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China Will Keep Pursuing Digital Standards

Kathy Chen. Wall Street Journal. (Eastern edition). New York, N.Y.: Apr 23, 2004. pg. B.1

Beijing -- CHINA MAY HAVE caved on one effort to set unique digital standards, but it is moving ahead with efforts to influence global technology in other areas, from cellphones to video-compression technology to inventory-tracking tags.

Facing anger from companies including Intel Corp. and pressure from the U.S. government, China agreed Wednesday to indefinitely shelve a home-grown wireless-encryption standard that would have been mandatory for all vendors of Wi-Fi technology in China by June 1. But Beijing said it would continue to work with international bodies to set global standards, and some policy makers say China could continue to push the wireless encryption standard through such bodies.

The dispute shows how China, propelled by nationalist pride and a desire to decrease reliance on foreign technology, is shaking up the global standards game. Its push to set technical standards is sending an unsettling message to U.S. companies: In a world moving toward globalization, the rules are sometimes set elsewhere. China's new assertiveness is of special concern because it is both the world's factory floor and its biggest market.

China is saying "if you want access to my market, you have to use my standards," says Chen Yuping, a director at a Ministry of Information Industry's research institute. Adds high-tech consultant Fang Xingdong: China's huge market "is ours, but we've been passive, not proactive. To negotiate with the other side, we need our own cards to play. Standards are China's cards."

Technical standards ensure that, say, a CD bought in one country can be played on a CD player made in another. Standards typically are set by groups of manufacturers or, increasingly, by international organizations. If China enforces its own standards, companies would need to make special versions of products to sell in the Chinese market, adding cost and complexity.

China is a latecomer to the standards game. Traditionally, it has held relatively few patents of its own, and so often has had to pay high royalties to use components and software developed by others. Having its own standards could strengthen China's hand when negotiating royalties or technology transfers. The strategy also could allow China to claim early ownership of an emerging technology and give its industries a head start over foreign rivals.

The drive to influence global standards has opened up a heated internal debate in China, underscored by Beijing's 11th hour reversal over the encryption standard.

Policy makers say China is drafting a number of other compulsory standards in the name of security, including for routers, which direct traffic on the Internet; and other Internet-related hardware and software, to deter hackers and address other security concerns. Some foreign companies worry that security concerns could provide a cover for trade barriers. "We hope national security issues will be dealt with in narrow, confined ways," says Jim Gradoville, head of the American Chamber of Commerce in Beijing.

Other parts of China's bureaucracy are taking a more open and flexible approach in setting standards. In 2003, China was poised to introduce its own national product-code system to track inventory, but backed off when it found out about a superior technology, radio frequency identification tagging, or RFID, with which it was possibly incompatible. Beijing's decision to return to the drawing board wasn't popular in many circles in China.

"There are lots of industries where China's market is leading, like cellphones and DVDs," says Anne Stevenson-Yang, head of the Beijing office of the U.S. Information Technology Office, a Washington-based industry group. "It's natural for Chinese companies to emerge as leaders in setting standards in those areas. But you want to do it through inducement, not dictate, or you'll cut off your companies from export markets, international customers and collaboration in technology."

China's growing importance as a market and manufacturer is driving its efforts to influence global standards for RFID. The promising technology transfers small bundles of information embedded in product tags to special wireless readers, and is being adopted by companies like Wal-Mart Stores Inc. to track inventory. Global players have been working on RFID standards, but China envisions a role for itself, too. A working group set up by the government is in talks with two dozen multinationals to define an RFID standard for China, with a pilot project in the works to test globally available technologies and then using the "best of breed" to cobble together a made-for-China standard that would be compatible with other standards.

China hopes to sell another homegrown standard, for video- compression technology, to the rest of the world, touting a superior technology and simple licensing scheme. Currently, the world's most widely used compression technology -- which turns audio and video signals into digital code and is crucial for sending video over the Internet and transmitting high-definition TV -- is MPEG, created by an international group called the Moving Picture Experts Group.

Gao Wen, an urbane computer scientist who has led China's delegation to MPEG since 1997, saw an opportunity for China. He spoke up at a monthly brainstorming session of scientists outside Beijing in March 2002, arguing that "China needs to have its own [compression] standard." Recalls Mr. Gao: "We felt that we could do this because the market is so big and the manufacturers are all here."

Mr. Gao says the Chinese standard, created with the help of multinationals like Microsoft Corp. and Cisco Systems Inc., is not only technically superior to the latest version of MPEG, called MPEG- 4, but also offers a better licensing deal. While manufacturers that want to license MPEG-4 must negotiate fees separately with each patent holder, the Chinese standard, Audio Video Coding Standard, or AVS, require licensors to deal with just one licensing body.

Partnerships with foreign companies to set standards offer benefits for both China, which can grab onto new technology, and the companies, which can gain an entree into its huge market. "Nokia would like to help China develop any global standards," says Ma Jian, a manager at Nokia China R&D Center of Nokia Corp.; the Finnish company already is working with China to develop a standard for the next-generation Internet.

China's decision to indefinitely shelve the controversial wireless- encryption standard took even industry insiders by surprise. The about-turn, announced in Washington by visiting Vice Premier Wu Yi, was a decision made at the top and appears at least in part based on the realization that China's compulsory approach was out of step with international practices. "China needs to consider its national character, but also how it could work more happily with the international community," says the Ministry of Information Industry's Mr. Chen.

In some ways, the process underscores the inevitably bumpy learning process that China is undergoing as it seeks to take a more active role in defining global standards. "This isn't the last you'll ever hear of this debate" over whether China should use standards as a power game or work more closely with international bodies, says USITO's Ms. Stevenson-Yang.

In the city of Xian at Xidian University, where the encryption standard was born, the debate continues. "If we just adopt other people's standards, we're just giving them money and turning into a follower," sniffs Liu Shuaihong, a 28-year-old electronics graduate student. "Why should we always follow other countries' standards when we can design our own?"

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Technical Competition

China hopes to influence world standards for digital technology. Among
the areas it is targeting:

-- RFID: Made-for-China standard to govern radio frequency identification
tagging technology that would be compatible with global standards.

-- AVS: Digital-compression technology standard that offers an alternative
to the global MPEG-4 standard.

-- 3G: A third-generation cellphone that is vying with standards set by
Europe and Qualcomm of the U.S.

-- EVD: An enhanced video-disc standard that China is promoting as a
next-generation DVD system.