Saturday, May 19, 2001

Freedom to Dial

(Syndicated article for the Metro newspaper group).

Cellphone user in Beijing 2001.

When an elementary school in southeast China exploded in March -- killing over 40 students and teachers -- it was a blast heard round the world, with its story told via telephone and the Internet. And had this tragedy occurred a few years ago, the world may have never known what really happened.

“Everybody knows it was caused by the fireworks,” Zhang Chenggen told the Associated Press by telephone just after the accident. “The government is trying to cover the facts. Please do not believe them,” said this father of an 11-year old boy killed in the explosion.

But as the government officials in the province of Jiangxi erected roadblocks, detained roving reporters, bulldozed the school, and began -- formulating its official account of the blast -- Zhang, spoke candidly to the media and the world: “I was among the first batch of people to rush to the explosion site, and I saw the hands of some dead children still holding fuses.”

The Washington Times reported its phone conversation with man named “Chen” from the local fire department, who said, “debris at the site was littered with firecracker wrapping papers.” And according to the New York Times, reporters reached parents by dialing random numbers within the town’s telephone area code.

Several days later, Chinese Foreign Ministry spokesman Zhu Bangzao called news reports like these “irresponsible…absurd and erroneous,” according to the state news agency Xinhua. “Some overseas media even attacked China by carrying these untrue stories with elaboration distorting the facts,” he added.

Chinese Premier Zhu Rongji would later explain in detail how a 33-year old suicide bomber -- nicknamed Psycho -- had blown up the school and himself.

But while in-person or snail-mail exchanges may have in the past slowed or halted the gossip and anger over this tale of child labor and death, the government was unable to stop the flow of information. “Today people can communicate instantly…200 to 300 million people (in China) have access to one way or another of staying in touch,” said Simon Cartledge of the South China Morning Post. “They can call…page…and they can e-mail,” he added.

It is now possible for residents to buy a temporary cell phone number without registering with the government, and numerous cyber-cafes offer anonymous Internet access (although chat-rooms are on time-delay and are censored by the government.)

“Allowing a huge swathe of its population to communicate openly and freely is perhaps the most astounding change China has undergone over the past decade,” Cartledge wrote.

Perhaps this free exchange of information is what prompted the Premier to later retract his earlier explanation of the cause of the blast. Ten days after the tragedy, Zhu told a live television audience: “No one can cover up historical truth. I want to apologize and review and reflect on my own work.”

Hans Sandberg

Wednesday, May 2, 2001

Characters and Computers

(Syndicated article for the Metro newspaper group).

Legend's Beijing factory 2001.

In the 1980’s, China opened the door to foreign investments. At first, they tried attracting export industries -- imitating Asia’s “tigers” like Singapore, Malaysia and Taiwan -- but today, it is as much of a priority to build industries that will serve the Chinese market. And at the same time, economic reforms have helped create several very successful Chinese IT (information technology) companies.

China’s economy continues its steady growth, and the IT sector plays a large role, especially in the cities. From Beijing and Shanghai in the east, to Guangzhou and Shenzhen in the south, city dwellers have money to spend, and although these 250 million people represent only a small minority of the country’s 1.3 billion people, their increasing demand for consumer goods is boosting a number of high-tech industries.

For those Chinese who already have TVs, refrigerators, and cellular phones, a personal computer -- or at least a Web TV -- is the next logical step. In Beijing, Shanghai, and Guangzhou, the PC-penetration is said to have reached 25 percent.

China developed their first computer systems in the mid 1950’s, but these were mostly used in scientific and military circles. It was not until hundreds of thousands of personal computers were imported into China nearly three decades later, that the public became aware of them. Many computers however, would remain unused because of software applications were scarce, computer literacy was low, and there were few systems that could deal with Chinese characters (input/output.)

This was soon to change because of China’s economic reforms, not the least within the research sector. Suddenly entrepreneurs emerged, acting more independently even though many still worked in state-owned companies. Most of these highly qualified computer researchers came from Beijing’s many universities and research institutes, including the Chinese Academy of Science’s (CAS) Institute of Computing Technology (ICT) which felt increasing pressure to generate their own income.

