Much At Stake For High-Tech Firms In Congress China Vote
By MARCELO PRINCE
NEW YORK -- The high-tech industry admittedly has a great deal at stake as the U.S. Congress decides whether or not to approve permanent normal
trade relations (PNTR) with China.
High-tech companies of every stripe, from personal computer makers and wireless telecommunications firms to software vendors and Internet portals
have heavily lobbied Congress to pass the hotly contested measure. Their financial incentive is twofold: to push China to liberalize its giant economy and
to ensure that U.S. firms get the same chance at that market as other multinationals.
The potential of tapping the Chinese market hasn't been lost on high-tech executives. Although China boasts a population of 1.2 billion, just 2.5% own
personal computers, fewer than 1% have Internet access, and about 5% have cellular phones. By comparison, nearly 50% of Americans have PCs,
about 40% have Web access and about one-third carry cellular phones.
"Any time those kinds of numbers exist, it's a great opportunity for everyone," said Rick Miller, a spokesman for Microsoft Corp. (MSFT), which has
lobbied heavily for PNTR passage. "Everyone in high-tech should be equally interested."
U.S. trade with China has been up for annual review by Congress since Beijing violently crushed protests in Tiananmen Square in 1989. Last year the
U.S. agreed to make China's trade status permanent as part of its deal to grant China entry into the World Trade Organization, which regulates trade
between most countries. But if Congress votes against the permanent status, China could exclude U.S. companies from the benefit its extends other
countries in the WTO.
Opponents, labor unions and human rights groups have worked tirelessly to defeat the bill because it does not protect workers' rights and because of
China's poor human rights record. But support for giving China PNTR has gained steam in recent days with everyone from President Bill Clinton to
Microsoft Chairman Bill Gates making public pleas. Last Friday, China and the European Union inked a trade deal that means the EU will support
China's bid to join the WTO.
After much posturing, the House opened a spirited debate Tuesday on the bill that was peppered with pork barrel politicking and continued Wednesday
morning. A final vote, which one representative called "the most important vote of the millennium," is expected later Wednesday.
Here's a look at what the vote means for several high-tech industries:
WIRELESS
In the near term, the high-tech industry with the most to gain from better trade relations will likely be wireless infrastructure and equipment makers. That
group includes Motorola Inc. (MOT), Lucent Technologies Inc. (LU), Qualcomm Inc. (QCOM) and others.
"China's communications equipment market clearly represents a massive opportunity for the major international equipment suppliers," Lehman Brothers
analyst Tim Luke said.
The market is so lucrative, in fact, that America's largest mobile phone maker, Motorola, has been in China for more than a decade. With $1.5 billion
invested and a wholly owned subsidiary operating within the country, Motorola is one of the largest foreign investors in the China.
"China is well on its way to becoming the second-largest wireless market in the world," said Norman Sandler, Motorola's director of global strategic
issues. "There are a lot of handsets in the market, but the penetration remains very low."
To gather popular support for better trade relations, Motorola has spent over $1 million campaigning for the bill's passage. Sandler said it is critical that
the U.S. take action now, or European competitors will gain a head start in the Chinese market.
"It's a must-do now, or somebody else is going to do it," he said. "The fact of the issue is, the European Union has already inked its own agreement with
China."
China accounts for 10% of Motorola's international sales, and Motorola expects that percentage to swell as tariffs drop on its American-made digital
set-top boxes, mobile phones and telecommunications infrastructure gear.
Qualcomm has perhaps been the most noticeable technology hostage in the trade negotiations.
The wireless technology company negotiated a deal with China's second-largest mobile phone service provider to build a nationwide network using
Qualcomm's technology. But as trade negotiations intensified, Chinese officials indicated they would delay the network build out.
The company, China Unicom, plans to spend as much as $10 billion building the network this year, which is more than three times the spending
anticipated by leading U.S.-service providers like AT&T Corp. (T) and Sprint Corp.'s PCS Group (PCS).
INTERNET
A House vote in favor of PNTR could indirectly benefit Internet companies by putting China on the path towards opening it to investment by foreign
Web firms, but such benefits may not materialize right away.
As it stands now, Internet firms face tight restrictions when dealing with China. In December, a top Chinese government official told The Wall Street
Journal that new Internet laws will require Web content to be regulated by Beijing, all Internet companies will have to apply for licenses and foreign
investors will need official approval before taking stakes in Chinese Internet companies.
Moreover, under the Chinese-U.S. deal struck last fall that clears the way for China's entry into the WTO, Chinese Internet companies are barred from
having more than 50% foreign ownership for two years after China joins the WTO.
