1

Building Asia’s InformationInfrastructure:

A Business Perspective onChina’s National Experience

Dan BrodyManaging Director

US Information Technology Office

2

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USITO Parent Associations

• American Electronics Association• Computer Systems Policy Project• Information Technology Industry Council• Semiconductor Industry Association• Software & Information Industry Association• Telecommunications Industry Association

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USITO Members 2001

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4

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Agenda

• Why Asia? Why China?½ The importance of Asia & China to the IT industry

• China’s policy & economy½Overall – Foreign Trade, FDI, GDP structure½ IT Manufacturing½ Telecom

• Future½E-government½R&D½ IPR½People

5

5

$VLD�3DFLILF�WR�*URZ�IURP�����WR�����RI�

:RUOGZLGH�,7�6SHQGLQJ�E\�����

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999 2000 2001 2002 2003 2004 2005

United States Canada Latin America Western Europe

Central and Eastern Europe Japan Asia/Pacific Rest of World

Source: Gartner

6

6

&KLQD�WR�3DVV�*HUPDQ\��8.�WR�%HFRPH�:RUOGV�7KLUG�/DUJHVW�

,7�6SHQGHU�E\�����

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1998 1999 2000 2001 2002 2003 2004

United States Japan German UK China France

Brazil Canada Australia India Taiwan Hong Kong

Source: Gartner

3

7

7

0

10

20

30

40

50

60

70

1999 2000 2001 2002

Americas Europe Japan Asia Pacific

$/Billions

Source: SIA Spring 2002 Forecast

Regional Semiconductor Consumption

Chips: Asia Pacific Leads

14% Decline

3.5% Decline

1.7% Decline

27% Growth

Forecast

8

8

Asian Foundries Rising

Source: Semicon Research

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China’s Economy

• Population: ~1.3 billion• Economy: ~$1 trillion• Foreign trade: ~$475 billion½Electronics $109 billion (22.9%)

• Foreign investment½Contracted $700 billion½Utilized $350 billion½Foreign invested enterprises (FIEs) 370,000

• Structure½Agriculture down, Industry up, Services steady½ ICT increasing rapidly as a %age of GDP

4

10

10

World Top 10 Traders in 2000

0

500

1000

1500

2000

2500

Total Trade Import Export

US 15.9%Germany 8.2%Japan 6.7%England 4.9%France 4.7%Canada 4.1%China 3.7%Italy 3.7%Hong Kong 3.3%Holland 3.2%

Source: IMF, 2000

Country and %age of world trade

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Structure of China’s Foreign Trade

By trading partner½Asia 58%�Japan 18%, HK 11%

½Europe 18%½US 16%

By province½Guangdong 37%½Shanghai 12%½Jiangsu 10%

By type of enterprise½FIEs 50%�Contractual JVs 4%�Equity JVs 22%�WFOEs 24%

By type of trade½Processing 49%½Normal 43%

Source: MOFTEC White Paper 2001

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Distribution of Chinese Manufactured Exports as Percent of Total Exports1985-1999

-

10

20

30

40

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Per

cen

t

Clothing, Footware and Toys

Machines and Transport Equipments

5

13

13

Intro: China’s FDI

0

20

40

60

80

100

120

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

(# o

f pro

ject

s)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

(US

D b

illio

ns)

Contractual FDI Utilized FDI Projects

14

14

0%

20%

40%

60%

80%

100%

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

$JULFXOWXUH�'URSV�IURP�����WR�����RI�&KLQDV�*'3�RYHU����

\HDUV���

Tertiary

Secondary

Primary

Source: State Statistical

15

15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000

«7HOHFRP�SOXV�,7�5LVHV�IURP����WR�����RI�&KLQDV�*'3�LQ���

\HDUV

Tertiary - Non-TelecomTertiary - TelecomSecondary - ITSecondary - Non-ITPrimary

Source: State Statistical Bureau

6

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16

• 4% of 2000 GDP, up from 2% in 1995• ~30% CAGR 96-00, same for 00-05

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

(milli

on U

SD

)

Output SalesRevenue

Exports Value Add Profit Tax

+LJK�5HYHQXH��/RZ�0DUJLQV�LQ�&KLQDV�,7�(OHFWURQLFV�

0DQXIDFWXULQJ�6HFWRU���

Foreign Wholly Foreign Ow ned Enterprises

Foreign Equity JVs

Foreign Contractual JVs

Foreign Limited Liability Enterprises

Hong Kong, Macao, and Taiwan enterprises

Chinese enterprises

Source: MII

17

17

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Output SalesRevenue

Expo rts Value Add Profit Tax

���),(V�$5(�&KLQDV�,7�6HFWRU

Foreign Wholly Foreign Owned Enterprises

Foreign Equity JVs

Foreign Contractual JVs

Foreign Limited Liability Enterprises

Hong Kong, Macao, and Taiwan enterprises

Chinese enterprises

Source: MII

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China’s ICT Policy

Informatization Driving Industrializationor

Industrialization Through Informatization

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IT & Telecom, Policy & Market

• IT manufacturing½Policy changes�Socialist Market

Economy• Joint venture

requirements• Technology transfer

requirements• Preferential policies

to attract FDI�WTO Entry

• Remove barriers

½Market effects�Factory of the world

• Telecom Services½ Policy changes�Separate government

and enterprise� Introduce competition�Reduce tariffs

½ Market effects�Capex down�Bandwidth�Broadband

½ Current issues�CNC/AGX�Foreign investment�Universal Service�Broadband

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China PC Market 2002-06

8.0589.569

11.61214.296

17.55

21.228

18.8% 18.8%

21.4%

23.1% 22.8%

21.0%

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006

mill

ion

s o

f P

Cs

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

An

nu

al G

row

th

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China Computer-Related Markets2002-06