China’s leading computer maker -- Legend -- was founded in 1984 by Liu Chuanzhi and ten of his colleagues at ICT. (In the beginning the company was called ICT Company.) These spun-off researchers retained their salaries from ICT, used its resources, and borrowed $25,000 in capital for their new venture. (The government still owns two-thirds of the company.)

Legend's founder Li Chuanzi.
(Photo curtesy of Legend.)

An important reason behind the success of China’s leading PC manufacturers -- such as China Great Wall Computer Corp.
, Founders Group, and Legend -- was that they all attacked the issue of Chinese input/output. It was a very difficult problem, as they needed large amounts of computer memory to work with the thousands of unique characters instead of the 26 letters of the English alphabet. (Alternatively you needed new mathematical methods to digitally represent Chinese characters.) High-resolution computer screens were also needed to clearly display Chinese characters. Each computer company approached the problem differently.

In 1985, Great Wall Computers introduced its own version of IBM’s PC XT that managed to handle Chinese characters and show them in a higher resolution than their rivals, including a model developed in Japan, that IBM planned to introduce in China.

Founders Group was born out of a large-scale government research project that began in1974 with a goal to modernize the country’s printing business. At that time, it could take up to 500 days to print a book, and daily newspapers were produced by lead-based printing technology.

The company had access to brilliant researchers who developed their own system to produce newspapers and books in either Chinese or Japanese. This system soon became a world leader. Founders is owned by the local Beijing government and Beijing University (which has the nickname Beida,) but is run quite independently.

Legend also understood that Chinese characters were a key problem for the industry and soon found a researcher at ICT that had created a system for Chinese “word processing.” He was brought over and helped them to develop an add-on card for Chinese characters, which during the first three years generated one-third of the company’s income.

Despite their advances in adapting computer technology for the Chinese language, it seemed in the early 1990’s as if Chinese computer makers would be an easy take for the Japanese, Korean, Taiwanese, and American competitors. Foreign brands controlled 66 percent of the Chinese computer market in 1992, and one after another built factories in China to avoid import tariffs, as well as to take advantage of the low Chinese salaries.

“Foreign PC companies dominated the market up to 1996,” says Legend’s spokesperson Catherine Lee. Before this, the Chinese government protected the domestic IT business with import tariffs and other regulations. When the government abolished the protection, the country was flooded with foreign products – a shock for the domestic industry. But this soon changed to competitiveness for many Chinese PC companies.

Legend's spokeswoman Catherine Lee.

“It took some time for our companies to reform and improve their productivity, but after four years Legend started a price war against the foreign companies,” says Ms. Lee. “Before 1996, a PC in China cost about 10,000 Renminbi ($1,200,) which was unreasonable. Besides, the computers that were sold here were not very good,” she adds. In a surprise “attack,” Legend lowered the price on four occasions, and soon became the number one vendor.

“We price cuts, but we were not only competing on price alone -- there are several low cost brands -- but the others offered hardly any service, few application programs, and sometimes not even an operating system,” says Ms. Lee. (This is not as strange as it sounds, since 90 percent of all programs sold in China are pirated copies, and you can buy a copy of Windows on the street for $1 or $2.) “It’s unacceptable for the average customer not to have good service and applications, since their level of computer knowledge is quite low,” says Ms. Lee.

Legend instead went for good-looking and well-designed computers for the mass market. They offered free Internet access for one year, and ran massive advertising campaigns (including one featuring the star of the Academy Award Winning movie: Crouching Tiger, Hidden Dragon.) While foreign companies focused on the corporate market, Chinese brands like Legend kept their eye on the consumer. There is no doubt that the strategy has been successful, both in terms of marketing shares and profits.

Driving today’s Chinese PC market however, is the Internet. “Eighty percent of those we surveyed say that they want to go online,” says Ms. Lee. It may be, as the head of Ericsson China says, that mobile phones and hand-held computers will eventually give people access to the Web. And Liu Chuanzhi recently told Reuters that Legend will “gradually move from personal computers to areas such as Internet access, mobile phones and servers.”

But that doesn’t change the fact that very few Chinese own a PC. With only 24 million computers in China today -- one for every 50 people -- companies like Legend will most probably need their new factories to keep up with consumer demand.

