The China Question - Page 3


Whats in It for Me?

Given the size of the market and the amount of modernizing to be done in the Chinese communications sector, U.S. technology companies have been eager to expand their reach in China.

"For a number of U.S. companies, particularly those in the high-tech area, China is the mother lode for future growth, and thats not going to change," said Ed Rice, president of the Coalition for Employment Through Exports and a former senior aide to the House International Relations Committee. "So its extremely important that we make this work."

While most U.S. companies stand to gain from the bilateral trade deal that lowers tariffs and removes some distribution and other barriers to selling goods directly in China, technology companies in particular would benefit greatly from the agreement.

For example, China has agreed to sign the Information Technology Agreement, which would eliminate tariffs on things like computers and semiconductors by 2005. Tariffs on such products coming into China currently average about 13 percent.

Under the WTO deal, foreign companies will be able to provide a broad range of telecommunications services, including cellular and Internet services, and be allowed to invest directly — up to 50 percent for some services — in Chinese telecommunications and Internet service companies.

As a member of the WTO, China also will be subject to an agreement that sets minimum standards for intellectual property enforcement. While industry officials said China has made much progress in tackling the problem, in 1999 the country had a piracy rate of 91 percent for business software.

In addition, China will allow foreign companies to market their products directly to potential customers and has agreed to stop such practices as requiring companies to share technology with the government.

As the economy in the U.S. and other parts of the world cools, Chinas remains strong. The government recently reported that Chinas economy grew by 8 percent in the first quarter of 2001. Some of the growth is due to domestic spending by the government aimed at helping to insulate Chinas economy from the global downturn.

For American companies suffering from the tech slowdown at home, China is among the bright spots on the global horizon.

"To the extent that other markets are growing faster, it does make it even more important," said Jim Whittaker, director of international public policy at Hewlett-Packard. "Its one of the advantages of being able to operate on a global basis."

Some of the bigger and older technology companies, like HP, IBM and Motorola, have had research, sales and manufacturing operations in China for years, but are looking forward to having some of the restrictions and barriers removed or relaxed once China joins the WTO. HP, for example, employs 1,800 people and runs 14 sales offices and three manufacturing facilities; it makes some components in China that are shipped to the U.S.

William Reinsch, head of the National Foreign Trade Council and a former Commerce Department undersecretary for export administration, said China is particularly important for the technology industry because "thats the stuff they want."

Industry officials cite a plethora of statistics to back up their optimism. Chinas is the fastest-growing telecommunications market, and only 5 percent of it has been tapped, according to the Telecommunications Industry Association. The number of wireless phone users is expected to grow from about 50 million in 2000 to 170 million in 2005, according to the eAsia Report released by eMarketer, an Internet statistics and analysis firm, in February.

China is expected to be the third-largest market for personal computers by 2003 and the second-biggest market for semiconductors by 2010, technology industry analysis firm IDC predicted last year.

Despite its efforts to control the type of content Chinese citizens can access on the Internet, the government has encouraged the development of its communications sector and growth of the Internet, according to Nina Hachigian, a senior fellow at the Pacific Council on International Policy in Los Angeles.

Earlier this month, Zeng Peiyan, who heads Chinas State Development Planning Commission, was quoted by Chinas state-controlled Xinhua News Service as saying: "We believe that the rapid development of Chinas network economy and speedier process of informatization [sic] will inevitably create enormous business opportunities for both Chinese and foreign investors."

Total online revenue in China is projected to grow from an estimated $818 million in 2000 to $23 billion in 2004, according to eMarketer. Internet penetration is growing rapidly as well, up from fewer than 1 million users in 1997 to 22 million in 2000, according to figures provided by the Chinese government, though some private figures say the number of users is lower.

"I think there is a lot of B2B [business-to-business e-commerce] potential," Hachigian said.

Yet Hachigian and others are quick to note that a number of obstacles must be overcome if China is to reach such potential.

Several companies and analysts said one of the primary barriers to doing business in China is a lack of transparency in its regulatory system. They also point to unequal application of Chinas value-added taxes and requests for multiple testing of products and certifications by various ministries. For example, HPs Whittaker said, the Chinese now impose tariffs on his companys computers of between 9 percent and 15 percent, which inflates the costs of his products to Chinese consumers.

"The No. 1 problem in doing business in China is they have rules and regulations and interpretations that seem to change from day to day," Sybases Chen said. "Thats why we want to build up a relationship with them . . . [so they will] interpret them in your favor. Thats always an issue for an American company."

Sybase has a major operation in China with 300 employees focused on selling to the government, and the railroad and tax agencies. Chen said his company has 28 percent of the database software market in China. But one of the reasons the company has not set up a manufacturing plant in China is concern over the protection of intellectual property, which Chen said he hopes will improve once China joins the WTO.

PricewaterhouseCoopers released a survey in January measuring "opacity" — the lack of "clear, accurate, formal, easily discernible and widely accepted practices in the worlds capital markets." China finished last on indexes examining the opacity of the regulatory and legal environments of 35 countries.

"Anyone who has done business over there knows it is very diff-icult," Reinsch said. "Youre dealing with people who are arbitrary under the best of circumstances. They dont have a lot of standards. When an incident comes along, it makes everyone nervous."

Chen and others said they expect the regulatory and legal environment will improve with Chinas accession to the WTO. China will be subject to the organizations rules, and other members will be able to bring a complaint before the WTO should China fail to live up to its obligations.

As China is "increasingly exposed to Western business methods and international competition, it will put increasing pressure on China to address all these issues, to remain competitive and attract foreign investment," said Timothy Bennett, AeAs senior vice president for international affairs and former senior official at the office of the U.S. Trade Representative.

Still, others noted that U.S. companies should not expect instant solutions and that the Chinese market should not be seen as an immediate cure for U.S. economic woes. For example, while many think of China as a giant market with more than 1.2 billion people, the true market is probably only 350 million, said Eddie Cheung, Asia analyst at eMarketer.

And those who followed the 1999 launch of the Chinese-language portal got a glimpse of how difficult launching in China could be. While optimistic about his companys fortunes, Daniel Mao, chief operating officer at Sina, said his firm faced several obstacles when it set up operations in China.

Given Chinas strict controls over content, Sina knew it needed a license for its site based in Beijing. But China had yet to develop regulations covering the Internet. Company officials didnt know where to go to obtain a license until China imposed some regulations in late 1999. Sina encountered a similar problem when it wanted to post advertising on its site. Chinese law requires advertisers to obtain a license, but there was no regulation that addressed online ads. To get around the problem, his company set up a separate ad company.

Mao said such inconveniences are understandable, and those who choose to set up shop in China must learn to be patient.

"It is a developing nation. While the infrastructure is improving, its not to a level that the average American can enjoy," Mao said. He, like other executives of foreign-based companies doing business in China, was reluctant to directly criticize the Chinese government. "My take is very simple. If you dont want to make money there, you stay home."

Other obstacles to e-commerce in China include the lack of fixed telephone lines, the lack of credit cards and other payment methods for online purchases, and the lack of transportation. Cultural differences also hamper e-commerce, such as a desire by many Chinese to see a product before they buy it, Hachigian said.

"Thats been the story — that it will be big market," said Jim Lucier, vice president and senior analyst at Prudential Securities. "The problem with that is poverty. There is still tremendous underdevelopment in central parts of the country."