Turning up the heat on Huawei

Bruce Einhorn

Opposition on the anti-Communist right is building to the proposed investment in 3Com by Huawei Techologies, the Chinese network equipment maker run by a former officer in the People’s Liberation Army. Ileana Ros-Lehtinen, the Cuban-born anti-Castro GOP congresswoman from Florida, is leading the charge in the House, introducing a resolution calling on the Bush administration to veto the deal.

Meanwhile, 3Com is trying to reassure people that there’s nothing to worry about. For instance, see this AP story from BusinessWeek. “3Com said in a regulatory filing Thursday that Huawei will not have any access to sensitive U.S. technology or U.S. government sales as a result of the deal,” the AP reports. “3Com said Bain Capital will control 83.5 percent of the company's voting shares and appoint eight out of 11 board members. Huawei will name the other three. In addition, Huawei can increase its stake in 3Com by up to 5 percent based on certain performance criteria, but it can't gain any more seats on the board, 3Com said.”

The problem is, critics of this deal aren’t worried about whether Huawei has five seats or just three. They worry about Huawei (a company with ties to the Chinese military) having any seats at all. I doubt that 3Com’s statement is going to do anything to reassure them.

Baidu's Big Drop

Bruce Einhorn

First, the bad news for Baidu investors: the Chinese search engine’s stock price plunged $51 yesterday. Yes, fifty one dollars. In one day. The amazing news, though: Even after that drop, Baidu's shares are still riding high. The Nasdaq-listed shares are still up 174% for the year.

Contributing to the drop on Thursday was a report from JPMorgan analyst Dick Wei predicting that the company would report quarterly earnings on Oct. 25 slightly below earlier predictions because of the temporary closures of some Internet data centers for technical reasons. Still, Wei is looking at the company’s stock price to rise to $400 by the end of next year as Internet usage continues to grow in China and online advertising gains acceptance.

And what of talk from Google about closing the gap with Baidu? (See, for instance, this BW story that I did a while back about Google’s plans to team up with local partners.) Wei may have prompted a momentary run on Baidu’s shares, but he’s still bullish on the company: “[F]rom a 12-month perspective, we expect Baidu to further consolidate its leading position and increase its monetization rate from growing traffic.”

While the Chinese search market is likely to keep on growing fast, Baidu also isn’t sitting still. The company has launched it first operation outside China, a service in Japan. In another attempt to diversify its revenue base, in August Baidu launched BaiduTV, which enables the company to sell its customers video ads. JPMorgan’s Wei, in his research report, says that more than 50% of Baidu’s traffic comes from non-search traffic. “We expect Baidu to offer more advertising/revenue opportunities in the long term,” he writes.

Some more evidence that Baidu is on a roll, despite the data-center issues: According to a new report from Comscore, Baidu is now ahead of Microsoft in search-engine popularity. Not just in China, but globally. As Mary Jo Foley points out this in this ZDNet blog, there were 3.3 billion searches done via Baidu in August, compared to just 2.2 billion* for Microsoft’s sites. Google of course is far ahead globally. The fact that Baidu is ahead of Microsoft is a sign that Baidu is doing well, although it’s also an indication of how badly things are going for Redmond’s search strategy. (Foley points out that NHN, the big Korean search engine, is close on Microsoft’s heels at No. 5 globally.)

The continued success of Baidu, despite the best efforts of Google, no doubt cheer the company’s investors. But it’s not so good news for critics of Google and other U.S. Internet companies doing business in China. Sometimes people angered by the way the Americans have played along with Beijing’s censorship rules in order to enter the Chinese market argue that the U.S. companies have leverage over the Communist regime. That is, if Beijing insists on the companies censoring the Net, the Americans could just threaten to leave, as if that might make the Chinese back down a bit.

But as the success of Baidu shows, the Chinese have their own domestic (not to mention domesticated) companies. So if the Americans leave, so what? China's leaders may not care about Googling something as long as they can Baidu it.

* Corrected on Oct. 13

Burma, an investment destination?

