Tag: China

Can Chinese Firms Pass the Quality Test?

Posted on June 14, 2011

Earlier this month, Chinese PC maker Lenovo launched its latest and thinnest business laptop ever — the Lenovo ThinkPad X1 — in India. The India launch followed quickly on the heels of the global launch, a clear indication that Lenovo views India as an important growth market. During the launch, Amar Babu, managing director of Lenovo India, said that the company aims to be the number one PC vendor in the country in the next few years. It is currently in fourth position after Hewlett Packard, Dell and Acer. “We have captured a double-digit market share at 10% in the last quarter. Now we want to focus on growing faster, retaining our customers and becoming number one in the next few years,” he said.

According to the IDC India PC Market Tracker report, Lenovo has been gaining ground in the country. Expanding at twice the market growth rate over the past five quarters, Lenovo has increased its market share from 7.2% in the first quarter of calendar year 2010 to 10% in Q1 of 2011. The growth has been uniform across all of Lenovo’s business divisions, including enterprise, consumers and small and medium businesses. Over the past year, Babu has increased the company’s retail presence in India significantly by more than doubling its retail outlets from 150 to 400. He is now looking at upping this to 1,000 by March 2012.

Gaining the number-one position may not be easy, though. The biggest challenge for Lenovo in India, and indeed for all Chinese companies, is to overcome the commonly held perception that Chinese products, while very price competitive, are also very low in quality and not durable.

Chinese firms in India face another challenge: Political tension between the two nations. Last year, India blocked purchases from Chinese telecom equipment vendors because of security concerns.

Analysts also point out that unlike their Korean counterparts, Chinese firms have not made significant investments in India. Talking to the business daily The Economic Times, Alka Acharya , associate professor in Chinese studies at the Centre for East Asian Studies at the Jawaharlal Nehru University in New Delhi, noted: “The pricing advantage of Chinese players has been neutralized by the fact that all the global majors like Nokia, Motorola and Siemens have set up manufacturing facilities in the country.”

Some of that may change. In December 2010, Chinese Prime Minister Wen Jiabao came to New Delhi with a 300-plus business entourage. They signed bilateral trade agreements worth $100 billion by 2015.

“Chinese companies have changed considerably to adapt to the Indian environment,” says Weimin Yao, vice-president (corporate affairs) of Huawei Telecommunications (India). Huawei started with an R&D center in Bangalore 10 years ago; it is only over the past few years that the company has started doing business here. Weimin is himself an example of that adaptation: His card reads “Rajiv Weimin Yao” — Rajiv being far more pronounceable in India. “Chinese companies are now manufacturing here for export to other countries,” he adds. “Our R&D center is doing work for all over the world.”

Lenovo, meanwhile, has consciously played down its Chinese lineage and positions itself as a global company. In 2007, it centralized all of its marketing communications and services from across the globe in India.

Of course, one could argue that Lenovo’s lineage has a strong U.S. flavor. In 2005, it bought IBM’s PC business for US$1.75 billion and jumped from being the eighth largest PC maker in the world to the third position. It is currently the fourth largest PC vendor globally.

Hari Rajagopalachari, a partner at PricewaterhouseCoopers, points out that China today is in the same position that Japan was in before the quality revolution took place there. “Post-World War II, Japanese products were considered cheap and not very high in terms of quality, but over a period of time, led by the automotive players [like Toyota, Honda, etc.], Japan came to be known for both low cost production and high quality.” Rajagopalachari adds that although China has yet to make that shift regarding quality, there is no doubt that having mastered mass production, China, too, will go through a quality revolution. “But this will take time, maybe another 10 years,” he says. “It takes time to get an entire workforce to think of quality as a religion.” (See A Young Woman’s Mission to Brand China.)

See also: “Liu Chuanzhi on Rebuilding the Lenovo Brand“

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What Poor Patent Protection Costs Us

Posted on June 6, 2011

A new book titled, Great Again: Revitalizing America’s Entrepreneurial Leadership, by Silicon Valley entrepreneur Henry Nothhart, looks at the obstacles facing U.S. companies today — including high corporate taxes and government overregulation — and offers advice on how to fix it. One of his targets is the U.S. patent office.

