Handheld Combat

Gao Yanhong strides out of his Shanghai flat and slides into a taxi. Opening his sample case, which is filled with designer shades, he grabs his wireless handheld computer and begins his morning routine: trading the mainland's volatile "B" shares online as the taxi weaves through traffic. For Gao, who sometimes slips out of sales meetings to check on a preprogrammed stock alert, the personal digital assistant (PDA) has become indispensable. "I always take my PDA with me," says Gao, whose specialty model, made by niche player GWcom, sells for $240 in a market where stripped-down devices go for as little as $60.

These days Chinese PDA makers are hungrily pursuing customers like Gao, who represent long-term salvation from a price war in the mainland's fledgling but fast-growing PDA market. There are as many as 100 rivals in this slugfest, ranging from market leaders Hi-Tech Wealth, Meijin and Legend Computers, to manufacturers better known for selling refrigerators. Their tactics are predatory. In brutal marketing campaigns with names like Plan A (inspired by a popular Jackie Chan action flick), they have cut prices by a gut-wrenching 40%. "I'm the worst one when it comes to challenging all the manufacturers with price slashing," Meijin founder Sher Tak Fa boasts with bravado typical in this rough-and-tumble industry. "I want to show my power."

While the locals fight it out, multinationals—with the exception of Microsoft—remain warily on the sidelines, unsure if they can profit in China's savage market. Today, Compaq and Hewlett-Packard have a combined market share of under 3%; Palm and IBM don't even sell PDAs on the mainland and there isn't enough Mandarin software to spur consumer interest. "We know this is a weakness," concedes Franklin Sze, product director for Compaq's iPAQ in Greater China. Preoccupied with tough times at home and hobbled by supply problems, U.S. PDA manufacturers have focused international efforts instead on affluent consumers in Europe and Japan. "When you first look at the China numbers, they are pretty dazzling," admits William Holtzman, international vice president for U.S. PDA maker Handspring. "But in China, it's the old story of fools dash in."

Still, foreign players have begun to wake up to China's potential. In Japan, which once seemed so promising, they have made little headway with consumers so inextricably hooked to their cell phones. But in China, sophisticated wireless PDAs are shaping up as a potentially important way to access the Internet. Already, China has quietly become the second-largest market in the world for handheld computers, according to market research outfit IDC. Last year, close to 1.5 million PDAs were sold, a number expected to double in 2001. Add in cheap but popular electronic organizers, and the number swells to around 4 million. The dominant maker, says IDC, is Hi-Tech Wealth, which has a 40% share. "It's a very significant market by any measure," says Dane Anderson, IDC's chief of regional computer research. "But so far, the local players benefit most."

Sher, one of the pioneers, introduced Meijin's first PDA to China in 1995. A high-school dropout, he and his family slipped away to Hong Kong from his native Fujian during the Cultural Revolution. Today, the family has built a small empire with interests in property and light manufacturing. Sher struggled for years to build a market for PDAs. Even today, manufacturers complain that their main competition in China is the Filofax. "We started from zero. A complete nothing," Sher says. Today the employer of 900, he likes to needle rivals, notably Hi-Tech Wealth president Zhang Zhengyu, a software engineer who got his start distri-buting Sher's products. "Tell Mr. Zhang: 'Please, work hard to improve your technical know-how. You are still very inexperienced,'" Sher jibes. "'If you don't improve, your company will have a very short life.'"

But analysts say it is Sher who should worry. Chinese manufacturers have been slow to realize the value of making a PDA chic, rather than boxy and utilitarian. Many of China's device makers mock Palm for producing a Michael Jordan PDA. Zhang, a savvy marketer, was the first Chinese PDA manufacturer to understand the role of whim and fashion in the industry. He turned his product into a household name with the help of a massive television advertising campaign featuring China's debonair movie heartthrob, Pu Quanxin. Zhang has also proved to be a clever distributor. He secretly installs a bar code in each PDA so when his reps visit retail shops, they can detect when distributors poach on one another's territory. But Zhang's magic bullet in the PDA wars is a sleek regulation-blue Police PDA. Flip open the lid, press a button and the detailed files of some 300,000 criminal suspects are just a tap away. Given the size of China's vast law-and-order bureaucracy, Zhang hopes eventually to sell several hundred thousand Police PDAs to the security ministry. Next up, says Zhang, is a medical PDA that will store case records and allow doctors to write on-the-spot case notes and prescriptions, using Chinese character-recognition software.

For all the sophistication of such products, China's PDA market remains a hodgepodge, advanced in some areas and primitive in others. A creative local manufacturer has developed a PDA that Beijing traffic cops use to record fines and track stolen cars in a new cashless system that eliminates the chance for bribes. Innovators have experimented with voice recognition and designed built-in modems so users can plug PDAs directly into phone lines for Internet access, a useful feature in a country where less than 2% of the population owns a computer. But the China market is hindered by a lack of common software standards. Each PDA maker has gone its own way, creating homegrown—and incompatible—programs for each device. There is little incentive for the independent software developers that have helped come up with 10,000 applications for Palm and more than 650 for Microsoft's Windows CE.

"Without applications, the industry will not grow," warns Legend CEO Yang Yuanqing. But it's not easy to persuade rivals that cooperation is worthwhile. Legend, more than any Chinese player, has pushed for common, open standards. So far that hasn't paid off for Legend or its partners. The PC maker introduced China's first PDA based on Microsoft's Chinese Windows CE in May 1999. It has also promoted H-Open, a Chinese operating system it co-developed with a government think tank. But today, PDAs with Windows account for just 15% of Legend's sales, while buyers flock to low-cost devices running cheaper software. No outside developer or competitor has adopted H-Open. All this offers a sobering lesson for the multinationals that are cautiously entering the market. Earlier this year, Compaq introduced a Chinese iPAQ. But with a retail price of $723, it is hard to imagine sales will soar. Microsoft executives concede that success may be a long time coming. Making money? "This is a very big question," says one Microsoft senior executive, adding that his company will wait it out.

Money-losing Palm isn't as willing to take such risks. The dominant U.S. player only now has a Chinese operating system in the works, mainly because Taiwanese computer maker Acer persuaded Palm officials to let them develop one. Acer will introduce a Chinese Palm under its own brand name later this year. Meanwhile, Palm itself has no immediate plans to market a PDA in China under its brand. "They don't understand China," says Acer executive J.T. Wang. "They do understand it's very difficult to build a sustainable and solid business there."

So should foreign players make a dash for this market? China's PDA manufacturers are glad to weigh in with advice. "They will surely fail," says Sher. Less partisan observers offer this suggestion: come in, but proceed with care. A billion plus Chinese means a lot of appointments are being forgotten and phone numbers lost. Somebody has to get them organized.