Such restrictions haven't stopped Internet companies from positioning themselves to capitalize on the potential opening of China's Internet market. Just
this week, Lycos Inc. (LCOS) launched three Chinese-language Web sites in partnership with a Singapore company. The sites are aimed at Hong
Kong, Taiwan and mainland China. Yahoo! Inc. (YHOO) is another leading Web portal with investments in China. Last fall, CMGI Inc. (CMGI)
swapped $350 million worth of shares with Pacific Century Cyberworks Ltd. (H.PCW), a Hong Kong Web firm, and agreed to develop Internet
operations in Asia.
A number of Internet executives have banded together to voice support for both China's WTO entry and the PNTR vote before Congress. The group is
the Global Business Dialogue on Electronic Commerce, or GBDE, whose membership includes executives from 60 companies.
Despite current restrictions, the GBDE said Congressional approval of PNTR, together with China's WTO entry, would help China meet several
commitments related to opening up the Internet there. According to the GBDE, China has committed to opening up its telecommunications sector to
foreign investment and reducing tariff and non-tariff barriers on the import of information technology products.
The GBDE estimated Internet usage in China doubled in the last six months of 1999 and is expected to have the second-largest number of Internet
users in the world within the next decade.
SOFTWARE
Software companies are more likely to see the immediate benefits of Wednesday's vote and China's admission into the WTO, which could come as
soon as the second half of this year. That might explain why software executives and industry groups have been among the more visible and vocal
advocates for PNTR and China's entry into the WTO.
The financial incentives are clear enough: China imposes duties, taxes and other fees of up to 30% on all software imports. Once admitted into the
WTO, the Chinese government has promised to "zero out" those tariffs.
"When we see our products at 30% additional cost, it's hard for us to compete," said Microsoft's Miller. The software giant, which employs 450 people
at its Chinese subsidiary, has been lobbying heavily on Capitol Hill and the media for the measure.
In addition to lowering tariffs, passage of the PNTR bill would also help software companies combat the piracy that currently runs rampant in China.
Upwards of 95% of software sold in China has been pirated, Miller said. China has promised to beef up its anti-piracy enforcement and adhere to
WTO regulations once its admitted.
On Tuesday, Microsoft Chairman Gates published an opinion piece in the Washington Post that essentially summarized the high-tech industries stance.
He wrote: "Today, only a small percentage of Microsoft's revenues come from China, but we are making large investments there, because we believe in
its future - not only as a place for Microsoft to do business but also as a fertile source of new ideas about how technology can improve people's lives."
Gates added: "The opportunities are virtually limitless as the Chinese market for software grows, as China expands its information technology
infrastructure, as intellectual property protections continue to advance and as U.S. companies develop new products for the most populous nation in the
world."
(Corrected at 01:03 PM)
HARDWARE
Normalized trade relations with China would be a boon to U.S. computer and semiconductor makers. The U.S. International Trade Commission
predicts a 14% growth rate for sales of U.S. electronic equipment in China, which totaled $283.6 million in 1998.
The potential market, of course, is huge. China currently uses more PCs and semiconductors than any country in the world except the U.S. and Japan.
And those markets are growing fast. Projected growth rates for chips, computers and telecommunications products in China range from 20%-40% a
year for the next 15 years, according to a report by the Semiconductor Industry Association, or SIA, a trade group representing the U.S. chip industry.
The SIA estimates that the Chinese chip market, omitting Hong Kong, totals about $5 billion a year, with just 20%-25% of that market being supplied
by domestic Chinese producers.
If the barriers actually came down in accordance with last year's initial agreement, tech companies would be justifiably excited.
"China basically gave up everything, and the U.S. basically gave up nothing. They leveled the playing field," said Chuck Mulloy, a spokesman for Intel
Corp. (INTC), the world's largest semiconductor company.
There are several sticking points. As it stands, Intel, or any technology company for that matter, can't sell directly into the Chinese market, but must go
through a Chinese trading firm.
"Currently, we have to do everything through a third party. Export, import and distribution," said Rich Lehmann, director of public affairs for
International Business Machines Corp. (IBM). "The ability to do things on our own account will create substantial efficiencies in the way we operate."
Also, China, the world's largest Communist country, levies a tariff of between 5% and 15% on all information technology products, including parts and
systems, Lehmann said, and heavily restricts foreign companies' ability to provide computer-related services. For IBM, that's particularly distressing
because services represent one of its headiest growth engines.
A free trade agreement with China would also peel back restrictions on U.S. investments in Chinese tech companies, a concession that pleases the likes
of Intel, a huge investor in startups with promising products the world over.
Intel already operates a research and development company in Shanghai, which is working on voice-recognition software based on the various Chinese
dialects. The goal is to speed demand for PCs in a country whose language doesn't lend itself to easy integration with standard computer keyboards.
