The Hindu Business Line : A missed chance

Though China is doing all the right things, powers such as the US don't like it. The Asian country's size and numbers allow it its arrogance. There's a lesson for India here.

THINK of a wrong move. Any move. You can bet your bottom dollar that India has made it.

Remember the time when American workers were growing resentful of having to do jobs that got their hands dirty and the fat-cats in that country went right along because they figured that it would be more profitable for them to sweat cheap labour overseas and export a whole bunch of the messier manufacturing jobs? The better economists of that time in India screamed themselves hoarse trying to persuade people that we should try and get at least some of these jobs... and nobody listened. The consequence is that America is now a land of lawyers suing the socks of everybody in sight and brokers who make paper millions from others' gullibility and which, if push comes to shove, probably can't manufacture a halfway decent safety-pin while China, Taiwan, Japan and other countries of the East have developed formidable competence in manufacturing.

Remember those Indian economists, not fooled by the fluff put out by our self-anointed tech leaders and visionaries, trying to explain that only technical competence and investments in hardware - and not cheap labour and a focus on software - would ensure the long-term development of our information technology industry? - But people didn't hear them because they were too busy answering the telephone for and taking dictation from American clients. Well, when the telephones stop ringing and the dictation winds down, they may be able to hear China sniggering...

For the last decade or so, the America tech industry has been raucously celebrating its `honeymoon' with China - but its now the morning after the night before and the US tech industry doesn't quite know what to make of China's insistence that it doesn't consider itself married in the first place!

In the last few months, China has, with typical inscrutability, been quietly changing the rules around to give a boost to domestic manufacturers and to pretty much compel foreign companies to step up their local operations. The American tech industry has been huffing and puffing about trade tiffs that can potentially mar relations between the countries for a long, long time - but China couldn't care less.

Piqued by China's insouciance in the face of its threats, the US has now gone scurrying to the World Trade Organisation to challenge Chinese tax policies that, according to its Trade Representative, Robert Zoellick, constitute an unfair trade barrier. The US is pretty steamed about one of these policies, in particular the one relating to a value-added tax rebate on semiconductors under which China rebates roughly 80 per cent of the VAT in the case of local semiconductor companies — but not in the case of imports - thereby putting overseas suppliers at a massive disadvantage. In the present circumstances, foreign chipmakers will either have to establish production facilities in China or team up with local outfits.

Observers point out that the Bush administration's initiation of action at the WTO — the first case brought by any country against Beijing since it joined the WTO in December, 2001 — has undoubtedly been prompted by the fact that the likely Democratic presidential nominee, John Kerry, and fellow Democrats have been accusing the White House of not doing enough to enforce the commitments China had made when it signed up with the WTO. The accusation is a weighty one as China currently runs a record $124-billion trade surplus with the US.

China has been having fun at US expense in another area: Wi-Fi. It insists that, with effect from June 1, all Wi-Fi equipment sold in the country will have to comply with a Wi-Fi security protocol that it has developed — called Wired Authentication and Privacy Infrastructure (WAPI) - and that foreign chipmakers will have to shell out to Chinese companies a per-chip royalty for WAPI and/or enter into partnership with them for development. Further, as the Chinese Government is not willing to let its proprietary technology go out of the country, foreign companies will just have to deploy their staff in local facilities if they want to remain in the market!

US companies are yelling themselves hoarse about the WAPI law being a Chinese employment generation programme in disguise. But the China Broadband Wireless IP Standards Group is all for the new laws and blandly maintains that the WAPI policies are entirely in order in that they enable China to achieve internal security objectives and to lower dependence on foreign companies.

Robert Zoellick has called upon China to change its tax policy and repeal the WAPI law. The US Secretary of Commerce, Donald Evans, and the Secretary of State, Colin Powell, have also sent a letter to the Chinese Vice-Premier, Wu Yi, urging an immediate reconsideration of the law and Chinese adherence to its WTO obligations. But China isn't budging. In fact, it is, with great serenity, carrying on with its tax laws and its Wi-Fi security protocol and, of course, its initiative to get government and related agencies to switch to local software ... and getting ready to tangle with the West on its TD-SCDMA standard for 3G cell-phones.

Lesson for India

There is an object lesson for India in the Chinese campaign to support and nurture its tech industry by going eyeball-to-eyeball with Washington.

Quick flashback to 2002: In that year, America realised that China, with a PC penetration less than five per cent of its huge population and a swiftly growing economy, was most definitely a growth opportunity for transnational outfits such as Hewlett-Packard, Intel and so on. Ironically, foreign tech companies loved China for the tax breaks that it gave them. IBM, Intel and Nortel Networks were among the tech majors that invested in the well-known Shanghai Waigaoqiao Free Trade Zone, an industrial park set up by the Chinese Government for overseas companies. Companies working out of Waigaoqiao did not have to pay income taxes for the first two years of their operations. After that period too, they were required to pay half of the standard 15 per cent for three years. In addition, the Waigaoqiao companies were exempted from having to shell out export tax and VAT.

Responding to this opportunity, several US tech majors established manufacturing and/or research and development centres in China. For instance, Microsoft set up a lab in Beijing and it generated a fair amount of the intellectual property underlying the MPEG-4 video-streaming standard. Further, anticipating growth, the Chinese Government took to funding research extensively - Legend and Red Flag Software (a Linux developer) - were among the companies set up with this funding — and encouraged universities to create strong technology departments. Beijing, in addition, fine-tuned the legislative environment to protect intellectual property.

The people of the country, who have traditionally shown a pronounced interest in and aptitude for technology, supported foreign tech companies in a big way. Even at that time, China had the largest number of cell-phones users in the world with a base of 167 million customers and four to six million subscribers signing up each month. PC shipments were predicted to grow at an average annual rate of 18 per cent through 2006 and server revenues at 12.7 per cent a year.

Jun Tang, President of Microsoft China, had predicted at that time: "Today there is a lot of low-end assembly, but 10 years from now you will probably see a copy of today's Taiwan. First they'll build up the manufacturing part, and eventually people will design products out of China... "

All this was just two years ago. China today feels confident about tangling with the big boys and doesn't whine when some state or the other in the US says that it doesn't like low-grade work being outsourced. It has gained confidence because of the success of its hardnosed strategy of leveraging its massive market and low labour rates to bring in multinational companies of repute and of then studying and absorbing their strengths in software — and hardware. In fact, American chip manufacturers begin to hyper-ventilate when they think about China because they find that they can't compete with the Chinese manufacturers working with low-cost labour.

In sum, the Chinese are not where they are because they ran around the world fixing the Y2K bug or because they put on a phoney American accent to become telephone operators for US companies.

Picture by R.V. Moorthy

eworld@thehindu.co.in

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