The Chinese personal computer (PC) industry
The Chinese personal computer (PC) industry is estimated to be "the fastest growing computer market in the world", and China is considered to be so big potential a market because of the fast growth of Chinese information technology and computerization. In this circumstance, Chinese domestic companies hold dominant positions in the market for a long time. The purpose of this study is to answer the following three questions: Firstly, were there any explicit strategies, which have led local companies to grow to today's status? Secondly, Lianxiang Group (No1 Chinese PC manufacturer) has taken a top position in the Chinese PC market since the fourth quarter of 1996. So, what are the similarities and differences in the developing path of Lianxiang in comparison to foreign and other domestic companies? And finally, what challenges it will be faced at present and in the near future? Answering these questions, this paper analyzes the competitiveness of local companies through the case of Lianxiang.
This study argues the role of Chinese government was important in the PC industry such as any other industries in China. And it insists that local companies have developed the process of importing-absorbing-recreating. It shows the core competitiveness of local companies are the low price and industrial policy in comparison with foreign advanced companies.
Besides, Lianxiang's differences with any other Chinese domestic companies are its cooperative relationship with Chinese Academy of Sciences (CAS), high quality of human resources (based on stock options etc), specialization strategy, and distinguished marketing strategy and so forth. These factors have played a vital role to make Lianxiang become No.1 from 1996 in Chinese PC industry.
Even with these advantageous abilities, Lianxiang is faced with a lot of challenges at the present time. After more than 20 years' of 'open door' policy, China has now become 143rd of the World Trade Organization (WTO). Foreign companies' aggressive marketing, and rising competition with the growth of domestic companies menace the position of Lianxiang. Further more, it needs to watch how the emergence of the mobile-internet service affects the PC industry in China.
CONTENT
INTRODUCTION
.1 Purpose Of The Study
The objective of this study is to analyze the Chinese PC industry and use the case of No.1 Chinese PC manufacturer - Lianxiang Group and try to answer the following three questions: Firstly, were there any explicit strategies, which have led local companies to grow to today's status? Secondly, Lianxiang has taken a top position in the Chinese PC market since the fourth quarter of 1996. So, what are the similarities and differences in the developing path of Lianxiang in comparison to foreign and other domestic companies? And finally, what challenges it will be faced with in its future development? Answering these questions, this paper analyzes the competitiveness of local companies through the case of Lianxiang.
This study argues the role of Chinese government was important in the PC industry such as any other industries in China. And it insists that local companies have developed the process of importing-absorbing-recreating. It shows the core competitiveness of local companies are the low price and industrial policy in comparison with foreign advanced companies.
It explains the history of Lianxiang, the representative PC maker in China. Lianxiang started its business with Lianxiang Chinese Card, and moved ahead grew by leaps and bounds after the stagnation during 1993-1995. Concerning the cause of restructuring, management innovation, and industrial policy of government, Lianxiang could hold the competitiveness in the Chinese market, which is the arena of hot competition between local and foreign advanced companies. This paper shows the core abilities of Lianxiang compared to foreign and any other local companies.
Above all, the low technical entry barrier with Wintel (Windows+Intel) system is the main factor of the competitiveness of the local companies. The price advantage, such as low labor cost, transportation cost, import tariff, components, and management expenses, is one of the most important competitiveness in comparison with foreign PC makers. And its better understanding of the Chinese market, wide-range distribution network, local preference for local brand, and industrial policy help it gain core abilities on the market.
Besides, the Lianxiang's differences with any other local companies are as follow: cooperative relationship with Chinese Academy of Sciences (CAS), high quality of human resources (based on stock options etc), specialization strategy, and distinguished marketing strategy and so forth. These factors have played a vital role that Lianxiang could hold 27.3% of market share on desktop PC sector as of 1999.
Even with these advantageous abilities, Lianxiang is faced with a lot of challenges at the present time and in the near future. The open market with entry into WTO, foreign companies' aggressive marketing, and rising competition with the growth of local companies menace the position of Lianxiang. Further more, it needs to watch how the emergence of the mobile-internet service affects the PC industry in China.
.2 Structure introduction
This paper is composed of six chapters:
* Chapter 1 is introduction.
* Chapter 2 is methodology.
* Chapter 3 is theoretical framework.
* Chapter 4 describes the history and the current condition of the Chinese PC industry. In addition, it will analyze the environment of the PC industry in China by using PEST theory.
* Chapter 5 introduces the history of Lianxiang Group. It offers three stages of developing process: initial, slowing down and coming back stage.
* Chapter 6 is the main part of this paper, presents the competitiveness of Lianxiang Group compared to foreign and other local companies. Those core advantages of Lianxiang could be counted to price, industrial policy, wide distribution channels, and its own strategies and so forth.
* Chapter 7 shows the facing challenges of Lianxiang Group. Facing the entry to WTO and challenged by new entrants from electronic industry, there are a lot of existing variables in the Chinese PC market. In this chapter I will examine the facing difficulties, and reveal Lianxiang's response.
* Finally, Chapter 8 is the conclusion and summary of this paper.
2 METHODOLOGY
The PC industry in China is still in its infancy and thus the available literature in terms of industry findings is as of yet rather scarce. There are however, due to the vast potential of the Chinese market, a great number of professional consultant reports on the PC market in China, which some of them can be found and viewed in the City Library at Beijing and Tianjin, but most of them were prohibited from applying as a source of information because of their exorbitant costs.
Thus with little information in terms of regular books and conventional industry reports, and without the use of personal interviews, the Internet has been the prime source of information gathering for this dissertation. The Internet has shown vast potential in this respect. However, although the extent of information available is enormous, it has been difficult to disseminate all this information and reach conclusive evidence, which could be verified by other means, or different web pages. Verifying the information gathered has proved rather difficult, as the sources have different motives for their dissemination of information on the Internet, and therefore their views on the various issues of interest have often diverged. I have sought to use material to the best of my ability and have succeeded in this aim for the most part.
3 THEORETICAL FRAMEWORK
It is important to establish the theoretical boundaries of a report, as these provide the framework of the analysis. As the topic of interest concerns an industry analysis, the choice of both the PEST in terms of an environmental analysis and Michael Porter's Five Forces Framework constitute the traditional approach to such analysis.
As the Chinese PC industry is rather complex, the use of these two frameworks will on occasion lead to repetition of information and hence the two frameworks will be adapted to suit the purpose of this particular analysis of the Chinese PC industry.
* Environmental Analysis / PEST Framework
The use of the PEST framework presented in Figure 1 (next page) takes an overview approach to the issue of industry analysis.
This framework goes beyond the mere industrial level, and interprets the environments, which influences a given industry. At the same time it takes into account the macro level of the country in question.
a. The political influences on the PC industry in China will be dealt with in terms of the trends in regulatory restrictions.
b. The economic development of China has spurred the impressive growth of the PC industry and the industry in turn has had and will exercise much influence over the continued expansion of the Chinese economy.
c. The social issues in connection with PC industry are highly interrelated with the demographics of China especially when China moves into network era. In this context the regional dispersion of the telecommunication is important and the point of discussion.
d. The technological aspect influence the industry in terms of the recent trends within the industry, and concerning equipment/methods which originate from both foreign PC vendors, and joint ventures as well as from Chinese companies. This aspect also relates to both the economic and political development of China in terms of government ability and ambition. 1
* 3.2 Porter's Five Forces Framework
Michael E. Porters Five Forces framework, presented in Figure 2 (next page) is probably the most utilized analytical framework for conducting industry analysis.
It has been included in the analysis of the PC industry in China for several reasons. First and foremost, because of its general applicability, all industries can be analyzed without further adaptation of the framework. Also the Five Forces Framework, being a classic, has the advantage of being a well-known tool, both in terms of its virtues but more so in terms of its deficiencies, which makes it applicable without extensive explanations. Its primary deficiency is its ignorance of the general environment, which affects an industry. This however, is remedied in this analysis of China's PC industry through the initial use of the PEST environmental framework. The easy use of this tool is a further reason for applying it in this analysis.
4 REVIEW OF PC INDUSTRY IN CHINA
According to the International Data Corporation (IDC) survey result, the Chinese PC industry is estimated to be 'the fastest growing PC market in the world', and China is considered to be so big potential a market because of the fast growth of Chinese information technology and computerization. Since the Chinese government mollified the import barriers and quotas in 1993, the PC market is in keen competition day by day, and market share competition between foreign companies and local companies has also intensified. PC industry in China has developed continuously by the name of Golden project-establishment of information highway infrastructure and the rapid increase of PC usage in order to facilitate services and social infrastructure.
PC industry in China is from the Super PC Era to PC Era and now entering the Network Era. Super PC Era, which had been the first step of PC industry, was promoted by the government owing to the limitation of technology concerned and narrow set of information. It has started from 1955 with 'Twelve years technology development project', and prospered during the period of the Seventh Five-Year Plan period. With the production of trial-product level PC in the Eighth Five-Year Plan period, China had actually entered the PC Era. It has grown via the process of importing, absorbing and recreating. Because of fast growth of Internet service in the late of 1990s, China could be said to have entered Network Era now. 16.9 million of Internet users as of July 2000 promote the sales of PC. Since the development of the mobile-internet, there is an apprehension of collision between the growth of Internet and the sales of PC. However, China is really still far from reaching this era on account of its weak infrastructure. So it is expected to that PC Era and Network Era will coexist in the Chinese market for the time being.
Chart 2.1 the growth process in Chinese PC industry
Source: applied and transformed from Dedrick, Kraemer (1998), p. 30
4.1 Super PC Era
China's PC industry has started from selecting and promoting six important items in its' Twelve year's technology development project' in 1955. In the year after the announcement of the project, a PC institute was established in the Chinese Academy of Science. After then, PC institute has produced 'Model 103', which was the first vacuum tube in China. However, the real growth of Chinese PC industry has started with pragmatism2 deployed by government in the 1980s. It produced the super PC 'Galaxy' at The National Defense and Science University in 1983, and developed 'Great Wall series' with IBM compatible, 'Zijin' with Apple compatible in 1985.
China has made an effect to catch up to global standard technologies continuously. Its PC produced in the Seventh Five-Year Plan period (1986-90)3 was behind three years than developed countries, its 386 PC in the Eighth Five-Year Plan period fell back one year or so, and Pentium PC produced in 1995 was behind for about three months. It was said that its own developed super PCs 'Galaxy 2' and 'Dawn 1' developed during the Eighth Five-Year Plan period has distinguished the products in its design technology. Especially development of `Dawn 1' was meaningful in Chinese PC industry in the respect of localization after digesting global level technologies, and is the core asset of the Chinese IT industry.
4.2 PC Era (Importing-Absorbing-Recreating)
In fact, Chinese PC industry just has a ten-year history. China has followed the global PC technology since the 1980s, and it had recruited the PC designers over the whole country, and had developed assembling import product with full government support. But the development was just in the trial-product level, so it could not enter the mass-production system. Even though they strained every nerve for development of their own product, but because of long production cycle time and low quality of their products, they could not meet the economic demands.
In the long stagnation, PC industry could not but rely on mass-scale end-product import.
