(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.
Wednesday, May 2, 2001
(Syndicated article for the Metro newspaper group).