OVER THE CHINESE WALL
Tech Companies Stake Footholds, Await Market Opening
By ANDREW SIMONS
In a white, nondescript plant in Shanghai, alongside similar ones owned by Intel Corp. and IBM Corp., some 50 people who used to work farmland with their hands now work with silicon to make memory modules.
It’s a culture shock for many of the workers at the plant, jointly operated by Fountain Valley’s Kingston Technology Co. and Chinese computer maker China Great Wall Computer Shenzhen Co.
“Most of them were farmers and we’re training them to work indoors on high-tech equipment,” said Stephen Rodriguez, vice president of marketing for Kingston.
Earlier this month Kingston dispatched a human resource team to Shanghai to help ease Kingston’s Chinese staff into the world of flash memory cards and random access chips.
“We wanted to bring them into our culture,” Rodriguez said.
That means everything from teaching them about the company hierarchy to explaining that free lunches are part of the benefits of being a Kingston employee.
Said Rodriguez: “The expectations are minimal for now.”
They won’t be for long. Only five months after China was admitted to the World Trade Organization, OC technology companies,along with a range of U.S. businesses across,are eager to build operations in China.
Some of OC’s largest technology names already operate Kingston-style manufacturing plants in China. Others are looking to open plants soon. But while the cheap labor and attractive export rules entice companies such as Kingston, the Holy Grail in China,to sell goods to Chinese consumers and businesses,remains elusive (see related story, page 5).
That’s because every memory module made at Kingston’s Shanghai plant is shipped out of China for export.
The issue is tax: Since Shanghai is a tax-free zone, Kingston, IBM and others don’t pay taxes or tariffs on the products they make and export.
They must send the products out of China, leaving the country’s home-grown computer parts makers to sell to the Chinese market themselves.
While it’s not a bad deal for Kingston and the like, it could be much better, companies say.
China benefits by the tax-free areas, or “research zones,” because it protects its markets from foreign competition while giving its citizens some important lessons in technology.
But with one of the world’s largest personal computer markets so close to its Shanghai operations, Kingston hopes to start selling its modules to Chinese PC makers soon, once regulations are lifted.
China’s ascension to the WTO is contingent on the end of its protectionist trade and market operations. Monopolies are not allowed under WTO rules, yet the telecommunications, railway and power industries are monopolistic.
China imposes onerous inspection and safety licensing requirements on imports, it designs technical standards that protect Chinese producers and it discriminates against non-Chinese companies in awarding government procurement contracts.
All of these measures are supposed to end.
In computer products alone, U.S. companies have salivated at China’s relatively underserved consumer market. Technology executives have lobbied the U.S. and Chinese governments to ease trade hurdles between the two countries, while partially state-owned Legend Holdings Ltd. of Hong Kong and other Chinese companies cash in.
The payoff for foreign makers of computer parts could be big.
Personal computers shipped to the Chinese market are projected to grow 24% this year and will maintain more than 18% annual growth for the next five years, according to an International Data Corp. study.
Contrast that growth to North America’s anemic 6% projected growth, and the appeal of doing business in China is obvious.
“China’s market will replace Japan’s as the second-largest PC market in the world by 2003,” behind the U.S., according to IDC analyst Kitty Fok.
Change is afoot. For one, tariffs charged on products shipped to China have gone down substantially,with some duties going as low as 12%, from 30% in the past couple of years. Companies also are hoping it will become easier to set up and conduct business inside China.
“The rules are very different province-to-province in China,” Rodriguez said. “By 2005, we expect there to be more transparency and predictability in the rules. Negotiations should be easier.”
Irvine-based Rainbow Technologies Inc. would welcome any changes. The company’s encryption products must go through a notoriously lengthy and bureaucratic government review process in China. And the company must attain a sales license before it can sell to Chinese customers.
“They want to make sure there’s no back door designed into the products,” said Humphrey Chan, Rainbow’s vice president of Asia Pacific and Latin America. (China, like the U.S., is concerned about corporate espionage.)
Newport Beach-based Conexant Systems Inc. has signed several deals with Chinese technology companies, including Legend, China’s largest computer maker. Under that pact, Legend is shipping Conexant’s V.92 modems in its TeanLin Premia desktop PC line throughout China.
Conexant is busy elsewhere in China. Shenzhen Huawei Technologies Co. tapped Conexant’s Mindspeed Technologies unit for semiconductors to be used in a networking switch.
“China is a very important market for us,” Chief Executive Dwight Decker said.
But even with some good progress in China, there’s still a long way to go, companies say.
Shipments to China account for a small slice of OC’s total exports,about $400 million last year. The county’s overall 2001 exports were $17 billion.
But with exports slowly improving, Kingston and others are benefiting from a seeming endless supply of cheap Chinese labor.
Kingston invested $8 million in its plant with Great Wall.
“The labor rates are much cheaper there,” said Mike Rodriguez, vice president of marketing for Kingston. “We’re going to be in a good position with this plant.”
Other OC technology companies hope to build on their Chinese presence. While Conexant doesn’t have a manufacturing plant in China, it does run a design center in Shanghai, which keeps the company in close contact with its local customers, officials say.
“Manufacturing in China is definitely a good thing, but right now we just have a design center,” Decker said.
Santa Ana-based computer products distributor Ingram Micro Inc. plans to revamp its Shanghai-based co-venture with China’s E-Tunnel Electronics Co.
Ingram, which has sold to the Chinese market solely through E-Tunnel, said it would like to have closer contact with its customers, such as having its own sales staff make calls.
Chinese law has prohibited foreign distributors from establishing independent operations in the country. But, under China’s WTO commitment, Ingram and other foreign distributors can form joint ventures with Chinese companies and take majority ownership of them in 2003.
“We just want to be set up for when there aren’t any regulations,” said Mike Grainger, Ingram’s chief operating officer.
Companies that haven’t jumped into China could do so soon. Lake Forest-based Western Digital Corp. would love a crack at selling its disk drives to Chinese computer makers. While Western Digital does limited business inside China, the company is rumored to be close to making some announcements soon about its plans in China.
“We are confident that, with some of the trade barriers broken by China’s involvement with the WTO, Western Digital will successfully participate in China’s anticipated monumental PC growth,” said Western Digital spokesman Steve Shattuck.
