The Place to Be

Since China's entrance into the World Trade Organization three years ago, U.S. businesses and multinationals from other countries have accelerated their efforts to enter the world's hottest market. With good reason: It's where the growth is.

The nearly 1 billion consumers between the ages of 15 and 65 in China have more disposable income than at any other time in the country's history. That's changing what they buy -- and how they buy it. "For the first time, we see people in Beijing and Shanghai using credit lines to manage their finances and improve the quality of their lives," says Willie Fung, general manager of China operations for MasterCard International Inc.

Beyond favorable demographics, import growth is virtually assured. As a WTO member, China must cut tariffs on imports gradually, from an average of 23 percent when it joined WTO to 12 percent.

To tap this market, U.S. multinationals rely heavily on business technology to make their Chinese operations efficient and profitable. The software and infrastructure available are remarkably similar to what's used in the West. Chinese-language enterprise applications from Oracle, SAP and Siebel Systems, for instance, are available, as are leased high-speed telecom lines.

So what distinguishes the business-technology strategies that multinationals are putting to work in China from those used in more-developed markets? Western companies are discovering that education and collaboration are the most vital components of a successful in-country technology strategy. The tools are at hand but haven't been widely used and haven't been applied to specific business goals. That's particularly true given that most Western companies in China must cooperate closely with joint-venture partners and merchants that may not have much experience with business technology.

It was a lesson that General Motors Corp. learned the hard way. Two years ago, the company rolled out Siebel customer-relationship-management software at its operational centers in Shanghai. The automaker sold 386,710 vehicles in China in 2003, and year-over-year sales have jumped 49% for the first two months of 2004. GM, which sells most of its vehicles in China through joint-venture partner Shanghai Automotive Industry Corp., was looking to develop a more-sophisticated view of Chinese car buyers. However, local dealers had never heard of CRM and had little incentive to provide GM with the sales data it needed to make the project work.

"They were reluctant because it's something they never had to do before, and they just weren't used to it," says Addons Wu, CIO for GM China. To encourage broader participation, GM built a Web portal that makes it easier for dealers to order vehicles. To use it, however, they must provide the customer information GM wants. "Now, by default, when we get a vehicle order, we get the customer data at the same time," Wu says.

Getting Chinese partners to embrace technology is crucial for companies that want to capture market share as efficiently as possible. Because of generally poor logistics and infrastructure, Chinese companies' expense-to-sales ratios greatly exceed those of Western companies. Logistics costs can be up to 50 percent higher than in the U.S., according to a recent study by Accenture. In other words, it's easy to go broke trying to make a buck in China. To control costs, GM -- the No. 2 foreign auto seller in the country behind Volkswagen -- would like to replicate key aspects of its global IT model within Shanghai Automotive. For instance, GM uses a consistent PC image at all of its operations worldwide and is helping Shanghai Automotive move onto a similar platform. GM provided its partner with the basic specifications but relied on the company's IT staff for the implementation. "They have the local knowledge. If we tell them what we want and why we're doing it, then they will take that information and do it cheaper than we could," Wu says. Persuasion, he counsels, wins out over power plays. "In China, we put more time into getting consensus," Wu says. "You can order people to do things once or twice, but you lose your influence after that."

GM also wants to integrate electronically all its operating units in China to develop a more-efficient supply chain. Among other things, it's using SAP software to coordinate sales and shipping information between its factories and its warehouse and trading unit. For now, most knowledge flow is out of GM and to its partners, but Wu expects that to change. "China is still learning best practices in the automobile industry," he says, "but in the future, there will be more local innovation that finds its way out into the broader marketplace."

Training business partners in E-commerce has been critical to MasterCard International's establishing itself in China. The country lacks central credit-rating agencies, but regional credit bureaus that profile the banking and payment histories of residents in metro areas such as Beijing and Guangzhou have emerged. About 60 million Chinese carry MasterCard-branded debit cards, but very few have true credit cards. In five years, the company hopes to have 100 million Chinese credit-card customers, which will come as more credit bureaus emerge and Chinese consumers get comfortable with purchasing on credit. The government also is encouraging Chinese consumers--second in the world in terms of their savings rate--to open their wallets and spend to stimulate the economy.

In fact, the Chinese government built much of the infrastructure required for a national credit card system. In 1999, it completed work on the Golden Card project, an effort to construct a national cross-bank network to facilitate bank-to-bank credit-card transactions. "We've already accomplished the infrastructure-building in China," Fung says. "The urgent requirement now is educating the banks, government and consumers."

To that end, MasterCard provides consulting services to regional banks to help them automate processes such as credit scoring and credit reviews. It's also helping them implement automated transaction-processing systems such as VisionPlus from PaySys International Inc., a First Data Corp. subsidiary. The software, which is available in China through the IT integrator Shanghai Huateng Software Systems Co., automates key parts of the credit card payment cycle, such as payment authorization. Fung says Chinese banks will need to adopt such technology if they are to compete with the many foreign banks targeting China under the WTO liberalization. "The international banks carry a lot more knowledge about the credit industry, so Chinese banks will need to rely all the more on technology," Fung says.

For banks that want to outsource transaction processing, MasterCard is helping create service-level agreements with vendors such as First Data. It's also assisting its members in establishing and operating call centers.

