Doing Business inChina - Is it in your future?

John H BurgoyneBurgoyne and Associates

Our Story

• 1991 – Trading Area GM, IBM– 28 year career with IBM US– Offer to be the President and GM of IBM China

• October 1992 – First Trip to China– Accepted the job

• November thru February– 6 hrs per day in Mandarin lessons, sold home, sold cars, said

goodbye to friends and family and read books about China.• March 1st 1992

– Xiao Wu “Mr John, you have big problems”.– Living in Beijing, hotel for 30 days, then in ex-pat housing– Working 18 hours a day, seven days a week.

IBM China Company. Ltd.

• IBM first entered China in 1934• Left China during WW2• Returned shortly after WW2, left in 1949• Returned in 1984 as a representative office

– All employees were contract employees, they actually worked for the Chinese Government

• In 1992, IBM China Company Ltd was approved as a Wholly Owned Foreign Enterprise (WOFE)– For the first time could employ PRC Nationals– As a WOFE, IBM was treated as a local company– One Problem - All 150 employees refused to join IBM

• What to do?

The Problems

• Interviewed 50 of the 150 people and try to find out what the issues were.– Salary

• Paid in foreign currency when a representative office.• Paid in RMB as a WOFE – inflation was rampant.• Hong Kong to PRC salary ratio: 30:1

– Recognition– Benefits

• Housing – no hope to own their own home.• Insurance

– Perception of Opportunity– Fairness – perception of second class citizens

• This really was a communication problem.

Within 30 Days

• Implemented a “pay for performance” system, maybe the first in Communist China.

• Implemented a recognition program for PRC Nationals with significant cash awards.

• Committed to find a solution to the housing dilemma. There was no easy solution. The employees had to “trust” that we would find a solution.

• Communicated the plan over and over to everyone…many times.

• Treated every employee with dignity & respect.

The Housing Solution•We were ahead of our time.•There was no mortgage industry in China.

–Worked with PBC to establish the first mortgages in China.–IBM kept $500,000 USD in PBC.–Sponsored the first 10 employees.

•Fledgling real estate market.•Employees didn’t understand home ownership.

–We taught classes in the evenings.–Basic considerations of buying a home.

•The closing ceremony was fantastic.–Suitcases and paper bags.–It took all day.–I have never seen happier people.

•Beijing TV – 2003 Tenth Anniversary of Private home ownership.

The result?

• Every employee moved to the WOFE, all 150 of them.• Morale was very high.• We concentrated on moving PRC Nationals into

significant jobs, management jobs.• Employees felt an “ownership” for IBM China.• We overachieved all objectives in 1993, 1994 and 1995.

China led all countries in which IBM does business….160 worldwide!

• In 1996 I retired from IBM…started my own consulting business…helping other companies enter the China market.

• Great Story …. But…

What does this have to do with doing business in China? Or any

other emerging market?Everything…

1. You will be dealing with issues you don’t understand and are not trained to handle.

2. You will not understand the culture. You have to rely on the employees from that culture to guide you.

3. Your instincts will mostly be wrong….they won’t work in a different culture.

4. Prioritize …..Take things one issue at a time.

5. Try to simplify issues and not get overwhelmed with complexities.

There will be a long list of problems• Intellectual Property Rights

– Cultural Complexities– Communism

• Strategic Decisions• How to best open the market?

– Go it alone?– Distributors?– Joint Ventures?

• Whom to partner with?• What products do we sell in China?• Making the business Plan?• Complying with the Foreign Corrupt Practices Act• How to work with the Chinese government?• And the list goes on….and on!

Joint Venture Strategy

Starting in 1993, IBM formedSeven joint ventures withChinese Companies:

EXAMPLES•Tsing Hua University – Software Development•Great Wall Computers – Distribution and manufacturing.

•Ministry of Rail – Maintenance of IBM equipment in outlying provinces.•South China University of Science and Technology – Software Development.•Tai PC – Personal Computer Manufacturing and modification of IBM Point of Sale Devices to fit the Chinese market.

Unprecedented GrowthFrom RibbonCutting to over 125 employees In Shanghai inLess than six months.

IBM had incredible access to veryHigh ranking decision makers in China.We made significant investments there.As a result, IBM’s business has doneVery well in China.

IBM Successes in China

• IBM China, circa 1992– 150 employees, $100 Million Revenue– No Joint ventures– Barely profitable

• IBM China, today– 8,000 IBM employees, 11,000 JV employees– $4 Billion in Revenue– Very profitable

Questions?

Politics/GovernmentHistoryLanguageGeographyMarket SizeStandard of LivingSize of EconomyCulture

Freedom of the People

OpportunityOngoing Issues:ƒ Individual Rights vs.

State's Rightsƒ Global Outsourcing -

Is this a new phenomenon?

Summary

China and Asia will have the fastest growth in the global economy of the 21st Century.

Almost all businesses are global now.It is very likely that your jobs will have some focus in Asia.

The more you understand about that part of the world...the better prepared you will be!

Backup Charts

1. US/China Political Issues

2. China’s Economic Growth

3. China’s Telecommunications Growth

4. The Chinese ConundrumCommunism and Capitalism

5. Distribution of Wealth in China

6. China’s Rulers – Political Pragmatists

China Issuesƒ Sovereigntyƒ US is Perceived as Meddling in China'saffairsƒ US is perceived as

trying to control Asiaƒ History of Foreign

Dominance

US Issuesƒ Human Rights

–Dissidents in Prison–Prison Labor–Freedom of Religion

ƒ Weapons Proliferationƒ Taiwan ƒ Military "in business"ƒ Trade Balance/Currency

Manipulationƒ Communist Ideologyƒ IPR abusesƒ Global Outsourcing

Ongoing Political Overtones

Chart 1

China, a growing economic power!

Chart 2

China, a growing technology and communications power

Chart 3

The Real Interesting Question about China

Can a Socialist State with strong and authoritarian central control coexist with a free market economy?

Chart 4

Another Real Interesting Question about ChinaPeople in the major cities are improving their lifestyles dramatically…..

Chart 5a

While in the Countryside…

Chart 5b

A key question….

• Can 400,000,000 people “get rich” while900,000,000 live in the 19th -20th century?….without civil strife?

• This is a huge question for China’s leaders.

• They are very aware of the consequences and are working desperately to spread the wealth.

• Only time will tell.

Chart 5c

The Governmenthas displayed stabilitythrough some very difficult challenges:June 4, 1989 Tian An Men Square Incident

Early 1990s very high inflationDeng Xiao Ping Succession 1996 – Jiang Zemin

Taiwan Straits ExercisesHong Kong HandoverAsian Financial Crisis of 1998-1999

Hu Jin Tao SuccessionIssues with US

Spy Plane IncidentBelgrade BombingNorth Korean Nuclear Threat

Hu Jin Tao

Chart 6