Asustek and Tsinghua Tongfang Tie-up?

Taiwan's China Times has reported rumors (article here) that Asustek and Tsinghua Tongfang may merge in a bid to replicate the success of Acer's alliance with Founder.  If such a merger occurred, the Chinese marketplace that Lenovo relies on would probably become not quite so hospitable.  One more reason to think Lenovo will continue its decline and no longer rank among the major global PC vendors (if measured in something more sensible than just unit sales in China).

Google's Trouble Started at the Top

According to the Guardian's review of Wikileaks' release of US diplomatic cables (link here), a member of the Chinese Politburo ordered hacker attacks on Google after searching his own name on the international version of the search engine and finding articles critical of himself.

Hua Hong over Grace

The always pending but never completed merger of Grace and Hua Hong is a step closer to being realized now that Ulrich Schumacher has stepped down as CEO and President of Grace and Gacre VP and former Hua Hong executive, William Yu Wang, has taken over as President.  It sounds if Schumacher went down fighting as he tried to become CEO of the Grace-Hua Hong JV fab, Huali, before resigning as CEO and President of Grace (link here).  Could the fact that the CEO position is still vacant mean Grace anticipates a full merger with Hua Hong sooner rather than later?

Nonsense Number One

China is now being heralded as the world leader in patent filings (link here), but this world number one reveals very little about China's innovation prowess or lack thereof.  First of all, counting filings (applications) rather than approved patents is rather silly.  Anyone can apply to Harvard Law School.  What is impressive is getting into Harvard Law School.  Second, China is busy filing lots of patents in China where the process of approving patents is lax at best.  If (when?) China overtakes Germany or Japan in patents received from the USPTO or some other respectable patenting office, then and only then should we sit up and take notice.  Third, there are different types of patents representing different levels of innovation.  For example, in the USPTO system, the inherent innovation behind utility patents is all else being equal much higher than that for design patents.

China ends ban on rare earth exports to Japan but damage is already done

In line with many of its other recent foreign policy foibles that have served only to irritate its neighbors and drive them into a closer embrace with the US, China's rare earth export ban directed at Japan was just plain dumb.  It served to heighten everyone's concerns about relying on China so now everyone will look for alternative rare earth suppliers.  On top of that, it heightens the alarm already felt about China's perceived increasing willingness to use its economic leverage to squeeze its trading partners.  And it puts the spotlight on how opaque China's descionmaking process is as there were rumors but no official confirmation of the ban for days.  Lifting the ban (link on lifting here) does not undue this damage.

Foxconn and Retail

Foxconn's public announcement that it will venture into retail has the potential of being a real game changer (link here and here).  With GOME on the ropes due to the arrest of its founder and ensuing succession battle, Foxconn's strategy of building up a rural network based upon setting up its own employees in business has the potential to rival Lenovo's rural distribution arm.  It will be interesting to see if the Chinese state tolerates this gambit.  As much as Taiwanese are considered compatriots when the issue of Taiwan's political status comes up, the Chinese state more often than not treats Taiwanese firms as foreign ones.  This can be good (lower corporate taxes) but also bad (many non-tariff barriers to the "strategic" parts of the domestic market blocking Taiwanese firms).

Acer and Founder

The new tie-up between Acer and Founder looks very interesting (see report).  Acer has always dreamed about being a big player in China's PC market and this may (depending on the details of the agreement) finally push Acer into the top ranks in a market that Lenovo still dominates.

Geography, Inequality and the Renminbi

Yukon Huang in the FT (link here) suggests that a fixed exchange rate will help move factories to the interior and thus reduce China's massive inequality.  Therefore, he is against china appreciating its currency.  But recent research challenges the conventional wisdom that geography accounts for a lot of inequality in China.  Benjamin, Brandt, Giles and Wang (Ch. 18) in China's Great Economic Transformation find that at least half and up to 2/3 of inequality is between "neighbors" within a given locale rather than across locales (city or village). Provincial differences account for even less of the inequality.  Urban-rural differences are also not a major source of overall inequality.  However, they did find that the "dynamics of inequality" are different between interior and coastal provinces with a faster increase of inequality within interior provinces due to faster increases in rural inequality and urban-rural income differential in the interior.  Huang would surely jump on the suggestion Benjamin and his colleagues make that one of the reasons for different dynamics of inequality in the coastal provinces is the stronger job growth in the non-state sector there in order for Huang to claim that such dynamics could be transferred to the interior along with the movement of non-state production to those areas.  The question remains how much the transfer of coastal-style non-state sector job growth would reduce the overall level of inequality.  If such a transfer does not solve a lot of the national inequality it does not seem like a very strong argument against appreciating the renminbi.

