Valley shies away from China debate
TECH FIRMS `BETWIXT AND BETWEEN' ON REVALUATION
By Karl Schoenberger
Mercury News
China's currency is a hot issue in Washington, where U.S. officials are pressuring Beijing to raise the value of the yuan in hopes of reducing the huge U.S. trade deficit by making Chinese products more expensive and less attractive to U.S. consumers.
But in Silicon Valley, most major companies are so intertwined with the Chinese economy it's hard to predict how a rise in the value of the yuan -- currently 8.3 yuan to one U.S. dollar -- would affect the bottom line. Afraid of becoming embroiled in a debate that could provoke a backlash from either China or U.S. consumers, most companies won't talk publicly about the issue. Those that will talk are taking a neutral stance.
Applied Materials, the Santa Clara semiconductor-equipment manufacturer, is one company that probably would gain from a higher-valued yuan in its sales to the Chinese market. But company spokesman Dave Miller said the calculations are too theoretical to know what the impact would be.
``Our business depends on consumer demand for chips, and we're monitoring all these factors,'' including currency rates, Miller said. ``But we don't know what the impact would be, and I don't think anybody knows.''
Other leading Silicon Valley companies, including Hewlett-Packard and Cisco Systems, declined to talk about the impact of a rising yuan. The issue is not on the radar screen yet, said Cisco spokesman Ron Piovesian.
``It's an interesting question, but it's hypothetical, and it's not something we're able to comment on,'' Piovesian said.
Manufacturers from the American Rust Belt complain that an artificially undervalued yuan gives Chinese imports an unfair competitive advantage in the U.S. market. But brand-sensitive technology companies have little to gain by speaking publicly about the issue, said Dan Hutcheson, chief executive of Santa Clara research firm VLSI Research.
``These guys are betwixt and between because they don't want to offend the Chinese government and they don't want to offend the American people,'' Hutcheson said. ``The American public is upset about this huge issue of offshoring jobs. I think the big tech companies are trying to keep their heads low.''
Chinese factories
Technology brand manufacturers could be vulnerable if prices rise on imports from China, analysts say, since they increasingly rely on Chinese factories to produce the personal computers and other high-tech goods they sell at home.
Taking the currency off its fixed rate and allowing it to float upward could undermine the advantage of China's cheap labor and possibly result in companies moving production to other low-cost labor markets, analysts say.
``It all depends on your place in the food chain,'' said Greg Sheppard, executive vice president of the Santa Clara research firm iSuppli. ``If you're an electronics maker who has outsourced its manufacturing to China, you're looking at increased costs. A 10 percent shift could be significant enough to force you to look at places like Malaysia or Vietnam.''
Some U.S. business lobbyists and politicians say the yuan is undervalued by as much as 40 percent, though many economists say a more accurate estimate would be 10 to 20 percent.
Michael Cannon, chief executive of the electronics contractor Solectron, said he agrees the yuan is undervalued but opposes the push for a sudden revaluation.
``I think the best outcome is to see change in the value over time,'' said Cannon, whose Milpitas-based company has extensive manufacturing operations in China producing goods for Silicon Valley companies. ``For Solectron, the impact of a revaluation would not be all that significant because we're a global manufacturer and the cost of labor is only a small portion of the cost of making electronic goods.''
Cannon was critical of the political pressure that trade hawks are putting on China to change its currency policy. Bipartisan legislation in the Senate sponsored by Sen. Charles Schumer, D-N.Y., and Sen. Lindsey Graham, R-S.C., threatens to impose 27.5 percent across-the-board tariffs on Chinese imports to correct China's ``unfairly undervalued currency advantage.''
The senators, after meeting with Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow, agreed last week to delay at least until September a vote on the legislation, to give the Bush administration more time to negotiate with China.
Cannon said he does not think the proposed legislation is helpful.
``I don't think the Chinese respond well to that kind of public display of political pressure,'' he said. ``I think a quieter approach is more effective.''
The currency debate is dense with macroeconomic theory, but it boils down to the question of whether Chinese officials are manipulating the value of the yuan to make their exports cheaper in global markets. China's fixed exchange rate, the complaint goes, makes it harder for some U.S. manufacturers to export to China or to compete with Chinese imports and maintain U.S. jobs. The undervalued yuan is blamed in part for China's massive $160 billion trade surplus with the United States.
Greenspan's view
Federal Reserve Chairman Greenspan weighed in on the matter last week, telling the Senate Finance Committee that some critics ``mistakenly believe'' that increasing the value of the Chinese currency would ``significantly increase manufacturing activity and jobs in the United States.''
``I am aware of no credible evidence that supports such a conclusion,'' Greenspan said, suggesting that a higher yuan would only shift production to other low-cost markets in Asia instead of restoring manufacturing jobs lost to years of offshoring.
In other words, Silicon Valley's workshops in China might eventually move elsewhere, but that wouldn't necessarily affect the U.S. global trade deficit, its domestic job growth, or the bottom lines of multinational technology companies.
Bill Hiland, who runs a business trading parts and peripherals for semiconductor etching machines, said he thought a stronger yuan would help his products sell in China. But the San Jose entrepreneur, whose company Semispares employs eight people and sells goods in Japan and Europe, said he would still avoid China.
``I'm not all that hot about China,'' Hiland said. ``I realize it would be a good thing if the yuan went up, but I know a lot of people who sold goods to China and never got paid. [my note: I know a lot of Chinese companies too sold millions of US$ goods to the US and never ever got paid either, such as ChangHong (Apex). So maybe we call it an even<g>] I'm not going to mess with China, and I think as a country we are going down a bad road, giving away all our manufacturing and our prosperity.''
Contact Karl Schoenberger at kschoenberger@ mercurynews.com or (415) 477-2500.
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