Making IT in China

Information Technology Enabled Manufacturing and Transactions in China
-- An Opportunity for Global Businesses

by
Peter P. Yim

Preface

I was born in Hong Kong and got my primary and secondary education there. Like a number of the more fortunate of my contemporaries, I was able to further my education abroad. I came to the US for college. After getting a degree in Industrial Engineering and Operations Research from Cornell University, and some training at the graduate business school there (concentrating in Organizational Behavior and Personnel Management), I returned to the Far East in 1973 and started a career in manufacturing. In the 24 years after that, I have witnessed, first hand, the meteoric economic growth that swept Asia , first the ‘Four Tigers’ -- Hong Kong, Singapore, Taiwan and South Korea -- and then Thailand, Malaysia, ... and, of course, China.

Besides Hong Kong and the US, I have lived 4 years and 6 years, respectively, in Taiwan and Singapore, and have traveled extensively in Japan, South Korea and China. I have done or even started businesses in all these places.  All the while, I was mainly working with Western businesses (US companies, in particular) to help them get into the Far East. I’ve worked on helping them set up business operations or joint ventures, transferring technology or products, improving their product quality, lowering their costs, and so on. But all that essentially boils down to making the partners concerned -- say, the Western manufacturers and their Asian contractors -- work more effectively as a team, and thus, more responsive and competitive.

From the corporate management suite, I turned myself into an entrepreneur in 1984. I started a technology based company that would leverage on information technology to develop emerging markets. It was about that time that I started to learn to work in China. The enterprising spirit also drove myself and my teams to explorre the edges of technology and business organizations. I was among the first to develop local area networking in Taiwan,  do surface mount computer assemblies in Hong Kong and China, setup a pilot computer integrated manufacturing (CIM) operation in Singapore, develop multimedia software, setup a software factory in China, employ groupware as the corporate transaction platform, develop a PCMCIA data/fax/voice modem with a team distributed in six locations around the world, ...  and so on.  For a while, life was constantly 35,000 feet above sea level, going at 650 miles per hour.

I decided, then, to slow down and  to spend some time on research, trying to make some sense out of what has transpired. The first thought that dawned on me was that nothing else I have encountered during my career, compares, in magnitude and profundity of the impact, with the emergence of China as a market economy. As an affiliate of the Institute for the Future, I am trying, here, to gather a collection of thoughts, reflections, insights and lessons, around the subject of manufacturing, transactions and information technology  in China as it relates to Western businesses, as my contribution to the Outlook project. I hope you may find some of the material useful.

 

Peter P. Yim

June 1997.

 

Introduction

Pick something up from your favorite department store or toy store shelve. There’s a good likelihood that you will find the “Made in China” label on it somewhere. Behind that, lies a story of some of the greatest opportunities and challenges that Western businesses will be presented with for (at least) the next couple of decades. Over the next 10-20, in many industries, success in China will be required to maintain global market share leadership.  This is not just a huge opportunity, but a huge risk for those that miss the boat.

The news about business activities in the Asia-Pacific, and about China in particular, grab the headlines in our economic news (see sidebar, “Why Talk About China”). China has 21% of the world’s population and it is the world’s fastest-growing economy, putting it on the path to becoming the world’s largest economy and a global power some time early in the next century.

While economic growth in the industrialized countries cannot be fueled much further by increases in mass production and consumption in their home markets, China promises a potential market of unprecedented size and appetite. With a cordial economic and trade relationship, both China and the industrialized world stand to benefit through access to each others’ markets, resources, and investments.

Just as the Chinese economy is poised to take-off, information technology (IT) is enabling transformative changes in all industrialized economies. In China, these changes are none more visible than in their impacts on manufacturing and changes in the nature of transactions. In this report, we shall explore what’s in store at this juncture of Chinese economic growth.

 


 

Why Talk About Manufacturing

The Western world is taking about 250 years (from about 1750 to, say, the year 2000) to transition from an agricultural economy through an industrial economy and onto an information economy. Over the course of the industrial era (which we are probably at the tail end of), we saw the emergence of the middle class, the development of manufacturing, which enabled mass production, mass consumption, and a vast improvement in living standards.

China is possibly going to go through most of this transition in a span of 40 to 50 years. The process (re)started in about 1979. That was when Deng Xiaoping, China’ paramount leader who just passed away in February 1997, opened up the country from economic seclusion and initiated reforms which embrace the market mechanism alongside the socialist ideology in what he termed a “socialist market economy.”

