Walt Strickler
Senior Business Manager
Keithley Instruments
Cleveland, Ohio

The booming electronics industry in China beckons Western test-equipment suppliers. But doing business in China is not as simple as sending catalogsand a sales force, then waiting for orders to pour in. Chinese and Western business practices differ, especially in the test industry, and Western companies trying to do business there must be aware of these differences.

The biggest competitive advantage China has in the global marketplace is low-cost production, and they pay extraordinary attention to keeping tight hold on that advantage. They will maintain it in ways they feel are best for them, and are not wedded to Western approaches to cost cutting. For example, the Chinese do not automatically embrace automation. They will use it where appropriate, but automation has little value as a labor-saving strategy because Chinese labor costs are low and unemployment is rising. The Chinese People's Daily on March 7, 2004 reported that the government's urban unemployment targets increased to 4.7% in 2004, and there are widely publicized estimates that the true rate of unemployment is 10%, perhaps greater. This large pool of underutilized labor helps keep wages down, so there is little incentive to replace workers with automated equipment.

For equipment suppliers to succeed in China, it is more important to emphasize ease of operation, application support, and total cost of ownership, all with a view to lower costs.

Several years ago, Chinese companies routinely manufactured products designed by Western companies. In those situations, Chinese plant engineers had little input into methods or procedures, as they were asked only to replicate processes developed elsewhere. Today, as skill levels and experience of Chinese engineers grow, their influence over test strategies and choice of test equipment is growing as well. For example, with 40% of the world's new phones being made in China, Chinese engineers are on the front lines of production and well positioned to reduce wireless test costs.

TESTING IN CHINA

Test-equipment suppliers find Chinese-customers need more application support than others because their companies tend to lack engineering and test expertise in many areas. A factory that last week was turning out computers or cordless phones may now be asked to build mobile phones. Managers and engineers running the factory aren't likely to be well versed in this new segment and need vendors that can describe why particular tests are needed and, most importantly, how they will lower costs. At the same time, the Chinese view this level of customer service as a “given,” and they pressure equipment vendors to provide extensive support at low or no cost.

With test costs as a driver, the Chinese seek out equipment that offers only features they truly need. Superfluous bells and whistles have little or no attraction. Chinese manufacturers may initially perform the same number of tests as their Western counterparts but are more likely to scrutinize the need for each test and the level of test resolution others might use just because it was always done in the past. In keeping with their focus on keeping costs down, Chinese contract manufacturers tend to have accurate cost-of-test data and closely monitor how long each device is in a test fixture. For test-equipment providers, it's important to provide equipment that is more sensitive, more accurate, or more consistency, so users can tighten up tolerances, increase yields, and reduce test costs.

TESTING AND THE WIRELESS MARKET

When mobile-phone production first moved to China, it was simply an extension of a company based elsewhere in the world. Designs and prototypes were put together at the parent facility, where test methods were also dictated. In fact, in many cases, Chinese workers were not even given access to source code as a way to control changes. Moreover, technologies in production lines that were relocated in China were mature and required few changes. However, as more manufacturing moved to China and local expertise grew, more responsibility and autonomy has been given to Chinese factories.

For mobile and wireless devices, test costs constitute a larger portion of overall manufacturing cost than they do for other types of electronics. One hundred percent of mobile phones are tested to ensure regulatory and standard compliance, while many other consumer electronic products are merely sample tested.

Because the Chinese are relatively new to mobile-phone manufacturing, they look at testing with a fresh perspective. Their willingness to embrace costeffectivetesting can be a competitive advantage-for them. Many Western phone manufacturers have large capital and intellectual investments in existing methods and many have made significant cuts in test-engineering departments, all of which can make them more resistant to change. That's not the case with the Chinese, who seek out only test methods that work best for them.

The rapid shrinking of product life cycles from 12 months to as few as three is also aiding the push to more local design in China. At the same time, worldwide sales of mobile phones totaled 520 million units last year, a 20.5% jump from 2002, according to Gartner Inc. The number of Chinese mobile phone users is estimated at about 250 million and expected to increase to 500 million by 2007. With such a large domestic market and the higher costs of dealing with ultrashort life cycles, one can expect more and more design to move to China.

China has a mix of mobile phone technologies, with AMPS, TACS, GSM and TDMA all in use. Third-generation wireless is just beginning to spread there, and three standards — WCDMA, CDMA2000, and the Chinese-developed TD-SCDMA — are vying for dominance in a market where as recently as last March, no 3G licenses had been issued.

The Chinese view WCDMA as a “ European” standard, CDMA-2000 as an “American” one, and TD-SCDMA as “Chinese.” The Chinese Ministry of Information Industry indicates it will issue four 3G licenses to Chinese wireless service providers and let each Chinese telecommunications company choose its own standard. But most industry observers believe pressure will be exerted on at least one operator to go with the Chinese TD standard. Aside from national pride, use of TD would spare Chinese telecom operators from paying for foreign standards and technology, according to a report in the People's Daily. It has been reported that several Chinese vendors will introduce commercial TD phones before midyear, and several European companies have shown interest, including Siemens, which entered into a $100 million joint venture last fall with Huawei for R&D, manufacturing, and sales of TD phones.

