Mainland China doesn't yet boast a Silicon Valley, but an influx of venture capital funding in promising new areas could put U.S. startups at a disadvantage as they compete for funds.

Venture capital players are increasingly betting on Chinese startups that supply the software, chips, and networks to feed the country's 400 million cell-phone users' voracious appetites for wireless data. That includes applications like instant-messaging, video-uploads, and mobile Web searches, along with consumer-level Web services such as social networking. The influx of funding saw a brisk increase last year—VCs bet $920.7 million on information technology companies last year, up 34% from 2005, according to a Feb. 13 study from Dow Jones VentureOne and Ernst & Young. And that funding shift across the Pacific could pressure Silicon Valley startups to devise business models with extremely meager cost structures as a way to attract venture capital.

Expanding Beyond China?
"The Valley investors I know are generally much more reluctant to make investments in American firms than in previous years," says Reed Hundt, the former Federal Communications Commission chairman and author of In China's Shadow, a book published last October on American competitiveness with China. Hundt also sits on several tech company boards.

Question is, can China's fledgling dragons spread their wings and expand beyond their home market? Investors hope so. If China's wireless and Internet companies make the trans-Pacific leap, it could mean new competition for U.S. startups. "Some days I wake up thinking that in areas like mobile services and social networking, the Americans better watch out," says Drew Clark, director of strategy at IBM's venture capital group. Still, despite Chinese tech companies' success at home—Baidu.com and Alibaba.com have respectively given Google and eBay fits in China—"whether any of those will escape China's gravity and come over to the U.S., I don't know," Clark says.

While VCs have hedged their bets in China by backing later-stage companies, "we're also seeing a surge in early-stage deals," Clark says. Venture investments in China last year hit a three-year high of $1.89 billion, according to VentureOne, and 22% of the 214 deals struck last year were second-round investments or later—up from 15% in 2005. But early-round deals still accounted for $828.2 million in venture investing, or 62% of all deals.

Partnering Abroad
Overseas expansion is difficult under any circumstances, and Web and mobile-phone apps are particularly bound by culture, says Richard Lim, managing director of GSR Ventures, the Chinese affiliate of Mayfield Fund, which manages nearly $300 million in China-focused venture capital. For example, Mayfield in December, 2005, invested $1 million in PingCo.com, which makes software for sending ad-supported SMS messages that are free to users. "You can't build that business outside of China," he says—other markets lack a large enough pool of wireless Internet subscribers to make the business model fly.

What has changed is the ability of venture-backed Chinese firms to strike deals with companies that have international reach. IBM sells consulting and technology to VC-funded startups including YeePay, an electronic payments company that has a deal with Visa of China; Lingtu, a creator of digital maps that supplies location-based services to mobile-phone giant China Unicom; and Digital Media Group, which operates a network that transmits ads to electronic billboards. DMG recently won the exclusive right to serve ads aboard the express train connecting Hong Kong with its international airport.

Chinese startups' aspirations—combined with the lower investments necessary to build a profitable Mainland company—are putting pressure on U.S. entrepreneurs to keep costs down. VCs are trying to keep investments in U.S. companies below $10 million if possible, and certainly below $20 million. "Everybody's living by the rule of keeping the burn rate really low," says Hundt. Whereas a 100-person startup in the U.S. might burn through $20 million a year, a like-size Chinese firm would probably consume just $2.5 million, according to Lim. "That's why Chinese companies get very profitable very fast," he adds.

VCs are also shying away from U.S. startups with high capital requirements and operating expenses, Hundt says. Take wireless Internet service providers, a category of companies long absent from VCs' U.S. portfolios. With the exception of Craig O. McCaw's Clearwire—which has amassed $900 million in backing from Intel and Motorola to assemble a high-speed wireless network using WiMAX technology—those plays aren't getting launched in the States. "In China, you still see investment activity in 20th-century service-provider models," says Hundt.

Still an Emerging Market
That's partly because average subscriber revenues in China are a fraction of what they are in the U.S. and Europe, leaving plenty of room for expansion. Indeed, the potential for big returns from backing companies that sell in China alone is often enough to justify investments, Cadol Cheung, a managing director at Intel Capital, said in an e-mail. Intel has a $200 million fund aimed at Chinese investments. Even though many Chinese executives aren't experienced in international business, and lack sufficient English skills to expand overseas, China's IT market is so large that "the opportunity cost of going out is too high," he says.

