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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?

Leverage China and India to Transform the Pharma Industry

Steven Pearlstein’s article - “Not What the Doctor Ordered” - in today’s Washington Post makes some excellent points about the self-imposed ills of the pharma industry. Here are some additional perspectives.

The pharma industry needs to figure out how to speed up its rate of new drug development while at the same time reducing the exploding costs of R&D. And, it needs to aggressively pursue new growing markets so that the rising costs of R&D can be spread over a larger scale. On both of these fronts, leveraging China and India (as talent platforms and as markets) is becoming increasingly important for the health of the pharma industry.

Each of these two countries produces five times as many chemists at the bachelor’s level and three times as many at the master’s level than the U.S. on an annual basis. And, this talent costs only about one-fifth to one-third of that in the U.S. Also, given the large populations and low income levels in China and India, enrollment in clinical trials can be fast, easy, and highly efficient as a single site can recruit a much larger number of patients. According to Jean-Pierre Garnier, the recently retired CEO of GSK, the cost of Phase II and Phase III clinical trials at a top notch academic medical center in India is less than one-tenth the cost of similar trials at a second-rate medical center in the U.S. In short, if a global pharmaceutical company wants to boost its innovative capabilities while at the same time trimming its R&D budgets, it must rely increasingly heavily on China and India as R&D platforms.

China, India, and other emerging economies are also becoming strategically important as markets. According to industry estimates, by 2017, pharma sales in just the big emerging markets are likely to be larger than those in the United States plus the top five European markets combined. In a highly scale-sensitive industry such as pharmaceuticals, going where the growth is becomes critical not just for the top line but also to be able to support growing expenditures on R&D.

India’s Satyam Scandal – A Blessing in Disguise?

The unfolding Satyam saga, India’s Enron, has been a watershed event in Indian corporate history. According to the now-under-arrest founder’s own public confession, Satyam (India’s fourth largest IT services company) had inflated its reported revenues by 25 percent, its operating margins by over 10 times, and its cash and bank balance by over one billion dollars. The magnitude of this fraud makes it by far the biggest accounting scandal in India’s history and one of the more prominent ones worldwide in recent years.
Just like product safety crises in 2008 involving toys, toothpaste, and tires from China, the Satyam scam has been a big black eye for corporate India. However, if we look ahead, I believe that this scandal will prove to be a blessing in disguise. The ownership structure of India’s corporate sector is rife with the potential for governance abuse. More than half of the 30 companies in the BSE Sensex - India’s equivalent of Dow Jones – are family controlled. Similarly, over 40 percent of the companies listed on the Bombay Stock Exchange have family shareholdings exceeding 50 percent. Dominant control by a family block is not necessarily detrimental as it can enable rapid decision-making on important strategic matters. It can also reduce the risk of divergence between the interests of owners and managers. However, such an ownership structure does demand that the interests of non-family shareholders be zealously protected. This is often not the case today in India.
While the scale of the scam at Satyam is breath-taking, there is no reason to believe that many of the other family controlled companies in India are squeaky clean. Thus, a blow-up was bound to happen at some point in time. Regulatory systems – not just in India but virtually everywhere – are always reactive. Thus, the sooner the regulators get a kick in their pants, the better. Even the mega-scale of the Satyam scandal is a blessing in disguise. It simply cannot be swept under the rug or responded to with half-hearted measures. It has already resulted in a toughening of the disclosure requirements. Other moves are being considered. It also is very likely that the perpetrators of the fraud at Satyam will see themselves behind bars for a considerably long time. Further, Satyam’s auditors, PricewaterhouseCoopers, have already suffered a massive damage to their reputation and are unlikely to come out of this scandal unscathed.

Will the current economic turmoil result in a back tracking of globalization?

Many people think that the coming recession will lead governments in the U.S. and elsewhere to become more protectionist thereby slowing or reversing the ongoing march of globalization. I disagree for the simple reason that companies from the mature developed countries need access to high growth markets like China and India more than ever. Any protectionism in the developed countries will be met by a counter response thereby jeopardizing this much needed access.

