BusinessWeek - The Tech Dragon Stumbles
Anthony Townsend
across China. By contrast, SMIC's Taiwanese rivals, United
Microelectronics Corp. (UMC) and Taiwan Semiconductor Manufacturing
Co. (TSM), have built most of their factories in two science parks
just a few hours' drive from one another in Taiwan, making it easier
to manage the plants. So why has SMIC spread out so much? "Every
[local] government wants to go into high tech," says Pranab Kumar
Samar, an analyst in Hong Kong with Daiwa Institute of Research. That
might make for good politics, but it's not exactly smart business."
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Asia May 3, 2007, 9:06AM EST text size: TT
The Tech Dragon Stumbles
China's upstarts are finding life in the big leagues tougher than
they reckoned
by Bruce Einhorn
In recent years, the world has watched with a mixture of fascination
and trepidation as Chinese technology companies making everything
from semiconductors to cell phones have pushed their way onto the
global stage. Investors have piled in, hoping to reap the rewards
that would flow from betting on an Intel (INTC) or Dell (DELL) in the
making. Potential rivals, meanwhile, have feared that the Chinese,
like the Japanese and Koreans before them, might elbow their way into
prominence worldwide.
From the looks of it, neither group has it quite right. For a host
of Chinese tech companies trying to adjust to life in the major
leagues, these are difficult days. Cell-phone makers TCL and Ningbo
Bird have seen their share of the mainland market whittled down by
global giants Nokia (NOK) and Motorola (MOT). Profit margins at
telecom equipment makers Huawei Technologies and ZTE have shriveled.
BOE Technology Group, the country's biggest maker of liquid-crystal
displays used as screens for PCs and TVs, has dumped noncore assets
to prop up earnings and is lobbying for a government bailout.
Chipmakers Semiconductor Manufacturing International Corp. and Grace
Semiconductor Manufacturing Corp., which once hoped to challenge the
Taiwanese as world leaders, are limping. "Our greatest challenge is
how to turn the company profitable," says Anne Chen, SMIC's Hong Kong
representative.
Even computer maker Lenovo Group (LNVGY), the highest-profile of
China's up-and-comers, is struggling overseas. Lenovo's acquisition
of IBM's (IBM) PC division in 2005 led to predictions that it would
morph into a powerhouse capable of challenging Dell Inc. and Hewlett-
Packard Co. (HPQ) Instead, even as Lenovo remains the leader in
China, it is falling behind big competitors abroad. It gained share
in the first quarter, but not enough to keep Taiwanese rival Acer
Inc. from jumping ahead of it into the No. 3 position worldwide,
industry watcher Gartner says. On Apr. 19, Lenovo said it was firing
1,400 people, or about 5% of its global workforce, with most of the
cuts coming out of Europe and the U.S. It plans to fill some of those
jobs with lower-cost employees in China. "We have more work to do,"
said Rory Read, president of Lenovo's Americas group. "We have strong
competitors out there."
Some of the malaise afflicting China's tech majors can be chalked up
to market forces in what are largely commodity industries. Makers of
LCD panels moved into the business after 2004, the year the sector
was at its most profitable. Since then, few players have made money.
And SMIC's woes are partially the result of a downturn in the
semiconductor industry. Although the Shanghai-based chipmaker on Apr.
27 said it posted a $9 million profit for the first quarter, without
one-time financial gains SMIC would have finished $40 million in the
red, brokerage Macquarie Research Equities estimates. For Lenovo, a
price war at home has hammered margins, and its overseas effort has
been hampered by logistical problems. While sales of consumer laptops
are surging in Europe, for instance, Lenovo cant get enough machines
into stores there.
The woes of China's tech hopefuls, though, aren't entirely the result
of poor timing or management missteps. What was supposed to be a
major advantage for Chinese tech companies--the backing they receive
from Beijing--has in many cases turned into a liability. In exchange
for preferential loans, tax breaks, and sweetheart property deals,
Communist Party bosses often get to influence key business decisions.
Take SMIC. The chipmaker will soon operate plants in five cities
across China. By contrast, SMIC's Taiwanese rivals, United
Microelectronics Corp. (UMC) and Taiwan Semiconductor Manufacturing
Co. (TSM), have built most of their factories in two science parks
just a few hours' drive from one another in Taiwan, making it easier
to manage the plants. So why has SMIC spread out so much? "Every
[local] government wants to go into high tech," says Pranab Kumar
Samar, an analyst in Hong Kong with Daiwa Institute of Research. That
might make for good politics, but it's not exactly smart business.
Many Chinese companies are also paying the price of a government
effort to spur the development of homegrown technologies. State-owned
Datang Telecom Technology & Industry Group, for instance, has
squandered hundreds of millions of dollars and almost a decade on a
Chinese standard for so-called third-generation (3G) mobile telephony
when it could have easily adopted one of the international standards
already in use. This has also hobbled Huawei, ZTE, and the country's
dozens of cellular handset makers. Chinese companies "don't have a
[3G] market in which to cut their teeth," says Mark Natkin of
Marbridge Consulting Ltd. in Beijing.
Meanwhile, competitors from other countries aren't standing still.
Taiwanese, Korean, and Japanese LCD makers are pouring billions of
dollars into more efficient plants, both at home and on the mainland.
The Chinese lack both the technology and the cash to build such super-
expensive factories. "It's very hard to catch up," says Byron Wu,
director of China research for market tracker iSuppli Corp.
Don't count China's tech companies out yet, though. One sector that's
thriving is the Internet. Search engine Baidu.com (BIDU) continues to
widen its lead over competitors Google (GOOG) and Yahoo! (YHOO)
Tencent Holdings is the leader in instant messaging, and NetEase.com
(NTES) rules in online games. One thing they all have in common: no
government backing. And in contrast to the likes of Lenovo and SMIC,
theyre focused largely on the local market.
China's state-backed champions, meanwhile, still have plenty of
potential. Remember that it took the Koreans and Japanese decades to
work their way to global dominance. And the Chinese have a huge home
base that gives them a chance to continue honing their skills for
future forays into overseas markets. The payoff, however, may come
later than China's boosters initially anticipated. There was a lot of
excitement about Chinese technology companies," says Frank Lee, an
analyst with Deutsche Bank (DB) in Taipei, but Chinese policymakers
"underestimated what it would take."
Einhorn is a correspondent in BusinessWeek