Analysis: Hu addresses U.S. stress over China high-tech drive

By Doug Palmer

WASHINGTON | Thu Jan 20, 2011 6:42pm EST

WASHINGTON (Reuters) - China's plan to change itself from a major manufacturer to a leading global source of innovation poses an enormous challenge for U.S. companies whose competitive edge depends on coming up with the next big idea.

Those firms may be able to breathe a little easier after China pledged during President Hu Jintao's visit to Washington this week to "delink" its indigenous innovation policies from its $88 billion-plus government procurement market.

"This issue has been one of our top advocacy priorities for the past year," said John Frisbie, president of the U.S. China Business Council, which represents more than 200 American companies that do business with China.

China's commitment is "potentially very significant" depending on how it is implemented, Frisbie said.

China's indigenous innovation drive refers to policies intended to spur its domestic firms to develop technologies and products as good as or better than those offered by the United States, Europe and Japan.

U.S. industry has feared being locked out of the vast Chinese central, provincial and local government procurement markets unless companies agree to develop and maintain their intellectual property in China.

Last January, 19 U.S. business groups representing aerospace, telecommunication, software, clean energy and other high-tech sectors put those concerns into a letter to U.S. Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner, Attorney General Eric Holder, Commerce Secretary Gary Locke and U.S. Trade Representative Ron Kirk.

What prompted that action was a Chinese central government proposal to establish a national catalog listing which products would be eligible for preferential treatment in government procurement contracts.

The groups told the five U.S. Cabinet officials that they were alarmed by criteria that would require products included in the catalog to contain "intellectual property that is developed and owned in China and that any associated trademarks are originally registered in China."

'NEARLY IMPOSSIBLE'

"This represents an unprecedented use of domestic intellectual property as a market-access condition and makes it nearly impossible for the products of American companies to qualify unless they are prepared to establish Chinese brands and transfer their research and development of new products to China," the groups said.

The issue also surfaced at the provincial and municipal level in China.

Shanghai issued its own catalog of innovative products in late 2009, and of "the 530 on the list only two were made by foreign-invested companies operating there," Frisbie said.

"And the two happened to be from joint ventures that had majority-Chinese ownership too," Frisbie added.

More than a year later, Shanghai has not updated its catalog -- which U.S. industry thinks illustrates the folly of using product lists to promote innovation, Frisbie said.

Microsoft links up with ARM in new tablet drive

By Bill Rigby

LAS VEGAS | Thu Jan 6, 2011 1:10am EST

LAS VEGAS (Reuters) - Microsoft Corp is taking its biggest step away from a long-standing, lucrative alliance with Intel Corp, teaming up with Britain's ARM Holdings to take on Apple Inc in the red-hot tablet and smartphone arena.

Microsoft, the second-largest U.S. technology firm, plans to design a Windows operating system compatible with chips designed by ARM, an Intel rival and the dominant producer of chips for smartphones and tablet computers.

Chief Executive Steve Ballmer pitched the move in a typically ebullient opening address at the Consumer Electronics Show in Las Vegas, looking to convince investors that his company can hold its dominance in a world moving away from PC-centric computing.

"Whatever device you use, now or in the future, Windows will be there," said Ballmer, stalking the stage in a packed, supportive auditorium, in his trademark blue shirt and slacks. "Windows will be everywhere on every kind of device, without compromise."

Investors and analysts were not immediately convinced that the software giant can maintain the dominance of Windows as Apple's iPad leads the exploding tablet market and Google's Android smartphone systems take off.

"The PC is not going to be the 95 percent dominant solution five years from now," said IDC analyst Al Hilwa. "The trajectory of the iPad and all these Android devices is to take on multiple form factors."

The lack of a coherent strategy on tablets hobbled Microsoft's share price last year, and its shares continue to trade around the same level they did eight years ago.

"We've already seen that the personal computer has lost dominance as a computing platform," said Brendan Barnicle, an analyst at Pacific Crest Securities. "Microsoft has to deal with the fact that Apple is making these really compelling devices."

Microsoft's move is the latest major win for ARM, which is making huge strides in mobile computing and on Wednesday also announced that graphics chipmaker Nvidia will begin designing central microprocessors for computers based on ARM architecture.

CORNERING THE MARKET

Microsoft's new approach marks a shift away from Intel, whose chips have held a hegemony on Windows operating systems on personal computers, and suggests the breakdown of the fabled "Wintel" alliance, which set the standard in early computing.

"It's highly symbolic, the Wintel duopoly that was such a good partnership for so long is fraying at the edges a little bit," said Todd Lowenstein, a portfolio manager at HighMark Capital Management.

The U.S. software maker offered no time frame for the launch of the ARM-supported operating system version, but Windows unit chief Steven Sinofsky said Microsoft typically aims for 24 to 36 months between major Windows versions, suggesting a launch date of between October 2011 and October 2012.

That means tablets capable of taking on Apple's iPad may be a year or more in coming, running the risk of leaving it too late to catch up with Apple's iPad, and betting that tablets will be an enduring new market.

"It's still early in the adoption phase for tablets," said Lowenstein. "Prices will be coming down, there is a mass market opening up even more, and both Intel and Microsoft have the capability to catch up. Microsoft has made a business model out of second-mover advantage, using its scale to crush opponents."