Thursday, November 03, 2005

盗版还是垄断?

((The following article is a translation of my August 16 post on Piracy and Microsoft, found here. I re-wrote it in Simplified Chinese for more general dispersal. ))

by Tyler Rooker -- re-written in Chinese

在 中关村,“中国硅谷”,Windows XP的盗版到处都有。这是谁都知道的。不管是农村来到电子城门外的流动人口,还是在柜台装机的人,许多人都不花钱用XP。什么原因啊?价格。正版 Windows要两千多元(250美元)。盗版只需要6元。但是,这样的情况到底损害还是支持微软的操作系统的垄断?

“枪打出头鸟”是中 文的一句俗语。对百度,用友,联想等大公司来讲如果它们用盗版,就会引起微软在法院里的“枪”。但是,对微软来讲,枪打那些今天在明天不在的流动人口,这 么做有什么好处呢?没有。这些流动人口只会被政府的工商部门抓了,罚款,然后遣送回家。而这些被罚的款都属于北京市的政府。那么,盗版怎么帮助微软呢?

从 一个观点来看,答案是,只要盗版在中国继续存在,微软就可以维持它在中国的垄断。现在中国没有操作系统。连计划中的系统都没有。为什么?因为一出来,也会 被盗版。盗版削弱微软,但是同时也削弱中国想要开发自己的操作系统的企业家们。如果中国操作系统是200元(25美元)的话,就可以让那些企业家们获得足 够的利润和投资收益。那样一来,为什么金山(中国的微软)不去开发呢?盗版。

在中国,盗版确实把微软的一部分利润窃取掉。但我想强调是,微软也是从盗版行为获得某些好处和利润。如果没有盗版的话,中国的操作系统就会像毛主席所说的“百花齐放,百家争鸣”。最终,那些系统会削弱或结束微软的操作系统的垄断。

下次微软抱怨中国的盗版时,注意他们找什么理由。在中关村4/5的电脑是品牌机,用的都是正版。1/5是DIY装机的,用的是盗版。那么,微软丢失了还是获得了利润呢?

Tuesday, November 01, 2005

Wikipedia Zhongguancun Entry Updated

I have added some information to the Wikipedia entry for Zhongguancun. It is currently listed under "Zhong Guan Cun," which makes sense because the characters in the Chinese name are three separate ones (see title of this blog).

The current address is:

Wikipedia Zhongguancun


Check it out.

Also, writing up a general introduction to Zhongguancun has made me recall my interview with Chen Chunxian, the China Academy of Sciences (CAS) member who was the first person to think of a Silicon Valley in China. Chen Chunxian was a plasma physicist at CAS until he quit to start a company. He is known in Zhongguancun as "the first person to eat crab" (第一吃螃蟹的人), meaning that dared to try something that looked horrible on the outside but is great once you try it. He passed away one year ago. I will post a future blog about him and his courageous work to set up a company and transfer scientific results into technology that could be used. He really is some one who should be remembered.

Sunday, October 30, 2005

Zhongguancun is the "China Valley"

With the increasing influence of China -- as global partner or global threat -- Zhongguancun, the Silicon Valley of China, will continue to attract attention from the West. In this vein, I propose that Zhongguancun be known in English as "China Valley" to attest to both its China origin and its purported affinity with Silicon Valley, California.

In the Bay Area and environs, along with those who claim to be insiders to it, Silicon Valley is known as the "Valley". Therefore the nickname given to the China Valley should come naturally.

In addition, this should remove the difficult surrounding the pronunciation of Zhongguancun -- Zhong, guan, cun -- which is quite diffiult for Westerners, and the awkwardness of ZGC, an acronym. "The Silicon Valley of China" works well as a name, but it is too wordy to use in ordinary conversation.

I would be curious as to opinions on this name. It seems to work well. Let me know your ideas.

Thursday, October 20, 2005

Problem Solving

Over the course of 2 years doing research on the Silicon Valley of China, I encountered numerous problems that required skill, perseverance, networking, and creativity to solve. The difficulties ranged from mundane?finding a university and professor to sponsor my research?to the cultural?convincing top executives at Beijing UFSoft Software Corporation that I could conduct objective research on their company operations. There were several different skill sets that I drew on to solve these problems. Besides my knowledge of Chinese culture and language, I sized up the situations, networked with relevant people, and persevered in accomplishing my goals to solve these problems.

To conduct research in Chinese companies is no simple feat. The first step was to obtain a Chinese visa for one year at a university in order to gain sponsorship both for the visa process and for future inquires into my research goals. Using leads from my research committee, I contact two Peking University professors. I also renewed a connection with the Peking University Mandarin Center, where I undergone advanced language training two years pervious. I arranged for one of the professors to write a sponsoring letter which I had delivered to the Mandarin Center. In two weeks, using money I had sent with application, an express letter containing my visa documents arrived. Facing the initial problems of visa and sponsorship, I moved quickly and arranged to have necessary documents delivered and a enrollment letter at Peking University prepared in a total time of less than one month. I was on my way to Beijing to study companies in the Silicon Valley of China.

Two of the three companies were relatively small, with less than ten people. In those two cases, access was not a problem since no proprietary technology or influential information was at stake. Despite this fact, two problems arose: one was how I would introduce myself to these companies; two was how I would explain my research so that I could both gain necessary access to managers and workers and guarantee the participants not to violate their rights as human subjects. I relied on an old friend to introduce me to companies that he knew beforehand. This method guaranteed a minimum of trust, which I subsequently used to explain my research project on the successes of China’s Silicon Valley, a patriotic thing for people in China. This cast my research in a positive light, which facilitated access to managers and workers, as well as revealing the nature of my research that protected individual’s rights of whether or not to participate.

Finally, the biggest challenge I faced in my research was how to get access to a large, prestigious company. I spent one month contacting friends, advisors, and government officials I knew to help me. On a hunch, I emailed to head of Beijing UFSoft for an interview. After the interview, over diner, I mentioned that I needed on the ground information about a large company in China. The executive suggested that I work at UFSoft. This was the opportunity I had hoped for but, knowing how China business and culture work, I could not suggest it myself. I allowed the executive to think that it was he who had thought of the idea. My initiative in setting up the interview, calling on friends to guarantee my character, as well as understanding Chinese culture and this executive’s personality lead to a solution and my access to UFSoft for research. I accomplished my goals through initiative, skill, networking and perseverance that are reflected most poignantly in this example.

Interpersonal Skills

There is one particular time person in particular, the first six months of 2004, when my interpersonal skills were tested and displayed to the extreme. During this period, I spent half a year amongst the migrants and would-be entrepreneurs who work in the IT/electronics markets of Zhongguancun, the Silicon Valley of China. These women and men are not the lofty paragon of technology virtuosity that China’s Silicon Valley is meant to contain. Instead, they are an eclectic population, coming from all corners of China with education ranging from middle school drop-out to technical community college graduate. Living and working amongst them, I experienced tests of my ideas of privacy, rudeness, hygiene. My responses, from anger and frustration to compassion and understanding, reveal the greatest extent to which my interpersonal skills can be stretched.

Experiencing IT/electronics markets for the first, one sees chaos. Boxes seem to move up and down the crowded aisles by themselves, while people spit, smoke, and throw trash outside their stores, regardless of who may be outside or walking by. But even more poignant for an American are people’s eyes. Glances become stares and shopping for a new printer is more like being an animal in a mobile zoo. Hearing only “ha-lou!” (the Chinese transliteration of hello), one quickly tires of these markets.

But I wanted to understand the mixture of technology and business in China. So, on a daily basis, I came to the markets, meeting people store after store, who constantly drew attention to my appearance, my race, and my nationality. In turn, I emphasized politeness. I observed every courtesy and custom that I knew of. Some one once joked with me that I was “more Chinese than the Chinese.” The manners I displayed had been honed over previous years of experience with China.

Store by store and counter by counter, I used my difference to create similarity. Slowly, a group of regular store owners, colleagues, and even friends emerged against the backdrop of chaos and stares. Addressing elder migrants as “big brother,” adopting Chinese mannerisms and postures, and generally being sympathetic to their opinions (at least initially), I was able to enter circles that exist in the IT/electronics markets.

What is even more significance, however, is that I gained an audience. While I learned about China’s technology migrants and emergent market economy, I also was able to speak to a receptive and interested audience about the reasons for the Iraq war, the meaning of human rights, and how unions are formed. Had I not gained trust and feelings of commonality, I be ignored and dismissed. Instead, open dialogue and thoughtful discussion took place as a result of adapting to behaviors, customs, and forms of address that made the IT/electronics migrants of the Silicon Valley of China comfortable.

Sunday, September 18, 2005

Science City Plans Approved

Beijing City Land Plans Approved
Zhongguancun “Science City” Demarcated
August 24, 2005 on http://house.tom.com
Source: Beijing Business Today (http://www.bjbusiness.com)
Original website in Chinese: http://house.news.tom.com/1056/2005824-45625.html

Translated by Tyler Rooker on September 18, 2005 for http://chinasilicon.blogspot.com


Sketch of “Science City” in Zhongguancun by Zhao Zhenchao

This reporter learned yesterday from the Beijing City Planning Committee that the specific plans for Zhongguancun Science City had been approved. The vice-president of the company responsible for first level developing of the Science City, Yang Jianping of Zhongguancun Science City Construction Limited Liability Company, said: the specific plans were put in place in order to increase benefits from development.

According to the City Planning Committee, the Zhongguancun Science City will run from Chengfu Road in the north to Zhichun Road in the south; from Zhongguancun Avenue (Baiyi Road) in the west to Finance & Economics Academy Road East in the east. This is a total of 331.43 hectares of total land use. The planned total construction is 4.42 million square meters, of which 2.65 million square meters will be set aside for construction by China Academy of Sciences. Insiders pointed out that this is possibly the largest scale land use in a city ever.
The Planning Committee also emphasized that it must combine demands for city landscape, environment, and land development so that multiple levels of construction involved in the Zhongguancun Science City are addressed. Also, it must clarify the plans for a green land system in the Zhongguancun Science City, plans for road and traffic systems, and plans for public facilities and government offices.