The top investors in China last year included IDG Ventures, Sequoia Capital, Jafco Ventures, Walden International, and Softbank Capital, according to VentureOne. Among the richest early-stage deals last year, TV shopping company LuckyPai in November raised $15 million from Intel Capital, DT Capital Partners, and Lightspeed Venture Partners. Semiconductor and networking equipment companies whose technologies underpin the emerging Web are also ripe for investment, says Gina Chan, a research manager at VentureOne. NTS Technology, a maker of equipment for 3G wireless networks, announced on Jan. 4 that it had raised $10 million in first-round funding from Softbank Asia Infrastructure Fund.

The hottest area for technology investing overall last year was in VentureOne's "information services" category—filled with companies focused on social networking, online video, and other user-generated Web content. They garnered $464.6 million—more than half of all venture investments in Chinese IT companies last year.

Regulatory Hurdles
Still, several factors could hamper future investments. First, China's Internet economy generates less cash than that of the U.S., which could limit the number of successful companies reliant on revenue from online advertising, e-commerce, and Web site subscriptions. The Chinese government is also working on country-specific technology standards in areas including digital television, Radio Frequency Identification (RFID) chips, and software encryption methods. That could boost costs for foreign companies and help Chinese firms compete, but it's potentially at odds with VCs' interest in building the broadest possible markets for companies in their portfolios. And the Chinese government has been slow to issue operating licenses and construct 3G data networks, which could power new cellular applications like mobile blogging, searches, and mobile video uploads.

Beijing also introduced new foreign-investment rules on Sep. 8 that could subject mergers and acquisitions and initial public offerings to longer approval periods and more scrutiny. Possibly as a result, fourth-quarter venture investments in China slowed by 23% compared with the third quarter, to $417.5 million, according to VentureOne.

According to GSR's Lim, some of the most important technology companies of the next decade will emerge from China. "The most valuable Chinese companies have some significant degree of innovation—whether in their business models or technology—compared to their counterparts in the United States," he says. The hope for profits now rests with the VCs' ability to help the Chinese startups navigate a daunting course of technical, regulatory, and cultural barriers.

Sources: New York Times

The mergers and takeover of local companies by foreign investors have brought China "new opportunities" and would help the country ascend the world's industrial chain and make better use of foreign investment, a senior commerce official said here on Sunday.

"Some departments do not have a thorough understanding of the mergers and acquisitions of local enterprises by overseas investors and therefore adopt a cautious approach in dealing with the issue," said director Li Zhiqun of the Foreign Investment Department of the Ministry of Commerce in an interview on the ministry's official web site.

"China must promulgate at an earlier date the regulations on foreign mergers and acquisitions (M&As) to encourage fair competition, standardize and advance mergers and takeovers," he said.

Foreign M&As have become a controversial topic since last year because of the concern that such deals might jeopardize China's industrial safety.

China has beaten other developing countries to become the most popular destination for overseas capital for years, but greenfield investment, or new operation on a bare site, has been the dominant form.

Only recent years that multinationals started to try merging with or taking over local companies in chemical industry, fundamental material industry, consumer goods production and services sector.

"Such mergers and acquisitions are small in both number and turnover," Li said.

The director identified a number of uncertainties in attracting foreign investment including the unification of corporate income tax rates which would require foreign-funded companies to pay the same rate as local competitors, the appreciating yuan, higher lending rates, lower export tax rebates as well as stricter policy changes in processing trade, land, labor and environmental protection.

"The Ministry is striving to make good preparations for the promulgation of new corporate income tax regulations and trying its best to secure the continuity and stability of foreign-investment-attracting policies," Li said.

The ministry together with other authorities is accelerating the revision of industrial guide for foreign investment and the catalog for high-tech products in favor of foreign investment.

China encourages foreign investors to channel their capital into the industries of high-tech, advanced manufacturing, service, agriculture and environmental protection, Li said.

China has overtaken the United States becoming the top seat for multinationals to establish their research and development centers according to a survey of the United Nations Conference on Trade and Development.

Foreign direct investment used in China topped 69.47 billion U.S. dollars last year, bringing the total foreign investment used to 685.4 billion U.S. dollars.

The country so far has more than 590,000 foreign-invested companies with 41,485 newly established last year, official data revealed.
 
Source: Xinhuanet

There is no innovation going on in China in the electronic industry, but there will be, Harry Rowen, former assistant Secretary of Defense in the US government, chairman of the US National Intelligence Council and president of the RAND Corporation told an audience at the Globalpress Summit Conference in Monterey last night.

