A landmark move for China Inc.
IBM's sale of its PC unit to a Chinese firm is the latest sign that a new giant is rising.
OAKLAND, CALIF. — In a moment on Wednesday, the gathering might of the Chinese economy became as imposing and obvious as the Great Wall. This was no economic forecast - no set of percentages and decimal points that hinted obliquely at the power that 1.3 billion shoppers could someday wield. This was news that a Chinese company had agreed to buy one of the most venerable product lines in the history of American technology: IBM's PC business.
The deal, announced in Beijing, evokes images of the 1980s, when Japan swept through the American marketplace in sorties of Sony TVs, turning homegrown companies like Zenith into free-market flotsam. Indeed, in coming years, a tide of Chinese cellphones and refrigerators could find their way into American homes. Yet China Inc. goes beyond that.
The IBM deal symbolizes one of the first waymarks of the new economic order, as China not only adds innovation to its well established assembly-line ethic, but also opens its borders to the global marketplace with an eagerness - and a population - that Japan could never match.
And while the upshot is not likely to lead to the collapse of the American business machine, it does point to the seemingly inevitable rise of a challenger to the economic hegemony America has enjoyed for nearly a century.
"It's still ramping up ... but China is already the greatest engine of growth and the greatest agent of change in the world," says Donald Straszheim of Straszheim Global Advisors in Los Angeles. "It's going to have a lot more heft, and Americans will have to get used to it."
It is already taking some adjusting. China's construction boom has created a worldwide shortage of materials such as concrete and plywood, driving up the cost of housing construction across America. Preparations for the 2008 Olympics have exacerbated worldwide steel shortfalls. And analysts suggest rising Chinese consumption of gasoline has played a significant role in $2-per-gallon gas.
The impact of Chinese tech firm Lenovo's bid to buy IBM's PC division, however, is more symbolic. Unlike the 1980s, when Japan swooped in to snatch the lucrative consumer electronics market from American corporations, Lenovo is merely taking a business that IBM is eager to offload. In the $1.75 billion deal, IBM may actually gain ground in the Chinese market through partnership: It will hold a 19 percent stake in Lenovo, and one of its top managers will become Lenovo's chief executive. And, to some analysts, it's not losing much. By today's standards, the personal-computer market is Stone Age stuff, with prospects of only modest profits in the US. IBM plans to focus on more profitable software and consulting ventures.
Yet the deal should put the world on notice. China might not be buying Rockefeller Center just yet, but its businesses are at last looking beyond their own borders (Lenovo plans to move its headquarters to New York). "It's an example of the kind of mergers and acquisitions were going to see more of," says Mr. Straszheim. "China will be buying brands to buy reach, to buy marketing, and to buy managerial experience, which they don't have."
It represents the maturing of China's economy. Like Japan, Korea, and Taiwan before it, China is starting to move from the labor-intensive assembly industry that so long defined it into greater innovation and product design. One Chinese refrigerator company has already moved into a $14.5 million building on Broadway in midtown Manhattan with plans to hit $1 billion in sales in the Americas by next year. And the IBM deal gives Lenovo access to the computer giant's technology and expertise. "[Lenovo] will use that to fuel innovations in their own product," says Simon Yates, a tech-industry analyst at Forrester Research in Cambridge, Mass. "In 20 years, Lenovo might have the sort of brand attachment as Dell or HP."
Others agree that the Chinese wave might not be imminent, but the Lenovo bid suggests it is not far off, and it could effect everything from mobile phones to automobiles. "In five years' time, China will become the source of some innovation in the high-tech sector," says Dieter Ernst of the East-West Center in Honolulu, a research center that studies Asian Pacific nations. "We've got to get accustomed to the idea of having an innovative China in addition to Japan, Korea, and Taiwan. The dynamics are changing."
Moreover, China's economic influence is bound to be far greater than that of Japan simply because it has opened itself to the world more than Japan did. While Japan effectively erected a force field around its economy, China is turning itself into an international business mall.
Obviously, many products made by American companies are manufactured in China. But China has also shown an appetite for foreign goods, as well. Some 85 percent of the computer chips in the Chinese market come from abroad, for instance. In an economy that has averaged 8 percent growth for the past 25 years, the economic opportunities set off more salivating than Pavlov's bell.
"It's been growing stupendously and it will continue to grow at great rates," says Stephen Cohen, codirector of the Berkeley Roundtable on the International Economy in California.
That's not to say that China is on a primrose path to untold prosperity.
Consider environmental challenges alone: Smog is so thick that it is cutting crop yields. Add to this a centralized government that will increasingly come into conflict with the free-market Frankenstein it has created, and China could face serious problems in the future.
To many analysts, though, China's potential is a glimpse of the United States a century ago - standing on the cusp of a new age of economic influence. What this means for the America of today is unclear. Contrary to the angst that accompanies the rise of an economic competitor, economists generally see a healthy China as a boon to the United States. Prevailing economic theory has long held that flourishing economies are mutually beneficial, with each country naturally specializing in a way that helps itself and others.
Clearly, for all of China's strides, the United States still holds an enormous entrepreneurial advantage as a place with a history of venture capital and innovation. In 2001, for example, American firms filed for more than 87,600 patents; Chinese companies filed for fewer than 200. China has enormous ground to make up, and America's prosperity lies in maintaining this advantage in an era of white-collar outsourcing.