China gains as U.S. economy struggles: 'painful cuts' here, investment there - American-schooled Chinese engineers return home

Electronic News, Sept 23, 2002 by Gale Morrison

Economic pain in the United States has turned into China's gain.

Rampant layoffs and sluggish sales here, coupled with mainland China's economic expansion and billion-dollar commitment to broadband deployment, are driving American-trained Chinese engineers back home. Making matters worse, the lack of connections back to China is hurting smaller U.S. companies' chances of winning critical contracts with booming OEMs there.

The flood of Chinese returning home is especially painful because repatriation was not their intention, executives say. But U.S. companies can't keep them on the payroll. And because they were not employed long enough to see their H1-B visas become green cards, they see no other option.

"Before, engineering school graduates would stay in the United States," says Leo Wang, director of marketing at BitzBlitz Inc. in San Jose, a transceiver specialist with close ties to Chinese networking giant Huawei. "They would find a job, get their H1-B visa, and keep working and get their green card. Now they are being laid off in the middle of their H1-B. They have no other choice but to leave. The unemployment rate is so high. It's pretty brutal out here."

But that's only part of the story. While Chinese engineers are being pushed out of this country, there's also the pull of a booming market in China for the first time.

In response, the largest and richest semiconductor companies and OEMs--Intel, Motorola, Texas Instruments, Alcatel--are moving into China as fast as they can, and making necessary cuts in U.S. operating expenses to do it.

Wong says ties between Chinese-American engineers and their homeland can be a serious advantage, and it is for BitzBlitz. Access to the domestic Chinese market without native Chinese OEMs and government-sanctioned contracts is virtually impossible.

The DVD market is a case in point. LSI Logic bought C-Cube for its DVD assets. Last winter, after two years of work, it introduced an elegant and sophisticated single-chip, digital video recorder system. But Asian-based ESS Technology, a competitor, was the company to get in with Shinco, the Chinese DVD powerhouse.

Now, though, ESS appears to have been outmaneuvered in its own backyard. Michelle Abraham, an analyst at In-Stat/MDR, says Taiwan's Mediatek and ALI have made inroads with their own designs, and they are the reason ESS had to warn Wall Street on Sept. 12 that profits would be far lower than previous guidance indicated. ESS said a competitor came up with a DVD chip with an integrated front-end servo, and customers took to it even more rapidly than expected. (In-Stat/MDR is owned by Reed Business Information, the parent company of Electronic News.)

BitzBlitz's Wong says connections and an understanding of the culture are vital.

"We are engaged with Huawei on several fronts. We have a fairly strong presence there. We are pretty familiar with Huawei operations because a lot of engineers and their key executives were college buddies," Wong said. "All of Huawei's executives are young -- very, very young. Their sales guys are all fresh out of college. In fact, sales can be college graduates only, and only after that can they move back and do other types of operations. That's a drastically different philosophy than the United States. And they consistently have an outstanding sales force ... It's so different that Cisco has a hard time matching up."

Wong adds that China is pouring resources into breeding new semiconductor companies and OEMs of its own, using a double-shot of Hong Kong venture capital and Chinese government contracts.

"All of these startups have heavy government connections," he said. "At the formation of the company, you have a contract in hand [that a government ministry assigned]. So then everyone is slightly more comfortable in dealing with you. That cannot be said about U.S. startups. They rarely have any business to start out with, and in today's environment they are very shaky."

Nevertheless, China's very different philosophy on IP is a concern. Content and software piracy is rampant. Last week a Chinese engineer on an assignment from China Petroleum Development Corp. was arrested at San Francisco International Airport while trying to leave the country. The Silicon Valley seismic-engineering software company where he was working alleges he was attempting to steal software.

Further, Huawei rival Cisco is battling Chinese-made networking gear that looks and is even branded the same as its own gear. China's admission to the World Trade Organization (WTO) was meant to bring about a way of recourse in cases like these.

On the bright side, mainline semiconductor companies, such as U.S.-based BitzBlitz, are seeing success. Last week Qualcomm Inc. said demand in China pushed its expected quarterly shipments up from 18 million to 20 million cell phone chipsets. And IDT Inc. said its communications coprocessors were going into ZTE equipment.