After electonics bureau in Ministry of Electronic Industry has supported funds and research environment, the Chinese PC technology has leaped. After they decided to develop focusing on IBM compatible, they made technological breakthrough with development of Chinese characters display software, and they finally developed their own model, 'Great Wall 0520'. By entering the mass production of this model, the Great Wall Group4 occupied most of the market share in the Chinese PC industry.
From the early 1990s, since Chinese government has reduced the import tariffs and eliminated quotas for import PC, the Chinese PC market was opened in a full-scale. Few people bought local-brand PC at that time. AST, which is an U.S. brand, occupied about 70% of Chinese PC market in the early 1990s, Compaq, also an U.S. brand, followed5. In this situation, foreign brands of PC seized almost all the market. Since local brand companies received a lot of stress, those like Great Wall, Langchao, and Changjiang chose diversification strategies, and gave up setting their own brand PCs. Other companies also could not help accommodating the technology through distributing foreign products, due to the lack of technologies. They studied the technologies in the process of following the forerunning partner, such as Tontru-AST, Haixing-Compaq, Shida-IBM, and Lianxiang-HP. After the middle of 1990s, because of local brand PC's quality upgrade6 and price reduction, Chinese companies could have considerable competitiveness. In addition, China's PC technology also leveled up. In 1995, local brand, Lianxiang, first brought Pentium PC to the market.
Chart 2.2 2000 PC shipment growth rate
Source: IDC; Merrill Lynch estimates
4.3 Network Era
The steep growth of PC manufacturing has direct and mutual relation with the growth of Internet users. In the release (chart 2.3, next page) from the 'China Internet Network Information Center (CNNIC)' under the Ministry of Information Industry, as of July 2000, the number of Internet users is totally 16,900,000. Among them, 2,580,000 are through leased line connections, 11,760,000 are dial-up users and 2,560,000 use both. Besides computer users, people who use other equipment (e.g. mobile terminals and information electrical appliance) are 549,0007. The steep increase of Internet user in China is backed up by the fast diffusion of Internet-connectable PCs. Of course, the number of Internet-connectable PCs does not correlate to the number of PC users, because many people are generally sharing a PC so far.
Chart 2.3 Internet Users in China (thousands of units)
Source: CNNIC report (2000.7)
4.4 The current status of the PC industry
At the end of 1980s, as soon as foreign companies such like IBM, Compaq penetrated into China, IT industry by local companies almost died, except for a few survivors. In the PC industry, some companies such as Lianxiang and Great Wall kept alive with fewer than 20% of market share. However, local brands are resuscitating in the Chinese PC market with a remarkable sales amount at the late 1990s. Especially, almost all the home PC is made by local brands. It is said that local and foreign brands of market share were 45% and 15% respectively in the 2000 (the rest of 40% taken up by the assembly PCs). Compared with 9% and 37% in 1996, it could be said to the great reversal.
The Ministry of Information Industry (MII) and the Central Commission for Discipline Inspection (CCDI) expect that PC sales in China will reach eight million units by the end of 2001 (according to the persons concerned, it is expected to surpass eight millions in 2001 with which chasing the heel of Japan's ten millions8), and total sales amount will be two hundred billion RMB is a 14.3% increase from 2000. The whole sales amount of the Chinese PC market was 175.5 billion RMB, which increased 18.2% from the same period of the previous year. As mentioned above, as PC market in China is growing rapidly year-by-year, competition between multi-national conglomerates also become severe so as to be called 'a bloody fight of Great Wall'.
Table 2.1 the scale of PC market in China (unit: thousands)
Year
991
992
993
994
995
996
997
998
999
2000
Sales
00
250
450
720
150
2100
3400
4100
4940
6200
Source: Chengshi Xu (2001), p.64
After the forth quarter of 1996, local brand Lianxiang has kept up the indisputable position of market share in China. It occupied 21.5% of the share in 1999(refer to Table 2.2). In comparison with IBM's 6.92% of market share in 1996, its outcome in the fierce market environment is worth noticing. Another feature of the PC industry in China is that almost 50% of the market is occupied by small and middle-sized local PC companies. In the past, because those PCs were coarse in quality9, they were insignificant in the estimation of the market share. But with a steep improvement of quality and low price nowadays, they are augmenting the market share centering on the home PC market.
Looking over the growth of PC market in China, due to the advent of Internet PC, PC purchase in China has increased. Soon after, the appearance of multi-media PC successively accelerated home PC demand. According to various kinds of statistics, the main reason that Chinese buy home PC is ascertained for connecting Internet. It represents that the development of Internet stirs up purchasing PC. When they import the PC, it is clear that the import of fully assembled PC is reduced, while on the other hand, the import of components is increasing10. Recently, foreign companies has founded and expanded the manufacturing facilities in China in order to avoid high tariff.
Also, 'one family, one child' policy also promoted its PC sales. Those young children called 'small emperors' in China are the most powerful group in China now. In connection with national computerized education, the small emperors incited their parents to purchase PCs, despite their parents' low-income level. According to Lianxiang release, its PC sales surpassed two hundred thousand during the summer vacation in 2000. In addition, the mushrooming 'dot.com' companies and Small and Medium-sized Enterprises (SMEs) also stimulate the growth of PC sales, IDC analyst John Hang said11. In general, SMEs and personal users prefer local brands12. The foreign brands simply do not have the depth and breadth in distribution, and cannot offer the local tailoring and these make local brands popular.
Table 2.2 PC market share in 1998-2000 (unit: %)
No.
998
Vender Share
No.
999
Vendor Share
No.
2000
Vendor Share
Lianxiang
2.5
Lianxiang
5.7
Lianxiang
21.5
2
IBM
7
2
IBM
7.2
2
IBM
6.2
3
Compaq
6.5
3
Founder
5.8
3
Founder
5.9
4
Tontru
5.8
4
Compaq
5.4
4
HP
5.6
5
HP
5.4
5
Great wall
5.1
5
...
This is a preview of the whole essay
Vender Share
No.
999
Vendor Share
No.
2000
Vendor Share
Lianxiang
2.5
Lianxiang
5.7
Lianxiang
21.5
2
IBM
7
2
IBM
7.2
2
IBM
6.2
3
Compaq
6.5
3
Founder
5.8
3
Founder
5.9
4
Tontru
5.8
4
Compaq
5.4
4
HP
5.6
5
HP
5.4
5
Great wall
5.1
5
Great wall
3.5
6
Founder
3.9
6
HP
5
6
Compaq
2.9
7
AST
2.7
7
Tontru
3.9
7
Dell
2.5
8
DEC
2.3
8
Langchao
3.1
8
9
Great wall
2.1
9
Shida
3
9
0
ACER
2.1
0
HiSense
2
0
Sub
50.1
Sub
56.2
Sub
Others
49.9
Others
43.8
Others
Total
00
Total
00
Total
Source: The Ministry of Science and Technology of PRC (2001), p. 84, IDC
Chart 2.4 Personal PC market in China (US$ million)
Source: World Trade Atlas (China Edition) December 2000
Notes: Total market equals Imports plus Local Production minus Exports.
Table 2.3 PC hardware and peripherals
Year
995
996
997
998
999
2000
Big, middle-sized
PC (unit)
4
4
Small-sized PC (unit)
328
354
350
976
032
401
Workstation (unit)
039
460
832
908
PC (thousands)
08
639
875
751
230
380
Peripherals
Total
(thousands)
446
060
4135
5090
9880
7130
Floppy drive (thousands)
00
516
2730
5560
2976
700
Hard drive (thousands)
7.6
326
833
233
3490
5180
Terminal
(thousands)
400
225
337
265
3000
6390
Printer (thousands)
76
277
222
230
420
460
I/O equipment
(thousands)
1
28
4
0.856
3.106
4400
Source: The Ministry of Science and Technology of PRC (2001), p. 83
Table 2.4 International PC sales in 1997-1999 (unit: thousands)
Nation or region
997
998
999
USA
Sales
(Growth rate)
23,001
(23%)
26,888
(16.9%)
30,891
(14.9%)
World share
29%
38.70%
37.80%
Europe
Sales
(Growth rate)
5,210
(18.7%)
7,194
(13.0%)
9,245
(11.9%)
World share
26.10%
24.70%
23.60%
Japan
Sales
(Growth rate)
5822
(66.3%)
8390
(44.1%)
8726
(4.0%)
World share
0%
2.10%
20.70%
China
Sales
(Growth rate)
150
(60.2%)
2100
(82.6%)
3500
(66.7%)
World share
2%
3.00%
4.30%
World
Sales
58,174
69,568
81,633
Source: The Ministry of Science and Technology of PRC (2000), p. 84
However, PC penetration (see in table 2.5) in China is still in the considerably low level. Even though the sales of PC in China are expected to be eight million in 2001, but its penetration is only 5% of the whole country. Compared to 49% of USA PC penetration per urban household, this looks far away from the data of the developed countries. Chinese PC penetration per population is also under 2%. But, in other words, it represents that Chinese market still has much prospective.
Table 2.5 China PC Penetrations
Country
%
Per Urban Household
China
5
USA
49
Per Population
China
<2
Taiwan
4
South Korea
5
Hong Kong
30
Singapore
36
Source: IDC; Merrill Lynch estimates (2001), p. 2
4.5 Environmental / Pest analysis
4.5.1 Political
The political circumstance in China remains the most dominant force of influence over the PC industry. Having been isolated from international impact and developments for more than 30 years from the Chinese Communist Party (CCP) liberate China in 1949, China has had much to catch up on in terms of the developments, compared to the outside world. The pace of the economic, social, and technological development as well as progress in all areas of macro-level interest has, as previously mentioned, been determined by a central government in Beijing, which seeks to balance the transition to market economy with a centralistic and still communist government. Thus, the PC industry, the government and the entire economic performance of the country are inextricably bound.
China's computer policy encompasses all types of computers, but is focused mainly on the PC industry as can be seen in the major goals of the Ninth Five-Year National Development Plan, 1996-2000:
From government aspect, China needs foreign investment, yet without giving up too much control. Three things have characterized the government's policy for PC industry:
•Its main goal has been to secure a domestic industry.
•The policy has often been elusive, especially to foreign companies.
•The policy changes constantly.
The first characteristic, the wish for a domestic industry, can only be created with the help of advanced foreign companies, as Chinese entrepreneurs have little abilities for developing the industry on their own in any short time period. The foreign companies of course have been more than willing to abide by almost any rule imposed by the Chinese government in order to be able to grasp part of the market, and preferably do so before their new foreign competitors. Joint ventures (JVs) have been an important part of the policy and it has almost always been a requirement for entry that the foreign companies should invest in a JV and should utilize and transfer western technology to the Chinese partner.
Key actions for foreign vendors in China to receive contracts and obtain a higher market share are:
• Establish R&D centers in China
• Have JVs with a high level of local content, local management and exports
• Provide technology transfer
• Facilitate financing of the customer
• Make long-term relationships with key government people
The second characteristic of Chinese government policy for telecommunications is the elusiveness of the policy. What the exact rules are, what is allowed and what is not, are concepts, which are sometimes unclear in terms of present regulation and government instructions. This unclearness forces the foreign companies to operate on a trial basis. This can be seen as a "regulatory vacuum" that will only be filled when an actual specific set of regulation is politically negotiated and implemented.
