Venture Capitalists Have Eyes on China

Travelling the Silicon RoadStartups all across China in the technology sector are looking for seed money and second-and third-round investments, and are courting foreign as well as local investors, particularly U.S.-based venture firms.

But are the American VCs interested? Do they share in the buzz, the excitement about China?

They most certainly do; the answer is definitely yes. But it’s a qualified yes. American VCs aren’t just handing out money at the drop of a Chinese hat. While there is perhaps a bit of a gold rush mentality in the semiconductor industry with regards to China, perhaps the VCs remember the aftermath of the last technology gold rush – the one that began with the letter “I” — and are treading a little more cautiously.

But that’s not to say that U.S.-based venture capitalists aren’t taking a long, hard look and China, because they are. And they are excited about what they see, and what the future holds.

Only a Matter of Time

Everybody is excited about China for one reason or another, and VCs are no different. While many, if not most VCs in the West are reluctant to invest directly in China-based startups, they often speak as if it’s only a matter of time. And it is a sure bet they are looking at their clients based outside of China and how they can help them do business in China. It is without doubt an important market.

They often cite the use of mobile technology in China, where a lack of a wired infrastructure coupled with an emerging middle class is opening opportunities that don’t exist in older and more developed Western markets, or have a much more limited demand here, such as Internet protocol television and bill paying by mobile phone.

“It’s obviously a great new customer area,” said Mark Gorenberg of Hummer Winblad. “We look at it today as much more potential for our customer base rather than investing for ourselves,” he said. “But we talk about it all the time.”

Dave Liddle, a general partner at U.S. Venture Partners, said his firm has been looking recently at several Chinese-based companies but so far hasn’t made that kind of direct investment. “But that’s just how it’s turned out,” he added.

What’s more common at this point for Western VC firms interested in China typically is to work with a Silicon Valley-based firm that actually has a few people on the ground in China, or has opened an office there, or they work with a U.S.-based company that has set up its manufacturing in China, Liddle said. In fact, China is a market that VCs are encouraging their startups to look at now, ahead of more traditional markets, like Europe, he suggested.

But that’s not to say that U.S. Venture Partners, Hummer-Winblad and others aren’t looking at investing directly in China.

But like any investment, the general rules apply: the market served has to be accessible, and it has to be a cost effective proposition, Liddle explained. “We track that a great deal,” he said of potential direct investments in China. The company maintains a lot of connections within in the U.S. entrepreneurial community that have ties to Taiwan or mainland China.

One firm that is investing directly in China right now — in what is perhaps an example of how the world of capital is changing, and not just with regard to China – is Big Blue, or rather its VC arm, IBM Venture Capital Group.

“The energy in China is just tremendous … all the legendary firms are very much focused on China right now,” said Claudia Fan Munce, a VP and the managing director of IBM’s VC Group. Incidentally, at the time she was interviewed for this article last month, Fan Munce had just returned from China where IBM had hosted a meeting of some 200 VC firms from around the globe.

Rather than make direct investments, IBM’s VC Group operates on what it calls a “give to get” strategy, focusing on relationships that will directly benefit IBM. But it works with other traditional VC firms that do make direct investments

Many foreign VCs are teaming up very quickly with local firms throughout the Asia/Pacific region, and many in China, Fan Munce observed. “Our drive is … what are the best companies and what are the best technology solutions? What kind of partner do we want to bring to market with us? How can our technology help them?”

Big Blue Puts the ‘e’ in YeePay

One of IBM VC Groups success stories in mainland China, and an example of the type of emerging market that exists in China thanks to a relative lack of existing infrastructure, is YeePay. Founded in 2003, YeePay (which translates into Mandarin as “easy pay,” according to the company) is an electronic payment service provider. It enables consumers and businesses to send and receive payments via the Internet, mobile and traditional wired telephones.

In November the two partners, IBM and YeePay, announced that in just five months after the partnership began, YeePay increased its financial transactions handling from just $120,000 per month to more than $1.2 million per month. A lot of that had to do with IBM’s association with the startup; IBM is a revered brand in China. In fact, IBM’s laptops are so venerated there that some Chinese consumers were not excited but worried when domestic PC maker Lenovo bought IBM’s PC unit, worried about the future quality and performance of the Thinkpad laptop.

