Finding the balance in changing global environment

IT companies must identify niches, focus on shifting consumer tastes

Last year was a tough one for foreign technology companies in China. Slower economic growth, rising regulatory and legal pressure and preferential treatment of domestic competitors were some of the factors that posed daunting challenges for tech companies.

Indeed, some top executives spoke openly of scaling back their China operations or even leaving.

But that would be a mistake. With an accurate view of the market and the right strategy, there is still an opportunity for foreign information technology companies to play a major role in a country where the high-tech sector is increasingly important.

Slower growth

First, the bad news.

With third-quarter growth at 7.4 percent, the economy is expanding at its slowest rate since the 2009 financial crisis. Exports are lower than forecast and imports are down. Property prices are slumping. Bad loans continue to plague the banking system. And predictions for 2015 are no rosier.

On top of all this, tech companies, along with a considerable number of other foreign companies, have been the target of regulatory or legal investigations by the Chinese authorities.

One reason for this is the fallout from revelations by former US intelligence analyst Edward Snowden that some tech companies were involved in passing data to the US National Security Agency. That triggered widespread and understandable suspicion on the part of the Chinese government.

This past spring, in a blow to Microsoft Corp, China banned the Windows 8 operating system from government computers, citing security concerns. The move followed claims in the Chinese media that Windows 8 was a tool the NSA was using to collect information on China.

Media reports also said that the Chinese authorities were concerned about the security implications of the reliance of Chinese banks on IBM Corp's servers. And during the summer, State broadcaster China Central Television described Apple Inc's iPhone as a threat to national security.

New direction

As all this was going on, Microsoft faced a probe into allegations of price-fixing. There was a surprise inspection by Chinese government officials of Microsoft's facilities, with mail and other material being seized.

Chip producer Qualcomm Inc has also been investigated over its pricing procedures, and other companies have faced probes.

Meanwhile, the central government has made clear its desire to see Chinese companies rely more on the products of domestic tech companies.

The appeal is obvious: greater perceived security and lower costs.

One result is that domestic companies such as Huawei Technologies Co are increasingly winning contracts from the IT departments of Chinese businesses. Meanwhile, Alibaba Group Holding Ltd has moved away from using IBM servers, EMC Corp's storage and Oracle Corp's databases by developing its own products.

Changing tastes

Many foreign IT companies have not kept up with Chinese consumer tastes and usage patterns. One example is the hugely popular and lucrative icons offered for sale by Tencent Holdings Ltd's WeChat, the type of product that other competing services, such as What's App, do not offer.

On the face of it, this is enough to make any foreign IT executive consider giving up on China. And yet, for all the problems, the potential of the China market is still so vast that it is foolish to think about heading for the exit.