Globalization refers to integration across economies. As the spread of the U.S. sub-prime crisis to the rest of the world has demonstrated, the world economy is more integrated than ever. As is also clear, a solution to this crisis has to be a globally coordinated one involving the developed as well as the major developing economies rather than isolated actions by individual countries.

Over the next five years, the primary growth opportunities will lie in the big emerging powerhouses (primarily China and India) and not in the developed markets of U.S., Europe, and Japan. Even as the U.S. and Europe head into a recession, China’s GDP is expected to grow above 9% in 2008 and around 8% for 2009. For India the predications are above 8% in 2008 and around 7% for 2009. Thus, for any established MNC, pushing for growth requires a deeper commitment to the pursuit of markets in China and India.

Another likely byproduct of the current recession in the U.S. and Europe will be a more intense push for cost reduction. As a result, companies are likely to be more eager to outsource value chain activities from countries such as China and India where the cost of blue collar labor is 1/20th and that of white collar labor 1/5th of the costs in the U.S..

For companies headquartered in China or India, the current economic turmoil means lower asset prices in the developed world creating more favorable opportunities to acquire valuable businesses. Thus, another outcome of the current economic turmoil is likely to be a more rapid globalization of the emerging dragons and tigers from China and India.

The Corporate Identity of A Global Winner in 2020

Take any industry, whether it is cars or retailing or pharmaceuticals, the global winners are likely of two types.

Some of those would be incumbents, companies like Proctor & Gamble, IBM, Cisco, and Nokia that are giants today and will most likely remain giants in 2020 except that they would have transformed their identities. Today we might call Proctor & Gamble an American company. But by the time 2020 rolls around, if it is still to be a successful company, it would actually, by every measure, be not just an American company but a Chinese company, an Indian company, a European company. Same for IBM or Nokia or Cisco.

At the same time there will be a second group of winners in 2020 and they will be the newcomers from China, from India, from some of the other emerging economies. But if they are to be winners in 2020, they cannot be like the Chinese company of today. They would have to be like the Chinese company of tomorrow. And the Chinese company of tomorrow will have to be not just a Chinese company but also an American company, a European company and an Indian company. And the reason I say that is because the Chinese company that is a global winner in 2020 cannot be exporting mostly out of China. It’ll have to have R&D, manufacturing, marketing and sales, and service activities and employees and managers located in major hubs around the world. And so if the bulk of the company’s core activities are actually sitting outside China, then the company is no longer a historical, traditional Chinese company.

And a perfect example of a company like that, that’s already being created out of China, is Lenovo. Of course, the roots of Lenovo are in China. The chairman of Lenovo is Mr. Yang Yuanqing. He is a Chinese gentleman but his office is in North Carolina and he lives there. The CEO of Lenovo is Will Amelio, an American, who sits in Singapore. The CFO is Mr. Wong Wai Ming whose office is in Hong Kong. And the Chief Marketing Officer is an Indian American and the global marketing hub of Lenovo is in Bangalore. And so is Lenovo a Chinese company? True. Is Lenovo an American company? Yes. Is it an Indian company? Yes.

Roads Ahead for Chinese Companies Going Global

Chinese companies that aim to become the global giants of tomorrow must overcome their weaknesses in the soft skills - organization and leadership. Why? Chinese companies that become global will have their value chain activities geographically dispersed. Their key managers may come from many different nationalities separated by a huge distance of time, language and cultures. And so in that case, a command and control system doesn’t work. Of course, companies will always have hierarchies but if the person reporting to you is sitting 10,000 miles away, the fact that he or she reports to you is irrelevant because essentially it becomes a lateral, horizontal relationship.

Given China’s history of a more of a command and control economy, a culture that respects hierarchy, a country that’s relatively very homogenous, that the DNA of Chinese business leaders hasn’t taught them as a natural course how to work horizontally, how to work across diversity will be an immense challenge. And I think that’s the single biggest area where Chinese companies need to figure out how they build those capabilities.
And they’re working on that. But it’s something that is going to take time. China has the capital and the hard capabilities, but what still needs to be accumulated and cultivated and built are the soft capabilities.