China Still Years From Competing Against U.S. IT

LAS VEGAS—China is closing the technology gap with the U.S. every year, but it will be many years before it challenges the U.S. for dominance of the technology market, according to Fred Hu, co-head of Investment Banking for China at Goldman Sachs.

The country is also improving human rights conditions and vows to resume a human rights dialogue with the United States over its "sweat shop" policies—particularly in light of the upcoming Beijing Olympics. However, slowly churning human rights changes in China will still result in cheaper IT manufacturing prices for U.S. companies, Hu told an audience, Feb. 26, at Goldman Sachs 2008 Technology Symposium here in Las Vegas.

"China has been making great strides in a lot of areas. It's making large strides in IT to close the gap with the U.S., but that gap remains very, very big," said Hu. "There are reasons to think one day China will become of the leaders in technology—there is the human capital [quotient] where every year China trends 600,000 graduates in engineering. That's by far the greatest number of engineers. So there is an abundance of human capital. And there is the social aspect….but I haven't found anything event remotely compatible to Microsoft. Is it in five years [competitors will emerge]? I think even longer."

At the same time, said Hu, while China's nod to basic human rights for workers is viewed by many as the culprit to rising costs of manufacturing goods in China, a little perspective is necessary. The average cost of manufacturing in China, even with the implementation of minimum wages and worker safety initiatives, is still less than one-tenth of the cost of manufacturing in South Korea, and still less than one-twentieth the cost of manufacturing goods in the United States and Europe. "There's still a long way to go," said Hu.

In response to the question regarding China's actions to prevent rampant intellectual property theft in China, Hu said there are philosophical differences that keep IP theft alive. The biggest thing is the deeply held belief in China that the poor must, and should, do what's necessary to acquire knowledge. "In China if you steal someone's car or break into their house, that's theft," said Hu. "Intellectual theft is sort of an intangible. Education is a big thing in China. For the poor to acquire knowledge to learn [the idea is that] if they couldn't afford a book [they should] steal a book. In China, stealing a book is an elegant offense."

During his keynote address Tuesday at the Tech Symposium Mark Hurd, CEO of Hewlett-Packard, bemoaned IP theft in emerging markets, where counterfeiting is a significant issue. Hurd said while HP is working with some authorities to solve things like printer and ink counterfeiting, there is still a lot of disruptive practices, with seemingly no end in sight. "We've had some successes," said Hurd. "But those are some of the risks of emerging markets."

Despite China's cultural differences with respect to IP, Hu said that the country has come a long way in its thinking. He said that what China does very well is write a new copyright law, trademark law or patent law. But, that being said, those laws require enforcement—and a whole new judicial system. Hu pointed out that there is still a shortage of lawyers in China that can argue IP cases, and the courts are still inadequate. "All this takes time," he said.