According to a review of Great Again in today’s Wall Street Journal, Nothhart states that 1.2 million patent applications are waiting for approval, three times the number from a decade ago. While agreeing with Nothhart that the U.S. Patent Office obstructs rather than nurtures business, reviewer Nick Schulz also acknowledges “chronic underfunding [of the office] by Congress, which in the past 10 years has diverted to other uses more than a billion dollars in fees collected by the office.” Schulz is a fellow at the American Enterprise Institute and editor of American.com.

Also in today’s Wall Street Journal, columnist Matthew Slaughter refers to a report in May from the U.S. International Trade Commission (ITC) called “China: Effects of Intellectual property Infringement and Indigenous Innovation Policies on the U.S. Economy.” The ITC had asked 5,051 U.S. companies to “gauge the incidence and extent of infringement of their copyright, trademark and other intellectual-property rights in China,” according to Slaughter. The result: The ITC estimates “that all U.S. IP-intensive firms lost at least $48.2 billion in 2009 alone — perhaps as much as $90.5 billion — from foregone sales, royalties and license fees.”

The companies also estimated that if IP rights in China were better protected, their annual revenues would increase by as much as 20% — more than $100 billion a year, Slaughter states, adding that higher revenues would create the need for a bigger labor force, which in turn, could lead to more than 900,000 new jobs.

Stronger patent protection, it seems, is a no brainer when it comes to leveling the playing field and encouraging innovation. “Improving operations at the U.S. Patent Office is a bit like spending money on roads,” says Wharton legal studies and business ethics professor Richard Shell. “It is strengthening the market infrastructure.” The amount of money it would take to fix the patent office, he adds, “is a rounding error compared to what was spent on TARP (the Troubled Asset Relief Program) or the auto industry bailout. We’re not talking about a lot of money here. So in that sense, it is an excellent investment that would certainly pay off in the long run.”

U.S. companies, meanwhile, are not shy about suing other firms for alleged patent infringement, Knowledge@Wharton noted in a recent article. Apple has sued HTC; Motorola has sued Research in Motion and Nokia has sued Apple. Companies often are looking to solidify their positions as a front runner and are willing to use their intellectual property as a weapon in their arsenal, the article points out.

Slaughter, who is associate dean and professor at Dartmouth’s Tuck School of Business and was a member of the Council of Economic Advisers from 2005 to 2007, suggests that strong IP protection would also be a boon to China, given its goal of expanding employment to knowledge-based industries, including IT and clean energy. “China will not become a global leader in innovation if its government does not safeguard the fruits of its research and development,” Slaughter writes.

Or, as Shell says, “when China becomes the innovator rather than the imitator, it will begin to significantly strengthen the patent system.”

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China’s Sinking Competitiveness

Posted on June 1, 2011

The United States is heading towards a resurgence of manufacturing that will reclaim from China a large piece of the market for making things and will start to reverse one of the most durable trends in international trade over the last 15 years, some analysts now say.

According to the Boston Consulting Group (BCG), a “manufacturing renaissance” in the U.S. is underway as the wage gap between the U.S. and China narrows dramatically. That gap is shrinking largely because manufacturing wages are rising far more quickly in China (17% annually over the next five years) than in the U.S. (3% for the same  period) and also because the renminbi is set to appreciate gradually against the dollar in the coming years.

As that wage gap shrinks, some U.S. states will “become some of the cheapest locations for manufacturing in the developed world,” according to BCG, thanks in part also to flexible work rules and more government support. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015,” BCG senior partner and managing director Hal Sirkin says.

Also contributing to the narrower wage gap is the continuing higher productivity of U.S. workers. Though the productivity of Chinese workers as risen tenfold since 1990, it remains only about two-thirds that of U.S. workers.

It’s not that the U.S. will become a cheaper location to manufacture versu China in absolute terms. But given that wages account for somewhere between 10% and 30% of total manufacturing costs, and given a much slimmer wage gap, the importance of wage costs in a given product’s cost will become far less important. Costs for other product inputs, meantime, are often very similar. What is likely is that the U.S. will gain significant advantages over the next five years when it comes to making certain kinds of products, such as more high-tech and individualize products requiring smaller productions runs, the BCG report suggests. China will likely maintain the advantage for large runs of standardized products.

