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
Wednesday, July 27, 2005
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.
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
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
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