As the world's most populous country, not to mention an economy that has consistently grown at a staggering rate relative to the rest of the world, it's no wonder tech companies are chomping at the bit to gain a foothold with businesses and consumers in China. The opportunities for the tech industry -- across multiple areas including cloud services, devices, and the Internet of Things, to name but a few -- are huge.
However, China's highly regulated governmental oversight, concerns surrounding tech security, and a growing sense that "outsiders" are less than welcome have made doing business in China challenging, to say the least. In what is likely a precursor of things to come, IBM (NYSE:IBM) CEO Ginni Rometty is taking a unique approach to gaining a foothold in China; and it's spot on.
What's the big deal?
The reason IBM and virtually every other significant tech company on the planet are targeting China as a means for growth is the nation's phenomenal appetite for technology. According to IDC, China will account for 43% of the world's information and communication technology sales growth this year.
Included in that astounding figure, per IDC, Chinese consumers are expected to make one-third of all smartphone purchases and to conduct one-third of all online shopping.
However, the Chinese government also recognizes the limitless opportunities its consumers represent, and has seemingly gone out of its way to make it difficult for foreign companies such as IBM and its competitors to sell their wares.
China is focused on growing its own tech industry rather than simply becoming a significant sales destination for foreign companies. Also, Edward Snowden's revelations regarding U.S. National Security Agency activities added fuel to the anti-foreign fire. Non-Chinese tech companies, thanks to Snowden's insights, brought with them security concerns that raised yet another roadblock for outsiders. In fact, a report from Gartner suggests that over 80% of Southeast Asian CIOs don't believe their companies are adequately protected from digital security breaches. So what's a foreign tech behemoth like IBM to do? Take an entirely different tack.
IBM has a plan
Rather than "viewing the country [China] solely as a sales destination or manufacturing base," which has been par for the course for device manufacturers such as Apple (NASDAQ:AAPL) and most every other tech giant, Rometty and team intend to actively assist China in developing its own tech industry. That is a significant shift in strategy, but there is a method to Rometty's madness.
The over-the-top ad recently displayed by billionaire Internet video site founder Jia Yueting that included, among other negative connotations, a statement that "Apple is Hitler" speaks volumes about the challenges facing foreign companies in China. Sure, Jia is rumored to be entering the smartphone market, so taking a stab at Apple was self-serving, and the manner in which he did so was ridiculous, but the message was clear: buy "in-house." That's not so different from the "Made in America" mantra so many U.S. companies market.
Rather than fight China's heightened governmental regulations and growing consumer angst regarding foreign products and services, IBM will work with Chinese companies as they build everything from servers to chips, all utilizing IBM architecture. As Rometty put it, "I think some firms find that perhaps frightening. We, though, at IBM ... find that to be a great opportunity," and she couldn't be more right.
Chinese banking regulators have mandated that the nation's financial institutions use more "made in China" technologies: that's how focused its government is on weaning itself off foreign technology. IBM's approach, along with the development of strategic partnerships with several Chinese tech companies, is a way to participate in the world's largest market even as others are being squeezed out.
Going forward, investors would be wise to monitor revenue from IBM's China efforts. Big Blue is finally beginning to stem its losses in China -- IBM's revenue from the nation declined a mere 1% year over year in Q4 2014 -- and with Rometty's plans now in full-swing, growth won't be far off.