Tech Trouble

In by Simone

As the effects of the global financial crisis begin to trickle down from the heights of high finance to the bricks and mortar, not to mention cable and server, companies that comprise the majority of economic activity in China, many are wondering what will happen within the country’s technology sector. Several tech heavyweights are already showing chinks in their armor. Lenovo (联想), the world’s fourth-largest computer manufacturer, recently announced a “resource redeployment plan” aimed at improving its financial standing in the coming quarter. The plan includes cutting 11% of its workforce, reducing executive-level pay by 30-50% and reorganizing both its China and Asia-Pacific organizations into a single business unit. This comes in response to it posting its first quarterly loss in almost three years.
Lenovo is not alone. Yahoo! has announced plans to cut 10% of its workforce and IBM is expected to make a similar announcement shortly. While these cuts are global and will not necessarily affect China operations, any downsizing by a Western technology company will inevitably have ramifications for China-based companies in the fields of tech support, human resources and manufacturing that depend heavily on Western contracts.
“In our opinion the Chinese market has not yet seen the worst part of this financial crisis,” warns Chris Evdemon, a managing partner at Eastern Bell Venture Capital based in Shanghai. “Q1/Q2 is going to be particularly tough this year and most VCs, despite having available funds, are likely to ‘sit’ on their money.”
John Feketekuty of Virginia-based Ariba Asset Management points to another challenge facing the development of the Chinese tech sector. “China is very good at providing low-cost products,” he says, “but in terms of innovative, cutting-edge new products it still lags behind South Korea, Japan and the US. It needs to invest more money into R&D programs and foster a stronger culture of innovation and creativity.”
The continued presence of big-name foreign companies — as well as standout Chinese firms like Lenovo — and their training of Chinese employees is seen as a necessity for the advancement of the country’s high-level R&D.
Any decline in the abilities of these R&D-focused companies to train Chinese engineers will not only negatively affect China’s short-term economic prospects, but could also slow down the transition to higher value-added goods that China needs to make if it is to stay competitive in the face of its diminishing price advantages.

GOVERNMENT AID
The Chinese government has so far been ahead of the curve in announcing confidence-boosting stimulus measures. The RMB 4 trillion (USD 586 million) stimulus package includes several measures directly aimed at helping build the infrastructure necessary for China’s continuing tech-sector developments.
Foremost among these was the decision to award the licenses for the development of China’s 3G telecoms infrastructure. The issuing process had been stalled for some time, and the resolution seems to have been propelled by the economic crisis. The awarding of the contracts is expected to unleash an estimated USD 41 billion in investment into the sector, and counteract job losses across the software industry.
Ian Yang, Intel China’s newly appointed president, heralds the Chinese government’s recent promotion of technology initiatives. “The establishment of the Ministry of Industry and Information Technology is of great significance for promoting the integration of computerization and industrialization,” he says.
According to Yang, Intel has a policy whereby “the more an economy declines, the more pressing the necessity is to invest for the future and to accelerate innovation.” This apparent commitment to recession spending by a major driver of innovation in the Chinese tech sector seems to suggest at least some measure of optimism. The hope is that other IT companies view the Chinese market in a similar way and continue to spend their R&D dollars in the country.

INVESTMENT OPPORTUNITY
Many investors overseas are viewing the current crisis as an opportunity to snap-up shares in Chinese tech firms while they are relatively cheap.
Ariba Asset Management’s Feketekuty is “bullish” on China, pointing to local tech giant Baidu (百度) as an example of what he considers a relatively safe tech-sector investment in these troubled times.
“My outlook for tech in general is fairly positive because technology can help solve problems and save people money,” he says. “I believe that China will [now] experience tremendous growth in the tech sector, with several multi-billion dollar tech companies emerging in China to rival Microsoft, Google, Apple, Sony and LG.”
Eastern Bell Capital’s Evdemon is more pessimistic, but concedes that “as always, in tough times there are also opportunities.” He sees the stimulus package as an effective measure by the government to promote the kind of investment that has been the engine of China’s economic development over the last 20 years.
“We are going to follow the industries the state is going to throw money into, i.e. education, healthcare and retail,” he adds. “There are technology products and services centered around these industries that can be both innovative and much-needed for the Chinese market, and we are looking for these.”

BRAVE NEW WORLD
The strategic importance of developing an innovative technology sector means that the Chinese government will continue to play the role of guarantor for this sector. The methods used up until this point to promote IT growth, such as tax breaks and land grants, can be expected to continue.
This leaves two short-term lifelines for the sector. The first is the continued development of technology solutions related to sectors in which the government intends to increase spending, such as education and healthcare.
The second is the possibility that as Western tech companies downsize, they will increase the off-shoring of many jobs to China. These possibilities for growth, plus government assurances, could reassure tech-focused investors that this is the right time to invest in China.
In the end, the outlook for the Chinese tech sector will remain tightly connected to the central planning of the government. This close interconnection between the public and private sectors could ultimately prove to be the sector’s greatest strength, sheltering it from the worst ravages of the economic storm.

[Published on China International Business Magazine]