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Terence Shen's Column

For small high-tech firms, is now a smart time to enter China?


Introduction

Is now a smart time to enter China? My answer to the question will be yes. I would like to point out three reasons why it is a good time for us to invest in China.

Firstly, China’s economy is growing fast throughout last three decades and is still booming. According to China’s National Bureau of Statistics, Chinese economy grew by 8.7 percent in 2009, and had 10.6% increase in 3rd quarter of 2010 over the same period of last year. Foreign Direct Investment in China also grew by more than 34% in the Tenth Five Year over the Ninth. These latest statistics show that both overall economy climate and investment environment in China is pretty good and quite stable.

Secondly, government policy prefers foreign investment in high-tech industry. Strictly speaking, it is a good time especially for high-tech company to enter China. China state council published a new guideline in relation to foreign investment in China on April 2010. In the guideline, government states that they encourage foreign investment in high-end manufacturing, high-tech industries, modern service industries, new energy and energy-efficient and green industries, but restrict investment in high-pollution, high energy consumption and raw material intense industries.

Thirdly, the investment in China’s high-tech industry is feasible and the government policy for foreign investment is implemented quite well. In many provinces and cities, local governments established so-called Hi-tech Industries Development Zones to attract high-tech investment. For example, Xi’An Hi-tech Industries Development Zone provides well established infrastructures and facilities such as power, steam and heat, roads, communications, computer network and bonded warehouses. They built primary and middle schools, kindergartens, 3-star hotels, clubs, golf courses, parks and beautiful residential quarters for employees and their families as well. In another Hi-tech Industries Development Zone in Chengdu promote various incentive policies for high-tech enterprises in the area. For instance, they financially support enterprises in IT, pharmaceutical, precision manufacturing industries and offer an office rental subsidy to Software companies that set up an R&D office at Chengdu Hi-Tech Zone.  These main reasons supported by concrete examples show that entering China could provide opportunity of success to oversea high-tech companies.

I will examine what advantages and disadvantages we have if we move our business to China. I also would like to present my recommendations with real cases.

Opportunities and Recommendations

In comparison with local potential competitors in China, we enjoy several comparative advantages. First, we have unique and innovative technology. As long as we continue to invest in Research & Development, the innovative technology we have would always be our key comparative advantage. Second, we are much better financially than Chinese local companies of the same size. Not only can we invest more money in R&D, we also have option of business acquisition. Third, we would enjoy more comfortable status since some government policies favour foreign investors. There are also two crucial disadvantage. First we do not have oversea business experience. We could encounter difficulties in China’s market that we have never experienced before. Second, we cannot compete with large multinational corporations because of our size and ability. What kind of opportunities and challenges we will have depends on how we understand our advantages and disadvantages.

My first recommenation is to join partnership with Chinese local companies such as Joint ventures and provide demanded products in Chinese market. According to The New York Times, many high-tech companies have moved their business to China, including large companies like “Applied Materials” and small ones like NatCore Technology. Applied Materials, for example, is one of Silicon Valley’s most prominent firms. It makes equipment for the manufacture of solar panels. They realized that The Chinese demand for energy has presented a strategic opportunity to high-tech companies. According to report by an investment consulting company, China’s green energy programs attracted $34.6 billion in investments in 2009. For China, alternative energy is naturally of great strategic importance, since the country is fast overtaking all others as the most preferred manufacturing location. This year, Applied Materials announced on their official website that they have signed a memorandum of understanding to explore projects for accelerating the development and deployment of solar photovoltaic (PV) technology with China Energy Conservation and Environmental Protection Group, which is a state-owned new energy company in China. This is a very smart move. The State-owned enterprises are usually strongly supported by government. If Applied Materials is working with SOEs, it is much easier for them to accomplish their projects without worrying too much about government restrictions or regulations. Also, other Chinese companies can hardly become strong competitors to Applied Materials in China.