But it wasn’t all just success by association, said Fan Munce. IBM provided servers and middleware to YeePay, helping them build an infrastructure based on open-standards hardware and software – not to mention access to a global infrastructure — and went with the company when it approached new customers. IBM isn’t a software applications provider; it doesn’t do industry-focused software, but needed a way to serve industry verticals, she explained. “Our mission has always been to identify a pipeline or partner,” Fan Munce said.

In a country that already has more mobile phone users than the entire population of the United States, and skyrocketing activation rates, YeePay was naturally attractive to Big Blue. There is a high risk, Fan Munce acknowledged, but huge potential for high returns. And that’s important for IBM, where more than half the company’s revenue is derived from services. And as Fan Munce observed, “We don’t really care who caries the brand.”

And there is a larger story beyond the IBM/YeePay, foreign-VC-success-in-mainland China story, and that story is the emergence of the corporate VC firm; IBM is far from the only big technology company to get involved in the venture capital game. Big Blue rival and fellow chipmaker Intel is a prime example; at the other end of the technology spectrum Cisco Systems is another.

The emergency of corporate venture capital as a means of growing a business and driving revenue is a definite trend that has emerged just within the ten years, Fan Munce agreed. And it has blossomed; just take IBM. When Fan Munce joined the IBM VC Group in 2000, it was involved with some 21 startups; as of last month, it was involved with 964 scattered around the globe.

Rules Still Apply for VCs with Regard to China

So what is the implication for China? In the future the technology industry is likely to see more partnerships a la IBM and YeePay, aside from interest on the part of more traditional VCs.

And as for VC firms looking to get involved in China, they face the same issues that anybody looking to do business in China faces, such as intellectual property protection, and establishing and maintaining the proper relationships needed to get things done. Both Liddle and Gorenberg acknowledged that while China’s government definitely seems to be stepping up its efforts on IP protection, it is still an issue to take into consideration.

“As a venture capitalist, I focus on companies where the IP has originated with the entrepreneur in China, or with these particular people,” Liddle said. “That’s different than taking IP originated in the U.S. and transferring it into China.”

IP protection is a problem that to some degree is culturally ingrained, Gorenberg observed, and that has to change. But he noted one recent example that it is indeed changing.

With the Olympics coming to Beijing in 2008, the central government has already gotten its marketing efforts well underway – and, in a somewhat ironic development, has had problems with local “entrepreneurs” selling knock-off souvenir paraphernalia, souvenirs that aren’t officially licensed, yet feature copyrighted logos and so forth. The government is already cracking down on this, and that’s a hopeful sign that it will become further involved in efforts to protect corporate IP, Gorenberg suggested.

Foreign VCs looking at China also face the age-old question they always do anywhere and anytime they become involved in a startup: how to pick a winner. This is compounded by the fact that many Chinese startups, not to mention established companies, are constantly turning to what’s hot and trendy at the moment. A year ago, for example, there were some 400 mp3 player manufacturers on the mainland.

“It is difficult,” Liddle acknowledged. Typically, VCs will categorize startups into “brave new world” companies, that have something new, or “faster, better, cheaper” companies, those that have a better product or better way of serving an existing market. In China, most of these fall into the latter category.

Because of that, it’s often not difficult to validate the market a startup wants to pursue; what is often difficult is determining the character of the team involved in a startup. In cases where an entrepreneur or executives in the fledgling company were educated or worked in the industry in the United States or Europe, evaluation is not so difficult. Where it becomes problematic is when the entrepreneurs have spent their entire career in China, Liddle observed.

“We don’t have the same type of references there,” he said. “The trickier thing is to evaluate the senior people in the firm then. That’s hard. It can be done, but it takes a lot of work and it takes a slow process”

Electronic News Travels to ChinaWhich is perhaps why so many VCs are either looking to take their fledgling companies from the U.S. and elsewhere into Asia/Pacific, and namely China, or looking to partner with people and companies already in China. Relationships are the critical element when it comes to doing business there.

“In China people believe — and it’s true by the way – you have to be tapped into the local ecosystem,” said IBM’s Fan Munce. “You have top know the right people.”

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

Moving to China: Where Should You Set up Shop?

Travelling the Silicon RoadSo you’ve decided you need to have a presence on the ground in China. Or you’ve decided it’s time to move some manufacturing to China, or expand the sales offices you have there.

Then the question becomes where do you go in China to set up shop?

