This article validates my previous msgs wrt semi vs China.
biz.yahoo.com
Tuesday May 30, 11:55 am Eastern Time
Forbes.com
Tech Sector Sees Big Opportunities In China
By Arik Hesseldahl
There is no end to the impressive statistics about China, and they only start with the
population of 1.3 billion people.
From PC manufacturers to Internet concerns, telecommunications carriers to makers of the
silicon chips that make them all possible, high-technology companies are among the biggest
backers of a landmark U.S. trade bill with China. Companies like Intel (Nasdaq: INTC -
news), 3Com (Nasdaq: COMS - news), America Online (NYSE: AOL - news) and Cisco
Systems (Nasdaq: CSCO - news) were only a few of the names promoting the measure that
cleared the U.S. House of Representatives last week and now heads to the Senate. And no
surprise, those companies are among those who stand to benefit the most.
But the sheer size of the potential market is no guarantee of success, and for every study
predicting huge growth potential for technology-related businesses there is another equally impressive statistic identifying
potential problems in those sectors.
China is already one of the leading Asian markets for personal computers behind Japan. During the first quarter of this year,
International Data Corp., Framingham, Mass., reported nearly 1.4 million PCs were sold in China over and above the 14.2
million PCs already in use there. By 2003, the market research firm expects 42.9 million PCs to be in use. In 1997 China was
the sixth-largest market for PCs, and by the end of next year it will be the second largest. A government-sponsored survey
estimated China's 1999 PC revenue at $21 billion.
Yet that same government survey found an interesting twist on the PC market. Major brand-name PCs in China do not
dominate the market. That survey found that some 80% of PCs sold in China are so-called homemade models. (EDIT: that's AMD's for grab) IDC's data on
the overall PC market in Asia--excluding Japan--reports similar findings. While Korea's Samsung, China's Legend and
U.S.-based companies like IBM (NYSE: IBM - news), Compaq Computer (NYSE: CPQ - news) and Hewlett-Packard
(NYSE: HWP - news) were the top five Asian PC vendors during the first quarter of this year, combined they controlled only
about 36% of the market, while unnamed others held nearly 64%. By comparison, nonbrand-name PCs account for about
20% of the U.S. PC market according to another 1999 IDC study.
Those computers will need software, and to that end Microsoft (Nasdaq: MSFT - news), the biggest software company in the
world, has 450 employees working in China, and plans to spend $80 million on various operations there in the next few years.
Networking software maker Novell (Nasdaq: NOVL - news) and database giant Oracle (Nasdaq: ORCL - news) are also
among those software firms with operations in China.
Yet software piracy continues to be a severe problem. The Business Software Alliance, a Microsoft-backed organization that
monitors software piracy, says that software companies lost an estimated $645 million to piracy in China last year, ranking
fourth behind the U.S., Japan and Germany. And while that figure is down from the previous year's loss of $1.2 billion, more
than 90% of all business software in use in China last year was copied illegally, according to the BSA. Beijing has promised to
crack down on the problem in the past, but hasn't done so well on this issue in the past.
China is quickly catching the Internet bug as well. With 3.2 million Net users as of two months ago, IDC expects that number
to reach 25 million by the end of 2003, almost a sevenfold increase. Chinese consumers are ever so slowly warming to the idea
of spending money online. A recent survey by China's Ministry of Information Industry estimated Chinese online spending at
about $6.6 million in 1999. And while only 20% of China's Internet users made an online purchase in 1999, almost 90% said
they would like to make at least one online purchase in the coming year.
But Chinese consumers don't have much disposable income. The national annual average in China was $735 in 1998, but it
tends to vary greatly from region to region. In some rural areas in western China, that figure can drop below $300 per year, but
it can rise to more than $3,000 per year in cities like Shanghai, according to the Washington, D.C.-based U.S.-China Business
Council. Beijing would like to repair that disparity, and therefore promotes investments in basic infrastructure, such as oil, gas
and telecommunications networks as the answer.
Robert Kapp, president of the U.S.-China Business Council, says that consumer spending for high-tech products will be based
in large cities like Shanghai. But there is also a huge potential for communications infrastructure vendors like Cisco, Nortel
Networks (NYSE: NT - news) and Lucent Technologies (NYSE: LU - news) to benefit from infrastructure developments in
rural areas.
Another key area is in wireless technology. Wireless technology companies like Qualcomm (Nasdaq: QCOM - news),
Motorola (NYSE: MOT - news) and phone handset makers like Ericsson (Nasdaq: ERICY - news) and Nokia (NYSE:
NOK - news) have been nurturing their Chinese opportunities for some time. ``China has the potential to do some leapfrogging
past developed countries with cellular communications and the potential of the borderless Internet could mean a lot for China,''
Kapp says.
And as technology products and infrastructure take hold in China, the semiconductor industry expects to benefit handsomely.
George Scalise, president of the Semiconductor Industry Association, pegged the current size of the Chinese market of
semiconductor products at $8 billion, about half of which will go to U.S. chip companies. By the end of next year the country
should be the third largest consumer of semiconductor products, according to SIA forecasts, and the second largest by 2010.
But the semiconductor industry is already running at a full tilt and is still unable to keep up with demand. Shortages of
components have become the rule in the last year, and chipmakers have been rushing in recent weeks to add manufacturing
capacity. Should a sudden surge in demand for electronics products in China materialize in the next year or two, there's no
guarantee that the industry will be able to keep up, as most of the new chip factories announced in recent weeks, won't be
running at full speed for at least a year or two. (EDIT: This is one of the major reasons that I don't see semi will repeat the previous boom-bust patterns in the near future, say 3-5 years)
U.S. chip company Motorola has been an investor in China for several years, and already employs roughly 10,000 people at
various facilities around the country. Norm Sandler, Motorola's director of Strategic Issues, says business in China contributes
about 10% of the company's $31 billion in global revenue. But so far most of the Motorola products made in China are used in
products sold domestically.
Another trade group, Semiconductor Equipment and Materials International, expects the Chinese market for semiconductor
manufacturing equipment to quadruple from $1 billion last year to $4 billion by 2003 as the government moves to eliminate
tariffs on such equipment by 2005. The organization says that current domestic production in China meets only about 20% of
demand.
But if there's one thing that is sure about doing business in China, it is that you never know what can happen. Beijing's attitudes
tend to run hot and cold.
``China tends to have waves of openness that don't always last,'' says Stephanie Hutchison, analyst at IDC.
Intel Chief Executive Craig Barrett echoed that sentiment in a speech last week in Kuala Lumpur, Malaysia. When it was
suggested that Intel had captured a great deal of the semiconductor market in China, he said: ``I'm not sure anyone has
captured anything in China.... We have made a couple of investments in China. The Chinese government is a little bit
schizophrenic. One day you're allowed to invest; the next day you're not allowed to invest. We try to invest on those days
when it is legal, and we don't invest on those days when it is not legal.''
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