Doing Business in
China - Is it in your future?
John H Burgoyne
Burgoyne 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.
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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?
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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 formed
Seven joint ventures with
Chinese 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 Growth
From Ribbon
Cutting to over
125 employees
In Shanghai in
Less than six
months.
IBM had incredible access to very
High ranking decision makers in China.
We made significant investments there.
As a result, IBM’s business has done
Very 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/Government
History
Language
Geography
Market Size
Standard of Living
Size of Economy
Culture
Freedom of the
People
Opportunity
Ongoing Issues:
ƒ Individual Rights vs.
State's Rights
ƒ 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.
2.
3.
4.
US/China Political Issues
China’s Economic Growth
China’s Telecommunications Growth
The Chinese Conundrum
Communism and Capitalism
5. Distribution of Wealth in China
6. China’s Rulers – Political Pragmatists
Chart 1
Ongoing Political Overtones
US Issues
ƒ Human Rights
–Dissidents in Prison
–Prison Labor
–Freedom of Religion
ƒ Weapons Proliferation
ƒ Taiwan
ƒ Military "in business"
ƒ Trade Balance/Currency
Manipulation
ƒ Communist Ideology
ƒ IPR abuses
ƒ Global Outsourcing
China Issues
ƒ Sovereignty
ƒ US is Perceived as
Meddling in China's
affairs
ƒ US is perceived as
trying to control Asia
ƒ History of Foreign
Dominance
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
Chart 5a
Another Real Interesting
Question about China
People in the major cities are improving their
lifestyles dramatically…..
Chart 5b
While in the Countryside…
A key question….
Chart 5c
• Can 400,000,000 people “get rich” while
900,000,000 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 6
The Government
has displayed stability
through some very
difficult challenges:
Hu Jin Tao
June 4, 1989 Tian An Men
Square Incident
Early 1990s very high inflation
Deng Xiao Ping Succession
1996 – Jiang Zemin
Taiwan Straits Exercises
Hong Kong Handover
Asian Financial Crisis of 19981999
Hu Jin Tao Succession
Issues with US
Spy Plane Incident
Belgrade Bombing
North Korean Nuclear Threat