The third characteristic, the ever-changing policy, has been especially strong in 1990s because of PC industry's small age, which have been particularly turbulent in regard to policy and structural changes. For the entry of WTO, the MII was created in 1998 through the merger of the Ministry of Post and Telecommunication (MPT) and the Ministry of Electronics Industry (MEI). The MII has taken over the regulator function from its predecessors but separated itself from the service operations. This was done in order to create an independent and consolidated policy body for the industry, which is of great importance, if there is to be free competition after the entry of WTO.
4.5.2 Economic
China has during the past 20 years announced growth rates in excess of 8 % per annum. The economic development in the country has been massive. Recognition of the need for capital, the government noticed on the trial use of joint investment to further speed up the development of PC industry. This notice provided that PC enterprises should attempt to "use foreign funds" for "joint investment" in projects "in accordance with national policies and laws. Returns for such joint investments were permitted to take the form of either a fixed amount for a definite period, or a percentage of operating profits distributed according to the percentage of the parties' investment in the project13.
China's has thus obtained advanced science and technology from foreign manufacturers, making it one of the largest users of foreign capital among developing countries. This application of advanced technology has significantly reduced the technological gap between China and developed countries. China demands state of the art technology, and this has brought the PC industry to its present stage. The vast potential of the country and its position, in the eyes of many investors, as a country of the future, has permitted the government to demand the newest technology and obtain this on very favorable conditions for China. This has been possible because of the eagerness of foreign companies to enter the Chinese market, and thus obtain a first mover advantage vis-a-vis their competitors.
What is vital to establish under this economic header is the fact that the economic growth has been the reason for initially establishing the consumer demand for PCs.
Emphasis should be, and is, placed on the notion of China as a consumer market with more than 1,22 billion potential customers. This is the prime reason, why so many foreign companies have chosen to focus on China, and it also constitutes the basis for the strong competition in the PC market, where foreigners are allowed to compete with Chinese businesses. With the increased income levels of Chinese households, the focus turned from color televisions, refrigerators and washing machines in the 1980s to mobile phones, personal computers after the mid of 1990s. This has strongly set the demand for the expansion of PC industry.
Thus the economic development has been and will remain an important influence on the PC industry in China. It fosters new initiatives and is itself kept apace by the expansion of the computer used in China
.
4.5.3 Social
The social dimension of PC industry also implies a reference to market and household demand for computers. The average income dispersion between rural and urban areas is still highly unequal. The gap between rural and urban incomes has been enlarging in recent years. From 1998 to 2000 China's urban citizens' per capita income averaged 5458 Yuan, 5888 Yuan and 6316 Yuan respectively, while the figure stood at 2162 Yuan, 2210 Yuan and 2253 Yuan for rural dwellers. The former was 2.52, 2.66, 2.80 times respectively of the latter.14 The disposable income per capita naturally affects the demand for use of computers, as well as for all other computer products. This unequal distribution of income has resulted in a growth imbalance across regions, with the coastal regions being far more economically developed than the western and evens some of the central provinces.
This growth imbalance has also presided in the area of Pc industry, where the investments so far have primarily centered around the Special Economic Zones (SEZ's) in the coastal regions and on the capital of Beijing. Lately however, over the course of 1998, investments have increased markedly in the middle and western provinces, showing a beginning focus on some of the poorer regions of the country. Last year the growth in PC markets in Yunnan was 187.5 %, 182.7 % in Guizhou, 107.7 % in Jilin, 96.3 % in Henan and 84.5 % in Hebei15. This rapid growth was, according to experts, due to central government investment policies designed to stimulate the economy. Nevertheless, the total number of PC owners was still 72% located in the 11 eastern provinces and cities. Thus the immediate focus has not changed dramatically, as the potential for business in the coastal regions, i.e. the eastern provinces, has yet to be saturated, before the full attention will be turned westward.
4.5.4 Technological
New technology is the focus of the Chinese government, which pushes the foreign competitors in the PC industry to import and utilize only state-of-the-art technology in China. This strategy has meant a rather rapid minimization of the technological gap between China and the developed countries. This has meant that in order for a country to follow the international evolution and progress, access to the latest technological innovations and methods are needed. Therefore, because of the extreme pace of the IT development and because of this segments importance to global integration, it is paramount for China to keep up with the developed world, if they want to become part of this league of nations in the 21st century.
This need to keep up with the developed world is countered by the previously mentioned aim of the government to develop a strong local industry. In fact the need to stimulate technological development has proven one of the government's motion to liberalization in the IT sector. The technological sphere is an important influence on the PC industry in general, and thus it is also has a large impact on the industry in China. This can be observed by so many foreign investors entering into Chinese PC industry, which however also is a result of the necessity to develop the industry with the general economy (table 2.6, next page). Thus the investments not only relate to the desire to obtain the most recent technology, but also to the need for up-front economic development, which requires latest technology and vice versa. Thus these two aims seem to be intertwined.
Table 2.6
Source from http://www.crito.uci.edu/GIT/publications
4.5.5 Conclusion
The most influential environment faced by the players in the PC industry in China, is the political factor. Foreign investors should try not to fiercely compete with the domestic industry until if new policy or policy change can be sure or stable after the entry of the WTO. The economic as well as the technological environments are also important, as these seem to be interrelated with the PC industry as well as with each other, and thus the three of them depend on one another. Economic growth permits the development of the PC used rate and the purchase of the newest technologies, and this on the other hand is the prerequisite for further economic development if the level of developed nations is to be reached. The social environment holds the least specific influence on the PC industry, but in terms of general economic development, the unequal dispersion of the wealth produced in China will ultimately lead to a growing dissatisfaction in the poorer regions, which could eventually inflict political instability, thus possibly affecting the Chinese PC industry.
5 CASE STUDY - GROWTH OF THE LIANXIANG GROUP
5.1 Initial Stage: Development Of Lianxiang Chinese Card
Lianxiang group was founded in the name of 'New Technology Development Inc.' in Zhongguancun, which is referred to as Chinese Silicon Valley in 1984. It started with twelve researchers including Liu Chuanzhi, the present CEO of Lianxiang, and 200,000RMB loans from the Chinese Academy of Sciences (CAS). But just in the short period, it has grown to become the largest PC company in China. Lianxiang has attracted attention from the beginning stages because of the technical support it receives from the CAS, which is called the cradle of Chinese technology science, and the financial support for SOEs. But it chose the way for itself since 1984, autonomous from the Chinese government.
At the beginning stage, Lianxiang raised some funds by repairing and inspecting five hundred of IBM PCs in CAS, and providing technological services. It began distribution of PCs such as IBM and AST, as well as HP printers and peripherals. After then, it put up the Lianxiang Chinese Card16 on the market in 1985, which makes Lianxiang ready to start exporting. The development of Lianxiang Chinese Card had affected on expansion of the PC market. As it was loaded on to IBM PC in 1986 and 1987, it increased its share on the components market. When Lianxiang fulfilled the early stage conditions, it made a plan to produce its own PC in 1988. However, because they were still under the influence of the planned economy which the government strictly controlled the extra-planned production, they inevitably dived into foreign market with a lot of ventures.
With the expansion of export, Lianxiang felt its limitation in technology and marketing. So its eyes are opened to the foreign market. In the beginning, Liu Chuanzhi, who is a CEO in Lianxiang, made a plan to establish the research center in Silicon Valley. But he realized its excessive gap with U.S. technology at once. So, he turned his focus to Hong Kong. In 1988, Lianxiang cooperated with Hong Kong DAW Company and Chinese Technology Trade Ltd17, and established the Lianxiang technology and science company.
Lianxiang chose Hong Kong because it is the information city that can notice directly the circumstances of international market trends and movements of new technologies. And it is also a financial city that can afford the funds on a large scale of PC trade. Those funds were spent for product development and production. Hong Kong Lianxiang mostly produced motherboard. It was necessary to specialize the product because there was already too much competition in the world market in 1989. After then to 1991, due to price war among chip providers in the world PC market, Lianxiang could secure bigger pie of the market. The export amount of that year has increased to two hundred thousand pieces from eighty thousand pieces originally planned, and it could occupy 10% of the whole world motherboard market in 1994.
Henceforth, Beijing Lianxiang was founded in 1989. It changed the brand name to Lianxiang. Beijing Lianxiang opened its zenith of prosperity by being in charge of design, production, and distribution. In this prospering period, Lianxiang developed 286 PCs and put it up on the market in 1990, but because of inroads of foreign companies into the China market such like AST, it was almost buried under snow. But undauntedly, it developed 486 PCs the following year, and intensified marketing strategy with the emphasis on education from 1992. It was founded the branch, subsidiaries and research center, including in Silicon Valley in 1992. Thus, Lianxiang has developed its ability with its trade-production-technology strategy.
In this period, Lianxiang could afford to work its operational funds more than other SOEs, and it accumulated considerable capital through foreign trade. In addition, foreign companies could not be on the domestic electronic market in the 1980s. That is, the market was favorable to Lianxiang at the time, capital, and industrial policy in this rising stage.
5.2 Slowing Down: Meeting Competition From Foreign And Domestic Entrants
Under China's open door policy, foreign companies were allowed to enter and compete with domestic manufacturers, although not on totally equal footing. Foreign firms, such as AST, Compaq, IBM, Microsoft, Hewlett Packard, Digital, NEC, AT&T, and Acer flooded the market with superior PC hardware and software products18.
In addition to the market pressure coming from foreign players, increasing competition from domestic players also threatened to erode Lianxiang's market share and profits. Domestic companies, such as Beijing University's Founders Group and the Ministry of Electronics Industry's Great Wall Co. were major entrants into this lucrative market. These firms raised industry standards and operation costs for high-tech products.
In such circumstance, Lianxiang was not prepared for foreign brands to enter China's market. In 1993, like other domestic PC companies, Lianxiang failed in this battle19. For the first time, Lianxiang did not reach its annual sales plan. With this lesson of failure, Lianxiang launched its restructuring of the personnel organization and management innovation. For inducing the enterprising spirit of the staff, it introduced the incentive system. And it changed into a high productive system through its strict management. With these arduous restructuring, Lianxiang could be ready for capturing the domestic home PC market.
5.3 Coming Back With Balancing Between Foreign Products And Promoting Its Own Products
After competition with foreign companies in 1993, Lianxiang came to pay attention to the question of whether or not Lianxiang was capable of competing with foreign brands. For the sake of this matter, Lianxiang decided to do follows: first, it kept up importing foreign products for the profits of high-margin, to accumulate operational capital and learn advanced technology. It set up R&D centers, formulated sales and distribution channels, and developed a PC motherboard in this period. Second, it improved its management and sales strategies from linking product development logistics, production and sales together. Third, quickly localized its component supplies in order to reduce the cost, and to enter the home PC market ahead of others.
