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.

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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.



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.

3. Such spillover is discussed in K. Lim, “The Many Faces of Absorptive Capacity: Spillovers of Copper Interconnect Technology for Semiconductor Chips,” Industrial and Corporate Change 18, no. 6 (2009): 1249-1284; and W.C. Shih and G. Carraro, “Low-k Dielectrics at IBM,” Harvard Business School case no. 610-023 (Boston: Harvard Business School Publishing, 2009).

4. See, for example, J.A. Mathews, “Strategy and the Crystal Cycle,” California Management Review 47, no. 2 (2005): 6-32; J.W. Spencer, “Firms’ Knowledge-Sharing Strategies in the Global Innovation System: Empirical Evidence From the Flat Panel Display Industry,” Strategic Management Journal 24, no. 3 (2003): 217-233; and B. Bowonder and T. Miyake, “Japanese LCD Industry: Competing Through Knowledge Management,” Creativity and Innovation Management 8, no. 2 (1999): 77-99.

5. This was based on two studies, conducted by the author, of production issues on an exposure machine at a generation 8.5 thin film transistor-LCD fabrication facility in China.

6. A. Gerschenkron, “Economic Backwardness in Historical Perspective: A Book of Essays” (Cambridge, Massachusetts: Harvard University Press, 1962).

7. A. Hirai, I. Abe, M. Mitsumoto, and S. Ishida, “One Drop Filling for Liquid Crystal Display Panel Produced From Larger-Sized Mother Glass,” Hitachi Review 57, no. 3 (2008): 144-148.

8. This observation came from a case study on the company; see W. Shih and S. Chai, “BGI: Data-Driven Research,” Harvard Business School case no. 614-056 (Boston: Harvard Business School Publishing, 2014).

9. D. Cyranoski, “China’s Bid to Be a DNA Superpower,” Nature 534, no. 7608 (2016): 462-463.

10. W. Shih and N.H. Dai, “From Imitation to Innovation: Zongshen Industrial Group,” Harvard Business School case no. 610-057 (Boston: Harvard Business School Publishing, 2010).

11. BYD entered the market with the purchase of Xi’an Tsinchuan Auto Co. Ltd.; see “Company Profile,” n.d., www.byd.com.

12. G. Brooch, “The Limits of Software,” in G. Boyd, “Executable UML: Diagrams for the Future” (webinar), Feb. 5, 2003, www.devx.com.

13. See S. Mills, E. Clementi, B. van Kralingen, T. Rosamilia, R. LeBlanc, and B. Picciano, “Evolving IBM’s Core Franchises: Segment Panel and Q&A,” May 14, 2014, www.ibm.com.

14. For example, see R. Courtland, “Intel Now Packs 100 Million Transistors in Each Square Millimeter,” Nanoclast (blog), March 30, 2017, https://spectrum.ieee.org.

15. See, for example, G. Fasol, “Room-Temperature Blue Gallium Nitride Laser Diode,” Science 272, no. 5269 (1996): 1751-1752; K. Werner, “Higher Visibility for LEDs,” IEEE Spectrum 31, no. 7 (1994): 30-34; S.W. Sanderson and K.L. Simons, “Light Emitting Diodes and the Lighting Revolution: The Emergence of a Solid-State Lighting Industry,” Research Policy 43, no. 10 (2014): 1730-1746; and “Nichia Sues Taiwanese Blue LED Rival Epistar,” Sept. 25, 2003, www.compoundsemiconductor.net.

16. Chinese firms like Huawei have become leaders in international patent filings as well as litigation in support of their IP ownership. See, for example, K. Chan, “Huawei Wins China Patent Lawsuit Against Rival Samsung,” Seattle Times, Jan. 11, 2018; J. Osawa and J. Cheng, “Huawei Sues Samsung Alleging Patent Infringement,” The Wall Street Journal, May 24, 2016; and “Shenzhen Is a Hothouse of Innovation,” The Economist, April 8, 2017.

17. Many companies either don’t allow visitors to bring personal computers into buildings or seal USB ports on visitors’ computers upon entry.

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Comment (1)
Steffen Baeumler
Great article and especially as a German it is a very good read as the German automobile and mechanical engineering industries are hit hard by the tech commoditization.
I think there might be two other, very potent, protection strategies:

1. Build a strong and exclusive brand, e.g. Apple, Trumpf, Porsche (I know this does not work in all markets/areas)
2. Differentiate by offering a superior service/digital portfolio, e.g. Amazon, IoT Services for machines, ...

What do you think?