Diversity and design are new watchwords

Wei Xin, chairman of number two Chinese PC company Founder, speaks with what sounds like nostalgia of the time less than a decade ago when PC sales in China generated gross profits of up to 30 per cent.

Those days are long gone. Margins are less than a third of the level of the late 1990s, where the market was still hedged about by bureaucratic restrictions. And net returns are now often less than 2 per cent, Prof Wei says.

“The problem is profit... The net profit is very, very thin.”

The problem is hardly unique to Founder. Chinese market leader Lenovo has already responded to the challenge in spectacular style but buying the global PC business of US icon IBM for US$1.75bn, a deal it hopes will widen margins through economies of scale.

Prof Wei, a soft-spoken academic from elite Peking University – Founder’s ultimate parent – is taking a much more low-key approach. The group has already quietly moved to establish itself in more lucrative market segments with a circuitboard plant in south China’s Zhuhai city that the chairman says is generating net profits of 15-28 per cent.

But potentially the most significant shift in strategy is Founder’s effort to become a producer of computer chips through anotherventure, Shenzhen Microelectronics.

Prof Wei is already preparing a push into the even higher-margin business of designing integrated circuits, with a proposed venture that he hopes to staff with Chinese currently working or studying in the US.

“In the past Chinese companies could not offer high salaries to compete with US companies, but now we can,” he says. “We can offer salaries, houses, cars and good working environments.”

Founder’s plans reflect a widespread view that China is set to become an important base for the chip design business.

Government support and the establishment of a handful of “foundry” contract chipmakers has encouraged the creation of hundreds of small design houses. Few have yet made much market impact, however, and executives say the industry is still in its early days.

Mr Wei is under no illusion that Founder is ready to take on the titans of the global semiconductor sector in anything other than carefully chosen niches.

“I don’t think Founder can compete with Intel... but Intel cannot cover every area and that is the opportunity for Founder,” he says.

Founder is relatively well placed to push into new areas. PCs are the group’s most high-profile business, but account for just Rmb6bn of its Rmb22bn in 2004 revenues. Much of its income comes from other IT products such as Chinese type-setting software or from its medical products and services arm. The group even has its own steel plant.

Such a diverse set of operations will carry its own future management challenges, but for the moment it gives Founder a substantial base from which to try new things.

And, while his heart is clearly elsewhere, Prof Wei is not ready to give up completely on PCs. With the completion of a new production base in the eastern city of Suzhou, he says, Founder’s PC production capacity will actually soar to 9m units a year from the current 3m.

Aside from providing turnover, keeping the business is justified by the possibility that new technologies might allow PCs to evolve in ways that make them a rewarding product once more, Prof Wei says.

“If you can give the customers very good PC application...maybe you will still have opportunities,” he says.

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