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Compaq restructures China operation

Hoping to capitalize on the exploding yet daunting Asian market, Compaq forms an integrated sales and service division that will solely cater to China, Hong Kong, and Taiwan.

Hoping to capitalize on the exploding yet daunting Asian market, Compaq Computer (CPQ) has formed an integrated sales and service division that will solely cater to China, Hong Kong, and Taiwan.

Compaq, like many U.S. manufacturers, has found the Asia-Pacific market to be an awesome opportunity but also one fraught with difficulties. Information technology spending in the region is expected to grow by 11.4 percent per year between now and 2000, with China's IT spending expected to grow at 24 percent annually, according to International Data Corporation. Worldwide growth is expected to top out at 10 percent.

To participate in that growth, however, American companies have to traverse a minefield of government regulations, unfamiliar local conditions, tariff restrictions, and old-school networks that often give indigenous manufacturers an edge, said Rick Miller, an analyst at IDC. And in the past, the limited size of U.S. manufacturers' overseas operations have failed to live up to the task. Compaq itself lost $32 million to a Chinese distributor in 1995, according to various sources.

"It's important for American vendors to establish a direct presence in Asia," he said, adding that penetration by U.S. manufacturers has been limited.

Compaq's new Greater China Region will handle manufacturing, sales marketing, and service for China, Hong Kong, and Taiwan. Phillip Yu, the former chief executive officer of Nortel China and former president of Hewlett-Packard's Chinese operations will direct the new division. The company has similar geographic units for North America, Latin America, Japan, Asia Pacific, Europe, the Middle East, and Africa.

In Japan, Compaq has also indicated recently that it would organize consultants into a "solutions unit" that will cooperate with local computer system integrators to offer software and hardware solutions for large corporations. Kuniaki Fujimoto, president of Compaq KK, the company's Japanese division, said that the company will add 120 new employees, a 40 overall increase, in marketing and technical divisions by the end of the year to boost Compaq's presence.

Dick Snyder, senior vice president and general manager of worldwide sales, marketing, service, and support for Compaq said that institutional buyers, including the government, constitute the primary target market in China. The home market is--and will likely remain--small by comparison because of a lack of credit and disposable income.

Along with distribution problems and high tariffs, Compaq also faces the problem of coming up with a suitable product mix. "The rest of the world tends to be a high-end market. China tends to be at the low end of the spectrum," he said. To this end, the company will manufacture a few, relatively low-priced lines, mostly Pentium-powered, for this market.

In addition, Compaq plans to double its sales force in China from 150 to 300 in the next year.

By contrast, the main problem the company faces in Japan is breaking into the market. "There are a lot of barriers to entry. The distributors are pretty well locked up. The Japanese companies tend to have a preference for Japanese products," he said.

One of the company's secret weapons is turning out to be its expertise with Windows NT, which partially explains the emphasis on consulting.

Compaq has suffered unexpected setbacks in Asia. In 1992, the company entered the Japanese market with desktops that cost about 50 percent less than what Japanese manufacturers offered. The "Compaq Shock", however, failed to turn into market share because, among other reasons, Compaq could not establish strong relationships with local wholesalers, according to various analysts.

Distributors have been a major problem in China too. In 1995, Compaq sold $32 million of equipment to Cheflink, a Chinese distributor, under loose terms. The computers shipped, but Compaq never got paid. Compaq has had an assembly plant in China since 1994.

"The distributors [in China] have the upper hand right now. It's a little shady at the moment" said Miller. "You might see the Chinese government step in in the future."

Another problem with the Chinese market lay in its tariffs, said Miller. China places a tariff on imported electronics products, which means manufacturers usually have to pay a tax to put a computer together. If the manufacturer wants to then export the computer, it pays another tariff.

The tax issue may resolve itself, he added, if component manufacturers increase their mainland presence or if the government eases tariffs.

Reuters contributed to this report.