C3S Fortnightly Column No. F010 /2015
It was unthinkable that Big Blue would ever agree to share technology or production arrangements with the Red Mandarins. For years, the International Business Machines (IBM), also called Big Blue, was renowned for its tight-fisted corporate policy of operating through wholly-owned companies and selling its products and services. On their part, the Chinese authorities were near xenophobic while demanding that technology be indigenized rather than imported. Following revelations from the Edward Snowden cyber-copying scandal, they had become highly suspicious of U.S. sources for compute hardware. There were reports that the Chinese government’s advice to their banks to stop importing high end servers from the U.S. and use instead domestic brands was targeted against the IBM. This war like scenario was on high display in May last year. Even earlier, there were furious spats between China the U.S. authorities over specifications and standards in the computer sector. China was unwilling to accept U.S. standards and insisted on the adoption of its own standards. Despite this record of acrimony, the unthinkable has happened.
IBM has recently unfolded its strategy to globalize the manufacture of its new system called OPEN POWER8 with China as a major partner. A closer study of this agreement may well be the toast of game theorists. It may also provide a lesson for the Modi government which talks all the time about “Make it in India.” It clearly shows how two strong contestants in a market can adjust their roles to suit the changing market dynamics even while advancing their own interests.
IBM is no stranger to China. It arrived in China in 1993 to manufacture personal computers. In later years, it began to produce servers, retail storage systems and printers. Initially, they were for exports and, later, to cater to the domestic demand.. During the course of its operations in the first ten years, IBM took note of emergence of massive supply networks in the Pearl Delta area. It observed the supportive structures built for industrial growth by the Chinese authorities such as Economic Zones, Industrial Parks, highways, ports, universities and training colleges. By 2006, IBM decided to shift its global procurement services division from its headquarters in at Armonk, New York, to Shenzen. It was a bold and strategic decision: By doing it, IBM was strengthening its own supply base and also helping its clients to strengthen their chains.
Edward Tse, a management consultant, explained how IBM’s presence in China was “defined not by an expanding consumer population or by low-wage labour, but by the integration of Chinese activity with its worldwide enterprise.” On its part, IBM declared that it would “develop its business into China IBM rather than IBM China.” (China Daily, March 18, 2005).
IBM also earned the goodwill of the Chinese public and government when it sold its personal computer (PC) business to Lenovo, a rising Chinese computer company, in 2005. (Since then Lenovo has become a global giant in computers.) As explained by Palmisano, IBM’s former Chairman who put through the deal, IBM did it for strategic reasons: Chinese government wanted its corporation to expand globally, and by aiding that national goal, IBM would enhance its stature in the lucrative Chinese market, where the government is in command. In the coming years, there were major changes in global trade as well as in the technology market which impacted the operational modes of global corporations.
A study by the IMF (Changing Patterns of Global Trade, June 15, 2011) drew attention to the role played by supply chains and the position occupied by China. It noted that the import content of China’s high technology exports increased by 30% from mid-1990s to the mid-2000s. Together with other Asian countries, China began to play an increasingly dual role in global supply chains for high technology products, as an assembly country and as an exporter of intermediate outputs to other countries. Thus, the traditional pattern of global trade was getting inverted: Asian neighbours fed the Chinese factories and their exports to advanced countries passed through China. Multinational Corporations (MNCs) were rushing in to take their place in the sun. It was not surprising that by 2008, IBM decided to establish a growth markets unit in Shanghai to take care of its entire emerging market business.
The emergence of new supply chains, as contrasted with the earlier model of vertical integration, brought about attitudinal changes in corporate boards. They were willing to share technology and promote supply chains to take care of many markets. It stemmed partly from the growing mutual trust and partly from the fear that code violation would meet with exclusion from the market. It was also the fallout of the latter day legal framework such as TRIPS, etc. enforced through WTO.. China was getting deeply involved in high technology market and ready to play by the rules. It was no longer deemed the enfant terrible.
