CBQ, Inc. (China Business Quotient) (fka CBQI)

[Da !]

Bix, this article provides a good overview of what's going on in the Chinese computer industry. I would tend to agree with what some had posted---companies that have a foothold in China and are manufacturing there should soon be able to bring Chinese computers into the U.S. It should simply be a matter of getting the right licenses, etc.

The problem is that these companies already have built-in costs in their existing supply chain and domestic manufacturing facilities. Those costs won't go away overnight. They will not be able to shift nimbly to a Chinese-only manufacturing cost model. CBQ, Inc. is building its computer hardware business upon a Chinese-only manufacturing cost model.

http://www.legend-holdings.com/eng/media/20000926150604_media.html

PC Legend in the making
U.S. companies lag as Chinese firm's market share in China soars

By Julie Schmit, USA TODAY

HONG KONG -- Wang Hai Lin, 14, knows why he wants a personal computer made by Legend Holdings.

"It is cheaper, it is better, and it is Chinese," he says as he and his parents shop for PCs in the Chinese city of Shenzhen. Wang is one more reason for Beijing-based Legend to cheer -- and for U.S. PC companies to groan.

Legend is racing away with what is soon to be the world's third-biggest PC market -- China -- and its U.S. competitors are falling further behind in a market they once led. While China's PC market is young, and winners and losers may change several times in the future, Legend is looking more likely to live up to its name.

In the last quarter, Legend's market share surged to 23% from 17.3%. Such a gain in one quarter is "unprecedented," says PC analyst Douglas Lee of Goldman Sachs in Hong Kong.

At the same time, the combined market share of IBM, Hewlett-Packard and Compaq Computer dropped to 13% from 15.4%. "Legend is eating them for lunch," says Vijay Harjani, PC analyst at Credit Suisse First Boston in Hong Kong.

It wasn't supposed to be this way. Pre-1996, IBM, Compaq and AST jostled for the top spot in China's PC market. Legend mostly distributed other companies' PCs. But in 1996, Legend got serious about selling PCs. It lowered prices, improved quality and targeted the home market, just beginning to take off.

While Legend's fortunes came together, the U.S. companies stumbled. AST was on the ropes globally. Compaq suffered a fiasco with its distribution system in China.

In 1997, Legend took the lead, and it hasn't looked back. A recent Chinese government survey found Legend, which is 61% owned by the state and the rest by private investors, to be one of China's top 10 brands.

Its stock, on the Hong Kong stock exchange, has soared this year, from 2.72 Hong Kong dollars on Jan. 1 to a close of 18.20 Hong Kong dollars Friday. Legend's revenue was up 46% in fiscal 1999, which ended March 31. Net profit jumped 34%.

"They have been unstoppable," says Tony Leung, director of Compaq's consumer group for China.

China is a valued prize. Market researcher International Data Corp. predicts it will be the third-biggest PC market after the USA and Japan in two years. For the past three years, China's PC market has averaged 37% growth per year. About 70% of China's 1.2 billion people live in rural areas, and most can't afford PCs. But China's urban population is wealthier, and it's as big as the entire U.S. population. Of those urban homes, just 2% to 3% have PCs. In the USA, PCs are in almost 50% of homes.

U.S. companies mostly haven't targeted China's home market yet. Instead, they've gone after the higher-margin business buyers. But as the consumer market grows, they'll put more effort into it. Just weeks ago, Hewlett-Packard rolled out its home PC in China. Gateway expects to enter the market next year, says Frank Smilovic, regional manager. Dell Computer introduced its first home product last April. "Over time, we have to move down into the consumer market to continue to grow," says David Chan, president of Dell Computer's China operations.

Toughening up

To be more competitive, U.S. companies are:
Finding local partners. Last year, Compaq launched a joint venture with China's Dawncom, which now manufactures and distributes Compaq PCs in China. "A local company knows how to market to its citizens better than a foreign company does," Leung says.

Compaq's China market share is half of what it was two years ago. Leung attributes that to the rise of local PC makers, including Legend, and Compaq's failure to realize sooner the value of manufacturing locally. Still, Compaq shipped 16,000 PCs into China homes in the first nine months of this year. That was up from 9,000 for all of last year.

Manufacturing in China. IBM now makes almost all of its PCs for China in China. Two years ago, it imported about 30% of them, says Richmond Lo, general manager of IBM's personal systems group for China. That increased costs to buyers because of 30% tariffs on imported PCs. There are no such tariffs on products that are made in China for sale in China.

Dell opened its plant in China in 1998.

Legend won't make it easy for the U.S. companies. Its PC prices are 10% to 15% lower. It has 2,000 distributors vs. a few dozen for the U.S. companies. In the past year, it added 250 service centers for a total of 400.

Help from on high

The government also helps Legend:

China recently cracked down on smuggling of goods between Hong Kong and China, hurting foreign-made PC sales because many of them were smuggled by distributors in Hong Kong into China to avoid tariffs, analysts say.

Government agencies are encouraged to buy local brands to support China's high-tech industry, says Kitty Fok, IDC China analyst. The government accounts for 18% of Legend's PC sales.

Legend gets research and design help from the Chinese Academy of Science, the leading Chinese high-tech R&D center.

Even China's accession to the World Trade Organization isn't expected to give foreign PC makers much of a boost. As a WTO member, China must drop tariffs on imported components and products. In the PC sector, such tariffs range from 6% for chips to 30% on full systems. But Legend, like its U.S. competitors, imports chips, hard drives and operating systems. So it will benefit from falling tariffs, too.

Ultimately, Legend's success will depend on whether consumers like its products. Home users account for 33% of Legend's sales. In two years, they will account for 50%, says Mary Ma, Legend's operations chief.

So far, Legend is hitting the mark. Eight of 10 Chinese buyers have never bought a PC before, and Legend does a lot of hand-holding. "We try to lessen their terror," Ma says.

Its "Happy Family" software lets users point to pictures on the screen to get the PC to do what they want. By clicking on a calendar on a desk, they open up the calendar program. Last month, Legend rolled out a warm, oval PC in blue, green and purple. It comes bundled with a free year of Internet access that connects with a single keystroke. Other keys take users to sites for such services as news or sports.

To get more face time with consumers, Legend has opened 40 retail stores in major Chinese cities. By April, it expects to have 100 stores.

In the stores, shoppers can tinker with PCs and receive training on how to use them. Says Beijing student Liu Yinghao: "Legend suits the Chinese market."

Contributing: Antoaneta Bezlova in Beijing