The Area is Equivalent to 1.5 Summer Palaces

(See here for an English tour of Beijing’s Summer Palace)

Zhongguancun Science City is located along the development axis of the Zhongguancun Science & Technology Zone. It has an area of over 330 hectares, equivalent to the area of 1.5 Summer Places. Together with Peking University, Tsinghua University and the Zhongguancun western high-tech commercial center, it forms the Zhongguancun Science & Technology Zone, Haidian Park central region. Zhongguancun There are over 25 national research institutes and over 50 national keystone laboratories and development laboratories. There are 16,000 science and technology workers of whom there are over 100 from the two Academies of Sciences. The Science City of Zhongguancun also has a large number of competitive high-tech enterprises. You could say that Zhongguancun Science City is the national treasure of high-tech talent in China.

Tardiness in Constructing the Science City

This reporter learned from related departments that as early as 6 years ago, China Academy of Sciences (CAS) had made plans to construct the largest science city in all of East Asia. In 1999, the city of Beijing and other science and technology departments decided to use a period of 10 years to build Zhongguancun Science City into a world-class science and technology zone.
In 2001, the city of Beijing government and CAS joined hands to plan the science city. In that year, on November 8, the Beijing Zhongguancun Science City Construction Limited Liability Company was formally established, which showed that the Zhongguancun Science City had entered the practical phase. And yet, over three years have passed and construction on the Science City remains in initial stages. Up until yesterday, formal permission to go ahead with the plans by the City Planning Committee had not been given.

The vice-president of the Beijing Zhongguancun Science City Construction Limited Liability Company, Yang Jianping analyzed the situation. He said that the tardiness of construction had three aspects. First, this area totals 331.43 hectares, equivalent to 1.5 Summer Palaces, and so there are difficulties in development. Second, the structure of Zone construction is complex ? the Science City encompasses 25 national research institutes and over 50 national keystone laboratories and development laboratories. These cannot be demolished so demolishment must be carried out carefully to avoid damage. Finally, there have been other problems with demolition that have not been solved.

The Rise of a High-Tech Economic Center

With the issuing of specific plans for the Science City, clear progress has been made in developing it. Specific plans have been integrated with overall city planning and specific district planning. Land use and use intensity in the specific districts has been clarified, while roads and engineering angles as well as environment protection have been integrated. These plans are the direct result of management by the City Planning Committee.

The Beijing Zhongguancun Science City Construction Limited Liability Company vice-president, Yang Jianping, explained it this way: the specific plans have been issues to demarcate the basic height, area, and roads to be encompasses. This is the backdrop to the next stage in planning.

The Beijing Zhongguancun Science City Construction Limited Liability Company has taken on the responsibility of constructing the Zhongguancun Science City High-Tech Industry Innovation Incubator. Starting with land development in 2001, today it has basically completed organization of this land. The Zhongguancun Science City High-Tech Industry Innovation Incubator will take up 33.6 hectares, with the basic function of transferring the scientific research capabilities of the Science City into industrial capabilities. It will become a well-know collaboration and information exchange center domestically and internationally. The Innovation Incubator will also be a high-tech and product training center. According to the plans, within 5-7 years, the Innovation Incubator will take advantage of a perfected infrastructure construction, advanced information networks, lively enterprises, beautiful environment, dense cultural atmosphere, and a modern feel -- a world-class science and technology zone.

President of China area for the Kotler Marketing Company (USA) Tiger Cao, real-estate investment consultant, said in an interview that: “This region has great development future. It will become concentrated area of high- and medium-level income groups. At the same time, because of Zhongguancun’s attractiveness, it will create a large movement of people. Over the next few years, this place will become like the CBD District -- an economic center with high-tech as its focus.

Tuesday, September 06, 2005

DIY & Potatoes

DIY -- A Plate of Delicious Sliced Potatoes
Gao Mingxin
http://www.i-chinatrade.com/zgc/zuan/diy.htm

Another person has come to Zhongguancun. In the blink of a eye, he has bought a screwdriver. A few hours later, he has collected a CPU, a monitor, memory and other Zhongguancun “specialties” to take back home. This is “DIY” a newly fashionable phrase in the Village (Zhongguancun’s nickname). Put simply, DIY (“do-it-yourself”) is a three-way contest between a screwdriver, a computer case, and a monitor. “Cultured people” in the Village explain the phrase this way: “DIY is directly oriented to a large number of users. DIY assembly is the bridge between users and component sellers. DIY is the delight of component manufacturers; DIY is the scourge of complete system manufactures.”

A few days ago, the computer industry branch of the Beijing Electronics Merchant Association united with several dozen Zhongguancun brand-name computer manufacturers to present the government with a report. In the report, the licensed, brand-name manufacturers expressed outrage -- how is it that any Tom, Dick, and Harry can make computer assembly into a puzzle game? The report showed that the DIY market is in chaos: some DIY-ers are not licensed but still assemble computers at large scales. This phenomenon should be clamped down upon, the report recommended. There is no quality assurance for DIY products without licenses, and the safety of products is suspect.

Although the word DIY is of recent origin, the history of assembling computers in the Village is a long one. To learn how to eat sliced potatoes with vinegar and sugar, is it necessary to learn how to DIY potatoes? No, and yet many people who use computers start to learn about them from DIY. If a citizen wants to start work but has no abilities, he/she is not even given a chance to DIY a wooden stool in middle school crafts class. But if one’s dream is to use a computer -- starting an information revolution in the household -- one can actually use this passion to DIY computers. Part of the motivation for DIY comes from the simple fact that a portion of price goes to software makers; another portion goes to workers at the computer company. Men and women of the world prefer to grasp their pocketbooks tightly. Even if the memory strip doesn’t exactly fit in the motherboard, it is of little consequence -- take it and your screwdriver back to Zhongguancun.

In practice, those who can DIY potatoes but not computers need not worry since there are specialists in Zhongguancun’s electronics markets who DIY machines just like putting together a puzzle -- sticking together the different pieces and finishing within an hour. For the thousands of computer market counters, DIY is a Zhongguancun specialty. But the happiness of this bunch has become the worry of that bunch. The DIY business makes brand name manufacturers furrow their brows. With the appearance of licenses, brand names are more authentic and trustworthy. As the Chinese proverb foretells, “the army of the emperor will always defeat a lesser known army.” But history has shown that Li Zicheng still was able to occupy Beijing. The DIY-ers in the present component market are still riding high. “On Sunday’s, individual computer assemblers resemble a rushing stream -- they encircle the display areas of dozens of manufactures. In one day, every manufacturer has revenues over 100,000 yuan.” If everyone’s bowls were full, there would be no starving people suffering from famine. Isn’t it a good thing that everyone can enjoy DIY?

Demand has freed the market, so limiting DIY will not work. The debate over DIY does not boil down to a simple statement, nor is it a fundamental problem. DIY has real significance for the formation of the market and for rules of the market. DIY has relative standards that are based on price. Just as some people wear alligator skin shoes purchased from a store, others wear handmade vagabond shoes: it is not a question of whether or not your toes are comfortable -- price is the decisive factor. It is said that DIY products lack quality assurance. That is indisputable. Alligator skin shoes are more durable than vagabond shoes. But, as there are no DIY aircraft carriers, and no DIY B-52 bombers, there is little reason to fear.

10-20% of the U.S. computer market is personal or professional DIY assembled computers. But foreign DIY shows that red-hot demand centers on quality -- people who put a computer case together with a monitor suffer the scorn of experts. The originality of DIY comes from the pleasure of using one’s own hands in the process. If DIY creates a plate of delicious sliced potatoes but at the same time leads to conflict in the household, then losses outweigh gains.

Translated and edited by Tyler Rooker on September 6, 2005 for
http://chinasilicon.blogspot.com

Copyright help by original author

Friday, August 26, 2005

The Value of Money

Does China have the Second-Largest GDP in the World?

According to statistics reported by the China Daily, China's gross domestic product for 2004 was in the neighborhood of 13.65 trillion yuan (or 1.65 trillion USD, with an exchange rate of 8.28 yuan per dollar). Using only the exchange rate to convert yuan to dollars, however, does not reveal the entire story. Indeed, the CIA ranks China second in the world, behind only the United States, in terms of GDP. The figure they use is 7.26 trillion USD for China's GDP.

In terms of only the exchange rate (8.28 yuan per dollar) the World Bank ranks China's economy 7th in the world at 1.65 trillion USD. The IMF ranks China sixth in terms of GDP.

But when purchasing power parity, rather than the exchange rate, is used to “compare” China's GDP to those of other countries, the situation changes. This is why the CIA ranks China second in the world. This is also true of data from the IMF (see list here).

Purchasing power (also known as PPP, or purchasing power parity) is the principle that money used domestically can be exchanged for a certain amount of goods and services. Put simply, money has a certain value. To compare the value of money, one cannot rely simply on the exchange rate. The value of 1 yuan in China, that is the amount of goods and services it will buy, can be compared to the value of 1 USD in the United States. To make this comparison, economists choose a “basket” of goods and services and then compare the price in different countries, usually using the U.S. basket as a benchmark. In theory, a vast discrepancy between exchange rate and purchasing power will lead to arbitrage, since one can simply keep buying goods at the lower price until the exchange rate equalizes. China pegging the yuan to the dollar, however, keeps the rate stable regardless of inflows of foreign dollars. (There is a good article in the April 4, 2005 Business Week on “Hot Money,” but it is available to subscribers only).

