For centuries, China has represented somewhat of an enigma to outsiders. With a massive population, companies from around the world have noted the country's enormous potential, but in recent times, as the rest of the world remains mired in economic problems, it has become a far more attractive target.

Barbara Hilder, Australia's Trade Commissioner in Beijing, says the emerging Chinese market represents an important opportunity for Australian companies. She singles out the areas of fibre optic technology, broadband infrastructure, e-government, e-learning, and high-level enterprise software development as particularly relevant to Australian producers. Nonetheless, she warns against complacency when it comes to tackling Chinese markets.

"The most common mistake companies make is believing they understand the market because they have operated in other parts of Asia," Hilder said. "Here you need to work with a local partner, and you need to get to know them properly. Some people think that China is mythical or different in some way, but you need to do the same background checks as you would in any other country, and make sure you know who you are dealing with."

While much has been made of China's entry into the WTO, Hilder says the nomination of Beijing as hosts of the 2008 Olympic games has lead to increased interest in China on behalf of Australian companies.

"Prior to the Olympics announcement most of the companies who entered China were cautious, they had a fairly good idea of what kinds of difficulties they would be facing," Hilder said. "However, since the announcement there are a lot more Australian companies looking towards China, many of which do not have a sound understanding of the market."

Recognising this Austrade has organised a series of seminars aimed at bringing the Australian business community up to speed with the most recent changes to the Chinese economy and business environment.

Global Vision

There can be no doubt that, the People's Republic of China has become one of the leading strategic opportunities for Intel, Nokia, Hewlett-Packard and virtually every other multinational.

"The PC penetration rate is below 5 percent. This is still very much a growth market," said WT Tan, president of Intel China. "China is still in love with technology."

Thanks to a rapidly expanding economy, combined with a huge population that views both employment in, and products from, the IT industry as one of the most direct routes to success, double-digit growth thrives and will likely continue for several years.

Nonetheless analysts at Gartner are urging caution when it comes to forays into the Chinese market. Having witnessed larger companies try and fail Bob Hayward, senior vice president of Gartner's Asia Pacific operations, believes smaller Australian IT companies should "avoid it like the plague".

"The reality is that doing business in China is still a lot harder than what some people expect," Hayward said. "Enterprise spending on IT is still only slightly larger than Australia's. There is such intense competition that margins are very very low, and a lot of companies are trying to capture a large user base as a market entry strategy."

Hayward warns many of these strategies are destined to fail, if past evidence is to be taken into account.

"Previous attempts to enter the Chinese market using price as a differentiator have failed," Hayward says. "Other industries discovered that as soon as they raised their prices by as much as 1 percent they lost customers."

Nonetheless tax breaks, a competitive educational system, and low labour costs that are transforming the nation into one of the key stops in the product development rather than the consumer chain. The average worker in China makes about 3,000 yuan a month, the equivalent of US$365, according to various sources.

"Today there is a lot of low-end assembly, but 10 years from now you will probably see a copy of today's Taiwan," said Jun Tang, president of Microsoft China. "First they will build up the manufacturing part, and eventually people will design products out of China."

For large companies, the process is well under way. A number of major tech companies manufacture products or maintain significant research and development centres here. Microsoft's Beijing lab, for instance, came up with some of the intellectual property behind the MPEG-4 video-streaming standard.

Local companies have also gained in strength and are expanding beyond the borders. Haier, a Chinese consumer electronics conglomerate, and network equipment manufacturer Huawei Technologies have begun to export branded products to Europe and the United States. Legend, the largest local PC manufacturer, commands 26 percent of the market and is inching into cell phones and the export market.

Semiconductors also appears destine to become a huge industry. Nearly 200 chip designers have sprung up in the past few years, said F.C. Tseng, deputy chief executive of Taiwan Semiconductor Manufacturing Co, the world's largest chip foundry.

Consequently, foundries-which make chips for companies that don't have factories--are proliferating on the mainland, and TSMC plans to open facilities there to compete with locals such as Grace Semiconductor and Semiconductor Manufacturing International.

"They are getting into communications and consumer products," Tseng said of the mainland Chinese, including their own standard for next-generation mobile phones. Targetting the markets

Some argue the high-tech opportunity in China exists largely because of a confluence of historical circumstances.

During the Cultural Revolution of 1966-76, "there was no law", says Cedric Chao, partner with Morrison & Foerster, an international law firm based in San Francisco. However, the 1979 ascendance of , Deng Xiaoping set the country on a course of economic reform and stability.

While political reform until recently has been fairly slow, the country's economy adapted rapidly to market forces.

Today "99 percent of consumer prices are dictated by supply and demand", says Lawrence J. Lau, professor of economic development at Stanford University. The government owns 70 percent of the stock on the Chinese exchanges, he added, but private enterprise is responsible for 65 percent of the gross domestic product.

