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| October 2003 |
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| CHINA BUSINESS HEADLINES |
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Outsourcing Service in the Limelight
(October 23, 2003) China has the potential not only to pull in a huge amount of
outsourcing revenue from the United States but can also offer opportunities for
US outsourcing service providers, say industrial executives.
During the first China US Outsourcing Business Development Summit at the
weekend, Michael F. Corbett, president and chief executive officer of a US
outsourcing research company, said: "Outsourcing is still in its infancy stage
and we believe you (Chinese people) have tremendous opportunities to help shape
that future."
He said although China is already a big recipient of manufacturing outsourcing
orders from US companies, it still has good prospects for moving further up the
value chain by getting involved in more advanced areas.
While many US companies still give most of their software outsourcing projects
to Indian firms and ignore Chinese businesses due to language and legal
barriers, they are starting to pay more attention to China.
"Considering the two challenges Chinese companies face, my initial impression is
that they can start (off in) some technical areas, which have common industrial
language," said Corbett.
Corbett said he believes Chinese companies have a lot of room to develop their
scope for industrial design and engineering, as well as information technology
(IT) service outsourcing.
Rao Vellanki, offshore operations director of the US home appliance retailing
giant Best Buy Inc, said although his company has more than 500 people working
in India to develop internal information infrastructure, Best Buy is interested
in cooperating with Chinese IT service providers.
He has already made arrangements with some leading software firms in China
including Shenyang-based Neusoft - one of the biggest software exporters in
China.
Walter Fang, chief technology officer of Neusoft, said he anticipates that the
interest from US companies will create another huge market.
"Most of our outsourcing projects come from Japan, but I believe the United
States will be a bigger market for us in the future."
However, China will not simply receive outsourcing orders from the United
States, as it also has potential to offer such contracts to US firms.
William Poon, Chinese general manager of the Managed Services Department for the
US-based Hewlett Packard Services, said while his company had only worked on
projects from multinational firms in the past, he has been talking with several
domestic companies about outsourcing their IT services. Some agreements could be
announced in two or three months.
Sources: Xinhua News Agency
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China Upgrades Intellectual Property Rights Enforcement
(October 24, 2003) China has stepped up efforts to enforce laws on intellectual
property rights since its accession to the World Trade Organization (news - web
sites) nearly two years ago, the state-run Xinhua News Agency reported Friday.
Citing Wang Jingchuan, commissioner of the State Intellectual Property Office,
Xinhua reported that last year Chinese courts at various levels heard more than
6,200 civil cases on IPR issues, up 17.8% on year.
Of those cases 1,824 concerned copyrights, 2,080 concerned patents, and 707
dealt with trademarks.
In 409 criminal cases on IPR infringement, 253 violators were "brought to
justice," Wang was quoted as saying.
Wang added that patent offices, industrial and commercial administrative bureaus
and copyright watchdogs in China accepted 1,442 patent disputes and investigated
39,105 trademark violations resulting in total fines of 214 million yuan
($1=CNY8.28), and confiscated 67.9 million pirated publication products last
year.
Since 1985, when China adopted its first patent law, the country has constructed
an effective legal system for IPR protection, said Xinhua.
Wang's comments come on the heels of the European Union Chamber of Commerce in
China's position paper issued Tuesday. The document included criticisms that
China isn't cracking down on counterfeiters despite its pledge to implement
international standards for intellectual property protection.
E.U. Chamber Vice President Jan Borgonjon also told reporters Wednesday that
results of an internal survey found that 83% of chamber members feel that they
haven't seen a decrease in the counterfeiting of their brands since 2002.
Source: Dow Jones Newswires
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Chip Demand Rising, But What About Supply?
(October 28, 2003) What does a semiconductor company do when it has a great new
chip design, but all the chip factories are running at full capacity?
Well, it wrestles with - and sometimes loses to - that age-old issue of supply
vs. demand. Analysts say chip companies will soon enter that ring after a
three-year downturn that freed up tons of manufacturing space.
Because of the downturn, the chip industry isn't spending enough on new chip
fabrication plants, called fabs, say some analysts. That could leave them short
of capacity when things rebound.
