China may snub overseas services

Chinese state firms and banks could suffer as much as or more than American businesses in the short run, if the government does ban them from using American consulting firms and IBM computer servers, say analysts.

For one thing, Chinese consulting firms are unable to provide the international edge and market intelligence needed for state-owned enterprises (SOEs) to transform themselves into market-oriented ones.

For another, replacing IBM computer servers - widely preferred by Chinese banks - and installing locally made ones could incur additional, even unnecessary, hardware and maintenance costs.

These possible negative ramifications could explain why there has been no progress made since talk of such bans surfaced.

A report on May 25 by the Financial Times, citing sources close to senior Chinese leaders, said United States consulting companies McKinsey, Boston Consulting Group (BCG), Bain & Company and Strategy& (formerly Booz & Co) would be snubbed by China's SOEs.

On May 27, media reports citing "people familiar with the matter" said the government was pushing banks to replace IBM's servers with a local brand.

These moves were seen as a warning to the US after its Justice Department indicted five Chinese military officers on May 19 for alleged cybercrimes against American firms such as US Steel, Westinghouse and Alcoa.

On top of suspending its involvement in a bilateral cyber-security working group, China has reportedly banned Microsoft's Windows 8 operating system from its government computers.

Some say these bans are also aimed at growing local consulting firms and computer server makers by reducing foreign competition.

"If it is to help Chinese consulting firms grow, we should not use a 'one size fits all' solution like banning foreign competition," Mr Huang Dongtao, general manager of Beijing Baizhang Culture & Consulting, told The Straits Times.

"If we want to grow this sector, the government has to tackle the fundamental problem and start by building a conducive environment for companies to grow independently."

Analysts say Chinese consulting firms lack the deep talent pool and expertise that foreign players bring to local enterprises.

It will also be hard to erode the strong presence of US consulting firms in China as many are on retainer contracts with clients that cannot be terminated overnight.

BCG reportedly has had over 1,000 projects in the greater China region in the past five years.

At McKinsey, the largest global consulting group operating in China, SOEs make up one-third of its local clients.

Meanwhile, IBM's dominant position in supplying high-end servers in China will make replacement exercises costly for any firms turning to local products. An unnamed senior IT manager at a state bank was quoted in a CCTV report on May 29 as dismissing talk of the bans, because IBM computers "are stable, easy to support, mature in China and abroad, and training is easy".

"If the government really wants to force this, they will need to come up with a solution," he added. "I think it is all talk."

Still, such talk has spurred Chinese tech firm Langqiao, which produces the Inspur computer server, to launch an "IBM-to-Inspur" sales campaign.

It is clearly taking on a big challenge as its 2012 revenue of 40.1 billion yuan (S$8.1 billion) amounted to only 6.2 per cent of IBM's revenue in China that year.

However, analysts believe US computer and consulting firms will inevitably lose ground amid increased competition from their Chinese rivals as the latter improve their technology and skills.

As it is, IBM's operating revenue in China for the first quarter dipped to US$22.5 billion (S$28.3 billion), down 21 per cent from levels for the last quarter.

This article was first published on June 7, 2014.
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