Why China and Korea's Priorities May Decide The Smartphone Wars

2007 and the world economy is on the brink. By June, we hear the stirrings of an unprecedented crisis. A mortgage bubble is about to burst, destroying personal wealth and plunging the global economy into a recession as severe as anything we have ever experienced.

In case anybody has forgotten, this was the economic background when Apple launched the iPhone, a device that revolutionized its industry, transformed personal computing habits, and may well have salvaged the American psyche from the wreck of the Great Recession:

Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net worth. By early November 2008…. the S&P 500, was down 45% from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008.

Steve Jobs launched the iPhone in June 2007, as a premium product priced at $499.00 and $599.00. The phone had been rumored as far back as 2002 when Jobs downplayed talk of a new PDA,suggesting that the next PDA would be a phone, anyway.

The reaction of competitors such as RIM (BlackBerry) was disbelief, even panic, or ridicule. Microsoft’s Steve Ballmer though it was ridiculous not to have a physical keyboard on a device. Fans called it the Jesus phone. But even the loyal Macrumors website carried almost as many negative comments as positive about the iPhone: 494 to 434. The launch was a nervous time, especially as heavy data usage from new owners began taking networks down ,in what appeared at first to be an Apple bug.

But from there on, what a story.

At the start of 2007 Apples share price stood at $83 (Jobs had announced the phone in January). At the launch of the iPhone it was $122. It dropped back to $94 at the peak of the crash in 2008 but from there rose to a peak of $700 in Fall 2012.

While it was at its peak Apple became the company with the highest capitalization of any company anywhere, Q4 profit in 2012 higher than any non-oil company had ever posted, in effect making it the most successful company in the world. At the launch of iPhone 5, economists speculated that this one model would add between one quarter and one half percent to US GDP growth.

There have been downsides to the rise of Apple. It has coincided with the terminal phase of deindustrialization. And we can’t kid ourselves any longer – its value lies in design not in grunt.

In contrast it is fair to say also that just as mortgages destroyed the wealth of some families, Apple created wealth for many others. A thousand dollars in Apple in 2007 could have risen to over $8,000 in 2012, a rise well above the drop in real estate values.

More than that though, Apple played to a view of the global economy that fits very well with how the American intelligentsia and business elite see it. That says: what really counts is our native genius. Other countries can discipline their workers to turn out parts in new megafactories but only Americans have this innate genius for product, technology and business.

And Apple also created its own free market. All those Apps, Jobs would tell supporters and critics, were created by the little guy. Here was a microcosm of free market America, except that Apps were made everywhere, in Apple’s developer ecosystem.

So this smartphone created wealth and sustained the way the country perceived itself – successful, transformative, spirited, and entrepreneurial, even if critically injured.

Alongside it, Android, reflected an even more American techno-centric view of the world: open source and even more opportunistic, beginning, as legend has it, in Apple’s own boardroom.

So that should we make of Apple and the smartphone? Plenty.

It used to be autos that sustained economies and led recoveries. But look back over the past five years and a company called Apple saved America, with Google picking up from behind.

By taking over the global smartphone industry, though Apple, has created two other phenomena that will sink Apple in turn, if it does not adapt quickly.

The first is the phenomenon of informal industrial policy. Everyone has seen what smartphones can do for the wider economy. The second is modularising innovation. It’s now possible to create smartphones with none of Apple’s genius.

First that industrial policy. Europe, before the iPhone, owned mobile. Carriers like Vodafone were the first truly global brands. Manufacturer Nokia was perhaps the first brand to realize the astonishing new scale of technology inherent in mobile. While GE and Philips could sell millions of light bulbs, only one company sold 450 million units of high-tech devices each year.

And Nokia saved Europe, as much as Apple saved America. In the mid-1980s the EU wondered how it could possibly counter the might of America and Japan in computing. It decided not to – and opted for mobile instead. Mobile and broadband to be exact, which is why countries like Holland began 35Mgbit downloads well over a decade ago. Mobile though was the great promise, the unspoken industrial policy, the vision to unseat America at the top of the tech pyramid.

By crushing Nokia, Apple and Google took 5% out of the Finnish economy, wiped out the post-Psion, British OS Symbian, which had already found its way into over 350 million smartphones, and relegated Nokia to the status of struggling niche player, dependent on another US company, Microsoft, just at the point where it was going to write a new chapter in mobile, augmented reality and mapping.