Already, the U.S. has seen some manufacturers choose to return or remain in the U.S. Caterpillar, for example, decided to expand its hydraulic excavator manufacturing plant in Texas rather than in China, and the NCR Corp. in 2009 announced it was returning ATM production to Georgia, “in order to decrease the time to market, increase internal collaboration, and lower operating costs,” BCG noted. Last year Wham-O, the toymaker, brought half of its Frisbee and Hula Hoop production from China and Mexico to the U.S. What’s more, Ford and General Electric recently announced plans to build new plants in the U.S.

Wharton professors, meantime, offer some perspective on to this larger picture. While it is true that China looks likely to sink some because of its rising wages and currency, just how much the U.S. will benefit is less certain, says Marshall W. Meyer, professor of management at Wharton. “The U.S will never be a low-cost leader. China will cede this advantage to Indonesia, Vietnam, etc. However, when you factor supply chain risks into the equation — we have learned a lot from the March 11 earthquake and tsunami — then it becomes more plausible for manufacturing to return onshore.”

Wharton finance professor Franklin Allen agrees about the significance of supply chain issues as part of the mix. “While I do not think it is likely the U.S .will overtake China, I do think recent supply chain problems will lead to a revival in U.S. manufacturing.” He adds that “high-tech manufacturing is easier to control if done in the U.S.  Dispersed manufacturing of high tech can create significant problems as the delays in the Boeing Dreamliner 787 illustrate.”

Allen recommends more caution regarding the value of the dollar going forward. “Predicting the dollar is very difficult. Given the problems in Europe, it could strengthen against the Euro. Also, predicting the exchange rate against the renminbi is not as easy as the U.S. government would seem to believe. They focus on the current account but the capital account is arguably more important. It is not clear what the balance of capital flows in and out of China would be if capital controls were gradually relaxed.”

Mauro Guillen, a Wharton management professor, thinks it is very difficult to generalize what will happen within individual industries. “There are some high value-added manufacturing tasks that continue to be competitive when performed in the U.S., including defense equipment, advanced instruments, robotics and the like. Some of them have increased recently due to the weaker dollar and efficiency enhancements, as in machinery, metals, automobile components and other areas.” But there are many other areas — textiles, clothing and furniture – that “are gone forever, even if the dollar remains weak.”

And while the lower dollar certainly helps boost U.S. competitiveness, “innovation is the best long-term fix,” says Meyer.

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Executing the Perfect Search in China

Posted on May 12, 2011

China’s Internet industry can’t seem to stay out of the limelight. That’s not a surprise. In a country that is flocking online by the millions, the social, economic and even political force of the Internet is formidable. And it’s likely to stay that way for some time, according to Robin Li, the multimillionaire founder and CEO of Baidu, the country’s largest search engine. In a recent interview with China Knowledge@Wharton, the 42-year-old Beijing-based executive predicted that the number of Internet users in China could double in the next 10 years to nearly one billion.

That’s both a threat and an opportunity for Baidu. With May marking the start of a spate of U.S. share offerings from a Who’s Who list of China’s Internet companies, there’s no shortage of competition wanting to nip at the lead Baidu has built since its own debut on Nasdaq in 2005, five years after Li launched the company. To stay ahead, what Li must prove to the markets more than anything else is that Baidu can innovate its way into the next growth phase of China’s Internet. Now that archrival Google has been securely relegated to the number-two position in China, a big part of that means capturing far more of the corporate monetization of the web than it has so far, he told CK@W. Its latest initiative — making downloading applications, data and services easier through what the company calls “box computing” — will also need to gain more traction among users and credibility among investors.

So far this year, Baidu is basking in the investor limelight, with its share price up some 50% since January. In late April, Baidu announced first-quarter net income of RMB 1.071 billion (US$163.5 million), a 123% year-over-year increase, on an 88% rise in revenue, to RMB 2.4 billion (US$372 million). During that earnings announcement, analysts wondered whether Baidu’s pace of growth will continue through the year.

Baidu’s growth projections won’t be the only thing Li can expect to defend this year, however. The search engine was recently found guilty of copyright infringement and ordered to pay about 550,000 yuan (about $84,000) to Qidian, a popular literary website. Qidian sued Baidu last March, saying the search engine linked to pirated versions of five novels for which the site owned Internet copyrights.

