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 THE STORY OF CHINA'S involvement with the outside world was a simple one when I first started covering China in 1979-it was called the Canton Trade Fair. This annual trading event in the city, since renamed Guangzhou, was almost the sole point of contact between China and Western companies.
Now, of course, China has exploded economically; its engagement with the world has mushroomed. The Severe Acute Respiratory Syndrome epidemic didn't halt China in its tracks any more than diplomatic flaps over U.S. spy planes or tensions on the Korean peninsula have.
In this regional report, Chief Executive presents three snapshots of foreign involvement on the mainland. They show that in some ways, China's technology base has become quite sophisticated. American companies can definitely make money if they play their hands carefully. But over the long term, there may be limitations on how fast China can emerge, partly because it will take time to develop the skills it requires to build a world-class economy.
-William J. Holstein
The eBay of China: Eachnet
A Shanghai online auction firm set out to imitate eBay. In June, eBay bought it.
BY REBECCA FANNIN
 From his 25th-floor corner office overlooking Nanjing Road's famous neon-lit shopping malls and fanciful skyscrapers, Bo Shao runs an online auction business that could someday outpace even its role model, eBay. "If we realize our dream, we could have the biggest online trading marketplace, period," says Shao, 29, chairman and CEO of Eachnet, which was founded in Shanghai four years ago.
Maybe that's a bit of an exaggeration, but he is on to something. At Eachnet, some 140 employees-who are all shareholders-sit in rows of cubicles decorated with stuffed teddy bears, posters, stamps and other favored top sellers on the site. It looks a lot like the setup at the eBay corporate campus in San Jose, even down to the primary color scheme of the logo. Cell phones ring intermittently with irritating musical themes and managers pop into Shao's office to chat about the next project meeting. The mood is upbeat, fun and productive-like at eBay, but with some Chinese flavors.
Eachnet is likely to look a lot more like eBay now that eBay owns the Chinese company. In June, eBay plunked down $150 million to complete the acquisition, having paid $30 million in March 2002 for a 33 percent chunk of the company. The transaction is expected to close during the third quarter of this year.
International growth is hot at eBay. International revenues climbed by 173 percent, to $356.5 million, last year, outpacing overall growth of 62 percent, to $1.2 billion. Of the 26 markets that eBay has entered over the past three years, China is the one that seems paramount. CEO Meg Whitman served on Eachnet's board before making the acquisition and travels to Shanghai regularly.
Who would think that an American Internet-based company could find a market in China? But Chinese consumers are eagerly snatching up computers, cell phones, fashions and even cars and Western-style villas as the country's middle-class population swells beyond 100 million. Dimly lit Internet cafes in the bustling cities of Shanghai, Beijing and Shenzhen are packed with young chain-smokers, checking their email, playing interactive games and shopping online. Currently numbering 48 million, online Chinese users should grow to 200 million within five years, according to research group International Data Corp.
 Currently, Eachnet has 4 million users in China-a fraction of eBay's 62 million in the U.S.-but that 4 million gives it a commanding 85 percent market share of online auctions in China, Shao says. Revenues are growing at the rate of 10 times per year, he adds, and are estimated by IDC at $1.8 million.
Eachnet is growing fast because it offers a convenient shopping option not often found in China. Shopping in China is done mostly at the thousands of mom-and-pop stores that line dusty rural streets and Shanghai alleyways rather than in vast shopping malls common to the U.S. While Shanghai does have fashionable malls with clothing and cosmetics boutiques, these tend to be in trendy, touristy areas. There are few general merchandise stores like Wal-Mart.
Because the retail business is so cutthroat in the U.S., eBay does not bother trying to compete with retailers but rather specializes in surplus inventory, hard-to-find items and used or outdated merchandise. With only limited retailing competition so far in the few fashionable malls that have sprung up in major coastal cities, Eachnet offers a far broader mix of goods on its site. It is a virtual one-stop shopping marketplace for clothes, computers, cell phones and other goods.
Even though the promise is there, it would be comforting to know that Eachnet is profitable. It isn't yet. Shao, an optimist like most entrepreneurs, declines to give a timetable for reaching profitability. He says his focus is on steady, high growth. "The bigger the fruit, the higher you have to climb," he says, referring to the challenges and opportunities that Eachnet faces.
Certainly Shao has achieved things far beyond his dreams when he returned to China and started his own business after earning a Harvard MBA and working at Boston Consulting Group. Convinced by some research he had done for a client that a business like eBay would work in China, he raised $400,000 from friends to start Eachnet in August 1999. He later picked up $27 million in two rounds of venture capital financing. "It's humbling to see the deep knowledge and understanding that eBay brings to the online auction business," says Brian Doyle, a partner at Provident Capital Management in Hong Kong and one of the original venture capitalists behind Eachnet. "The eBay model works well in China."