Even today, manufacturing is still a most significant part of the western economy. In the USA, for example, manufacturing profits amounted to $664 billion, and accounted for 30.1% of the total corporate profits contribution from domestic industries in 1996. This makes manufacturer the biggest contributor, followed by the financial industry (23.9%), transportation and public utilities (18.2%), and then wholesale and retail trade (14.5%).

Manufacturing is important for China. It makes up 48% of China’s total industrial output. It is crucial in China’s growth too as it is the means by which consumer needs for durable goods are being fulfilled.

It is important to talk about manufacturing because that is one area where the industrialized countries have a lot of technology, experience and know-how. These are highly marketable assets which can be leveraged upon as a means to gain access to the Chinese market.
 

Why Talk About Transactions

On the verge of the information era, today’s manufacturing no longer resembles its counterpart from the past. Since the Industrial Revolution of 1750, the manufacturing process have evolved from craftsmanship to mechanization and then to mass production. Along the line, the “quality” evolution set in. Computer and information technology brought further transformative changes to that evolving process over the last couple of decades. “Islands of automation” gets replaced by “Computer Integrated Manufacturing (CIM),” which is further evolving into schemes variously labeled as “Computer Integrated Man-Machine Manufacturing (CIM3),” “Agile Manufacturing,” “Virtual Manufacturing Enterprises,” or “Next Generation Manufacturing (NGM).”

Today’s manufacturing is an orchestrated workflow of transaction processes. Three distinct, but coordinated transaction processes are occurring in parallel: (a) the progressive conversion of materials and energy, (b) the exchange of information in transactions of purchase orders, invoices, inventory positions, bank account debits and credits, and so on, and (c) the communications and conversations between the people involved.

Transactions form the landscape which today’s manufacturing subsists and thrives upon. The first two processes have traditionally been given a lot of attention—studied, analyzed, defined and structured. It is the third—the transactions among people—which has sometimes been neglected.

We are talking about transactions, and particularly, about this third type of transactions because this process is more prone to breakdown in a setting when language and cultural barriers have to be crossed. And that, incidentally, is exactly the setting a western business will have to grapple with when she attempts to access the China market.
 


How Are Things Doing in China?

Let us take a look at how things are doing in China; in particular, those relating to manufacturing and transactions.


Manufacturing

Manufacturing has been growing very rapidly in China since the time Deng Xiaoping opened up the country to foreign trade and investment. Table 1 shows the rate of growth of the total industrial output of China in the recent years.

Table 1

China’s Total Industrial Output* Growth Rate (Percent)

Period Sixth Five-Year Plan Seventh Five-Year Plan Eighth Five-Year Plan
Years  1981–1985 1986–1990 1991–1995
Growth rate 15.7%  17.6% 22.2%

*Industrial, excluding building and transportation, but including oil and natural gas.

 Source: CTISS

 

Shenzhen and the Pearl River Delta

The first Chinese territories being opened up in the early 1980s for foreign trade and investment, more or less as an experiment, were 14 coastal cities and 4 Special Economic Zones (SEZs). Not all of them developed quickly, nor did they do equally well. During those days, both the pioneering investors and their Chinese counterparts had to struggle. The laws, regulations and guidelines were incomplete; they hardly had telephones; transportation and accommodation were inadequate; and neither side had the references to properly set their expectations. To the foreign managers or support staff, it was considered “hardship,” during those days, to be on China project teams. A lot of projects failed or could not reach completion.

On a more positive note, though, it was the pioneering companies or individuals, who had taken their time to build up relationships with the Chinese during those difficult years, who were to be given preferential treatment and to become very successful further down stream. Companies like Digital Equipment Corp., Motorola, Hewlett Packard, Texaco, IBM, Sanyo, Epson, McDonnell Douglas, or individuals like Hong Kong business tycoons Fok Ying-Tung, Gordon Wu and Li Ka-Shing are cases in point.

During the mid to late 1980s, the areas that grew most rapidly were the SEZ of Shenzhen (which is right across the border from Hong Kong), and shortly following it, the SEZ of Zhuhai (across the border from Macao), the city of Guangzhou, and eventually the entire Pearl River Delta area of the Guangdong Province. Take, for instance, the Hongkong-Shenzhen combo, a lot of the manufacturing facilities established there were (and still are) joint venture operations with Hong Kong businesses. The Hong Kong partners would be doing the manufacturing front-end work—marketing, selling and customer service, as well as material procurement, handling the international financial transactions and the logistics of the export shipments. The China operation would be handling all the production back-end work. The work model is somewhat similar in nature to that of the maquiladoras between the US and Mexican border. Typical China-side facilities would employ hundreds or even thousands of workers, engage mainly in assembly work with a mix of manual and automated equipment, and producing fairly matured products (or with fairly matured processes) in very high volumes at low costs. Very high productivity and efficiencies have been attained, due mainly to the high production volumes involved, and the industriousness of both the Hong Kong and the Chinese work forces. These front-end/back-end teams formed distributed business enterprises that are highly competitive. Within a few years, millions of jobs were created and this area became a major low cost manufacturing base of light industrial products and consumer goods for the rest of the world (especially for the U.S. consumer market).

