Creating and managing high-tech opprotunites in China
02/01/1999
Creating and managing high-tech opportunities in China
Phil Naughton, Motorola, Austin, Texas
James Spencer, Industrial Design Corp., Tianjin, People`s Republic of China
China continues to attract and mystify Western entrepreneurs who seek to enter its market. The story behind Motorola`s successes in China - how it "broke the ice" with semiconductors - reveals many lessons that can be valuable to others who aspire to do business with or in China, especially those involved with high-technology endeavors.
Motorola has persevered and prevailed as a pioneer in China`s emerging economy (Fig. 1). The story of this pioneering work began in 1983, when Deng Xiaoping redefined China`s place in the world, suggesting that it was glorious for Chinese to get rich. This revelation reversed the official revulsion for capitalism cultivated by Mao Tse-tung`s Cultural Revolution. It also got the attention of Robert Galvin, the CEO who built Motorola into a global $28 billion company from 1959 to 1990. Like many Western executives enticed by the prospects of a liberated Chinese market, Galvin began watching China closely for evidence that its new attitude was real.
In 1984, Motorola assembled an Asia-Pacific Task Force of blue-ribbon company executives who were assigned to perform an intensive analysis of opportunities in Asia. The team was tightly cloistered and fiercely focused. During its three-month analysis, the task force was isolated from all outside distractions. Task force chairman and senior Motorola executive Carl Lindholm recalls, "We couldn`t even talk to our organizations, which for the most part we headed."
This total immersion produced dramatic results. The task force concluded that Motorola needed to get heavily involved in leveraging markets - markets in which the company could expect to get the greatest benefit from its distinct technology. An obvious attraction in China was the sheer size of the market. But the greatest enticement was the exceptional fit Motorola`s technology had with China`s hunger for new technology. "We were just perfect for that world," Lindholm recalls, "communication for people on the move - cellular, digital, all of that - where land-line communication was terribly primitive. With cellular, they could have an excellent, if limited, telephone system almost immediately. And we had manufacturing expertise, which they badly needed." To realize this dream, Motorola needed microelectronics manufacturing capacity in China.
One of Motorola`s greatest concerns about China was the quality of its manufacturing standards. A tour of approximately 30 Chinese production facilities did not reassure executives about their reservations. Motorola found that previous expatriate joint-venture partners had simply set up production lines and told Chinese workers which buttons to push, without transferring the technology or know-how needed for locals to understand manufacturing processes or to respond when systems broke down. The Cultural Revolution had taken its toll on China`s renowned brainpower by depriving a generation of training.
Motorola found Chinese skills lacking in such basic concepts as inventory control, factory coordination, or audits of work in progress. The conventional approach to quality control was to repair defective products repeatedly until they worked. In one television factory, product failure rate was approximately 20%.
In 1986, China underscored its seriousness about reform by issuing "New Provisions for Foreign Investors," 22 articles of liberalization. This document stipulated many land-use provisions and tax holidays for export-oriented and technologically advanced enterprises. The favored enterprises included "net earners of foreign exchange" and "[local] production enterprises possessing advanced technology supplied by foreign investors which are engaged in developing new products, and upgrading and replacing products..." Such enterprises could also "in accordance with their organizational structure and personnel system, employ or dismiss senior management personnel, increase or dismiss staff workers." Within the context of these provisions, a whole new style of management might be tried.
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Figure 1. Motorola`s MOS 17 facility in China awaits a revived Asian and worldwide economy to become operational.
China`s Magna Carta
Calling this document China`s "Magna Carta of free enterprise," Galvin initiated a relationship with China that would result in an investment of well over $1 billion and nearly 10,000 employees in the country by 1997. But first, he had the audacity to ask the world`s largest market to reinvent the way it did business. Like many developing countries, China`s invitation to expatriate investment was tempered by an insistence on joint ventures. Motorola knew that it could not count on a conventional joint venture to maintain quality and customer service.
