August 5, 2015

China Perspectives: Member Experiences

CIO Strategy Exchange, New York, 2005

Security Concerns about intellectual protection play an outsizes role in both business strategy and in IT environments.

  • All security issues and rules definitions are more time-consuming and involve more extensive negotiation in China than anywhere else. Since the copying of intellectual property is culturally acceptable, we’re quite nervous. And that constrains the amount of IT work allocated to China compared to India. [Redacted] launched its venture in China thirty years ago; now the company has three more joint ventures for sedans, vans and heavy trucks.
  • Most joint design programs with Chinese partners reside on servers outside the firewall. In that respect, we treat our Chinese partner no differently than we do an American partner like .
  • Security of intellectual property is a problem without a clear solution. Consequently, both research and manufacturing activities in China will focus on “finishing” operations like personal care product ingredients and water purification products suited to local environmental conditions. (Both are relatively low cost and late stage operations.) “We anticipate retaining higher-level knowledge in subsidiaries rather than sharing it through joint ventures but, realistically, with China’s hyper-growth conditions and industrial sophistication, their knowledge and expertise will catch up with ours.” Besides, we can benefit: “the Chinese are constructing buildings so quickly that we know they’re also developing new building techniques — and Dow wants to participate. Generally, European multinationals are more cognizant of the amazing pace and true nature of this opportunity than U.S. firms.”
  • “We source only component parts [no local assembly] which deters the ability to reverse engineer our finished products.”
  • Exercise utmost due diligence to protect your intellectual property. This may involve non-traditional thinking around security. Although the China legal system is improving quickly, one cannot yet rely solely on the law for protection in China.
  • The attitude towards intellectual property in joint ventures, and especially IP security and control issues, is more disturbing in China than anywhere else. The encryption laws just add another difficult dimension to the issues.
  • There is potential for R&D and manufacturing, but valid concerns about intellectual property protection remain a significant barrier to making an extensive commitment. [Redacted] operates only a sales subsidiary in China, which has existed for over five years.
  • With advancements in commercial law, counterfeiting seems a less pervasive problem nowadays.

Government and Law: The CCP is very controlling and often arbitrary.

  • The government strongly prefers that multinationals adopt a “single company” approach to conducting business in China, regardless of the traditional separateness of the corporation’s various entities. This may require [unnaturally] coordinated and holistic corporate behavior. [Redacted] began its Chinese operations in banking and travel 87 years again, with a single Shanghai office to handle both activities. Its first office to handle [Redacted] and all aspects of its travel business opened in Beijing in 1979, followed by Shanghai, Guangzhou and Xiamen. In 2004, [Redacted] formed a partnership with the Industrial and Commercial Bank to issue the first branded credit card in China. International card members can withdraw local currency through over 3,000 ATMs.
  • Business protocols and rules tend to be undefined or subject to negotiation. As a result, tax rates are poorly defined and variable, some applied locally, some nationally.
  • Be aware of government protectionist practices (i.e. quotas) that strongly favor homegrown manufacturers by helping them to be more “competitive.” And policies in this arena can change overnight…without any advance warning.
  • Expect lots of local variation. The provinces have quite different bureaucracies and conflicting governing styles. “Don’t ever tell a provincial official: ‘here is what they do in Shanghai,’ but listen with respect.”
  • Government regulators can strongly tilt, favoring domestic firms. Although has been selling controls in China for two decades, one major domestic competitor is already larger – after just three years of operation – because of very effective official sponsorship. [Redacted] has plants and engineering labs located in Beijing, Shanghai, Xian, Guangdong and elsewhere. These sites were originally established to produce low-cost export products; now, domestic sales have grown to around $500 million.
  • The government isn’t always clear about what can be done outside China versus what must be done inside the country. To illustrate: “we had an efficient Singapore-based Internet service provider until being advised that only a domestic supplier was acceptable – presumably so all our network traffic could be monitored.”