Hong Kong provided the international business infrastructure (telecommunications, banking, component supply, and so on) for those enterprises. The Hong Kong partners were adequate in terms of transferring manufacturing process management and expertise. In what they were doing, the team did great. However, jointly, those enterprises fell short of being able to develop new/innovative products. The products were mainly consumer goods at medium or low technology levels. As a result, the value proposition remained pretty much one that was exporting low cost labor from China to the rest of the world.

The role of Hong Kong, however, was vital to the early economic successes. Besides facilitating Chinese exports, Hong Kong, will again play an important role in adding value to business partnerships between Western business and China, as integrators, facilitators, and at times, financiers. At this year and month of Hong Kong’s reunification with China, I would suggest that Hong Kong will continue have a very bright future, for, categorically, no other community, can come close to Hong Kong in terms of exposure, experience and expertise in facilitating business between China and the West. And, that facilitation, sure adds a lot of value, in view of all that we’re discussing in this report.
 

Other Developments in Cities, Townships, and Villages

Coastal cities like Xiamen and Fuzhou (across from Taiwan) and the Northeastern cities of Qingdao, Dalian, Tianjin and Shenyang around the Yellow Sea also started attracting manufacturing ventures and enterprises in a similar fashion. Taiwanese partners made the bulk of the investor in the two former cities; and the Japanese and South Koreans manufacturers tapped into the Northeastern cities.

While the coastal cities and SEZs were enjoying their success, manufacturing also sprung up in smaller towns and villages. These township and village enterprises (TVEs) were hugely successful in terms of making better use of the manpower resources, bringing wealth to those territories, and in improving the living standards of the people there.

However, the proliferation of TVEs have also become a threat to the environment, especially in the earlier days, before the government focused attention in the matter. Foreign firms should be aware of the risks of working with local firms that heavily pollute.  Exposure of some of the more serious cases, if they are not taken care of promptly, could create ecological conflict with the rest of the world similar to or worse than how the labor abuse issues is getting treated today in some of the Western markets.
 

Developments in Shanghai

In the 1990s, Shanghai started developing in a big way. The development of the Pudong SEZ sends a clear signal that Shanghai is poised to be China’s preeminent industrial and commercial center once again. More important even than the infrastructure, Shanghai (with a population of more than 13 million) has always had the talents, the entrepreneurship and the business acumen.

The compounded annual growth of Shanghai’s GDP between 1992 and 1995 was in excess of 14%. The GDP generated by an average worker in Shanghai had grown more than seven folds, from RMB 4,295 Yuan in 1980 to RMB 31,268 Yuan in 1995. Figure 2 shows some of Shanghai’s economic statistics alongside those of the entire country of China.

 

Figure 2

Shanghai’s Economic Statistics (1995) Compared With Those of the Entire Country of China

  Unit  China Shanghai Percent
Population Million People 1,203 13 1.1%
GDP Billion Yuan 5,773 246 4.3%
Total industrial output Billion Yuan 4,421 525 11.9%
Financial revenue Billion Yuan 619 70 11.4%
Port (cargo handling volume) Million Tons 790 166 21.0%
Total investment in fixed assets Billion Yuan 1,945 144 7.4%
Total imports and exports Billion U.S. dollar 281 48 17.1%

Note: Approximately RMB 8 Yuan to 1 U.S. dollar.

Source: Shanghai Internet Trading & Consultancy Ltd.

 

High technology endeavors are also being sought in Shanghai. The showcase project being the RMB 10 Billion (about US$1.2 Billion) investment during the Ninth Five-Year Planning Period (1996 to 2000) into Hua Hong Microelectronics—the 0.5 micron wafer fabrication facility with a 20,000, eight-inch wafers per month capacity—which is jointly invested into by the Ministry of Electronics (52% equity) and the Municipality of Shanghai (48% equity). This company will also host several IC design companies, a crystal growth facility to produce boules for 8-inch wafers, and will also engage in the R&D of 0.3 micron technologies.
 

