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Communications of the ACM

Transforming China

It Is Not For Everyone in China


A 2004 report by consulting firm Gartner Dataquest forecasts that the worldwide market for IT services will top $762.3 billion in 2008, up from $608.1 billion in 2004. The Asia-Pacific region's compound annual growth rate of 9.7% (projected 2003–2008) leads the world. IT services revenue in the region will thus top $43.9 billion in 2008, as China surpasses South Korea to become one of the three largest IT services markets in the region, along with Japan and Australia.

The growth of China's enterprise software market in 2003–2004 reflected this broader trend. Sales of enterprise resource planning (ERP) software, according to a 2004 China Computer World (CCW) research survey, totaled 1.19 billion yuan ($144 million U.S.) in the first half of 2004, up 29% over the same period a year earlier. Human resources software posted sales growth of 80.4% for the first half of 2004 over the same period a year earlier. On the other hand, customer relationship management software sales barely crossed the 200-million-yuan mark, up 2.2% over the same period a year earlier. Nonetheless, the CCW survey anticipated a customer relationship software boom in five years when Chinese companies have had enough time to digest their operational-level IT investments and move on to more sophisticated management software. Despite the mixed outcomes in terms of ERP implementation and use in China [4], the CCW survey found that 47% of Chinese enterprises had installed ERP modules, with an annual growth rate of 5% for new installations.


Many Chinese firms would be ill-advised to focus on IT when trying to improve competitiveness and achieve strategic advantage.


Government policymakers in China have long acknowledged the importance of IT to the country's economic development, specifically identifying development of the IT industry as a top priority in the country's 10th five-year national economic plan announced at the Ninth National People's Congress in 2001. That plan called for the government to invest $151 billion over a period of five years (2001–2005) to build a national telecommunications infrastructure. The goal was to ensure that China would become the biggest telecommunications market in the world by 2010.

Recent economic development statistics show that the government's initiatives are working. For example, the total number of Internet users in China was 94 million at the end of 2004, an 18.2% increase over the same period a year earlier. That made China second only to the U.S. in number of Internet subscribers. The country has more than 300 million cell phone users, most with Web-enabled cell phones [4]. During a September 2004 news conference in Beijing announcing investment of $32 million in a new Chinese research facility, Cisco Systems, Inc. CEO John Chambers predicted, "China will become the IT center of the world."

As IT permeates Chinese organizations, the debate in the U.S. about the IT productivity paradox [1], the business value of IT [5], and whether IT even matters to a company's competitive advantage [2] will inevitably be relived in China. This is good for Chinese business managers, policymakers, and scholars. Recognizing that IT is not a silver bullet for all companies seeking performance improvements or a competitive advantage, they would be better able to make decisions and craft policies for maximizing IT benefits and minimizing IT risks at the beginning of what is likely to be a massive IT transformation. Being better able to avoid the pitfalls already experienced elsewhere, China has the potential to leap forward toward being a world economic power, deploy IT in all sectors of the economy, and transform its basic economic structures.

IT infrastructure in China is far from complete, however, and IT products there are far from being commoditized. For early adopters, it is still possible to leverage IT to create a unique set of organizational capabilities that are difficult for competitors to imitate. In this sense, IT can be used as a differentiator to gain competitive advantage. For example, e-commerce pioneers (such as Sina and Sohu, two major Chinese Web portals managing both information and e-commerce) have succeeded in terms of popularity as well as profitability.

On the other hand, IT is not necessarily beneficial to all Chinese companies, operating in a unique socioeconomic environment unlike those in any other developing country. The most notable difference is China's abundant and relatively inexpensive labor force. Pushed and pulled by these circumstances, how might IT help create optimal business value for a particular firm?

It makes economic sense for any enterprise to replace labor with IT or other technology only when the marginal return of the technology is greater than the cost of the labor. In the U.S., justifying this substitution is relatively straightforward due to the fact that labor is expensive. However, when labor is inexpensive, replacing it with IT may not always be beneficial. Whether or not a firm's business interests are best served by deploying IT depends largely on its size and market orientation, as well as on the information intensity, or extent to which information is integral to core business processes, of the industry in which it competes.

Chinese companies, like their counterparts worldwide, can be classified into three size categories: large, medium, and small; and two market orientations: global and domestic. For example, Huawei and Haier are two large firms in the networking equipment and consumer appliance industries, respectively, with global market orientations, and Shanghai Volkswagen and China First Automobile Group are two large China-based automobile manufacturers with domestic market orientations, selling products mainly in China. An industry's information intensity can be roughly classified as high or low. Industries with high information intensities, where information is a critical resource and integral to core business processes, include financial services, retail, and transportation. Industries with low information intensities include agriculture, mining, and construction. Whether IT should be a primary focus for a specific firm is contingent upon its size, market orientation, and industry information intensity (as the table here illustrates).