After then, Lianxiang took decisive restructuring instead of passive working mood of other State-Owned Enterprises (SOEs)' character. It induced the piecework system in 1994, and promoted its efficiency. Lianxiang proclaimed the price of Pentium PC under ten thousand RMB at first in 1996, and has preceded the price lead so far. And it has established its educational image though continuously providing technological and educational service. For example, from the recreation activities such as Lianxiang Happy Weekend club and Lianxiang 1+1 club, it made a step forward to meet needs of existing and prospective customer, and could understand customer's desire and trend.
In this 'importing-absorbing-recreating20' process, Lianxiang has dominated the market gradually with proper developing strategy. Lianxiang has made an overall marvelous growth in home PC, office PC, and laptop PC21. Lianxiang sales reached new highs with home PCs and notebook PCs, up 164 % and 127 % respectively. Lianxiang sold about 216,000 units on the second quarter of 2000 in China, and became the largest PC enterprise in Asia-Pacific market, exporting 433,766 units in the same period22. According to recent IDC statistics, the PC and OA PC sales of Lianxiang occupied 2%(190,849 units), and 1%(210,473 units) on the whole world market respectively, it ranked 10th in the world with the 401,322 units of total amounts. And it maintained No. 5 position in the world motherboard market continuously. It is also in charge of manufacturing and sales of the Lianxiang brand PC, distributing foreign brand PC and peripherals, as well as system establishment and production of CPU.
Lianxiang was well positioned to leverage on its successful Internet strategies and to exploit its local niche. Turnover of the Lianxiang Internet access device business recorded a strong growth of 115 %. Following the rollout of the Conet PC, Lianxiang launched the Tongxi Internet PC in 1999, targeting the household market and further extending the 'one touch to the Net' function to the low-end mass market. During this period, Lianxiang brought numerous new products to market, which was well received by customers, enabling its market share to reach 26.3% and in the first quarter of the fiscal year, and it should exceed 30% in the second quarter.
Together with the development of new products, the number of distributors for Internet access device products increased from 2,000 to 3,200, while there are now 158 of 1+1 Home PC Specialty Shops in 2000. Driven by the commitment to enhance customer service quality, the largest PRC call center, building on advanced Customer Relations Management (CRM) concepts, it is now in operation. There are close to 200 well-trained hotline customer service engineers providing 24 ? 365 assistance. To promote Lianxiang's service policies and service products as well as establishing its professional service image, the group launched the high impact 'Lianxiang's Service is Around You' campaign in 20 cities in China in recent two years.
The motherboard business maintained stable growth with sales increasing more than 60% during the first half of the year. Through its large-scale promotion and marketing activities, the Group strengthened its exploration of national and overseas OEM customers and the systems integration market.
The Lianxiang Group's power and prospect could be concluded by its CEO, Liu Chuanzhi, as follow: 'Lianxiang fills a unique niche in the world's largest and most rapidly growing PC market, the PRC. The Group is adopting the most advanced management practices and up-to-date technologies from around the world to exploit these advantages in China. This in turn will maximize the benefits to the Group and enhance shareholder returns. Looking ahead, Lianxiang will leverage on its competitive advantages to continuously focus on its two core businesses, the Internet and e-commerce, in order to become a provider of full-range Internet products and comprehensive Internet services.'23
Chart 3.1 Lianxiang's Breakdown of Operating Profit, FY00(%)
Source: Company data, Salomon Smith Barney
Chart 3.2 1985-1998 sales profit (millions of RMB Yuan)
Source: Jin Zhanming, MaLi (1999), p. 24
Chart 3.3
Sales amount (thousands of unit)
Source: Liu Bin (2000), p.44
Lianxiang has taken the top position in the total sales of Chinese electronic industry in 1998-1999. It is astonishing that Lianxiang ranks the top for two years successively in the electronic industry, which all of advanced foreign companies keenly compete. The table below explains China's fifteen largest companies in the electronic industry, and Lianxiang holds priority to Shanghai General Electronics Group Co. Ltd. (SGEG) with a large margin on total sales. In addition, when considering that Great Wall ranks fifth, HiSense ranks eighth, and Founder ranks twelfth, it indicates that the Chinese PC industry is growing steeply.
But as mentioned below in Table 4, it is clear that Lianxiang tops on total sales, but not on the benefits. It is not only applicable to Lianxiang, but also to all the PC companies such as Founder, Great Wall, etc. From this fact, it could be estimated that the total profit rate has been lowering on the Chinese PC market with keen competition24.
Table 3.1 China's fifteen largest companies in the electronic industry
(Ten thousand RMB)
Company
Total sales
Benefit
Main products
Lianxiang
2,029,181
49,511
PC, Board, SI
2
SGEG
,745,656
37,304
TV, information equipment, Display, PC
3
TCL
,324,054
67,930
TV, telephone, battery, PC
4
Konka
,315,070
62,466
TV, cellular phone, refrigerator, washing machine
5
Changhong
,304,684
66,540
TV, air conditioner, DVD player
6
Great Wall
,209,020
26,787
PC, peripherals, memory
7
PTIC
,147,537
62,261
Mobile communication Equipment, cellular phone, networking product
8
HiSense
,065,221
23,351
TV, air conditioner, PC, software
9
Panda
,034,812
40,373
Sound equipment, PC, electronic machines
0
Huawei Technologies
,021,473
70,096
Communication equipment
1
Shanghai Bell
864,694
26,036
Mobile communication system, software
2
Founder
842,760
6,054
PC, software, hardware
3
Eastcom
736,419
40,411
Cellular phone
4
Caihong
635,823
57,078
CRT
5
Ericsson Beijing
620,746
6,826
Cellular phone, mobile communication equipment
Source: Trade News (06/03/2000)
Table 3.2 the history of Lianxiang Group
Year
History
Product
984
Beijing Lianxiang was established and began the distribution of PCs such as IBM and AST.
Lianxiang Chinese
Card
988
Hong Kong Lianxiang was established to distribute foreign brand PC products and peripherals for Beijing Lianxiang.
989
Hong Kong Lianxiang began the design and manufacture of motherboards as well as providing systems integration products and services for large corporate and government clients in the PRC.
990
Beijing Lianxiang began the design, manufacture and distribution of its own line of products. It was the first company to introduce the home PC concept in the PRC.
Lianxiang brand PC
991
Lianxiang software center was established.
993
Construction of the Lianxiang Science and Technology Park as the Group's manufacturing base.
994
Hong Kong Lianxiang was listed on the Stock Exchange of Hong Kong.
Printed circuit
Boards
995
Lianxiang Technology Center was established.
+1 home PC,
Pentium PC
996
Lianxiang PCs became the best selling brand in the PRC.
It had achieved the ISO9001 international certificate at first in PRC PC maker.
'Gemini' series PC (joint venture with Acer)
997
Beijing Lianxiang injected assets into Hong Kong Lianxiang.
998
The one millionth Lianxiang PC left the production line, symbolizing a new stage in the development of the Chinese information technology.
Pentium PC
Laptop PC
Palm PC
2000
Lianxiang ranked the 8th in the Information Technology 100 from Business week. Lianxiang also became the top selling brand in laptop and desktop PC market.
Source: Liu Ren (2000), p. 18, 47
6 SOURCES OF THE COMPETITIVENESS OF LIANXIANG GROUP
What is the core aspect of success for Lianxiang? In the early and middle 1990s, foreign companies occupied about 80 percent of the market with taking advantage of open door policy. Lianxiang also failed to achieve its annual plan in 1993. But how could local companies, including Lianxiang, take advantages of the Chinese market at last?
In this chapter, we will show the reason why Lianxiang could keep the top position on the Chinese PC market, which is the fastest growing market in the world, since the forth quarter of 1996.
6.1 Comparing With The Foreign Companies
6.1.1 Low entry barrier in the PC industry
When it came to shopping for a personal PC, Chinese consumers have long faced two options before: The overpriced, old-generation offerings of domestic manufacturers or the latest U.S. brands, often smuggled in by shady distributors. But when Intel Corp. launched its new MMX multimedia chip at road shows in Beijing and Shanghai in the late 1996, it became a different story25.
When the PC industry entered into Wintel system, there did not exist the technical barriers for developing companies any more. In this situation, Chinese local brands formed technology partnerships26 with foreign companies, and accumulated technical abilities. Also, they imported foreign capital, product, technology and management know-how, et cetera. After then they invested in co-production and R&D through joint venture, and finally they produced the high tech product in their own brand. Moreover, they have also moved aggressively to introduce new technologies into the marketplace by taking advantage of the delays (called technology edgy) that foreign companies face when they import technologies from abroad. Local companies, by manufacturing locally, can introduce new technologies more quickly. Even though local brands did not have any particular technology, because of standardization in PC, they could enjoy the advantage of home ground just with assembling the product.
Table 4.1 Lianxiang's technology partnerships
Partner
Nature of relationship
Intel
Strong working relationship
Microsoft
Strong working relationship
PC Associates
An equal joint venture by Lianxiang and PC Associates to develop software for the China market
D-Link
Joint venture capitalized at $10m in which Lianxiang holds 57% and the remainder by D-Link to design, manufactured and distribute networking products for the China market
IBM
A strategic alliance with IBM to customize and distribute IBM software products in China
National Semiconductor
A jointly established laboratory by Lianxiang's parent and National Semiconductor to develop Internet appliances such as set top boxes and thin clients
Texas Instruments
A jointly established Digital Signal Processing laboratory by Lianxiang's parent and Texas Instruments to develop products such as ADSL modems.
Source: Lianxiang Holdings, re-quoted from CAZENOVE&CO.(July 2000)
6.1.2 Price advantage
Lianxiang has been in a dominant position than foreign brands since 1996. The core reason of taking top position is supposed to be the price advantage27. Lianxiang even had lowered its price three times from April to May in 199628. At that time, it enforced over 25% of cost reduction every time, and as a result, it increased by 300% of the sales as compared with the same period of the previous year. Besides the low price of the original PC, local companies took advantage of low labor cost, low transportation cost, no import tariff, use of cheap components and low operation capital29, etc. And local brands, including Lianxiang, bargained with Wintel (Widows+Intel30) in collaboration, it could offer the product with even lower price.
According to CNNIC survey results, more than 50% of the PC buyers choose PC under the price range of 10,000~15,000 RMB. Local brands are almost within this range, but foreign brands are far over this. As Chart 6, Lianxiang PC price was indifferent from foreign advanced PC in price. Besides, even it's with low quality; Lianxiang PC price was higher by 30% than local word processor at that time. But after management improvement, it lowered its price by a large margin. So Lianxiang PC price is lower by over 15% than foreign brands.
Chart 4.1 Comparison of PC price
Foreign brand foreign brand
Lianxiang lower than 5% lower than 15%31
Lianxiang
higher than 30% higher than 15%
Local word processor Local word processor
Source: Jinzhanming, Mali(1998), p. 205
These low prices are deprived of its managerial innovation. By beefing up time-to-market and shortening inventory turn, Lianxiang is maintaining margin at lower average selling prices. Being able to sell at the low-end with adequate margin is the key to profit from the family-driven China growth32. Also it depends on low local labor cost and cheap components. Another aspect could be counted on the import tariffs33. The Chinese government has levied 15% of tariff on a microprocessor with the countries whom China has exchanged MFN (Most Favored Nation) status. If not, it levied 70% of tariff. Of course, after China joins WTO, it will lower to fewer than 10%. And when considering it often happens that Chinese government cut the 15% of VAT to the local companies, foreign brands is difficult to narrow the price gap with the locals'.