The Issues of the State-Owned Enterprises

With high economic growth in almost all urban areas, and some of the best people leaving the security of state-owned institutions and joining business enterprises, China is left to face a major problem at her large state-owned enterprises (SOEs). These SOEs, which once dominated the economy, are still sucking up 70% of the financing which banks loan out. They, however, now account for less than 40% of China’s industrial output, and only about 1% of the total industrial profits. To revitalize these enterprises has become a top priority for the government. The issue, however, is more than just one of streamlining the operations. These SOEs, together, provide employment to 100 million people. A fair percentage of those employed are actually non-productive, but have traditionally been tagging along. A lot of these SOEs, have always been running their communities of employees and families. They provide these people with housing, health care, education and so on. As such, layoffs, or even privatization without a sound plan, may not be very much of an option. We are looking at, as much, a social security problem, as it is a productivity problem here. Unless a multinational company really knows its way around China, they are well advised to be cognizant of the risk involved in teaming up with money losing SOEs. Of course, the challenges aside, that may mean huge opportunities as well.

The SOEs, though, still have access to some of the countries most major resources. The focus and the conviction by the government to solve this issue is, indeed, a move in the right direction.
 

The thrust on Advanced Manufacturing Technology

Since the beginning the China high-tech “863 Program” (initiated with Deng’s approval in March 1986), the research and development in advanced manufacturing technology—particularly in Computer Integrated Manufacturing Systems (CIMS) and in Intelligent Robots—have been given a major thrust. Over the first ten years of the program (1986 to 1996), major headway has been made by the research scientists and engineers engaged in various projects within the program. Being recipients of the world’s most prestigious award in advanced manufacturing, the CASA/SME - LEAD Award, in 1994 (University Award) and 1995 (Industry Award), China more than demonstrated her commitment and ability to come to grips with the technology.

The employment of advanced manufacturing technology is scaling up quite rapidly. CAD (Computer Aided Design) systems, for example, is now used by 5% of China’s manufacturing enterprises (the penetration is at about 30% among large enterprises). It is, however, growing at a pace of 20% per year.

As Professor Wu Cheng, Director of the 863/CIMS Expert Steering Committee puts it, the target is to have CIMS be the driving force for the Chinese enterprise by the year 2000. Their goals, among others, include the use of CIMS as a means to reform China’s large SOEs. They are also committed to use CIMS to help cure China’s manufacturing industry of its “olive” syndrome—their problem of having an oversized production force, but being weak at both the front (design and development) and the tail (sales and distribution) ends. A CIMS enabled “dumb bell” strategy (tailored to boost the two ends) shall be deployed. Professor Wu then concluded with a very pragmatic remark, “it’s not what needs to be done, but rather, what can be done right now.”
 

As for the Transaction Infrastructure . . .

China started late, but have been going at it at a breath-taking pace. Take the telephone network, for instance, most of the lines were put in over the last 10 to 12 years. I still remember having to place a call with an operator 24 hours in advance, before I could talk to someone in Guangzhou from Hong Kong (when one could actually get there by train, physically, in a matter of about five hours)—and that was in 1985. By the end of 1995, China already had a 4.6% telephone coverage across the entire country (this figure was at 17% for urban areas alone), and even had more than 3.6 million cellular phone subscribers.

Plans are for the country to have a 10% telephone coverage by the year 2000. By then, the number of cellular phone subscribers is expected to reach 18 million. (Source: CTISS)
 

In Banking and Finance

Historically, the Chinese were leaders in financial systems. They, for example, invented paper money around the end of the 8th century AD. For them, however, electronic financial transactions only happened in recent years. For centuries, transactions in China were handled manually computed with the aid of an abacus, and recorded by pen (the Chinese brush, to be more exact) and paper. It wasn’t until the Eighth Five-Year Plan period (1991 to 1995) that major investments were put into the modernization of the financial industry by China. The networking of the banking and finance industry did not start happening until it was way into the 1990s.
 

Going Electronic

China nationalized all banks after the communists took over in 1949. Banks operated then as branches of the People’s Bank of China, which functioned as a central bank. Industry specific banks were only (re)established in the 1980s. The notion of banks operating as a business (with profit and loss responsibilities) is only just being deployed (in the mid-1990s).

For the China Industrial and Commercial Bank, established in 1984, who claims the leading position in China’s banking computerization, their agenda is to “go electronic” within the Ninth Five-Year Plan (1996 to 2000).

There is, obviously, a lot of work to be done. More critical, though, is that fact that the development of the market economy—both within China, and with the rest of the world—has to rely on and be supported by this infrastructure. This leads to solutions which fits well with China’s conditions. This also creates the opportunity for China to team up with outside partners who have the experience and the know-how to put this infrstructure in place rapidly.
 

