iPhone Blog

[April 03, 2011]

Apple tries to avoid Motorola’s mistakes in China

Apr 03, 2011 (The Pittsburgh Tribune-Review – McClatchy-Tribune Information Services via COMTEX) — Chairman Mao Zedong had been dead for two years, and China’s economic system was about to follow him to the grave.

An economic backwater in 1978, the Communist country lived on politics, not production. But that year, Deng Xiaoping out-maneuvered political opponents to become China’s paramount leader.

Through a radical experiment that became known as “socialist market economy,” he set out to save China by welcoming Westerners to invest.

Most American businesses were wary, except technology behemoth Motorola. CEO Bob Galvin ordered construction of “a huge Motorola sign built on a skyscraper overlooking Hong Kong harbor,” recalls Motorola’s former Chief Technology Officer Dennis Roberson.

“It was a calling card for China,” he said. “Bob Galvin decided that China had the most people. It would be a key market. The Cold War was still on. Everyone thought it was very presumptuous.” Yet the courtship seemed to worked. Motorola’s decision to relocate jobs and research to mainland China is a story of great success for the company and China.

And it is also a story of betrayal.

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Now another dominant American communications company, Apple Inc., is trying its hand in China. On the backs of its popular iPhones, iPads or iPods, you’ll find the words “Assembled in China.” But Apple’s CEO Steve Jobs has not gambled as many chips in China as did Galvin and Motorola.

Apple conducts its research and development in the United States, and has avoided the temptation of giving China access to its technology — so far.

Calling card Motorola’s Hong Kong harbor sign in the early 1980s interested the Chinese government and negotiations began, said Richard Younts, former Motorola executive vice president and corporate executive director for Asia.

The Chinese said Motorola could do business there if it took on a Chinese partner and shared core technology, Younts said.

“We said, ‘No way, Charlie,’” he recalled.

Galvin bargained hard, Roberson said, and eventually asked Chinese officials: “No. 1, would they like to have the No. 1wireless provider in the world? No. 2, did they think they could create the No. 1 provider themselves?” The Chinese said yes to the first question, and no to the second.

As the two sides were reaching agreement, democracy protests swept China, culminating in the Tiananmen Square massacre in June 1989. Suddenly, many companies testing the Chinese waters decided they were entirely too hot.

“Everyone else left,” Younts said. “The Chinese appreciated that we stayed.” In return, Motorola got what it wanted: No partners. No technology transfers.

Or that was the plan.

At first, Motorola made and sold pagers and small gadgets in China, according to those involved. Then it brought in analogue handset phones, followed by cellular digital technology and a semiconductor plant. Though documents and reports vary, some estimates are that Motorola’s market share topped out at well more than 50 percent in the portable handset phone market.

“At one point, Motorola was so big that you didn’t ask for a cell phone (in China), you asked for a Motorola,” said Roberson, who was chairman of Motorola China Research and Development Institute.

By 2000, China’s cell phone use had grown to about 85.5 million from near zero a decade earlier, according to the International Telecommunications Union.

That year, Lai Bingrong, president of Motorola (China) announced: “Motorola wants to be a purely Chinese company. We want to be more Chinese than local companies.” Motorola was the biggest foreign firm in China by 2001, according to the Chinese Communist Party’s People’s Daily.

As Deng’s policy of opening China to foreign investment played out during the first decade of the century, the number of cell phone users in China continued to explode. Last year, they numbered an estimated 780 million, according to the Gerson Lehrman Group.

Motorola’s Galvin was right, except that his company ultimately wouldn’t benefit nearly as much as he envisioned.

Loyalty In China, Motorola thought it found a loyal friend.

But clearly, this demanding friend held a different idea of loyalty.

In 1991, China pushed for Motorola to open a sophisticated chip manufacturing plant.

Four years later, Chinese Premier Li Peng — a key architect of the Tiananmen Square massacre — met with Motorola CEO Chris Galvin, who took the reins of the company from his father, Bob. The official Chinese news agency reported that Li told Galvin he “hoped Motorola would pay more attention to opening up its technology to its Chinese partners and cooperating in production.” By that year, Motorola had two Chinese partners, having formed Leshan-Phoenix Semiconductor Co. Ltd and the Shanghai Motorola Paging Products Co. Ltd., according to the ICFAI Center for Management Research, which studies business cases worldwide. Motorola in 1995 began a partnership with Eastern Communications Co. Ltd to make mobile handsets.

China’s People’s Daily reported that by 2001, Motorola had established 18 research and development centers in China, and planned to have $10 billion in investments there by 2006. Its sales volume was the biggest of any foreign company in China.