It’s a big question, and not one with the clear-cut answers it had just a few short years ago. At first glance, it might seem obvious: if you’re talking about electronics manufacturing, then Shenzhen, China’s richest city, is the place to go. If you’re talking about something farther up the food chain, say semiconductor manufacturing, then Shanghai is the place to be, right?

Well, if you’ve been following along as Electronic News has ventured down the Silicon Road this autumn, you know it is not quite that simple. There is some truth to those statements, to be sure. But the industry landscape in China – and foreign companies options – are considerably more complex, to be sure.

But lets look at that conventional wisdom first. Shanghai and Shenzhen are obvious places for a reason. Shanghai is a huge port city with plenty of natural resources, namely water, and an established infrastructure – this is why there are fabs here in the first place, including many that belong to the fourth largest chip foundry, Semiconductor Manufacturing International Corp. (SMIC). You’ll find the Chinese offices of many a U.S. and European chipmaker here in the gleaming new skyscrapers that dot the skyline.

Look at Applied Materials Inc., the world’s largest process tool vendor, and an old hand when it comes to operating in Asia – it’s literally around the corner from its biggest Chinese customer, SMIC, and its headquarters in Shanghai.

At the other end of the supply chain spectrum is Shenzhen, which has blossomed over the past two decades into China’s electronics manufacturing center. It was made a special economic zone for a number of reasons, but those reasons are similar to why Shanghai has exploded — and why Shenzhen is exploding.

For one thing, Shenzhen is a port city. Located in southern China on the eastern edge of the Pearl River delta, just across the border from Hong Kong, it is home to much, if not most, of China’s electronics manufacturing, and has the infrastructure to support that. In fact, it is probably the only place in the world to have a wholesale electronic components shopping mall located in an office tower downtown. That’s right, the SEC Electronics Marketplace: seven floors of components and finished electronic goods available wholesale.

Both cities have abundant human resources, not to mention prevalent universities, particularly Shanghai. In fact, Shanghai is so popular right now — particularly with Chinese engineer-entrepreneurs returning from abroad to take advantage of the advantageous business climate – that there are some 120 fabless companies in various stages of development in Shanghai, according to one chip startup I visited.

Plus, both cities have much to recommend them in the eyes of Western expats. Both cities are relatively clean and pollution free, and are very cosmopolitan; one could easily get by in Shanghai without having to learn Mandarin, or ever having to eat Chinese food, for that matter (why anyone would actually want to do that, however, I wouldn’t know – but I met Westerners in Shanghai who happily pointed this out).

Shenzhen, meanwhile, while much smaller and definitely more “Chinese” than Shanghai, is rapidly approaching that same level of international sophistication, and is so new and clean, it has been labeled China’s garden city. Indeed, the whole city seems at first glance to be sparkling and new, and compared to China’s older cities, green space is much more abundant.

But these very things that make Shenzhen and Shanghai such obvious choices may also serve to make them not-so-obvious choices. Shanghai, for example, is very expensive by Chinese standards – many people I spoke with, both Chinese engineers who had worked in Silicon Valley, as well as Western expats, pointed out that housing costs are approaching San Francisco/San Jose levels – and all of the attendant issues are starting to crop up in Shanghai, too.

“It’s not a problem for us yet,” said Kevin Sun, a marketing manager for Applied Materials China, referring to the high cost of living in Shanghai. “But of course they feel this pressure,” he said of Applied’s local Chinese employees.

It’s Not Just Location, Location, Location: Beijing vs. Shanghai

Another thing to bear in mind is that to do anything in China, you have to have established quan xi with the government – you have to establish and maintain the right relationships. For all of its cultural opening up, for all of its warm embrace of the free market, China is still a party where the Communist Party holds near absolute power.

And while Shanghai and Shenzhen may have a wealth of technological human resources, when it comes to finding brainpower in China, there is no better place than Beijing – which happens to be the seat of political power in China as well.

Now, for people not familiar with China – and perhaps more so for those who are only familiar with Shanghai – it’s important to understand that Beijing is the cultural heart of China, not just the political center. Geographically, Beijing never had much to recommend it, but in China’s distant past, as its dynastic rulers began to consolidate power across this vast country, Beijing became a strategic location, the crossroads of a growing realm. That is essentially why it became the seat of power for China’s emperors, which in turn attracted China’s intellectual and cultural elite, historically.

