PC Revolution Sweeps China
Excerpt: "If the Chinese government changes the policy and the
local phone company offers a flat rate, the ISPs will
follow," H-Lines' Luo said. "And when that happens,
the Internet in China will explode."
techweb.com
(04/26/98; 11:58 a.m. ET)
By Richard Wallace, EE Times
Nine years after government tanks rolled into
Tiananmen Square to crush a nascent revolution,
another powerful grass-roots movement is sweeping
China as its citizenry embraces the personal computer.
Encouraged by China's political leaders, who consider
the PC an essential modernization tool, ordinary
Chinese citizens have joined influential customers in
government and industry to create a huge and thriving
market in OEM and retail PC hardware and software.
Indeed, China has proved a bright spot in a dim year
for the PC industry as the sales numbers here have
bucked the West's downward trend.
Nowhere is the PC boom more in evidence than in
Beijing's bustling Zhong Guan Can electronics district, a
frenetic hub that epitomizes the uniquely Chinese OEM
business model of on-the-spot manufacturing. Reports
from other such centers in Shanghai, Guanghou, Tianjin
and Shenzen suggest that PC fever is a nationwide
phenomenon.
Bounded on one end by Pizza Hut and on the other by
Dunkin' Donuts, Zhong Guan Can makes Tokyo's
bustling Akihabara district look staid by comparison.
Throngs of buyers seeking equipment for business or
personal use crowd the strip's hundreds of stalls and
larger shops, which proffer the latest microprocessors,
motherboards, disk drives, SIMMs, graphics cards,
monitors, keyboards and modems.
Indeed, virtually any PC component or add-in available
in today's market - and every known brand-name in
computerdom - can be found at Zhong Guan Can.
While the components aren't manufactured here, expert
assemblers and system builders can configure virtually
any customized system while you wait - usually for
about 10 percent below Dell's best price. And huge
3Com and Cisco billboards attest to the rise of an
attendant business in networking hubs and routers,
characterized by the same cash-driven, turnkey
approach to system integration.
Though there's an official 17 percent customs tax on PC
parts imported into China, sources here suggest
government enforcement is casual at best. "The small
PC assemblers have found ways of avoiding the tax,"
one source said, noting that the cost savings let the
build-it-on-the-spot shops operate with margins that the
likes of Dell, Compaq and HP can only envy. Lacking
the credit infrastructure of the West, and with telephone
sales and electronic commerce virtually unknown in
these parts, cash-for-merchandise bargaining is as
spirited in Zhong Guan Can as elsewhere Beijing.
Old - and new - Shanghai
In Shanghai, the CVIC Center, a large, modern
computer emporium in the heart of downtown, lacks
Zhong Guan Can's colorful atmosphere but rivals its
activity. The center comprises six floors of computer
stores, ranging from large enterprises with flashy
displays of brand names to hundreds of tiny shops with
stocks of parts and handwritten price sheets.
Also in Shanghai - on the city's historic Bund, where
Europe set up shop after the Opium Wars - is the new
Wai Tan Computer center, now operating in phase one,
with phase two to open next month. Wai Tan's small
shops specialize in selling components, which buyers
assemble into PCs .
Whether located in a clean, modern venue or off a
dusty alley, the importance of small PC stores as a
major channel in China is undeniable. Intel Corp. has
said that about half its CPU sales in China are
channeled through the no-name shops.
Like China's small retailers, local PC makers are
winning market share with a no-frills approach that
stresses low price and a flexible feature mix. And the
largest Chinese PC makers, such as Legend Group,
Great Wall Computer Co. and Shanghai Computer
Co., are rapidly establishing their brand names.
Legend is China's leading PC OEM. The company
reportedly sold more than 500,000 units last year,
topping Compaq with a market-leading share of roughly
11 percent, said Peter Liu, chairman of WI Harper
Group, a venture-capital concern that has helped fund a
number of PC-related enterprises in China. Tontru,
another popular local brand, sold more than 200,000
units last year.
The price differential between the established brand
names and the built-on-the-spot machines can be
cavernous. At Shanghai's small shops, less than $800
will buy a Pentium 233-MHz MMX multimedia system
with 32 Mbytes of DRAM, a 15-inch monitor, a
2.5-Gbyte hard drive, a 24x CD-ROM drive, graphics
and fax/modem cards. Similar systems from NEC, IBM
and Acer run about 50 percent more.
The disparity is even more pronounced for Pentium II
systems. The Chinese assembly shops offer Pentium II
multimedia systems for as low as $913. Pentium II
packages are commonly found for $1,100. Foreign
brands of similar systems can cost up to 74 percent
more.
