Epox president explains motherboard business in China

AT THE BEGINNING of this year, Jerry Feng took over the position of president of EPoX. Feng joined EPoX two years ago, excited about the opportunities the growing corporation offered. He intends now to steer the motherboard manufacturer to profitability despite recently resolved difficulties within EPoX itself and worldwide economic woes. To do that, Feng relies on, among other things, his experience managing a software arm of Acer Sertek that grew from revenues of $150,000 to $3,500,000 in the early nineties.

I recently had the opportunity to interview Feng about the conditions motherboard manufacturers face in mainland China. EPoX strategies in mainland China mimic their successful strategies in Europe and the United States, relying on brand name and the ability to cultivate relationships with large order distributors.

Feng cautioned, however, that working with distributors in mainland China is more complicated. To make the point, he told a classic account of economic misfortune in mainland China. EPoX originally adopted the name Pan Ying to market itself in mainland China. At the time, it was cooperating with a local corporation to help establish itself in the Chinese market. The arrangement between the two companies apparently worked until the mainland Chinese corporation registered the name, Pan Ying, as its own. EPoX cried foul and eventually took the incident to the appropriate authorities. When the dust settled, however, the Chinese courts decided in favor of the local corporation, and EPoX had to choose another name. It decided on Pan Zheng. The zheng connotes righteousness and honesty.

The difficulties continue despite the fact that the two companies have different names, Feng reported. Whenever EPoX products become more popular or receive good reviews, within a month, the mainland Chinese corporation produces almost identical, lower priced and lower quality products. Educating clients about the conflict, about the quality differences and how to distinguish between products of the two companies, of course, brings EPoX needless headaches and added costs.

I asked Feng about how to avoid the risk of reverse engineering. Feng believed that, at least to a certain extent, risks are unavoidable. He mentioned that, years ago in the United States, he spoke with a mainland Chinese engineer who worked at a laboratory in Xian that hoped to launch a rocket. Apparently, the Chinese researchers had gotten their hands on a piece of circuitry "from who knows what country". The Chinese researchers did not have the source code. Instead, they duplicated the code in optical format, modified it, and were able to launch a rocket with the modified code. With commitment of that caliber, Feng believes, the Chinese will eventually duplicate the most sophisticated technologies.

EPoX invested in mainland China for the first time about three years ago. It maintains three facilities there: a trading office in Beijing, a manufacturing plant in Ningbo and a service and repair office in Ningbo. Intel likewise divides its operations in mainland China into a network of distinct legal entities. Although I have talked with Intel representatives who claim that Intel implements this division of operations worldwide, Feng appeared more honest about how the investment climate in China pressures foreign enterprises to adopt this model of operation.

Feng lamented division of operations. He said matter of factly that three offices require three locations instead of one and adds to administrative costs. Despite the additional costs, however, EPoX maintains three offices because of Chinese import and export restrictions.

In three years, the WTO will obligate China to abolish mandates that foreign enterprises cooperate with local corporations in order to sell their wares domestically. For the moment, those regulations either keep foreign enterprises out or pressure entrepreneurs to find alternative ways of conducting their business in China. Feng did not mention the political advantages of establishing a trading office in Beijing, though I imagine the folks at EPoX considered those advantages when deciding where to locate their trading office.

What Feng did mention were regulations to promote export oriented manufacturing. Feng characterized these and other customs restrictions as the greatest obstacle to doing business in mainland China. He appeared to have a long list of grievances. Among the more important items he mentioned was that the Chinese government approves the entry of foreign manufacturers into China project by project. Procedures for project approval are cumbersome, and this weighs heavily on motherboard manufacturers who are constrained to get approval for individual projects and are then either fined or taxed if they are not able to complete their projects within a predetermined period of time and export their products out of mainland China.

Although customs officials approve projects individually, they do not necessarily have adequate familiarity with the industries they are micromanaging. Feng mentioned that EPoX had difficulties when, despite the fact that hundreds of products with widely varying prices qualify as capacitors, Chinese customs officials preferred to treat capacitors in terms of a unitary average price.

Feng mentioned difficulties other than those at customs. EPoX is currently having financial difficulties because no trustworthy credit system exists in mainland China. The risk of theft is ever present, and therefore, all mainland Chinese transactions are done in cash, Feng said.

Despite the difficulties, Feng believes that working in China is imperative. He is also optimistic about the pace of improvements in China, often comparing the mainland to Taiwan of thirty years ago. That optimism is likely to lend EPoX renewed vigour as Feng settles in at the helm. µ

* OUR APOLOGIES TO Dimitri Kessler. This story was originally published under the Mageek byline by mistake. Ed.