Open investment policy would also deprive China of the ability of force transfer of key technologies to Chinese firms. A cumbersome set of
requirements are often used to pressure foreign companies into transferring their technology to Chinese firms, the SIA said.
U.S. companies would, of course, increase their manufacturing capacity in China to meet stepped up demand should an agreement be reached. That's
the reason labor groups have voiced their opposition to the issue, but tech companies argue that an open China would create jobs in the U.S., not erase
them.
IBM's Lehmann said that the company, which already has several joint venture manufacturing divisions in the country, would have to boost the research
and development and other manufacturing-process efforts it performs in the U.S. that support those overseas joint ventures.
CABLE
Cable-equipment makers also stand to benefit greatly as more liberalized trade between China and the U.S. fuels demand for broadband services, such
as high-speed Internet access, video-on-demand, and telephony services - all of which can be delivered over cable.
Cable is "no longer just Dallas re-runs. It's not just entertainment," said James Bauer, an investor relations official, with Antec Corp. (ANTC), a
manufacturer of cable telephony equipment.
Antec, which already has a multi-year contract with a Shanghai telephone company to extend its cable systems, sees great potential for demand as new
systems are built in the Asian region, which, he noted, is highly underdeveloped.
CommScope Inc. (CTV), a provider of cable for "last mile" broadband connections, also expects strong demand for its cable products.
"With the sheer number of TV households, it offers a huge opportunity for our wireless business and our coaxial cable business," said Philip Armstrong,
CommScope's vice president of investor relations.
"We have a meaningful amount of sales (in China)," he said. "It's an important market for us and we expect it to grow, particularly as trade barriers are
removed."
Scientific-Atlanta Inc. (SFA), which currently manufactures and sells some of its products in China, said more liberalized trade would make it easier to
do business there.
"We've sold into that market for quite a few years," said Thomas Robey, Scientific-Atlanta's vice president of investor relations. "They have some
quirky regulations there right now."
More significantly, however, is the likely impact China's expanding economy would have on demand for broadband equipment, he said. That could
mean a significant jump in business for Scientific-Atlanta, the leading producer of digital set-top boxes after Motorola Inc. (MOT).
"Our business in Asia had contracted to a tiny percentage, but it expanded very rapidly in the last quarter," said Robey. "With Asia's economy coming
back we expect it to be big."
TELECOM
China, due simply to its population of 1.3 billion, is the third-largest telecommunications market in the world, trailing only the U.S. and Japan.
According to Jardine Fleming Research, traditional wireline penetration in China was 11.3% at the end of last year, while wireless penetration stood at
3.5%. By 2004, Jardine Fleming estimates wireline penetration will grow to 16.9% while wireless penetration tops 12%.
That means many telecommunications networks will have to be built.
Lucent Technologies Inc. (LU), which holds the leading position in the optical networks market and significant positions in wireless and wireline
switching, expects to benefit from better trade relations.
"It is very important for us," said Mike Butcher, president of Lucent's international sales. "You've got 1.3 billion people in China, and a lot of them have
never made a phone call."
Last year, Butcher said, 20 million fixed telephone lines were installed in China and more than 12 million people became wireless subscribers.
"And telecommunications densities are still very low," he added. "The scale of opportunity is enormous."
Currently, telecommunications companies are required to be licensed by the Chinese government to sell products. A provision of the licensing
agreement is that the licensed products must be manufactured in China.
Butcher said Lucent has invested "several hundred million" in China, where it has 3,500 manufacturing, technical support and other employees.
E-COMMERCE
Passage of the legislation would also benefit Internet commerce and content companies indirectly, said Mitchell Rubenstein, chairman and chief
executive of Hollywood.com Inc. (HOLL), because the legislation would open up Chinese markets to U.S. businesses on a more consistent basis.
The resulting growth in the Chinese economy would boost Chinese ownership of personal computers and use of the Internet, Rubenstein said.
"That brings more traffic to us," he said.
Hollywood.com operates an eponymous Web site that provides information about movies and sells movie paraphernalia. The Boca Raton, Fla.,
company also operates other sites like Broadway.com - which provides information about live theater - and owns a stake in the MovieTickets.com Inc.
online ticket vending company.
Hollywood.com has already agreed to a joint venture with a Chinese computer company, Legend Holdings Ltd. (H.LHD), to distribute its entertainment
content to Chinese consumers.
-Marcelo Prince; Dow Jones Newswires; 201-938-5244
(Johnathan Burns, Peter Loftus, Janet Whitman, Scott Eden and Ross Snel contributed to this article.) |
