Quite a bit of attention on the Google saga. Breaking into the middle kingdom has its fair share of challenges, but the rewards are great.
Quotable Quotes – “When it comes to sales, it’s a huge market of a billion-plus people. If you capture even a small percentage of that, you’re still doing well…” Anna Han, Santa Clara University law professor who advises American companies on doing business in China. “It’s a market you can’t ignore.”
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Tech firms find China a challenging market
By John Boudreau and Brandon Bailey
Source – Mercury News, 16 Jan 2010, updated 17 Jan 2010
Google’s threat last week to leave China, after it spent millions of dollars to get a toehold in the country’s enormous Internet market, underscores the promise and pitfalls of operating in the world’s fastest-growing major economy.
Western companies have stampeded into the country of 1.3 billion, drawn by both a huge pool of cheap labor and the buying power of a swelling middle class. But doing business in China means dealing with rampant piracy, an intrusive government, widespread theft of intellectual property and a regulatory environment that often favors local competitors.
And while no other Western companies signaled they would follow Google’s example, more are expressing frustration with business conditions in the country.
“I think there are lots of areas in which it is or will get harder to operate,” said Mark Natkin, managing director of Beijing-based Marbridge Consulting.
Government intrusion varies significantly by industry. The Internet and telecommunications industries are under tight scrutiny, facing censorship of the Internet, because the technology of companies like Google can provide access to politically sensitive information.
“If you provide something they disapprove of, they’ll come down on you,” said Anna Han, a Santa Clara University law professor who advises American companies on doing business in China.
On the other hand, manufacturers of everything from shoes to chips can face fewer pressures and in fact are often warmly embraced. When Intel announced it was building a chip plant in the northeastern city of Dalian, government officials rolled out the red carpet with tax breaks and handshakes.
Many companies have downplayed the problems and continue to make a huge bet on the country. Commenting on Google’s charge that hackers with possible ties to the Chinese government launched cyberattacks on the search giant and at least 20 other companies, Hewlett-Packard CEO Mark Hurd told the Financial Times that “I’d hate to run off on this one example and say it’s a threat to the evolution of the IT industry.” He described China as “an amazing market with tremendous growth.”
In 2008, Palo Alto-based HP sold more than 4.4 million PCs in China, making it the nation’s second-largest computer vendor after Lenovo, according to the IDC research firm. Not long ago HP announced it planned to open its second manufacturing plant in Chongqing in the country’s central-western region. In addition, a branch of HP Labs, the company’s highly regarded research division, is based in Beijing.
But even PC makers ran into a roadblock last summer when the government suddenly demanded all new computers sold in China be preloaded with the so-called “Green Dam” Web-filtering software that would block both pornography and banned political sites. After a global and domestic uproar, the government indefinitely set aside the requirement.
In a report last fall, the European Chamber of Commerce complained that despite some positive changes, operating in China was becoming more challenging.
For instance, the Chinese government released new rules in November requiring that computer hardware, software and green technology products must be based on intellectual property that was developed and owned by Chinese companies, in order for the products to be certified for sale to Chinese agencies.
“No other country in the world has a proposal as draconian as this,” said Robert Holleyman, CEO of the Business Software Alliance, a trade group for commercial software companies. “This is completely antithetical to how products are created, particularly for software, which tends to be developed on a global basis, with elements designed by teams all over the world.”
“U.S. companies are finding it increasingly frustrating to do business in the Chinese market,” added John Neuffer, vice president for global policy at the Information Technology Industry Council, a tech industry trade group.
Added to these recent tensions are long-standing concerns. The Business Software Alliance, for instance, estimates that 80 percent of the software used by businesses in China is pirated, meaning they are illegal copies for which no license has been paid.
And knockoff brand-name laptops are hawked on street corners in Shenzhen, fake iPhones roll off nearby assembly lines and the latest version of Microsoft’s Windows operating system can be had for a lot less than its retail price.
Still, those who have operated in China for many years say the government is far more sophisticated about understanding what foreign companies need.
“I started doing business in China during the early ’90s. The restrictions back then were a lot more than they are today,” said Jack Jia, chief executive of Baynote, a Cupertino startup that makes search software and has operations in China. “In 1993, 70 to 80 percent of business was based on government relationships. Even business to business was done through the government.”
China’s strong infrastructure makes starting a business easier than in other countries, said Michael Cusumano, a professor at the MIT Sloan School of Management who has worked in both countries.
“There is corruption in China,” he said. “But it doesn’t compare with the levels of corruption you see in India.”
While frustrations are sure to continue, no one expects other major Silicon Valley companies to threaten to leave China, as Google has done.
“When it comes to sales, it’s a huge market of a billion-plus people. If you capture even a small percentage of that, you’re still doing well,” Santa Clara University professor Han said. “It’s a market you can’t ignore.”