The Technological Rise Of China Was Just the Beginning

The Technological Rise Of China Was Speedy --
And Just the Beginning

--- THE WALL STREET JOURNAL
December 20, 2004; Page B1

XIAMEN, China -- At first blush, the sale of International Business Machines Corp.'s PC unit to China's biggest PC maker, Lenovo Group, this month seemed quite shocking. After all, Lenovo is a Chinese company -- majority government-owned even -- and it's gobbling up a storied asset of the bluest American blue chip.

But the deal shouldn't have come as such a surprise. Lenovo is one of a handful of Chinese companies with the size, management skills and financial strength to attempt such a coup. And the deal helps IBM in China and means it won't have to hand off its baby to a U.S. competitor.

There's good reason, though, to pay attention to the deal and what it means about China. First, China is more advanced in the use of technology than many people know. It passed Japan this year to become the second biggest consumer of PCs after the U.S. It's closing in on 100 million Internet users, placing it second in that area, though it still has only half as many users as the U.S. And 15 million Chinese subscribe to broadband DSL service. That's more than in the U.S., though many Americans get their high-speed connections from a cable company.

In cellphones, China's 250 million users far surpass those of any other country. (Official statistics claim more than 325 million subscriptions, but they overcount business travelers, who get more than one subscription to avoid high roaming fees.) What's more, those 250 million users are still only about one-fifth of China's population.

The second big reason to pay attention to China's technological rise is that it's happening faster here than it did elsewhere in Asia. The transfer of marginal businesses from the U.S. and Europe to lower-cost operators in Asia has been going on for more than a generation, starting with Japan, then South Korea and Taiwan. China's government, companies, partners and investors learned lessons from the country's neighbors. They're also all moving faster because the tools of the trade -- manufacturing equipment, logistics systems and the like -- are all better than ever.

Even the everyday use of e-mail and videoconferencing sets the Chinese apart. Earlier this year, after a rocky first three months together, product managers at Huawei-3Com Co., a data-network-equipment joint venture of China's Huawei Technologies and the U.S.'s 3Com, developed a routine of e-mail, conference calls and face-to-face meetings. "By the second quarter, we adjusted our communication mechanism and we could prioritize items," says Rose Chen, president of international sales. Last week, the venture shipped its first products.

Already in China it's possible to detect regional technology centers and competition for workers, similar to the rivalry between Silicon Valley, Boston and Seattle in the U.S.

Southern China's Guangdong province, dominated by the cities of Guangzhou and Shenzhen, is the center of most TV, stereo and computer assembly. Meanwhile, the city of Suzhou, not far from Shanghai, is home to a lot of notebook PC production, notably many of the operations of Taiwan's giant contract manufacturers.

A group of telecom-equipment makers is based in Hangzhou, which is also along the central coast near Shanghai. The country's biggest homegrown chip maker, Semiconductor Manufacturing International, is farther north in Tianjin, near Beijing, in facilities originally built by Motorola. Meanwhile, both Motorola and Intel are way out in the western city of Chengdu. They're taking advantage of access to engineering universities that for years offered support to the country's military contractors, located there by the government in the belief they would be insulated from attack.

Finally, China's size means that its technological gains could have longer-lasting consequences. For instance, China passed the U.S. in unit consumption of TV sets two years ago as household penetration of TVs passed 90%, closing in on the near ubiquity of TVs in developed countries. If population trends hold, China is unlikely to be challenged as the world's largest market for TVs until the middle of the century, when India is expected to become the most populous country.

And when final figures emerge shortly, we're likely to learn that China passed the U.S. this year as the world's top PC maker, another change unlikely to be challenged for years to come.

A recent study by University of California-Irvine researchers found that most of China's recent PC-industry growth was driven by outside companies, led by the Taiwan-based contract manufacturers. But it's not just them. This year the output from Dell's China factory here in Xiamen, from which the company supplies Japan as well as China, will match production at pre-IBM Lenovo.

Still, Lenovo is China's first company to tackle the complexity of a high-profile, international deal. In the process, it plans to move its headquarters from Beijing to a suburb of New York City and take an IBMer as its CEO. More than 70% of its sales will come from outside China, while 70% of its workers will be inside China.

And the cherry on top: Lenovo's largest shareholder will continue to be an unlisted holding company controlled by the Chinese government.