For MasterCard to reach its goal of 100 million credit-card holders, it needs to do more than win over bankers; it needs to persuade smaller merchants to accept plastic, where today it's largely the big hotels and other businesses catering to international travelers that accept credit cards. MasterCard's experience with small businesses shows how it's sometimes necessary to take a low-tech approach in China. It could be years before a majority of small merchants get the telecommunications and technology to connect with MasterCard's payment network, so it's offering off-line transaction-processing services. Storekeepers can still send paper receipts to processing centers if they choose.

MasterCard will need the competitive advantages that those systems bring, because it's far from the only card issuer going after Chinese citizens' estimated $1.3 trillion in savings. HSBC Group and American International Group Inc., among others, plan to offer cards in the country. American Express revealed its intention to do so last week. GM also plans to introduce auto loans in China, though GM China managing director Philip Murtaugh says the company would proceed slowly given the lack of a nationwide credit program. China's telecommunications infrastructure is an obstacle for many multinationals. There are still areas where just getting acceptable broadband telecom connections is a major hurdle. But more often, the availability of the technology isn't as big a problem as the expense of efficient telecom networks. That's partly because "last-mile" access in China is monopolized by China Telecom in the south and China Netcom Corp. in the north. Then there's China's complex web of telecom regulations. "The most significant telecom challenge in China for multinationals relates to the pure complexity of doing business in that country," says Bill King, general manager for AT&T Business Services for Greater China. "There's a lot of red tape in terms of getting installation on time, getting support, and getting contracts signed."

On the upside, because many multinationals are building Chinese operations from the ground up, it's easier for them to deploy state-of-the-art technology. AT&T, which sells networking and other telecom-related business services in China, typically provides customers with packet-based IP services running over proprietary networks. That lets them establish their own priorities for different classes of voice calls and data. For instance, companies that rely heavily on voice communications can assign more packets to voice and fewer to less-urgent applications, such as E-mail.

AT&T also has found a market in Chinese companies looking for an even footing with international competitors. Air China turned to the company for managed services that will tie together its 48 operations sites around the world. The airline wants to improve the speed of its reservations systems and its use of the Web for sales, marketing and operations. It had run its legacy applications over lines using the X.25 wide-area-networking standard. But X.25 can't support the newer Web-based services Air China is implementing or contemplating, including online ticketing and Voice-over-IP services for reservations agents.

AT&T is replacing Air China's X.25 network with frame relay over leased lines that will let Air China run an IP-enabled telephony network. From its support center in Singapore, AT&T monitors traffic on Air China's network, providing early fault-diagnosis and failure-prevention services. It also provides those services to foreign multinationals operating in China. Air China is an example of how trade liberalization in China is forcing domestic businesses "to deploy technology that will make them internationally competitive," King says.

As its business in China grows, AT&T is increasing the number of network point-of-presence nodes it maintains in key cities. Competition in the market is heating up as more businesses need international telecom links. BT Group recently struck a deal under which it will provide IP services to customers of China Netcom, the country's No. 2 fixed-line carrier.

But companies in China need to move more than bits and bytes that represent money. They need to move physical goods. A poor transportation infrastructure combined with a myriad of import and export requirements means most multinationals operating in the country rely on shipping- and logistics-services suppliers. That's created a big opportunity for United Parcel Service Inc. The importance that UPS assigns to China is reflected in the fact that chairman and CEO Mike Eskew was recently elected chairman of the U.S.-China Business Council. In 2001, UPS gained the right to operate direct cargo flights from China to the United States. This year, it expects sales in the country to top $300 million.

UPS focuses equally on serving multinationals operating in China and local businesses, in part, through its joint-venture partner, Sinotrans, says Edward Choi, UPS's marketing director for China. The company plans to upgrade the handheld devices used by drivers on many Chinese routes. Version III of its DIAD (Driver Information Acquisition and Delivery) system will let them capture customer signatures and transmit delivery-status information in real time through an internal packet-data radio to UPS's worldwide delivery network. UPS is training its own and Sinotrans drivers to ensure that they understand English and are able to upload the correct shipping information into their systems. However, UPS has no immediate plans to upgrade Chinese drivers to its version IV DIAD system, which supports Bluetooth and a range of other wireless technologies -- those standards aren't commonly used in China. Introducing small businesses to automated shipping technology is key to UPS' ability to serve efficiently millions of customers in China. "There's a huge group of mom-and-pop shops where business is still done by fax and phone," Choi says. "But it's an important market segment that we can't ignore. They feed up to the big distributors that in turn feed the multinationals." In some cases, UPS installs Web terminals at smaller customers that generate a lot of business. "We sometimes have to buy the equipment to make sure it's used," says T.H. Lin, UPS' VP for industrial engineering in Asia-Pacific. UPS runs seminars and conferences to educate business owners about the technology and its benefits.

UPS has developed and deployed Chinese-language versions of its WorldShip, QuantumView and CampusShip shipping-management systems and has made them widely accessible to its customers through the Web. UPS also is working with Chinese businesses to help them standardize shipping data. Things that a business client might do itself in other countries -- such as cleaning up shipping data to verify addresses and avoid duplicates -- Chinese companies sometimes expect UPS to do for them, Lin says. "In the U.S., if you ask people to clean up their shipping data, it's done. In China, everything is new to them," Lin says.

Multinationals are working hard to change that, so that their Chinese partners are comfortable not just with possessing the latest technology, but with using it to actually ring up higher sales and profits.