Two billion armpits waiting for a deodorant? (China as a market) (editorial) David H. Ahl.

China has been much in the news lately because of Deng's moves toward capitalism. Dent Xiaoping, China's supreme leader, has even gone so far as to rewrite Karl Marx's famous dictim, "From each according to his ability to each according to his needs." Deng changes it, " . . . to each according to his work." But is this capitalism as we know it, and what is the meaning of it for the West? More particularly, what are the opportunities for trade in high tech products and computers?

I recently visited China with several invited speakers and leaders from the South East Asia Regional Computer Conference. We met with a delegation from the Institute of Computing Technology of the China Academy of Science and Technology. This group is responsible for computer throughout China. In a sense, this Institute is the IBM of China.

Although China has hardly been a leader in computing technology, they have managed to keep up with the rest of the world--albeit a few years behind. They built their first vacuum tube computer in 1953, first transistor computer in 1965, first IC (third generation) computer in 1971, and first LSI machine in 1981. Today, they are proud to boast that their Model 757 when used in vector mode has a speed of 1000 Mflops. This is an order of magnitude less than machines in the U.S. and Japan, but still quite respectable.

Not so encouranging is the fact that just 4000 mainframes and minis are in operation throughout the entire nation. This is about the same number as are currently in Baltimore, MD. In addition, the nation has about 30,000 micros, mostly in schools, and mostly obsolete units purchased from manufacturers in Hong Kong. In fact, an executive at one such maker boasted to me that he was selling 5000 machines a year to China with rubberized keys, no spacebar, 4K of memory, and an RCA Cosmep mpu. A machine like that would die on the shelves anywhere else in the world.

Bur perhaps that is indicative of the nation. China is a nation of one billion people, 800,000 of whom are still employed on the farms. Their farming methods haven't changed much since the 1600's. The few tractors they have are not in use on the farms where they might have some impact, but as transportation to and from town. Flying over the landscape, one has the impression of an alien planet: unpaved roads, virtually no moving vehicles, and virtually no light (a 25-watt bulb is a luxury).

Things began to change in 1978 when Deng and his allies began to gain control over Mao's chosen successor, Hua Guofeng. Amongh the first changes instituted by Deng was the dismantling of collectivized agriculture. Communes were disbanded and family farms restored; more important, a "responsibility system" was instituted that allowed peasants to sell goods from a portion of their land on the free market.

In 1979, experiments were started that allowed manufacturing enterprises to retain a small portion of their profits to use as local managers saw fit. Results were so good that the system is now being extended to firms throughout the entire nation. The new plan gradually abandons nearly all central planning in favor of an almost free market, although the control of key industries such as power generation and steelmaking will stay in government hands.

But as The Wall Street Journal said, "Capitalism it isn't." Pricing is still under control of the state, and it is not clear whether any, some, or all prices of goods and services will be allowed to rise to their full market value. That could make a big difference in the ability of the Chinese to develop or purchase the technology to improve their many inefficient and unprofitable factories.

Nevertheless, the country has accumulated hard currency reserves of $14 billion, and Deng's plans call for spending $1 billion in 1985 for the latest technology from the West. That's good news to scores of computer vendors who would like to replace each abacus in China with the micro of their choice. As one marketing wag said, China is "two billion armpits waiting for a deodorant" and the doors are now open.

Frankly, I don't think it is that simple. There are far more reasons for caution than for optimism. No one has been more successful in negotiating with communist nations than Armand Hammer of Occidental Petroleum. Yet his $600 million joint venture with China to produce the world's largest open pit coal mine has been stalled for years. And this is in the fact of the admitted and almost desperate need of China for more energy; today nearly 20% of the nation's factory machinery stands idle for lack of energy.

Or take the two-year old deal in which China agreed to purchase 6 million tons of wheat annually from the U.S. Harvest improved in China, and they sought a way out of the deal. They found it in our textile import quotas which they said were "unfair," and used that to repudiate the wheat deal.

I believe we must make a much greater effort to understand the Chinese people before we will be able to successfully deal with them. In the meantime, it is far better to err on the side of caution when dealing with the largest and oldest civilization on the face of the globe.