"Capacity use at fabs has steadily increased," said Joanne Ito, an analyst at
Semico Research Corp. in Phoenix. "For state of the art (chip designs),
shortages are not far off."
A shortage of manufacturing capacity could slow chip industry growth just when
things are starting to look up.
On the other hand, manufacturing shortages could drive up chip prices. That
would help some in a market that's seen some prices, such as DRAM memory chips,
slump more than 80% the past three years.
Balancing Act
True, chip prices always fall over time. But in the past three years there has
been a free fall that has cut chipmaker profits and driven some companies out of
the business.
But it's a tricky situation. Rising chip prices could well raise prices for the
products powered by chips. And if businesses and consumers balk at higher
prices, then chip sales could fall off again.
It's a balancing act, says VLSI Research Inc. analyst Dan Hutcheson. And for
now, he says, the market is out of balance.
"It's a lot more probable that there will be an upturn next year - and that
there will be shortages of chips," Hutcheson said.
He points to flat sales of chip gear as chip sales rise. He says that shows that
companies aren't boosting manufacturing capacity.
On Monday the Semiconductor Equipment & Materials International trade group said
the chip equipment book-to-bill ratio in September was 0.95. That's a ratio of
new orders booked to old orders filled and billed. A ratio of 1.0 or better
shows growth.
The Semiconductor Industry Association trade group had predicted that chip sales
would rise 10% this year to $157 billion after a flat year in '02 and a steep
decline in '01. SIA President George Scalise now says there are signs sales
could grow as much as 12%. For 2004, the SIA forecasts 16.8% growth to $185
billion.
The SIA says chip factory use is above 85%. That's up from less than 65% in the
third quarter of 2001.
Scalise says PC and consumer device sales are strong. Network gear, another big
market for chips, also could see sales finally start to rise. Also, the latest
federal tax cuts will pump more cash into the market.
"You take all of that together, and we're in for a pretty good period," said
Scalise in a recent interview.
Perhaps too good, if supply can't meet demand.
Intel, IBM, TI Fine
With a few exceptions, spending on new plants, and on chipmaking gear by chip
companies that own factories, has "virtually collapsed" this year, said Jodi
Shelton, executive director of the Fabless Semiconductor Association. The trade
group's members are chip companies that don't own their own fabs. Instead they
use contractors, called foundries. The largest foundry is Taiwan Semiconductor
Manufacturing Co.
FSA estimates that 83% of all the capital spending by makers of chips this year
will be by foundries and memory chipmakers. Korea's Samsung Group, for example,
plans to spend nearly $4 billion on new plants and gear. Samsung is the No. 1
memory maker.
Shelton says companies like Intel Corp., IBM Corp. and Texas Instruments Inc.
will be fine. These big companies own their own factories. The great majority of
chipmakers, though, don't have their own fabs.
Intel Chief Financial Officer Andy Bryant doesn't see any capacity problems, at
least not at Intel. He says he's seen no panic buying by customers, who often
will buy large amounts of chips if they expect a shortage is near.
"We see nothing unusual," Bryant said. "It's almost an unusually normal"
marketplace today.
Intel might be an exception, says Hutcheson. "The industry is pretty nonchalant
about expanding at this point," he said, adding that even foundries could be
caught short. "The foundries don't want a repeat of the 2000 bubble, so they're
holding back" on spending.
Factories being built in China could fill the gap, say some observers. Hutcheson
disagrees.
"Sure, there are one to two dozen fabs on the books in China. But these are
still paper tigers," he said. "It takes equipment to make real capacity, and
this is not happening."
Source: Investor's Business Daily
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China's Web Portals Benefit From Economic Growth
(October 16, 2003) China's Internet content boom continues. Its three largest
Web portal companies - Sina Corp., Netease.com Inc. and Sohu.com Inc. -watch
their U.S. stock prices soar.
Sina's American depositary receipts, for example, are up in the last year to
about 40 from 2.
Hurst Lin, Sina's chief operating officer, co-founded SinaNet, one of Sina
Corp.'s two predecessors, in 1995. The firm provides sites designed to be
portals, or a user's entry onto the Web. Its many services include online games
and a short message service (SMS) for businesses.