Bruce Einhorn

Leave it to the People’s Daily to find some upbeat news from Burma. Yes, the junta may be killing monks and crushing dissent. But according to the official newspaper of China’s Communist Party, there are still plenty of investment opportunities in the impoverished Southeast Asian nation. At least, so says Xinhua, the official Chinese news agency. The People’s Daily has a Xinhua story on a report from the press in Burma (or Myanmar, as the regime there has renamed the country) on a German delegation that visited the country last month to look into setting up production of pharmaceuticals there. Writes Xinhua: “German entrepreneurs are planning to set up pharmaceutical industries in Myanmar to produce home-use capsules and tablets as part of foreign engagement in the development of the sector, a major local news journal reported Tuesday.”

Apparently the delegation traveled to Burma in September, before news of the latest protests really spread worldwide. We’ll see whether the investment really does go forward. In the meantime, though, I did learn from this that not only does the Burmese newspaper the Yangon Times Journal have a website, it also has one of those slogans that would be unintentionally funny if not for the fact that people are now dying: The paper describes itself as “Your Best Choice for Truth and Usefulness.”

The rest of the site is in gibberish since there’s no English version; you need to download special fonts if you want to read it in the original. So no, not the most useful. And you can take a guess on whether the part about truth is any more accurate.

Buy Sony's Internet-to-TV Link, Get SI's Swimsuit Video

Kenji Hall

Buy a Sony TV (plus attachable module), get Sports Illustrated's annual swimsuit issue—-in video. That might get men to drop anywhere between $900 and $6000 for a flat-screen Sony liquid-crystal-display TV plus $300 for the separate book-sized attachment that streams online video to the set. But will it appeal to a mass-market audience? To be fair, there's more to Sony's announcement today than the SI swimsuit video. The company said it had signed deals that will expand the video libraries available on the company's free Internet-to-TV Bravia Internet Video Link service. Some videos will go live this month; others will be added "as they become available" whatever that means. I just wrote about Sony's nifty but nascent tech last week. Sure would've been nice to have this information back then. Here's an excerpt from Sony's press release:

New Internet channels will be coming from CondéNet, Sports Illustrated, blip.tv and Sony Pictures, which will add eight new Internet channels. The new content partners join a current roster of providers that include Yahoo!, AOL and Crackle, which have been live on the service since it launched in August.

CondéNet, an Internet unit of Condé Nast Publications, will provide fashion, lifestyle, food and travel videos from Style.com, Men.Style.com, Epicurious.com, and Concierge.com. SI will offer behind-the-scenes video from the making of the annual swimsuit issue and other sports-related footage later. The new blip.tv Internet channel will feature Internet-only videos, including Rocketboom, Unleashed, Break a Leg, Alive in Baghdad, Goodnight Burbank and Geek Entertainment TV. And Sony Pictures will round out the offering with TV shows, action/adventure classics, promo TV and movie trailers, and "Minisodes" of shows condensed to four to six-minute versions with the full story lines intact. Not bad for a service that's not even two months old.

Samsung Teams up with B&O on Phone

Moon Ihlwan

The latest thing among cellphone makers, it seems, is moving upscale. Little wonder that global manufacturers are reaching out to luxury brands to bring out fashion phones with a little panache. But it hasn’t always worked out. For instance, Samsung and Denmark’s Bang & Olufsen jointly developed a head-turning handset called the Serene in 2005, but the sleek phone was more notable for its form than its function.

Now the duo have switched tactics. They have paired up again, and this time around they’re emphasizing Bang & Olufsen’s signature sound quality as much as the handset’s design. The Serenata music phone, expected to hit stores in Europe in late October, includes a built-in hi-fi speaker and bass system that the companies say can play tunes for up to five hours (listening via headphones boosts battery time to 13 hours).

The Serenata holds 4GB of songs and has a number of other features similar to the iPhone. But if you’ve been put off by the iPhone’s $400 price tag, you’ll find no relief here. The Serenata will likely cost well over $1,000. And unlike the iPhone, the Serenata lacks a camera and doesn’t offer full browsing capability, although it is Internet-enabled through WAP 2.0.

For Samsung, Serenata underlines its campaign to cement its status as a provider of high-end handsets catering even to niche markets. The Korean company has also teamed up with European and American fashion designers to target young, trendy consumers. Last month, Italian designer Giorgio Armani unveiled a phone jointly developed with Samsung at his women’s wear show for spring and summer 2008. Armani and Samsung are also working together on an LCD TV due to be rolled out next January.

