will limit the new entrants in the specific market and the
capital scale limit enterprise development scale. (b)
Upgrading mode of the foundry enterprises has a higher
opportunity cost. After OEM business upgrade to OBM,
production scale must be adjusted, production cost savings
brought about by the scale economies will form part of the
opportunity cost. (c)The exit of the OEM enterprises is
influenced and limited by the special equipment investment.
The greater investment in equipment, the greater the
proportion of fixed costs occupy, and the more difficult to
exit the industry. (d)To protect the local employment and
the industrial structure, the local Government may refuse or
discourage the enterprises exit.
III)The infect of consumer behavior.
Influenced by the brand popularity and quality, many
Chinese consumers are crazy about the foreign things when
they buy goods; even facing the same quality goods
consumers tend to prefer foreign brands. Using the
sportswear industry as a example, the gap on the product
properties of " Nike and Li Ning is not very big, but the
" Nike " sales is several times per year of " Li Ning ".
Similarly, the OBM enterprises established their own brands
will also face such resistance, unfortunately, if a new brand
is lack of effective marketing tools will be more difficult to
be accepted by the consumer.
IV. RESOLVING POLICY OF UPGRADING RESISTANCE
A. Do a good job of strategic transformation planning
OEM enterprises must conduct a comprehensive analysis
about their own abilities and external environment of
industry to determine the upgrading paths. In general, it is
better for the enterprises which own sufficient funds,
operating capacity and are in rapid changes industry to
select the path: OEM OBM. It is secure for other
companies to choose this path: OEM ODMOBM. After
determining the upgrading paths, enterprises need to explore
the upgrading strategic objectives and the strategic
implementation of programs, and make a strategic
transformation preparatory work. Finally, corporate
management layer must have strong leadership, decision
making and supervision to ensure the real implementation
of the strategic objectives and the upgrading process going
smoothly.
B. Focus on the core value chain links
The upgrading process in the foundry enterprises mode
must always focus on the low-cost and differentiation in the
value chain. First, foundry enterprises should seize the
scarce resources and maintain the good cooperation
relations with suppliers, to lay the foundation for directly
establishing supply relationships after the upgrading. So
both sides should maintain an honest and trustworthy
cooperation premise and keep mutually beneficial and win-
win collaborative thinking. Foundry enterprises also must
pay attention to the maintenance of the supply chain and
improvement of the supply channels, to access to cheaper
raw materials and lower production costs. Secondly, the
foundry enterprises must pay attention to production
operations management to improve production efficiency.
Because of the increased product diversity, the upgraded
OEM enterprises may lose the advantage of the scale
economy, so the companies must pay more attention to cost
control, take lean production or flexible manufacturing
management to increase product differentiation and reduce
production costs. Finally, foundry enterprises, in particular,
need to concern marketing strategy and brand development.
In one hand, enterprises should develop a marketing
strategy in line with the overall business strategy, from
product, price, distribution and promotion aspects to look
for differentiation to meet the needs of more consumers and
reduce costs in order to gain more market share; On the
other hand, enterprises should also transfer corporate culture
and brand culture from the inside to the outside to converted
the brand image to the product image, so as to establish the
status of products in the minds of consumers and pave the
way for enterprises future development.
C. Seek strategic balance in competition and cooperation
Michael Porter (1997) pointed out that the existence of
the appropriate competitors in the market can bring out
many strategic benefits, such as: increasing competitive
advantage, improving the current industrial structure,
contributing to market development, actively containing the
potential competitors from entering [9]. (a) Through
producing the product differentiated from the competitors,
the foundry enterprises achieve differentiation or
innovation, meanwhile, they also can take advantage of the
industry leader (which may be the clients ) giving their the
cost umbrella. (b) The entry of the new foundry companies
can exploit the advantage of the bargaining power with
suppliers to the full to help improve the buyer's overall
bargaining strength and reduce supply costs. Foundries can
also act as a market niche role to fill gaps in market
segments and help the industry to enhance barriers to entry.
(c) The foundry companies can contact with other brands
enterprises to share the cost of market development, help
technical standardization or legalization and jointly
safeguard the industry's image. (d) The competitors can help
prevent the threat of potential entrants in the control of the
entry barriers and market segments, at the same time, if the
resistance of the manufacturing companies in the foundry
mode upgrading is reflected sufficiently, which can also be
regarded as a strong difficult signal of the industry entry.
D. Playing the role of government functions to create a
favorable environment for manufacturing foundry
enterprises to upgrade.
Good economic competitive environment is the necessary
condition of the transformation and upgrading for the
foundry enterprises[10]. In one hand, the government should
strive to improve intellectual property laws and regulations,
increase the protection degree on the trademarks, patents,
sharply attack the counterfeit and piratic products to
encourage enterprises to actively innovate and implement
the new mode, new technologies and new products. The
concerned departments should raise entry barriers of the
patented products, strictly control the patent quality to
eliminate the phenomenon of repeated applications of the
similar patent. In addition, the government needs to
continue to strengthen the degree of concern on the
domestic independent brand, such as improving related aid
policies, focusing on the quality of own brand products and
encourage consumers to buy the independent brand
products. On the other hand, the government should deeply
introspect using market exchange technology strategy and
make relevant policies timely to foster and stimulate the
market demand to the national products and services to
form a strong pull to the transformation upgrading for the
local foundry enterprises
V. CONCLUSION
The transformation and upgrading is the choice which
must be faced for Chinese foundry enterprises, accurate
grasping all kinds of resistance is the basic premise to
successfully implement the transformation and upgrading
for the foundry mode enterprises. Their transformation and
upgrading cannot complete smoothly only with their own
efforts, it need the joint efforts of the enterprise and
government. From the point of the enterprise, they should
analyze the foundry mode and various upgrading paths
accurately, understand the various resistance may
encountered in different upgrading paths, make good
strategic planning, focus on the core value chain links and
do good tactic balance in the competition and cooperation.
In order to promote and accelerate the transformation
upgrading, the government should strive to create a good
market environment for the foundry enterprises.
ACKNOWLEDGMENT
The writing of this paper got my husband Dr.Jun Liang's
support, and the discussion with him let me got much
inspirations, he helped me polish the words in the text,
without his support, this paper could not be completed
successfully. At the same time, I also got my graduate
students Peng Jiang, Feng-qi Li and Na Zhou and other
fellow students various forms of help and supporting, they
are always well complete the work which I handed to them
and their excellent make me feel very proud. I want o
express my sincere gratitude to them.
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