The Economist has compiled a Big Mac Index which uses the price of a Big Mac to relate the purchasing power of currencies to each other (the benchmark is a $3 U.S. hamburger, so if the same burger is cheaper in China, purchasing power is greater there). For China, they cite a figure of 3.43 as the PPP of the dollar. This would imply, using the Economist Intelligence Unit's figure of 1.68 trillion USD for China's GDP, a "Big Mac" adjusted GDP of 5.76 billion USD. That is, in terms of purchasing power, China's has a GDP of 5.76 trillion USD (FIY the Economist Intelligence Unit’s own figure for GDP in terms of purchasing power is 7.55 trillion USD, using 4.5 for its purchasing power ratio or a yuan-to-dollar rate of 1.84).

The more common figure for understanding the purchasing power of China's economy is 1.8 (from the World Bank's World Development Indicators report, listed here). Using quick and easy math, divide the exchange rate (8.28 yuan per dollar) by the purchasing power conversion factor (1.8 yuan per dollar) and you get a unit-less ratio of 4.6. What it means is that 1 USD buys 4.6 more value in China than in the United States. Converted in this way, China's GDP ranks second in the world.

I am not an economist. The above was gleaned from the web over the past week. I can only provide my experiences as a confirmation of the relevance of purchasing power to converting statistical figures that come out of China these days.

Two anecdotes
Before I went to China for the first time with University of California's Education Abroad Program in 2000, I attended an orientation hosted in Berkeley. One of the speakers, a past participant, noted that one should not argue vigorously with petty traders over a few yuan. Later, I expressed my unease with such a blanket statement. An economics undergraduate, who was giving me a ride, vehemently defended the speaker. The ride home was quite unpleasant as I stuck by my conviction that despite the fact that a couple of yuan was only a quarter or two, I did not want to give away my quarters. I also felt that such unequivocal rendering of exchange was dismissive of the context one might encounter in China.

Living in Beijing for several years since the yuan polemic, I discovered the real power of money. In Beijing, in Zhongguancun, a nice two-bedroom apartment cost me 2,400 yuan a month (about 300 USD). This was a nice area, convenient, clean, and safe. But my friends in China chided me that it was too expensive, since the apartment lacked a refrigerator. I scrimped money by eating fast food (a bowl of rice topped with one item of cuisine) for 5 yuan a meal. But herein is the evidence for purchasing parity calculations.

In China, or Beijing nonetheless, the cost of daily living is much cheaper than in equivalent cities in the U.S. Therefore, a figure such as the ratio 4.6 worked out above for multiplying China’s GDP (or other figures such as the Big Mac Index) is reasonable. An 8 yuan meal in Beijing converts via the exchange rate to a 1 USD meal. But using the purchasing power multiplier, it is really a 4.6 USD meal. That is much closer to actual experience, since I can buy rice topped with food items in San Francisco for about 4 USD. Rent, too, should be viewed this way. My two-bedroom apartment in Beijing only cost 300 USD a month. But in real purchasing power terms, it cost 300*4.6 = 1,380 USD a month. That seems to fit reality much closer, since 300 USD rents you only a storage unit in San Francisco, while 1,380 USD would get you a nice two-bedroom apartment.

Purchasing power arguments notwithstanding, the official exchange rate of 8.28 (or, now, 8.11) yuan per dollar tells us little about what a dollar or a yuan actually purchases in China. Certainly, the point can be made that Starbucks coffee in Beijing is more expensive than it is here (it costs 16 yuan or 2 USD for a cup of Starbucks coffee in Beijing). But the point is that that coffee costs more in value in China than it does in the U.S. To understand the equivalence in value, rather than in monetary, terms, one must use purchasing power. Hence that cup of Starbucks coffee really costs you 9.2 USD in terms of equivalent value forsaken to imbibe the brewed beverage. There are real reasons to vehemently bargain over “a few yuan.”

Tuesday, August 16, 2005

What is Piracy to Microsoft?

Piracy or Monopoly?

In Zhongguancun, China's Silicon Valley, piracy of Windows XP is rampant. That is beyong dispute. From the migrants who approach you outside the major electronics markets to the DIY (do-it-yourself) computer assemblers, no one pays for Windows. The reason: cost. It costs over 2000 yuan ($250) to buy Windows. Pirated copies cost 6 yuan (three quarters). But does this subvert or sustain Microsoft's monopoly on operating systems?

"The bird who sticks out its head gets shot," goes a proverb in Chinese. The meaning, for large companies like Baidu, UFIDA, and Lenovo, is that if they use pirated software, they will be "shot" by Microsoft, in court. The fly-by-night migrant, who only make 800 yuan ($100) a month selling pirated software can be arrested, bankrupted by fines, and sent home. But what would that net Microsoft? Nothing, since the fines would go to Beijing city government police. How does piracy help Microsoft?

The answer, from one point of view, is that by continuing piracy, Microsoft is able to sustain its monopoly in China. There are no Chinese operating systems. There are none even in the works. Why? Because they will be pirated as well. Piracy undercuts Microsoft but it also undercuts would-be Chinese entrepreneurs who could (undoubtably) create a Chinese proprietary operating system that could sell for 200 yuan ($25). That is the threshold price that would keep Chinese entrepreneurs profitable and return their investment costs. But why doesn't Kingsoft, the Microsoft of China, attempt it? Piracy.

Piracy, in the case of China, does take profit from Microsoft. But I would argue that Microsoft also benefits, and even profits (as the proverb predicts) from piracy. Without piracy, 100 operating systems, like Chairman Mao's flowers, would bloom. They would undercut and eventually end Microsoft's monopoly on operating systems.

Next time Microsoft complains about piracy, make sure they point out exactly why. 4/5 of the computers in Zhongguancun are name-brand, and come with official Microsoft licenses. 1/5 are DIY, are cheaper, and come with pirated Windows. So where is profit lost with respect to profit gainined?

Wednesday, August 10, 2005

Report on Zhongguancun

2005
The First 6 Months

Map:



graphic courtesy of The Beijing News
(see map source here)



Zhongguancun in the First Half of 2005
Translated and adapted from the original Chinese by Tyler Rooker on August 10, 2005 for Zhongguancun Blog

“Year-to-Date Income for the Zhongguancun Science & Technology Zone Surpasses 190 Billion”
(article source)
Reporter: Zheng Jinwu of Science Times (Kexue Shibao)
Original article reported on July 28, published on July 29.

Information released by the Zhongguancun Science & Technology Zone management committee revealed that, in the first half of 2005, Zhongguancun enterprises had a total income of 191 billion yuan, representing an increase of 29.6% over last year.

Exports had foreign currency profits of 3.2 billion USD, an increase of 91% over last year.

Industrial production reached a value of 104 billion yuan, an increase of 29.8% over last year.
______________________________________________________________________________

This income was structured in the following ways:

Product sales had an income of 121 billion yuan
Technology had an income of 25.0 billion yuan

If income is separated according to the different parks of the Zone, we find that:
Name_____________2005 Income_______Percentage of total
_______________________________________________
Haidian Park 99.9 billion yuan52.2%
Fengtai Park 23.4 billion yuan12.2%
Changping Park 12.5 billion yuan06.5%
Electronics City 17.0 billion yuan08.9%
Yizhuang 37.5 billion yuan19.6%
Desheng Park 0.78 billion yuan00.4%
Jianxiang Park 0.25 billion yuan00.1%

Enterprises in the Zone during the first 6 months of this year had total profits of 4.91 billion yuan, a decrease of 9.8% from the same period last year.

OTHER STATISTICS
Software enterprises in the Haidian Park have had a total income of 10.3 billion yuan during the first five months of 2005.
System integration has earned 7.16 billion yuan during the same period.

Energy and conservation companies are rapidly expanding in the Changping Park. For example, three notable companies are

Great Wall Drilling Company (GWDC)
National Electricity Fuel Company (NEFC)
China National Logging Corporation (CNLC)

There are over 196 companies in the Zhongguancun Zone that have an income over 100 million yuan in 2005. These companies have 63.7 billion yuan in production value, have created 2.4 billion USD in export reserves, and have 6.5 billion in profit.

Already in 2005, 2,236 high-tech companies have been created.

There are currently 73 companies listed on the Shenzhen, Shanghai, Hong Kong, and NASDAQ stock exchanges that come from Zhongguancun.

Tuesday, August 09, 2005

Proposal for California-China Free Trade Agreement (CCFTA)

In this post, I call on the Gubernator, Governor Arnold Schwarzenegger of California, to use his trip to Beijing (November 13-18, 2005) as a stepping stone to negotiate a free-trade agreement with California. One important reason, as a review of the recent Central America Free Trade Agreement (CAFTA) shows, is that California is subsidizing socks, skirts, shirts, and other garments being produced in Alabama and North Carolina.

What is it about China?

Two articles in The Economist last week (entitles “How China runs the World Economy” and “From T-shirts to T-bonds,” both published in the print edition on July 28, 2005) give us a reasonable understanding of the relation between China, the U.S., and the world economy.

First, China: it has a massive, cheap labor force to the extent that shoes, toys, clothes, electronics, and other manufactured goods are made cheaper by being made in China. Of at least as much important, however, is the second thing about China, namely that is usually open to trade (total goods and services in export and import is equivalent to 75% of its GDP according to The Economist).

Why does this affect the U.S.? Because the yuan or renminbi (China’s currency) has been pegged to the dollar at around 8.27 yuan per USD, the more investment and export of goods and services, the more foreign (U.S.) currency China has. Since the exchange rate is supposed to remain constant, China must push the U.S. dollars it earns back out of the country (or else the yuan will rise naturally due to less dollars in the world economy). China’s central bank does this by purchasing treasury bonds from the U.S. government. As a result, money spent comes back as money loaned out, in effect, by China’s central bank.

Needless to say, if China’s bank decided to stop buying treasury bonds or even sold some off, the U.S., its banks, and its consumers would have to pay up or face high interest rates.