Why India's Internet connections are falling

Bruce Einhorn

Here’s some weird news from India: At a time when Internet usage is supposed to be on the rise, the number of Net connections in the country actually dropped in the second quarter, falling from 9.27 million to 9.22 million. As a somewhat incredulous Economic Times reporter comments, “India is possibly the only country in the world where internet connections are falling.”

How can this be? I asked my colleague Nandini Lakshman in Mumbai to explain what’s happening. Her take: More and more Indians are indeed online. They’re just not using landline connections. Instead, she says, Indians are getting onto the Net via mobile. According to the Economic Times, over a fifth of India's 200 million-plus mobile subscribers go online via their handsets.

“Yes, mobile Internet is big,” Nandini says in an email. “Even college-going kids carry phones with GPRS costing upwards of $400. Mobile operators are constantly introducing VAS schemes as their entire focus is to increase the average revenue per user. India's ARPU is the lowest in the world.”

Morever, the popularity of mobile Internet connections is also a reflection of the sorry state of India’s big telcos. “The largest service providers are two state-owned companies -- BSNL and MTNL,” she adds. “But they are so overwhelmed by the load, that their servers crash often. Accessing the Net on the mobile becomes more convenient.”

It’s great that Indians are among the world’s leaders in terms of using their cell phones to access the Net. But India doesn’t have 3G yet and speeds for mobile access of course can’t compare to broadband over fixed lines. For the country’s Internet companies to take off, India’s telcos need to get their act together.

What's happening in India is also worth noting given the interest among people in the IT industry in coming up with inexpensive ways to help people in the developing world go online. MIT Prof. Nicholas Negroponte's One Laptop Per Child non-profit this month is coming out with its first machines, designed with kids in poor countries in mind. (See this story by my colleague, Steve Hamm, about OLPC's attempts to jump-start its program.) Intel has a project of its own, the Classmate PC, that's also meant to meet the demand for a low-cost way to provide Internet access in poor countries in Africa, Asia and Latin America. (I wrote about how the two projects compare here.)

OLPC, Intel and others are betting that the PC is the best way to do that. But PCs, even specially designed ones for emerging markets, are more expensive than cell phones. Negroponte's project isn't off to a roaring start: See, for instance, this BW story by my colleague Steve Hamm about OLPC's efforts to jump-start its program.

Some people, such as Qualcomm chairman Irwin Jacobs, argue that focusing on the cell phone is a better way to boost Internet usage in the developing world. You would expect Jacobs to say that. He's in the business of selling chips for cell phones, of cours. But the drop in landline connections in India - and the surge in mobile access to the Net - seems to support his case.

Will Shoppers See More Panasonic-branded LCD TVs?

Moon Ihlwan

With the rapid growth in LCD television sales allowing Samsung Electronics to maintain its global TV leadership, it would be interesting to watch how Matsushita Electric will react over the next year or two. So far, the Japanese maker of Panasonic products has been focusing on the plasma technology for large TVs, saying it is determined to stay number one in the plasma segment. While other plasma panel makers are cutting back investment, Matsushita is investing $2.3 billion to help double its plasma capacity in the next two years.

Few doubt Matsushita will stay as the No. 1 plasma TV maker in the foreseeable future. Yet many tech analysts believe it may not be among the top four players in the flat-screen TV market unless it boosts its LCD presence. Already in the April-June quarter, it was ranked sixth in the thin-TV market, accounting for only 7.3% share. That’s well below half Samsung’s share of 17.3% and No. 2 Sharp’s 11%, according to market researcher iSuppli. It also lags behind Philips, LG and Sony.

Surely, there’ll be fans for the plasma technology, which is self-illuminating, unlike LCD that has to be backlit. But plasma's share of the flat-screen market has slid and industry experts predict LCD will remain the dominant technology for years to come. Researcher DisplaySearch says global LCD TV sales grew 28% to $14.4 billion in the second quarter of this year from a year earlier, while plasma TV sales fell 29% to $3.4 billion.