Shao acknowledges he has learned a lot from eBay and says he regularly adapts parts of the eBay business model that he thinks "might work in China." Like eBay, Eachnet charges sellers a small fee to list items and a separate fee once the transaction is complete (although Eachnet initially offered its services for free for fear of driving off China's cost-conscious consumers). Eachnet also has copied eBay's seller feedback program, where buyers rate sellers on product quality, order processing and delivery. Other similar features include the ability to conduct trades at fixed prices, rather than through bids. Shao proudly says Eachnet introduced fixed-price trading before eBay.
But Shao has had to customize other parts of eBay's business strategy because they just wouldn't work in China. For instance, payment couldn't be arranged by credit card like it is with eBay because most Chinese don't trust plastic as a secure form of payment. Registration of sellers also couldn't be done with credit cards like it is in the United States. And when Eachnet started, the postal service couldn't be relied on. The company worked through each of these obstacles.
In the past, buyers and sellers met personally at designated city centers and exchanged goods for cash. Today, most transactions are handled by wire transfers through the postal savings bank, and trades can take place between cities. And an improved Chinese postal service is now used for deliveries that take a standard two to three days. To solve the registration process for sellers on the site, Eachnet used national identity cards instead of credit cards for confirmation. For Meg Whitman and eBay, these are valuable lessons for cracking a potentially huge online marketplace.
Sealed Air Quietly Builds
The company took a careful step-by-step approach to build a profitable presence.
BY WILLIAM J. HOLSTEIN
 You can tell that Bill Hickey, CEO of Sealed Air, has spent a lot of time in China-he understands how the Chinese think about food. "Very early in my career, one Chinese employee was trying to explain why his people eat chicken feet," Hickey recalls. His employee explained: "You Westerners ask, €˜What kind of animal is it?' We Chinese ask, €˜How do we eat it?'"
You can also tell that Hickey has spent time in China because he knows how to make money there. Over the past decade, Sealed Air, based in Saddle Brook, N.J., has built a $30 million-a-year portfolio of businesses in Greater China. They've identified two major markets: packaging for goods that China exports and plastic wrap for all that Chinese food, which is often handled in primitive outdoor markets. As Chinese consumers buy more of their food in stores and even supermarkets, it is wrapped in Sealed Air plastic.
In addition to identifying market niches, Hickey and his China team have employed a step-by-step strategy rather than taking the plunge with billion-dollar-plus investments, as Motorola and General Motors have done. Sealed Air has two wholly owned packaging factories in Shanghai and Guangdong and a joint venture in Guangdong that makes plastic wrap. The joint venture is with a local municipality, and over time Sealed Air has increased its stake to 90 percent.
The company manages all this activity from Hong Kong, to take advantage of the former British colony's legal infrastructure and higher standard of living. When Sealed Air's operations on the mainland need a technologically sensitive component, the company ships it in from its plants in either Malaysia or Australia. That way, it doesn't have to worry about having its intellectual property misappropriated. "We're generally moving the previous generation of technology into the market, not the most recent," Hickey explains.
Add it all up and the company has different product lines in different parts of the country, with different ownership structures. Some products are intended for local consumption, others for export. By blending in offshore capabilities, Sealed Air has insulated itself from nasty surprises. Sales grew by 14 percent in the first quarter of this year. "We've made simultaneous landings in different parts of the country," Hickey says. "Some of my fellow CEOs took the €˜build it and they will come' approach. That's a mistake."
Another interesting twist is that Sealed Air-so called because it was the company that invented bubble wrap as a kind of wallpaper in 1960-doesn't employ any Americans on the ground in China. A Chinese-American runs the Southeast Asian region, which includes China, but he's based in Hong Kong.
China still represents less than 1 percent of Sealed Air's $3.2 billion in total sales, but Hickey says its operations on the mainland are profitable and it has been able to convert the local currency of reminbi to dollars. And clearly, the fundamentals are in place for many years of continued growth in sales and profits. "It's the same model we've followed around the world," says Hickey, whose company sells 45 percent of its products outside the United States. "We go step by step: build it, expand it and develop people along the way."
He acknowledges that the company has had "more than one" problem with its China operations. One has been high turnover of people because the Chinese are not as loyal to companies as Americans might be. Another was the discovery of dishonest employees, all of whom were terminated. The West Coast port strike also interfered with exports, as did the SARS epidemic.
But because of Sealed Air's limited investment risk, it's unlikely that a single problem will derail its China operations. "As the population of 1.3 billion moves along the path toward getting richer, we think we can build a very substantial business," Hickey says.
That kind of long-term perspective is essential for any CEO trying to fathom China. Since Deng Xiaoping opened China's doors to the world in 1978 and proclaimed that it was all right to "get rich," the Chinese have been barreling down the path of economic development. The Communist ideology has been swept aside and it's difficult to imagine a single event that could halt China's emergence.
