After a decade of moving factories to China, many of the world’s big high-tech firms are forging a new style of partnership with Chinese manufacturers that show the country’s growing engineering prowess - and its competitive threat.

In a delicate dance with potentially formidable enemies, firms like Siemens AG, Thomson and Alcatel are establishing global joint ventures with China’s rising producers of TVs, mobile handsets and home appliances.

Many expect it will be well worth the risk of bringing company secrets to the table in return for access to China’s low-cost researchers and its fast-growing consumer market.

“Almost no company can avoid the opportunity to take advantage of China’s talent base,” Tom Manning, director at business consultancy Bain & Company, said.

“Two-thirds (of multinationals) are doing R&D here. The majority is still in non-threatening R&D, but it is quickly moving up the food chain.”

Germany’s Siemens, Europe’s biggest electronics group, has teamed up with handset maker Ningbo Bird Co. Ltd. and is moving half of its mobile phone research to China. It also co-developed China’s homegrown high-speed mobile phone standard, called TD-SCDMA.

In equally far-reaching agreements, Netherlands-based Philips Electronics is developing hospital equipment with China’s Neusoft, while Finland’s Nokia Oyj and U.S.-based Motorola Inc. have developed unique handsets in China that use the freely distributed Linux operating system or let users enter text messages with a stylus.

China’s low costs, a vast and growing supply of engineers and a market of 1.3 billion consumers have convinced many multinationals that they need more hooks into the country.

“China, because of the size of the market, the cost of the people and the skills of the people, is a privileged place,” said Christian Reinaudo, head of Asia Pacific operations at Alcatel. It has teamed up with Shanghai Bell and employs 1,800 researchers in a 50-50 joint venture.

Many Japanese firms are expected to be more cautious, especially in their core areas of expertise.

“I don’t see Japanese companies being as flexible as European or American companies in terms of rearranging their assets,” said John Yang, an equity analyst at Standard & Poor’s in Tokyo.

“Sony or Matsushita and others don’t want to show all their cards,” he said.

“Sony has an assembly plant in China for their PlayStation 2 but they are not willing to actually produce chips in China. They want to sell in China but they don’t want to bet the farm on it.”

But foreign companies can afford to bring more research and expertise there, said Manning. The shelf life of technology has become so short that the risk of being outpaced by rivals is worse than the risk of piracy. “(Many) innovation cycles are 18 or even 12 months. Staying out of a rich talent base, simply to protect a patent that you may never use, doesn’t make any sense,” he said.

In many recent partnerships, global firms are simply handing low-cost or struggling product segments over to China.

Thomson, which made basic TVs and DVD players, offloaded those operations to a joint venture majority-owned by Huizhou-based TCL International Holdings Ltd. The venture is now the world’s largest TV company.

Telecom equipment maker Alcatel also tied up with TCL in a global mobile phone venture as the French company’s handset business was too small to survive on its own.

The pressure from Chinese competitors could also push some second-tier Japanese digital camera makers like Kyocera Corp. and Konica Minolta Holdings Inc. out of the market sometime after 2006, said Ryohei Takahashi, an analyst at UBS in Tokyo.

But it would take at least half a decade before Chinese firms enter the high end of the market, where the global giants are now focusing their efforts, analysts said.

Philips chief executive Gerard Kleisterlee said some Chinese players would inevitably become big global brands, just as Japan’s Sony and South Korea’s Samsung successfully challenged the elite.

“But the new Chinese players will also help grow the market. And in a bigger market there’s room for more players,” Kleisterlee said.

(Shenzhen Daily October 28, 2004)