The second recommendation is to build R&D facilities and hire local talents in China. There are several benefits. First we can reduce the cost for facilities and human resources. We can found talented people with less labour cost and relatively cheap facilities in China. Second, we can enjoy the benefits such as reduced taxes from local government’s policies toward high-tech investors. Like Applied Materials, the Xi’an city government sold a 75-year land lease to them at a deep discount and is reimbursing the company for roughly a quarter of the lab complex’s operating costs for five years, according to the New York Times. We can also utilize good infrastructures the government built for high-tech companies that located in specific “industrial development zones”. Third, it is a good opportunity to enjoy the first mover advantage in this specific industry in China. China could be the largest consumer market in the world. It is more efficient to do both research and production in China if we sell products in Chinese market. Forth, because the high-tech industry has a bright future, it will be much more important industry as far as Chinese government considered. The the potential market capacity makes China as one of the best place for high-tech development and investment. I believe that it is because of the same reasons, Applied Materials have built the newest and largest research labs in Xi’an city in China. Not only the large corporations, small high-tech company also did the same. For instance, NatCore Technology, a relatively small company in New Jersey, also reached a deal with a consortium of Chinese companies to finish developing its invention and mass-produce solar panels that are thinner and use less energy and toxic material to manufacture in Changsha city.

The third recommendation is to consider the possibility of exporting high-tech products from China back to US and even the world. The market for our products currently is still the United States. According to academic studies, China’s processing trade policy–which exempts input imports for re-export from tariff and value-added tax (VAT)–has played an important role in helping China attract FDI and expand its exports. Our company can be more comparative than our competitors in the US market since we would have lower cost and higher income by relocating research centres and production line in China.

Challenges

As I stated before, we also have many disadvantages. It is possible that we will face challenges when we go to China. The first challenge would be different business culture in China. For example, Chinese business negotiation has unique characteristics from other countries. When dealing with Chinese partners such as negotiation, we have to understand the way they do business and Chinese people’s mentality. In addition, our employees sent to China also need to learn Chinese language and communicate well with our Chinese employees. It is important to create good working environment. This is sometimes very difficult and time-consuming so that we need to prepare in advance.

The second challenge we will face in China as a high-tech conpony is the problem regarding to protection of intellectual property, especially our technology. There are two things that Chinese government and enterprises want: money and technology. We can find many examples of stealing technology by Chinese employees in foreign companies. In the case of Applied Materials, it reports that Applied Materials has taken measures in response to a greater challenge of fighting technological theft. For example. They seal its computers’ ports in order to prevent the easy use of flash drives to record data. And, employees are not allowed to take computers from the building without special permission, and an elaborate system of computer passwords and electronic door keys limits access to certain technological secrets. But to a small company like us, it could be easier to manage employees.

Conclusion

To sum up, I believe that it is good time now to enter China for high-tech company no matter it is big or small. Both business environment and government policy in China are in favour of development of high-tech industry. However, whether or not can we be successful in China depends on understanding of our own advantages and disadvantages and also our business practices. It is possible that we will succeed if we can overcome these difficulties and potential challenges I have stated in the report.

References

Applied Materials Official Website, <http://www.appliedmaterials.com/news/articles/applied-materials-and-china-new-energy-leader-cecep-collaborate-advancing-solar-pv&gt;

Bradsher, Keith. China Drawing High-Tech Research From U.S. The New York Times, March 17, 2010.Chinese Government website, <http://www.gov.cn/zwgk/2010-04/13/content_1579732.htm&gt;

Chengdu High-tech Industrial Zone, <http://www.chengduhitech.co.uk/Guide/Government_Policies.asp&gt;

Cheung, Kui-yin. FDI, Export and Innovation Performance of China’s High-tech Product Industry. Journal of the Academy of Business and Economics, Jan, 2009.

Daily Markets. <http://www.dailymarkets.com/stock/2010/08/23/applied-materials-china-push/&gt;

FDI in China, <http://www.fdi.gov.cn/pub/FDI_EN/Economy/Investment%20Environment/default.htm&gt;

National Bureau of Statistics, <http://www.stats.gov.cn/english/statisticaldata/Quarterlydata/t20101105_402681396.htm&gt;

Xdz.com <http://www.xdz.com/article_show5.asp?ArticleID=602&gt;

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