Galvin decided to challenge China`s leaders directly by a radical proposal. He planned a 16-day trip to China during which he would make his case personally. Strategically, he was convinced that delicacy was not the way to get his hosts` attention. "When you are dealing with a major issue, sometimes you`ve got to really challenge somebody," noted Galvin, "so he`ll know he`s dealing with someone who`s going to be forthright."
At the end of his first ceremonial meeting in China, Galvin respectfully suggested to China`s minister of railroads, Ding Guan Gen, that reliance on conventional approaches to developing new industries in China would not achieve a world-class result. But if the government allowed Motorola to come into the country and run its business completely on its own, with its own land, buildings, staff, policies, tools, and nationwide sales and service organization, then Motorola would make a $100 million investment in China immediately, in the form of a $50 million semiconductor factory and a $50 million two-way radio factory. In addition, Motorola would pledge that its presence in China would be forever.
Word of this bold offer quickly rippled throughout the country. During a subsequent dinner, Shanghai mayor and future president Jiang Zemin told Galvin "We Marxist-Leninists are very pragmatic; if it`s the right thing to do, we decide to support it and do it."
"Guanxi"
One of the most compelling aspects of Motorola`s offer was its appeal to the Chinese ardor for "guanxi" - a sense of mutual trust and long-term commitment (Fig. 2). The Chinese seemed to appreciate the sincerity of Motorola`s revolutionary approach, and the shrewdness of weaving the concept of forever into the offer helped seal a "guanxi" bond. Not long after, Motorola`s "guanxi" was further enhanced when it chose not
to alter its investment plans following the
infamous Tiananman Square incident.
Getting permission to build in China on its own terms was a major hurdle for Motorola, but it was only the first. The biggest challenges were more practical than political. Motorola knew the success of its China venture hinged on the ability to mobilize exceptionally strong support from key suppliers whose reliability and adaptability were well established. Among these critical suppliers was the design firm assigned the task of delivering one of the most complex high-technology industrial facilities - a semiconductor wafer fab - in the decidedly low-technology setting of Tianjin, China. The facility, dubbed MOS 17 (Fig. 3), was planned to become one of the most advanced industrial complexes in China.
IDC selected
Motorola selected Industrial Design Corp. (IDC), a firm well known to Motorola and a company that shared a long-term strategic focus on China. IDC had already performed more than 20 projects for Motorola in Texas, Virginia, and Japan, and had a solid track record in international, high-technology project delivery. Top IDC executives made numerous trips to China during the 1980s, many in support of US economic development missions. The individual selected to manage IDC`s first Chinese office had spent 25 years living in China and was fluent in Cantonese.
While Motorola was concerned about the capability of local resources to operate advanced industrial facilities, IDC was concerned about how well those resources could meet the rigorous demands of designing and building such facilities. Like Motorola, with similar commitments to China, IDC sought and secured permission to do business in China as a wholly owned foreign enterprise (WOFE).
A Chinese counterpart
A particularly appealing aspect of IDC`s commitment to the transfer of technology was the company`s willingness to collaborate with a Chinese counterpart. Once it was hired by Motorola, IDC sent a team of technical staff to China to interview a series of government-sponsored technical institutes, China`s closest approximation to high-technology design firms. IDC made its final selection based on technical skill and cultural compatibility. The Eleventh Design Research Institute (EDRI) offered semiconductor experience and a spirit of openness and flexibility that IDC considered conducive to problem solving.
Once the project team was formed and work was underway, technology transfer began with a vengeance, but the transfer of knowledge flowed in both directions. IDC brought a core team of EDRI engineers, computer-aided design drafters, and information technology staff to the US to train on technology tools and methodologies used to support the project. The EDRI staff was familiarized with IDC`s unusual teaming concept, in which all design disciplines are arranged together in a "project pit" to maximize communication among team members. EDRI emulated IDC`s project-team structure so closely that it built a mirror image of IDC`s project-pit layout in its Tianjin office.
There was much more adaptation to be done with the many other project contributors in China, however. Factors considered routine in more developed locations became problem-solving opportunities in Tianjin.