Revaluing the Yuan
Some politicians call for measures to penalize China since it pegs the yuan to the dollar. With a cheaper yuan, the cost of exports from China would rise, making the price of goods (shirts, socks, and televisions) more expensive and hence more competitive with manufacturers of these goods in the U.S. The U.S. does not manufacture televisions. But, apparently, it still does manufacture shirts, socks, and skirts. To protect their constituents, politicians pressure the government to pass measures to restrict competition. Not only is this unfair trade and more typical of big government interference than free-market capitalism, it ends with consumers paying more, or subsidizing, for goods that could be made cheaper elsewhere. This is a same and I call on Governor Schwarzenegger to stop it.

Note: According to an August 2, 2005 New York Times article, entitled “Bush Administration Will Ask China to Agree to Broad Limits on Clothing Exports,” the Bush administration was forced to concede to politicians from Alabama and North Carolina to pass the Central America Free Trade Agreement (CAFTA). First, in elaborate conditions, shirt pockets and skirt waistbands must be “made in America” in order to be “freely traded.” This is essentially a subsidy on clothing imports from central America, and it is endemic in this type of agreement (see a wonderful book by Pietra Rivoli entitled The Travels of a T-Shirt in the Global Economy). Second, the Bush administration promised to force quotas in China imports. This is grossly unfair competition. I hope that the mechanisms of free trade and competition can put an end to subsidies that are wasting away on shirt pocket and skirt waistband manufacturing in Alabama and North Carolina. I am sure the workers can find something better, more productive, and more competitive to do.

But as for California, it is a dynamic state. It’s GDP is high, with vast farmlands, world-class technology, and cultural resources. Why should California subsidize the workers in Alabama and North Carolina? It shouldn’t. Therefore, California should negotiate a free trade agreement with China, independent of the rest of the United States.

This would have several advantages: first, California would no longer be forced to pay higher prices for consumer goods made more cheaply in China. California’s consumers would enjoy low prices on many consumer goods, leaving them with money to invest in business, home, and well-being. Second, removing subsidies to Alabama and North Carolina would attract businesses into California. California has lost much business due to its concern with worker welfare and corporate responsibility. A free trade agreement with China would allow business to purchase unsubsidized goods and deploy resources where they are most effective.

If Alabama and North Carolina want to outlaw Target and Wal-Mart in order for their shirt, sock, and skirt factories remain subsidized, I will grant them that freedom. But I do not believe California, California business, or Californians should be forced to bear this subsidy. Negotiate a California-China Free Trade Agreement today! Make California a better, richer, and more productive place to live!

Wednesday, July 27, 2005

The Debate on Chinese Enterprise Acqusitions

The Contradiction of “Going Out”:
Can the “Great Leap” Buying Spree Fulfill China's Desires?


Published July 25, 2005

(Statement: This publication uses the manuscript of China News Weekly, which along with China News Agency holds copyright privileges.)

(Article Source: China News Weekly Author: Wang Chenbo)

Click Here for the webpage of the original article in Chinese from ChinaNews.com


((Translated from the Chinese by Tyler Rooker on July 27, 2005 for http://chinasilicon.blogspot.com. ))


The high-speed growth of China’s enterprises has made apparent the fact that these enterprises are using world-class production capabilities to operate within a regional market. It is almost to the point where China can no longer hold them, since the extensive growth pattern of the past has already come an end. As a result, they hope to use acquisitions to realize a “crossover” in terms of branding and technology. The next step would then be to solve the problems of a surplus of production capabilities and upgrading industries.

However, those Chinese enterprises who “go out” face a contradiction: because the problems of surplus of production capabilities and upgrading industries remain unsolved, China’s enterprises lack true competitiveness, and thus have become passive in acquisitions overseas. Moreover, although acquisitions can sometimes extend the lifecycle of their product lines, acquisitions are not sufficient to solve the basic problems of technological progress.

The only way to change in order to realize technological progress and economic growth is to form an extensive society-wide system whose base is devoted to technology. The thought process whereby “dangerous crossovers” can be avoided by relying on overseas acquisitions must be abandoned: this desperate impulse is the result of China’s enterprises being ill-prepared to make “dangerous crossovers” in terms of branding, technology, and processes. Being firm and absolute in their choice to acquire overseas businesses, can their desires be fulfilled?




Three years ago, when China entered the WTO, a popular national habit was to cry “Wolf!” Today, while this impression still lingers, U.S. and European business sectors have begun crying “China!”

“It seems to be a little like the ‘Battle of one Hundred Regiments’ from 1940. Recently, China has divulged its concentrated firepower. The U.S. and Europe cry China, and they are referring to the coming of China’s enterprises,” said Liu Erfei, China regional chairman of Merrill Lynch, in an interview with this newspaper’s correspondent.

The “Battle of one Hundred Regiments” that Mr. Liu refers to is the recent overseas acquisitions by Chinese enterprises. It began on May 1, when Lenovo acquired IBM’s global personal computer business for 1.25 billion USD. At the time some thought that this is start of large-scale overseas acquisitions by Chinese enterprises, while others demurred that this was only an isolated case.

Before the debate came to a conclusion, on June 22 (West Coast time in the U.S.) CNOOC announced that it was embarking on the single largest overseas acquisition in Chinese history--bidding 18.5 billion USD in order to acquire the U.S. oil company Unocal Corporation.

Meanwhile, almost at the same time, Haier Group also announced its bid for the third largest U.S. consumer electronics giant, Maytag Corporation.

In addition, one of the most impressive events that happened previous was that TCL Group had formed separate joint ventures both with the old European brand Thompson Company and with Alcatel Company.

“The ‘regular army’ of China’s enterprises have, one after another, crossed the ocean to make acquisitions. This shows that overseas acquisitions are not an isolated behavior by certain Chinese enterprises. Instead, this is a trend,” the national Merchants and Commercialists Acquisition Consortium secretary general and Galaxy Securities vice president Tang Shisheng said in an interview conducted by this newspaper’s correspondent.

The “Desperation” and “Impulsiveness” of being 18-years-old

The actors on this road to acquisitions--Haier, TCL, Lenovo--are all true market heroes domestically. Lenovo’s PC products have a stable 30% market share in the domestic market; Haier’s refrigerators and deep freezers, among other white goods, have been at the top of the industry for a long time; finally, TCL, despite being a latecomer to the color television and cellular phone industries, has a market share that hovers around 20%.

Along with this glory is a short-span of growth for these enterprises. “These enterprises are more like an 18- or 19-year-old boy. Their hormones are blossoming and they are very impulsive. They run around everywhere doing things no one has thought of yet,” said vice-president of Galaxy Securities, Tang Shisheng.

As for these special “boys,” “hormones” are uncontrollable. Take China’s consumer electronics industry as an example: this industry has a history of less than 20 years, yet it

In the beginning, enterprise “profit” was directly dependent on “production capabilities.” Simple technology was introduced and a low-cost labor force and enormous market demand were added creating a situation where one could sit back and watch the money roll in. According to an industry manager interviewed by this newspaper’s correspondent, as long as one could construct a high-efficiency processing factory, “fast money” could be made easily. Everything was made, and everything made money. There was no fear of not being able to dispose of goods. Many enterprises in China have become accustomed to this situation.

This led directly to the “overlapping competition” of “homogeneous products.” Soon, this group of “boys” who grew up quickly discovered that they were using world-class production capabilities to play a regional market. It is almost to the point where China can no longer accept them, since the extensive growth pattern of the past has ended quickly.

The “fast money” made in the beginning has created an accumulation of structural surplus. This can be seen from the operating rate of capacity of current consumer goods enterprises. “From 2000, if China’s consumer goods enterprises could reach 40% of operating capacity, they would thank their lucky stars,” said Ji Shupeng, a manager at the HollyHigh Investment Consulting Company.

According to Mr. Ji’s research, the surplus in production capabilities of domestic consumer goods industry has reached white-hot levels. In microwaves, for example, the yearly production capacity of the top 5 manufacturers, including Galanz and Haier, is over 30 million units. The domestic market for microwaves has a capacity of 4 million units per year, while the entire globe takes shipments of approximately 50 million units. This means that production capabilities of domestic enterprises require the entire globe in order to be absorbed. Other products, such as refrigerators, air-conditioners, and televisions, also face the same type of problem.

Another aspect of this situation is that “cut-throat competition” of homogenization in the market never stops. The price war has become a “gentle knife,” and industry stories of “destroying” competitors’ production capabilities are old news.

Recently, a famous domestic consumer electronics enterprise acquires another domestic enterprise in the same business. Its goals for the acquisition were to “bury its brand, idle its production, and demobilize its employees.” The management of this enterprise did not mince words in saying: “Rather than spending hundreds of millions to engage this competitor in a price is war, it is better to directly ‘destroy’ them.”

Meanwhile, direct competition from foreign brands is become fiercer. Professor Zeng Ming of Cheung Kong Graduate School of Business points out that LG Company of Korea, produced 60 billion yuan worth of products in China last year, of which one half was sold in China.

Liu Chuanzhi [Chairman of Lenovo] once put this feeling into words: China’s most outstanding enterprises have encountered a “bottleneck.” This so-called “bottleneck” occurs when one hits a “ceiling” in a certain field, after which it is difficult to gain more achievements.

Therefore, over the past 5 years, Lenovo was unable to find “north.” It attempted many different things, but in the end returned to the computer industry. TCL has taken many detours, first making money and then losing money in the cellular phone industry. Changhong really has no other mode of operation other than a price war. Haier tried an even wider range of things, including computers and capital markets, but it was unsuccessful.

“There are two fatal quandaries that these enterprises face: one is the surplus from the production capabilities that result from an extensive production pattern; the other is a deficiency in the ability to upgrade the industry,” said the top international economist, Cao Yuanzheng, at the Bank of China in an interview with this newspaper’s correspondent. This has become understood as a crucial problem in how Chinese enterprises will “modernize.”