Nonetheless Gartner's Hayward points out Chinese markets remain strictly regulated when compared to other markets.

"In order to sell any of this software you often have to get government approval, and it is enormously difficult as a foreign company to achieve it," Hayward says, conceding past experience has made him fairly cynical as to the Chinese government's willingness to open the country's massive markets to foreign competition. "The government is not in the business of making foreign companies profitable in China, if they realise an industry is doing well they change the laws so as to ensure a profits do not go offshore."

The economy has grown by 10.9 percent a year since 1979 and will continue to expand by 7 percent annually for the next several decades regardless of economic conditions outside the country, according to studies by Lau. With US$450 billion invested in it each year, China will surpass Japan as the world's second-largest economy by 2020, he predicts, and its GDP will equal that of the United States by 2035.

Anticipating this growth, the government has funded research and adjusted its laws to provide a fertile environment for intellectual property. Legend, Linux developer Red Flag Software and other companies were created through funding, research, and often personnel from the state-run Chinese Academy of Sciences, which recently developed a prototype of a 150MHz processor compatible with Windows.

Hundreds of universities with strong tech departments have been created. The Chinese public has responded in kind.

Fuelled by what Hayward describes as a price based market entry strategies and fearsome competition, China has become the largest consumer of cell phones in the world, with 167 million customers and another 4 million to 6 million new subscribers each month.

However, this early success is mitigated by low average revenue per unit when compared to other markets, and a prevalence of prepaid, rather than the more lucrative plan-based payment systems.

"Foreign operators have to come to terms with the fact that China is an extremely price sensitive market," Hayward says.

The demand for personal computers has slipped since 2000, when consumer shipments grew 82 percent, but it is still relatively strong.

PC shipments are expected to grow 18 percent annually on average through 2006, according to market researcher IDC. Server revenue will grow 12.7 percent annually through 2006.

This is good news for countries which are active within the hardware market, however, the news is not so good for service-focussed markets such as Australia.

"Services companies don't exist in China, if you buy a server from IBM, IBM comes in and installs it themselves," Hayward says. "Many of the things Australia is good at are not in high demand."

Nonetheless Hayward signals opportunities for niche software developers in vertical markets such as mining and utilities.

"If a company manages to make the connections and get involved with a big project it should do very well," Hayward says. Picking the winners

For now, the bulk of China's high-tech production will probably serve the local market, which alone is huge and growing faster than other regions. That is why Lau and others liken China to 19th century America rather than other Asian countries, which depend mostly on export businesses.

Gartner's Hayward believes this inward looking trend is likely to continue.

"There is a heavy emphasis on importing technology so as to adopt it for themselves - and create replacement industries," Hayward said. "Most of the beneficiaries of the boom in China are going to be the Chinese."

However, the opportunities for foreign companies should be underestimated.

"Eighty percent of our semiconductors get imported from out-side," said Dai Haibo, CEO of Shanghai Zhangjiang High-Tech Park Development Corp, an industrial park catering to semi-conductor manufacturing that counts Applied Materials and Lam Research among its tenants. "In 20 years if we have 20 more production (sites) we still won't have enough."

In five years, half of Zhangjiang's tenants will be Chinese companies and the other half will be outsiders, but a projected 70 percent of the park's output will come from overseas manufacturers.

Exports will grow as well because of low labour costs. A notebook costs US$25 less to manufacture in China than in Taiwan, said Carter Tseng, CEO of Microtek, a major scanner manufacturer.

Scanners cost US$8 less to produce. Nearly every Taiwanese manufacturer has or is investing in factories on the mainland, said David Lin, CEO of Lite-On, the second-largest optical drive manufacturer world-wide.

Taiwan produces about half of the world's notebooks and one-third of its desktops annually, so a large portion of US hardware will inevitably come from the mainland in the future.

Last September, Dell Computer shifted its Japanese manufacturing to China. Microsoft's Xbox is built, but not sold, here. Intel also assembles Pentium 4s, chipsets and flash memory in China for worldwide consumption.

Government obstacles

The enthusiasm, though, is tempered by risks and bureaucratic stumbling blocks. Chinese law imposes tariffs, restricts foreigners to certain sales regions, mandates sales caps, and forces some companies to enter into joint ventures with Chinese companies, among other restrictions.

There is also some confusion as to the extent and nature of government restrictions on the ICT market.

For example Australia's Trade Commissioner in Beijing Barbara Hilder says restrictions are only placed on vendors selling into the Government and Military sector, Gartners's Hayward points out that many software vendors are required to be registered with the government, a task he says is difficult for non-Chinese companies.

It is also widely recognised that Government officials also need to be courted. Establishing personal connections within the bureaucracy, hiring locals, and working closely with regional universities and companies are often crucial to success.

"You need to deal with the government a lot more than in other countries," Intel's Tan said. "On the positive side, the government is totally aware of how important IT is to the country."

