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U.S. firms ride China boom

While much attention remains focused on Hong Kong, China's high-tech economic engine is running full-throttle on the mainland.

Compaq Computer is learning how to do business in China the hard way.

In 1995, Compaq shipped $32 million worth of products to its largest Chinese distributor, Cheflink, under very loose credit terms. So loose that Cheflink never paid up.

In going after its money, Compaq soured its relationship with Cheflink and other local partners. And, according to those who know China well, that will hurt Compaq most. In China, guanxi, or connections, are everything.

"Some Americans have this attitude that 'Oh, I don't need government support, I don't need to deal with these Chinese officials.' If you don't have the connections, you won't tie into an existing network of people that the Chinese trust," said Bryan Larsen, an international trade specialist at the Commerce Department who covers the Asian computer market. "Without the proper relationships, you cannot sell your product, you can't get it through distribution channels, you can't advertise."

While media spotlight focuses on the social and political implications of Hong Kong's return to Chinese rule July 1, another huge story is quietly unfolding on the mainland: High-technology firms are going to extraordinary lengths to learn the often-confounding art of doing business directly in China.

Chinese officials are dismayed by the thought that foreign firms may be planning to make a quick buck at their expense. To avoid this, the government requires that many foreign firms begin their work in China as part of a joint venture, though wholly owned subsidiaries are now allowed. Beijing also demands that foreign firms transfer valuable technology, not just bring their manufacturing operations to China.

But, like many other U.S. industries, the technology sector believes that the push into China--and the risks that go with it--are well worth the effort.

The business climate across Asia is exceptional, analysts say. But the computer industry's potential in China is "unbelievable," says Denis Simon, director of the Andersen Consulting China Strategies Group.

"There is a tremendous amount of competition for these companies [in Asia], but the reality is if you are looking at the market of the future, China clearly has to be center screen," he said. "A number of years ago, Peter Drucker, the management guru, said you have to be in the United States, Japan, and Europe. In the late '90s, you have to be in China."

Even the U.S. government has affirmed that business with China is of national importance. After a protracted and fiery debate, the House on Tuesday voted to uphold China's Most Favored Nation status, despite concerns about human rights, religious freedom, and the spread of weapons of mass destruction.

The numbers show why. China is the fastest-growing major PC market in Asia. Personal computer sales are estimated to reach 6.42 million by 2000, compared to 2.1 million last year, according to International Data Corporation.

The consumer PC market, in particular, is booming. reports that 20 percent of computers sold in 1996 were bought by households. A Commerce Department report says, computers now top urban families' lists as "must-have" items.

That market is sustained, at least in part, by educational and cultural reasons. China's one-child per family policy has influenced many parents to give their child every advantage they can afford. The Chinese Ministry of Electronic Industries

Sean Maloney, VP, Intel Asia-Pacific on why China is a key market
According to the U.S. Information Technology Office in Beijing, in 1995 about 35 percent of home multimedia PCs were used for educational purposes.

It doesn't stop there: China's desire to become the world economic power of the 21st century has fueled IT sales across the board. The government has designated information technology as a "pillar" industry, and is upgrading or building for the first time sophisticated information systems that will propel China onto the world stage.

Through a national high-technology agenda known as the "Golden Projects," the government plans to establish an information superhighway, create a nationwide banking and credit card system, and simplify tax collection, among other things.

Brad Whitworth, Hewlett-Packard's international public relations director, summed it up like this: "The sheer numbers are appealing, but it goes a little bit further than that. For example, the Bank of China doesn't have a sophisticated infrastructure like a London or New York bank. As China opens its borders and Chinese companies start to compete globally, they will have to invest in the technologies that other countries use."

But doing business with Beijing is a two-way street, and right now China has the right of way. Companies give lip service to official "cooperation" and Chinese "interest and support" for U.S. initiatives, but off the record, they are more critical. Company officials who requested anonymity characterize the Chinese market as "bare-knuckled" or, more generously, as a "wide-open business environment."

"I've seen the Chinese government sign a contract and then something better comes up and the contract is torn up," said one official who works for a leading U.S. computer maker that produces in China. As with all governments, "the Chinese don't have friends, they have interests. But in China, they have the inclination and the power to take more--or less--direct action than a government in Europe and North America," the source added.

That, at least, seems to be the lesson Compaq learned.

In 1995, Compaq's sales, driven by vigorous demand in the home and server-class PC markets, outstripped rival AST Research to make Compaq the No. 1 PC vendor on the mainland.

Today, Compaq is No. 4, trailing IBM (which jumped from third place), domestic Chinese computer maker Legend Computer, and Hewlett-Packard.

"We couldn't help but to feel some pangs of sympathy for them," said Gordon Bennett, director of the Hong Kong-based Asia Pacific Research Group, referring to Compaq's trouble with distributors. "I remember an HP guy--an old China hand from way back--commented that the distributors in China were the bane of our industry, in that 'most of the distributors were financially insolvent and would be considered bankrupt if they operated in any Western country.' We all laughed, but painfully knew it to be true."

Compaq executives would not comment for this article, but its experience with Cheflink--referred to as the Compaq "fiasco" by some--has become legend in the industry.

"They made a bad deal," said Rick Miller, an International Data Corporation analyst who covers the Chinese PC market. "It could happen to anyone. It is a wild and woolly market. A lot of times, companies don't know who they are dealing with."

Firms that accommodate Beijing are likely to be more successful than companies that want to play by their own rules. The government will do what is necessary to accomplish its goals, analysts say, but those goals are not the same as those of libertarian high tech.

"These high tech companies are driven by the imperatives of global

Maloney on the benefits of good contacts in China
business, they have a very focused purpose," said Andersen's Simon. "But China is still operating from national imperative. The global [goal] clashes with national economic development. It is hard to create the simpatico on both sides so that it would work."

Difficulties notwithstanding, U.S. companies are wiser to the complexities of doing business in China. And the future looks bright.

IBM, for instance, is now well-connected throughout the key government ministries, universities, and the industry sectors.

CEO Lou Gerstner makes China a frequent stop. The company also restructured its operations in 1994 to create a "Greater China" organization, which combined the Hong Kong, Taiwan, and China management and staff into one cohesive unit--a subtle and politically acute move.

"Competition cures any sort of culture," said the Commerce Department's Larsen. "American companies are really flexible. Those that don't adapt will die out."