This is a long , background article on developments in Asian trade which could affect computer and high tech sales. Although there is a passing reference to IBM and COMPAQ as the leaders in the region, it is not a COMPAQ-specific story.
Review: WTO Entry Would Make China Cos More Competitive
By TRISH SAYWELL
Dow Jones Newswires
SHANGHAI -- NATO's bombs have complicated China's entry to the World Trade Organization, obscuring a debate within the country over the risks and benefits. Membership, in fact, would anchor China firmly in the global economy and force companies to become more competitive, reports the latest edition of the Far Eastern Economic Review published Thursday.
Whenever China gains entry to the WTO, Shanghai Haixin Plush will be ready. The company, listed on the Shanghai Stock Exchange, makes long-fiber silk and cotton for use in products exported to the U.S. and Europe. The trade benefits of WTO membership, its management reckons, will far outweigh the costs.
Haixin Plush hopes that WTO membership, when it comes, will finally secure its access to the U.S. market - still vitally important to many Chinese companies, despite the anti-American rhetoric that has flowed since NATO's mistaken bombing of the Chinese embassy in Belgrade. Securing China's most-favoured-nation trading status with the U.S. would end the unc ertainty caused by the annual debate in Congress over whether Chinese imports should continue to enjoy the lowest tariffs. Just as important, Haixin Plush sees WTO membership as a link to a wider range of markets: If China joins the world-trade body, Beijing eventually will see an end to quotas on Chinese textile exports to countries in the West. And that would mean new opportunities for Haixin Plush.
"In the past, even with China's advantages of low labor costs, we could not get a large-enough market share because of the strict quotas on our exports," says Yan Yufeng, a company spokesman. Garments and carpets account for about a third of Haixin Plush's 500 million yuan (CNY) ($1=CNY8.2779) in exports each year; toys make up the rest.
Pragmatism Seen Overcoming U.S.-China Tensions
Indeed, despite fears within China that Premier Zhu Rongji's market-opening offers could cripple domestic industry, many Chinese companies would have much to gain from WTO entry. (That may also be one reason to believe that once anger over NATO has dissipated, a more pragmatic tone will resurface in U.S.-China relations.) At the broadest level, increased competition from foreign companies would put new pressures on state enterprise, banks and farmers to raise productivity. And the liberalization of the financial industry would force a reallocation of capital from loss-making state-owned enterprises to more efficient private companies. While such changes would undoubtedly cause economic pain, they could also prompt much-needed corporate reform. Once companies see growing competition "th ey will become more proactive in developing new products, improving services and bringing down costs," says Andy Xie, China economist at Morgan Stanley Dean Witter.
The bold concessions Zhu offered on his recent trip to the U.S. included opening the telecoms industry to foreign ownership, allowing foreign banks to conduct business in yuan by 2005, and lowering tariffs on key imports such as cars. Zhu also offered to eliminate all import tariffs on information-technology products by 2005 and allow forei gn insurers to gradually enter health, pension and other forms of insurance business - areas that represent almost 85% of total insurance premiums in China.
While Zhu's offers were welcomed in Washington, critics - among them Chinese bureaucrats - have since argued that economic opening on this scale would destroy money-losing state-owned enterprises and shatter China's banks at a time of high unemployment. "It will be a battleground and no one will benefit except the consumer," argues Lawrence Ang, head of China research at Deutsche Securities Asia in Hong Kong. Another source of irritation is Washington's insistence on the right to extend its import quotas on textiles by five years after the Multifiber Arrangement expires in 2005.
Zhu's willingness to allow greater foreign participation in the telecoms industry has been particularly controversial. Beijing has been awash with unconfirmed reports that Zhu's stance prompted Wu Jichuan, head of the Ministry of Information Industries, to offer his resignation. So far, Beijing has made no public statement about any change in Wu's status.
But cracks in China's resolve have already been detected. On May 7, before the bombing in Belgrade, European Union Vice-President Leon Brittan declared during a trip to Beijing that China had already pulled back on some of its key offers - including allowing foreigners to hold majority stakes in companies in the telecoms, banking and insurance industries.
