Eric Nee: The China Syndrome

As China emerges as the world's second-largest market for digital technologies, China's government and Chinese IT companies are minting new standards in an effort to keep profits at home. The impact on U.S. CIOs may be substantial.

Chinas meteoric rise from a closed, near- feudal society to the most dynamic economy on the globe has been mostly good news for U.S. CIOs and captains of technology. An enormous supply of cheap labor, coupled with modern factories, means that prices for most high-tech gear should remain low for years to come. Armies of highly educated yet low-paid scientists, engineers, accountants and other professionals provide a long-term opportunity for U.S. firms to get skilled work done for less. Add to that the millions of newly minted middle-class Chinese and thousands of growing businesses ready to buy, buy, buy, and whats not to like?

Well, there is another side to Chinas emergence as an economic power, and one that poses a threat to the U.S.: Chinas use of its growing economic might to try to dictate critical technology standards. Chinas current effort to establish its own 3G wireless standard has little chance of success outside some parts of China, and is mostly an annoyance. But in the years to come, China may be able to use its heft to dictate standards in newly emerging markets, and to use them to its own advantage. The implications of this could be profound, because whoever sets technology standards will also control the direction the industry takes—who wins, who loses, and where the wealth created by that technology ends up.

For the past 50 years, the U.S. has held sway over most technology standards, and over the technology industry itself. Not only were U.S. companies such as IBM Corp. and Intel Corp. the most innovative creators and biggest producers of technology, but U.S. consumers and businesses were the largest buyers as well. That symbiotic relationship helped make the U.S. the most powerful country in the world, and helped U.S. companies become the most creative and productive users of information technology.

To be sure, Chinas $1.2 trillion economy still ranks a distant sixth behind the world-leading, $10.2 trillion U.S. economy. And IT spending in China is expected to total $30 billion in 2004, just 3.3 percent of the world market. But the gaps are closing fast. Chinas supercharged economy grew an average of 10 percent a year through the 1990s, eclipsing the U.S. growth rate of 3.4 percent annually during the period. And Chinese IT spending is expected to jump almost 20 percent in 2004, nearly four times the rate of growth for the rest of the world.

Already China is emerging as one of the worlds largest single markets for some digital products. China recently passed Japan to become the second largest PC market in the world, trailing only the U.S. In 2003, 13.3 million PCs were sold in China (8.6 percent of the world market), compared with 52.7 million in the U.S., according to IDC. And China is already the largest mobile-phone market in the world, with 270 million users at the end of 2003. This year, China expects to add another 52 million wireless customers, according to the Chinese Ministry of Information Industry. That will make the Chinese mobile-phone market larger than the entire population of the U.S.

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