China Impact Big, Getting Bigger By Bernard Levine

How important is China to the global electronics industry? Very important today and probably more so tomorrow, barring any change in China's increasing international engagement. Just look where your latest PC or monitor, or its parts, came from. China already is crucial to the electronics industry supply chain for low-cost production and assembly. China also offers foreign electronics firms the world's largest home market—more than 1.2 billion people ready to buy the latest cell phones, televisions and other consumer gear. Yet last week's return of the U.S. reconnaissance plane demonstrates how fragile relations there can be. Many multinational makers of computers, telecom equipment and infrastructure, consumer products, and contract manufacturers, semiconductor and passive component makers and distributors are heavily involved in China today, usually in joint ventures with Chinese companies. With many new projects on the drawing boards, China should become even more crucial in the future, although observers caution that in international politics, nothing is certain. "China certainly is an opportunity," said Steve Cullen, director and principal analyst of semiconductor services at Cahners In-Stat Group, Scottsdale, Ariz. In-Stat is owned by Cahners Business Information, the parent company of Electronic News. "There is a fair number of semiconductor wafer fabs over there now; so many, I've started to lose track. Most are joint ventures—semiconductor companies teamed with somebody who has local influence, either with the government or someone else." The Chinese mainland, according to George Perris of Sierra Marketing Group, Rocklin, Calif., "is one of the fastest growing markets in the world today and eventually everyone will have to participate in it. Growth there is just immense, only limited by political overtones, but at some point, there will be political change that will make it even more conducive for doing business," he predicted. "Distributors are starting to get over there. Arrow, Avnet and other leading distributors are there. Whoever is going to be anybody in electronic distribution will have to have a position over there—contract manufacturers, OEMs. An awful lot of electronics is going on there." Connector makers are counting on China this year as one of their few bright spots, according to Ken Fleck of Fleck Research, Santa Ana, Calif. He expects worldwide connector shipments to be down this year, but the Pacific Rim, led by China, will be up. "The China export market is showing some signs of weakness," Fleck said. "Some of the second-tier suppliers who are Taiwanese companies have had their backlog dry up and are significantly dropping prices to fill up their shops. Other Taiwanese companies are holding steady. The Chinese domestic market will remain strong in 2001." Still, there always is danger, In-Stat's Cullen warned. "In my mind, indications are China wants to become more a part of the world and less isolated," Cullen said. "They see the benefits of trade. I think the intentions of the civilian government are to become more a part of the world. The bid for the Olympics and the World Trade Organization are part of that. If they get WTO and the Olympics, things will move forward." Many in the world business community are betting on that, but there are no guarantees. Politics can be irrational and history is full of surprises, analysts note. The recent reconnaissance plane uproar highlighted the differing political opinions inside China, including some that are less supportive of international ties. China's History Makes for Uncertain Future AFTER JIANG? Chinese president Jiang Zemin is scheduled to step down in a little over a year. His replacement is TBA. In just over a half century, China has gone from Mao's victory and establishment of the People's Republic as a Communist nation in 1949, to armed conflict with the United States during the Korean War and disputes with the Soviet Union. The 1960s saw the Chinese aid U.S. foes in Vietnam and the internal convulsions of China's Cultural Revolution. Later years have seen China purge Maoists and increase political and trade ties with the West. Recent years also have seen the return of Hong Kong to China, and continuing Chinese insistence that Taiwan come under the mainland's control. A number of analysts caution that, recently, China has been on its best behavior. "We can't take anything that's happening today as indicative of what's happening tomorrow," said Ray Jodoin, group manager and principal analyst of wireless technology at In-Stat. "A lot is indicative of how the WTO negotiations go. China is saying all the right things because they want to be part of the WTO, but it is still the world's largest Communist country, established over 50 years. If I were a CEO and had a joint venture in China, I would worry I could be kicked out on my ear, but the Chinese won't do that as long as they want to get into the WTO."