A Baidu spokesman told Reuters that the company has already filed an appeal in the Qidian case. The search engine also recently launched a beta version of a music service offering free licensed downloads of songs. In the past, Baidu has been at odds with the music industry for running an MP3 search service that links to free downloads of unlicensed content.

In addition, critics of the search engine giant accuse it of kowtowing to the Beijing government’s self censorship information policies, which require companies like Baidu to police and block content appearing on their sites. Shortly after Li spoke with CK@W, the government announced a new body charged with overseeing the Internet, a move with potentially enormous implications for all of China’s Internet firms.

In his discussion with CK@W, Li responded to those critics and offered his thoughts on what needs to happen for China’s Internet players to capture far more of corporate marketing budgets than they have in the past, and why, in his words, the key to Baidu’s own success now “is all about execution.”

To read the interview in full, visit China Knowledge@Wharton.

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Taking Stock of Sino-Japanese Trade after the Earthquake

Posted on April 29, 2011

As the two-month anniversary of Japan’s 9.0 earthquake, tsunami and nuclear meltdown nears, there is still plenty of uncertainty about the full extent of the disasters’ economic devastation — not just in Japan, but also among its major trading partners.

Japan’s biggest trading partner is China, and this week, China’s stock markets fell for four consecutive days — the largest weekly decline since November — raising questions for some analysts about whether Japan’s woes were beginning to affect that country.

Of course, any losses within China are likely to pale in comparison with the damages that Japan must bear, which could reach as much as $300 billion. But they will add up, said Patrick Chovanec, a professor at Tsinghua University School of Management and Economics in Beijing, in an article published this week in China Knowledge@Wharton. Regarding how — or whether — recent events will have a significant impact on trade flow between the two countries, Chovanec predicted that “as the Japanese economy suffers, demand for imported goods from China will fall.”

The pace of trade between the two countries had recently improved despite unresolved tensions over, for example, China’s “rare earth” export embargo that has affected Japan’s high-tech firms. According to the Japan External Trade Organization (JETRO), bilateral trade was a record $30.3 billion in 2010, up 30% from 2009. China is Japan’s largest export market — Japan’s exports to China rose 36% year on year to US$14.9 billion in 2010, while imports from China totaled US$15.27 billion in 2010, up 24.7%. In terms of the types of goods that are in demand, electrical equipment — including semiconductor chips, electronics parts, and audio and telecom equipment — accounts for 23.5% of China’s imports from Japan, followed by machinery at 22.4%, chemical products at 14.5%, autos and auto parts at 10% and steel at 5.3%. Meanwhile, Japan’s main imports from China include electrical equipment — the largest category, accounting for 25.9% of the total — followed by machinery at 16.8% and textiles at 14.3%. According to JETRO, foreign direct investment from Japan into China reached $4.24 billion in 2010, an increase of 3% from 2009. It’s the forth-largest direct investor, after Hong Kong, Taiwan and Singapore. 

Opinions vary as to how China’s supply chains are adapting to the unprecedented disruption. “For six months to a year, there will be serious disruptions in supply chains. But I would be surprised if the Koreans could not do what the Japanese are doing now,” Wharton finance professor Franklin Allen said in the China Knowledge@Wharton article. But Xianfang Ren, a Beijing-based China economist for IHS Global Insight, a research and information company, is not so certain, given the unique technology involved in making some components. “Chinese manufacturers may find alternative sources for general parts, but that may be impossible for parts that only one or two Japanese companies can make, and then there is no one to fall back on.”

Meanwhile, among Japan manufacturers, those in the auto industry are being watched particularly closely. On April 18, Toyota — the world’s largest automaker, with 8.42 million units sold in 2010 — resumed production at all of its 18 Japanese plants, after shortages of power and parts forced closures after March 11. The company said production from May 10 to June 3 will run at about half of its normal capacity, after which it will decide how to adjust production pending an assessment of its suppliers. That disruption will have a limited, if any, impact on China’s auto buyers since Toyota exports less than 50,000 vehicles to China annually. But the company does have three joint ventures in China selling around 900,000 vehicles a year locally, and on April 20, Toyota announced that it will cut production at those joint ventures until early June due to supply disruptions.

