Why High-Tech Commoditization Is Accelerating
Knowledge embedded within state-of-the-art production and design tools is a powerful force that is leveling the global technology playing field. It democratizes innovation and makes future competition ever more challenging.
For tech companies that rely on sophisticated engineering, staying ahead of international competition seems to get harder every day. It used to be an article of faith that technology-intensive product manufacturers, automakers, or white goods makers could capitalize on their longstanding engineering and design leadership to cement their position worldwide. But that’s no longer the case. Today, young upstarts in many product segments, especially from China, can develop world-class design and production capabilities in a short period of time. In some cases, they are closing gaps with long-established incumbents and becoming market leaders within a decade.
The popular narrative is that three main factors are driving this: (1) blatant copying of intellectual property (IP), (2) governments pressuring companies to share technology in exchange for rights to do business, and (3) normal knowledge spillover as workers move from multinationals to local companies.1 But other, less recognized forces are at play, and they are accelerating commoditization and making product differentiation increasingly difficult to sustain.
Knowledge, particularly the tacit know-how that takes years to develop, now flows through pathways that we take for granted. It is embedded into the tools used to design and manufacture products, and it is incorporated into the building blocks that are used to build more complex systems. The implications are profound. Perhaps the biggest implication is that, armed with this knowledge, young competitors can skip years of practice and experience building, and become competitive threats almost instantly.
Making Complex Things Easy
Sophisticated production and automation tools are at the heart of many manufacturing processes. Their designs are based on years of scientific research and development (R&D). They take things that are hard to do — for example, making electronic devices that have dimensions on the scale of tens of atoms — and make them routine. Specialized tools contain a lot of know-how, and the procedures for using them can speed development cycles by turning the science into simply a matter of following a recipe. The tools make the process repeatable and take out the variability and risk. This can lead to rapid commoditization of whole product areas: All you need is the money to purchase the tools.
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1. The work here is extensive. See, for example, D.B. Audretsch and M.P. Feldman, “R&D Spillovers and the Geography of Innovation and Production,” American Economic Review 86, no. 3 (1996): 630-640; P.M. Romer, “Increasing Returns and Long-Run Growth,” Journal of Political Economy 94, no. 5 (1986): 1002-1037; P. Krugman, “Increasing Returns and Economic Geography,” Journal of Political Economy 99, no. 3 (1991): 483-499; G.M. Grossman and E. Helpman, “Innovation and Growth in the Global Economy” (Cambridge, Massachusetts: MIT Press, 1993); K. Saggi, “Trade, Foreign Direct Investment, and International Technology Transfer: A Survey,” World Bank Research Observer 17, no. 2 (2002): 191-235; D. Ernst and L. Kim, “Global Production Networks, Knowledge Diffusion, and Local Capability Formation,” Research Policy 31, no. 8-9 (2002): 1417-1429; R.R. Nelson, ed., “National Innovation Systems: A Comparative Analysis” (Oxford, United Kingdom: Oxford University Press, 1993); and D.C. Mowery and J.E. Oxley, “Inward Technology Transfer and Competitiveness: The Role of National Innovation Systems,” Cambridge Journal of Economics 19, no. 1 (1995): 67-93.
2. Rendering with visual-effects tools to produce movie scenes is now a commodity often outsourced to low-cost regions or regions where there are subsidies.
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Steffen Baeumler