U.S. firms ride China boom

Compaq Computer is learning how to do business in China the hard way.

In 1995, Compaq shipped $32 million worth of products to its largest Chinese distributor, Cheflink, under very loose credit terms. So loose that Cheflink never paid up.

In going after its money, Compaq soured its relationship with Cheflink and other local partners. And, according to those who know China well, that will hurt Compaq most. In China, guanxi, or connections, are everything.

"Some Americans have this attitude that 'Oh, I don't need government support, I don't need to deal with these Chinese officials.' If you don't have the connections, you won't tie into an existing network of people that the Chinese trust," said Bryan Larsen, an international trade specialist at the Commerce Department who covers the Asian computer market. "Without the proper relationships, you cannot sell your product, you can't get it through distribution channels, you can't advertise."

While media spotlight focuses on the social and political implications of Hong Kong's return to Chinese rule July 1, another huge story is quietly unfolding on the mainland: High-technology firms are going to extraordinary lengths to learn the often-confounding art of doing business directly in China.

Chinese officials are dismayed by the thought that foreign firms may be planning to make a quick buck at their expense. To avoid this, the government requires that many foreign firms begin their work in China as part of a joint venture, though wholly owned subsidiaries are now allowed. Beijing also demands that foreign firms transfer valuable technology, not just bring their manufacturing operations to China.

But, like many other U.S. industries, the technology sector believes that the push into China--and the risks that go with it--are well worth the effort.

The business climate across Asia is exceptional, analysts say. But the computer industry's potential in China is "unbelievable," says Denis Simon, director of the Andersen Consulting China Strategies Group.

"There is a tremendous amount of competition for these companies [in Asia], but the reality is if you are looking at the market of the future, China clearly has to be center screen," he said. "A number of years ago, Peter Drucker, the management guru, said you have to be in the United States, Japan, and Europe. In the late '90s, you have to be in China."