Here's a report out of China on PCs and the Internet:
PC Revolution Sweeps China
(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 Carrol>>> |
