The merits of manufacturing in mainland China are well established but high-tech companies or those with sensitive intellectual property still have reservations.

Take Wavecom, for example, a ‘fabless’ company (one that outsources manufacturing and concentrates on design) headquartered in Paris with subsidiaries in Hong Kong, the US, Germany, China, Japan and Taiwan.

In recent years it has faced intense price competition and other changes in its business environment that have resulted in a dramatic downturn in revenues. In 2004, revenues dropped to €151.6m, from €275.6m in 2003 and €551.1m in 2002. The Asia Pacific region made up 46% of the company’s business in 2004, with Europe, Middle East and Africa (EMEA) encompassing 50%, and the Americas 4%.

Despite its substantial earnings by serving, among others, Chinese and Korean mobile phone manufacturers, in 2003 market competition intensified substantially, particularly in Asia. By September 2004, corporate executives decided to quit the mobile phone handset business and concentrate exclusively on the market for wireless communications between machines, specifically automotive, industrial and mobile professional applications.

Beefed-up R&D

The redirection called for corporate reorganisation. More research and development was needed in Asia, which required 10 extra engineering hires. While mainland China appeared to be a contender for a cost-effective expansion, Wavecom executives decided instead to increase the size of its Hong Kong operation.

“We made a comparison between Shanghai, Shenzhen and here,” Didier Dutronc, group vice-president and managing director of Wavecom Asia Pacific, told fDi in an interview in his Hong Kong office. “We found that salaries were lower in Shanghai and Shenzhen, but when local taxes were added, we realised they could be higher.”

Also, with so many companies entering the Chinese market, salaries in mainland China are now increasingly volatile. China today is witnessing 1%-3% wage increases, particularly in large cities such as Shanghai and Shenzhen.

“In Hong Kong we also find engineers are more experienced, although the gap is quickly being reduced,” Mr Dutronc adds.

Wavecom’s staff increase may not be substantial when compared with other companies operating in the region, but its commitment to Hong Kong has been substantial for a company of its size. It opened there in 1999 with one employee; by 2005, the staff totalled 55.

An added benefit is that in Hong Kong, a city built by entrepreneurs, a company the size of Wavecom does not get lost in the shuffle. In fact, the government of the Hong Kong Special Administrative Region (SAR) lends a great deal of support to small and medium-sized enterprises.

Lab planned

For example, the SAR has offered to build a lab at the Hong Kong Science Technology Park, a 22-hectare state-of-the-art infrastructure on the Tolo Harbour waterfront in Pak Shek Kok, New Territories. The park offers a knowledge-based, campus-like environment with high-tech enterprises and a skilled workforce. A special attraction for Wavecom is that it is designed to accommodate companies of all sizes and stages of development and to promote interaction and innovation at both local and global level.

“The lab is not yet defined, but if it matches our requirements, it could be a win-win,” says Mr Dutronc. Other developments to foster high technology may come on line if the Hong Kong government decides to convert its Ocean Park theme park into a science centre. Discussions about the move are under way. Wavecom is also looking to tap resources at the University of Hong Kong and the Hong Kong Applied Science and Technology Research Institute, which was set up in 2001 to capture and promote technological advances for Hong Kong.

The fact that Hong Kong offers an innovative environment to scientists and engineers alike is attractive to Wavecom. “The engineering population is stable in Hong Kong,” Mr Dutronc explains. “In China, people move fast from one company to another – and they take their knowledge with them.”

This is of particular concern to Wavecom since the company has already fallen victim to copying, in early 2004. The incident involved Wavecom’s logo, which was associated only with a small portion of the company’s business. “But it was enough to raise alarms,” Mr Dutronc says. “Hong Kong laws protecting intellectual property are much stronger than those in mainland China.”

Since joining the World Trade Organization, China has strengthened its legal framework and amended its intellectual property rights and related laws and regulations to comply with the WTO Agreement on Traded-Related Aspect of Intellectual Property Rights.

But despite stronger statutory protection, according to one copyright industry association, China’s piracy rate remains one of the highest in the world (more than 90%). Though China is a party to international agreements to protect intellectual property (including WIPO, Bern Convention and Paris Convention among others), a company must register its patents and trademarks with the appropriate Chinese agencies and authorities for those rights to be enforceable in China.

Intellectual property rights are critical to Wavecom as its business relies on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance its competitive position. If it were unable to prevent a competitor from using its designs and techniques to produce competing products, its business would be badly affected.

This issue is more critical today than ever before. Before it decided to expand R&D operations into Asia, Wavecom used its Hong Kong office for sales and marketing only, with R&D activities being centred in San Diego and France. “But we need all people connected to the market here and close to the factory,” Mr Dutronc says. Quality control is paramount for both hardware and software.

Wavecom does not manufacture any of its products, but contracts the business out to Solectron, a global electronics contract manufacturer. Until the end of 2003, Wavecom used three contract manufacturers to produce its modules and modems, one of which was with Solectron in Bordeaux, France. In October 2003, it decided to concentrate all manufacturing with Solectron, using its plant in Suzhou, China.

By using the single contract manufacturer, Wavecom was able to reduce costs and improve control over the manufacture of its products. However, this also means that the company is more dependent on a single supplier to assemble and test components and products.

All products are shipped directly from Solectron to customers. “We are trying to limit warehousing our product,” Mr Dutronc says. “Besides, Wavecom is an advanced product utilised by Solectron. So they use us as a technology tool for themselves.”

Tax and transport

This again raises the question of why Wavecom preferred to expand its business in Hong Kong rather than mainland China. The company found several good reasons. Hong Kong offers tax advantages; plus its labour laws are flexible. Travel was also a consideration. Since more flights transit via Hong Kong than any other airport in Asia, Hong Kong was deemed the superior choice. “There are not as many good connections from the other cities. Plus, to come and go from China you need a visa,” he says.

The bulk of Wavecom’s R&D will remain in San Diego and Paris. “But as we introduce new production, we need to be close to the factory to make a smooth transition,” Mr Dutronc says. “But not everything can be transferred. We need to keep an eye on our intellectual property.”