Table 4.2 The PC tariffs rate in China
HS Code
Description
Preferential
General
VAT
8471.4140
Micro processing
5%
70%
7%
8471.4940
Micro processing
5%
70%
7%
8471.5040
Micro processing
5%
70%
7%
8471.6031
Stylus printers
5%
40%
7%
8471.6032
Laser printers
9%
4%
7%
8471.6033
Inkjet printers
9%
4%
7%
8471.6039
Other printers
9%
4%
7%
Source: Customs Import and Export Tariffs of the People's Republic of China (1998); re-quoted from Personal PCs & Peripherals (1998), p.10
Notes: Preferential rate for the countries with which China has exchanged MFN trading status; General rate for non-MFN nations, VAT is levied on all imports entering China.
6.1.3 Better understanding of the Chinese market
Local brands have grasped the trend of the Chinese market. After the Chinese government opened its PC market in the 1990s, foreign companies, such as IBM, AST, Compaq, and Hewlett-Packard, occupied over 80% of the Chinese market. But their main target was the higher-margin business buyer, it means, they did not expect the growth of home PC. On the contrary, Lianxiang concentrated its targeting to home users, and it was correct as home PC market has increased rapidly after the middle of the 1990s.
Besides, U.S. companies tried to apply the globalization product to China. But Lianxiang devoted its energies to the Chinese market, so it could correspond to the special needs34 that the Chinese really demanded. And when U.S. brands thought China as the low-quality market to put up the low level PC, Lianxiang always offered the state-of-the art technology in the market35 in order to upgrade its brand image.
Another strategy of Lianxiang was targeting the children. That is, it emphasized the educational aspects of PC. The Chinese government has enforced 'one family, one child' (also called 1+1) policy since the middle of the 1980s. It means there will have six adults (father, mother, maternal and paternal grandfathers and grandmothers) will invest their incomes to one child. So for their 'small emperor's' education, the Chinese PC market has increased all of a sudden, and Lianxiang can expand its share of the pie.
6.1.4 Wide-range distribution network
In fact, foreign companies established the wide-range distribution network in the early 1990s. Foreign companies are not allowed to engage directly in trade with China, aside from marketing goods manufactured in China. Therefore, foreign exporters must use domestic Chinese agents to both import and market imported goods in China. Consequently, foreign companies have found it beneficial to form joint ventures with local partners. In the early 1990s, Compaq and AST dominated the Chinese PC market, as they were extremely successful in identifying strong distributors. As distributors were used to deal with only one vendor, it was relatively easy for single distributors. But the landscape has changed now. Distributors often work with more than one vendor, and local PC companies have become more competitive36.
Lianxiang had extensive sales network of more than 2,500 distributors, dealers and retailers in the PRC since 1990. And it has extensive service network, which includes six regional technical service centers and 500 maintenance outlets. In comparison with IBM (ten subsidiaries and one hundred sixty service centers) and Hewlett-Packard (five subsidiaries in Shanghai, Chengdu, Guangzhou, Xi'an, Shenyang, and over sixty warranty service centers), Lianxiang can be said to have a wide distribution system. Because sales agents are supporting PC training, software installing, and delivery services for free, it is one of the core advantages for Lianxiang.
The market share of Toshiba laptop PC was under 1% in 1995, but since Lianxiang undertook its sales agency, it expanded to over 30% from 199737. This example shows well Lianxiang's wide distribution system, and Lianxiang implements agent agreement system for keeping it. This system is for co-development with both agents and Lianxiang. Lianxiang relied 100% on agent sales since 1994 instead of direct sales.
.1.4 Good industrial policy
Another aspect of their growth is the close relationship with the government38. Lianxiang is a quasi State-Owned Enterprise (SOE), which founded in 1984, affiliated with the Chinese Academy of Sciences (CAS)39. Even though it is unrestricted from government 4intervention for promoting competitiveness, it is a SOE. So, the Chinese government still wants SOE to take advantage of computerization policy that the government propelled. Another example was that the Chinese government cracked down on smuggling of goods between China and Hong Kong since 1998, hurting foreign-made PC sales, because many of them were smuggled by distributors in Hong Kong into China to avoid tariff40. Because of low competitiveness with high tariff41, U.S. companies relied on smuggling in some portion. So as the result of smuggling prohibition, U.S. companies received a severe blow.
Chinese government declared 2000 to be 'the year of online government', and urged the government authorities and companies to change up to online system42. This pressure made them consume PC in large quantities within the short period of time. Newly established information systems in government agencies have contributed to the increase in PC sales. China is planning on developing its own Intelligent Card Program for identification and personal registration (a combination of social security number and residence permit). PCs are also being used as management tools in large projects including air traffic control, road transportation and construction project management. Government purchases of PCs accounted for about 85 percent of the market in 1997.43 And the State Education Commission (SEC) has promised 1% of PC purchase every year for the elementary and secondary schools. It means that SEC will purchase about two hundred thousand PCs every year by allocating the local sources.
Government also would fulfill computerization by promoting the Golden project since 1993. It can be clarified to the Golden Bridge (a national information network), the Golden Card (a nationwide banking system linking Chinese banks), the Golden Gate (a communication network connecting foreign trade companies with customs bureau), the Golden Tax (a Computerized tax system), the Golden Agriculture (total management of agriculture by Computerization), the Golden Enterprise (a network of enterprise's production and distribution system), the Golden Intelligence (a personnel network with science, research, and education), the Golden Macro(the system of support for the national economy), the Golden information(a project of foundation connecting national statistics information), the Golden Health(the national health care network) and so forth. The Golden Bridge, the Golden Gate, the Golden Card and the Golden Tax are promoted actively among them44.
In 1993, the Chinese government cancelled its protective policy on the PC industry. It means, it lowered its tariff on PC import, and it also cancelled the import quota for PCs. It led to inroads of foreign companies, and they shared about 80% of its market by the end of 1993.
The Chinese government set up the goal that promotes China to be the base of the Asian IT industry following the steps of Taiwan, Japan, and Singapore. For that, it implements discount of taxation in order to foster its IT related industries. It has discounted its 17% VAT to 4~5% on the software companies, and has deducted in full, their R&D cost from taxable income since 1999.
When market competition become violent since the multi-national cooperation chose the green field strategy, the Chinese government announced 'the policy to support the development of local companies'. Its specific contents are that it intensively trains two or three companies, which can produce one million units of PCs per year within three years, and seven companies, which can produce five hundred thousand products companies. After centralized training, those companies could occupy 60% of the share in the total production of the Chinese PC industry. In addition, it is planning to arrange its market proportion to 2:8(import product: local product) in 2005.
In May of 1995, the Communist Party of PRC published its strategic policy, 'Developing the nation with a technology and education', and confirmed it in the Fifth Plenum of the 14th Central Committee, with the document which was named by 'a Central Committee's proposal about the institution of the Ninth Five-Year Plan for the national economy and social development, and the 2010 prospective view. It also made a decision to conclude national economy's informationalization. In addition, the government's Ninth Five-Year Plan (1996-2000) calls for extensive infrastructure facilities and improvement.
Finally, the central government supports domestic producers and often gives tax breaks and low-interest banking support. Founder, Lianxiang, Great Wall, Tontru, and Langchao have all been supported by the government, and will each receive a loan of US $ 24 million. Also they have benefited the tax cut by government by 1/4~1/2 of the general tax.
6.1.5 Local preference for local brand
The preference for local brand is revealed at the interview with a customer on Asian Business45. When the journalist of Asian Business asked a customer why he bought the Lianxiang product, he answered, 'It's cheap, it works, and it's Chinese'. And, some people even say there is a bit of chauvinism involved in Lianxiang success46. Yang Yuanqing, the head of Lianxiang PC Systems Ltd., interviewed Forbes journalist with confidence that if the quality and price are the same, the customers will buy a domestic brand first.
After the middle of the 1990s, because of narrow quality difference with Wintel, there was no inducement to have to use U.S. brands decisively as like the early days of the 1990s. And they selected local brands that are relatively familiar with its brand name. According to the finding, those who intend to buy PCs have chosen Lianxiang, Founder and Great Wall as their most favorable brands, representing 57.3%, 8.1% and 2.7% respectively. 74.6% of the collected samples show that product quality is very important and 52.7% of them believe that service is very important47.
6.2 Comparing With The Other Local Companies
Indeed, low technical threshold, price advantage, localization, service system et cetera are in common points with other local brands, for example, Founder, Great Wall, Stone and so forth. Lianxiang is not providing the cheapest PC in China, and other local companies also have a wide distribution channels. If so, what differentiates Lianxiang? How could Lianxiang step on the top of the local companies since the early of 1990s? This following part will answer these questions.
6.2.1 Cooperative relationship with CAS
The first answer is on the basis of the research done by the Chinese Academy of Sciences (CAS), which is the parent company of the Lianxiang. Liu Chuanzhi, a CEO of Lianxiang, said that the major reason for Lianxiang's success was its background in the CAS and its research48. Lianxiang was originally the test case of CAS researchers' enterprise foundation. Because CAS is the core IT industry center in China, Lianxiang cannot but be the best in production technology and product quality in China. CAS has devoted deep study to the PC, wireless communication and semiconductor and so forth since September 1954, the year of reorganized by independent research institute. CAS had concentrated its studies on fundamental science and national defense development for a considerably long time. But it changed its strategy to focus on applied science, technology transfer and commercialization. With the best technology, the best human resources also cannot be overlooked. Most of the core executives in Lianxiang were CAS researchers. And it has continued to support Lianxiang so far. The government ever announced it would send more than four hundred researchers from the Chinese Academy of Sciences, a national think tank, to work at Lianxiang's research labs per year49.
6.2.2 High quality of human resources
Because Lianxiang is located in Zhongguancun, which is the Mecca in Chinese IT industry, it is surrounded by the high quality of students from Tsinghua and Peking50. So it is easy to adjust their demand and supply of human resources with the low cost. China has strong technology-oriented education and a large number of engineers with the right skills.
One of the characters of Lianxiang personnel is that they are young. The average age in the whole Lianxiang is 28.1 years old, and the average age of executives is just 33.8 years old. These young personnel are the one of the core merit in PC industry where flexibility is needed because of the rapidly changing circumstances.
Another point is that Lianxiang is one of the two companies that implement the stock option51 in China since 1997(the other is the China Resources Enterprises). Through these systems, it recreates enterprising spirits from high quality personnel, and helps to induce innovative and efficient management.
The core culture of Lianxiang resides on the incorporation into the development of the enterprise the pursuits of its staff. As a people-oriented enterprise, it created a unique corporate culture. Providing the equivalent compensation, its staff could bring their creativity into full play. It rewards employees with profit-sharing deals and stock options. The colloquial Chinese term for options, gupiaoqiquan, was barely known before Lianxiang started handing out stocks52. Lianxiang's stock-option schemes make it one of the most attractive places to work in China. It is known for its dedication.