By and large, this is still the case today. Not only is it the seat of government, it is home to most of China’s premier universities – the Peking University, Tsinghua University, and the China Academy of Science, to name just a few — not to mention most of its millionaires, old and new, and its popular entertainment stars. It is also home to many of its brightest painters, musicians and writers.

And if there is a hot-button issue for the Chinese today – well, there are many, actually, but the rivalry between Beijing and Shanghai is one of them. Of course, the people that live in China’s other burgeoning high-tech cities have their own views on the matter, but most Chinese people in the tech industry in either Beijing or Shanghai, have a strong opinion with regard to the rivalry.

And the people that argue on behalf of Beijing make strong arguments. Beijing may not be a bustling port city, and may not have the infrastructure for manufacturing that Shanghai has, which the city’s proponents readily acknowledge.

If you’re just after cheap manufacturing, then by all means, go to Shanghai, says Liang Sheng, the section chief of the Department of Information Industry of the Beijing Municipal Government. “But if you want to expand your profits, you have to come to Beijing.”

And if you are looking to develop intellectual property (IP) tailored for the booming Chinese market, Beijing is the place to be. “Here we have our own IP,” he said, observing – as many Chinese officials did — that there was a reason SMIC built its first 300mm wafer fab in Beijing.

Liang likens Beijing to Silicon Valley; it is where a big chunk of China’s domestic chip IP is created. China’s only EDA company, CEC Huada, calls Beijing home, and of the 400 design houses in China, 85 are in Beijing. If that ratio isn’t good enough for you, consider this: out of the 16 design houses that achieve more than $100 million in annual revenue, more than half have their headquarters in Beijing.

Of course, there is no official distinction between Shanghai and Beijing when it comes Chinese efforts to lure the semiconductor industry there. Rather, it’s the result of a natural evolution: “it’s just what it is,” remarked Xu Xiao Tian, secretary general of the China Semiconductor Industry Association. “These two cities have their advantages and disadvantages.”

There’s More to China than Beijing and Shanghai

Some of those disadvantages in Beijing, aside from a comparable lack of natural resources, are considerable pollution and horrendous traffic. That is not to say that they aren’t problems in Shanghai, but in Beijing, they are particularly acute. While Beijing has a venerable, effective public transit system, there are still so many people in the city that its traffic jams rival the worst of those anywhere on the globe; it will be interesting to see how Beijing addresses this problem when it hosts the 2008 Olympics.

And it isn’t the only place to find superior human resources in China; consequently, nor is Shanghai the only place to find infrastructure and physical resources for manufacturing. As Xu observed, quite rightly, many companies both domestic and foreign, are looking at other cities around China – Chengdu, Xian, Shenyang, just to name a few. There are resources to be had elsewhere, often without the costs associated with Beijing or Shanghai.

One thing is common to virtually every significantly large municipality in China today: the local governments are playing to their strengths, and doing what they can to lure foreign investment. Wherever you go, whomever you talk to in local governments – as well as the local companies looking for foreign business partners – the phrase “win/win” comes up time and again; incentives are falling out of the metaphorical trees.

And each these other municipalities offers unique cultural environments as well, as followers of the Silicon Road blog know well, be it the food of Sichuan Province, or the warm subtropical climate of southeastern coastal China.

“I want all these cities to be successful with their semiconductor industries,” Xu remarked. “We’re paying attention to all of them.”

Electronic News Travels to ChinaIndeed, if one were involved in optoelectronics, Xiamen would deserve consideration. If software is your company’s forte, then Shenyang may be the place to set up Chinese headquarters. There are many places, places that we couldn’t squeeze into my Silicon Road itinerary, that are burgeoning high-tech and/or industrial centers in their own rights, or soon will be – Xian, Wuhan, Tianjin, Beihai and Guanzhou, just to name a few.

Wherever you decide to set up shop in China, I can say one thing is abundantly clear after spending a month investigating China’s tech industry: now is definitely the time to be there.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

ARMing China

Travelling the Silicon RoadSHENZHEN, China — Software is a hard sell in China — in a country that understands the physical aspects of manufacturing inside and out, the concepts surrounding software are perhaps somewhat esoteric.

Furthermore, while system integration is something the Chinese technology industry is adept at, design is still relatively weak by comparison. This may make China an unlikely place to launch an embedded software and hardware company centered on microcontroller development kits, but on the other hand, that would make you the only local game in town, and being local is often a key element to doing business in China.