IBM is known to be a creative corporation and to change its strategies from time to time to suit the changing market conditions. When it was losing its dominance in the PC market, it shifted gear and turned to “enterprise integration” services which included several areas such as waste reduction, transportation and alternative sources of energy. In recent years, the senior management got the message that the company was losing its image and the market in the hardware segment. By 2013, its revenue from Power-based systems declined 25% compared to the previous year. Its servers (UNIX) could not match the performance of x86 servers (XEON) offered by INTEL and Advanced Micro Devices Inc. (AMD). In 2012, x86 servers accounted for 98% of worldwide shipments and 70% of server revenues. During the same period, IBM shared the elements of its Power technology for different applications but not for servers. If IBM were to meet the challenges from Intel/AMD and expand its global business, it had to change its approach. It has to share technology and also seek new partners for manufacture.
Thus was born its Open Power Foundation initiative. It was formed in 2013. The idea was to open Power technology to partners, creating an ecosystem around Power8 that could compete with Intel. Presently, the Foundation includes about 120 members from 22 countries. IBM will license the power architecture and allow companies to design and build their own Power chips. Tyan, a Taiwanese company, will make the server which is expected to bring down the cost. About twenty Chinese companies are members.
China’s Suzhou PowerCore is a major partner. The first Power chip which is central to the OpenPower ecosystem is CPI and Suzhou will design and supply it to Chinese companies. There will be similar sharing of technology and design by other Chinese companies for other items. All these members are known to have good command over technology, manufacture and market for the related items. It is also significant that the Chinese government assisted actively this collaboration with the IBM. Early in 2014, it promoted the formation of the China Power Technology Alliance (CPTA), a public-private partnership. The main mission of the CPTA is to upgrade China’s industrial structure through the integration of China’s local and OpenPower ecosystem under the guidance of the government.
Given the objectives of IBM and the Chinese government, the arrangements seem to meet them well. IBM gets a firm foothold in the China market which is large and growing. In 2014, China imported servers worth $23 billion and Intel had the major share.IDC, a consultancy firm, estimates that China will account for 43% of world’s information and communication market. Unlike in the past, China was demanding that foreign companies indigenize their production and adopt China’s standards and specifications. If IBM is unwilling to meet these demands, it is acutely aware, it will be shut out of the Chinese market. IBM is also aware that if it does not meet China’s demands, China has alternatives.
IBM’s new CEO Virginia Rometty met the challenge head on. As she explained at the China Development Forum in March, 2015, “If you are a country, as China is, of 1.3 billion people, you would want an IT industry as well.” I think some firms find that perhaps frightening…. … find that an opportunity.” IBM seized it.
There is jubilation among the Chinese public over the arrangement, as it permits national companies to build the chips, etc. as per Chinese regulations under government guidance.The government’s security agencies get over their apprehensions attached sourcing of these equipment from the US. As one Chinese professor told China Daily, “collaborating with China will allow IBM to get involved in shaping the trajectory of China’s IT industry and the competition landscape in China.” It fits in with the official policy of the government to promote “indigenous innovation.” In other words, it will be “IBM made in China.”
In the context of the much touted program of Modi government calling upon all foreign companies to “Make it in India” is there any lesson for India based on this China Model, especially in the IT sector? We have to face grim realities. While India’s IT sector is well developed on the software side, it is woefully deficient on the hardware segment. While our BPO sector has grown exponentially, it is highly dependent on the vagaries of foreign demand, especially the U.S. The US recession and rupee rate variations affect the sector from time to time. The situation on the hardware side is worse. We are dependent on import of chips, hardware, etc to the extent of over 80 per cent. Much of the import is from China. Our chip manufacturing -what are called fabs – is quite weak. There are only two major project for chip manufacturing under implementation and these are yet to have financial closure. Import of chips and customs duty variations pose a threat to their economic viability. Our telecom companies lack manufacturing capability unlike China’s and do their operations by outsourcing their requirements. They lack the muscle to enter into any meaningful collaboration with any major foreign company, Chinese or American. We seem to be happy to play the role of back office boys in most of the IT sectors..Thus the scope for any program to ‘make it in India’ on the China-IBM model appears elusive. Slogans alone cannot lift a large economy like India. We have to undertake a lot more of homework in terms of infrastructure, R&D development, marketing, management, etc. before we can achieve that goal.
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