Asia's Tech Concerns Aim to Stay Nimble
Shanghai-based Grace Semiconductor Manufacturing started business early this decade with high hopes of becoming a global leader in the chip industry. Back then, China's rulers were keen on building the country's high-tech industry and money was flowing to new Chinese chipmakers investing billions of dollars in advanced semiconductor facilities. At the same time, Chinese companies making everything from cell phones to software dreamed of taking on giants like Motorola (MOT) and Microsoft (MSFT).
Today, executives at Grace have more modest goals. The privately held company (it does not release sales or profit numbers) is a foundry, which means it makes chips on a contract basis for customers that want to outsource their production. Unlike big foundries in Taiwan or Singapore, Grace still operates a single chipmaking factory, with a monthly capacity of just 35,000 wafers. That's just a fraction of what industry leaders such as Taiwan Semiconductor Manufacturing manage. And while TSM and others operate several cutting-edge factories making wafers that are 12 inches in diameter, Grace is sticking with more mature technologies and smaller sizes.
Grace Executive Vice-President and Chief Financial Officer Daniel Wang says there's no shame in having goals that aren't quite so lofty. "Anyone going head-to-head with big foundries will only be able to compete on price, and that is too difficult a battle for a startup company," he explains. Over the past two to three years, he adds, it became "very evident to us that we need to focus on things where we can have value added." For Grace, that means finding niche markets, such as making chips with embedded flash technology for customers including Cypress Semiconductor (CY) and Marvell Technology (MRVL). "We need to focus on things that are, at the end of the day, profitable for the company," says Wang.
Strategizing and Overcoming Obstacles
In China, as well as in India, many technology executives are reassessing their strategies now. Both countries have booming economies growing at or near 10% a year. That has helped local tech companies build critical mass and start spreading their wings worldwide. In China, companies such as Lenovo, Huawei Technologies, and China Mobile have parlayed their home strengths into platforms for global expansion. In India, software-services companies such as Tata Consultancy Services, Wipro (WIT), and Infosys Technologies (INFY) have enjoyed strong earnings growth serving Western customers.
But companies in both Asian countries are now facing tough new challenges. Of course, both Chinese and Indian tech companies have to cope with the fallout from the subprime mess in the U.S. and the possibility that the housing crisis might lead to slower American growth or even a recession.
Moreover, in China, companies such as Grace are finding it's harder to become first-tier players than many optimistic investors might have thought a few years ago. Competition in the domestic PC industry is heating up as multinationals such as Hewlett-Packard (HPQ) and Dell (DELL) focus on trying to win some market share from local champ Lenovo (BusinessWeek, 4/2/07).
And the many scandals involving tainted Chinese toys, drugs, and food could set back efforts by Chinese tech companies to shed their reputations as poor-quality manufacturers of copycat products.
Indians don't have to worry about those scandals, but the country's IT companies have plenty of problems of their own. Like China's tech companies, they have to deal with increased competition from multinationals (BusinessWeek.com, 8/23/07) on their home turf. In India's case, that comes from the likes of Accenture (ACN) and IBM (IBM).
Quicker Expansion, Less Reliance
At the same time that foreigners are bulking up in India, the shares of the top Indian software services providers have taken a beating this year, amid widespread concern that the appreciating rupee (up nearly 9% against the dollar this year) and labor shortages in Bangalore will increase their costs and put pressure on earnings.
India's top companies are responding by picking up the pace of global expansion. They've been opening offices and hiring engineers beyond India for several years, but now they face greater urgency in diversifying their workforce and reducing their reliance on Indian labor. Satyam Computer Services, for instance, in early September opened a center in Malaysia's Multimedia Super Corridor, a high-tech zone near Kuala Lumpur. Satyam Founder and Chairman B. Ramalinga Raju expects the Malaysian center to employ 2,000 workers "within a few years." Some 20% of Satyam's employees are now based outside India.
When Indian companies like Satyam were first making themselves felt globally, it would have been unthinkable for them to bother with places like Malaysia, since there was plenty of talent available at home. The business model is now changing, says Raju. "The way we view offshoring is very different from seven or eight years ago," he says. Back then, it meant doing work from one place and one place only—India. "Now offshoring means accessing high talent and doing work out of high-quality countries," he says, adding that Satyam is expanding not only in Malaysia but also in Brazil, Egypt, and Hungary. "The proportion of offshore talent outside of India will grow significantly in the next few years," he says.
Satyam's major Indian rivals have similar strategies. Tata Consultancy Services, India's largest software-services company, is working to develop its business in China, among other countries where it's expanding. TCS has 1,000 people in the country and plans to increase that fivefold within the next four years, says Managing Director S. Ramadorai. That China presence has started to pay off for the company, which has landed a contract to upgrade the computer systems for state-owned Bank of China's 22,000 branches. In August, Wipro announced a $600 million acquisition of Infocrossing (IFOX), an IT services outsourcing company based in Leonia, N.J., in what is the biggest deal ever for an Indian IT company. Infocrossing, which has offices in cities such as Omaha, Neb., and Tempe, Ariz., will help reduce Wipro's reliance on workers at its main campus in Bangalore.
Less Risky Acquisitions
There are big risks in making acquisitions, of course. In China, Lenovo struggled after buying the PC division of IBM in 2005, losing share in key markets. While Lenovo now seems to be turning things around, regaining its No. 3 position globally behind HP and Dell, it faces increased competition from Taiwanese rival Acer, which last month announced a $710 million deal to buy Gateway (GTW).
Other Chinese-led deals have not gone so well. Guangdong-based TCL, which controls subsidiaries making televisions and cell phones, went for the big time in 2003 and 2004 by first buying control of the TV division of Thomson and then the cell-phone operation of Alcatel. Since then, TCL has stumbled. "TCL has been a lesson that a lot of people have watched in China," says Peter Williamson, a professor of international management at INSEAD, a French business school. Chinese companies are adopting more modest goals. "Instead of buying big companies, which are difficult to turn around, they are pursuing smaller companies," he says.
While it's not realistic to expect Chinese companies to become world-beaters in new technologies, adds Williamson, that doesn't mean they aren't going to be innovative. "It's true that these people are not going to come up with headline-grabbing innovations that push the frontiers forward, but maybe that's not where the money is," he says. "Are these people going to take over the world tomorrow? No. But they have been building experience and strength under the radar screen, and it's wishful thinking to underestimate them."
Not So Scandalous
Some Chinese and Indian executives say that they're hopeful that some of their biggest headaches will turn into advantages. Johnson Hu, vice-president of corporate branding and communications at Huawei, says that the made-in-China scandals might lead more people to appreciate companies like Huawei that focus on building their own brands. "Once some problems happen in one Chinese company, people feel that all Chinese companies have problems," he says. Because Huawei has been strengthening its brand-building efforts, though, "Huawei has gotten rid of this problem and will no longer be involved when Chinese brands have problems."
And while the threat of a recession in the U.S. looms, TCS's Ramadorai sees a silver lining. "The worry is always that if the U.S. goes into recession, spending will go down," he says. "But as the U.S. gets into a squeeze, [American] companies may have to do more cost-cutting, which means more work for us."
For a slide show ranking the high-tech prowess of China, India, and the U.S., click here.