WTO entry sweetens foreign investment in China
02/01/2003
China is the sixth largest economy in the world and the only trillion dollar economy expected to double in the next decade. By citing figures such as these, it becomes obvious why Deloitte & Touche's George Koo, director of the Chinese Service Group, thinks that China is so attractive to foreign investors. The market potential is too enormous to ignore, Koo says. The country's foreign trade already exceeds Japan's (third to the EU and North America), and it has become the largest mobile phone market with only 14% penetration.
What could slow down or sidetrack the country's plans for growth and US companies' desire to participate? Koo believes the biggest roadblock to China is Washington D.C. Obtaining export licenses for dual use equipment is particularly cumbersome. "The DOD, Department of State and the Department of Commerce all have a say, which severely hampers US companies' ability to sign contracts," states Koo. He also categorizes the limits as unreasonable. "If they were truly focused on critical pieces of equipment, it would be OK, but they're not," he says, adding that usually it's not the case that only US companies make the specific technology, so buyers will go elsewhere. He also believes that if the focus were only on equipment of importance to the military, it would be easier to enforce the provisions and track a limited number of items.
The significance of China's entry into the WTO is that it takes China out of U.S. domestic politics and — with the resulting open markets, removal of non-tariff barriers, and lowering of tariffs — foreign direct investment (FDI) will be encouraged. "Up until now, whether the US would extend permanent trade relations with China was an annual problem," states Koo. "It's not a political football now ... and being a member of the WTO obliges China to play by WTO rules."
Another benefit of being in the WTO: non-tariff barriers are not allowed, whereas, in the past, China tried to protect its home-grown industries, which tended to be inefficient and noncompetitive. The result, Koo says, is a more level playing field for foreign companies operating in China.
FDI in China is also increasing. "If FDI hits $55 billion in 2002, for the first time China will have attracted more FDI than the US," states Koo. Although he notes that, in light of the depressed US economy, the crossover point might be reached even if the $55 billion mark isn't hit.
If Washington D.C. politics are not so important, another potentially more incendiary topic is that of Taiwan. Koo maintains that China has no interest in politics or world domination, only economic development. Taiwan, however, could be another issue. "Taiwan business people see themselves as part of China — it's the politicians who don't agree," declares Koo. "There are about one million Taiwanese living and working in China, with 300,000–400,000 in the greater Shanghai area alone."
 Fabs in China in construction, equipment, or in planning. Source: Strategic Marketing Associates. |
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As evidence that young Taiwanese see their future as being tied to the Chinese economy, Koo estimates that about 1000 Taiwanese students apply every year to attend college in China, despite a burdensome process. In order to apply to attend college in China, one has either to go to mainland China or else Hong Kong or Macau.
Taiwanese government officials do not appear keen on making the connections with China easy. Koo explains there are three million man-trips between Taiwan and China every year, yet the Taiwanese government has not, until recently, allowed direct flights between Taipei and Shanghai. Travelers have had to make a side trip to Hong Kong first before being allowed to continue to Taiwan. This side trip to Hong Kong costs $200 — so if you multiply that by the three million trips/year, businesses would save about $600 million/year according to Koo's estimates. "Business people are clamoring for direct flights, and starting in February, charter flights between Shanghai and Taipei will be allowed as long as they touch down in Hong Kong first, which is still silly," quips Koo.
Markets, resources and the WTO
Statistics from the China Center of Information Industry Development (7/2/02 data) were presented at a recent Semi lunch forum by Samuel T. Wang, SMIC Americas' president. The center projects that China's IC supply vs. demand gap will widen to US$27.6 billion by 2005, from its 2001 level of US$12.9 billion. The data indicate a 2001 China IC market demand vs. IC domestic supply of US$15.2 billion and US$2.3 billion, respectively. The corresponding figures forecast for 2005 are US$36.1 billion and US$8.5 billion.
Besides the country's rapid growth in IC manufacturing (see figure), as of this year there are 243 IC design houses in China, and even Taiwan design houses have entered the country. After China enters the WTO, more multinational companies are expected to set up research centers there as well, asserts Wang. China boasts 400,000 science and engineering graduates each year, and, Wang says, more than 5000 students and professionals return to the country.
Despite the US restrictions, importing advanced equipment from Europe is not a problem. The US takes longer and is on a case-by-case basis for approval, while obtaining advanced tools from Japan is slower than getting them from Europe, but faster than from the US, according to Wang.
Other developments in China discussed at the Semi event were noted by Yih-Neng Lee, VP and general manager of worldwide fabless design house business for Agilent Technologies. The trends included: China's harnessing the intelligence of other Chinese-speaking people outside its borders, particularly in the areas of superconductivity and nanotechnology. With semiconductor production in China at $2.9 billion in 2001 vs. $71.2 billion in the US, and R&D spending at around $11 billion in China vs. more than $233 billion in the US, Lee believes that China is destined to become a science and technology superpower — just not by 2005.
China's companies are not content with being local players only. One example is Huawei, a company that Lee says makes switches as good as Cisco's but for half the price. Huawei has won deals with Britain, Germany and others; its international sales climbed 210% in 1H02. Additionally, ZTE opened R&D centers in New Jersey, California and Texas, and the company is targeting sales in Russia, India and emerging markets. Some companies are tying market access to technology transfer and R&D partnerships, too (e.g., Intel, GE, Matsushita, Siemens and Microsoft).
Lee cautions against thinking that when first starting out in China a company can afford to have only a small office with a skeleton staff. The country is huge geographically and transportation costs are not necessarily lower. Another observation: although China's business climate has long been driven by relationships, it is changing toward being value-driven due to the influence of being in the WTO. Lee adds that when companies have to play by WTO rules, they have to think about cost, service, delivery and so forth, not just prior relationships. Another effect of WTO membership is the recognition by China that its government policies, e.g.,those with respect to customer paperwork, need to be more consistent and streamlined.
Companies planning to invest in China have fallen into the trap of believing sales volume would be huge, only to be in for a dose of realism. In the past, it was contract manufacturing that was hyped, but now it's the semiconductor industry's turn.
Companies doing business in China need to look beyond the "bubble" and take a long-term approach that focuses on investment objectives, Lee suggests. He offers Agilent as an example; the company has been in China for almost 19 years and expectations for growth have been focused on the long term. Lee stresses the value in not trying to import proven, successful strategies wholesale, but instead establishing alliances and "acting local."
Debra Vogler, Senior Technical Editor, [email protected]