The issue of building codes, for example, posed a problem, since the company had the option of building to minimal local codes, which could reduce costs but jeopardize quality, or of imposing US-based codes, which could overwhelm local contractors and escalate costs. A practical compromise was reached in which training workshops were held to familiarize local officials and contractors in the rigorous level of code quality required for this type of facility. Ultimately, the decision was made to use Chinese codes and standards as a basis for the design with modifications as necessary to meet Motorola`s high standards for plant performance and safety.
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Figure 2. "Guanxi," the Chinese characters for "connections," as in mutual trust and long-term commitment.
IDC made sure that more than the typical details were shown on drawings to identify deviations from Chinese standards readily and help with interpretation of design intent. IDC also learned to assign design activities to local project-team members as early as possible to avoid duplication of work. In specifications, generic product names were used rather than specific US names to encourage the use of Chinese products able to meet specifications. In the field, sample rooms and mock-up areas were created to rehearse construction or assembly of critical building elements and equipment. Language barriers were overcome by keeping multilingual staff on site throughout the project.
Ensuring materials
An immediate concern was uncertainty about the availability and quality of construction materials and equipment, much of which would be taken for granted in other parts of the world. IDC responded by creating a materials procurement and contractor coordination matrix early in the project. This matrix listed all materials required for the project, and designated which materials were available in adequate supply in China, which needed to be imported, and which could be installed by local contractors. This matrix was also used to coordinate responsibility for the installation of each individual material.
Air Products and Chemicals was another key supplier that found novel ways to support Motorola`s project in China. Like IDC, Air Products was invited to interview Chinese technical firms and design institutes. As a result, Air Products received an expedited business license. This supplier`s creative solution to concerns about specialized gas supplies in China was to build a gas plant near the MOS 17 facility.
The right company structure
There are other examples of accommodations to address the nuts-and-bolts challenges facing industrial development in China. Such challenges can be met with the right blend of competence, patience, and ingenuity. For those who wish to flourish in China beyond one or two projects, however, the challenge of greatest consequence is how a company initially structures itself to do business in China; this is crucial to its ability to enjoy long-term prosperity and build "guanxi":
Having a savvy business executive to lead efforts into China is critical for success. The leadership team should have previous Chinese or Asian experience and fully understand what it takes to do business in China. The use of consultants and close contacts within the region near planned business activity can help a company stay abreast of changing government policies.
Establishing relationships with key government and business contacts is paramount. Relationships that are established in a nonbusiness environment are ideal. These types of contacts are nonthreatening and can lead the way to long-term relationships. Motorola started such a relationship in the 1980s when a top Motorola official and Chinese officials organized a People`s Republic of China (PRC) bridge association. This group attracted another bridge enthusiast, leader Deng Xiaoping.
An initial decision that must be made is the choice between a joint venture or WOFE. Total capital investment may influence this decision. Capital investments of less than $30 million can be approved on a regional level and do not need to be submitted to the central government. Joint ventures are the most popular form of business arrangement, but the trend is toward WOFEs, which provide more self-directed control.
A disadvantage of working with Chinese joint-venture partners is their lack of experience with many high-technology manufacturing operations. For example, a joint-venture partner may suggest substitution of local materials and methods for imported materials and methods. While significant savings can be achieved using local materials, an inspection of the factories producing the materials is warranted. It is essential to have QA/QC programs modeled after such programs as QS9000, Six Sigma, and Quality 1.
Once quality standards of local support resources have been established, it is advantageous in the long term to arrange for local training, spare parts, and warranty service to support imported materials.
A program to train local managers and help local suppliers improve quality is a must under any business structure. For a WOFE, it is an absolute. The Chinese will tolerate a WOFE only if it is perceived to contribute to China`s future and people.
It is important to establish a well-defined business plan with long-term goals. Short-term successes are rare in China. Even a Goliath like Chrysler took many years to succeed there. A good problem to have is when companies underestimate their potential business growth and thus find themselves running into the maximum limits of capital investment as stated in their business licenses. While increases in total capital investment are not difficult to obtain, the $30 million limit imposed by some regional governments should be carefully evaluated for the long term.
