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The woes of China's tech hopefuls, though, aren't entirely the result of poor timing or management missteps. What was supposed to be a major advantage for Chinese tech companies--the backing they receive from Beijing--has in many cases turned into a liability. In exchange for preferential loans, tax breaks, and sweetheart property deals, Communist Party bosses often get to influence key business decisions.

Wiki MarkupTake SMIC. The chipmaker will soon operate plants in five cities across China. By contrast, SMIC's Taiwanese rivals, United Microelectronics Corp. (UMC) and Taiwan Semiconductor Manufacturing Co. (TSM), have built most of their factories in two science parks just a few hours' drive from one another in Taiwan, making it easier to manage the plants. So why has SMIC spread out so much? "Every \ [local\] government wants to go into high tech," says Pranab Kumar Samar, an analyst in Hong Kong with Daiwa Institute of Research. That might make for good politics, but it's not exactly smart business.

Wiki MarkupMany Chinese companies are also paying the price of a government effort to spur the development of homegrown technologies. State-owned Datang Telecom Technology & Industry Group, for instance, has squandered hundreds of millions of dollars and almost a decade on a Chinese standard for so-called third-generation (3G) mobile telephony when it could have easily adopted one of the international standards already in use. This has also hobbled Huawei, ZTE, and the country's dozens of cellular handset makers. Chinese companies "don't have a \ [3G\] market in which to cut their teeth," says Mark Natkin of Marbridge Consulting Ltd. in Beijing.

Meanwhile, competitors from other countries aren't standing still. Taiwanese, Korean, and Japanese LCD makers are pouring billions of dollars into more efficient plants, both at home and on the mainland. The Chinese lack both the technology and the cash to build such super-expensive factories. "It's very hard to catch up," says Byron Wu, director of China research for market tracker iSuppli Corp.

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