ad info


Asiaweek TIMEASIA.com CNN.com
 > technology
 home
 intelligence
 web features
 magazine archive
 technology
 newsmap
 customer service
 subscribe
 TIMEASIA.COM
 CNN.COM
  east asia
  southeast asia
  south asia
  central asia
  australasia
 BUSINESS
 SPORTS
 SHOWBIZ
 ASIA WEATHER
 ASIA TRAVEL

Other News
TIME.com
TIME Europe
FORTUNE.com
FORTUNE China
MONEY.com
Asiaweek Services
Contact Asiaweek
About Asiaweek
Media Kit
Get up to 3 months of Asiaweek free when you subscribe online!


SEPTEMBER 1 , 2000 VOL. 26 NO. 34 | SEARCH ASIAWEEK


Ricky Wong for Asiaweek.


Suddenly, Profits Matter
A Chinese disk drive maker learns new rules
By ASSIF SHAMEEN

For the last two decades, the business of state-owned enterprises in China has been all about more sales, bigger market share, faster growth, bolder expansion. That makes the situation for Great Wall Technology, the nation's second best-known high-tech manufacturer after Legend Computer, something of a problem. Great Wall has been selling both disk drives and personal computers for more than a decade. The company's sales exploded in the 90s as it supplied a growing list of name-brand computer and disk-drive companies with low-cost product. But suddenly, size matters less than it used to. The true measure of success in post-WTO China will be survival, and that means SOEs like Great Wall had better change their mindset to quality over quantity.

The problem is apparent from just-released half-year financial results. Year-on-year profits fell 20% to $30.3 million in the period even though sales increased 9.6%. Earnings per share declined 37% and would have fallen much more steeply without a one-off gain. Blame the marketplace. Increasingly, the profit margins of disk-drive makers are being squeezed by a growing global supply of cheap units. Disk drives and related components account for about 43% of Great Wall's sales. That is better than four years ago when disk-drive parts made up fully 80% of revenues, but it is still a big proportion. However, because the company has expanded into manufacturing personal computers for itself and, through a joint venture, IBM, Great Wall is more multidimensional than before. Now, PC sales account for one-third of the company's turnover. The remaining one-quarter of sales comes from an assortment of PC peripherals like monitors, power supplies and modems.

For most companies, the response to long-term declining profitability of a key product would be obvious: Stop making that product. But remember that China's SOEs are better at expanding into new markets than shedding old ones. To their credit, Great Wall's managers have devised a comprehensive strategy to remake the company in the image of a cutting-edge Western technology producer by focusing on optical networking equipment. The time is right for such a change because some of the hottest names in global technology are looking for optical parts suppliers, companies such as Nortel, JDS Uniphase and Corning that are challenging the hegemony of Cisco Systems in networking equipment. At 25% to 30%, the margins on parts for such equipment are many times better than on disk drives, and though Great Wall is diving into a highly competitive market, its instincts — and quickness — are good signs.

But the transition won't be easy. Belle Chan, a technology analyst at Salomon Smith Barney in Hong Kong, says Great Wall's management has traditionally been more reactive than proactive, at least compared to Legend, the No. 1 computer maker in China by a wide margin. She notes: "However, Great Wall has been able to sell itself well." The company is talking about a two-pronged strategy to take advantage of the expected strong growth in Internet access and activity in China. It has begun procucing some optical networking equipment and expects sales of $15 million this year rising to nearly $100 million by 2002.

Part two of the plan is to become an Internet access provider for Chinese seeking the kind of broadband connection that allows for fast downloading of large quantities of information like music or movies. Initially, Great Wall said it would spend $640 million over the next three years to roll out a broadband fiber-optic network. The company projects that it will have 1 million broadband customers by the end of next year rising to 5 million by the end of 2003. That's ridiculous, say many analysts, who note that the U.S. today has only 4 million broadband customers. One of the constraints on Great Wall's growth in China will undoubtedly be price: Broadband connections are expected to cost about $60 for installation and then $12 per month, amounts that are out of reach for the vast majority of mainlanders.

"Great Wall has pushed its Internet story but it isn't very credible yet," says Mark Siford, technology analyst at Deutsche Bank in Hong Kong. "There is a lot of hype, and while [Great Wall] may have dreams and aspirations, the reality is they aren't about to become a serious broadband player." Investors seem to agree. From its IPO price on the Hong Kong stock market a year ago of HK$3.15 (40 cents), shares surged past HK$9 last year before falling with other tech stocks below HK$6 in March. The price has recently been stuck near HK$4.50 a share.

Perhaps Great Wall realizes it is over-reaching. The company recently announced plans to cut by 43% its planned spending on a broadband network by the end of 2002. That's a good sign. Most investors never bought into the company's huge prospective investment in a project with dubious potential for returns. Chinese SOEs aren't known for responding to investor sentiment so directly. Still, Merrill Lynch last week downgraded its earnings estimates for the company going forward to 2001. It seems Great Wall may be retreating from a bigger-is-better ethic, but whether it can truly focus on the quality of its earnings going forward is still open to question.

Write to Asiaweek at mail@web.asiaweek.com

Asiaweek Technology Home | Asiaweek.com Home

AsiaNow


Quick Scroll: More stories from Asiaweek, TIME and CNN

   LATEST HEADLINES:

WASHINGTON
U.S. secretary of state says China should be 'tolerant'

MANILA
Philippine government denies Estrada's claim to presidency

ALLAHABAD
Faith, madness, magic mix at sacred Hindu festival

COLOMBO
Land mine explosion kills 11 Sri Lankan soldiers

TOKYO
Japan claims StarLink found in U.S. corn sample

BANGKOK
Thai party announces first coalition partner



TIME:

COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state



ASIAWEEK:

COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness


Launch CNN's Desktop Ticker and get the latest news, delivered right on your desktop!

Today on CNN
 Search
  ASIAWEEK'S LATEST
Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?


  TECHNOLOGY
THIS WEEK
Profits: A Chinese tech company must change its focus

Baang: South Korea's edgy computer cafes

Language: Computer scientists borrow from mother nature

ASIAWEEK.COM

ASIAWEEK.com
Vol. 2 No. 5


COVER: Playing the Modern Game
Improve your golf game with better technology

Face Off: Audio recorders

Healthcare: Take care on websites for the unwell

Net Gains: Be wary of stock tips in chat rooms

E-vesting: The high cost of online trading

Asiaweek/CNN Tech Index: The Asiaweek/CNN basket of 40 companies

B2B: Learning the job online

Wired Exec: A Manila publisher at work and play


Asiaweek Technology Home

Asiaweek/CNN Internet Index: Track our Asian high-tech stocks

Back to the top   © 2000 Asiaweek. All Rights Reserved.
Terms under which this service is provided to you.
Read our privacy guidelines.