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[China Special] China’s New Frontier for American Companies

A new wave of American companies is setting up shop in China. While large conglomerates have been in China for many years, smaller companies are now starting to arrive.

Big or small, American companies face similar challenges — with the legal system, the banking system, and a lack of connections in a culture that relies heavily on personal relationships.

Yet the market potential is such that companies continue to arrive, setting up shop from Beijing to Shanghai. The semiconductor manufacturing fabs are arriving, as are the telecommunications-related companies, and even the venture capitalists. And the Chinese government’s decision to standardize on Linux software has energized a new market.

Consumer Electronics

Abundant engineering talent, skilled labor, and lower costs are attracting many leading consumer electronics and PC manufacturers to China, according to Bing Yeh, president and CEO of Silicon Storage Technology Inc (SST). High-volume networking and wireless communication products are especially suitable, he said.

SST has invested US$50 million in a new wafer foundry, the Shanghai Grace Manufacturing Corp Ltd, and set up a localized subsidiary, called SST China, in Shanghai. The company’s strategy includes providing embedded Flash memory components to the Chinese design community.
Yeh feels that the common refrain that relationships are the essential element to business success in Chinese is simplistic. “Everyone will claim to have good relationships with top government officials. Relationship is not the only thing — there must be true mutual benefit,” Yeh said.

The banking system is tricky, Yeh cautioned, with cash transactions still the norm. Bank clerks often dispense large sums in paper bags. Wire transfers take five to 10 days.

“The WTO will help, but just the number of foreign companies coming in will force change. Local law and accounting firms are important allies,” he said.

Future for VoIP

Netergy Microelectronics Inc is another small company that sees a big future in China, according to Virginia Lee, vice president of Asian sales (See Photo). Its Audacity processor and Veracity software support voice-over-IP (VoIP) and voice- over-DSL networks. With the Chinese government backing the restructuring of the telecom industry, Lee expects strong demand.

Size doesn’t count in establishing good relationships, Lee said, adding that Netergy’s focus on VoIP reassures customers looking for design services. The company employs Chinese-speaking support engineers. Netergy is looking for partners with a local manufacturing capability and connections in the ISP and telecom companies, she said.

VC Investments

Some American investors are out to create China-based companies rather than subsidiaries. Joseph Tzeng, a California venture capitalist, has three companies — about 25% of his capital — located in China. “China is a mystery place, a wild wild west. It is a totally different world to invest in China,” he said.

“There are real problems with the banking systems, such as the exchange, clearance of transactions, letters of credit — all of the hidden things we take for granted in the US. Everyone is hoping the WTO will force changes without dramatic consequences, without offending someone, because the WTO has a national consensus behind it that could get everyone moving in the same direction,” Tzeng said.

Exit strategies for investments in China differ from those in the US, he noted. “You can go public on the Shanghai Stock Exchange, or reinvest,” he said.

Wireless, broadband, enterprise software, biotech and nanotechnology are promising investment opportunities, he said. “An American company should never dream that they can do it ‘their way’ in China,” he warned. Microsoft tried, he said, and has been consistently slapped down by the government. Yahoo, which is the largest Internet portal company in the world, trails Sina, a company Tzeng invested in. “They positioned themselves as the outsiders who were going to show the Chinese how it was done. That was not well-received,” he remarked.

by Teri Sprackland, Colorado

(May 2002 Issue, Nikkei Electronics Asia)

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