This is exactly what one company, Shenzhen Embest Info & Tech Co. Ltd., has done.

Embest, a privately held company started up six years ago, is the first and probably still the only domestic company to offer commercially available development tools for ARM processors. ARM is a very popular technology, and the Embest founders were already familiar with it, having worked in the industry, so it was a natural fit.

The company is focused on enterprise customers, the R&D market and education — it sells kits specifically designed for universities and engineering education.

“Things are getting a little better,” said Zhang Guo Rui, international manager for Embest, referring to the Chinese market for its products. Once domestic companies understand the concept of embedded software and what can be done with it, it’s an easy sell, he added.

And with China recognizing the need to develop its own intellectual property in order to keep the revenue generated here inside the country, the domestic market is growing. While software design was often outsourced to India in the past, this is beginning to change as more domestic companies and international companies involved in the domestic market are focusing on their design efforts in China, Zhang said.

The company is located in Shenzhen, where much of the Chinese market for its embedded software and hardware developed is located, given the huge manufacturing base in electronics here.

Still, it’s not a huge market to begin with, and a nascent one in China, so Embest has directed the marketing for its patented technology on international markets. It began selling overseas in 2003; today it is doing business in several countries, including the United States, France, Germany and South Korea.

The company has already built a reputation as a third-party supplier of ARM development products; the industry’s penchant for outsourcing to China to lower costs coupled with Embest’s position in the local Chinese market and its capability to design finished products based on ARM processors, has all helped to boost the company’s market presence both domestically and abroad, said Zhang.

Electronic News Travels to China

Eventually the company would like to expand beyond ARM and produce development kits and product designs around other technologies, such as DSPs. It’s been talking to a Western DSP chipmaker about doing just that, although the talks are only in the initial stages. Like it does for ARM, it wants to introduce tools into the Chinese market to develop designs based around the DSP.

Of course, this could provide the Chinese proverbial win-win situation: It would boost the foreign company’s presence in China via a local supplier, and help spread Embest’s presence in the international market.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

Chinese Electronics: Getting Ahead of the Game

Travelling the Silicon RoadSHENZHEN, China — It seems wherever you go in China’s cities, north south, east or west, business and government are looking for foreign partners and investments.

Start-ups, local and central government, well-established domestic companies alike, all discuss the possibilities of establishing a win-win relationship with companies from the West, particularly the United States. These efforts are still relatively nascent in China’s chip industry, with a few notable exceptions like foundry Semiconductor Manufacturing International Corp.

And on the other side, many are just as eager. In some cases, they’ve already been here for years, like Agilent or Applied Materials. Or they are just now looking to get involved in the booming Chinese market, and might not be sure who to partner with – venture capital firms, for example, look at the raft of Chinese chip and technology start-ups, and are bewildered about which ones to choose.

But China’s electronics manufacturing industry is considerably more developed than its chip industry. While developing intellectual property and bringing it to market might not be a Chinese strongpoint, manufacturing is, so it is only natural that China’s electronics manufacturing industry is humming along strongly and has been for years.

While the semiconductor content of Chinese electronic components may come from beyond China, the rest of the content that goes into making an electronic product can be found locally here in China, be it cables, boards, connectors or whatever. In many cases a product can be sourced entirely here in Shenzhen and that, along with cheap human resources, is why manufacturing is inexpensive here compared to the rest of the developed world.

Look at the cost of manufacturing a television. Thirty years ago, it cost about 3,000 yuan; today it costs about 500 yuan to produce a TV in China, noted Chao Getu, a general manager at Shenzhen Deren Electronic Co. Ltd. That’s about 62 bucks.

“The same thing will happen in the field of white goods and household electronic appliances, sooner or later,” Chao observed. “The advantage of China lies in the whole [electronics] supply chain.

And when it comes to doing business with the West, China’s electronics companies are also ahead of the game. Deren Electronic is a good example.

A privately held company created in 1992, Deren is focused on R&D and production of electronic connectors. It has a solid foot in the middle layer of the electronics supply chain in Asia and the world; its revenue this year should be around $87.5 million (700 million yuan). It has seven factories around China, and has an impressive list of domestic and foreign customers.

Among its Chinese customers are giants like home appliance manufacturer Haier and television maker Konka. Among its foreign customers most notably are big Japanese names in electronics: Toshiba, Sony and Sanyo – a notably tough market to crack, even now.