But of course Samsung had a hand in that too – as did Google, with Android and with Google maps. Yet, it is Samsung we have to now turn to – with a watchful eye also on Huawei and other Chinese phone makers.

The reason is very simple. Smartphones, and their operating systems, are now perceived as an essential national asset. If you look at BlackBerry right now, its relevance is not the Z10 but its astute purchase of the QNX embeddable OS a couple of years back. It’s not just the device, it is the OS.

One overriding point about Samsung. It is central to the Korean economy. That’s not just because of smartphones, of course. It is a conglomerate engaged in activities as diverse as building and aerospace. It is a national champion, in the way that IBM and Nokia used to be and the way that Apple has become.

Its dealing with the science community in Russia, for example, is Government sanctioned. It deals with the Russian Government, not just the Academy of Science.

Samsung deploys a formidable innovation machine. It’s not about sleek designers in black or blue v necks, a genius bar or a kitchen cabinet.

Samsung trains hundreds of its engineers in innovation methodologies. It uses innovation training to create a new elite within its typically conservative social hierarchy. Innovation, in other words, is its version of social mobility.

That has allowed the company to master a fast-follow market approach, and it is moving towards technology leadership where it can, as it ranges across LTE networks, smartphones, computers, TVs, and white goods, and gradually content.

It is beginning to integrate a new generation of bought-in designers, Americans and Europeans, to make up for this one area of deficiency. The company is restless and relentless.

But Samsung’s problem is China. Not that it has a problem selling in China. In the last 18 months Samsung has transformed its operations in China and now employs substantially more native Chinese managers than Koreans there. And it has begun to transform its sales operations, with a plan to open new Samsung branded stores outside the main cities.

The China problem is a bit like the Google and Apple problem in Europe, though.  Europeans have seen their software leadership in mobile disappear as the iOS and Android have advanced. And with it their device leadership has disappeared too – never to return.

China needs a national champion in smartphones, and probably believes it has one in Huawei. Huawei transformed telecommunications’ infrastructure, globally, in the past five years.

Talk to executives in the European infrastructure giants five years ago and they’d tell you – yes we are being stuffed by cheap Chinese competition but we think we can maintain an edge in quality. Two years later they were saying – problem is we are being stuffed by cheap Chinese product that is very high quality. And now they know they are also up against exceptional service quality and bottomless funding.

Huawei knows how to transform an industry and has its eyes on Apple and Samsung. There is a feeling around, that a company like Huawei doesn’t really understand design or branding. But Taiwan’s HTC has recently produced what Techno-Buffalo regards as one of the best phones around. Samsung has bought branding experts in. It is hiring in design.

The genius at this point is not native skills like branding or design but the pace of change and the breadth of change – who can deploy enough engineers across enough projects, all the time?

The natural history of smartphones suggests that Hauwei will get its way. Nokia was a leader for fifteen years an an official European champion. Apple has held a lead for six years and is now under threat from Samsung, the Korean industrial champion. What’s the likelihood of Samsung being dethroned within 3 years?

Very high, because Chinese manufacturers will commoditize whatever high end features Samsung and Apple develop. What they need is an OS. They know from Samsung and Bada not to develop one of their own. They need to buy or, looking at Samsung’s possibilities, to find a way to become self-sufficient with Android or to access QNX.

The lesson of smartphones seems to be that control of the OS really matters. And let’s not forget also that smartphones are now becoming intelligence and data gathering machines. But it could also be that the movetowards open mobile presents new opportunities for Chinese companies to exert the control over innovation they crave.

With or without an OS companies like Huawei will have eroded Samsung’s lead within three years, because it really matters to China, because smartphones, and what comes next, are strategically important, and because China has a more encompassing innovation system than Samsung has, one that really puts a stranglehold on the competition.

In each case, innovation is played out with the tools these companies feel most comfortable with and that management can drive hard and fast.

For all those reasons Apple needs to decide is it going to be king of a niche that will be slowly eroded, as happened in computers, or will it take on the mantel of being the world’s biggest and best tech company? And in the same vein, you have to ask is Google’s hardware strategy serious enough? The national genius of Korea and China is to follow fast and overtake in the slipstream.

Forbes.com