The Disintegration of Production
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The Disintegration of Production

Firm Strategy and Industrial Development in China

Edited by Mariko Watanabe

In the past two decades, China has experienced rapid industrial and economic growth. This fascinating book explores the unique Chinese business strategy of vigorous market entry and low prices, which has been the key feature of this accelerated industrial growth.
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Chapter 3: TV and air conditioning: product innovation under vertical

Mariko Watanabe


This chapter will examine the strengths and weaknesses of the following features of Chinese industries: vigorous entry, scattered market share, and vertically disintegrated transactions. In this context, the chapter will look into the process by which new products are introduced into the matured TV and air-conditioning manufacturing industries. As argued in Chapter 1, the strength of vertical disintegration is attributed to the low cost of entry and the low product price. On the other hand, some literature warns of the weaknesses of vertical disintegration. These might appear in any domain where integral adjustments are required. In order to achieve high production quality, integral adjustment is necessary. To implement integral adjustment, intensive communications are necessary within a limited inter-firm relationship or within an organization. Therefore, vertical disintegration transaction does not enhance innovation or maintain high quality. Does vertical disintegration really erode the quality of products? Does vertical disintegration really hinder product innovation? As we have already seen in the Introduction and in Chapter 1, most Chinese markets are competitive, and the literature on innovation and empirical studies documents the innovation promoted by that competitive environment. This chapter will trace what actually happened in the product innovation process in a vertically disintegrated transaction relationship. Two markets will be covered as case studies by this chapter: TV and air conditioning (AC). These two industries have been chosen deliberately to indicate the types of innovations that are common to vertically disintegrated transactions in China.

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