Interview with Paul Waide of Pacific Epoch:
China is an impressive market, and many investors believe that much of the exciting activity in technology and venture capital for the next several decades will be in Asia. China is no longer just a cheap production site, but a place with a large market to both source and sell finished goods—even higher-cost technology products. And the country is becoming a source of innovative products that is no longer exclusively focused on reverse engineering or contract manufacturing. Yet recent stories of such issues as anti-dumping duties on bras and currency pegs cloud the level activity already under way.
To get an accurate picture, we spoke with Paul Waide, editor in chief of Pacific Epoch, a China-based publication covering technology finance, tech-related economic liberalization, and other activity around China’s rapidly growing technology community.
AlwaysOn: What technologies are changing China?
Waide: The local and foreign venture capitalists we speak to have a good take on the technologies that will change China, so looking at what they are investing in is a good way to gauge things: Software, telecommunications infrastructure (especially wireless), and semiconductor firms still receive the bulk of venture capital in China. However, there is increasing attention on consumer-focused technologies, and no doubt inspired by the success of NetEase, Sohu, and Sina, there have recently been a number of investments in e-commerce and Internet services. Internet-based financial services are hitting the radar. China Mobile will process more than 200 billion SMS messages this year, so even though it is a decade or so old, SMS is changing China.
Because handsets and mobile phone services are relatively cheap, the mobile phone has become almost ubiquitous in major cities. As we have seen with early 3G networks elsewhere in the region, moves to MMS [multimedia messaging service] in China will depend on the availability of handsets as much as consumer demand in the early stages. PHS [Personal Handyphone System] is bringing mobile to many people who would not be able to afford services if their carrier decides to deploy GSM. There has been a flurry of DTV [digital television] business plans sent around as many of the universities working on the national DTV standard attempt to spin off their work. Despite a spike in biotech interest in the wake of SARS, there seems to be very little venture money looking at biotech deals. That is not to say investments are not being made; it is simply that investments come from government or strategic investors.
AlwaysOn: Which PRC homegrown technologies are expected to spill over and dominate other markets? Which companies look most promising to do this?
Waide: If you draw comparisons between the way China tackles homegrown technologies and the way Japan tackled the same issue two decades ago, there are some amazing similarities, but China appears to be improving on the industrialization model. Both countries use protective measures to allow domestic industries to develop beyond the embryonic stage, but China's ministries (Ministry of Science and Technology, Ministry of Information Industry, and so on) are keen to employ standards-based technologies during the development phases of the market and have had some success pushing homegrown technologies into international standards committees—from the very high-profile 3G wireless TD-SCDMA standard to the recent next-generation broadband transmission standard on Ethernet over SDH/SONET (ITU-X.86). These homegrown technologies are likely to spill over, first into developing countries where China has some influence (the Republic of Congo, Angola, Cuba, Nepal, and so on). Telecom is one of China's pillar industries, and it has received a lot of attention. Companies like Huawei and FiberHome, are already getting a whiff of international success, thanks to low-cost, standards-based products.
Appliance giants including Legend Group, TCL, Konka, and Hisense have formed the Intelligent Grouping and Resources Sharing working group to develop an IGRS protocol, which will enable automatic detection, automatic networking, and resource sharing and collaboration among IT devices, home appliances, and communication devices in wired and wireless modes.
On the software side we expect Chinese antivirus and other security applications to catch up to and possibly surpass international rivals Symantec, Trend Micro, and Sophos. Rising, a company that claims 50 percent of the PC antivirus market in China, recently released its 2004 antivirus software and applied for international patents on "3D" virus scanning.
When China finally gets around to deploying 3G, we expect R&D at major vendors to swing to 4G wireless, and with the proliferation of digital TV, there could be some interesting synergies.
AlwaysOn: From the U.S. perspective, some see China and India similar as opportunities to fund low-cost goods and services outsourcing firms. Is this the primary attraction to the PRC by venture investors?
Waide: Low-cost goods are why the world (especially the Wal-Mart world) turns to China, but venture investors don't seem to be too interested. China is different from India in that it is a market itself. Domestic handset producers exported just over one percent of their products in the first three quarters of 2003. There are original design manufacturers emerging in China, but that link in the value chain is still dominated by Taiwan and Korea. In the case of handsets and to some extent PCs, a lot of Chinese—not to be confused with China-based—companies suffer from the U.S. syndrome: "Why bother looking offshore when we have a massive market right on our doorstep?" Outsourcing firms are starting to emerge, but they are a long way behind their Indian counterparts in terms of maturity.
Multinational corporations, on the other hand, are completing a lot of local R&D in China due to cost advantages and the local market entry requirements.
AlwaysOn: How are China’s state-owned enterprises (SOEs) affecting the direction of investment and innovation?
Waide: China’s SOEs are investing under the guidance and coordination of a few very influential agencies, namely, MII, MST, State Planning and Development Committee, State-Owned Assets Supervision and Administration Commission (SASAC), and the State Administration for Radio Film and Television (SARFT). On the standards discussed in the previous question, these agencies make funds available via the university system and a network of institutes. In the case of existing SOEs, the plan appears to make them leaner before they start investing heavily in research and development. There are, of course, exceptions that prove the rule. Huawei (the company Cisco infamously took to court for copyright infringements), is still a state-controlled company, and it invests heavily in R&D—especially in 3G and other mobile infrastructure.
AlwaysOn: How large of a concern should intellectual property protection be for foreign investors or corporations working in China?
Waide: Intellectual property is and should remain a key concern for foreign corporations and as IP laws tighten up for foreign investors. China has startups struggling with the cost-benefit question of using pirate software and have spoken with some that have barely survived after being forced to pay heavy fines for license infringements. The other problem with intellectual property rights enforcement is that it depends so heavily on the enforcers. Foreign companies would do well to see if IP rights are being upheld at the provincial and municipal levels. It is probably safer to think of operations in different China provinces the same way you would think of operations in different European countries.
The government has embraced its commitments to the WTO, but Chinese companies are often run by people that are not aware of their obligations under world trade agreements or are still caught in the old China intellectual property mindset, where if you improved upon a technology you had every right to use it no matter the original copyright holder. Any visitor to mainland China cities will face an onslaught of pirated goods, from DVDs and clothing to mobile phones (a recent report in the Chinese press asserted that approximately 50 percent of mobile phone batteries in use in China are counterfeit).
Back in August a Shanghai court found Shanghai Hezhong Enterprise Development and Shanghai Yatu Film Culture Broadcasting guilty of intellectual property violations and ordered the pair to pay 101,000 yuan ($12,200) to 20th Century Fox, and 35,000 yuan to both Disney and Vivendi's Universal Studios. The nominal amount of these fines compared to the cost of bringing such a suit to court should encourage foreign firms to be vigilant about their IP.
Chinese firms are beginning to understand the value of IP protection and are jumping to apply for trademarks and patents. Technology firms are at the vanguard: By February of this year, the State Intellectual Property Office had received over 2,000 applications for trademarks related to fiber optics, 1,000 for Internet communications, 200 for broadband access, and 2,000 for 3G wireless–related technology.
To give you an idea of just how rampant piracy gets: There was a case earlier this year where a newspaper—an entire newspaper—was being cloned and sold by a counterfeit publisher. Think about the effort that goes into putting out a newspaper every day, and then imagine someone going to the trouble of reprinting and distributing it! |