If supply disruptions continue for the rest of the year, China’s overall economic growth could be affected, say experts, although the situation involves many variables — including potential gains for some suppliers of steel and other construction materials as Japan begins rebuilding cities razed by the quake and tsunami. Other factors likely to have a more immediate impact are Beijing’s monetary policy tightening and the rising value of the renminbi, which crossed RMB 6.50 per dollar for the first time today. As Reuters reported, that’s a psychologically important benchmark for market watchers — and despite any Japan-related jitters, it may well have helped the Shanghai Composite Index reverse its decline of previous days.

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A New Era for China

Posted on April 14, 2011

For the past few decades, the availability of cheap goods from China “has pretty much subsidized the standard of living in the developed markets,” according to William Fung, managing director of Li & Fung, the Hong Kong-based trading company that sources and coordinates supply chains for about 30% of the brands found in the average American shopping mall.

During a recent appearance at Penn Fashion Week with designer Vera Wang, Fung detailed the new complexities his company is facing as retailers experience greater pressure to keep up with changing trends, expand into new markets and streamline production.

In a video interview with Knowledge@Wharton (which can be viewed in its entirety below), Fung discussed in more detail what he sees as one of the key changes for the next generation of retail — China’s transition from a significant source of goods to a consumer market that sets the trends for the rest of the world.

“China works in 30-year cycles,” Fung noted. “If you look at 1949 to 1979, from the founding of the People’s Republic to the opening up of China by Deng Xiaoping, during that 30 years, the world had no China. The world lost China. China closed itself off…. As a result, everybody did their commerce and went about their business very much without considering China.”

After Deng opened up the Chinese labor market beginning in the 1970s, however, “China burst on the world [growing the global labor force by] 20% to 25%.] China was “very productive, very aggressive, they knew that they were behind and they were trying to catch up,” Fung said. As a result, the world was hit with an onslaught of low-priced goods; meanwhile, “the China effect” kept the lid on labor costs in other parts of the developing world.

“But now that era seems to be ending,” Fung told Knowledge@Wharton. “What has happened is that China understands, first of all, that it needs another model for growth…. [Leaders in China now] understand fully that they have to raise the standard of living among their people. Now the country is moving into an era of consumer spending, domestic consumer spending, as a real alternative engine for growth in China.”

As consumer buying power in China grows, Fung predicted that demand for top-of-the-line goods will begin to increase among the country’s population. “As a result, there will be a lot of innovation and design that’s specifically tailored for the Chinese market. When that happens, that will also influence the rest of the world,” just like Americans’ increase in consumption after [World War II] meant that many products were initially created for the American market, Fung said.

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The Bull in China’s Shops and Shop Floors

Posted on April 13, 2011

In one more sign that the global economic and financial center of gravity is shifting East, a new survey by GlobeScan shows that the Chinese are more supportive of “free market” capitalism than Americans, who live in the so-called capital of free-wheeling market capitalsm.

That is remarkable given that China remains, at least nominally, a Communist country.

In the survey, respondents were asked if the “free market system and free market economy is the best system on which to base the future of the world.”

In China, 67% of respondents strongly agreed or somewhat agreed with that statement. In the U.S. the equivalent combined number was 59%. The U.S. number dropped 15 percentage points from a year-earlier survey and was down from 80% in 2002, when the first survey was taken by GlobeScan, a global research organization.

No doubt the financial crisis and resulting economic challenges of the last couple years took a toll on the U.S. scores, while China largely escaped a direct economic hit. China also had fewer naysayers — respondents who “somewhat disagree” or “strongly disagree” that a free market economy is best. In those categories China’s combined score was 19% versus 29% in the U.S.

GlobeScan also noted that “Americans with incomes below $20,000 were particularly likely to have lost faith in the free market over the past year, with their support dropping from 76% to 44% between 2009 and 2010.” Whatever patience Americans have shown for enduring recession appears to have been wearing thin by the time this survey was taken, between June and September of 2010.

Brazil also outscored the U.S. in its confidence in a free market economy, with 67% of respondents who “strongly agree” or “somewhat agree” that free market economies offer the best future – the same as in China. India’s scores were close to those of the U.S.

Other notable results for that measure include: Germany, 68%; Kenya 61%; the Philippines, 65%; and Italy, 61%. Just 31% of respondents from France agreed with those two statements and only 27% in Turkey. Japan clocked in at 47%.

