Fearing China’s factories

With staggering growth in revenues and operating profit and the world’s top place in the smartphone market, Samsung Electronics Chairman Lee Kun-hee had reasons to look confident at the Samsung booth during the International Consumer Electronics Show in Las Vegas in January of last year. He said, “Japanese competition seems to have lost steam. The Chinese are moving up laboriously, but it may take some time for them to catch up.”

He may have spoken a bit too soon. Samsung Electronics has been dumbfounded by the launches at this year’s Las Vegas trade show of new Chinese digital gadgets and electronic devices. Samsung’s wireless division may soon be thinking, “We may soon have to look to the Chinese for ideas. The Chinese brands are no longer relying on cheap gimmicks and copies.”

Samsung may not have to be too nervous about rivalry from the Chinese yet. Among 300 manufacturers of smartphones worldwide, only Samsung and Apple clock profits now. Industry heavyweights like LG Electronics, HTC and Motorola make virtually zero profits from the smarthphone business. Other companies are losing more money than they’re earning.

Samsung Electronics has risen to become a formidable rival to Apple. The world’s largest chipmaker, which used to be Apple’s prime parts supplier, hardly flinched even after Apple shifted contracts for liquid crystal display screens to LG and for memory chips to Hynix. Samsung has few companies to fear as it now dominates 30 percent of the global smartphone market.

But secretly, Samsung’s growing sense of fear comes out of China. Chinese companies, which came into the market with cheap, copycat devices, are now churning out state-of-the-art devices with surprisingly new and useful features. Smartphone demand in advanced countries has reached a saturation point. Manufacturers will likely compete primarily in China and India to sell low-tier products.

Samsung remains tops in China, the world’s largest smartphone market. Apple has fallen to the rank of sixth after local manufacturers Lenovo, Yulong, Huawei and ZTE. Considering the leapfrogging pace of the Chinese players, Samsung can’t rest on its laurels.

Chinese companies have the full blessing and heavy support from their government. Beijing has designated mobile technology as one of the country’s seven core industries and plans to nurture at least five global electronics competitors by 2015. The Chinese government is known for an unwavering and concentrated drive regardless of market rules once it sets its mind to an industrial goal. It plans to pump in 10 trillion yuan, or $1.5 trillion, to help expand local mobile manufacturing through a massive restructuring and takeovers of foreign competitors. The amount even tops the 4 trillion yuan economic stimulus package that stunned governments around the world during the time of the 2008 global financial crisis.

The investments are already paying off. Lenovo beat Hewlett Packard to become the world’s top computer manufacturer. Huawei last year nudged out Ericsson as the world’s largest telecommunications equipment maker. Government pampering has accelerated Chinese industry ambitions. Lenovo acquired the personal computer division from IBM and is eying Research In Motion, producer of Blackberries. Haier bought Sanyo washing machine and refrigerator units from Japan’s Panasonic.

China is already the world’s largest consumer market in cars, computers and smartphones. But the Chinese prefer local brands over foreign ones, even more than the Japanese. Rural areas are dominated by local brands. Half of the smartphones sold in China last year were made in China. The Chinese market runs out of synch with the global market. Emboldened by strong loyalty from local consumers, Richard Yu, chairman of Huawei, said his company will conquer the world smartphone market within three years after beating Samsung and Apple. The smartphone industry may face the same trajectory as computers and electronic devices. Once the Chinese enter, the game is over.

What’s scary is the galloping pace and eagerness of China’s global industrial campaign. The local media points out that the operating profits of the 43 electronics companies listed on the Shanghai bourse put together are the same as 16.4 percent of the profits of Samsung Electronics.

China has moved beyond copying. Its manufacturers come up with new products with a little bit more than the winning features of Galaxy phones or iPhones. One need not be entirely creative in innovation. The Chinese are doing the same thing that allowed South Korean products to beat out the Japanese. Now Samsung’s biggest rival may not be Apple but a generation of Chinese latecomers.

Korean companies have enjoyed a boom from China’s rapid growth over the last two decades. Our economy moves in sync with China’s. China wants to increase its domestic demand and make its manufacturers more sophisticated. Competition in exports has become fiercer and the tech gap is narrowing fast. China may no longer be a mere cash register for Korean companies. It could become their biggest nightmare.

*The author is an editorial writer of the JoongAng Ilbo.

by Lee Chul-ho