Many businesses coming into China are there for the purpose of setting up a factory that will supply products internally to China and products for export. Where a foreign company must plan carefully is if internal consumption of their product exceeds their expectations. A company must balance this ratio of internal to export as defined by its business charter. Staying to the business charter is very difficult, especially when triple-digit increases in sales occur. If a WOFE is starting to drift from its business plan, it must keep its government contacts informed so they understand the benefit to China.
When soliciting proposals from prospective foreign suppliers, a company must carefully interview each company to document its experience in China, not just Asia. Many foreign companies have offices located in Singapore or Taiwan, but nothing in the PRC. If during this interview process a prospective company thinks there is no difference between working in Taiwan and in the PRC, a warning flag should go up.
Companies that claim to have offices in the PRC may only have deployed a representative who has no actual experience in servicing foreign companies. Key questions to ask include: What is the level of training the company`s Chinese employees have received? Have its Chinese employees worked outside of the PRC? Do these Chinese employees have access to the latest systems and software? Also, if a key supplier is warehousing spare parts, will it receive the duty-free status needed to enable profitability?
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Figure 3. Motorola`s MOS 17 logo combines a dragon with a symbol for "six sigma" quality.
Companies desiring duty-free status should also prepare a careful investment plan. For a factory, the need to import infrastructure and manufacturing equipment must also include the need for imported installation materials. For example, an ultrapure water generating system may be imported to support a wafer fabrication facility. The total capital investment plan must also include the imported high-purity piping, high-purity piping welding machines, consumables, and the skilled work force needed to install and start up the plant. In the case of a large wafer fab, if only the equipment needed for an ultrapure water system was forecast in the investment plan, several million dollars of other required capital could be unavailable when needed.
A key element of success for a Chinese high-tech venture is the willingness to train Chinese nationals quickly on the materials and procedures of an operation. Motorola teamed with Air Products to provide training for its Chinese personnel at Motorola`s US factories. IDC was allowed to bring Chinese nationals back to the US to work side by side with their US counterparts on critical aspects of the Motorola building design.
When the success of a sophisticated system makes it imperative to involve a specialized foreign supplier, an investor must be able to determine quickly if the foreign company has the stamina necessary to deal with government bureaucracy, the resources to support the high cost of maintaining expatriates, and the patience to succeed despite an often plodding pace of activity. If not, a more experienced company must be willing to help out to achieve lower costs by sharing some of the lessons learned with partners.
Conclusion
The potential for rewards in the PRC is high, but so are the risks. With a good plan, open communications, and sincere application of the principles of "guanxi," all parties involved can help each other and share in the rewards. The Chinese benefit from the foreign products, services, experience, and technology transfer. Foreign firms gain access to auspicious Chinese markets and insights that can be passed along to help others gain entry into this most massive and most fascinating marketplace .
PHIL NAUGHTON received his BSME from Texas A&M University, is a registered professional engineer, and is a member of Motorola`s Semiconductor Sector site services organization in the new construction group. He is currently the design manager for Motorola`s MOS 17 wafer fab in Tianjin, China. Motorola Inc., 3501 Ed Bluestein Blvd., Austin, TX; ph 512/505-8143, fax 512/505-8145, e-mail rwba50@ email.sps.mot.com.
JAMES SPENCER is a former trade development officer for the Oregon Economic Development Department, where he managed trade and investment programs with Asian countries. At IDC, he helped start up the company`s operations in Tianjin, China, as well as Singapore and Malaysia. For Motorola`s MOS 17 project, Spencer coordinated many logistical arrangements, and assisted technical staff in the selection of Chinese design subcontractors and in contract negotiations. Tianjin IDC, #28, You Yi Rd., Room 103, Hexi District, Tianjin, PRC 300061; ph 86/22-2813-2886, fax 86/22-2813-2322, e-mail [email protected].