Tuesday, November 11, 2003

A chicken that will come home to roost: China

Unique among our trading partners, China is an 800 lb gorilla with a very poor attitude.

'We know we're losing jobs to China. One way of protecting oneself is investing in Chinese companies and benefiting from the growth of these companies. The problem is in China the investor doesn't necessarily rank high on the order of cash-flow distribution.

In Western capitalism, the shareholder has a right to that cash flow. In China and elsewhere in developing countries, companies are government owned or owned by the military and a general's cousin may run the business. It's a complex investment process. It's a problem from a global investor's point of view.

But the collision problem also affects investors from a non-Asian perspective. Let's say you want to invest in Cisco (CSCO:Nasdaq - commentary - research). And you have 3Com (COMS:Nasdaq - commentary - research) striking up a relationship with Huawei, the Cisco of China.

Huawei is a private company with a stated intention to displace Cisco as king of the router market. That's the collision course. You've got a great company like Cisco that's got a very high valuation, and it's going to have shrinking margins. Huawei can make irrational decisions about pricing because they don't have to care about shareholders. This is a very big concern for investors, whether you're committed to investing only in the U.S. or global. Navigating this collision will be very difficult.

Cisco sued 3Com over this partnership, and they dropped the suit. Huawei made specific products that Cisco accused them of blatantly copying. So there's the intellectual-property issue as well -- we know China just doesn't care. "

...You can't beat 'em and you can't join 'em either. so what's the answer? Embargo the bastards?



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