China's computer frenzy is expected to reach a new
level next month, when Intel chairman Andrew Grove
arrives for a company-sponsored multi-city tour. Intel is
also reportedly lobbying the Chinese government to
liberalize its Internet-connect policies and has been
been trying to develop the local software market.
Local sources said that Intel has set up a PC-software
incubation center in Shanghai and that it is working
closely with small and midsized OEMs to push adoption
of the Pentium II as the base processor for new
systems.
Such relationships could prove critical as China exerts
widening market influence. From a 1991 base of only
2,000 units, China's PC market has expanded at a clip
that finds brand-name suppliers, local OEMs and
one-man assembly operations scrambling to keep pace.
Last year, according to estimates published by China's
newly formed Ministry of Information Technology,
roughly 1.4 million PCs were sold; this year, is
expected to top 2.6 million.
The freewheeling PC trade has the government's
blessing; indeed, the IT ministry may be the market's
most vocal cheerleader. Some call the government
posturing propaganda, but it's paying off in spades.
Recently formed via the merger of China's electronics
ministry and its Ministry of Post and
Telecommunications, the IT mega-ministry encourages
PC adoption as a means of "readjusting and upgrading
China's industrial structure," in the words of Tu Deyong,
an official with the old Ministry of Electronics Industry
who spoke at a SEMI-China briefing in Shanghai last
week.
Part and parcel of that upgrade and readjustment is an
embracing of the digital revolution. As Tu put it, "If we
still keep analog products, we'll all be out of business."
The IT policy is also aimed at "deepening our reform of
scientific and technological systems to improve R&D
and includes "close ties to companies and universities,"
Tu said. "We need to update traditional industries and
use IT to boost national economic growth." Toward
that end, the ministry is promoting "golden projects,"
including efforts in CAD/CAM and CIM.
"China has done a much better job than Japan in getting
computers into business operations," said Dwight
Nordstrom, GM for Three-Five Systems, a local
manufacturing startup. "Every one of our 200
employees knows how to use a computer."
He added that he believes China's one-child-per-family
population-control policy has fueled the
home-computer boom, as parents seek to give their
offspring every possible advantage, even if it means
laying out three months' salary for a computer. "Home
use will be huge," predicted Nordstrom, who has spent
the past eight years helping U.S. companies set up
Chinese manufacturing operations.
Harper Group's Liu concurred with Nordstrom's
assessment. "The PC's emerged as a trendy product.
With only one child, Chinese parents will do anything to
help their children's education and to help them have a
better job," he observed, adding that the most
successful OEMs have been those that have been
flexible in localizing their products.
Liu estimates that more 850,000 PCs will be sold in
China this year and that by the year 2000, "the total PC
market in China will be 7 million to 10 million units."
Joseph Luo, vice president of H-Line Public Relations
(Beijing), which represents a broad mix of primarily
U.S.-based companies, predicted that computer sales
to the home market will grow more than 66.7 percent
this year over 1996 levels. "PC OEMs are very
aggressive and think they will double sales from this
year to next," he added.
Luo said a huge market also exists in China for all types
of add-in peripherals. Handwriting input devices are
particularly big sellers.
According to Liu at Harper, the Chinese government
has issued over 130 licenses to PC OEMs in China
over the past several years. Nonetheless, the number of
significant players has been winnowed to a handful, with
Legend in the lead.
Liu's venture-capital firm bankrolls companies that
demonstrate novel approaches for breaking into China's
PC market. Network security, for instance, represents
a major opportunity for those seeking to serve
businesses that routinely navigate the government's
labyrinth of ministries and bureaus. By working with PC
OEMs, the government and VARs with customizable
solutions for the Chinese market, Liu's VC group can
exert considerable leverage in establishing de facto
standards.
Liu has this warning for OEMs and others eyeing the
lucrative business of customizing PCs for China: "It
takes a lot of patience and a lot of handholding" to be
successful. But he said he is also looking at
opportunities beyond the PC-assembly business, noting
that China needs to focus not only on hardware but also
on software development.
Another trend that promises opportunities is the surge in
local Internet use. Internet-service providers currently
serve 870,000 users in China. But connection charges
are pegged to a government rate structure that charges
0.2 yuan a minute.
The IT ministry could wield some influence over rates.
Some observers think the per-minute rate structure may
soon be replaced by a flat-rate structure.
"If the Chinese government changes the policy and the
local phone company offers a flat rate, the ISPs will
follow," H-Lines' Luo said. "And when that happens,
the Internet in China will explode."
Additional reporting by Mark Carroll
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