How the company got into Toshiba and the Japanese market initially, was its competitive price, said Chao. While the Western supply chain is open to foreign suppliers, the Japanese electronics supply chain is still relatively closed, at least until a few years ago.

To get more solid footing in that market, Deren went a step further, hiring Japanese engineers and setting up a new business division specifically to interface with Toshiba and Japanese customers, one that operated like a Japanese business; Deren recruited staff for that division from Japanese companies.

“This was a good start for Deren,” said Chao; it led to its business with Sony and Sanyo.

Deren has also been able to lure the business of U.S. giant Tyco Electronics. The two companies announced their partnership in January of this year, signing a strategic agreement for connectors to be used in home electronic appliances and communications equipment. Deren agreed to manufacture and distribute certain Tyco brands within China; in addition to this OEM agreement it also serves as a distributor for other Tyco products.

For Tyco, which was at one time naturally a competitor of Deren, it gained a local foothold in the blossoming Chinese market, a place it had struggled to penetrate previously. By partnering with Deren and offering its technology, it suddenly was inside China’s large home appliance market.

Meanwhile, Tyco is supplying Deren with patented electronic connector technology, advanced management techniques and brand marketing, and more importantly an entry into the top-level of its target customer base.

Essentially, the deal represented the localization of Tyco – an important step for foreign companies doing business here – and a step toward the globalization of Deren Electronic. Tyco brought in staff from Taiwan to train Deren employees, gaining access to people with business experience overseas.

As Chao observed, “We need more cultivation than utilization.”

Electronic News Travels to ChinaThe company has already learned a lot from Tyco in less than a year, he said. Its human resources management and factory production and product design have all seen great improvements. While the cooperation on a sales and marketing level remains somewhat lower by comparison, Deren hopes to raise that level going forward.

It’s not resting on its laurels either; it is currently courting a large European company as well, hoping to duplicate its relationship with Tyco and continue its foray into global markets.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

Kingtype: Sussing Out the Chinese CATV Equipment Market

Travelling the Silicon RoadCHENGDU, China — While in China this past month, Electronic News Editor Jeff Chappell sat down with the founder and current board chairman of Chengdu Kingtype (Electronic) Group Co. Long Yon Gaing to talk about China, its burgeoning electronics industry, standards, and, specifically, the market for cable, digital and satellite television electronics.

Kingtype, the biggest manufacturer of CATV equipment in China, is one of the first domestic, privately held companies to form under China’s economic reforms of the early 1990s. In addition to the Chinese market, it also exports equipment to other parts of Asia, as well as to the United Kingdom.

What follows are excerpts of the conversation.

Electronic News: Can you tell us a little bit more about the history of the company and how it came about?

Long: Under the leadership of Deng Xiaoping, the central government in the late 1980s and early 1990s embarked on the policy of opening up China and its markets. It was at this time that several engineers including myself organized the company. There were six of us that started Kingtype in 1992. After 13 years, we’ve seen steady growth and great progress. The government’s policies have helped us achieve stable growth. Our current net assets are worth 260 million yuan [$32 million].

After so many years of development, we now stress technological innovation. We’ve had to address many problems of the years, but we’ve developed high quality products. We are the best among CATV equipment suppliers in China; we’re the No. 1 brand. Our company has also been directly involved in developing CATV standards in China. Others and I in the company were invited to serve on the National Broadcast and TV Standards Committee.

Electronic News: As a supplier of digital and analog CATV broadcast equipment and set-top boxes, do you do all of your own system design in-house? And are the components of your system produced domestically or abroad?

Long: Yes, we provide system design and system integration. Much of the materials and components, as related to semiconductor content in our products, come from outside China, while the rest of the system components come from domestic companies.

Furthermore, our industry is very professional, or business-to-business; it’s not like the consumer electronics industry. The domestic capability of China to design and produce its own chips is still relatively weak, so we must get our chip components from outside China, and will continue to do so for the time being. In the future, however, particularly for our set-top boxes, which just went into production, and satellite receivers, which we’ve just begun to start manufacturing, we perhaps might begin to use domestically-designed components.

Nowadays, the Chinese government is heavily supporting domestic chip design, manufacturing and the related software technologies. It is developing very fast. But today, our main products are CATV infrastructure equipment, such as network transceiver equipment, optical transmission equipment and wireless emission products, and system management software. And also digital signal broadcast equipment. We do make set-top boxes and satellite receivers, as well, but the set-top box isn’t that popular in China; digital television is still a small market.