After they have successively engage multinational companies in different capacities, they suddenly found that they did not have enough time to take the classical economic theory approach to growing into a world-class enterprise: “one step at a time.” This is the conundrum that Chinese enterprises have encountered with “globalization.”

The problems of “globalization” and “modernization” crisscross enterprises, plaguing China’s entrepreneurs. In this type of situation, a saying has become popular in industry circle: saying behind is equivalent to waiting for death; going out is seeking it. It is better to seek death than to wait for it, so I must go out.

It is just as Galaxy Securities vice-president Tang Shisheng said, once Chinese enterprises had made a lot of “fast money” they realized that they would rather make fast money than slow money; now they realize that they can only make “fast money” and in the end they will decline. Because of this, they have chosen to make acquisitions overseas and take the risk.

What this means is that, facing both “modernization” and “globalization,” Chinese enterprises have chosen a “clashing” approach to solve them. Some observers have noted that this approach is based on the thinking that “two negatives make a positive” and “fight fire with fire,” and that “this approach is unwieldy and full of risks.”

A recent article in The New York Times commented: “Part of the reason Chinese enterprises have engaged in this (overseas acquisition) behavior is out of despair.”

In reality, behind “impulsiveness” lies a landscape of dreams: if they have the mature sales channels of their competitors, they can “do one thing under the cover of another” and seize the market; they can realize real “crossovers” in technological R&D; “using a straw boat to capture spears [a parable from Three Kingdoms ]” they will create a global brand for themselves, etc. Then they can solve quandaries by utilizing the surplus in production capabilities and upgrading industries. A fashionable saying is that globalization can “reverse force” the modernization of enterprises.

“In terms of branding, technology, and processes, Chinese enterprises are not adequately prepared. Being firm and absolute in their choice to acquire overseas businesses, can their desires be fulfilled? I am anxious for them,” Dean Xiang Bing of the Cheung Kong Graduate School of Business said in an interview with this newspaper’s correspondent.

Only Dreams but no Glory

Actually, this round of overseas acquisition by Chinese enterprises has made many people anxious.

In looks as if the heroes of the Chinese market have generally chosen U.S. and European enterprises and businesses that are on their last gasp. For example, Haier chose Maytag Company, TCL chose Thompson, and Lenovo chose IBM’s PC business. Regardless of extent to which these U.S. and European brands gave off dazzling rays of light in their history, today they have no hope for the future. In U.S. and European industry circles, these enterprises and businesses are classified as “least likely to succeed.”

Taking the bid for acquisition by Haier of the third-largest U.S. consumer electronics enterprise Maytag Company as an example, it is clear that “besides Haier, there are no other strategic competitors in the world who are willing to acquire this tottering consumer electronics manufacturer. Previously, there was only one private stock investment company that hoped to buy [Maytag]. What is almost certain is that this investment company will, after massive layoffs and reduction in costs, sell Maytag, making a profit from the price difference,” said U.S. investment banker Arthur Kroeger.

How can Haier bring this enterprise back to life? Haier is the earliest consumer electronics company to go out of China. It has established a complete system in the U.S., from design and production to distribution and sales. But profits from overseas are thin: its income from global overseas production sales in 2004 is less than 8% of its total income. In the U.S., the Haier brand is in the predicament of fluctuating between being a low- and middle-end product. This time, Haier is changing its earlier expansion pattern of using a single brand. Clearly, Haier is impressed by the sales channels and brand-value of the other party.

A mainstream opinion in U.S. industry circles is that in order for companies who adopt single brand strategy, like Haier, to salvage a company like Maytag, they must have a completely new set of techniques.

People have reason to doubt: is a Chinese company like Haier a shrewd business dealer or a buyer who only knows to acquire failing companies? “Why are U.S. and European enterprises being acquired by us? Why are these brand names, which have been around for hundreds or thousands of years, unable to continue? How can Chinese enterprises manage U.S. and European enterprises? It is hard for me to believe that China’s managers have this type of management ability. Do these ‘18-year-old boys’ of China truly know how they made money in the beginning? Do they know where their advantage lies?” said Tang Shisheng.

It is hard to get a clear answer to these questions. Recently, the CEO of Haier Group, Zhang Ruimin, expressed the following point at a forum: “The globalization of Haier is at a juncture: it is being attacked by competitors overseas. If we make it through we are successful people; if we don’t we are martyrs.” Mr. Zhang’s opinion is very firm. He thinks that reality does not allow you to consider whether or not you should globalize, you can only think about how to globalize.

“Chinese enterprises first need figure out what to do, and then go and do it. In reality, for multinational acquisitions figuring out what to do does not mean that you will be able to do it. Why do 70% of the acquisitions in the world end in failure? The devil is in the details,” Merrill Lynch & Company’s Liu Erfei said in an interview with this newspaper’s correspondent.

On this point, Li Dongsheng, the president of TCL Group who has personally engaged in overseas acquisitions for over two years, should feel thankful. After the joy and glow from the beginning of the acquisition had faded, the risk and crisis of TCL overseas was completely revealed. Mr. Li’s one-time promise that the “joint venture company would make up its deficits within 18 months” had already become an impossible task.

At the end April this year, TCL Group (Stock code: 000100) issues a quarterly report showing 327 million renminbi in losses. Previous, Hong Kong-listed companies TCL Multimedia (1070HK) and TCL Communications (2618HK) also announced large losses. From these figures industry insiders think that the financial situation is completely out of control in both of TCL Group’s joint ventures (with international color TV giant Thompson: TCL-Thompson Company (TTE); and with cellular phone giant Alcatel: TCL-Alcatel (TA) Company).

The first “mishap” that TCL encountered was that it originally had placed much importance on Thompson’s technological advantage, and hoped to use this to escape the quandary of deficient technology. TCL then realized that they had made a strategic mistake in terms of evaluating Thompson’s liquid crystal technology research. Starting from last year, flat-screen television has become the new leading player in renewal of the color television market. Facing this change in technology, Thompson had decided early on to use all of its money on technological development of projection television products, abandoning the development of flat-screen liquid crystal technology. Hence the many years that Thompson had spent on projection television technology had become the direct reason for TCL “passively taking a beating” in the European market.

The second “mishap” that rattled the high levels of TCL was the branding problem. Li Dongsheng originally hoped to use Thompson’s subsidiary brand, RCA, to “do one thing under the cover of another” and expand in the North American market. But this brand that was originally thought to be “so strong” was actually much degenerated. Because Thompson had planned to sell it, the RCA brand had not been very well maintained or serviced.

After outlaying so much in order to purchase RCA, TCL had to pay even more money in order to upgrade and service this fading brand. A manager at TCL Group once complained to this newspaper’s correspondent that: “In North America, it would be better to simply popularize the TCL’s own brand. The original hope that we could rely on others’ branding to expand in the North American market is almost completely wrecked.”

These two “mishaps” show that, at a minimum, China’s enterprises lack sufficient preparation before going out, making them seem reckless and rash. An industry investor recalled to this newspaper’s correspondent that some Chinese enterprises often do not even hire a consultant when engaging in foreign joint ventures and acquisitions. They feel that hiring industry investors is asking for trouble.

“Starting from this type of situation, it is impossible to avoid being beaten black and blue. If the fall hurts, then you must draw lessons from the pain,” said Liu Erfei.

Doubts and Contradictions of “Crossing Over”

It should now be clear that Chinese enterprises charged out when they were most “desperate.” Waiting for them, I’m afraid, is the same “desperation.” Originally they hoped to use acquisitions to “crossover” brands and technology, as well to solve the problems of surplus of production capability and upgrading of industry. But the result can be glimpsed: that overseas acquisition is putting all the eggs in one basket--bringing teetering discombobulation.

Tsinghua University professor Hou Reshi views a true “crossover” through Chinese enterprises overseas acquisitions as possible only if their strength is sufficient to achieve it.

In June of this year, another acquisition case proved the importance of “strength” in acquisitions. Rather than the inflated prices that mainland enterprises pay for acquisitions, Taiwan’s BenQ Company completed a “profitable” deal with Siemens AG. Mainland enterprise circles were very envious.

In this deal, Siemens agreed to sell its struggling cellular phone unit for a relatively high price. To this end, Siemens will pay BenQ 250 million euro in cash and services, and will purchase 2.5% of BenQ’s shares for 50 million euro. Finally, BenQ will take all intellectual property related to the cellular phone unit.

In comparison, Lenovo Group paid cash and assumption of debt to IBM in the amount of 1.75 billion USD, as well as transferring 19% of Lenovo Group’s shares to IBM.

Why did IBM not pay anything to sell off its unprofitable unit? Especially while the famous Siemens company had to pay such a large price? Again, why is it that if, in the future, BenQ makes up deficits and becomes profitable with the cellular unit, Siemens will only gain negligible benefits?

Harvard University visiting professor, He Xianghao, said, “the price and method of acquisitions reflects the core competitiveness of the purchaser.”

BenQ Company has a hard-won strength. Its management of the supply-chain enables it to bring new designs to market quickly; its creativity and competitiveness subdue its opponents. To foreign industry analysts, enterprises such as Lenovo and TCL are more like “trade groups” that capitalize on short-term market opportunities.

Thus a contradiction is produced: Chinese enterprises hope to use overseas acquisitions to solve the problems of surplus of productive capability and upgrading of industry. Yet, on the contrary, because of the problems of a surplus of productive capability and industry upgrades have not been solves, Chinese enterprises lack true competitiveness. Thus they become passive in overseas acquisitions.

That is to say, “globalization” has exposed the problem that enterprises have not “modernized.” Using “globalization,” enterprises have no way to cross over into the ambitious course of “modernization.” Perhaps China’s enterprises should not have had such great fantasies in the first place. “In those years, the domestic market was exchanged for technology with very slim results being achieved. Today, will using the overseas market to exchange technology be able to fulfill wishes? Can other problems, such as management and brand strategy, be totally solved by overseas acquisitions?” said Cao Yuanzheng.