Why Huawei Wants a Part of 3Com

Bruce Einhorn

When it comes to big overseas acquisitions, the Chinese track record is pretty spotty. There have been some big flops – TCL’s deals with Thomson and Alcatel, for instance. Some, like Haier plan for Maytag and CNOOC’s for Unocal, never got off the ground. The best of the lot has been Lenovo’s purchase of IBM’s PC division, and the verdict is still out on that. So what to make of the news that Huawei Technologies is teaming up with Bain Capital in a $2.2 billion deal to take 3Com Corp. private? At first, this seems like a classic case of the Chinese getting suckered into buying something that nobody else wants.

Once, back in the 1990s, 3Com was important in the network equipment business and for a while the company broke out of the business page and into the sports section thanks to its naming rights for the stadium where the San Francisco 49ers played. But the glory days are long gone for 3Com, which has fallen far behind Cisco and hasn’t managed to make money this century.

So why bother? Maybe Huawei execs think that their engineers can learn something from the Americans at 3Com. The two companies did work together in a joint venture that lasted for three years, so the two sides do go back a while together. Last year, 3Com bought out Huawei's share of the joint venture, for $886 million, and that business in China is today probably the most valuable part of 3Com.

Moreover, Huawei can certainly need the help on the other side of the Pacific. It hasn’t exactly been smooth sailing for the Chinese company as it has tried to make its way into the U.S. Huawei is privately held and its reclusive CEO, Ren Zhengfei, is a former officer in the People’s Liberation Army. In response to questions about ties with the PLA, Huawei officials say repeatedly that there is no connection between the company and the Chinese military, but the company does have an image problem that makes expansion in the U.S. difficult.

That’s one reason that Huawei has been focusing on expanding sales in developing countries in Asia, Africa, the Middle East and the former Soviet Union. Huawei has also managed to make some inroads in Western Europe. Last year, for instance, Huawei formed a partnership with Vodafone to supply the British cellular operator with Chinese-made 3G phones. (More on that in this BW story from September a year ago.)

The problem is, ZTE, the Huawei rival that also is based in the southern Chinese city of Shenzhen, has making some impressive moves in the U.S., including a deal that it announced a few months ago to sell equipment to Sprint Nextel. ZTE also signed a deal last year to cooperate with Cisco, the company that embarrassed Huawei by taking it to court for alleged intellectual property rights violations. It’s no secret that the Chinese government wants its top companies to be expanding globally, and that includes the U.S. As the top Chinese communication equipment company, Huawei couldn’t sit back and let its next-door neighbor steal a march on it in the U.S.

In a press release from last Friday, Huawei's CEO emphasized that this deal was about business, not politics. "This is a commercial investment for Huawei. We believe the new ownership structure will help 3Com to improve its business operations, provide better products and services and bring more value to its customer," the press release quoted Ren saying.

The big question now is whether opposition to the deal builds in the U.S. because of Huawei's involvement - and what Ren and other Huawei execs are willing to do in order to address those concerns.

Sony's Hope For Flat TVs Is In An 11-inch Set

Kenji Hall

The future of Sony's flat TV business is a set with a screen that measures just 11 inches diagonally and rotates on a swivel arm. In an era when the trend is for ever-bigger screens, Sony's XEL-1 TV is an anomaly.

But as ludicrous as it sounds, the TV marks a huge technological coup for the Japanese electronics and entertainment giant: When the set goes on sale in Japan on Dec. 1, Sony will be the first company anywhere to commercialize an organic electroluminescent display TV. That's a big deal for Sony, and not just because it took 14 years of research to reach this point. The company got such a late start in flat-screen TVs that it needed a tie-up with rival Samsung Electronics of Korea to even be competitive. "A few years ago, people were saying that we had the technology but lacked must-have products," Ryoji Chubachi, Sony's president, told reporters on Oct. 1. "OLED TVs are a symbol of the revival of a technology-focused Sony."

Experts say organic electroluminescent displays could be the biggest innovation to reach the TV market in years. They're a big step up from current flat-panel technologies because they can be made wafer thin. They also offer a picture that's crisper and truer in color than either of the dominant technologies, liquid-crystal displays or plasma displays, and the screen response time is fast so images don't blur during fast-action scenes. The high-definition images of flashing neon lights at night and the sea in bright sunlight that Sony showed on the XEL-1 were so clear it almost appeared as if you might be peering at them through a window. Sony's hope is that it can eventually expand on its 5% share of overall TV shipments it had earlier this year. (Its share of LCD TVs is bigger, at 13%, according to iSuppli.)

