Moving Trucks at IBM

July 19th, 2006 at 07:12am David Bush - Iasta

IBM is moving its global purchasing headquarters from Westchester County, N.Y, to Shenzen, China, effective August 1, as per a recent announcement in Purchasing Magazine. Furthermore, John Paterson, Vice President and Chief Procurement Officer for IBM, will re-locate from Somers, N.Y. to China and run Big Blue’s Global Procurement Operations from there.

The move is designed to help IBM capitalize on the opportunities in China and the surrounding Asian marketplace and, preferably, help shape them to its advantage. IBM has been sourcing in Asia for 40 years, even before the neighboring “Land of the Rising Sun” was a major global marketplace. With a supply base that relies heavily on Japan, Korea, Taiwan and China, having a strong sourcing presence in Asia, and China in particular, certainly makes sense, especially when you want to source (software development) services and labor in addition to hardware components.

However, one has to wonder about moving the entire operation. After all, many industries in China are still in their infancy. Take, for example, an article entitled “Industry in Infancy” that Purchasing published one week prior to the IBM announcement article which noted that even though IBM buys a lot of production materials in China, there are many critical components, such as semiconductors, that it can not buy in China because the products it needs are just not available. A direct quote from an IBM Procurement Director is that “most electronic components are produced outside of China. Raw wafer and integrated circuit (IC) technology exists in China, but it is substantially behind product that is available from other regions”. Also, “Chinese manufacturers lack the intellectual property (IP) to build high-end semiconductors such as microprocessors, digital signal processors and ASICs” and “it is unlikely that Chinese manufacturers will get access to [this] IP in the next few years”.

In addition, if you read the other article on China published by Purchasing on the same day entitled “DOs and DON’Ts of doing business in China”, the first “don’t” is “don’t be in a rush” but IBM announced the relocation of its global procurement organization less then three months in advance!

Purchasing isn’t the only publisher of articles littered with warnings on the Chinese business environment. A recent Economist article entitled “Watch out, India” had a few scary facts and statistics of its own. Chinese workers tend to lack creativity, tend to speak and write English poorly, and as a whole China is still five to ten years behind India. Furthermore, few engineering and computer graduates are as good as their qualifications may suggest. While they tend to have a solid grasp of theory, few leave university able to apply it to real-life problems. “It is as if they can describe a hacksaw and how it works perfectly, but have no idea how to build a door with it.” Furthermore, they typically need “two years of full-time training just to become a middle-level engineer and four years to get to be a project manager” and, in the end, “only 10-20% of programmers ever get to a really good level and can become an architect.”

Does that mean I think that they might have made the wrong move? Not necessarily. If China lives up to predictions and becomes a global market force in the next decade, similar to Japan’s transformation two decades ago, this bold move for IBM could reap huge rewards in the long term. But if the issues of IP protection, rampant piracy, and market liquidity do not get resolved, you have to wonder how they’ll grow beyond a fledgling LCC provider to the global market, regardless of their size and numbers. In other words, I think the jury is still out.

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Entry Filed under: General, Global Supply Issues/Risk, Suppliers, Technology / SaaS