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The Logic of Industrial Parenting

Written by Brian Hicks
Posted October 27, 2005

Hmm, this is no ordinary pop-up.

I can't read the Chinese characters on my desktop screen, but I know what an exclamation point looks like. A teenage boy sitting next to me in the Internet café of this multi-level bookstore glances at my screen for a second, then snaps his head back as he notices me notice him.

My keystrokes have taken me to a forbidden site. The Chinese are very careful about incoming information, and who has access to it.

Though I speak in glowing terms about the country's rapid pace of economic reform and commensurate growth, a sort of far-eastern perestroika, there is not yet an equivalent glasnost.

Let's examine the difference between the two major policy changes that morphed the face of Soviet power irreversibly:

Perestroika means restructuring. Steps were taken at official levels in the Eastern Bloc to reexamine many of the core principles of Socialist economic planning.

Glasnost means openness. Frank discussion of political topics became permitted in a way that had been entirely unimaginable under previous Soviet regimes.

China is undergoing a process of economic restructuring, but we should not confuse financial and political transparency.

Powderkeg.com

In my last column, "A Tale of Two Countries," I made a mistake. I said that Yao Ming makes $17.8 million a year. That was wrong. He really makes a paltry $5.5 million annually, the poor guy.

Yao Ming isn't just a Chinese Model Worker, as I previously mentioned. He is a conduit for American culture, as so many teenage boys in China and the Chinese Diaspora don jerseys of their hero Yao and his American-born teammates like Steve Francis.

They're not just interested in the big guy who looks like them, they're interested in everyone on the court.

And so, when they check Yao's stats online, or decide to practice reading English by checking NBA news on Yahoo!, they don't just get Yao Ming, they get all of America. This scares elderly Chinese who think that www.yahoo.com is some kind of strange telephone number, but even more so it scares young apparatchiks who know exactly what the Internet is capable of conveying across the information border.

So how can anyone expect to make money in Chinese information technology if the information itself is restricted?

CPU = Chinese Processing Unit

This week, U.S. microprocessor maker Advanced Micro Devices (NYSE:AMD) announced that it will license the technology behind one of its leading products to Beijing University for research and development purposes.

If you read my previous article, wherein I challenged claims that China's political climate suffocates the country's intellectual air, you know that over 750,000 engineers are graduating each year from Chinese universities.

AMD knows that, too.

The x86 Geode microprocessor research team already operating at AMD's primary research facilities in California will be augmented by the students of Beijing University.

Not only will this spell an immense innovation pool at the university, but AMD will hold the intellectual property rights to any advances that are made on the x86 under the project's auspices.

The Chinese Ministry of Science and Technology is acting as liaison not only between AMD and Beijing University, but also between AMD and Chinese computer companies that develop interest in its products.

Who's Your Mama, Little Tech-ling?

What AMD is doing is brilliant. Not only are they taking part in Chinese initiatives like the Zhongguancun Science Park (a.k.a. China's Silicon Valley), they are also imprinting their brand on the minds of countless engineering students who will know AMD products first and best.

Have you ever seen funny videos of baby ducks following around some poor farmer who they decided was their mother because his was the first face they saw? How about a flock of nerds quacking away for a chance to help AMD blow Intel out of the pond?

Google "Intel China" and the first results you see are actually about AMD and how Intel is fumbling itself out of a pole position in the world's favorite emerging market.

"China's New Wireless Standard Met with Intel Resistance" ...
"AMD Invades Intel's China Turf"

Is this a joke? If it is, I'm not chuckling.

But AMD is going to be giggling and clicking its heels all the way to the bank.

Chinese Search Engine Sputtering

By now, you should know Baidu. Maybe you even want to buy Baidu...

But there's Baidu bad news. The stock fell today by about 14% (Nasdaq:BIDU).

Yes, the bubble seems to be deflating on this Chinese search engine, coming down from its one-time 354% gain.

Evidently, those day-traders that inflated all of the domestic dot-com IPO's to ridiculous highs in the late 90s got wind of Baidu and decided to set the IPO addicts all up for another fall. How sweet.

Well, Baidu is now taking a bath, cleansing itself of the market scum and leaving the fresh and clean product for real investors.

Baidu's third-quarter net income and sales are both up 170% from a year ago. But its costs are also up, and margins are down.

But for God's sake, 354%?!! Implied fair value of Baidu should be around $37.50 per share, according to Goldman Sachs.

It seems to me that IPOs should be like a little kid's birthday party: Everyone comes and blows kazoos, sucker punches Ronald McDonald a couple times, watches the kid eat some cake, and wishes him well for the coming year.

Some people, it seems, just want to keep feeding the kid white cake, give him more Ninja Turtles dolls, and let him gorge until he explodes like Mr. Creosote in Monty Python's The Meaning of Life. Eventually, you have to let the kid go back to normal, healthy habits. In the long run, everyone will benefit.

Take this to heart especially when dealing with an emerging market like China. Too many overzealous and undercautious foreign investors may cause the whole thing to come tumbling down.

Chances are great that a large shock to China at this stage will reverberate for decades, and we will have squandered not only American hopes but Chinese as well.

Keep your eye on Baidu and other Chinese stocks with the following caveat always in mind:

Invest carefully, and watch what you feed a growing child.

While I don't recommend you buy shares in BIDU, one thing's clear...we're certain to be faced with some incredible opportunities in China, and Asia in general, as this economy makes its transition into young adulthood.

- Sam Hopkins


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