"There are a thousand US companies with R&D centers in China, there's no research, and not a lot of development, but there is a lot of design work," said Rowen, "Chinese venture capitalists ask: 'Why should we innovate when there's so much low-hanging fruit out there?'"

The China government thinks differently. "The Chinese government finds this situation deeply unsatisfactory," said Rowen. He said that the government planned to increase China's annual spending on R&D from $30bn in 2005 to $113bn in 2020.

"There is no innovation in China but, in five to ten years' time, look out", said Rowen, instancing China's rapid rise up the table of the most prolific countries in filing for patents. It is now 18th in the world.

Asked by EW about the state of China's university system, Rowen replied: "There are no first-class universities in China", adding, "But they're trying to change."

He said that many extremely bright students came through the Chinese system, and some went on to US universities, but added: "Some of the brightest students don't want to go back."

Rowen said that the Chinese IT industry is dominated by management from large Taiwanese companies led by Foxconn and Quantum Computer. "The Chinese and Taiwanese are very reticent about this," said Rowen.

He said that, although China exported $342bn worth of IT and electronic equipment last year, 85 per cent of that value was attributable to imported components. For instance, $47bn worth if ICs were imported, not for use in China, but to be put into equipment and re-exported. "China is an assembler of products rather than a manufacturer," said Rowen.

Rowen is a great believer in China's future. One reason is that: "China has the most competent economic management of any country in the world," he said.

However, asked by EW about the traditional Chinese outlook that the top people are entitled to a good life, while the bottom people are entitled to little, Rowen replied: "Attitudes must change".
.

Source: Electronicsweekley.com

The China peril to U.S. moldmakers, and maybe moldmakers everywhere, seems more anecdotal than factual. Don't believe it? Read on: The author's experience in Chinese mold shops dates back to the advent of that country's moldmaking industry.

Just 20 years old, China's moldmaking industry is in its infancy. But in that short time, China has become the world's second-largest plastics processing market (behind the U.S.) and the third largest moldmaker (following the U.S. and Japan). The growth of China's moldmaking industry has been spectacular, and the pace of that growth has proven cause for concern for moldmakers elsewhere.

China's annual mold sales

In 2002, the accumulated turnover of China's moldmakers was estimated at $875 million. The 2005 revenues of moldmakers exceeded $7.6 billion, with exports of $925 million - the latter a staggering 50% increase over 2004. However, as in many sectors, China continues to import high-tech, high-precision molds and export less-complex, labor-intensive molds. In 2005, China's mold imports exceeded $2 billion. China imports high-quality and complex molds requiring multicavities, multicolor, and multimaterial, and a high degree of precision, with most of these from Japan, Korea, and Taiwan.

The mold industry in China is fragmented with only a handful of mold makers having annual turnover of more than $10 million.

Concentration in Guangdong could slow growth

Guangdong province (primarily the areas around Shenzhen & Dongguan) accounts for approximately 40% of China's total mold production. Moldmakers here also have the best processing equipment compared to other areas in China. But Guangdong's economic success will cause problems for moldmakers there. After almost three decades of breakneck growth, Guangdong is now the richest province in the mainland. Guangdong's GDP reached $159 billion in 2005 (11.9% of PRC's total GDP). By comparison, Hong Kong's GDP in 2005 was $173 billion. (In terms of per capita GDP, however, Guangdong lags far behind Hong Kong.) Guangdong Communist Party chief Zhang Dejiang believes that the province's economy will be as big as Taiwan's in a couple of years and South Korea's in another decade.

If he is correct, the chronic shortage of cheap labor for manufacturing industries in Guangdong will become worse as other sectors take off. More and more workers are leaving manufacturing for better pay and conditions in the services sector. As Guangdong becomes wealthier, living costs are soaring and employers have to offer higher pay for workers. The Pearl River Delta has labor-intensive industries such as electronics, textiles, food processing, and plastics, which employ about 15 million rural migrant workers from other relatively poor provinces. Normally, these workers return home for the Lunar New Year holiday and rush back to work after the long break. Until two years ago, employers in the Pearl River Delta could hire from a large pool of migrant workers after the Lunar holidays. A salary of $112 a month was sufficient for a migrant worker. Things have changed. Now even at $150 a month, factories cannot find enough hands.

