IBM to help Chinese build IT, instead of just selling to them

Updated: 2015-03-26 11:29

By William Hennelly(China Daily USA)

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IBM has decided to rethink its business strategy in China.

The US tech giant recently concluded that to be successful in China, it must help the Chinese build their own IT infrastructure, instead of just selling them IBM equipment or manufacturing it there cheaply.

"If you're a country, asChinais, of 1.3 billion people, you would want an IT industry as well," IBM CEO Virginia Rometty said on Monday. "I think some firms find that perhaps frightening. We, though, at IBM ... find that to be a great opportunity."

Rometty spoke at the ChinaDevelopment Forum in Beijing, an annual Chinese government-sponsored conference that brings together business executives and China's top politicians.

IBM will allow Chinese companies to build products ranging from semiconductor chips and servers based on IBM architecture.

IBM already had announced partnerships with Chinese vendors, and packages its database software with products from Inspur, a server-hardware maker and IBM rival. It also has made deals with Youyou, a Beijing software firm, Reuters reported.

IBM to help Chinese build IT, instead of just selling to them

"On the strategy front, collaborating with China will allow IBM to get involved in shaping the trajectory of China's IT industry and the competition landscape in China, in which IBM will keep an advantage for itself," Minyuan Zhao, an associate professor of management at the University of Pennsylvania's Wharton School, wrote in an e-mail to China Daily.

"It sets the precedent for other multinational firms, making it more difficult for everyone to negotiate with China.

"IBM can also strategically decide how to share knowledge in the process," she said. "Taking an active role is better than having other players to decide for you.

"IBM knows China will have alternatives, one way or the other," she said. "If your cake is going to be eaten anyway, you might as well go and eat with them."

Zhao said that "keeping the technology in a treasure chest does not help. On the contrary, China is a large-enough market for IBM to learn about new market trends and improve itself among its competition. This is also an opportunity for IBM to experiment on new ideas.

"On the institutional front, the Chinese government still plays a very important role in the industry's development," she said.

"This allows IBM to be close to policymakers and potentially gain favorable treatment in other businesses that IBM tries to push in China."

IBM's move comes amid tensions over technology between Western nations and China.

Chinawants to use more home-grown and less foreign technology, to grow its own tech sector but also as a response to ex-US National Security Agency contractor Edward Snowden's leaks about US cybersurveillance.

In February, a Chinese parliamentary body discussed the draft of a counterterrorism law, under which technology firms that operate in China must hand over encryption keys and provide security "back doors."

Firms also would have to keep their servers and user data within the country; censor terrorism-related web content; and turn over communications records to law enforcement, reported knowledge@wharton, a website of the Wharton School.

China's banking regulator has adopted new standards requiring tech products to be "secure and controllable" for use in the financial sector. Those that have not been developed in China must be registered with the government.

On March 19, the European Union criticized China's new cybersecurity rules, measures that US and EU companies said could force them out of the Chinese market.

The European Commission called the regulations a "tremendous barrier" for foreign companies in the IT sector.

"China continues to consider that only Chinese-developed information security technology is regarded as 'safe', and applies a concept of 'national security' far beyond normal international practice," the commission said in an annual report on trade barriers.

IBM, though, has decided to work within that framework. Its sales inChinahave recovered somewhat after a decline in the third quarter of 2013, following Snowden's revelations. Revenue from China fell 1 percent in the fourth quarter of 2014, compared with the previous year.

Zhao said that some downsides of IBM's China pivot are: "knowledge outflow, creating competitors for itself".

Also, there could be a potential issue that once IBM works more closely with China's government, "it may have to go through more scrutiny before getting contracts from the US government agencies", Zhao said.

"Moreover, there are both pros and cons - from the US government's perspective - when a supplier works with foreign countries," she said. "Almost all the large military suppliers in the US have sales, even arms sales, in foreign countries. That allows these suppliers to spread the cost of R&D and have more opportunities to move down the learning curve. It's just the required level of trust will have to be higher."

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