Hans Sandberg

Tuesday, May 1, 2001

Legend Has It…

(Syndicated article for the Metro newspaper group).

Legend's spokeswoman Catherine Lee showing one of the company's new computers for children.

Legend is a shining star among China’s young and fast-growing computer companies. It has leapfrogged the competition  both domestic and foreign – and captured 31 percent of the PC market in China, as well as 12 percent of the Asian market (outside Japan.) Last December, it opened a new $200 million PC factory, which can build 2 million desktop computers each year.

The factory is located just east of the Summer Palace, in Zhongguancun, an area that is also known as Beijing’s “Silicon Valley”. This is the Haidian district where many of China’s leading universities and research institutes including Tsinghua University and the Institute for Computing Technology (ICT) are located.

This is where eleven ICT researchers set-up a small consulting shop in 1984, and that shop later became Legend. At that time, Legend was among only a few dozen computer stores and small start-up companies in the district. Today, Zhongguancun is hard to recognize. Last year alone, the zone generated $19 billion in income (up 40 percent from 1999,) and 2,400 new companies were added to the thousands that already existed.

Zhongguancun boasts modern factories, office skyscrapers, new apartment complexes, luxury hotels, restaurants, bars and trendy Internet cafes. Traffic crawls on its noisy streets, while bulldozers flatten the old single-story Chinese houses to make room for things new.

Catherine Lee.

Legend’s spokesperson Catherine Lee tells us about the company’s new Intranet, and its new Enterprise Resource Planning system (ERP, i.e. a computer system that integrates all facets of a business, from sales and marketing to corporate planning and manufacturing.) Her company’s elegant meeting room, laptop, and her snappy PowerPoint presentation may not sound like much, but it does reflect a the new style of doing business in China, where previously a reporter would have to “make due” with a party secretary’s political platitudes, while sitting in a meeting room with spittoons and under-stuffed doily-covered armchairs.

A Legend PC for the modern office worker.

Legend has 12,000 employees and a turnover of $2.3 billion. Sales have increased by 72.4 percent on average for the past three years, and profits have gone up 53 percent. “We sold 1.5 million PCs in 1999 and reached our goal of 2.6 million for 2000,” says Ms. Lee, and adds that Legend has been China’s leading PC manufacturer since 1996.

Access to the factory floor is strictly controlled, and photos are not allowed. Past the production flowchart, racks of ready-mounted PCs, and six assembly lines, lies a colossal room - the likes of which you’d find in an IKEA store. The aisles between the huge metal shelves are barely ten-feet wide however, as they are navigated by computer-controlled robots, and not by humans.

On three of the assembly lines (dubbed “satellite” lines,) one worker puts together one computer at a time – start to finish. Ms. Lee says that the average Chinese consumer is still not ready for custom-made computers, but Legend’s vast network of distributors can place custom orders into the company’s e-commerce network via the Internet. The orders are then sent to the company’s ERP system, and will end up on an assembly worker’s computer screen.

It takes 50 minutes to build a desktop PC at Legend’s new factory, plus an additional 1 hour and 10 minutes to test it. “No other local producer has such an advanced capacity,” writes Richard Lo of the Hong Kong-based financial company Ing-Barings, in a report published in February.

The other three assembly lines are called streamlines where, according to the company, computers can be mounted in as little as 20 seconds.

“We have a factory outside of Shenzhen and we are building a new one in Shanghai…so Legend’s capacity should be 4.5 million next year,” says Ms. Lee.

They will need the increased capacity and new factories to face future competition as China joins the World Trade Organization (WTO.) But Legend shouldn’t fear WTO since they already have access to cheap labor (about 70 cents per hour,) and -- as more electronics manufacturers invest in China -- cheap components as well. This combination is hard to beat, so long as China manages to combine economic reforms with political and social stability.

Gone are the days it seems, where the iron rice bowl was a worker’s only incentive. All employees who have worked at Legend for two years are entitled to buy stock options in the company, which is listed both in Hong Kong and NASDAQ. But in case this is not enough motivation, a red banner facing the assembly lines boldly reads: “If you love your country, you have to love your factory.”

Hans Sandberg