There is also a startling change in people's attitudes. Jobs such as taxi driving, waiting on tables in restaurants, and working as domestic maids - once considered menial - are more attractive than factory work for many. The labor shortage sweeping the Pearl River Delta will require profound restructuring of attitudes and even of the economy.

Even with the labor "shortage" in South China, labor in China is still a fraction of the cost in the U.S. While China's labor force has a long way to go before it attains the skill sets of U.S. toolmakers, average wages in China are only a tenth of that in the U.S. and the Chinese workers' skill set is developing rapidly with the transfer of industries from other countries.

Chinese threat to U.S. mold makers ¡ªreal or imagined?

There is a great deal of anger and frustration with Chinese moldmakers who "are taking our jobs away." However, the ire may be greatly misplaced - at least for now. The perception of the Chinese threat to moldmakers in the U.S. is amplified manifold by the paranoia that China's exponential growth over the past 30-odd years has created. It must be remembered that China started with a zero base and, while China has the resources to maintain such a speed of growth for several more years, the rate of growth will inevitably taper off as the economy matures.

The emergence of China as a player on the world stage combined with the flattening of the world by advancements in technology has created uncertainties for workers everywhere - not only in the U.S. Many Chinese workers are also bewildered by the dynamic marketplace (where layoffs have now become a fact of life) that has replaced the state's guarantee of food, shelter, and jobs from cradle to grave.

China's economic development has benefited U.S. business interests as much as, if not more than, it has China. However, when companies shift jobs overseas, they clearly maximize returns for their shareholders and their executives at the expense of the laid-off workers.

The U.S. imported over $1.5 billion worth of molds in 2005 (less than the $2 billion that China imported). Canada accounted for $800 million of U.S. industrial mold imports - or a whopping 50.70%. China accounted for $79 million. Though China rose from being the eighth-largest exporter of molds to the U.S. in 2000 to the fourth-largest exporter in 2005, it still accounted for less that 5% of the mold imports to the U.S. While China's mold exports have grown rapidly, it still accounts for a miniscule portion of the U.S. mold market. Canada's 2005 mold exports to the U.S. were $97 million more than 2004, an increase greater than China's total exports in 2005. Considering that the U.S. imports only about 20% of its mold requirements, China's impact is limited to 1% of the U.S. mold business. China also is the third-largest importer of U.S.-made molds, after Mexico and Canada.

At least for now, the China peril to moldmakers seems more anecdotal than factual. China's mold exports to the U.S. are bound to rise as the quality of Chinese molds improves. However, moldmakers in competing countries like Germany, Portugal, and Taiwan may feel the brunt of the China threat before those in the U.S. do. Nevertheless, there is no gainsaying that Chinese imports of molds to the U.S. will increase at the cost of moldmakers in the U.S. and in the other countries exporting to the U.S. Though China's contribution to the decline of the moldmaking industry in the U.S. has been negligible hitherto, that is likely to change. The impact of China on the U.S. mold industry will be greater in the years to come. Moldmakers in the U.S. can view the China factor as a threat ¡ªor as an opportunity.
   
Sources: Modern Executive

It is only 20 years since Japan was getting under the skin of many Americans. They feared that the 21st century would be Japan's, as the 19th had been Britain's and the 20th America's. And just as Great Britain had reacted with a loss of nerve at the rise of Germany and the United States at the end of the 19th century, America near the end of the 20th seemed to be in the grip of what I have called a ''diminished giant syndrome.'' These worries appear astonishing now. For well over a decade Japan has been deeply mired in macroeconomic failure, its feared dominance having dissolved into dreary ordinariness.

Is China now poised to turn the 21st century into its century? Or will it, despite its phenomenal nearly two-digit annual growth over the past 15 years, rejoin the human race with a slower economy? Or is it possible that its powerful locomotive will, as Japan's did, shift into reverse gear?

Certainly, any number of popular writers believe China will only continue to go up and up, turning into a gigantic power. Some economists, like Richard Freeman and Alan Blinder, agree. Will Hutton, the former economics editor of the left-leaning British newspaper The Guardian, calls this the prevailing view, and in his interesting book ''The Writing on the Wall,'' he seeks to overturn it.

He is hardly the only one. Nearly all Sinologists have been debating the question of China's future for quite some time, and many of them have raised the likelihood of potholes down the Chinese road.

