Foreign PC makers say they support Beijing's crackdown on the smuggling of IT goods and expect positive results in the long term from the establishment of official mainland distribution channels. However, the short-term effect on foreign vendors - whose attitude towards smuggling has been ambiguous and some of whose PCs have been involved - is unknown. GartnerGroup distribution industry analyst Lane Leskela said it had been common for foreign PC vendors to ship semi-knocked-down computers and parts from Hong Kong to the mainland for final assembly to get around some tariffs. These tariffs include a general value-added tax of 17 per cent, plus import duties of 30 per cent for finished computer products and 9 per cent for parts. To avoid them, many major foreign PC vendors set up plants to manufacture PCs in the mainland for sales there. In the past, this local production strategy has been defeated by competition from smuggled products, which avoid import taxes. 'The rationale [for local production] has been significantly weakened,' Compaq Computer's deputy managing director in China, Philip Leung, said. The government's recent anti-smuggling campaign was nationwide and comprehensive, targeting all kinds of products, not just computers, industry sources said. 'It is actually part of the government's initiative to fight against corruption and stop participation of the PLA [People's Liberation Army] in commercial activities,' Mr Leung said. The crackdown on smuggling, therefore, is expected to help local manufacturing. On the other hand, some foreign vendors have benefited from unofficial distribution channels - the 'grey market' - which bring their products into the mainland from other countries for sale at low prices. Price remains the focus of competition for customers in the mainland. For foreign vendors, it may not really matter whether their products are shipped via official or unofficial channels. The short-term impact of the anti-smuggling activities was more on prices to consumers, said Jared Peterson, research director with International Data Corp in Beijing. Prices of computers as well as parts such as chips and hard drives had risen 10 to 20 per cent - and more for notebook PCs - because of the lack of supply due to the crackdown. However, Mr Peterson said that had not really hurt the vendors. 'They have to recalculate what's happening and keep their channel partners happy,' he said. Compaq's Mr Leung refused to comment on the short-term impact for his company, but agreed there had been a PC shortage in the mainland and expected an oversupply elsewhere. He said trading companies and distributors were adopting a wait-and-see approach before deciding whether to continue importing via unofficial channels or to shift to legal means. He felt the crackdown would help establish official distribution channels in the mainland in the long run. IBM personal systems group general manager for greater China Richmond Lo said the crackdown was positive for the long-term development of the PC industry in the mainland. It had no direct short-term impact on IBM because the company manufactured PCs in the mainland, he said. However, Gartner's Mr Leskela was doubtful about the long-term impact of the anti-smuggling campaign, saying an effective official crackdown was almost impossible in small cities while street-level profits could be made by traders. It was also questionable how far PLA-operated businesses had been curtailed. Nevertheless, he said the government's initiatives would give channel distribution a chance to become standardised in the mainland and for tier-to-tier logistics supply to be possible and profitable. Vendors would benefit in several ways. They would be able to calculate their profit margins, which Mr Leskela said would benefit high-end products, in particular, servers. The reputation of many brands of PCs also should improve because PCs imported by non-authorised distributors usually did not enjoy after-sales service warranties. And with a regulated channel distribution system, vendors would be able to better check the effectiveness of their marketing strategies because they would know the identities of their end-users and get feedback.