Smart Cards in China

A Xinhua New Agency newswire dated May 19, 1996, stated that “China will, in the next ten years, promote card-based payment instrument and card-based information medium in 400 Chinese cities for their 300 million population. By that time, there will be 1.2 billion cards of different types in circulation. This is just the beginning of the development of IC Cards in China.”

China’s “Golden Card” project started in 1993 with the intent to realize nationwide information sharing, particularly in the banking and commercial applications. As of 1996, 12 cities within China were developing pilot projects.

In the Shandong Province, for example, products like card readers, Windows-based online and offline IC Card management system software, card-based vending machine systems, inventory management systems, gas station payment systems, highway and parking payment systems, and so on, have been or are being developed.

The French company Gemplus, a world leader in the manufacturing of smart cards, has gone into joint venture, this year, with the Tianjin Telephone Equipment Factory to produce memory cards for pay-phones. They will go on to produce microprocessor based smart cards later. Their facility is expected to have a capacity of 10 million cards in the first year, expanding to a 100 million cards per year capacity by the year 2000.

In Shenzhen, remote-coupled contactless smartcards are being deployed for transit applications. Users only had to wave their card in the general proximity of the reader to get their stored-value bus fare card transacted.

Other IC Card applications, ranging from healthcare records to stored-value cards for the purchase of liquid propane gas, are being piloted or deployed throughout the country.

The deployment of IC Card based transaction system is a clever one. These cards do not require online communications with banks to work. And, for China, where the network infrastructure is still being developed, this system can allow China to convert the basis of her economy (at least partially) from cash to stored-value cards without passing through the paper check and plastic credit card stages.
 

Internet in China

The discussion of the future of transactions will be incomplete if we don’t at least talk a little about the Internet.

Probably like a lot of other countries in the rest of the world, China has had an evolving attitude toward the Internet. It has changed from the early “let’s limit access to just the research and academic community” to “let’s embrace it, but make sure it’s free from smut, pornography and politics.”

While the exact number of Internet users in China is unavailable (but estimated to be in the order of 100,000 to 200,000), the awareness of the medium is growing rapidly. The barrier to more widespread deployment is due partly to the lack of infrastructure, and the relatively high startup and operating costs (as compared to the cost of living in China). Thus far, the Internet is associated mostly with access to and communications with the international community (with the Americans especially). Development of Chinese contents (for the domestic audience) is still at its infancy, but is receiving its due attention from the central policy makers.

Networking is growing very rapidly in China (banking networks and networks spanning vertical industry sectors, for example). The majority of them are private networks, which were planned for (and are being implemented or just being deployed) before the Internet began to gain popularity on a global scale. With the support of the Chinese decision makers and their international technology suppliers, a good portion of these private networks are being implemented as or converted to Internet compatible (TCP/IP based) networks.

For the Chinese, their Internet implementation will probably be more like an “intranet”—with the entire country’s network behind a firewall—which someone has wittily referred to as the “Great Fire-Wall of China.” While a lot of people in the West believe that cyberspace should not be “controlled,” and its probably true that it is technically impossible to “control” information on the Internet, that seems to be the direction China is taking. She is trying to implement the Singapore internet model, and actually working closely with “Singapore Inc.” to do it.

That aside, China is very much embracing the Internet (their “intranet” version of it). Not just that, but they are also embracing the idea of the NC (network computer), and even the object oriented environment of Java too.
 

Marketing 101: What does China really need? And want?

Yes, we all know, the potential market is huge! But what does China really need? What do they really want? Do we know?

We don’t. Neither do we think anybody does. This, however, is the author’s best guess as to what she probably needs, wants, and, not want.
 

Needs

•       Stability. This seems to be of paramount importance. China has been putting in a lot of effort to maintain stability despite all the economic activities going on.

•       Build up the infrastructure. A strong infrastructure is needed to support continued growth. So far, a lot of pilots have been conducted. More than anything else, it is a matter of scale now. A modern infrastructure to support a nation with a 1.2 billion population has never been built anywhere before.

•       Technology. Partly because of her technocratic leadership, and partly because recent history points to the fact that, as a nation, China has fallen behind badly in technology (noting that 400 years or so ago, and probably for a couple of millennia prior to that, China was among the most technologically advanced nations in the world), she knows she needs to catch up. This is one area where a lot of import is almost inevitable.

•       Capital for development. With so much to be done, and the rate at which these things need to be done, the need for capital is almost insatiable.