But for now Sony's new TV is for bragging rights more than profits. The company timed the announcement to fall on the eve of the annual CEATEC consumer-electronics and technology show in Chiba, just east of Tokyo.

Katsumi Ihara, executive deputy president, sidestepped questions about whether the TVs would be profitable. Other officials noted that one of the reasons for commercializing the technology now is to get feedback about the technology's pros and cons in preparation for the next generation of OLEDs. In a note to investors in April, Goldman Sachs analyst Yuji Fujimori called the technology "promising" but said he expects "little near-term earnings impact."

Continue reading "Sony's Hope For Flat TVs Is In An 11-inch Set"

Indians Teaming Up With Israelis

Bruce Einhorn

I’m on the record as a skeptic about Indian ambitions to build a semiconductor industry. As I’ve noted (see here, for instance) building even a chipmaking factory with lagging technology requires hundreds of millions of dollars. The price tag for a more advanced plant can easily top $3 billion. All that for an industry where only few companies manage to make money consistently. Yet companies in China – and now, India – want to spend the money anyway. Economics be damned. Real men build fabs.

Pushing hard is Hindustan Semiconductor Manufacturing Co. According to this story from EETimes HSMC is planning to build an 8-inch fab (i.e. one that uses more mature tech) for $1 billion, and another 12-inch fab (more advanced) “which will require another $3.2 to $3.5 billions of investment.” More interesting news about HSMC. According to EETimes, the company is in talks with Tower Semiconductor, a second-tier foundry from Israel. Of course Israel has a strong tech industry and plenty of talented engineers. Moreover, Intel makes chips there. Yet Tower has struggled for years in an industry that’s dominated by the Taiwanese. Teaming up with the Indians makes sense for the Israelis, and Tower’s stock price has risen nicely since EETimes wrote about the Indian talks next week. But HSMC will need to do a lot better than Tower if the Indian company wants to make an impact in the chipmaking business.

ZTE and the Philippine Scandal

Bruce Einhorn

Gloria Arroyo, the Philippine president, has cancelled a controversial $330 million deal that would have called for Chinese telecom equipment maker ZTE to supply equipment to the government’s planned broadband network. (For more on that move, click here.) ZTE rivals have been crying foul ever since April, when the Chinese and the Filipinos signed the deal, and the Supreme Court suspended the broadband project on Sept. 11.

The project may be over, but ZTE’s Philippine problems are not. ZTE says it has done nothing wrong and the accusations coming out of Manila are focusing on local officials, not people from the Chinese company. Still, the news is bound to be embarrassing for a company that wants to build up sales globally. Among the critics calling for a congressional investigation into the ZTE deal is one of the most powerful organizations in the country, the Catholic Church. According to this report in the local press both Archbishops Oscar V. Cruz and Angel Lagdameo yesterday called for Romulo L. Neri, former director general of the National Economic and Development Authority (which approved the government loan that helped ZTE land the deal), to tell investigators what he knew about the contract. And Neri seems to have heeded that call. In testimony before the Philippine Senate today, Neri said he had received a bribe offer of 200 million pesos (or $4.42 million) from another Philippine official.

New Delhi Discovers New Jersey

Bruce Einhorn

With the U.S. presidential campaign well underway, it looks like the favorite Asian target for politicians looking to score some points will be China and its manufacturing scandals. But outsourcing to India may still make the cut as a hot-button issue, and it’s easy to forgive execs at Indian outsourcing companies for being wary about a new Bangalore backlash. So politically it’s a wise move that India’s government is taking steps to boost the role that Indian companies play inside the U.S. Today the Economic Times reports that the Indian Commerce Ministry plans to set up “incubation centres” in New Jersey and Illinois to support the expansion plans of software companies from India that want to develop business in the U.S. and sell to American customers. “We are looking at markets where we can sell our softwares. At Silicon Valley already big software producers are there, so who’ll buy our products? Cities like New Jersey provide new marketing opportunities,” the Times quotes Alliance Infotech vice-president Rajendra Kukreja saying. Yes, Kukreja needs a geography lesson, but those of us from the Garden State are used to a lot worse.

