Editor's note

Electronic News, July 29, 2002 by Ed Sperling

China is hot, and it's no wonder. With U.S. electronics sales flat to down and the overall economy still in the doldrums -- and Europe and Japan don't look a whole lot better -- China is by far the brightest spot on the global business horizon.

But even if the U.S. economy were back in charging-bull territory, China still would look pretty attractive. At a panel discussion at Semicon West last week, executives from across the industry were talking about connecting the next i billion people to the Internet and via cell phones. Most of that opportunity, they said, is within China.

Nevertheless, there's a big difference between that market opportunity and actually benefiting from it. Everyone knows that doing business in China requires incredible patience, and it helps to have an intimate knowledge of the culture and strong political relationships. That's the reason that Axcelis bought a Chinese distributor earlier this year, and it's the reason that most non-Chinese companies have hired locals to run their operations within China.

This is not a new concept. IBM, for example, gained leadership in Japan decades ago by staffing up with Japanese employees rather than by transferring U.S.-based employees overseas. Japanese high-tech and automobile companies retaliated in the 1980s with the same approach in the U.S. market.

But there's more to China than meets the eye, and in some cases there's far less. While the market potential is enormous--probably even bigger than predicted, considering all the infrastructure that needs to be built--the political system is far less cohesive than it appears from the outside. My sources, who shall remain anonymous because they do business in that country, warn that the government continues to be fractious and factional.

As a result, even if a business policy is enacted at the national level, it may never see the light of day at the local level. If the local government doesn't want to implement a policy, mostly because it competes with a local business, chances are pretty good that it won't happen.

These sources say that one of the reasons that Shanghai's business climate is so favorable right now is that the Shanghai faction is in control of the national government. President Jiang Zemin is the former mayor of Shanghai, which may help explain why Shanghai has become a mecca for new fabs and electronics manufacturing.

The big question, however, is what happens once Zemin retires later this year. His likely successor is Hu Jintao, a hydraulic engineer by training who would likely continue Zemin's policies. But as any political analyst will tell you, don't count on anything going as planned until it's a done deal, and don't count on anything lasting forever long in politics-particularly in China, where succession is far from institutionalized.

Moreover, as the World Trade Organization (WTO) gets increasingly involved in China, there's going to be far more pressure on the government to close the door to foreign imports. China is still an agrarian economy, despite its aspirations to become a major player in electronics, and farmers and their allies still carry a lot of clout.

All of this shouldn't dissuade companies from investing in China. But like a hedge investment strategy, sometimes those investments that look the best don't play out as well on paper. The best bet is a portfolio-style mix that is managed carefully and reviewed often. And even then, as with all investing, ultimately it's still a game of chance.