TD's major advantage is that it provides more capacity for densely populatedareas than other standards, and has more density than GSM. Yet while TD is best in terms of user density, it is the worst from a test-complexity standpoint because it combines CDMA's code-domain access with time slots. It would mean both timing and power must be controlled simultaneously. Some people feel it goes against China's competitive advantage in labor because TD requires that vendors develop new test equipment without economies of scale. Because TD is new and complex, vendors need to develop TD test equipment. But the costs would be amortized over a small group of users as TD is slowly rolled out, thus keeping prices high. GSM and CDMA, conversely, are used in hundreds of millions of devices and can take advantage of mass-production savings. On the other hand, China may be banking on the sheer size of its market to make this happen. How the standardization picture turns out obviously has important implications for equipment vendors.

As mentioned before, Chinese business practices differ from those of the West. Establishing relationships with people and organizations are much more important than they are here. Building relationships takes time and effort, but they have their rewards. Having established rapport with one Chinese company often opens the door to others, as word spreads. But this can be a two-edged sword. It is a bad idea to treat one customer or supplier better than another, or offer one a special deal, because there is no secrecy in these matters. Give preference to one, and you risk alienating others, or at least causing them all to demand similar treatment.

China represents a great opportunity for Western test-equipment makers and others, but it's vital to remember that success in China depends on understanding the Chinese approach to testing and to doing business in general.

COMPANY (Standard)
LOCATION
TECHNOLOGY SOURCES
INVESTORS
Alcatel (GSM)
Suzhou, Jiangsu province
Alcatel
Amoisonic (GSM/GPRS)
Xiamen, Fujian province
Capitel Group (GSM, CDMA)
Beijing
Agere Systems, Qualcomm, TI
Nokia
Chabridge (GSM)
Xiamen, Fujian province

Chinese Electronics Corp.
Telecom (Chinese only) (GSM/GPRS,CDMA)

Beijing
Qualcomm
Dalian Daxian (CDMA)
Dalian, Liaoning province
Qualcomm
Datang Telecom Technology (CDMA)
Beijing
Qualcomm
Dbtel Technology (GSM)
Shanghai and Tianjin
Dbtel Technology
Eastcom (GSM/GPRS, CDMA)
Hangzhou, Zhejiang province
Motorola, Agere Systems, Qualcomm
Motorola
Ericsson Beijing (GSM)
Beijing
Sold its stake in Ericsson Nanjing to Nanjin Panda
Haier (GSM, CDMA)
Qingdao, Shandong province
Philips, Motorola, Qualcomm, Sando
Hisense (GSM, CDMA)
Qingdao, Shandong province
Qualcomm
(CDMA) Hitachi
Kejikan (Chineseonly) (GSM, CDMA)
Shenzhen, Guangdong province
Samsung Electronics, Wavecom, CommQuest, Chinese Academy of Science
Samsung Electronics
Konka
(GSM/GPRS, CDMA)
Guangdong province
Agere Systems, Qualcomm Compal Communications, Arima Communication, Pantech & Curitel, Telson Electronics
LangChao (CDMA)
Jinan, Shandong province
Qualcomm
Legend/Xoceco joint venture (GSM/GPRS, CDMA)
Xiamen, Fujian province
Qualcomm Arima Communication
Mitsubishi Beijing (Chineseonly) (GSM)
Beijing
Motorola (GSM, CDMA)
Tianjin
NEC Wuhan (GSM)
Wuhan, Hubei province
Ningbo Bird (GSM/GPRS, CDMA)
Ningbo, Zhejiang province
Siemens, Qualcomm BenQ, Quanta Computer
Nokia Beijing (GSM/CDMA (2H2003)
Beijing
Nokia Dongguan (GSM)
Dongguam, Guangdong province
Joint venture between Nokia and Dangguan Nanshin
Panasonic Beijing (Chineseonly) (GSM)
Beijing
China Putian Corp., Panasonic
Panda Electronics Group (GSM)
Nanjing province
Ericsson
Micocell, a Finnish handset designer, bought part of Ericsson's stake in Panda
Putian (GSM, CDMA)
Beijing
Samsung Electronics (GSM, CDMA)
Tianjin and Guangzhou province
Samsung Electronics
Sanyo (CDMA)
Tianjin
Qualcomm
Shenzhen Sed Electronics Corp. (GSM)
Shenzhen, Guangdong province
Siemens (GSM)
Shanghai
Shanghai (-)
Shanghai Mobile, Shanghai FRI, Telecom R&D General Corp.
Sony Beijing (GSM)
Beijing
Sony
Soutec (GSM, CDMA)
Guangzhou, Guangdong province
Motorola, Qualcomm
TCL (GSM/GPRS, CMDA)
Huizhou, Guangdong province
Qualcomm, Wavecom
Telsda (GSM)
Shenzhen, Guangdong province
Top Group (GSM)
Chengdu, Sichuan province
Zhenhua (CDMA)
Guizhou province
Qualcomm
ZTE (GSM/GPRS, CDMA, PCS)
Shenzhen, Guangdong province
Qualcomm, Samsung, Commquest
Qualcomm, Samsung, CommQuest