Founded a mere 20 years ago, Cisco Systems Inc. is an adolescent compared with its older siblings in the electronics industry. But when president and CEO John Chambers speaks, many in the global manufacturing economy pay close attention.
These days, Chambers has been preoccupied with China: its high-velocity economy, the 100,000 engineers it graduates annually, its lower-cost labor pool, the business opportunities it poses, and the tough competition that Western companies face from local startups.
"In China, we will have a number of very strong partners as well as competitors," Chambers said in September during a presentation at the Beijing St. Regis Hotel. "In the future, when you look at our competitors, maybe as many as three will come from China."
The future of China and its role in the global economy is clear, Chambers told his audience: The country "will become the IT center of the world" and will race past the United States and Japan to become the largest global economy within the next 20 to 30 years.
The fact that China, an ostensibly communist state, is assuming a greater role in the global economy is obvious to most observers, particularly in the electronics industry. Global Sources, a joint-venture partner of CMP Media LLC (publisher of Electronics Supply & Manufacturing), cited figures from China's Ministry of Information Industry to predict in a recent report that the country's electronics output would grow 26 percent in 2004, to reach $286 billion, up from $227 billion in 2003.
By 2008, when Beijing hosts the Olympic Games, China's electronics industry revenue could reach $600 billion, making the nation the world's third-largest electronics maker, behind only the United States and Japan, Global Sources said in the report, titled "Consumer Electronics Outlook: China."
The twin pistons of China's high-tech growth are component manufacturing for global companies and rising Chinese consumer demand for all things high-tech, according to Global Sources.
Consumer, communications and computer products accounted for 66.4 percent of China's total electronics industry revenue in 2003, according to the report. The year-on-year growth in 2003 revenue was 62 percent for computers, 26 percent for electronic components, 21 percent for consumer electronics and 20 percent for telecom equipment and software.
Hyper growth in 2003 came in segments such as notebook computers, which saw a whopping 338 percent increase. Even cell phones-for which China is the largest market in the world-racked up a 54 percent growth rate.
Whether China's supercharged high-tech growth continues hinges on the nation's success in curbing counterfeiting and software piracy, experts said. China is notorious for software piracy and patent infringement. Some Chinese companies try to close the technology gap by outright copying and reverse-engineering products purchased from rivals, according to industry executives.
"At Intel, our critical strength is our intellectual property. The notion that our Intellectual capital can be stolen is, as you can imagine, very unsettling," said Claude Leglise, vice president of venture capital investments at Intel Corp. (Santa Clara, Calif.).
"Protecting intellectual property is critical from two perspectives," added Leglise. "One is the ability for foreigners to bring their technology to China, and the other is for China to develop technology so it can grow its industries."
Stopping the flood
The Chinese government has promised to crack down harder on piracy and counterfeiting in order to sustain investments from foreign high-tech companies. In the first half of 2004, China seized 2 million fake compact disks in response to increased U.S. pressure to curb counterfeiting. Beijing sent 13,000 employees to check 8,000 CD and software dealers nationwide in the first six months of last year, fining violators 30 million yuan ($3.6 million), Zhang Zhigang, a vice minister of commerce, said at a press conference in Beijing.
"A national campaign is very welcome because it may shore up some areas where enforcement is weak," said Lawrence H. Sussman, a lawyer with the Beijing office of U.S. law firm O'Melveny & Myers LLP. "There is a comprehensive set of IP laws, but enforcement is still lacking."
China's Administration of Industry and Commerce probed 13,922 trademark cases in the first half, bringing to 117,000 the number investigated since April 2001, according to Zhang. The Customs General Administration and the Intellectual Property Office investigated a further 4,036 violations in the first half.
More than 90 percent of the software used in China is fake, according to a study by the Business Software Alliance and International Data Corp. That amounts to one of the worst piracy rates in the world.
"We agree that software piracy is serious," Yan Xiaohong, vice director of China's national patent office, said during a news conference late last year. "We have significant work to do ahead."
Indeed, ersatz DVDs and software were still available within a 10-minute walk from Beijing's State Council News and Information Office, where the news conference was held. Traders touted copies of Microsoft's XP and Windows 2000 software for about $1.20 a disk. In a nearby street, Time Warner Inc.'s entire Harry Potter movie series was on offer for about $12.
"I understand the export of counterfeit goods is getting worse," trade lawyer Sussman said. "The penalties aren't high enough. You can shut down a counterfeiter. He's fined 4,000 yuan but is up and running again the next day."
The Chinese government hopes to bring in tougher penalties for intellectual property rights violations early this year, revising the law to make it easier to bring criminal prosecutions.
"We have made 100 years of intellectual property rights progress in 20 years," vice minister Zhang said, referring to the fact that China didn't even have copyright protection laws on the books until after 1978. "But we must work harder."
Still, they come
Western multinational companies aren't shying away from China despite its numerous problems. They continue to plow investments into the country, especially into new R&D laboratories.
At Cisco's September press briefing in Beijing, CEO Chambers announced that the company was investing $32 million in a new lab in Shanghai to conduct research into mobile and Internet voice/data transmissions.
Motorola, the world's second-biggest mobile-phone maker, recently announced plans to invest $90 million in a new R&D center in China.
Given the country's status as "the world's largest mobile-phone market, global technology companies are forced to come to invest in R&D to cater to Chinese consumers," said Edward Yu, president of Beijing-based technology research company Analysys Consulting. "This, in turn, will help put China in the driver's seat for high-tech development in the decade to come."
Chinese networking equipment giant Huawei Technologies Co. Ltd. grew by manufacturing and selling routers and switching devices for China's mobile-phone networks at prices that undercut Cisco's. In recent years, it has made quick strides as an exporter, with exports expected to reach 50 percent of sales in 2005, according to vice president Tian Feng. Huawei recently signed an agreement with 3Com to sell a range of products in China under the Huawei-3Com brand and internationally under the 3Com-Huawei brand.
China's vast supply of electronics engineers-the nation produces more than 100,000 graduates a year, according to Global Sources-and their low salaries are two other major reasons that foreign technology companies continue to invest in China, even at the risk of losing their intellectual property.
Chinese engineers earn between $5,000 and $10,000 a year, less than a tenth of Silicon Valley wages and a third of engineering wages in India, according to the Global Sources report. "With such low salaries and plentiful skilled labor, foreign tech companies must come to China to invest," said Yu of Analysys Consulting.
Motorola, for one, plans to build a 55,000-square-meter campus in Beijing to house 3,000 employees. "We don't only do business in China; we are designing the most advanced phones in China for Motorola worldwide," said Motorola China president Daniel Shih.
Foreign high-tech companies have invested a total of $70 billion in China, or one-eighth of total foreign investments made in the country, according to the Ministry of Information Industry.
The Chinese government also is encouraging the growth of high-tech consumption by requiring that the nation's broadcasters convert to digital TV by 2015.
China's main cities have begun broadcasting digital TV signals, according to the Global Sources report. The development of digital TV in China is expected to enter a period of accelerated development whenever the government releases the terrestrial standard for China's digital TV broadcasts.
"China's low-cost labor, huge domestic market and rapidly developing economy have attracted international IT companies to establish manufacturing operations or sales offices in the country," Global Sources said in its report.
Because of its focus on educating top-notch engineers, China's emergence as a high-tech powerhouse is almost a foregone con-clusion, according to Cisco's Chambers.
"At least 25 percent of [China's] graduates are in computer science or engineering," Chambers said. "You're going to see China's gross domestic product grow 8 percent, 9 percent or 10 percent a year, not only for one decade but for two to three decades."
T.J. Zheng is based in Beijing and can be reached at email@example.com.