Improved Efficiency, Lower Costs Long Term
There is no doubt that WTO membership would initially be painful for the Chinese economy, says Shawn Xu, head of research at China International Capital Corp., an investment joint venture between Morgan Stanley and China Construction Bank. But he argues that the economy as a whole would benefit in the longer term if the increased competition forces Chinese companies to improve efficiency and cut costs.
Xu says that's exactly what has happened to China's consumer-appliance makers. He says that in the mid-1990s Japanese companies dominated sales in China of goods such as color televisions and refrigerators. Now, domestic brands are pushing Japanese companies from the market. "Because of competition from the Japanese, local companies figured out what they needed to do - like improve efficiency, research and new models," says Xu. "I've talked to some Japanese firms - they say the local Chinese firms are killing them" in China. Appliance makers such as Haier, Guangdong Kelon and Konka have even moved abroad. Indeed, Haier now exports washing machines to Japan and refrigerators to the U.S.
Much the same phenomenon is at work in the computer industry. Executives at Legend, China's biggest personal-computer maker, say the appearance in China of high-end foreign computer products in the early '90s was a wake-up call for the industry. "When China first lowered import tariffs on IT products in 1990, China's information industry got a big boost," says Legend President Liu Chuanzhi. (Import tariffs on PCs are now 9%.) The increased competition hurt Legend at the start, says Liu, but then the company became a sales agent for a number of foreign brands including Hewlett-Packard, Toshiba, IBM and Microsoft. Through its relationships with such companies, Liu says Legend improved its quality control, logistics and marketing strategy. "And we managed to design a better product," he says. "So the Chinese market has expanded with competition, but Chinese companies have improved their performance, too."
Legend is now a major player in the Asian PC market. Its market share in the Asia-Pacific region, exc luding Japan, rose to 5.4% in 1998 from 3.1% a year earlier, according to International Data Corp. That puts it third on the list of top PC sellers in the region, behind global heavyweights Compaq and IBM.
Chinese Cos Seen "Better Positioned To Export"
Economists say WTO membership would also lead to an increase in exports for companies in low- to mid-tech labour-intensive industries in which China already has competitive pricing, such as apparel, footwear, textiles, toys and consumer electronics. Fred Hu, executive director of Asian economic research at Goldman Sachs in Hong Kong, says the textile industry would "benefit tremendously" from the removal of quotas by Western governments. He says that if the U.S. agrees not to extend its quotas on textiles beyond 2005, Chinese textile and clothing exports would nearly double from current levels to $70 billion annually in 2005. "This is an area where China has a basic comparative advantage," he says. That's good news: Textiles and clothing products make up more than one quarter of China's total ex ports.
Richard Newfarmer, an economist at the World Bank in Washington, says that if China enters the WTO, falling trade barriers would also provide domestic companies with "better access to technology, efficient machines and markets." And that, he says, would make the companies "better positioned to export."
Executives at state-owned underwear maker Shanghai Three Gun are looking forward to an end to what they see as the "discrimiNATOry" quota system. Last year, just $2 million of the company's total expo rts of $20 million went to the U.S. Shen Bing, the company's vice-president, notes that in value terms Three Gun imported more Lycra and dyeing agents from the U.S. than it exported in finished garments. After China enters the WTO, and if the U.S. lifts its quotas on textiles, Three Gun expects to at least double its exports to the U.S.
Chinese exporters wouldn't be the only ones to benefit from WTO membership. Perhaps the biggest advantages would fall to companies that import components and raw materials . Economists say most small- and medium-sized enterprises would see large benefits from a wider - and cheaper - choice of imports. Cheaper imports would allow companies to cut prices and improve their competitiveness in the international market, says Xiao Geng, a professor of economics at the University of Hong Kong. "With restrictions on imports, Chinese domestic enterprises find it hard to get bigger," he says. "If you apply tariffs on imports you create a lot of inefficiencies."
Not all executives in China are so optimistic, but Xu of China International Capital Corp. says that if Chinese companies are allowed to compete on an equal footing they will both survive and improve. From that angle, says Xu, WTO entry "is good for the U.S. and it's good for the rest of the world and it's good for China."
For the moment, however, those potential benefits hang on a restoration of relations between Washington and Beijing.
-(For the complete story, see this week's edition of the Far Eastern Economic Review.) |