Lin recently spoke with IBD about the Chinese and online economies.
IBD: What sort of growth do you see in the Chinese Web portal field?
Lin: The Internet economy is expected to grow 30% to 40% a year for the
foreseeable future. IDC says 150 million (Chinese) will be online by 2007, and
by 2008 China will pass the U.S. in the number of Internet users. So it's still
underpenetrated relative to many other markets.
We don't need to do anything to grow the market. The fundamental driver is the
falling price of the PC and telecom services, as well as the growth of the
Chinese economy. None of the three major portals have anything to worry about.
China is the real major economy of the 21st century. This is the last major
economy that's going to have hypergrowth for the foreseeable future. It's going
to rival the U.S. in 20 years.
IBD: What's the outlook for ad sales?
Lin: Online advertising had not grown in the past because the low number of
users online didn't make sense (vs. other ad outlets such as) newspapers, radio
and outdoor billboards. The switch got turned on when users (in China) reached a
critical mass of 80 million people.
Also, there's a professional class of Web users who are relatively high income.
Advertisers are figuring out they can use the Internet as a primary source of
information and entertainment. They're the ones who purchase luxury items, like
cars and cell phones. Car advertising is now among our top three categories. If
you watch TV in China, you take a bus. If you access the Internet, you're more
likely to buy a car. You see a lot of real estate ads as well.
IBD: Have you changed the way you solicit advertising?
Lin: Our head of sales (L.C. Chang) came from Grey International (in 2002). He
said we couldn't sell ads directly, like Yahoo used to do. Ad space on Sina is
sold like television: Prime-time spots (cost more), and we structure a pricing
plan (around that). About 70% of inventories are presold to the big four
advertising firms (for the year), and about 30% are held back hoping for a
better margin as the year goes on.
Now, when advertisers come to us, we send them to an agency. That takes away
some of Sina's advertising risk. It's the ad agencies' problem if a customer
pulls out.
IBD: Providing SMS means working with just a few carriers, mostly China Unicom
and China Mobile. Since they control the network, what is the risk they'll ask
for a larger piece of your revenue?
Lin: Theoretically, they could raise the toll, since they collect money on
behalf of end users. We have to go through them to get to our users.
Particularly since we're doing so well, they could say, "Why can't I take a
higher tax?"
But practically, it hasn't changed. It's been stable at a 15% revenue share plus
another 10% for usage of the network to pump content through their network to
cell phones.
We don't see any changes in sight, but theoretically it can happen any time. Has
there been talk about it? Yes.
But China Mobile consists of 33 operating units, like the old Ma Bell system in
the U.S. We sign our contracts with units individually, so they're renewed on a
rolling basis. So even if they raise the tax by a few percentage points, it's a
gradual (change).
Also, there are 400 smaller service providers in China. Some of these guys don't
have the scale we have. They'll drop off first (if rates rise) and we'll pick up
their market share. Passing price increases onto the consumer is another
possibility.
IBD: Could the telecom carriers enter the SMS content market?
Lin: Two telecom giants, China Telecom and China Netcom, are dying to come into
this market because they realize fixed-line growth just isn't going to happen.
It's easier for people to get a cell phone.
IBD: Why doesn't the largest carrier, China Mobile, go into the content
business, since it already runs the networks?
Lin: Even if they want to, logically why would they? We need them to collect
payment from end users. If they really want to stick it to us, it's easier to
levy a higher tax. Why hire 1,000 people to (provide content), especially when
with a stroke of the pen they can add two percentage points from content
providers? What's the point of trying to re-create the wheel?
IBD: When will they ask for those percentage points?
Lin: I don't expect it in the short term. Probably 2004-05. The dialogue about
it is that the SMS business is fine as is. But if we add new services like Java
games or ring tones, they're talking different economics.
IBD: So next-generation services won't have the same profit margins as your
current SMS offering. What's the status of those new services?