Signs of looming difficulties are not hard to find. Standard economic analyses indicate that China is likely to face problems with its exchange-rate policy, its financial sector and the inefficiency of its state-owned enterprises. Hutton certainly knows his economics, and any reader can profit from what he has to say about many of these issues. But his central thesis is that China's main problem is not the inadequacy of its capitalist economics, but the limitations of its Communist politics.

Indeed, it's true, as Hutton shows in great detail, that China faces a number of critical economic difficulties that are directly traceable to its lack of democracy. He mentions the Sinologist Elizabeth Economy, for example, who has documented how indiscriminate environmental destruction is turning the Chinese landscape into a wasteland. Should this damage be factored into the statistics on the Chinese economy, the result could well be to reduce China's estimated growth rate below its current levels. More important, the Chinese experience shows dramatically, as the Russian experience did, that environmental damage is likely to become ever more crippling in the future because there are no democratic institutions like public opposition and a free press to countervail and contain it.

Similarly, because China has an authoritarian regime, it cannot fully profit from the information revolution, thus inhibiting the technology that is at the heart of growth today. The PC (personal computer) is incompatible with the C.P. (Communist Party). So India, with its robust and chaotic democracy--what V. S. Naipaul has called a ''million mutinies''--has moved dramatically ahead of China in computer technology. Hutton points out that from 1981 to 1995 China had 537 scientists and engineers doing research and development per one million people while India had only 151, and that China had three times as many personal computers as India and a 4-to-1 lead in Internet usage. Yet by 2001, India was producing one-fourth more software, and exporting most of it. ''So despite massive investment,'' Hutton writes, China ''trailed far behind India.'' He points out, too, that China damages itself by seeking to control and stifle what its citizens can learn and disseminate. ''Yahoo, Microsoft and Google are part of the cultural yeast of globalization,'' he says, ''yet each has been at the receiving end of China's Internet firewall of censorship."

And it's not just growth prospects that are handicapped. China's authoritarianism creates political uncertainties that are equally problematic. Democratic governments facilitate orderly change; Communist regimes do not. Marxists may claim to believe in historical determinism, leaving no room for the randomness of events, but they are no less affected by the contingencies of history than anyone else. Asked many years ago by the economist Robert Heilbroner how China would evolve, the Sovietologist Padma Desai answered: It all depends on whether Mao Zedong or Zhou Enlai dies first.

What's more, China's authoritarianism is a breeding ground for corruption. As Hutton says, ''The morality of revolution--that the end justifies the means--becomes a morality that justifies corruption.'' Consider how the phenomenon of ''takings''--commissars and their cronies appropriating land from peasants--has led to numerous disruptions. In a political system lacking the essential attributes of a functioning democracy, social groups can't turn to a free press to take up their cause, or an independent judiciary to appeal to, or opposition parties to embrace their complaints. Revolts are what they have left.

All of these are problems within China. But the lack of freedom is likely to affect its trade strategy as well. As its flood of exports leads to ever increasing fears of job loss and reduced wages in the United States, there will be a strong temptation on the part of the American government to exploit human rights violations as a way of rolling back Chinese goods. When Japan was the perceived threat, those who feared competition, like the carmakers in Detroit and the chip manufacturers in Silicon Valley, had no convenient basis for their complaints and were forced simply to demonize Japan as a wicked trader. In China's case, the protectionist critics can credibly assail its lack of democracy and human rights abuses.

The question, then, is whether, the Chinese Communists will be able to make the necessary accommodations, justifying the optimism of those Sinologists who have been predicting a ''resilient authoritarianism.'' Or will China's leaders dig in their heels, suppressing dissent and opposition and possibly precipitating political and economic chaos? It's anybody's guess; and Hutton is not particularly helpful on this matter.

He does think, however, that the West can actively help the Chinese make the wiser choice, and a major part of his book, as his subtitle suggests, is devoted to arguing for engagement rather than confrontation. So he supports China's participation in the World Trade Organization and opposes protectionism. But the question, frankly, is: How does one make an 800-pound gorilla move in the right direction? Offering it Jessica Lange isn't going to make any difference; and kicking it in the rear, a course Hutton rightly counsels against, will not accomplish much either.

In the end, no matter what the West does, China is going to make its own choices, the way it did when, after nearly three decades of really bad economics, it turned to reforms under Deng Xiaoping. The giant everyone had expected to rise up in the 1950s continued snoring until the 1980s. Now it has awakened, and all the rest of us can do is watch as it takes its own faltering steps.
  
Sources: New York Times