A Motorola report shows it had 170 Chinese suppliers by 2006. One company Motorola hitched with that year became a mortal threat: Huawei Technologies Co.

“We had the majority (ownership) of those ventures. We didn’t see it was a problem,” Younts said. “We were probably a little naA”ve.” Roberson recalls the drain on Motorola’s technology as being more subtle, and not the result of Motorola directly sharing it with joint venture partners.

“They didn’t get it legally,” he said.

Although Motorola filed more than 3,500 patents by 2006, Roberson said the Chinese largely ignored patents as inferior law. Employees were a bigger issue.

“Motorola was used as a training ground for all the competitors in China,” Roberson said. “A person might work for you for six months or a year, then go over to a Chinese competitor. … Things like a two-year non-compete clause don’t work well in China.” Roberson said the Chinese gained valuable intellectual property because the government insisted Motorola shift more R&D to China. A Chinese engineer would work at Motorola as long as it took to learn the technology, he said, and then would quit to work for a competitor.

“Though the Chinese wanted to be trained by Motorola, they wanted to work for Chinese companies,” he said. “Most were small at first, but there were a dozen of them. Then they started to get muscle. And the Chinese government gave them support that the government didn’t give Motorola.” By 2006, Motorola’s market share had shrunk to a little more than 20 percent. By last year, an iSuppli study reported China’s ZTE knocked Motorola out of the top five phone manufacturers in the world. Motorola’s position in the Chinese market had fallen to around 2 percent, according to research firm IDC.

Said Roberson: “Motorola will never get back to the position it was in. The world has changed.” Chris Jones, principal analyst at Canalys, a high-tech consulting firm, said Motorola “got squeezed. … Companies that used to be Motorola suppliers are now competitors.” While emphasizing that China is “a difficult country to compete in,” Jones blamed Motorola for being caught off-guard in 2007 by Apple’s iPhone.

One-way ticket On Feb. 28, 2007, software engineer Hanjuan Jin was stopped by U.S. Customs agents as she was attempting to board a Boeing 747 at Chicago’s O’Hare International Airport using a one-way ticket to Beijing.

What they found was alleged industrial espionage on a grand scale, demonstrating that secrets Motorola thought it kept from China were not secure — even at its home base in Schaumburg, Ill.

Jin told Customs officers she was carrying $10,000 in cash, according to an FBI complaint. But agents who searched her luggage found more than $30,000. Suspicious, they looked further and discovered Jin carried a laptop computer, four external hard drives, a flash-memory thumb drive, a videotape and 29 recordable CDs. She also had paper copies of documents stamped “Confidential Proprietary” from “Company A” — later identified in court papers as Motorola.

Jin told Customs agents that she had recently returned to work for Motorola and took the documents to help refresh her memory, documents state. She also said she held a second job with “Company B,” later identified as Motorola competitor Lemko Corp.

In fact, she had a day earlier submitted her resignation to Motorola, which estimated the value of the research and development spent to prepare some of the documents Jin was carrying at more than $600 million.

Lemko, Motorola later alleged in a civil lawsuit, was run by former and current employees of Motorola. Most had close ties to — or were citizens of — the People’s Republic of China, but Motorola said it did not know about the dual loyalties.

Customs officials confiscated the papers and computer equipment, and did not allow Jin to board the plane. Under questioning, Jin said she had talked with a man in China from whom she expected a job offer. She told authorities that during an earlier trip to Beijing, the potential employer gave her some classified Chinese documents to study to determine if she could help work on them. The documents involved Chinese military telephone communications technology, court papers state.

The FBI charged Jin with stealing trade secrets from Motorola in an attempt to pass them on to the Chinese military. She was later indicted by a federal grand jury. She pleaded not guilty and awaits trial.

In a civil lawsuit filed last year, Motorola accused Jin, 13 other individuals and two companies of conspiracy, misappropriation of trade secrets and other alleged misdeeds. Jin and the other defendants responded that they did nothing wrong. Motorola’s lawsuit included an intriguing claim that Lemko was working with Huawei — China’s largest telecommunications vendor and one of the world’s largest mobile network suppliers.

Created in 1988 by Ren Zhengfei, a former officer in China’s People’s Liberation Army, Huawei grew explosively, largely at Motorola’s expense, the U.S. company charges. Zhengfei allegedly met with Motorola employee Shaowei Pan in Beijing in 2001, when Pan was a senior engineer and director of architecture working on Motorola’s projects and technologies.