6.2.3 Specialization strategy
Lianxiang chose specialization strategy while others selected diversification strategies in the 1990s. It also concentrates its ability on some specific components. Lianxiang developed Lianxiang Chinese Card, which could translate English to Chinese in 1985. With this specific technology, Lianxiang could step up on the vantage ground. When the necessity of the Lianxiang Chinese Card was decreasing, Lianxiang rapidly moved its ability to the motherboard because components' brand name and sales network are easy to approach than the fully assembled PC's. The gradual expansion strategy, those process was sales of digital watch - production of Lianxiang Chinese Card - motherboard - Lianxiang brand PC, was suitable for Lianxiang with its consequence.
Lianxiang selected diversification strategy within the boundary of the PC industry. Because of the technology intensive character, short cycle time, and keen competition, PC industry is a field needing the specialization. It is clear that most of the advanced companies, Apple, IBM, Intel, Compaq et cetera, specialized with PC or chips and components. But most of the PC companies in China chose the diversification route after the opening of the Chinese PC market since 1993. The representative examples of diversification are Stone and Giant. Due to the low market share of local brands and narrow technology in PC industry, they picked up the diversification. When these Stone and Giant occupied considerable market share in the early of 1990s, their choice was persuasive. However, considering Lianxiang, Founder, Great Wall stand head and shoulders above others at the present time, it makes sense that specialization strategy is suitable for the PC industry.
But Lianxiang seems to have chosen the diversification strategy instead of specialization in its PC industry. It has developed its business arena continuously and has been moving its core ability from PCs to the Internet and E-commerce. However, its main profits still depend on Lianxiang brand PC with a 69 percent of proportion as Chart 4 indicates. So even the trend of diversification with its base on PC part will go on for the time being.
Chart 4.2 Lianxiang's business arena
Source: www.legend-holdings.com
6.2.4 Early entry into internationalization
In comparison with the same industry in China, Lianxiang had an early experience of internationalization. Through the foundation of Hong Kong Lianxiang in 1989, Lianxiang could collect early information about new technologies on PCs. Hong Kong became an early player in the PC industry by capitalizing on its entrepreneurial business culture, its excellent business environment and infrastructure, and its well-developed supply base for electronics components. The tight-knit networks of small, flexible, strong overseas ties helped Lianxiang participate in the global production system53. It ships motherboard, the circuit cards that run PCs, to 26 countries. And in 1993, it became the first Chinese PC maker to open a design center in Silicon Valley. It could be said that it has translated what's going on in technology abroad and brought it to China, where it understands the market54.
After accumulating the know-how of the multi-national management of vertical integration, which combines technology development (Silicon Valley, Hong Kong, Peking), large-scale production (Hong Kong, Shenzhen, -sales network (Beijing: local sales network, Hong Kong: international sales network), Lianxiang entered to competition on the local market at a mature stage.
6.2.5 Distinguished marketing strategy
And another successful aspect can be accountable to its marketing strategy. For example, the 'one family, one PC, 1+1 club' has encouraged the expansion of the Chinese PC market. It provides software bundled with PC for free, and also gives one-year free Internet connection for Cornet PC.
The company has developed a variety of software products for the first-time customers that are bundled with its PCs, including tutorial programs on everything from using the World Wide Web to mastering home finances55.
And its extensive network of distributors, service center, and high quality of after-sales service promoted the sales of Lianxiang PC. With over 130 '1+1 special shops' in the PRC and 24-hour hotlines and on-site service, website for customer support and software download could absorb the wide range of customers. Lianxiang Group was the first company to introduce the concept of function, application PCs and 'one touch to the net' PC, and was the first PC manufacturer to commit to a 3-year guarantee service in the PRC. These kind of 'first' tries made the image of Lianxiang 'state-of-the-art'.
7 CURRENT ISSUES AND PROSPECTS
7.1 China's Entry Into WTO
Even though Lianxiang took advantage of price so far, there is doubt as to recent China's entry into WTO56, whether it still can have a competitiveness on the market or not.
China officially applied to the General Agreement on Tariff and Trade (GATT), the predecessor of the World Trade Organization, in July 1986 to resume its status as an original contracting party. WTO membership will give China a more stable access to foreign markets because it will reduce disruptions in foreign trade that are caused by unpredictable policy shifts. Given the conditions of WTO membership, there will be greater competition between Chinese firms and foreign firms, both in China's domestic market and in the foreign markets. As a result, there will be a large scale restructuring of industries.
And labor-intensive industries would be in China's comparative advantage, but natural resource-intensive industries, capital-intensive industries, and technology-intensive industries are in China's comparative disadvantages57.
For consultancy services related to hardware installation, data processing and tabulation services, and time-sharing services, foreign-service suppliers will be able to operate in China without limitation upon accession. These services can also be provided through cross-border delivery. China signed the Information Technology Agreement (ITA) on accession, thereby committing to eliminate tariffs on all products covered by the ITA. Tariff reductions from the current applied average of 13%. China, which generally prohibits companies from distributing imported products or providing related distribution services, will permit foreign enterprises to engage in the full range of distribution services. These rights will be phased in over a four-year period for almost all products, including ITA products. And to alleviate the uncertainty associated with China's inconsistent application, refund, and waivers of its 17% VAT tax, China has agreed to apply all taxes and tariffs uniformly to both domestic and foreign businesses58.
7.2 Foreign companies' aggressive marketing59
U.S. PC companies, although surpassed by Lianxiang in the desktop PC and notebook PC market, still dominate the high-end server market. IBM, HP, and Compaq rank the top five for both desktop and server sales. Although U.S. companies no longer control the desktop market, they can remain competitive by changing their strategies to fit the Chinese market60.
To counter the high tariff rates, many foreign companies have moved their manufacturing plants to China. Those who sell PCs entirely produced in China have a price advantage over those who still have to import their products. Companies still need to develop relationships with local distributors. U.S. companies have also found it useful to cooperate by forming a distribution network with local companies and develop joint ventures with local companies.
IBM has plans to work with Shenyang Alpine Software Ltd. to develop new products, set up marketing programs, and offer consulting services. In addition, IBM and Great Wall have entered into joint venture to produce both IBM and Great Wall PCs for domestic sales and export. IBM plans to open IBM-branded specialty shops in China. Compaq and Founder plan to jointly manufacture and sell a multimedia notebook. Compaq and Stone also have a joint venture in Shenzhen licensed to produce PCs. HP realizes that high prices have hindered efforts to expand market share in China. HP has the most advanced facilities, such as the Shanghai plant, to produce PCs locally in order to bring costs down. However, HP is the top selling PC server, inkjet and laser printer at the moment. And Dell PC61 has opened a production and sales center in Xiamen, Fujian, in order to source all their China demand. Dell's China PC Center will produce, sell, and provide service and offer technical support for the company's full range of PC systems in the China market.
7.3 Rising competition with the growth of local companies
Even though Lianxiang marked 107.2% of growth per year, its market share has lowered from 27.3% in the fourth quarter in 1999 to 26.2% in the first quarter in 200062. This fact shows that Lianxiang is facing more severe competition in the PC industry. Domestic companies' entry into the PC market can be divided as follows. First, there is the entry of the electronic companies, such as HiSense, Peony, Panda, Changling and Haier, etc. Haier and TCL, which mainly manufacture TV and refrigerator at past, are manufacturing their own brands' PC already. In particular, the Internet PC of TCL is coming up to be the competitor against Lianxiang's Conet PC. Second, there are some PC science research centers, such like Shuguang, Yinhe and Tianji. Third, Shida and Stone are the kind of external manufacturers. Fourth, Heguang, Haixing is based on PC distribution. And finally, there are newly established enterprises as Tsinghua Tongfang, Shanghai Red Hundred. Because of this trend, the various enterprises' entry into the PC industry becomes more complicated in the local PC market63.
In addition, other local brands, for example, Founder, Great Wall, Tontru, Langchao, are benchmarking Lianxiang now. Tontru is growing through the distribution of AST PCs. And HiSense is using the low-price marketing strategy through advertising that its products are cheaper than Lianxiang's.
7.4 Weak software technology and the complication on OS (Windows/Linux)
On the application of operating system (OS), Lianxiang is in an awkward position at the moment. First, Lianxiang has been in the close relationship with Microsoft. Lianxiang has clinched a deal with Microsoft to pre-install the Chinese version of Windows 98/2000 on all Lianxiang brand PCs. It has cooperated with Microsoft on the whole process including sales, marketing and production. In March of 1999, Lianxiang announced a deal with Microsoft to develop low-cost 'set-top' devices to hook televisions to the Internet through cable.
But the Lianxiang group officially announced its entry into the Linux Operating System (OS) arena on May 9 2000 with the introduction of its Fortune Linux 1.0 OS. It has three stages of strategy. First, Lianxiang will cooperate with other manufacturers and use Fortune Linux 1.0, which is a 'user-friendly and functional operating system for household use'. Second, the company will roll out a series of Lianxiang Linux products. And third, it plans to further develop its Linux product line and to achieve technological breakthroughs.
And, local companies including Lianxiang have a lot of disadvantages. For example, they lack competitiveness in R&D and software. When the multi-national companies moved their manufacturing facilities into China, local brands would lose their advantages in price. So local brands must move their abilities to the application field. They, including Lianxiang, have a difficulty that is characterized by 'strong part is strong, and weak part is weak'. To overcome this problem, Lianxiang made connection with the local software enterprise64, and invested US $ 35 million to develop the innovative software. And the government supports them by with four hundred of CAS researchers on R&D.
7.5 The emergence of the mobile-internet service (WAP)
As indication in the review of 2.3, the PC industry and the Internet have a relatively close relationship. The biggest aspect of PC purchase was Internet access. But it is said that the technology leapfrogging will happen from Internet directly to Wireless Application Protocol (WAP) in China because of its narrow infrastructure of the Internet industry.
For every four Chinese with a handset, there is only one in four with can access the Internet through Internet, and the nation's love affair with mobile phones has blossomed to the stage where boutiques selling handset covers and accessories proliferate in the downtown areas. WAP allows mobile phone users with a suitable handset to access a pared-down, text-only version of the Internet through special WAP sites. Officials promoted the heady visions of a China transformed into the world's largest Internet market through a computerless IT revolution, where workers could log on via mobile phones and check e-mail, buy tickets and trade stocks at the push of a button.
But, like many grand plans in China, a mass market in wireless Internet is a lot trickier to pull off than it looks. That lack of success is owing to the technical difficulties. Its transfer speed is only 9600 Bites per second, and it will even charge the Internet connection fee. Even though the prospective users of WAP are expected to use WAP for e-Commerce and stock investment, its infrastructure is far from expectation the areas of convenience and services65. Another challenge is that regular cellular phone users in China already experience problems with calls66. Despite solid government support and industry backing, rates of subscription to the WAP service have been dismal. Current numbers of WAP users are still just in tens of thousands.
China has the second largest and the fastest-growing mobile telephone network in the world. But the growth of mobile-internet in China is not outstanding on the account of the large scale of PC sales. Tiny data screens and time-consuming methods of entering Chinese characters have also restricted interest. But considering the large amount of cellular phone users in China and the government's full support, the growth of wireless Internet also has a considerable perspective.
