Monday October 5, 10:43 pm Eastern Time
FEATURE-China shops for high-tech toys
By Scott Hillis
BEIJING, Oct 6 (Reuters) - Information age products are catching on
fast in China.
In Beijing's high-tech retail district of Haidian, vendors show off
high-powered Compaq (NYSE:CPQ - news) and IBM (NYSE:IBM - news) personal computers.
Government officials crowd a networking exhibition to pore over glossy brochures for lightning-fast
servers from 3Com Corp and Cisco Systems.
Young Chinese women in bars chat gaily into colourful mobile phones from Motorola Inc (NYSE:MOT -
news), Nokia AB and Ericsson .
And new software releases can draw long queues of buyers eager to try the very latest.
Zhang Hongsong, for example, joined hundreds of others recently to buy one of the first Chinese copies
of Microsoft's (Nasdaq:MSFT - news) Windows 98. An elated Zhang had to wait past midnight before he
could finally clutch his new purchase.
''After all, it's not too pricy, so I can pick up a copy to play with,'' Zhang said in Beijing after shelling out
1,998 yuan ($240).
Zhang's eagerness is repeated throughout much of China, a nation of 1.2 billion people, creating a boom
for high-tech goods and offering relief for foreign technology companies battered by Asia's financial
crisis.
But there are plenty of frustrations for the industry, too.
High tariffs, rampant piracy and investment barriers are just a few of the problems.
FIRST, THE GOOD NEWS
There is also plenty of good news. Growing incomes and an overhaul of musty state industries are
fuelling a frenzied rush to get wired.
China has offset plunges in spending across Southeast Asia and in moribund Japan.
''We've been able to stay flat in the region as a result of the counterbalance of those various forces,''
said James Jarrett, president of Intel China.
While China's slowing economic growth -- a result of the Asian financial crisis -- has pinched car
makers to beer makers, information technology spending is set to grow at an eye-popping 27.6 percent
a year, according to tech market research firm International Data Corp (IDC).
''Everyone sees China having such potential. Vendors are all looking to get a foothold,'' said Jared
Peterson, IDC's China research director.
Industry executives giddily recite the latest forecasts for the PC market: four million machines in 1998,
up from 2.8 million last year.
Moreover, with just 11 million PCs installed nationwide, there is no bottom is sight.
''The penetration here is very, very, very low in all the markets -- business, government, academic
markets,'' said Jarrett.
Another bright spot is telecommunications sales. With only seven percent of China's people hooked up
to telephones, Beijing has made development of the sector a national priority.
''In telecoms, God knows how far projected into the future, they're still adding something like a Baby
Bell a year,'' said Mark Mechem, deputy director of the U.S. Information Technology Office (USITO) in
Beijing, referring to a major regional U.S. telephone company.
BUSINESS CAN BE TOUGH
To secure the privilege of selling to 1.2 billion people, foreign firms have poured hundreds of millions of
dollars into factories churning out pagers, memory chips and disk drives.
But China has largely failed to attract big-ticket projects such as microprocessor factories, which
demand billions of dollars of investment.
One reason is strict U.S. controls on transfer of computing and manufacturing technology that
Washington fears could be used by the Chinese military to craft deadlier weapons.
Analysts say the technology is advancing so fast that U.S. lawmakers can't keep up, meaning even
relatively mundane machines could be subject to export controls.
''The laws don't get reviewed frequently enough, are not flexible enough and run years behind,'' Mechem
said.
Unless Congress revised export control regulations, the next generation of Intel (Nasdaq:INTC - news)
Pentium II processors used in desktop PCs would require an export licence for sale in China, Mechem
said.
In some ways, China has made it tougher to arm itself for the information revolution.
Foreign telecoms firms are barred from directly operating networks. Many have bypassed that rule with
a complicated joint venture scheme, although Beijing seems set to close that loophole.
Most electronic goods face a 10-15 percent import tariff and a whopping 17 percent value-added tax.
''Over 90 percent of the trade in information technology products around the world now is taking place
on a tariff-free basis,'' Jarrett said.
''Not to be in that growth is somewhat of a disadvantage.''
SOFTWARE A PROBLEM
While many Chinese buy the latest and priciest equipment, analysts say they often ignore the crucial
role of software and solutions that put those machines to best use.
''The problem for both IT and telecoms vendors is that the China market is quite mature in its
understanding of tangible things represented by physical equipment,'' said Edward C. Lanfranco, senior
analyst with China Research Corp.
''However, it is much less so with the intangibles such as software and services, which cannot be seen,
but are definitely felt,'' Lanfranco said in an e-mail interview.
Although software is one of the most promising growth areas, rampant piracy and an emphasis on
hardware could smother China's chances of breeding the next Microsoft.
''The problem here is one of creating an environment where those creating products can generate
revenues to spur future developments,'' Lanfranco said.
Michael Rawding, director of Microsoft (China) Co Ltd, agreed. ''If a domestic software market-place
were to emerge, it would only emerge as and when China makes greater progress on respect for
intellectual property and understanding the value of software licences.'' |