Motorola said it discovered a 2002 Pan e-mail to Zhengfei, saying: “If our plan can progress smoothly, Lemko will be the company we are planning to establish, and it will be independent of Motorola Inc.” Lemko formed in 2002. Pan, who continued working at Motorola, secretly became Lemko’s chief technology officer, and other Motorola employees moonlighted for Lemko, Motorola alleges.

The American multinational further alleges that intellectual property that made Motorola a world leader in wireless communication flowed to Huawei, which began producing competitive products.

Huawei, which has denied the allegations in court papers, did not respond to a request for comment Pan, chief technology officer for Lemko, said there was “no merit” to Motorola’s allegations and that he was not spying on the firm. Jin could not be reached.

Lemko spokesman Raymond Minkus said the company denies the allegations in Motorola’s lawsuit, contending it never obtained trade secret information from Jin and that Motorola has offered no evidence that Lemko ever received any information. Lemko and others named as defendants have filed several counterclaims against Motorola, he said.

As happened with cell phones, Motorola no longer leads in wireless communication technology. It is trying to sell that business to Nokia Siemens for $1.2 billion. On Jan. 4, Motorola split into two separate companies: Motorola Solutions, Inc., which concentrates on public safety communications, integrated command and control and other advanced services, and Motorola Mobility Holdings, Inc., which deals in cell phones and mobile devices. The latter firm is enjoying major success with its series of Android phones and its Xoom tablet, which is competing with Apple’s iPads.

Motorola Mobility, in a statement to the Trib about its experience in China, said only that China remains “an important market for us.” Nick Sweers, Motorola Solutions vice president for global communications, said in a statement the company takes “intellectual property very seriously,” but answered “no comment” when specifically asked about China.

Apple takes a bite Apple became the world’s most valuable technology company last year while largely ignoring the Chinese market.

Microsoft’s Windows, widely and illegally copied in China, long has been the preferred product to run computers that are cheaper than Apple’s Mac line.

Roberson, Motorola’s former technology chief who has worked directly with Jobs, said of the Apple CEO: “He’s very demanding and frequently changes his mind.” Jobs apparently decided initially he could do without the Chinese market. That began to change in 2007, when Apple introduced the technologically advanced iPhone. Demand quickly rose among Chinese consumers and China Mobile, the world’s largest telecom provider with 589 million customers, wanted to distribute the iPhone.

Forbes magazine described this as an epic struggle for control. China Mobile wanted concessions from Apple, including control of the App Store. Jobs said no. When he finally made a deal, it was with the smaller China Unicom.

Apple opened its first store in China in 2008, a second store last year and plans more.

“The advantage Apple has is that it has an integrated approach that it controls. No one else does that,” said Chris Riley, once an Apple leader in strategic planning.

Roberson said “it’s too early to tell” whether Apple can avoid Motorola’s mistakes in China.

Younts said Apple might have to move some R&D work to China in order to become highly successful there — a move Jobs might decline to make.

“There is no secret that Chinese companies don’t have much respect for intellectual property,” said Ali Farhoomand, director of the Asia Case Research Center at the University of Hong Kong School of Business. “… What Apple does, it controls the ecosystem that supports its software and services, so it is much more difficult for other companies, including Chinese ones, to copy Apple’s product.” Apple has no publicly disclosed technology transfer agreements in China. The technology giant has moved final assembly of substantially all of the company’s Mac products, iPhones, iPads and iPods to third-party vendors in China. Among them is Foxconn, a Taiwanese-owned company that operates a large assembly plant for Apple products in Shenzhen, China. The plant gained international attention last year due to a spate of suicides workers blamed on labor conditions.

An analysis of Apple’s iPhone 3G by the Asian Development Bank Institute said vendors making the phone’s parts come from the United States, South Korea, Japan, and Germany. The cost of making an iPhone — excluding Apple’s U.S.-based software and design — is $178.96, the institute said. Of that total, the Chinese labor expense is $6.50.

Though Steve Jobs might get his way in China over the issue of shared technology, he would be one of few.

“China is getting more control,” Younts said.

More than 1,200 multinational R&D centers operate in China, according to the Chinese Ministry of Commerce. R&D, Roberson said, presents the greatest access to technology.

Decades earlier, Deng Xiaoping spelled out clearly his plan for China: “Poverty is not socialism. To be rich is glorious.” To see more of The Pittsburgh Tribune-Review or to subscribe to the newspaper, go to http://www.pittsburghlive.com/x/pittsburghtrib/. Copyright (c) 2011, The Pittsburgh Tribune-Review Distributed by McClatchy-Tribune Information Services.

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