“Going out to seek death” is not a road that will lead Chinese enterprises out of the real quandaries of a lack of core competitiveness and strength. “Going out is a type of fixed thought tendency. This type of fixed though tendency has a major limitation. It is not necessary to use the method of ‘seeking death.’ There are many new methods that enterprises can choose,” said Zeng Ming, professor at Cheung Kong Graduate School of Business.

In forcing themselves to “the ends of the earth,” are Chinese enterprises using a one-sided logic? Is the only way to so-called “globalization” and “modernization” that of overseas acquisition? The scholars and industry insiders interviewed by this newspaper’s correspondent generally think that Chinese enterprises might as well re-examine the domestic market.

Taiwan’s high-tech enterprises are an interesting example. “Currently they have chosen two roads: one is choosing to give up its fate in OEM, borrowing the huge potential of the mainland market to develop its brands; the other road is to move low-cost production bases to the mainland, while continuing to participate in the global division of labor,” said Qu Wanwen, a researcher at Taiwan’s Academia Sinica, Institute of Humanities and Social Science Research.

Most of Taiwan’s high-tech enterprises have chosen the former, hoping to use the low-cost of labor and the huge market demands of the mainland to foster branding and upgrades in technology. In the eyes of Taiwanese enterprises, as well as most Japanese, Korean, U.S., and European enterprises, the mainland market is the largest global market. As a result, most R&D and design centers have been setting up shop in mainland China.

In reality, it is difficult to differentiate between China’s market and the international market in industries such consumer electronics and PC’s which are already global. The concepts that Chinese enterprises hold about “globalization” appear very dogmatic. They are simply paranoid about constructing a factory or establishing a sales agency overseas.

One fact that is difficult to ignore is that in the past 15 years, China has formed two basic camps: one is completely blended into the global production line, mainly engaging in OEM--an example would be Galanz; the other is a type of “wild hero” that achieves success in local market melees, for example TCL and Haier.

What is significant here is that, in the past, all the “wild heroes” were attempting “globalization,” while those OEM enterprises already blended into the global production chain where working hard to “domesticate”--constructing channels and promoting brands domestically.

“These two types of Chinese enterprise lack core capabilities, but the ‘wild heroes’ have a practical ability to manage branding. Enterprises that were born of OEM know the rules of the global game and the structure of the global industry chain. How to fuse these two types of enterprise is a crucial opportunity for the future of Chinese enterprises,” said Zeng Ming. Maybe this is the path to will enable Chinese enterprises to realize “modernization” and “globalization.”

(Article Source: China News Weekly Author: Wang Chenbo)

(Statement: This publication uses the manuscript of China News Weekly, which along with China News Agency holds copyright privileges.)


Click Here for the webpage of the original article in Chinese from ChinaNews.com

Tuesday, July 12, 2005

Free Markets Aren’t Free

Imagine yourself in the city. There is a place in the city that you go to by bus or train. Driving is out of the question, since parking is a nightmare.

Upon arrival, you squeeze past a dispersed group of people only to be met at the entrance of a large building by crowds of people, some pushing in, some pushing out. You manage to get in the door and make a beeline for the escalator. From higher up, you can see the swath at the entrance through which you just passed.

The second floor is still too crowded so you continue up to the third floor.

On the third floor, you exit the escalator and turn right. Opening up before you are rows and rows of glass counters, each with several people and boxes out in front. There is not enough time to let your eyes absorb all the activity so you continue moving forward.

Passing the first row, you go down the second row. About three counters in, you see a sign in English reading “DIY.” You stop.

Behind the counter, a young man looks up. “Assemble a computer?” he asks.

Okay.

Your own personal Dell website, right here in the Hilon Electronics Market of Zhongguancun. Of course, you could have gone to Dinghao “Top” since they do DIY, too. But Hilon is still the most popular. And besides, what is shopping without the hullabaloo?

The young man is from Hebei, and has been in Zhongguancun for 2 years. Migrant-cum-computer specialist, he pulls out a piece of paper listing memory, CPU, disk-drive, keyboard, monitor, etc. He asks you what you want, and they builds a computer to your specification, leaving himself 100 yuan ($12.5) in profit. You walk away with a new desktop computer after one hour.

In China, this is DIY, on-the-stop computer assembly. It is omnipresent in Zhongguancun. Why is computer DIY so popular?

Why is DIY so popular for home decoration (Home Depot) and automotive care (Kragen) in the U.S.?

Are there similarities between the functions that each of these industries play in their respective markets?

Free markets are not free. In the U.S., the market is free only because of intense, hard work to make them so: to make competition fair, to make products that do not harm people, to create a transportation system that integrates with the markets.

Many things we take for granted. These external costs are absorbed without thought. Cars are the most obvious example. How could “suburbs” exist with any sort of specialized goods were it not for cars to transport individuals into cities (for work) and trucks to transport goods out to suburbs (for consumption)?

In China, suburbs do not yet exist. They are coming, but slowly. Instead, Zhongguancun, a centralized IT, electronics, and high-tech zone, exists. Everyone in the city, and even those outside the city or from other cities, comes to Zhongguancun for computers. This is not the only place to buy computers, but here the prices are lowest, brands most varied, and service (including on-the-spot computer assembly by our Dell-technician-in-training Hebei migrant) the best.

For China’s markets to become more “free,” what is required is more, not less, regulation. Instead of “freeing” Zhongguancun’s computer markets from government influence--something that happened when they were formed in the first place circa 1980--what is missing is a court system that can enforce laws, a provincial and national system of credit and identification, and more protection for property rights.

The people who are hurt the most by a lack of free markets are businesses in Zhongguancun, despite the fact that they are commonly viewed as the beneficiaries of loose property rights and fly-by-night businesses.

Monday, July 04, 2005

Zhongguancun Before and Now

Zhongguancun: “Electronics Avenue” Returns to Its Position as “China’s Silicon Valley”

June 8, 2005

((Translated from the Chinese by Tyler Rooker on July 3, 2005 for http://chinasilicon.blogspot.com))

http://www.chisa.edu.cn/chisa/article/20050608/20050608005274_1.xml

Text/ Zheng Jinwu and Xiong Juan
 
On October 23, 1980, as if he was on a mission, Chinese Academy of Sciences researcher Chen Chunxian took the lead in establishing the first science and technology organization run by individuals in Beijing’s Zhongguancun--the Advanced Development Technology Service Department [sic] of the Beijing Plasma Physics Association. Thereafter, science and technology companies run by individuals, such as Kehai, Jinghai, Sitong [Stone], and Xintong, were all established in the Zhongguancun region. By the end of 1986, there were close to 100 development companies in Zhongguancun. Gradually the domestically and internationally famous “Zhongguancun Electronics Avenue” was formed, with development and business in electronics as its main essence.

In the course of 20 years, the dilapidated past of Zhongguancun has been replaced by row upon row of towering office buildings and modern, bustling markets. 13,000 small, medium, and large enterprises, close to 60 listed companies, and over 100 billion yuan in total industrial production have lifted the reputation of Zhongguancun domestically and internationally. Because of its unique clans of science and technology personnel, and its entrepreneurial atmosphere, Zhongguancun has entered the history books as a synonym for “China’s Silicon Valley.”


Out with the Old, In with the New--20 Years of Experience in Zhongguancun

Strictly speaking, Chen Chunxian’s “Advanced Technology Development Service Department” was not a high-tech company. We can only say that it was a prototype for high-tech companies. But it made people realize that something along the lines of high-tech companies created in “Silicon Valley” or Boston’s Route 128 of the USA could be possible under conditions existing in China.

In May of 1995, the Central Committee of the Communist Party of China and the State Council published a report entitled “Decision Regarding the Acceleration of Progress in Science and Technology.” In it, they clearly pointed out that, “science and technology enterprises run by individuals are an important part of the advancement of science and technology for all of society; they are an effective force in the development of high-technology industries in China; they must be given continued encouragement and led to healthy development.” With inspiration from the “Decision,” the Beijing city committee of the communist party and the city government decided to reexamine strategies for Beijing’s economic development. As a result, they decided to build a Beijing New Technology Industry Development Experimental Zone, which would be structured as one zone with many parks, including the Haidian Experimental Park, the Fengtai Park, and the Changping Park. In 1999, the “Beijing New Technology Industry Development Experimental Zone” was officially renamed the “Zhongguancun Science & Technology Zone.” Today, the Zhongguancun Science & Technology Zone includes seven science parks: Haidian, Fengtai, Changping, Desheng, Electronics City, Yizhuang, and Jianxiang. These form a true high-technology industry development structure of one zone and many parks. The name Zhongguancun is valuable--hence many places that are far from the central area of Zhongguancun have been brought into the Zhongguancun domain. The concept of a “big Zhongguancun” has gradually formed.

The establishment of a science & technology zone has made a big impact on people’s thoughts. The obsolete pattern that had existed for many years has been broken piece by piece as researchers, professors, engineers, and students from the dozens of universities, such as Peking University, and hundreds of research institutes, lead by CAS. They have left the academic and research buildings and become an entrepreneurial vanguard of knowledge heroes. Wang Xuan, Ni Guangnan, Wang Zhidong, Wang Jizhi, and Liu Chuanzhi are some of the outstanding people who emerged from this background.


The Name Speaks the Truth--Zhongguancun Top of China Science & Technology

The reason for the success of Zhongguancun lies in the birth of Lenovo, Stone, and Founder here. These three companies created the miracles of the Lenovo [Legend] Mandarin Card, the Founder laser typesetting system, and the Stone typewriter. Sina and XiaoLingTong lead the race in the Chinese internet and communication industries; Yaxin and Baidu have provided system integration and search technology for the information superhighway. China Semiconductor Engineering of Zhongguancun has, in only a few short years, has given birth to multiple series of large-scale integrated circuit chips such as Fangzhou [Ark], Longxin [Dragon Chip], and Xingguang [Starlight]. China Semiconductor changed the history of China’s chip industry from non-existent to existent; and from existent to excellent.