•       Continue to have a strong export economy. So they can afford to import what they really need.

•       Producer goods (not consumer goods). It follow logically that China will want to spend its capital resources on building the infrastructure, on technology, and on producer goods. Products to satisfy consumption, will, more likely than not, have to be produced inside China.

•       Management experience. This has been something seriously neglected until the current economic reform. Again, there is a lot of catch up to do, especially, in the management of economic activities and free market enterprises.

•       Sustainable, eco-efficient developments. Last but not least, the target of the economic reform probably isn’t to replicate the consumption patterns of, say, the U.S. consumers. There simply isn’t enough resources in the whole world for that. China will have to develop in a way that is both economically and ecologically efficient and all within the context of a sustainable development.
 

Wants

From the people we have been associating with, we gather that China, or the Chinese enterprise, really wants:

•      Friends, partners and people whom she can trust to help grow her economy. As signified by the opening up of the country, China realizes that she is not going through this on her own. However, with the bad experience of the last 200 years or so, she is really careful in trying to identify friends and partners whom she can really trust.

•      To leapfrog. To avoid repeating the linear track, and especially the pitfalls which the West has gone through, moving from an agricultural, to an industrial, and onto an information economy.

•      To turn around its money losing State Owned Enterprises (SOEs). As described earlier, this is still a very major part of the economy (a segment which is still holding onto her key industries, natural resources and a good portion of her workforce), and this segment has to be turned around economically very quickly.

•      Narrow the gap in the living standard between the most well-to-do and the poorest part of her population. To this end, China has shifted some of the attention (from the coastal and major cities) to the less economically developed parts of the country, namely, the Middle West, Northwest and Southwest.

•      To be properly, smoothly and fully integrated into the world economic system, quickly, but at a pace she feels comfortable with. The desire for the former is clear. Diversity in opinion arises, even within China, as to “what is a comfortable pace” at which internal stability will not be jeopardized. The balance will be intricate, to say the least.
 

What They Probably Don’t Need Are

•       Huge imports that will drain their precious foreign exchange reserve. This follows from the above discussions.

•       The “Messianic” disposition of Western nations (especially the United States). This is an observation made by Bill Wu, who used to head the China Cultural Center in San Francisco. His point alludes to the misunderstanding which cultural differences may lead to. Even when expressed with every good intention, such disposition may not go over very well with the Chinese people, and is liable to be perceived as being “colonialistic” or even as a sort of “cultural imperialism.”

•       Again, because of cultural differences, matters are perceived through filters which could be culturally biased. Bearing that in mind, China probably isn’t going to be thrilled with international politics which are perceived as:

•       Containment (of China)

•      Unfair (to China)

•      Interfering with her internal affairs
 

Opportunities for Western Business in China

While opportunities abound, because there is such a huge need for everything, the following are ones, we believe, which make good matches between the strengths of the industrialized countries (which we referred categorically to as “Western businesses” or “the West” here; it is supposed to include Japan, too) and the Chinese needs and wants.

 

•       Infrastructure and energy. We’ve discussed the telecommunications and financial infrastructure before. Energy, again, is undoubtedly something that needs to be developed to support the economic growth of China. In particular, huge opportunities exist in infrastructures which will support sustainable development in the country.

•       IT systems and technology. The telecommunications and information infrastructure, of course, but other IT related technologies and systems are good candidates as well. The United States, for example, is not a leading mass manufacturer (China on the other hand, is), but it holds a leadership position in manufacturing technology (especially over the last couple of years, when advanced manufacturing technology precipitates towards the Internet as well). In this instance, the United States can leverage on that know-how to develop business relationships that will be economically rewarding. The fact that the Silicon Valley is now the United States’ third-largest exporting region demonstrates the point.

•       Producer goods (equipment, components, and so on). Be reminded of the “planned economy” roots of the current Chinese regime. China’s economic planners just isn’t going to throw money into importing consumer goods. The hesitation on the exact timing of China’s joining the WTO (World Trade Organization) comes back to the desire of these planners to buy time for China to build up and nourish its domestic producers. Given a choice, China should be spending on equipping and supplying its factories, rather than on procurement of finished consumer products—and so it will, because they still have the choice. Therefore, the opportunity for the western business, for the near to medium term future, is still on producer goods. That opportunity is huge too!

•       Product marketing, innovation, design, and development techniques and tools. These are areas where the industrialized countries have garnered a lot of experience and expertise, and which are still relatively unfamiliar to Chinese enterprises. The market system in the west has demonstrated that these front-end activities represent among the most significant values in the entire value chain. By “supplying” or leveraging on these expertise, foreign and Chinese enterprises can form “win-win” teams.