7.6 Technology bottleneck
Why Lianxiang has the competitiveness is as follow. First, it has considerable design ability on fully assembled PC and technology on the QDI motherboard. Second, it is made suitable to localize the international advanced technology in application and easiness. And third, it surpasses any other companies on designing and manufacturing with small funds.
When estimating the technology level of the enterprise, there is some need to answer the following questions: Are there enough researchers for R&D? How much does the company invest on R&D? How long does it take to put up the new product on the market and so forth? Lianxiang PC has 120 fulltime researchers for R&D, and it invested twenty million RMB on the R&D in 1999. Besides, it develops the new product every half year67.
But it still relies on U.S. for the core technologies. So, there is some technology bottleneck in the development of the PC industry68. There are some critical comments on the technology of Lianxiang that assembles the product with Intel microprocessor and Microsoft Windows. However, Lianxiang decided to concentrate its focus on the applied research and industrialization than the development of core components as such.
The problem in the competition with local brands is the technological difference. Because Lianxiang is in the frontier position in the Chinese PC market, when it develops the innovative technology and put it up the market, the groups that got into the business later copy its idea. So Lianxiang invested the large scale of funds and lost the first mover advantages in a very short time. That is, Lianxiang needed to develop the core technologies and prepare for the technology imitation against the local companies.
7.7 Others
Another existing variables could be accountable to RMB devaluation and restructuring on SOEs. If RMB devaluation occurs, the import prices of components will increase, and local PC price will follow suit. But that is not a serious matter at all because localization of components is being implemented in China at the moment. For example, Intel invested about US $ 198 million, and established the manufacturing facility in Shanghai Pudong New Area.
Besides, China's on-going reform of its State-Owned Enterprises (SOEs) will result in the lay-off of several million workers, whose loss of income may contribute to a slow-down in home PC sales.
8 CONCLUSION AND SUMMARY
This paper showed the competitiveness of Lianxiang, which is a young and dynamic enterprise born amidst the tidal wave symbolizing China's reform and open-door policy in comparison with both domestic and foreign companies. Because the PC industry is in the fast changing circumstance, the short product life, and in the high-tech industry demanding both upgrade of quality and downgrade of price, no one knows how to change the position of Lianxiang. As shown in Table 2.2, Founder, which entered the PC market with the software named RichWin, is chasing Lianxiang at a speed. It jumped from 6th in 1997 to 3rd in 1999, putting U.S. companies out of the arena. And Great Wall, which held the first position in 1990, recovered its 5th position in 1999 from 9th in 199769.
With the strong trend of success of local companies, foreign companies, such as IBM and Compaq, is establishing the local manufacturing facilities or starting the 100% of localization in China, because of import tariff and labor cost. In the case of Dell PC, it completed it's manufacturing plant in the southern China in 1998, and recruited three hundred local personnel already in order to lay out the more localized strategy. Besides, it created free hot line to level up the customer service, and commenced sales promotion through e-commerce on Internet.
As the Group's core business, Lianxiang PC business continued to record an excellent performance. During the period under review, turnover for the Lianxiang PC business increased by 77%. Unit shipment of home PCs, commercial PCs and notebook PCs surged up 112%, 75% and 229% respectively. Additionally, Lianxiang PC continues to maintain its number one position in the PRC market, with market share increasing from 14.4% in 1998 to 21.5% in 1999 and 22.8% in 2000, setting Lianxiang even further ahead from its competitors. The motherboards manufacturing business turned around during 2000, considerably improving profit margins.
This paper has defined the competitiveness of Lianxiang to price advantage, better understanding of the Chinese market, wide-range distribution network, local preference for local brand, and good industrial policy in comparison with foreign companies as Chapter 4.
Besides, even though there is a lot of follow-up attack from the local companies, Lianxiang has competitiveness on cooperative relationship with Chinese Academy of Sciences (CAS), high quality of human resources, international network and distinguished marketing strategies in contrast to domestic companies. These internal and external factors of competitiveness are the answers for the previous two questions: Were there any explicit strategies which have led it to grow to today's status? What are the similarities and differences in its developing path in comparison with foreign and other domestic companies?
The final answer for this paper is about impending challenges. There are a lot of changes in the Chinese PC industry even during the writer writing this dissertation, such as entry into WTO, inroads of more and more domestic electronic companies and so on. Although WTO is favorable to the foreign companies, but local companies, including Lianxiang, also import the core components, hard drive, and operating system and so forth which will also occur high-level tariffs. There are some opinions that Chinese local companies are in the contrary, will still be benefit from the Chinese entry into WTO.
With the related technologies, nation-wide distribution channels, and well-known brand names, the inroads of electronic companies into the PC market will make the PC market more sensitive. Even in these situations, Lianxiang is expected to sustain its position for the time being because it is difficult to form the advantages like low price, Guanxi (relationship) with the government, and especially wide distribution channels in a short period of time. The success of Lianxiang as SOE is very suggestive to the reform of SOE, and it is worth paying attention to from now on.
Bibliography
<English References>
Andrew Tanzer, 'A Legend in the making', Forbes, Mar 9, 1998
Anthony Paul, 'Asia's Businessman of the Year', FORTUNE
Dedrick, Kraemer, Asia's PC Challenge, Oxford University Press, 1998
Dexter Roberts, 'How Lianxiang Lives up to Its Name', Business Week, Feb 15, 1999
Elizabeth Cheng, 'Let 100 firms boom: China's enterprise groups await economic reforms', Far Eastern Economic Review, September 5, 1991
Holly Hubbard, ' China enters the PC Age', Upside, Aug 1996
Jeffrey Lin, 'China PC Industry: fallacies and facts', Merrill Lynch, Sep 25, 2000
Julie Schmit, 'PC Lianxiang in the making U.S. companies lag as Chinese firm's market share in China soars', USA Today, Dec 6, 1999
Justin Doebele, 'PC giant in the making', Forbes
Leonard K.Cheng, 'China's Economic Benefits from its WTO Membership', Hong Kong University of Science and Technology, December 1999
Lorien Holland, 'Waiting Game-Beijing holds out for WAP, but customers aren't biting', Far Eastern Economic Review, August 17, 2000
Mike W. Peng, 'The Growth of The Firm in Planned Economies in Transition: The Case in China', 1996
Milton Keynes, 'Dragons are ready to move out', Corporate Location, Sep/Oct 1997
Nicholas R.Lardy, 'China's WTO Membership', The Brookings Institution, April 1999
Pamela Yatsko, 'Speading It Thin', Far Eastern Economic Review, April 17, 1997
Peggy Lim, Ivan Trinh, 'Personal PCs and Peripherals', US & Foreign commercial service and US department of state, 1998
Peter Weigang Lu, 'Internet Development in China', China Online, 2000
Tony Jordan, 'In the beginning', Asian Business, Feb 1999
---------------(1999a), 'Mastering the market', Asian Business, Feb 1999
Wenlei Li & Jasper Yang, 'Chinese Home-grown Names-case studies of the Lianxiang and Stone Groups', www.harvardchina.org/magazine
Yasuhiro Goto, 'Ground Zero for China's IT explosion: Zhongguancun district in Beijing attracting big names, lots of money', Nikkei, Jun 26, 2000
'Lianxiang Holdings Leader of the Pack', SALOMON SMITH BARNEY Inc., 2000
'Lianxiang Holdings', CAZENOVE&CO., July 17, 2000
'Terms of engagement', Asian Business, Feb 1999
<Chinese Works>
Changcheng Qiye Zhanlue Yanjiusuo(Great Wall Strategy Institute), Woguo Gaojishu
Dagongsi Zhanlue Yanjiu (The Research of High-tech Large-scale Enterprises' Strategies in China), 1998
Chen Huixiang, Lianxiang Weishenme (Why Lianxiang), Peking University Press, 1997
Chen Liren, Qiye Jituan Jianshe Xintan (The Search of Enterprise Group Buiding), Jiangsu Renmin Chubanshe, 1999
Chengshi Xu, Jiedu Minzu Xinxi Chanye (The Understanding of National IT Industry),
Huawen Chubanshe, 1999
Jin Zhanming, Ma Li(ed.), Zhongguo Zhuming Qiye Zhanlue Guanli (The Strategy
Management of the Chinese Well-known Enterprises), Tsinghua University Press, 1999
Kang Rongping, Ke Yinbin, Qiye Duoyuanhua Jingying (The Diversified Management of Enterprise), Jingji Kexue Chubanshe, 1999
Liu Ren, Qiye Fangfa: Zhongguancun Caifuzhiyuan (The Way of Enterprise Management: The Origin of the Wealth of Zhongguancun), Zhongguo Renmin University Press, 2000
Liu Xinwen, Li Jinhui, Zhishi Jingji Jingdian Anli (The Case of Knowledge Economy),
Gongshang Chubanshe, 1999
Liu Yin, Dangdai Zhongguode Dianzi Gongye (The Electronic Industry of Present China), Zhongguo Shehui Kexue Chubanshe, 1987
Lu Cairong, Liu Lusha, Kan Lianxiang Zenyang Jinxing Guquan Gaige (How to Lianxiang Reform its Stock System), Guangming Ribao, 1999. 8. 18
Song Bingfang, Jiashi Jituan (The Management of Enterprise), Jingji Guanli Chubanshe, 1999
Zhang Qijin, Ruhe Zaojiu Zhongguode Weiruan (How to Make the Chinese MS?), Dangdai Shijie Chubanshe, 1999
Zheng Haihang, Zhongguo Qiye Jianbing Yanjiu (The Study of M&A of the Chinese
Enterprise), Jingji Guanli Chubanshe, 1999
Zhonghua Renmin Gongheguo Kexue Jishubu(The Bureau of Science and Technology of PRC), Zhongguo Gaoxin Jishu Chanye Fazhan Baogao (The Report of Development of Chinese High-tech Industry), Kexue Chubanshe, 1999
<Web sites>
www.cnnic.net.cn
www.chinaonline.com
www.chinapntr.gov
www.china.org.cn
english.peopledaily.com.cn
www.idc.com.cn
www.legend.com.cn
www.Legend-holdings.com
www.uschina.com
Source of this part mainly is from George Stonehouse, Jim Hamill, David Campbell, Tony Purdie (2000), "Global and transnational business: strategy and management", John Wiley & Sons Ltd.