Xia Yingqi, assistant director of the Zhongguancun Science & Technology Zone Management Committee, pointed out that Zhongguancun’s technology and products have gone from made in China to created in China. For this reason, Zhongguancun has become the brand name for science and technology in China--it is perfectly justifiable to call it “China’s Silicon Valley.”

This reporter spoke with a certain Mr. Liu. He became a sales distributor in Zhongguancun in 1997. He knows the evolution of computer brands, from IBM and Intel to Lenovo, from Founder to Jing Dongfang and TCL, like the palm of his hand. Not with emotion he said that, viewing the situation from the present, there is still some differences between domestically-produced and internationally-produced products. Yet, as the amount of core, independent technology increases, domestically-produced brands will certainly become a new force in the market.

In order to provide support to high-tech companies in the Zhongguancun Science & Technology Zone, government agencies including the Central Party, Beijing city, and even Zhongguancun Management Committee have announced numerous policy measures. In 2001, in order to build an entrepreneurial environment in Zhongguancun, the country allocated 10 billion yuan in special funds to be used in constructing and improving infrastructure in Zhongguancun. The Science & Technology Committee of the city of Beijing joined with other units in 2002 to establish the Beijing City High Technology Commoditization Service Center, providing convenient and quick “one-stop” service, from project application to policy fulfillment, for high-tech enterprises. Not too long ago, the city of Beijing also allocated 174 million yuan in special financing to encourage high-tech companies to engage in commoditization. The Zhongguancun Science & Technology Zone has also come out with a policy called “three reductions and two exemptions,” which gives benefits to entrepreneurs who decide to start-up in Zhongguancun. According to statistics provided by the Zhongguancun Management Committee, there are currently over 13,000 small- and medium-sized enterprises in the Zhongguancun Science & Technology Zone with a total industrial output value of 150 billion yuan. It is precisely this large-scale contingent of small- and medium-sized high-tech enterprises that gives Zhongguancun its liveliness and dynamism.


Foreign Enterprises’ Preemption--An Upsurge in Zhongguancun R&D

In July, 2004, the globally famous pharmaceutical development company Novolin set up only its second overseas R&D center in the Zhongguancun Life Sciences Park, expanding the scale of its R&D. The president of Novolin Greater China Area, Ke Ruilong, commented that they chose the Zhongguancun Life Sciences Park as an R&D center mainly because a national protein research center is located in the Park; also, the Park adjoins the CAS Institute of Zoology and other scientific units. “The R&D Center is not lead by the China market. Instead, we were attracted by China’s technology and talent.” Actually, this is not the only R&D center to settle down in Zhongguancun.

Institutes of scientific research and universities crowd Zhongguancun. According to reports, there are 3,813 currently active science & technology units in Beijing; there are 42 national engineering technology centers; and there are 49 key national laboratories. The vast majority of these units are all located in Zhongguancun. Beijing currently has 271,000 science and technology personnel of whom 383 are CAS academicians and 292 are China Academy of Engineering academicians. Again, the vast majority of these personnel are scattered in the various scientific research units and universities of Zhongguancun.

With a comparatively lower cost for real estate and talent, along with preferential policies from the government and the strong purchasing power of the Chinese market, Zhongguancun has attracted many multinational companies. Xia Yingqi said that Zhongguancun’s R&D ability is not easily ignored on the world science & technology stage. Establishing a subsidiary company, an R&D center, or a representative office in Zhongguancun has become a necessary action and current fad for multinational companies.

The assistant director of the Electronics City Science & Technology Park Management Committee of the Zhongguancun Science & Technology Zone, Xiong Xuehua, also pointed out that, in the future, the orientation of enterprises in the Zone must be R&D. Hence the Science & Technology Management Committee is building an R&D environment to allow enterprises to become focused on innovative technology.


With a Phoenix Comes Advantege--“Turtles [Returned Overseas Chinese]” Fall in Love with Zhongguancun

With the reform and open, China has had several hundred thousand students taken their books and gone far from home. The problem of losing talent to overseas study has created misgivings in society. But Zhongguancun today has become the first choice for students returning from overseas.

According to an official in the Overseas Student Start-Up Service Department of the Zhongguancun Science & Technology Zone Management Committee, the Zhongguancun Management Committee has established 5 liaison offices overseas in order to provide information, communication, and service to overseas students interested in returning to China to start a company. The government also provides assurances to returning overseas students for free grants, housing reimbursement, and loans guarantees to assist with starting-up.

Yan Changming is one of the entrepreneurs who returned from overseas study to start a company. In 1994, Yan Changming and others returning from Canada formed a team to establish the “Beijing Lanzi Ningshi Technology Company, Limited.” There are not preferential policies such as exist in the Zhongguancun Science & Technology Zone overseas, especially the type of help in terms of financing that the Management Committee gives. This help allowed Yan Changming’s enterprise through a difficult period in its development.

Materials from a recent report revealed that, in the past 4 years, the Zhongguancun Management Committee hosted 24,000 “sea turtles,” among which over 5,500 Ph.D.’s and Master’s have chosen to remain in Zhongguancun establishing over 2,300 high-tech enterprises. A large group of “turtles” have fallen in love with Zhongguancun. In terms of numbers and quality, this has re-established the core competitiveness of the Zone in terms of high-end innovative technology.

A specialist from the Zhongguancun Human Resources Association pointed out that attracted overseas students to return to China and start-up is not the same as simply attracting capital. Because overseas students have advantages in terms of specialized technology, credit laws, degree of internationalization, and market concepts, a large group of “turtle” enterprises is the same as adding an international “catalyst” of market economics to Zhongguancun. It will rapidly change from quantitative to qualitative the advancement of technology, management, finance, and international collaboration in Zhongguancun. Engaging in international competition will enable Zhongguancun to keep pace with the world economy.

Source: Science Times

Sunday, June 26, 2005

"Frying" Real Estate, Stock, and Goods

In the "Prologue" to the previous set of 5 posts, I noted that chao dipi or frying real estate was a problem in Zhongguancun. It is also a problem throughout cities in China and the world (witness the current real estate boom/speculation).

To clarify things, I want to quote extensively from a book by Ellen Hertz entitled The Trading Crowd: An Ethnography of the Shanghai Stock Market, published by Cambridge University Press (1998). Find it at Barnes and Noble here: (http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?isbn=0521564972&TXT=Y&itm=1)

I quote from Professor Hertz in order to clarify the meaning of chao or frying, which she discussed here in both a general and particular (to the Shanghai stock market) context.

The following paragraph is found on pages 140-141:

"Chao literally means "to stir-fry," the characteristic cooking technique in Chinese cuisine. It is used in the stock market--but also in the stamp, real estate, antique, goldfish, foreign currency and other markets--to refer to buying and selling within a very short time period, profit being earned through price differentials (chajia), rather than "real" increase in value. My informants always appeared mildly amused by the term, suggesting that its culinary connotations remain close to the surface. When explaining the analogy, informants highlighted rapidity, that is, the fact that the contents of the wok are transformed from raw into cooked food in a very short time. At a second level, the reference to food highlights the fact that one earns one's living (and hence one's eating) through this activity: someone who "stir-fries" stock for a living eats as a result of what he does. Finally, stir-frying involves a quick flip given to the contents of the wok; this flip has its analogy in the somersault (gentou) which stocks make when they double in price, and, paradigmatically, it is this quick somersault, as opposed to the steady climb of long-term investments, on which the dahu [big players of the stock market] nourishes himself."

I hope to return to chao in the future in reference to chao huo, a type of goods in Zhongguancun. As a teaser, chao huo refers to the practice of selling electronics products that have been stir-fried from a second electronics store. The U.S. equivalent would be Best Buy selling a VCR that it bought from Circuit City and then re-sold to the Best Buy customer.

Coda: Government Has Its Place

(Post 5 of 5)

The Crux: The Place of Government

“Memory is an intriguing thing; sometimes it represents lost dreams.” The once red-hot Zhongguancun “Electronics Avenue” today has become a wide road lined with bunches of buildings. The truly embarrassing thing is that its quality has not changed: it is still an electronics market. Zhongguancun has not undergone the intrinsic transformation from a large market to China’s Silicon Valley.

The government has already done much to subsidize and support Zhongguancun. People should not longer rebuke it as lacking. But looking at the current situation, the pace of the government and the pace of enterprise development need to be readjusted.

Zhang Zhongning said that at the beginning of the 80s, a group of technology savvy entrepreneurs drove the development of Zhongguancun, while the government’s position was to provide assistance and service. With the construction of the Science & Technology Zone, the government became a principal actor in encouraging economic development. Different districts and different government departments made increasing GDP their main goal. In this way, they began to rely heavily on real estate industry for development.

In Zhongguancun, real estate should not be allowed to transform science & technology-Zhongguancun into property-Zhongguancun. Only in this way will the advantages and long-term economic development of Zhongguancun be possible. Quick successes and instant benefits are not the development rules for a knowledge economy.

Again, in the construction of Zhongguancun’s finance system: assistant director of the Institute of Finance Research at the State Council Development Research Center, Zhang Chenghui, said, “Today, Zhongguancun enterprises are encountering financial difficulties. This shows that the government has not taken responsibility for many aspects of finance for SMEs. If finance is difficult for SMEs, this is not a problem that SMEs can solve and so the government needs to provide procedures for special support.”

Zhang Chenghui thinks that the government should put a lot of effort into this, for example providing credit services for SMEs, and providing loan and executive services. The government can form a non-profit intermediary to do this.