1.9 2.2 2.6 3 3.4

6.3

7.6

9.4

11.5

14

4.3

5.5

7.1

9.1

11.6

2002 2003 2004 2005 2006

US

D b

illio

ns

Servers Peripherals Software

8

22

22

&KLQDV�,7�3URGXFWLRQ�6KLIWLQJ�7R�+LJKHU�(QG

0

20

40

60

80

100

120

1999 2000 2001

(milli

ons

of u

nits

)

Cellphone

Sw itches

Color TV

PC

Monitor

IC (100 million)

Source: MII

Shift to High-End Manufacturing

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China’s Telecom Sector

• Mobile phone users 190 million, 1st in world½4-5 million new cellular users/month

• Fixed phone users 207 million• Telecom services ~$45bn annual revenue• Year to date by the end of September 2002½ Telecom revenue: $4.3 Billion½ Investment: $11.6 Billion½Switching capacity: 214.5M Lines½Mobile capacity: 259.1M Lines½ Total teledensity: 31.99%½Cellphone Density: 14.95%

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China’s Telecom User Growth

0

50

100

150

200

250

300

350

400

mill

ion

s o

f u

ser

s

Mobile 21 24 27 34 38 43 50 59 65 85 100 110 131 145 162 176 190

Fixed 82 87 93 99 103 109 118 127 135 144 155 160 172 179 189 199 207

Q398

Q498

Q199

Q299

Q399

Q499

Q100

Q200

Q300

Q400

Q101

Q201

Q301

Q401

Q102

Q202

Q302

2002205m

ProjectedMobileUsers

2003270m

2004320m

2005380m

2006415m

Source: MII, CCID

9

25

25

China’s Telecom Revenue

0%

20%

40%

60%

80%

100%

Railcom 0.1 0.1

Jitong 0.1

Netcom (CNC) 0.1 18.2

ChinaSat 0.1 0.1

China Mobile 38.0 38.1

China Unicom 10.3 10.3

China Telecom 51.2 33.4

2001 2002

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China’s Telecom Capex

$17.00

$25.70

$31.90

$2.30

$6.20

$11.60

$0

$5

$10

$15

$20

$25

$30

$35

US

D b

illio

ns

1999 2000 2001 02Q1YTD

02H1YTD

02Q3YTD

China Mobile $10.16 bn

China Unicom $8.88 bn

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China’s International Bandwidth

0

2000

4000

6000

8000

10000

12000

1997Oct

1998July

1999Jan

1999July

2000Jan

2000July

2001Jan

2001July

2001Oct

2002July

CSNet CGWNet CIETNet CMNet CSTNet

CERNet ChinaGBN UniNet CNCNet ChinaNet

By CountryUS 4023 MHK 749 MJapan 314 MKorea 251 MMacao 14 MAustralia 16 MEngland 0.5 M

10

28

28

0

5,000,000

10,000,000

15,000,000

Ethernet 50,000 2,000,000 3,500,000 6,000,000 10,000,000 15,000,000

ADSL 5,000 300,000 1,200,000 2,500,000 3,500,000 5,000,000

2000 2001 2002 2003 2004 2005

China’s Broadband Deployment

• Predicted 20-25 million BB users 2005• Only Sweden uses Ethernet in OECD• Ban on CATV-telecom convergence

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CNC Int’l Bandwidth Plans 2001

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China’s WTO Commitments

• Telecom

½VAS½Paging½Mobile½Other basic

30% 49% 50%

2002 2003 2004 2005 2006 2007 2008

In and between BJ/SH/GZ

In and between 3 + 14 cities

No geographical restrictions

30% 49% 50%

25% 35% 49% 49%

25% 35% 49%

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E-Government

• Major initiative by PRC government• Leading by example• Informatization does not increase

efficiency, it allows revisions to businessprcesses½ ICT infrastructure is a tool—perhaps a necessary

tool for a knowledge-based economy—but onlya tool

• Difficult policy issue: local goods forgovernment procurement

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China’s R&D Now 1% of GDP

China’s R&D Expenditures (by province, RMB billion)

0

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Prepared by USITO, the US Information Technology Office, in Beijing http://www.usito.org

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IPR

• Of overwhelming importance!½Patents for high tech products, including�Industrial designs�Production process

½Copyright�Software�Content

½Trademarks�Consumer goods

12

34

34

Chips is the only R&D-intensive,capital-intensive industry

Percent ofSemiconductorRevenues(67%)

R&D (14%)

CapitalInvestment(19%)

Source: SIA Annual Databook

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Top 10 U.S. Corporate Patent Recipients2886

1441

1304

1196

1053

901

875

795

787

686

1. International Business Machines Corporation

2. Lucent Technologies, Inc.

3. Micron Technology, Inc.

4. Motorola, Inc.

5. Advanced Micro Devices, Inc.

6. Hewlett-Packard Company

7. Eastman Kodak Company

8. Intel Corporation

9. General Electric Company

10. Texas Instruments, Incorporated

Patents Granted in 2000

“Patenting by Organizations 2000” PTO, March 2001

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People

• Human resources are the key• Brain drain or brain circulation• China’s graduates large in absolute

terms, small in %age terms

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37

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IT Will Keep Increasing Productivity

0

250

500

750

1000

1250

1500

1750

2000

2250

2500

2750

3000

3250

3500

3750

4000

4250

1997 1999 2000 2001 2002 2003 2004 2005

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30

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120

150

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illio

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Costs Microprocesso

r/ASIC Speed

Source: SIA International Technology Roadmap for Semiconductors – 1999/2000Website: http://public.itrs.net