Sony's "Back To Basics" PS3 Strategy

Kenji Hall

Sony gaming chief Kazuo "Kaz" Hirai's talk at the Tokyo Game Show doesn't classify as a crowd-pleaser. There were new trailers for soon-to-be-released games, but no flashy or gorgeous animated sequences. And none of it got the audience buzzing. Hirai was, true to form, all business.

That's actually a welcome change from his predecessor, Ken Kutaragi, who had people scratching their heads last year with his incomprehensible "vision" for the PlayStation 3. Hirai spent his keynote speech going over the company's basic strategy on every game platform (PS2, PS3 and PSP). It's clear he realizes that fun games are the key to his success. Question is, can he get enough developers to deliver for him before the yearend holiday season?

In an interview with Reuters, he expressed confidence that he could; that he could add more game studios (in addition to the acquisition of Britain's Evolution Studios, announced today) to give Sony a better chance at it; that Sony would throw more marketing money at the problem; and that all those games should help his crew sell 11 million in the fiscal year through March 2008.

One surprise was that Sony didn't cut the price of the PS3, as some analysts had predicted he would (which I referred to in my story yesterday). Another was that software is behind schedule: The virtual online world, Home, has been delayed from late 2007 until spring 2008, and top-selling series Gran Turismo 5 Prologue will now be released on Dec. 13, instead of October. But Sony is doing something about it. At Sony's booth, there were more than 40 PS3 new titles for the PlayStation faithful to try, and the company plans to have plenty more by yearend. Let's hope Sony makes sure the delays don't hurt its chances in the console wars.

Will Sharp Gobble Up Pioneer?

Kenji Hall

Can someone reading the tech-industry tea leaves tell me what the Sharp-Pioneer alliance, announced today, means? One company makes solar cells, flat liquid-crystal-display TVs and next-generation DVD players. The other specializes in plasma TVs, high-end home entertainment equipment and car navigation systems. Where's the synergy?

According to their announcement, the two plan to collaborate in developing next-gen DVD players, home network products, car electronics and TV and PC monitor technology. They'll also forge a capital bond: Pioneer will issue $350 million worth of shares to Sharp and Sharp will become Pioneer's biggest shareholders. The only thing I can think of is that this is a first step in a large-scale acquisition or merger of some of the two companies' divisions. A couple of years ago, Sony announced a collaboration with Konica Minolta in digital single-reflex-lens cameras, which led to its buying Konica Minolta's entire SLR business. So it's conceivable that Sharp and Pioneer are preparing for a similar handover.

That should be a relief for Pioneer, which has struggled for some time. It will end up with cash from the deal with Sharp. Before the announcement, a Sharp spokeswoman told me this was going to be "the biggest announcement for the electronics industry this year." She may have been exaggerating just a tad. But I don't doubt that this is big news for Japan's electronics industry. Analysts have been saying for years that there isn't enough business to sustain a dozen healthy Japanese tech companies all making the same stuff. Maybe the shakeout is finally happening.

Little Impact Seen from Samsung’s New Legal Dispute

Moon Ihlwan

The U.S. Justice Department’s investigation into possible price-fixing by makers of so-called NAND chips is certainly a psychological blow to Samsung Electronics. After all the South Korean company accounts for nearly half of the global production of NAND flash chips used to store data for portable music players, digital cameras and handsets. Yet the consensus among industry watchers is that financial impact from the probe would be very little, if any at all.

Circumstances surrounding the flash chip industry give little incentive for Samsung to collude with others for price fixing, according to analysts. Firstly, NAND prices have been falling by 50%-60% annually since the flash chip began going into handheld products in earnest early this decade. Then Samsung has been enjoying a fat margin, sometimes exceeding 40%, from its NAND business. “I can’t think of any real motive for price-fixing,” says Jay Kim, chip analyst at brokerage Hyundai Securities in Seoul.

Samsung has had plenty of legal headaches. In 2005, Samsung was fined $300 million in a U.S. probe into a price-fixing scheme with other computer memory device makers to keep the prices of chips artificially high. Currently, it is also facing scrutiny by antitrust regulators in South Korea, the U.S., and Japan, for possible price fixing of liquid-crystal display panels. Samsung and Toshiba, the world’s No. 2 NAND maker, have said they are cooperating with the U.S. investigation over the flash chip.