Firms competing in the global marketplace must offer high-quality products yet have low-cost operating structures and are more likely to achieve efficiency gains and increased productivity through IT than those in less-competitive circumstances [6]. IT must be in place to coordinate all business activities, including supply chain, market research, and customer relationship management. In addition, these firms often forge joint ventures with foreign partners. For example, the joint venture between Huawei, a China-based networking gear manufacturer, and 3Com, a U.S.-based counterpart, helps Huawei's network products gain traction in the relatively established and highly competitive North American market against other network giants (such as Cisco Systems and Nortel). To participate in the joint venture, Huawei had to invest in technologies to make its systems compatible with those from 3Com and coordinate their common business activities.

Large Chinese firms in the domestic market are likely to face intense competition from other large firms, including foreign rivals, now that China has joined the World Trade Organization (since 2001). Here again, IT can be used by farsighted managers to help their firms gain competitive advantage. For example, supply chain automation has helped Lenovo (formerly known as Legend Computer) become China's leading PC maker and enabled it to acquire IBM's PC business for $1.75 billion last December. These firms are also often eager to find foreign partners and capital. To succeed, they must first put their business operations, including IT, in order. Due diligence and solid management control over how the business is run are important to the partners and to the venture capitalists in the developed nations (such as those in Europe and North America).

For medium-size firms competing in the Chinese domestic market, IT investment decisions depend largely on the information intensity of their industries. Firms in industries with high information intensities are likely to benefit most from IT investment [3]. Centaline (China), a real estate management firm based in Beijing, is a good example of how to deploy IT effectively. It has more than 6,300 employees and maintains 350 branches across the country, including in Beijing, Shanghai, Guangzhou, and Shenzhen, with plans to open more offices in the near future. Because its operations are so spread out, streamlined collaboration and information sharing are the keys to the timely completion of transactions and customer satisfaction. To accomplish these goals, Centaline's top management decided in 2003 to migrate the entire firm's enterprise systems to a single end-to-end office automation solution based on various Microsoft products. Centaline also invested in internal IT development to create workgroup collaboration and workflow applications. These investments have paid off in terms of streamlined collaboration and information sharing; automated workflow management; new flexible information rights management; and lowered training and integration costs.

Most businesses in China are still relatively small and privately owned, serving a domestic market that has experienced explosive growth over the past two decades. Demand for product quality in the domestic market in both the business-to-business and the business-to-consumer sectors remain significantly lower than that in the industrialized economies worldwide. Most Chinese firms are thus better served by taking advantage of inexpensive labor relative to IT for overall business performance. For example, a manufacturer of silicon microchips used in testing equipment and instruments in Shenzhen had to decide whether to purchase a system that might extend the average life of the chips from 3,000 hours (domestic requirement) to 3,200 hours (international standard). Such a system would cost $100,000 and increase the price of the company's chips by 10 cents per chip in a production capacity of one million chips. In light of their own thin margins, most customers prefer the 3,000-hour chips without the price increase. For the manufacturer, being able to sell what it already makes obviates the need for the new system. However, if the 3,200-hour chip were mandated by the government, it could easily hire 10 more people to accomplish the same goal as the automated system. The company would still be ahead for the next eight years because the labor is so inexpensive that it would have to pay only about $100 per employee per month.

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Conclusion

IT is clearly not for every business in China. While IT can help provide significant business value for many enterprises there, actually realizing that value depends on many factors, including firm size, market orientation, and industry characteristics. Many Chinese firms would be ill-advised to focus on IT when trying to improve competitiveness and achieve strategic advantage.

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References

1. Brynjolfsson, E. The productivity paradox of information technology. Commun. ACM 36, 12 (Dec. 1993), 67–77.

2. Carr, N. IT Doesn't Matter. Harvard Bus. Rev. 81, 5 (May 2003), 41–49.

3. Hu, Q. and Quan, J. Evaluating the impact of IT investments on productivity: A causal analysis at industry level. Int. J. Inform. Mgt. 25, 1 (Feb. 2005), 39–53.

4. Martinsons, M. ERP in China: One package, two profiles. Commun. ACM, 47, 7 (July 2004), 65–68.

5. Martinsons, M. and Martinsons, V. Rethinking the value of IT, again. Commun. ACM, 45, 7 (July 2002), 25–26.

6. Melville, N., Kraemer, K., and Gurbaxani, V. Information technology and organizational performance: An integrative model of IT business value. MIS Quart. 28, 2 (June 2004), 283–322.

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Authors

Jing Quan ([email protected]) is an assistant professor in the Department of Information and Decision Sciences in the Franklin P. Perdue School of Business at Salisbury University, Salisbury, MD.

Qing Hu ([email protected]) is an associate professor of information systems in the Department of Information Technology and Operations Management at Florida Atlantic University, Boca Raton, FL.

Xinan Wang ([email protected]) is an associate professor and associate dean in the School of Computer and Information Engineering at Peking University Shenzhen Graduate School, Beijing, China.

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Tables

UT1Table. Should Chinese firms always look to invest in IT?

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©2005 ACM  0001-0782/05/0400  $5.00

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