WILL CHINESE OR U.S. COMPANIES LOSE OUT IN THE END?
Intel and Broadcom's China Headaches... Fortune Cookie Crumble?

China's growing arrogance and protectionist measures are beginning to bring forth questions for certain companies and industries on how much should they actually invest into China, what will the return on their investment be, and whether it is worth it at this juncture and early stage of China' growth to build a signficant presence their market.

These questions and others might be easy for some companies, such as Dell, HP, and KFC. But Intel and Broadcom are encountering some hurdles towards success in China's market. The following are a couple articles with slighty different spins on the same story. News.com explains:

"The Chinese government has passed a law stating that, starting June 1, all Wi-Fi chips sold must comply with the Wired Authentication and Privacy Infrastructure (WAPI) standard. The encryption algorithm was developed in China and is controlled by local Chinese companies." (full article)

TechWeb's Mobilepipeline headline reads, "China Tells Intel To Calm Down."

A little more sensational article, it quotes a Chinese official saying, "China is such a strategic market. I think Intel should calm down."

Overall, both articles reflect China's growing arrogance and long-term policy position to protect its domestic companies, and to rapidly acquire as much management know-how and technology from foreign companies. These are similar approaches that Japan and Korea have taken in targeted growth industries over the past decades. Japan and Korea in the early stages of their automobile markets completely blocked out foreign car-makers with high tariffs and policies allowing only a very minuscule presence.

In the wireless industry, Japan created their own standard, W-CDMA (Wide Band Code Division Multiple Access), with a similar intent as China, to protect their domestic market. In the end, the result hindered the long-term growth of their wireless companies. Korea went with Qualcomm's international accepted CDMA standard, and this resulted in their handset manufacturers' (e.g. Samsung, LG) effectively penetrating the U.S. and other global markets. The intent of China's economic policy makers are understood, but I don't know if it's the best approach for their nation and their corporations.

On the issue of forcing foreign companies, such as Intel and Broadcom, to create Wi-Fi joint ventures with one of the approved local WAPI standard companies creates a threat and loss potential (i.e. proprietary technology) that can scare off new entrants to the degree of preventing Chinese companies from obtaining what they want: management know-how and the transfer of technology.

Intel has already invest almost $1 billion into China, so they are going to work through this as much as they can. But for smaller companies and new entrants, it is a great concern.

The reality of the China market is that it is still like the Wild, Wild, West. The provinces are like cities dotted throughout the untamed West each with their own sheriffs and laws. Laws sometimes don't apply and even signed contracts don't mean much. I know of some Korean companies (favored technology partners with many Chinese companies) with signed agreements with wireless carriers and electronic manufacturers that have the most difficult time collecting their revenue or getting their domestic partners to execute on their contracts.

Korea is far more developed, but similar qualities can be seen and lessons learned for foreign partners new to Asia. When Costco initially entered the Korean market, it signed a joint venture with Shinsaegae, one of Korea's leading retailers. They created E-Mart, a Korean-style Costco, but then Shinsaegae broke the agreement (backstabbed) with Costco. Taking their know-how, but not paying the royalties. Costco re-entered the market on their own with some bitterness. Korea companies like to do and build things on their own and I have seen a similar quality in China. They will try to take and copy whatever they can get their hands on, and of course with the least amount of expenditure.

When Starbucks entered Korea a few years ago, it also signed with Shinsaegae as their domestic partner, but they came out with a favorable deal and Shinsaegae didn't. So I'm sure various industries and partners in China will also have numerous stories to tell.

So do U.S. and other foreign company take such risks to capture a piece of the China market, especially as more protectionist laws are created? How do they ensure their proprietary technologies will not be stolen and copied? How will China's legal system improve to protect foreign investors and partners? How long will China's corporate feifdoms continue?

The greater questions rest on China's policy-makers. Will this protectionist stance be better for Chinese companies or worse in the long-run? Will creating their own technology standards contain them to a domestic market of 235 million consumers, growing towards 1 billion, or allow them to dictate global standards? I really wonder how much thinking went into some of their policies and how many of them were dictated by the new rich in China.