Nonetheless the barriers appear to be dropping.

Membership in the World Trade Organisation is forcing the Beijing government to redraft laws in the next four to six years, and Chinese officials--especially younger ones-- have become increasingly serious about enforcing them, said Jian Daning, director of the Shanghai

Waigaoqiao Free Trade Zone, an industrial park run by the government and created for foreign corporations.

"Many previously nationalistic requirements will have to be changed," noted Jian, who said he is on the youthful side of a ministerial generation gap in Beijing. "The changes will be rapid. There will be a lot of changes in the next three to four years."

Getting products through customs, for instance, used to take 72 hours. When the government learned that Malaysia could process imports and exports in eight hours, it set a goal of processing goods through customs at ten hours in general and six hours for IT products.

China also understands tax benefits. Nortel Networks, Intel, IBM and other companies inside Waigaoqiao don't pay income taxes for the first two years of operations and half the standard 15 percent for three years after that. Last year, the park accounted for industrial output worth US$10 billion, with 80 percent of the volume coming from IT companies. All are excluded from export and VAT (value added tax).

In addition, government officials are seeking advice from their for-eign business partners. Nokia CEO Jorma Ollila, Ericsson CEO Kurt Hellstrom and Matsushita Electric Chairman Yoichi Morishita all serve on the Business Leaders Advisory Council to the mayor of Beijing, a position that requires them to visit the capital at least once a year. Microsoft, in particular, has become more attuned to local politics.

Piracy prosecutions and the use of Taiwanese translators on the Mandarin versions of Windows have rankled Chinese consumers in the last decade. In late 1999, the company's former general manager, Juliet Wu, wrote a tell-all book about Microsoft's business practices in China that became a bestseller.

Since then, Microsoft has worked to better ingratiate itself. A meeting two years ago between Microsoft CEO Steve Ballmer and Premier Zhu Ronghi led to the creation of Censoft and Wicresoft, two new software services companies owned jointly by Chinese companies and the Redmond, Wash., giant. Censoft began operations in April while Wicresoft will open in July, Microsoft's Tang said.

Drawing conclusions

So where will all this activity lead? First, foreign companies will begin to face increasing competitive pressure as Chinese industries mature even though they benefit from the growing market.

Semiconductor makers in particular could suffer from a mad rush by companies to build factories on the mainland to reduce shipping costs and to appease the Chinese government by investing in the country.

The market faced similar issues when a glut of chips occurred after Japan entered the semiconductor market in the 1980s and again when Taiwan and Singapore joined the industry in the '90s.

"From a supply point of view, you probably don't need these new facilities being built in China," TSMC's Tseng said.

PC companies will also increasingly engage in price wars. Since last year, Dell has cut prices and marketed more heavily to consumers with inexpensive PCs to gain market share. Legend, in turn, has vowed to take more business of its own.

Unlike previous tech manufacturing giants, however, China may not face pressure from price reductions. Manufacturing costs will remain low because more than half of the population still works in the agricultural sector.

"China will enjoy a huge advantage for years to come in low labour costs," Lau said. If history is any guide, the lower labour costs will translate directly to lower PC prices in the West over time. Taiwan and China may become less distinguishable from one another, at least economically. Taiwanese companies have invested billions of dollars in China and employ more than 300,000 people here, according to statistics from the Committee of 100, a Sino-American leadership group.

Taiwan provides the expertise in this relationship and China the workers. "It is only a matter of time before Taiwan rejoins the mother-land," said Ronnie Chan, chairman of the Hang Lung Group, a large Hong Kong real estate concern.

Taiwanese executives generally are far less enthusiastic about reunification but openly acknowledge that their future dictates a binding relationship with the mainland, with business leading the way.

"The politicians are not heading up the dialogue, but they are keeping their eyes on it," said Paul Hsu, a senior partner at Lee and Li, a Taiwanese law firm.

The freer flow of information and rising income will inevitably have an effect too. If global history is any guide, the result may be a thriving middle class that eventually leads to political reform.

"We think that bringing in more and more technology opens that country up," Intel President Paul Otellini said in an interview earlier this year. "It is the Chinese equivalent of glasnost. Long term, that has to be good."

Gartner's Hayward is in no doubt that China will become the most powerful economy on the globe within the next two decades, however he cautions against excessive excitement regarding the Chinese economy in the absence of good news elsewhere.

"We wouldn't be talking about China so much is things weren't so bad elsewhere," Hayward warns. "There is a lot of opportunity there, but the problem is that it is over hyped at the moment."

Despite its incredible growth figures, which are generally expected to continue, Hayward points to a looming banking crisis, and concerning budget deficit as potentially destabilising influences, but says neither is likely to significantly hamper growth.

"I don't see why our kids in Australia are still being taught Japanese at school, without a doubt in ten years time they will need to know Mandarin, and we should start preparing them now," he concludes.

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