As we’ve learned from the U.S. market, it’s not an easy one. This market is tough, and we also face outside competition. You see, unlike the United States, CATV in China is a public broadcast and service medium. So it is difficult to sell related products to the consumer. We would like to see China follow the U.S. FCC, which has set a new policy requiring that digital tuners be integrated with television sets in the future within the United States. As the set-top box isn’t popular here, we think we should follow this example in China.

Electronic News: With the growth of China’s economy, could that possibly spurn the growth of the market for consumer-related CATV and digital equipment, such as set-top boxes?

Long: Of course we will see considerable development in the future, and this will help promote the whole industry. Next summer China’s first direct satellite television broadcasts will begin, for example. That is when we plant to start selling our new satellite receivers. And the future integration of a digital tuner with the TV, this will promote sales of digital television. Once common people have the means to receive digital broadcast signals, it will spawn more digital programming – at that point we’re looking at a bright future.

Electronic News: Can you tell us about the state of broadcast and TV standardization in China?

Long: How fast the industry develops depends on China’s standards development. There are a lot of old standards: DVB, MPEG-2, and so forth. And now there are new global standards emerging, such as H.264. Here in China, we want to develop our own standard: AVS . Of course, the semiconductor industry is also concerned about this problem. These varying standards affect their design and manufacturing, and their design and manufacturing in turn affect ours.

Electronic News: So China’s own domestic standards will help China’s internal IC industry then?

Long: It should promote domestic IC design. It is why we set up our own standards. The H.264 standard, it costs too much money for domestic chip companies to design and produce related components. The MPEG-4 [a standard technically identical to H.264] actually is a good standard. …

Personally, I prefer the H.264 standard. But as a member of the committee, we can’t support it. But it does have a lot of support from the chip industry at large, however. If we did support it, we might see our own market [for related end-user equipment] develop more quickly. The number of chipmakers designing for the emerging AVS applications is still quite small. But this isn’t only my opinion. A lot of other committee members feel the same way. If the H.264 standard can eventually offer us a reasonable cost, we will accept it. That’s why China is waiting for the standards to mature a bit. We’ll wait and see. And that’s why we haven’t put our set-top boxes into mass production, because of the standards issue. DVB was the standard, now we are waiting for the new standard.

Electronic News: Can you tell us why Kingtype chose to set up shop here in Chengdu?

Long: Sichuan [Chengdu is the capital of Sichuan Province] is a base for the electronics industry in China. It stems from the era of Mao Zedong. In the interest of national security, the central government at that time adopted a policy of moving key industries inland.

Nowadays, the environment and talent here is quite rich. There are several excellent universities here, and a lot of electronics companies in China originated here; a lot of other companies in other cities – Shanghai, Shenzhen, etc. – their founders came from here.

The maturation of government policy has helped Chengdu grow, as well, but perhaps it has helped other cities such as Shenzhen even more so. But it will all lead to a more prosperous Chengdu. This city has demonstrated a lot of advantages under the new policies, such as the engineering talent available. There are a lot of multi-national corporations here now, too. And the living environment – the cuisine, the lifestyle – that’s why we chose Chengdu as our base.

Electronic News: Is there anything you would like to add, or anything else we should cover?

Long: Right now Kingtype is the main provider of CATV equipment in China. The next step for us is to cooperate with an overseas partner. We can learn advanced technology and management techniques from them; they can gain valuable access to the Chinese market. We are interested in mutual market development and R&D. It can be a win-win.

We also want to begin exporting more of our products beyond China. In fact, several companies outside of China have contacted us about OEM partnerships, inquiring about production of equipment for export.

Electronic News Travels to ChinaI’d also like to mention our involvement in two-way HFC [hybrid fiber coaxial] network equipment. [In 2004, the State Administration of Radio, Film and Television set up an HFC network technical lab within Kingtype. The company handles technical training for HFC operators in China.] Our company also wants to share its leading edge two-way HFC technology with the world. We’ve attracted a lot of attention already from Americans in this industry that came to see our two-way HFC technology; it’s won a lot of praise. We can build the related infrastructure for two-way HFC networks; our labor costs are low – it’s an advantage for us. But I want to stress the importance of the advantage of this type of network. Just in the last several months, we’ve done projects in this market, and it’s been well-received by consumers.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.