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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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MARCH 4, 2003 SPECIAL REPORT: EMERGING TECH MARKETS China: Where It Pays to Stay Nimble Market conditions change rapidly in the Middle Kingdom, often leaving foreign companies at a disadvantage. Even so, the payoffs can be huge
That hasn't fazed Dell, though. The Texas-based computer maker reaped a 24% increase in sales last year, to $692 million, and hopes to see similar growth this year, thanks in part to its move into low-end consumer PCs that sell for around $600. Size is the secret of the market's unmitigated appeal. Even if Dell holds onto only 5% of Chinese PC sales in 2003, it will move more than 500,000 units, assuming that the market expands by 10%, as Gartner Dataquest forecasts. "The growth rate may not be very high," says Gartner analyst Annie Chung. "But we're still talking about millions of units per quarter." The story is similar in many other segments of China's technology market. With the government determined to "informatize" the country, demand looks headed nowhere but up for at least the next five years. The only caveat is that companies will need to be nimble -- ready to deemphasize businesses that go slow and to jump on new ones that look promising. "WHERE THE MONEY IS." Alcatel (ALA ) is doing just that. Sales of data-communications equipment that link users to the Internet swooned in 2002, after China's phone companies completed their backbone networks. That could have been a disaster for Alcatel. But the French company still managed 20% revenue growth in China because it had already moved into building broadband networks, where installed lines doubled, to 2.5 million, in 2002 and should double again this year, says Etienne Charlier, vice-president of the fixed network division at Alcatel Shanghai Bell, Alcatel's flagship company in China, which is half-owned by local investors. Still, in the broadband market Alcatel is fighting two strong local companies -- Huawei Technologies and ZTE. So now it's jumping on what it sees as the next growth product in China: equipment for building internal Internet protocol (IP) networks that companies use for so-called voice over IP -- making phone calls via the Net. Traditional carriers (and Alcatel clients) China Telecom (CHA ) and China Netcom see the new service as a way to augment their stagnant business of selling phone service over fixed lines. "This is where the growth is, and where the money is for our customers," says Charlier. Installing all this gear is another growth business. Gartner figures that China's IT-services market -- which includes product support, consulting, systems integration, and the like -- will grow by 18.9% this year, to $4.9 million -- an increase second only to that in the U.S. By 2006, China's IT-services market could hit $8.9 billion. SHIFT TO SERVICES. Thus, as Motorola's (MOT ) main activity in China, building wireless infrastructure, becomes a commodity business, it's working with carriers and independent software developers to come up with unique market offerings. Motorola's move into services "is a trend we see globally as the telecom market matures," says Mary Lamb, director of corporate communications at Motorola Asia Pacific. Alcatel competitor Cisco Systems (CSCO ) is also looking to tech services for revenue. "Chinese companies have just started to use technology to improve their production and efficiency, and to use that as a competitive advantage," says Jia-bin Duh, president of Cisco Systems, China. At the same time, however, Cisco doesn't see its primary business of selling routers and servers slowing any time soon. "China is a market with big potential, especially in the future," says Duh. He figures that within 20 years, China could become as important a market for Cisco as the U.S., which contributed 50% of its $18.9 billion revenue in 2002. Asia Pacific, of which China is a "major portion," Duh says, accounted for 12% of revenues last year. HOME-FIELD EDGE. Though China has moved away from a planned economy, Beijing policy is driving growth in its tech markets. For instance, a government plan to get 90% of China's schools online by 2010 helped make the educational sector the fastest-growing one for PCs in 2002 -- it rose 27.4%. PCs sold to schools now account for 14.6% of the country's 9.29 million unit PC market, according to Gartner. By comparison, demand for business PCs, which account for 38.7% of the market, grew an anemic 2.7% last year. So far, however, foreign companies aren't getting much of the education market, because schools go for cheaper local brands. The emphasis on buying locally also makes cracking China's software markets a bit problematic for U.S. companies. The country has urged its government departments to buy at least 30% of their software from local companies -- and is even giving promising startups funding. They need it. Of the top five software companies in China, only one is local -- Beijing-based UFSoft, which sells management, financial, and enterprise resource-planning software. PIRATE FLAGS. The others, rounded out by Microsoft (MSFT ), IBM (IBM ), Oracle (ORCL ), and Sybase (SY ), accounted for more than 25% of China's software market in 2002. It's a small but fast-growing business. Driven by a domestic finance industry that needs to catch up before foreign banks are allowed to serve retail customers in 2006, China's $2 billion software market should grow by 25% this year, after jumping 21% in 2002, says IDC analyst Dorothy Yang. Of course, piracy is a major concern for software companies eyeing China -- and for most other tech companies as well. The International Intellectual Property Alliance, a U.S.-based trade group, figures that software, music, and movie piracy in China cost U.S. businesses $1.5 billion in lost sales in 2001. Companies seem reluctant to complain, however. "The piracy rate will decrease in the long run because the government in China is taking significant steps to make sure that intellectual property rights are respected," says Olivier Richard, corporate communications manager for Microsoft Asia Pacific. TRICKY MARKET. Richard hardly needs to mention the other reason that the software king is holding its tongue -- and in fact just decided to make the source code for its Windows operating system software available to the Chinese government: China is one of Microsoft's fastest-growing markets (see BW Online, 3/3/03, "Why Gates Opened Windows in China"). It's a tricky market for all foreign companies, and the only way to win is to be ready to adapt to change at a moment's notice. But the reward is too great to pass up.  By Alysha Webb in Shanghai Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. 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