Going Toe To Toe With Big Blue And Compaq

Suddenly, Chinese computer makers are holding their own

When it came to shopping for a personal computer, Chinese consumers have long faced two options: The overpriced, old-generation offerings of domestic manufacturers or the latest, souped-up U.S. brands, often smuggled in by shady distributors. But when Intel Corp. launched its new MMX multimedia chip at road shows in Beijing and Shanghai in late March, it was a different story. Eight local producers showed MMX-based PCs, some offering videoconferencing over standard telephone lines, compared with four American brands. The Chinese PCs are "very advanced systems and very competitive with multinationals," says James W. Jarrett, head of Intel's China operations.

After years of getting outclassed and outmuscled in their own market, Chinese companies are starting to bridge the once enormous gap with the likes of Compaq, IBM, and AST. Surprisingly, the reason has little to do with industrial policies cooked up by Beijing bureaucrats. Instead, Legend Group, Beijing Founder Electronics, China Great Wall Computer Group, and other products of Beijing's Haidian district, an electronics hotbed of some 6,000 companies, are snapping out models that often are cheaper, and just as up-to-date, as foreign ones. And they're making great strides in distribution and service.

More is at stake than a share of the world's fastest-growing computer market, where sales are expected to zoom from $2.1 billion last year to $8.7 billion by 2000. The comeback of China's top computer companies shows that Chinese industry has a chance of making it if Beijing opens the door to imports, as would be required if it enters the World Trade Organization. A locally made PC with a 166-megahertz Pentium processor, for example, costs around $1,200, 20% cheaper than a similar IBM or Compaq.

Few have made bigger strides than Legend. In less than two years, the $928 million company has come from No.6 in China to a spot close to market leaders IBM and Compaq. Sales were up 80%, to 140,000 units, last year, according to market research firm China Research Corp. As the main partner for AST, a pioneer of the China market, Legend helped set up 26 branches around China with nearly 1,000 sales and services agencies. "From this experience, we also learned about management and marketing," says Legend executive Wang Yan.

Another advantage is that Legend early on ventured overseas. It ships motherboards, the circuit cards that run PCs, to 26 countries. And in 1993, it became the first Chinese PC maker to open a design center in California's Silicon Valley. It pays Microsoft Corp. $12 million annually to load most PCs with the Chinese version of Windows 95. As a result, says Beijing-based analyst Ross Warner of China Research, "they've translated what's going on in technology abroad and brought it to China, where they understand the market."

TUMBLING. Other players are relying heavily on the huge technical resources at home. Controlled by Beijing University, Founder recruits top graduates for its 300-person research institute, which is expected to add 100 new employees annually for the next five years. Since diversifying from Chinese-language software into PCs in late 1995, Founder has zoomed to the No.8 spot and plans to make 100,000 units this year.

It's still far from certain who the ultimate winners will be. Great Wall, for example, was the leading computer maker in 1990 but since has tumbled to No.7. The competition will only get more brutal. Some 40% of PCs sold in China are made by small assemblers of unbranded machines. IBM and Compaq are building bigger factories inside China. If China joins the WTO, legal imports could flood in from Taiwan, South Korea, and Malaysia. Yet analysts such as Warner think players like Legend and Founder will still prove strong enough to dominate the market. It's a lesson Beijing should study as it weighs the merits of opening its markets.

Before it's here, it's on the Bloomberg Terminal.