•       Distribution and logistics. While there is a huge population of emerging consumers in China, China does not yet have the necessary distribution network, or the logistics support, to allow products to flow efficiently from manufacturers to the consumers. Experience and expertise in these areas represent values that could be leveraged by foreign businesses.

•       Management, entrepreneurship, market, and financial mechanism. Again, these areas, as applied to a market economy, are relatively new to the Chinese, but badly needed in order for the Chinese to make the most out of their investments in the market economy. The same “win–win” teaming strategy should apply.
 

Challenges for Western Businesses

The challenges are a many. A lot of them comes from differences in the ways things get done (the anthropologists’ view of “culture”). The fact that so much is going on at once, and the scale of them being unprecedented (to deploy one “Baby Bell” a year, for example) makes it all the more challenging.

•       Linking up with the “right” person. Working in a high-context culture like that of the Chinese, building relationship is not just necessary, but crucial. A nominal approach for a foreign business is to find and link up with a “right person” in China, and then work through him or her, and his/her network. Or, identifying the “right” decision maker, and focus the negotiations with him or her. While there is a lot of merit to this approach (at least, it is better than doing it all by yourself, as a foreigner), there are significant challenges too:

–      People are mobile. More capable people are more mobile these days. As such, the ability of your “right person” to help could be volatile. That being said, one should still be reminded that relationships should be maintained, because, while he/she cannot provide much help on one issue, the same person can prove to be extremely helpful on another issue.

–      That leads to the fact that there will always be multiple “right persons.” The challenge—and believe me, this is a challenge—is to maintained these multiple relationships and multiple networks, and have them reinforce, instead of jeopardize one another.

–     Linking with the wrong person is also a big problem.  In most of the Western world, if linked with the wrong person, you just dump them quickly, with little fall out.  Getting out of a bad relationship is much harder in China (and almost everywhere in Asia), and the fall out can be very damaging.

–      The most significant challenge for the western business person, however, is for him or her to recognize that a relationship is NOT a business deal. Failure to recognize this, or to handle accordingly, will just result in unpredictable results.

•       Intellectual property rights issues and perceived values. Most Chinese, and for that matter most of the people from emerging economies, still value “hard”ware (like machinery, durable goods) more than their “soft” counterparts (concepts, management). That is changing, though, from government efforts, as well as from the realization by the Chinese that “ideas” really sell. As a significant portion of foreign opportunities lie in “soft”ware, the issues of intellectual property rights needs to be addressed with priority. A lot of the work will have to be taken on by the governments. However, one may find the two hints below helpful:

–      Assume once you divulge a piece of information to one party in China, that the information may become available to other parties in China, too. While this may not always happen (especially because the Chinese has their own defense mechanisms in guarding secrets they value), one will need to operate with this assumption in mind, at least for now. You could assume you are dealing with “China, Inc.” as an entity in this respect.

–      Paradoxically, the Chinese are great guardians of secrets. Deep down inside, they realize the value of these things. Intellectual properties have, for thousands of years, been traded with the currency of trust and relationships in China. It will be the judgment call of, and a major challenge to the western business, as to how, and to what extent, they want to participate in such “trade.” Making the “right” call will be of strategic importance.

•       Finding the right structure, business model and partner. The whole economic landscape is in flux. Different business structures and models may prove to be better from business to business, and from time to time. Considering the additional dimension of a “Chinese partner” - which could be a government enterprise, an entrepreneurial operation, or even a foreign enterprise who has already established an inroad into China (say, a Hong Kong or a California company) - the choices and variability is almost limitless. This is indeed a major strategic challenge. We will discuss a little more about business structure and model in the next section.

•       Timing and priorities. This could also be part of the cultural difference discussion. However, it is significant enough to deserve independent discussion. The Chinese has had about 47 centuries of history and culture. To them, one generation (say 30 years) is a blip on the timeline. To the foreign manager (the Americans in particular), their accountability could be for the next fiscal year (when performance will be scrutinized all over again), if not the next quarter.

        From the perspective of a Chinese decision maker, he has to consider the priorities and welfare of the country, the ministry (or whichever superior institution they are accountable to), the enterprise (or institution) he is representing, he himself (or herself), his/her network of relationships or even his/her offsprings. In contrast, say, the American manager charged to interact with this Chinese decision maker has only one thing in mind - his business objective.

        While this may be an oversimplification, it demonstrates the challenge that the foreign manager may be faced with when he tries to comprehend a situation.