Lin: I wish they would take off. Even if our margins aren't the same, we're
still making a lot of money. Multimedia messaging services were launched in
August last year. The user experience has been kind of horrible. People kind of
give it up. You have to be a really determined geek like me . . . to get it to
work. We're trying to educate our users, and hopefully it will become more
stable. It looks like the transition will be a 2004 event, not a 2003 event. It
hasn't affected guidance, however, since it hasn't ever added revenue.
IBD: Are you worried that U.S. companies will enter the China Web portal market?
How do you defend against that?
Lin: U.S. companies have been in China for four years. The one with the longest
history is Yahoo China, which started in mainland China before Sina. But their
center of gravity is back in California, and that hurts their ability to capture
market share in China.
Will there be a shift in mind-set now that the three China portals have grown? I
think there will be. But is it too late for (U.S. portals) to get in the game?
By most interpretations, it is. What's their alternative? To buy an existing
entrenched player. EBay bought an entrenched auction player. If that's any
indication, these guys are thinking buy instead of build.
IBD: What kind of acquisitions are you looking for?
Lin: We'll look in high-growth areas like the mobile SMS and online game
sectors. Emerging areas like travel, search or auction are proven businesses in
the U.S., but they haven't taken off in China because of credit card payment
issues and other reasons. But it will get there in time. It may be late 2004 or
in 2005, but we're getting ready.
IBD: What SMS features are most popular in China?
Lin: We're heavily involved in dating networks. We collect 60 cents a month to
be in our database.
Sources: Investor's Business Daily
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China's Software Industry Catching up
(October 15, 2003) China's software outsourcing industry is expected to shorten
its gap with India in about three years with the advantage of a huge domestic
market and a rich talent pool, experts said at the two-day Global IT Outsourcing
Summit 2003 which opened in Shanghai Tuesday.
But the lack of ability to explore the high-end market and the absence of senior
software project managers could hamper the rapid development of Chinese software
exports, they noted.
"Although China's software industry has just taken off, it is going to largely
catch up with India in 2006 given its huge domestic market," said Girija Pande,
Asia Pacific director of Tata Consultancy Services - a subsidiary of India's
largest software firm.
"But China needs to nurture large-size companies to be capable of handling the
whole solution of complicated software, instead of only handling low-end
orders," he added.
Pande said most Chinese companies doing outsourcing work employ fewer than 100
workers, too small compared with their counterparts in India. China generated
about US$1 billion from software outsourcing last year, only a 10th of India's.
However, the past few years have seen China's software outsourcing business
starting to boom.
In shanghai, it is gaining momentum as many multi-nationals have shifted orders
to the city from countries like India and Ireland.
By the end of last year, Shanghai has got 1,207 software companies with a total
revenue of some 11.7 billion yuan (US$1.4 billion).
The city's software exports were valued at US$175 million last year, up 2.4
times from that in 2000. That accounted for about 12 percent of the country's
total.
Microsoft and Hewlett-Packard have opened global software research and
development centers in Shanghai.
Ericsson has also set up a telecommunications software research and development
center.
Shanghai Pudong Software Park Co Ltd, the city's software export center, is
aiming to become the world's top R&D center in 2010, said Hu Hongliang, its
general manger.
"We will finish a 580,000-square-meter software export center housing 20,000
staff in the park in 2006 with exports volume hitting US$300 million," he said.
"In 2010, the exports could touch US$3 billion while there will be 100,000
engineers involved in software outsourcing work."
Last year, 29 companies in the park had combined software exports of nearly
US$100 million.
Tang jun, president of Microsoft (China) Co Ltd, said Chinese firms must explore
the market in the United States and Europe if they want to develop further.
Sources: Shanghai Daily
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Citizens' Disposable Incomes Continue to Grow
(October 18, 2003) The per capita disposable income of China's urban
residents stood at 6,347 yuan (US$767.47) in the first three quarters of this
year, up 9 percent from the same period of last year, according to figures
released Friday by the National Bureau of Statistics.
The per capita disposable income of rural population stood at 1,802 yuan
(US$217.89), up 3.8 percent from the same period of last year.
Increased agriculture structural adjustment, the rising price of agricultural
products and the easing of farmers' financial burden enabled the rural
population's income to grow.
Source: Xinhua News Agency
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