2 The Chinese government decided to introduce foreign advanced technologies and give up the whole localization strategy in order to reduce the gap between Chinese and internationally advanced technologies. Chengshi Xu (1999), p.67
3 During the 7·5 period, local PC market share in China exceeded to 50%, even reaching up to 80% in 1987. Ibid, p.67
4 Belonging to the Ministry of Electronic Industry of PRC.
5 Maeda (1995), p. 199
6 Lianxiang and Great Wall had achieved the ISO9001 and ISO9002 international quality certificate respectively in 1996. This fact represents that they already reached the international standard in quality. The Gold Great Wall, which is the product of the Great Wall Group, just falls back 1-2% in non-breakdown rate compared with IBM, and its average "non breakdown hour" is over twenty thousand hours. Considering the international standard of eight thousand hours, this is remarkable data. Chengshi Xu (1999), p.69
7 http://www.cnnic.net.cn/develst/e-cnnic200007.shtml CCNIC report 2000.7
8 Gotou (2000/05/09)
9 According to random sampling test of the National Technology Supervisory Office and the Ministry of Electronic Industry in 1996, 38.5% of the product quality was deficient in standard, and rejected. Chengshi Xu (1999), p.69
0 Import portion in 1996 was as follow: components 70%, peripherals 11%, fully assembled PC 10.4%, application software 5.4%, Peggy Lim, Ivan Trinh (1998), p. 2
1 China Daily (2001.6.28)
2 Tony Jordan(1999a), p. 21
3 http://www.ccidconsulting.com/text/2000-6-2-34.htm
4 http://english.peopledaily.com.cn/200108/31/eng20010831_78962.html
5 www.china.org.cn/baodao/english/newsandreport/2001feb/new05-34.htm
6 An electronic card inserted in PCs to convert English keystrokes into Chinese characters. Although PC market has extraordinary expanded on the international market in the early 1980s, owing to the absence of Chinese word processing technology, there were a lot of limits on diffusion and inroads to market. At that time, none of the foreign countries turned their attention to the Chinese market; only research institute could develop this program (It already launched to develop Chinese characters information processing system through 748 project in 1974). But research institute was indifferent to customization after developing the product, and Lianxiang caught an opportunity and put up Lianxiang Chinese Card on the market.
7 Beijing Lianxiang provided technical expertise from the Chinese Academy of Sciences, access to the China market, know-how in dealing with Chinese government officials, and low-cost of production. DAW provided knowledge of international markets and connections with multinational companies such as IBM and 3Com, whose products it sold in foreign market. And China Technology Trade Ltd. is in charge of financial support through mortgage loan. Dedrick, Kraemer (1998), p. 201, Liu Xinwen, Li Jinhui(1999), p.721
8 The preference of the PC in the 1993 of China as follow: AST 45.8%, Compaq 42.7%, IBM 21.8%, Lianxiang 20.2%, Hewlett-Packard 18.1%, Acer 16%, DEC 14.8%, Great Wall 14.1%, King Soft 13.5%, Langchao 12.4%. Maeda (1995), p. 199
9 Especially, Compaq promoted the aggressive marketing strategies with low price, and made inroads on the China market. Lianxiang marked 25 thousands of annual sales which just was the half of original plan in 1993.
20 Hong Kong Lianxiang supplies components to Beijing Lianxiang in semi-knockdown form for reassembly in China. The finished PCs are all exported, then some are shipped back into China, where they are sold through Beijing Lianxiang's distribution channels. Dedrick, Kraemer (1998), p. 202
In the desktop PC part, Lianxiang has grown through distributing AST PCs. And it finally can be on the top of notebook PC market with distributing Toshiba.
21 Lianxiang laptop PC is occupied 24.2% on laptop PC market in the forth quarter of 1999, and ranked the top that won by 5% with no. 2, Toshiba. It expanded its share from 17.5% in 1998 to 24.2% in 1999, and increased 229% by the production per unit. www.Legend-holdings.com
22 http://www.Legend-holdings.com, IDC press release in 2000
23 www.Legend-holdings.com
24 Although the PC sales profit rate was 40% in 1993, it slipped down to under 20% in 1995. Its total profit rate went down year by year. Because of keen price war, it became the narrow margin industry. There are a lot of companies in Zhongguancun that cannot make a hundred RMB's profit per PC. JinZhanming, MaLi (1999), p. 7
25 Dexter Roberts, Bruce Einhorn (1997), p. 58
26 Foreign companies are unable to do trading, marketing and manufacturing in direct in China. They must do business with domestic agents in the standing rules. From this rule, while Chinese companies can learn the technologies and management know-how, foreign companies can take full advantage of those strong distribution systems. Peggy Lim, Ivan Trinh (1998), p. 6
27 Lianxiang makes a joint venture with Acer, which is based in Taiwan. Acer provides the components for production, and Lianxiang is in charge of marketing and partial assembly line. So they can put up the low price of product on the market. Hong, Sungbum(1997). p. 25
28 Jinzhanming, Mali (1998), p. 4
29 Lianxiang reduces the cost in the way of cutting down the storage period to two weeks and production system as order. Ibid, p. 6
30 Because Lianxiang is the largest PC company in China, its price bargaining power is increasing day by day. So Lianxiang can obtain the components what they want with the lower price than what the Intel and MS offer. In this situation, it can offer the product in the 15~30% lowered price range.
31 The price of Lianxiang PCs is even lower by 30 percent than the foreign ones'. Dexter Roberts, Joyce Barnathan (1999), p. 76
32 Jeffrey Lin (2000), p. 1
33 Tariffs on PCs were reduced in October 1997, and as Beijing pushed for entry into the WTO at then time, further tariff reductions are expected. Peggy Lim, Ivan Trinh (1998), p. 2
34 Lianxiang started its business with trade, and it formed its basis of technology and management skills through the distribution of foreign products. In this process, Lianxiang accumulated know how to sell the product, and what product the customer wants. So it experienced organization and market management through the cooperation with foreign companies, and finally could respond to the Chinese demand properly. Liu Xinwen, Li Jinhui(1999), p.723
35 Lianxiang's promise to customer: - We will provide the product which is the most advanced technology, with the fast speed, and the cheapest priced to the customer in China". www.legend-holdings.com.hk
Lianxiang put up the PC that loaded the Pentium chip in 1996. It was the first PC loaded Pentium chip in China. And it offered "Conet PC" in November 1998. This Conet PC is a kind of Internet PC, and its colors are blue, green, and purple as like iMac of IBM. In addition, it made a special button on the keyboard, so its user can connect to Internet directly without running any software. This kind of product innovation developed Lianxiang to be a leading local company. Justin Doebele (1999)
36 Peggy Lim, Ivan Trinh (1998), p. 6
37 Foreign Brand PC Product Distribution
Brand name
Product
Brand name
Product
Toshiba
Laptop PC
D-Link
Network car, Transceiver
H-P
Printer, PC, Server, Scanner
Motorola
Mobile Phone
IBM
Mini PC, Server
Sun
Server, Software, Mini PC
Canon
Printer. Fax machine
PC Associates
Software
Epson
Printer
CISCO
Router, Switch, Firewall
Microsoft
Software
Source: www.Legend-holdings.com
38 Government agency has bought the 18% of whole sales in Lianxiang.
39 Dedrick, Kraemer (1998), p.201. But according to the sources, it is classified into a state-owned enterprise or collective enterprise. Wenlei Li, Jasper Yang, p. 1
40 Julie Schmit (1999), p. 1
41 High tariff and the Chinese market share have a mutual relationship. When the Chinese government lowered PC tariff, U.S. companies shared 80% of the market while Lianxiang marked under 5% of market share. But since the Chinese government has turned back to the protective policy, local companies including Lianxiang could finally come on the stage.
42 The Chinese government has promoted "the on-line program of Chinese enterprises." It has pushed the off-line enterprises to implement e-business. The on-line program of Chinese enterprises is planning to computerize the 100 large enterprises, 10 thousands middle enterprises and one million small sized enterprises by the end of 2000. NIC (2000)
43 Peggy Lim, Ivan Trinh (1998), p. 4
44 The Golden Bridge project is promoted in thirty cities over China already, and the Golden Card project is tried in twelve provinces and cities at present. Especially, the Golden Card project is deployed in the Guangdong province and in Shanghai. In addition, financial IC card is already used in Hainan province. The Golden Gate project is under examination with the establishment of the EDI system. Tax computerization by Golden Tax project is also promoted centering around fifty major cities. Park, Sangsu(2000), p. 93
45 Tony Jordan(1999a), p. 21
46 Andrew Tanzer(1998), p. 81
47 www. Legend-holdings.com, Lianxiang press release, 13 July 2001
48 Tony Jordan(1999), p. 22
49 Dexter Roberts, Joyce Barnathan (1999), p. 77
50 High quality professionals have established personnel network and accumulated their know-how in Silicon Valley, America, they turned back to China one after another. These returning personnel play an important role in the Chinese IT industry.
51 The ownership of Lianxiang could be divided into CAS and the staff. 65% of the share is for CAS, and 35% of share is for the staff, 28 persons of early members including Liu Chuanzhi. The total value of staff's share is eight hundred and forty million US $, and the share of Liu Chuanzhi is fourteen million US $. Lu Cairong, Liu Lusha(1999)
52 Anthony Spaeth(2000)
53 Dedrick, Kraemer(1998), p. 202
54 Dexter Roberts, Bruce Einhorn (1997), p. 55
55 Dexter Roberts, Joyce Barnathan (1999), p. 75
56 According to the agreement between China and members of WTO, it will levy the import tariff on the chip to 6-10%, and on the fully assembled PC to 15-30% in China in 4 years from 2001. Although it is favorable to the foreign companies, but local companies, including Lianxiang, also import the core components, hard drive, and operating system and so forth. There are some opinions that local companies are in the contrary, still a beneficiary. Julie Schmit (1999), p. 2
And it is expected that multi-national companies will be affected by the prohibition of smuggling legally, if China enters to WTO. www.Lgend-holdings.com
57 Leonard K.Cheng(1999)
58 The white house (Feb 15, 2002)
59 But the relationship of foreign companies and domestic's is difficult to describe. It is represented to "one bed, two dreams" in Chinese words. Because Lianxiang is one of the rival for IBM in the China market, and also it is the second largest partner in China. Dexter Roberts, Joyce Barnathan (1999), p. 77
60 Peggy Lim, Ivan Trinh(1998), p. 8
61 One of the Salomon Smith Barney's researchers said that the direct-selling method would not work in the fledgling China market because China is not ready for the direct-selling model. This model generally depends on credit card-based transaction and the strong delivery infrastructure. Tony Jordan(1999), p. 24
62 China Daily(2000.5.28)
63 Chengshi Xu (1999), p. 81
64 Kingsoft, the largest software enterprise and which Lianxiang holds 30% of its share, is investing heavily on the development of Internet and educational software with Lianxiang. Justin Doebele(1999)
65 Northeastern Asia 21(2000. 9), p. 30
66 Lorien Holland(2000), p. 41
67 Liu Ren(2000), p.73
68 Cost of CPU, DRAM, the core technology, occupies just 20 percent of the whole PCs in China market. On the other hand, external equipments, which require the low level of technologies, such as monitor, keyboard, mouse, and power supply, hold considerably high proportion in China. These kinds of external equipments are the labor-intensive parts, and they have played the major role in lowering the price of local PCs. Chengshi Xu (1999), p. 66
69 Foreign brands such as IBM, Compaq and HP have competed in China for long. However, their aggregate market share has declined from over 30% in 1996 to less than 16% in 2000. Even more eye-catching is that IBM has even lost its No.2 position to Founder in the second quarter of 2000 while HP lost its No.4 position to Great Wall. The crux is that foreign brands mainly sell to the corporate sector while local brands' turf is the consumer market, which is a high growth area. Jeffrey Lin (2000), p. 2
