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How IBM Gets China and India Right!

Trapped in legacy mindsets, far too many corporate leaders continue to view China and India from the narrow lens of just off-shoring and cost reduction. Instead, they need to treat each of these economies as representing four game-changing realities, all strategically compelling, and all playing out simultaneously: mega-markets for almost every product or service, platforms for global cost reduction, platforms to boost a company’s intellectual capital, and springboards for the emergence of a new breed of extremely capable and highly ambitious competitors. For a multinational, developing robust China and India strategies requires addressing all four of these realities head-on rather than just one or two of them.
IBM is a leading example of a company that gets China and India right. Under Lou Gerstner, IBM made a clear shift in its strategy away from being a largely hardware company to becoming also a software and services company. Sam Palmisano, who took over as the company’s CEO in January 2003, has built on this legacy and put the company on a fast-track towards becoming a globally integrated enterprise that is blind to nationality, that seeks to optimize the value chain on a global basis, and that looks at the world as both its playground and as its school. As Palmisano explained his guiding philosophy: “This is an enterprise that shapes its strategy, management and operations in a truly global way. It locates operations and functions in the world based on the right cost, the right skills, and the right business environment. And it integrates those operations horizontally and globally.”
Since actions speak louder than words, let’s look at what IBM has actually done:
1. It has been at the leading edge in leveraging the unique strengths of each country. In mid-2004, IBM had about 9,000 people in India. By 2008, barely four years later, it had about 90,000 or 25 percent of its worldwide staff. IBM’s operational base in India is now nearly as large as any of the Indian giants – Tata Consulting, Infosys, or Wipro. It is fighting fire with fire. In the war for talent, for scalability, and for cost efficiency, IBM now competes head to head with the Indian tigers on their home turf.
2. IBM now sources a third of its hardware from China. While this may not be particularly remarkable, what is different is that, in October 2006, IBM moved the office of its chief procurement officer to China. Lots of companies rely on outsourcing to China. However, far too many of them do so without their eyes and ears open, without adequate monitoring and oversight, and without pushing the envelope regarding decisions such as what to insource vs. outsource, which vendors to rely on, and how to manage the relationship. IBM’s is a case of what I’d call “smart outsourcing.”
3. IBM has located two of its eight corporate research labs in China and India. Each of these labs is a global center of competence charged with developing new technologies for deployment worldwide, not just within the local market. For example, the India Research Lab is the focal point for the development of mobile web technologies, for telecom software development, and for AIX software. Similarly, the China Research Lab is the focal point for the development of future embedded systems and devices, resilient and pervasive infrastructure, and user interaction.
4. IBM has been far more aggressive in going after the IT services market within India than even the Indian players and now holds the number one spot in the country. It has looked at India as “four stories rolled into one” and not just as a platform for cost efficiency. Impressively, IBM has scored major wins in the Indian market by setting aside legacy notions about what products or services the market may need and at what price. Consider, for example, IBM’s partnership with Bharti Airtel, India’s #1 mobile operator. Airtel has the unique distinction of offering perhaps the lowest prices for mobile telephony in the world (closing in on one cent/minute nationwide) while at the same time enjoying some of the highest profit margins. How does it do it? The answer lies in Airtel’s unique business model developed in partnership with Nokia Siemens Networks and Ericsson on the one hand and IBM on the other. NSN and Ericsson install, maintain, operate, and upgrade the telecom network and are paid on the basis of capacity utilization. IBM owns all of the hardware, software and people, provides end-to-end business services, and gets paid in the form of a share of Airtel’s top-line revenues. This business model maximizes the elimination of waste in the supply chain while enabling the vendors to leverage their scale and core competencies. These outsourcing agreements, the first of their kind globally in this industry, have transformed India’s mobile telecommunications sector. Despite India’s poverty, the low prices for both equipment and services have made India the world’s fastest growing mobile market in the world with 11 million new subscribers being added every month – even during December 2008 and January 2009. This is just the start. IBM and other tech players are now working at full speed to bring ultra-low-cost mobile webs solutions (for banking, for commerce, and potentially even for education and health care) to the hundreds of millions of India’s poor.
5. IBM is actively pursuing the development of ultra-low-cost solutions for needs such as homeland security, intelligent electric grids, and the like in India, China, and other emerging markets. The market for these solutions in emerging economies is very large. However, like mobile telephony, it is also a very price elastic market. The ideal locations for the development of these low cost solutions are places such as India and China and not Armonk, Zurich, or Tokyo. IBM realizes, however, that today’s globalization runs both ways. Ultra-low-cost solutions developed for poorer economies can become killer applications in the developed ones also – especially in today’s economic conditions.
In more ways than one, IBM today is just as much an Indian, a Chinese, a European, and a Japanese company as it is an American company. It is for these reasons rather than sheer luck that IBM has delivered some of the best financial results in the tech sector even in the middle of the current economic crisis.

Prospects for a More Democratic China?

Hillary Clinton’s decision to choose East Asia as the destination for her first foreign visit after becoming the U.S. Secretary of State reflects an acute realization that Asia has already replaced Europe as America’s most important partner and competitor. Within Asia, China is the rising giant. Already the world’s third largest economy, China will quite likely overtake Japan by 2015 and the U.S. by 2025-2030. China’s economic future appears pretty clear. However, what about its political future? Given China’s enormous and growing clout, the answer to the second question is probably as important for the rest of the world as the answer to the first.
We see reasons for hope. Clearly, China remains firmly committed to a one-party political system and a press which must serve national interests rather than be guided by notions such as freedom of expression. Notwithstanding these commitments, China’s leaders are acutely aware of several new and irreversible realities: growing decentralization of economic power, rapidly rising education levels, and the even more rapid spread of communications technologies. More than 250 million Chinese now use the Internet and almost 600 million Chinese are mobile phone users. Both numbers are rising. The ongoing roll-out of 3G technologies will further increase the ability of China’s citizens to share audio, video, and other types of data at high speeds on mobile devices. China’s leaders are also aware that, given these developments, the only way that the country can remain socially stable is to ensure that the government and the Communist Party of China become more transparent, more responsive, and more process-driven than in the past.
We consider it important that, in their speeches to the 17th Party Congress in 2008, China’s top leaders used the term democracy repeatedly and emphasized that the Party must become more transparent and more responsive. Important new laws now start as drafts posted on government websites. Often, these drafts receive several hundred thousand comments and suggestions from the public. Many of these suggestions do get incorporated into the revised bills before they become the law. And, the Party itself – comprising nearly 75 million well-educated and on average more affluent citizens – has started to experiment with contested elections.
None of these developments imply that China will adopt a Western-style democratic system anytime soon. They do foretell, however, that the China of 2020 could be far more democratic than that of today.
Would you agree? Or, do you think that we are being overly optimistic?