Today’s global war is one of wealth, rather than military, and what can help generate wealth can be a focus on, among other things, technologies, suggests Handel Jones in ‘ChinAmerica: The uneasy partnership that will change the world’ (www.tatamcgrawhill.com).
In the US, individual companies such as Cisco, Apple, IBM, Google, Microsoft, and HP are highly innovative and have high market share in these industries around the world, the author notes. “A number of these companies are also creating new market opportunities. It is, consequently, important to regard these companies as part of the solution for building wealth.”
Restructuring plan
Cautioning that these are not enough, Jones advises the US that additional corporations in other markets need to be stimulated so that in the aggregate they create a positive trade balance. The combination of the Internet, mobile broadband access, demand for better medical care, and the need for more efficient automobiles and transportations systems will create a range of new business opportunities, he assures.
A chapter that lays out ‘a restructuring plan for the United States’ draws attention to companies such as Nokia, Samsung, and LG Electronics, which have emerged as major global companies in the last 10 to 15 years, despite their local markets being small. The author foresees that Chinese companies other than Huawei will emerge as major factors in global markets in the next decade or so.
Alerting that the time pressures on the US are increasing, which means that it is critical to start taking actions immediately, he rues that the US government is apparently oblivious to the seriousness of the situation, trying instead to get China to revalue its currency.
Upward mobility
Exploring Chinese culture, the author finds high upward mobility of the young within corporations, so different from Japan, where one’s level of responsibility is customarily related to one’s seniority. “In Chinese firms, often there is no group of older, experienced managers to serve as mentors for young managers.”
The book mentions examples of successful businesses in China built by young entrepreneurs, such as Tencent (Ma Huateng), Baidu (Robin Li), Focus Media (Jason Jiang), and Alibaba (Jack Ma). A key to the success of these entrepreneurs, as Jones decodes, is that they have applied market technology concepts developed in the US, Japan, and Europe while incorporating features unique to China.
Take, for example, Alibaba, a business-to-business online trading company that connects buyers directly with suppliers, cutting out the brokers and other intermediaries, thus combining Internet technology concepts from outside China with features unique to China. Not unlike a commercial Amazon.com, Alibaba offers a supply chain networking platform, explains Jones. “But because credit and debit cards are not as widely used in China, Alibaba has developed a PayPal-like payment technology, called Alipay, that is unique to China in that it is escrow based.”
Another business model that the author finds unique to China is that of Focus Media, which installed flat-panel advertising displays in elevators and other public places. “The advertising content is changed by people who go from location to location on bicycles to plug in new cards or DVDs. This way of updating content clearly would not be practical in most Western cities.”
Global competition
On the question whether Chinese companies will be able to compete globally, Jones feels the need to distinguish between the established and the newer companies. In the former category, he cites the case of China Mobile, China Telecom, and China Unicom, which have done well as wireless carriers in China. “However, the fact that China Mobile has 500 million subscribers in China does not necessarily mean that the company can compete strongly in markets outside of China.”
In contrast to traditional managers whose careers have not prepared them for the competitive pressures they must cope with to operate effectively in the global market, the newer entrepreneurs of companies such as Tencent and Baidu, Alibaba and Focus Media, hold the promise of China playing successfully on the global stage, the book postulates.
The track record, though, for new Chinese ventures, especially those in high-tech, has not been encouraging, observes Jones. Many companies in the electronics industry hit severe financial problems after their promising initial phase, he narrates.
“Some of these problems arose because they couldn’t develop appealing follow-on products.” A tougher problem for start-up companies, as the author outlines, is that the domestic market is highly volatile and intensely focused on low prices, making it therefore difficult to generate profits and invest in developing new products.
Looking back, he says that companies in Taiwan went through similar phases in their development of the electronics industry. “It took 5 to 10 years for companies such as Acer, Foxconn, and MediaTek to establish winning business models. But now the electronics industry in Taiwan is very competitive in technology and in manufacturing costs. It is able to compete anywhere.”
Taiwan-China synergy
In a chapter on Taiwan and its synergy with China, the author states that while the US has been Taiwan’s major export destination, China will be biggest customer for its exports during the next several years. “With their common language, it is very easy for the Taiwanese to communicate with the workers in China. The common language represents a major competitive advantage for the Taiwanese companies compared to Western countries that set up manufacturing facilities in China and have to rely on translators.”
Yet, it is not as if Taiwan would send its ‘crown jewels’ – its most advanced liquid crystal display (LCD) and semiconductor wafer fabrication facilities – to China, Jones clarifies. He informs that a range of restrictions have reduced the ability of Taiwanese companies to provide their most advanced technologies to China. Which is why ‘many of the most capital-intensive facilities, such as those required to make silicon wafers and flat-panel displays, are located in Taiwan, while the high-volume assembly facilities are located in China.’
Wafer economics
You may be aware that Taiwan is semiconductor world headquarters, supplying 80 per cent of the total global market for wafers from its foundries or fabs. These wafers, with imprinted integrated circuit, serve as the brains of computers, cell phones, music players and other devices, reads a snatch, for starters. “Large companies such as Intel and Samsung make their own wafers. Companies such as TI, Qualcomm, and Broadcom buy wafers fabricated by vendors.”
A quick 101 on the economics involved is that the wafers obtained from semiconductor vendors can typically represent between 25 and 40 per cent of the selling prices of semiconductor products. “Semiconductor prices, in turn, can represent 10 to 30 per cent of the selling prices of the devices in which they are installed. If the makers of electronic devices can control the supply of semiconductors from a foundry or can negotiate extremely advantageous prices from their semiconductor vendors, that will greatly improve the profit margins from the sales of the devices.”
Optimistic scenario
Taiwan’s greatest asset may be its strong optimism about future opportunities, Jones opines. As example of ‘forward-looking optimism,’ he refers to the work on new display technologies, including organic light-emitting diodes (OLEDs), which could be thinner than a sheet of paper and lighter, and using less power.
“They also are brighter, show more colours, have better contrast, and have a wider viewing angle. Because they can be made on flexible media, OLEDs can be embedded in fabrics, clothing, or paper. While the leading developers of OLED technologies are in Japan (Sony) and South Korea (Samsung), Taiwan is developing the skills for high-volume manufacturing of this promising technology.”
The chapter wraps up with two conflicting scenarios, thus: “China is a high-reward but potentially high-risk market for the Taiwanese corporations. China offers Taiwan the chance to duplicate the island nation’s present success on an absolutely vast scale. Or China could use the IP (intellectual property) to further expand its own success and rob Taiwan of a huge opportunity.”
The most likely outcome, in Jones’ prediction, is a combination of the two, where the ‘synergy’ is the advantage to China to advance its own industries using Taiwanese IP, even as Taiwan benefits from a large opportunity to sell additional goods to China.
Recommended addition to your ‘global’ reading list.
Tailpiece
“After outsourcing our manufacturing to China, we sent our board to Beijing…”
“To make hard negotiations?”
“No, on a one-way ticket!”
