Understanding China, both as a market and as a new economic and industrial powerhouse, is an important skill which most US and European technology firms have little time left to acquire... 

It does not take a degree in mathematics to work this one out. The population of China (now put at 1.3bn) is, alongside that of India (roughly 1.08bn), the greatest impacting force on global market dynamics today. Against a world population measured at under 6.5bn, you find that these two countries alone account for almost a third of the world’s population. China on its own is a cool 20% of that global headcount.

Factor in a situation in which the economic success in countries like India and China is slowly trickling down to the population at large, against a backdrop of high growth in GDP, and you have a scenario which tilts the world’s established economies off their axes. It’s an exhilarating prospect – albeit one that frightens the older economies in Europe, North America and parts of Asia.

China recently chose to re-value its currency, the yuan, de-pegging it from the mighty US dollar. An action ostensibly designed to ward off growing anti-China protectionist sentiment in the United States was in fact a minor attempt by the Chinese authorities to loosen their subjugation to dollar rates. Forget, for a moment, that the dollar’s dismal performance of late can be largely attributed to the US trade deficit with China.

The salient point is that, just five years ago, such a move by Beijing would have caused scarcely a flutter on the world’s financial stage beyond the curro-nerds who sit on currency desks. Not now. In 2005, such a move sends some markets into freefall and sends commentators scurrying to find out exactly what it means. The answer to the latter might well be ‘not very much’; the true picture runs far deeper.

A tale of three takeovers?
Three recent examples serve to illustrate China’s growing world economic status and the increasing fear that this is generating in complacent (and proto-protectionist) markets such as the United States:

• Lenovo/IBM: Lenovo’s December 2004 purchase of IBM’s PC-making arm for US$1.75bn might have seen the sale of a US icon to offshore, Chinese interests. But industry observers viewed (or pretended to view) the icon itself as ‘faded’. Collectively, the industry chuckled in its response to a deal which may yet prove to be the most seismic in the computer hardware sector. Lenovo has since broken some stereotypes by confirming its presence through a subsidiary in Taiwan; that might have been unthinkable a few years ago and was surely un-thought-of by IBM and its political sherpas just six months ago.

• Haier/Maytag: the pursuit by China’s Haier Group of a more prosaic but less tarnished icon, Maytag (the Iowa-based owner of consumer appliance brands including Hoover and Jenn-Air). The Qingdao-based, Shanghai-quoted Haier claims “first place in the United States for sales of compact refrigerators and wine coolers, in Iran for washing machines and Cyprus for air conditioners”. Its bid for Maytag caused alarms as mom, apple-pie and vacuum cleaners looked set to be ‘hoovered up’ by Chinese interests. Now, another US white goods icon, Whirlpool, is bidding US$1.44bn for Maytag with Haier, for the time being, having pulled out.

• CNOOC/Unocal: add the mirthed murmurs of Lenovo’s PC acquisition from IBM and the currently ‘on-hold’ bid by Haier for Maytag and throw in some political spice and you get Unocal. This small US oil company, implicated in a big way in some of the United States’s more crazed oil and pipeline policies in countries like Iraq, Afghanistan and the former republics of the Soviet Union, is currently wrapped up in a tug of takeover ‘love' between the China National Offshore Oil Corporation (CNOOC) and Chevron, which bats for the home side. Except in so far as Unocal is a witting instrument of the darker side of US foreign/energy policy, it is hard to see why CNOOC’s interests enflames passions in Washington DC. Yet it does, with the Senate portraying the potential takeover by the Chinese company as an issue of national security. Bets now are on Chevron, a dismally dull but homegrown oil company, winning out even if it fails to match the CNOOC bid of nearly US$19bn.

Last week’s re-evaluation of the yuan and its rise by 2.1% against the dollar was a wan attempt to defuse the antagonism that Chinese eyes on US assets have fomented in Washington DC. Predictably it failed and arguably the Chinese had no doubts that it would do so. Beijing, after all, holds all the aces in its dealings with the US and with ‘Corporate America’.

Phased expansion
To get a better understanding of this, it’s worth looking at how China has evolved and matured in global economic and, for our purposes, ICT terms. It falls into the following five phases:

• untapped demand, limited opportunities: the warming of relations between China and the outside world in the early 1970s paved the way for outside investors, with one eye on the huge domestic Chinese market, to enter into local manufacturing partnerships. The formation of the Alcatel Shanghai Bell switching/transmission venture in 1983 was probably the first such venture of any significance. At the time, slow economic growth and other restrictions on demand for communications services made such ventures expensive but not too profitable. Indeed, it was hard to get away from the sense that they were neo-colonial in nature.

• belated breakthrough: by the 1990s, surging GDP in China began to unleash the domestic market’s potential. Subject to certain restraints, access to modern communications – not just fixed line but mobile as well – came within reach of a growing proportion of China’s population for the first time. Network operating, while opened to competition on a limited basis, remained technically off-limits for foreign investors. In equipment supply, by contrast, new avenues of cooperation were built to link foreign manufacturers with locally-established enterprises.

• unremitting demand, limited opportunity: the coincidence of increased purchasing power in a growing proportion of China’s population sent the market skywards. China Mobile became the world’s largest cellular operator measured in terms of national subscribers in 2001 (growing to more than 230mn at end of June, 2005). The equipment market remained tight and the operating market closed as foreign investors would see it.

• export-oriented: China’s manufacturers, whether homegrown or JVs with outsiders, now realise that a programme of sales into the large yet unpredictable home market can be offset by aggressive sales into markets elsewhere in the world. Once upon a time the target list might have comprised the developing world, but now Europe and North America are firmly in view. This may involve JVs with local partners, but no longer on the neo-colonial terms of the 1970s and 1980s mentioned above.

• world player status: today, as the examples from the IT, electronics and oil industries listed above combine to show, Chinese companies are no longer content to mooch around in their home market. On the contrary, growing domestic revenues fill coffers that can be designated for strategic acquisitions in key markets abroad. Even when political logjams frustrate local demand, in areas such 3G mobile or broadband, local producers are able to shift their focus to export markets with ease and success. That spurs the likelihood of further investments in ‘old world’ technology companies on Chinese terms.

Anybody wanting to compete against Chinese technology firms like Huawei and ZTE should bear in mind the factors listed above. It is, methinks, unstoppable.

Wet feet?
Maybe the last word should be left to Haier Group’s CEO Zhang Ruimin: “Haier should be like the sea. Because the sea can accept all the rivers on earth, big and small, far and near, coming all the way to empty into it. Once in the bosom of the sea, every drop will function as a whole and rush together pertinaciously and dauntlessly, under the command of the sea, to a common goal. They will rather be smashed to pieces than retreat as deserters, hence the overwhelming force of the sea. The sea offers all of itself to the mankind and never demands anything in return. Only through this bounty and unselfishness can the sea become an everlasting existence providing for all living beings.”

Zhang, something of a charismatic figure, was not finished: “Concerted efforts will generate power of the sea. This will be backed by a spirit - ‘Dedication to the Motherland by Pursuing Excellence’  - which Haier persistently advocates. Therefore, everything deemed unbelievable and impossible can be real and possible, and the Billow of Haier will rush past everything on its way and roll on and on.

“Thus, Haier should be like the sea - making contributions to the mankind ‘sincerely forever’. In so doing, it will exist forever for the good of all. Haier will be part of the whole society. Haier is the sea.”

Sounds like a convincing gameplan to me. I would also dare to suggest that if you choose to laugh at the superfluity of language employed, your business is probably dead in the water. Or dead in “the sea”, as China’s tide comes in.
Jim Chalmers