Obviously China’s brand of “capitalism” – with heavy government planning and control – is far different that of the  U.S. Still, for a country that not all that long ago was pushing some of its most educated citizens back to doing manual labor on a farm, this is a remarkable time.

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Beating the Black Market Blues in China

Posted on April 8, 2011

Earlier this year, Chinese authorities lit bonfires in six locations across the country. It was their way of publicly celebrating the midway point of a campaign to crack down on counterfeiting and intellectual property rights (IPR) infringement. Some 5.2 million books, DVDs and other counterfeit products went up in flames. Over the three months preceding the bonfires, more than six million such products had been seized, 4,000 arrests were made and fines totaling $512,000 were imposed, Gao Feng, a top official with the Ministry of Public Security, reported at a press conference in Beijing following an announcement of the campaign.

But these actions have failed to impress David Buxbaum, an American IPR lawyer with Anderson & Anderson who has been working in China since 1972. The first American lawyer allowed to practice in the country after President Richard Nixon’s icebreaker of a visit the same year, he is “not a great believer” in government drives like the most recent one. From his office in Guangzhou, a city in the heartland of manufacturing and exporting, he calls IPR infringement in China a “raging epidemic,” one that only a major administrative and judicial overhaul can eradicate.

“I live in a middle-class community,” says Buxbaum. “Everyone can afford to buy proper discs and movies, but you cannot find one legitimate disc. They are all copies.” While the number of infringement cases involving trademark, patent and unfair competition disputes going through China’s 95 IP courts has been rising every year — for a total of 13,000 since 2006, according to online IP litigation database CIELA — it’s a small dent “considering how endemic IPR infringement is in China,” he notes. “If the Chinese government wanted to put an end to infringements, it could in a matter of months…. The capabilities of the Chinese government are enormous.”

Not all experts are as skeptical as Buxbaum, but many also voice concerns about China’s ability or willingness to get a grip on IPR. Consider these figures on counterfeit goods: According to the European Union, 64% of all fake or pirated items that were seized in the 27-nation bloc in 2009 came from China, a 10% increase from 2008. Among the 118 million articles seized, clothing was the biggest category, but several other types of goods — including medicines, household appliances and cigarettes, along with CDs and DVDs — were also seized.

Meanwhile, another form of IPR infringement — high-level industrial espionage — has become so pervasive across Corporate China that it has also become a global issue. Foreign companies in some sectors are bristling at the thought that they have to agree to transfer technology to their Chinese joint venture partners in order to win government approval for new investments. And China’s drive to become a technology powerhouse by 2050 under the recently introduced “indigenous innovation” plan is nothing short of controversial, with domestic companies in several sectors encouraged to reconfigure imported technology so that a “Made in China” label can be slapped on their goods. The goal is to increase the “value add” in seven tech-based sectors, including new energy and high-end manufacturing, from 3% of GDP today to 8% of GDP by 2015, and 15% by 2020, according to Lilly Chung, a Deloitte partner who participated in a panel on the topic during a recent Wharton China Business Forum in Philadelphia. “The shift is huge from ‘Made in China’ to ‘Created in China.’ I think the [government's] leadership understands that having the technology is the way to create the next powerhouse in China.”

But as a result, “the plan is considered by many international technology companies to be a blueprint for technology theft on a scale the world has never seen before,” James McGregor, China expert and senior counselor to APCO Worldwide, wrote in an analysis published last year by the U.S. Chamber of Commerce titled, “China’s Drive for ‘Indigenous Innovation’: A Web of Industrial Policies.”

What is arguably just as disconcerting to IPR experts has been the corporate response to such threats. Despite high-profile discussions about IPR infringement in China, experts say actual prevention at many companies leaves a lot to be desired. “The biggest obstacle is that many companies don’t think they can do anything [about this issue] in China, which is kind of a self-fulfilling prophecy,” says Chris Bailey, a lawyer at Rouse Partners in Guangzhou. He recalls his surprise when visiting a large, well-known foreign soft drinks company in China to find “outdated and underfunded” IP protection, with “very basic, low-cost administrative enforcement to deal with issues, and [a failure] to bring criminal or even administrative cases [to court].” The company “is probably very active in IP management in its home or key markets, but it has not translated that expertise to China.”

To read more, see: Black Market Blues: Cracking Down on IP Thieves in China

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