Legitimate Concerns on Rare Earth Minerals and Beyond

Paul Denlinger is spot on in calling the ability of Molycorp Minerals to get up and running in order to end America's utter dependence on China for rare earth minerals as a (one might say THE) test case for whether the US is serious about preventing a continuation of China's current near monopoly on these resources (link here).  One might go further and state that this is a test case for the American government's resolve in turning around the severe structural weakness of the American economy more generally (i.e. too much consumption, not enough investment and thus not enough production) amidst an international economy where other major players predicate their economic strategies on American excessive consumption (hello China, Germany and Japan) as former World Bank economist and FT columnist, Martin Wolf, has repeatedly emphasized over the past year or so. Beyond the question of US determination to fix these problems is the specific issue of how quickly the dependence on China for rare earth minerals can be terminated.  Denlinger's states that opening a few mines would end dependence, and this may be true, but opening a few of these mines might take a long time.  The Government Accounting Office suggests it might take up to 15 years to end rare earth mineral dependence on China (link here).

ECFA Mirage

Dan Rosen (link here) and others have praised ECFA as a way to boost Taiwan's economy while others-- and not just members of Taiwan's opposition party, the DPP--have condemned it as a threat to Taiwan's sovereignty. I have always suspected, even after the early harvest lists (which were much more generous to Taiwan than the PRC) were announced, that Taiwan would never be willing to open up significantly enough to fulfill the dreams of good neoliberal economists or realize the fears of Taiwanese nationalists. Yesterday's Economic Daily News has an interesting editorial that adds some support to my suspicions. The piece spells out very clearly the KMT government's own reluctance to open up in any significant way despite the PRC's expectations to the contrary.

Google: In or Out?

After issuing threats to leave China in January, Google became vulnerable to poaching of its key staff from other IT firms, particularly the foreign ones with large Beijing R&D centers e.g. Microsoft. As the disagreement with the Chinese government drags into its third month, one might think uncertainty would make things look bleak, but according to a report on Netease internally things have returned to normal according to at least one Google employee and Google appears to be recruiting staff although these vacancies appear to have been existing ones prior to the January quarrel. Advertising is also returning to google.cn so the tea leaves seem to be pointing to Google resolving its outstanding issues with the Chinese government. Happy Lantern Festival， 元宵节快乐！

SMIC: Good news, bad news

It is good news for SMIC's fabs that Simon Yang is back at SMIC as COO, which SMIC announced on February 9. Unfortunately, the board now is completely controlled by directors linked to the government, which was not the case as recently as a year ago. This situation cannot be good for the firm's governance and replicates the situation David N. K. Wang had with the heavy hand of the government when he was CEO of what the government originally promised would be a new improved "market-oriented" Hua Hong. The brand new Year of Tiger (though technically still Feb. 13 i.e. 除夕 here in London) will certainly be a fearsome challenge for SMIC's management.

Today on Beyond Beijing

I appeared on the radio program, Today on Beyond Beijing, with Professor Denis F. Simon to discuss innovation in China on Wednesday morning Beijing time.

The audio file link is here.

AMEC's settlement with Applied Materials

AMEC has reached an out-of-court settlement with Applied over patent infringement (link). While the amount of money AMEC has agreed to paid Applied has not been disclosed, I am tempted to think that this is a victory for AMEC i.e. they remain in business. China clearly is trying to promote its semiconductor capital equipment sector along with its semiconductor fabrication and AMEC is one of the most promising firms in China's semiconductor capital equipment sector. While Taiwan's attempts to leverage its large investment in semiconductor fabrication to enter the capital equipment sector (including lots of pressure on Applied according to insiders I've talked to) failed, China given its scale may be more successful. Of course, China's tendency to botch its industrial policy may work against realizing these dreams, but one day we might look back at this settlement as the beginning of the rise of China's semiconductor capital equipment industry.

Taiwan's other FTAs nixed

It appeared yesterday that Wang Yi from the PRC's Taiwan Affairs Office had signalled a major breakthrough in stating that China would not stand in the way of Taiwan signing FTAs with other regional economies. Unfortunately, today the Taiwan Affairs Office clarified that Wang had been misquoted (link). China clearly still wants an ECFA between Taiwan and itself before it will sanction Taiwan pursuing trade agreements with other regional economies. Of course, this ECFA looks less and less likely to happen given the push back from Taiwan's electorate.