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Thursday, Mar 28, 2024

China’s Entry Into WTO Is Good News for Valley Firms

China’s Entry Into WTO Is Good News for Valley Firms By SHELLY GARCIA Senior Reporter Like many companies, Diodes Inc. first set up a manufacturing operation in China to take advantage of the abundance of inexpensive labor. But six years later, the Westlake Village-based discrete semiconductor manufacturer is finding it’s not just the labor that’s abundant in China. The computer companies it sells to are moving there as well. “China is the hottest market in the global economy at this point,” said Mark King, vice president for sales and marketing at Diodes, which just opened its second sales office in Shenzhen, China to service the many Taiwanese computer companies that have set up manufacturing operations in the region. “Anybody in electronics has to have a big focus on that marketplace, and there will be continued migration.” For years, labyrinthine regulations, restrictive tariffs and other barriers kept all but the most determined foreigners from doing business in China. And for those companies that did venture into the region, China was little more than a solution to keeping labor costs down. But in recent years, as attitudes have shifted and restrictions have lifted, clusters of businesses representing every link in the supply chain have emerged in the region. Shifting political and economic winds in the recent past have already spawned dramatic changes, ranging from new roads to five-star hotels. With China’s entry into the World Trade Organization in December, the most staggering differences may be yet to come. “A lot of companies got into China with the understanding that they’re not going to make any money,” said Claire Wright, director of the World Trade Organization center set up at Ernst & Young LLP in August. “Now the difference is that the restrictions should go away. You can look at China as a place where you can actually sell products and make money.” In recent months, Bally Total Fitness has announced a joint venture to launch between 50 and 100 clubs throughout Asia in the next five years. American Express Co. has set up a partnership to launch its travel services in the region, as has Rosenbluth International, a service that specializes in business travel. And Warner Bros. International Theatres will soon open a multiplex in Shanghai. Not that the agreements makes China an instant Mecca on the global stage. Most who have done business in the region point out that the country’s policies are dictated as much by its cultural predisposition and the clout of local, provincial governments, traditions that will be difficult to breach, even with a legally binding agreement. Still, the WTO agreement comes as good news to many companies who have long eyed the region and the market potential of its population of 1.2 billion people, particularly the kinds of small and mid-sized businesses that dominate the greater San Fernando Valley. “The WTO entry has meant increased opportunities for American companies,” said Allan Woodruff, vice president, Asia Pacific, for Nomadix Inc., a Westlake Village-based maker of software for mobile technology that entered the market in China about a year ago through a partnership with a Chinese company called Cyberark. “(Infrastructure build-out) has meant large changes in the telecommunications industry. For companies who produce the products for this build-out, it means sales in an otherwise dismal technology market.” Larger companies like Wal-Mart, which operates 15 chain stores, 13 supermarkets and three club stores in mainland China, have for some time now had somewhat more leverage negotiating with the government because these companies can promise employment to large numbers of the Chinese moving from the farms to the cities. But smaller firms have typically had to play by the rules as written. That too is likely to change. “Now, how foreign-based companies are treated is a rule-based system,” said Wright. “In the past it certainly was who you know.” Such changes are spurring a great deal of interest in China by American companies, said Wright. Since opening last August, Ernst & Young’s San Diego-based World Trade Organization center has fielded questions about commerce in many developing countries. But there’s been a dramatic uptick in inquiries about China since the WTO agreement, she said. China has been loosening the shackles of communism for some time, shifting from a state-owned economy to private enterprise. But its policies have largely been geared to tilting trade balances in its favor. Foreigners could manufacture in China, but they could not sell there. A high percentage, if not all, of the raw materials and components used in manufacturing had to be purchased from Chinese firms. Those that could be imported were taxed exorbitantly. But with the agreement in place to join the WTO, the government of the People’s Republic must now relinquish many of those controls. Companies can not only make goods in China, they can sell them too. They will no longer be limited to using Chinese-made materials in manufacturing. And what they do import will be subject to pre-determined valuation criteria, not the whims of customs officials who often set valuations arbitrarily before. Tariffs on imports into China have been slashed to just over 9 percent of the value of goods, down from an average of 17.4 percent previously. By 2005, the average tariff should go down to 7 percent. And foreign ownership, in whole or part, will be permitted in many industries, eliminating the need to set up complex partnership agreements with Chinese firms. Perhaps the most striking changes can be found within the telecommunications industry. China has built an infrastructure, not only of roads but a broadband network that is setting the stage for a technological revolution. Already 123 million of China’s 1.2 billion people use cell phones. And, while only 12.5 million computers are in use in the region, that number is growing rapidly thanks to declining computer prices and a growing middle class. Just a few years ago, China had only one or two million computers, and Internet usage, currently pegged at about 35 million, has ballooned from 5.6 million in 1999. “I remember when I was in China eight years ago, you couldn’t even find an ISP,” said Max Sun, CEO of CBCom Inc., an Encino-based company that hopes to become the largest private Internet service provider in the country. “Now they’re getting triple-digit growth.” CBCom entered China about five years ago using a complex series of partnerships and agreements to comply with ownership regulations in place at the time. The WTO agreement completely revamps those rules, providing a staggered schedule under which foreigners may own up to 50 percent of telecom ventures after two years and 49 percent of mobile phone company ventures after five years. Just as significant, the government in recent weeks broke up its phone monopoly, China Telecom, which has held an 80-percent share of the Internet market. Sun points out that foreigners enjoy some advantages over the entrenched, state-owned businesses, but they also encounter disadvantages. “The disadvantage is they are government-owned and it’s easier to cut through the red tape,” Sun said. “You don’t have that. What you have is you operate in a more efficient and better way. You can compete with your sophistication.” Many believe that, even with the WTO agreement, it may continue to be necessary for foreign-owned companies to partner with Chinese firms for some time. Officials at Nomadix, which entered China with the assistance of a personal relationship between its founder, Dr. Leonard Kleinrock, and Dr. Daniel Gu, a Chinese national, say such relationships can be critical. “Having a Chinese national representing Nomadix and taking advantage of his ties is advantageous to us from a sales perspective,” said Nomadix director of marketing John DiGiovanni. “As in most Asian countries, the sales cycle is very relationship-driven.” Local relationships can also help companies navigate a bureaucracy in which local officials often hold the strings to permits and other business approvals. “One thing I do see is the central government by and large seems to be behind these moves, but that doesn’t mean each provincial official is behind this,” said Wright. “And they will drag their feet and pretend they didn’t get the memo.” Then too, the wheels of change grind slowly in a culture so long entrenched in communism, even with a local partner. Just ask Warner Bros. Warner Bros. International Theatres, in partnership with Shanghai Paradise Co. Ltd., scheduled the opening of its nine-screen, 1,490-seat multiplex, the first of its kind by a major theatrical exhibitor, for April. The theater is built, everything is set to go, but two months later, the company is still winding its way through the approval process and a new opening date has yet to be set. “Be prepared to be patient,” said Woodruff at Nomadix. “Something as simple as buying a mobile phone can take half a day.” The idiosyncrasies of China’s transition from a communist economy to a socialized one have been apparent in other ways as well. Sun tells a story about a financial consultant working with a Chinese company that intended to go public on an American exchange. The consultant pointed out that the company has not defined its market demographics and would need to do so to assure investors of its revenue potential. “The response from the CFO was, we are working for the benefit of the people,” Sun recalled, “and profit is not a concern for us.”

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