That's what Hickey concluded about the SARS outbreak. The company allowed its Taiwanese manager in Shanghai to return to Taiwan, but otherwise kept doing business as best it could. The SARS epidemic "might take some basis points off of China's economic growth rate," he says. "But will it ultimately slow down the Chinese quest to get rich? Not a chance."
A Future in High-Tech
Opening a computer chip plant in China teaches many lessons. Ask Richard Chang.
BY REBECCA FANNIN
 The busy Huangpu River in Shanghai serves as a delineation point for this bustling city of 14 million people. On one bank is the Bund and its long boulevard of buildings with European architecture from the colonial era. On the other is The Grand Hyatt, a silver sheen that is the world's tallest hotel, the landmark Pearl of the Orient TV Tower and high-rise apartment buildings. This is the Pudong zone. Heading further east, construction cranes, honking cabs and careening bicycles are everywhere before the landscape opens up to marshy plains and canals, and farther out, numerous high-tech industrial parks.
One of the larger high-tech parks in Pudong is Zhangjiang. Here, glistening new semiconductor plants have begun producing chips for computers, cell phones and consumer electronic products. Zhangjiang is being compared more and more to Taiwan's acclaimed Hsinchu Science-Based Industrial Park, as China's fledgling semiconductor business attempts to emerge as a rival to Taiwan.
A sign at the gate of one such plant, Semiconductor Manufacturing Industrial Corp. (SMIC), reflects this burning ambition. Big, bold letters spell out in English, "We're Your Foundry in China."
In the executive suite, CEO Richard Chang, whose family fled the mainland for Taiwan when he was a child, shuffles around in sneakers meant only to be worn inside the buildings.
Chang brings 20 years of experience in developing and operating semiconductor foundries worldwide. Yet he's surprisingly humble and gracious as he describes a business strategy for SMIC. The business plan could just as well have come from Silicon Valley in its heyday: Start with a vision for transforming a marketplace, expand rapidly and capture market share, become profitable, go public, pay off investors with large returns and reward the employees who own stock.
The scale of this project is one major difference. SMIC has financial backing of $1.5 billion from foreign investors, including Goldman Sachs, Toshiba and several venture capital firms in Asia and the U.S. "When Richard came to us, he had a piece of land, a dream, a vision and a commitment by the Chinese government to turn Zhangjiang into a science park because they had seen what semiconductors had done for Taiwan," says David Chao, Hong Kong-based vice president at Goldman Sachs, the lead investor in SMIC.
Chao says Goldman "got comfortable" with the deal after eight to 10 months of due diligence, which proved the need for more advanced chipmakers in China. Chang's background, including experience building foundries worldwide for Texas Instruments and the successful sale of his own Taiwanese chip-making startup for $515 million in 1999, were also major factors. Chao says that once SMIC goes public, Goldman Sachs expects to earn a return that is double its $50 million investment.
Chang, a devout Christian who says he sought God's blessing for this project, is working all his waking hours except Sunday morning. This is the first time he's been involved in setting up a chip plant in China and he admits that it's been a lot harder than he could have imagined.
One hiccup occurred when customs officials held up the arrival of his chip-making equipment for several weeks.
But the most difficult challenge he's faced, he says, is training SMIC's 3,100 employees, who have been recruited mostly from China. Chang says he has been forced to hire more overseas engineers-up from 400 originally to 850 today-to make up for shortcomings among local hires. One issue is their skills, but another is their attitude toward work. The task of the overseas staff is not only to design the latest chips but also for each of them to train two young Chinese engineers. The mainlanders get lessons in technical skills and what Chang regards as a must: character-building exercises meant to inspire teamwork, ethical behavior and creativity. Chang says SMIC "is overcoming the challenges one by one."
The first of Chang's two chip-making plants in Zhangjiang was constructed in a record 13 months and was cranking out the tiny integrated circuits by September 2001. A second foundry began operating three months later, and in September 2002, the company cleared ground for another plant in Beijing. Last year, SMIC had $80 million in revenues and is aiming for revenues of $360 million this year.
SMIC needs to reach break-even, which Chang predicts will happen this year despite weak worldwide demand for semiconductors. But the going could actually get tougher in one key respect: Competition has been slim. Of some 30 foundries in China today, only four use advanced technology, and SMIC has two of those foundries. Motorola and NEC have the remaining two.
But by 2005, Chang expects to see at least 10 more advanced foundries, driven in part by the arrival of the major Taiwanese chipmakers starting later this year. That could alter the dynamics of the market, throwing a another potential curveball at SMIC. "Doing business in China, if you do it right, is very profitable," says Chang. "But it requires patience, trust, time, training, government support-and many lessons." | 
The eBay of China: Eachnet