Zhang Zhongning says that the current Zhongguancun Science & Technology Park is managed by Chinese Academy of Sciences (CAS), institutes of higher education (Peking University (PKU) and Tsinghua University, who represent a group of universities), the Beijing city government, and the Haidian and Chaoyang district governments. Among these multiple managers, various governments and government departments need to take advantage of different things to survive. The relationships between these various advantages have not been coordinated. For example, the Beijing city and Haidian district governments built a Haidian Western District, while Tsinghua and PKU each have their own science parks. This creates a total new area of several million square meters. CAS is building an Eastern District. In actuality, this is all being done by real estate developers and creating a very serious low-level reconstruction.

“If we have a problem, should we go to the Bureau of Science & Technology, the Beijing city government, the Zhongguancun Management Committee, the Haidian district government or the Chaoyang district government? This is a very complicated management system,” said an IT boss in Zhongguancun.

There are many other problems in Zhongguancun. The solutions to these problems are even more numerous. Put simply, the government has gone from a leading position to the wrong position and back to its original position. These shifts have brought about major changes in Zhongguancun.

Maybe we have placed too much hope in Zhongguancun. Or maybe we are overanxious. But regardless, as long as Zhongguancun’s direction has not become skewed then giving Zhongguancun more time will only bring about a better future. (Topic selection: reporter Ge Fangxin)

Copyright: Global Business & Finance Magazine All Rights Reserved Unauthorized Reproduction Prohibited

http://www.hqcj.com/docs/2005_03/gb/tbch.htm

SMEs' Diagnosis

(Post 4 of 5)

The Finance “Bowel Obstruction”

For a long time, SMEs’ difficulty with finance has been referred to as the “Goldbach’s conjecture” of Zhongguancun’s high-tech industry.

Investigation has shown that the main reason many enterprises go bankrupt is problems with funding at the early and middle development periods. Unable to climb up onto the first stage, they run out of time to grow and are selected out early on. Those enterprises that reach the “first stage” of enterprise development sometimes run into difficulties due to long term funding. This also causes enterprises to miss out on high-speed growth opportunities, in the end becoming static “small, old enterprises.”

How can the lack of capital in the early stages of enterprise development for SMEs be solved? This is a crucial problem for the development of Zhongguancun.

Whether it is a coincidence or not, during visits to 5 Zhongguancun enterprises this reporter learned that, to the present, none of the 5 had received venture capital or bank loans. Then, where can Zhongguancun SMEs get money?

Small and large, there are over 100 venture capital companies in Zhongguancun. But in choosing “the stage of investment projects” in which to invest, most favor long-term and mature projects. Venture capital investments continue to lean “away from poor and towards rich.” Venture capital companies focus primarily on large enterprises, paying little attention to SMEs that need venture capital the most. Large enterprises “have flowers added to their bouquets,” while SMEs “are alone in the snow without charcoal.”

People think that venture capital is cautious in this way because of the cold spell that fell on IT enterprises in 2001. Some enterprises are immoral and in the process of attracting venture capital hide their money. Once they get capital investment, they bankrupt the company or abscond with resources. Some enterprises, even though not intentionally deceiving others, will not invest in management. Hence, once capital is invested, they make large expenditures and hand out ruminations of over 10,000 yuan a month to employees, expecting that they can always depend on venture capital to survive.

Fang Xingdong in Losing Zhongguancun points out that capital has not favored Zhongguancun. Capital includes both IPOs and venture capital.

The data has shown that total investment in China for 2004 was 1.269 billion USD. 27% of this went to Shanghai and 19% went to Beijing, a lowly second. In the past year, the companies that listed on NASDAQ are all Shanghai Companies: Shanda, Ctrip, and EachNet.

Specialists have shown that the immaturity of relevant intermediary service organizations is an important factor that affects enterprise finance. One investigation showed that 78.6% of enterprises think that the undeveloped nature of intermediary organizations affects venture capital negatively.

Advanced systems produce advanced technology. Whether or not Zhongguancun can become China’s Silicon Valley, it is clear that a large amount of advanced technology in a short period of time that will not determine it. A perfected finance environment and system is the crucial factor determining the life or death of Zhongguancun.

The Zhongguancun Science & Technology Zone Management Committee once advanced a policy entitled the “Gazelle Plan.” This is a classic Silicon Valley import. This Plan aimed to reform the SME finance environment in the Zhongguancun Science & Technology Zone. According to estimates, the “Gazelle Plan” brings liquid capital in the amount of 5 billion yuan to “gazelle enterprises” in Zhongguancun.

And yet, if IT SMEs in Zhongguancun want to get loans and financing from these organizations, it is very difficult. “The amount of financing we need is not a lot--a trifling 3 million yuan. But we have tried many different methods, for example guaranteed loans from Zhongguancun Guarantee Company, and we even tried project loans, but we still have no sources,” complained a high-level figure in a Zhongguancun IT enterprise.

For the majority of Zhongguancun’s IT SMEs, loans require that they provide collateral; but even then the fees for the loans are not cheap. The materials required to apply are numerous and procedures are burdened with trivial details.

Because of this, financing for every enterprise requires the display of multiple skills. Through investigations, this reporter learned that a common solution is private fund-raising including underground finance. On the basis of several founding partners’ original capital, the enterprise starts-up. Then, as development continues, the company will be forced to find new partners and attract financing for the next step.

But private and underground financing are the manifestation of a lagging financial system. For growing enterprises, relying on capital and profits to develop is an nerve-racking and unseen danger. The phenomenon of “vanishing” companies will occasionally appear in Zhongguancun, wherein companies are unable to continue only because they are lacking a couple dozen thousands of yuan.

Saturday, June 25, 2005

What Land Can Do

(Post 3 of 5)

Commodifying Zhongguancun Real Estate

Zhongguancun has its origins in the flows of commerce. Commercial development drove the development of the real estate industry but the real estate industry has obstructed Zhongguancun’s development. This seems like a paradox.

According to the 2004 “Investigative Report on Software Parks in Eight Cities,” there are three types of domestic software parks: company type (Zhongguancun, Dalian, Shanghai, Zhuhai); government agency type: those established by government departments (Jinan, Qilu, Shenzhen); and government and company joint type (Hangzhou).

Therein lies an obvious question: what is the benefit of company operations in Zhongguancun? It is known that income from real estate occupies a very important position.

Because of the large-scale involvement of real estate, Zhongguancun has quickly become “pricey.”

During a interview, this reporter learned that an ordinary counter in Hilon Electronics Market rents for 9,000 yuan, while an initial “support payment” of 88,000 yuan must be paid before entering the market. In addition, only qualified enterprises are able to enter: it is necessary to register as a company with at least 500,000 yuan in capital?getihu [self-employed laborers] are completely barred from entry.

Further, in Zhongguancun’s other parks, including Fengtai and Yizhuang, there have been effects from surging real estate development and escalating real estate prices. Real estate prices are climbing there as well.

An employee at a mid-level software company opened in an office building, Li Jianjun, told this reporter: “Even this grade of office building costs 6 yuan per every square meter. There is nowhere in Beijing where the price is this high.” High rents are especially difficult for SMEs to bear. Some enterprises have started to use residence buildings as offices or purchased homes to use as office and residence. Some have even moved to the Chaoyang District in eastern Beijing where office buildings rents are relatively cheaper. Mr. Li also intends to leave Zhongguancun and is in the process of browsing housing in Chaoyang.

The “new star” in Zhongguancun over the past years is Zhongxing Micro-Electronics Company which collaborates with world “giants” and maintains its own video chip technology and products. The chairman of the company, Dr. Deng Zonghan who has studied in the U.S., recalled his experience of starting-up by saying that there are too few office spaces to choose from in Zhongguancun these days. This has created a situation where the price of land, housing, and office buildings averages higher than other domestic and international rates. These factors have added to the cost of doing business for SMEs.

It is reported that there is no price disparity between land in Zhongguancun and that in the CBD [Central business district]. Moreover, SMEs in Zhongguancun have the lion’s share of these places?companies with 10-50 people occupy 80%; private enterprises occupy 80%. Clearly, capital is tight for these innovative enterprises and they need to conserve costs. High rents put huge amounts of pressure on their starting up.

In Zhongguancun in this era, almost all real estate projects, whether they are offices or apartments, orient their first round of consumption toward Zhongguancun IT enterprises. Zhongguancun enterprises are a special community both shouldering “the task of developing China IT to new heights” and also carrying “the assignment of digesting the development of regional real estate economics.” Is this double role too heavy?

Real estate development often needs loans from commercial banks to support it; hence there is pressure to repay the loan and real estate developers cannot help but pass on this pressure to the next business. The efficient use of real estate space, related to the flow of capital, has gradually become the focus of developers. As a result, how to maximize the benefits of capital is the top priority of developments. How to reasonably develop the industrial structure and commercial pattern of this region is often only a secondary consideration.

In light of this, some have noted in jest that “if the electronics market becomes untenable, the owners might change all the businesses into clothing or commodities.”

“‘Wearing software enterprise clothing to do real estate business’ companies can be found everywhere,” said IT critic Fang Xingdong in his Losing Zhongguancun, published in 2004. His book speaks frankly about how real estate has become a promotional poison to the long-term development of Zhongguancun’s IT enterprises.

Zhang Zhongning in the “Investigation Report on the Economic Increase of the Zhongguancun Science & Technology Zone” says that: “Real estate in Zhongguancun has become a factor, but this may only indicate the cost of ‘cashing out’ 20 years of savings including the ecology, brand, and intangible assets of the high-tech industry.” “Zhongguancun has gradually adopted a development plan whereby land and environmental resources are used by the market to attract capital while technology investments have turned into economic contributions. The hopes from ‘Official Reply’ [State Council answer authorizing investment in Zhongguancun infrastructure and planning] were that a large number of innovative technology results would move to market bringing economic development, but this has not happened.”

Besides land, another deadly problem that coerces the development of Zhongguancun is finance.