•       The cultural and communication gap. This tops them all, in terms of challenges. Enough has been written about this that we will not go into details here. It should be noted that language barrier is only the beginning and the most visible part of the challenge. Understanding the context, especially when the context took centuries to come by, is the real challenge. It is not insurmountable, though, judging from the enormous success that some foreign businesses are having in China.
 

Some Strategic Insights

We used the term “catching up” a lot when we talk about various aspects of China’s economy and technology. This, however, refers only to the transitional phase during which China closes the economic and technology gap between herself and the industrialized world in general. We should be constantly reminded that the end-point, which China’s economy is heading for, and the scale of it, is untreaded territory. No other corporation or country has experienced it before, and surely not under similar circumstances. To get to that end-point, there will need to be a lot of learning, a lot of knowledge creation, and a lot of innovation. This will have to be done by China, in conjunction with her business partners. The stakes are high, for the business partners, but so will the rewards. Sound strategies are crucial for all concerned. Here are some thoughts on business strategies:

•       Supply the needed “components” (not the whole products). Don’t try to be the monolithic supplier who comes in, captures the market, and starts supplying the products and pocketing the profits. This just isn’t going to happen, because there is too much within that value chain which China can provide for herself. Go back to the strategic planning exercise and identify the right “components” one has available to bring to the table (regardless whether they are “hard” or “soft” items), and focus on supplying those.

•       Think of the virtual manufacturing enterprise model. The concept of the “virtual manufacturing enterprise” describes temporary alliances among companies that work cooperatively by contributing each’s unique competencies, to achieve the common goal of rapidly capitalizing on specific market opportunities for mutual benefit. While “temporary” may take on some longevity here, particularly if the market opportunity persists, the entire concept fits well into the overall scheme of things. It is the rapid pace that things are evolving (in China as well as in the industrialized world) that makes a strategy of going vertical (doing it all by yourself) unsound. To catch and realize these narrow windows of opportunity, one will have to be “ready” with your own core competencies, and “willing” to team it up with others’ quickly. The Hongkong-Shenzhen team illustrated the potentials of the model. However, the scope of work will need to be extended to entail heavy, as well as light industries; product innovation and development, instead of just mass production; and then span a much larger scale too.

•       Develop the “networks” and weave the people in. Obviously, you don’t team up with someone you don’t know. You will go into alliance with someone you know well and can trust. Relationship networks take a long time to build up (and prove its worth), and therefore, cannot be something one tries to come up with at the last minute. One needs the networks there, so that when the opportunity arises, one can readily tap into them, to form those teams and alliances.

        Whether the entities involved in those teams and alliances are corporations or individuals, or a combination of both, it will, eventually, (at least for quite a while yet), be down to people transacting with people. It is imperative that people (not just contracts) are woven into these networks of relationships.

•       Go local as fast as you can.  Navigate with an intermediary, who really understands both cultures (yours and the Chinese’), when entering the waters. Once you’ve got things set up, hire locals, train locals, and promote locals as soon as possible.

•       Make use of groupware to mitigate cultural and communication challenges. Technology and the technological and social environments have developed substantially since the earlier days of groupware. The connectivity afforded on the Internet (or intranets) today, both for the systems and for the communities, can allow us to do things that were not possible before. Groupware platforms can be created quite readily now. What is needed will be to employ them to mitigate the cultural and communication challenges we are being faced with. Enhancing communications and making attempts to make explicit things which would otherwise be implicit should always help. Setting up structures and protocols (in the form of workflows) together, when new communities (of distributed, multi-cultural work teams) are formed can help alleviate misunderstandings. The receptiveness of the Chinese to technology and to workflow will make it a little easier to develop and deploy these type of groupware applications.

•       Start with a win-win strategy in mind. One has to believe that this is not a zero-sum game. It shouldn’t be, because a prosperous China (with her 1.2 billion+ population) does mean a bigger pie for all. Going back on our earlier discussion relating to the importance of trust and the Chinese mentality on “reciprocity,” one is well advised to go into China preconceived with a win-win strategy in mind.

•       Make sure its sustainable. Again, China is not poised to turn into a consumer economy like that of North America. In fact, China has very little resources, relatively speaking, for the population it has to support. Therefore, it will be crucial—both to China, and to the rest of the world—that one starts out with strategies that would sustain. Strategies which does not support sustainable developments, will themselves, probably, not be sustainable.

 

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Published by The Outlook Project, Year 1996-97
Report No. SR-628, June 1997
Institute for the Future, Menlo Park, CA, USA.