When IBM announced on January 19, 1993, that it had suffered a staggering US$5 billion loss in the previous business year, it was clear that something had to change.

At that time it was the biggest ever single-year loss in US corporate history. And it fell to a clutch of executives, notably former CEO Lou Gerstner, to shake up the Armonk, NY-based firm, the largest IT company in the world, and one with roots that can be traced back to the 19th century.

The result is a more streamlined firm that has not lost its broader presence in multiple IT sectors, but which has shifted the main focus of its existence away from commoditized products, such as personal computers, and toward the area that has made the company its second fortune, and saved it from the grave - IT services.

Many of the world's biggest companies, including financial services giant JP Morgan, have now outsourced their IT operations to IBM, in deals that together garner billions of dollars in revenues a year.

Garry Willinge, IBM's head of global services in Hong Kong, says the need for Chinese companies to improve product quality and services, and drive down prices to compete with overseas firms in overseas markets, is causing yet another sea change in the way Chinese enterprises think and operate.

"Some Chinese firms still take the "DIY" approach to IT, but most of them now fully realize how important it is to them. This is being led by the big State-owned banks and the very big SOEs (State-owned enterprises) and being filtered down to much smaller firms," Willinge says.

"Hong Kong in this sense is a leading indicator of what will happen in China. Companies realize they need to be competitive on a global scale, and so they need to constantly be looking to bring down fixed costs. Firms understand now that they need to differentiate and innovate or become commoditized."

The real value for Hong Kong or mainland firms is obviously in the former - high-end products sold at a premium generate real value for a firm's bottom line (think Apple's massively popular iPod music player), not low-end industry-standard products such as digital watches.

This sort of far-sighted outlook to future product generation and profit growth is increasingly being adopted by mainland firms, with help from IT partners such as IBM.

Willinge picks out Kingdee, a mainland software firm as being one such firm - the company has set up its Asia-Pacific headquarters in Hong Kong to support the increasing amount of business it does outside the mainland.

It is becoming tougher and tougher for businesses to differentiate their products from the next company's, particularly in China's copycat marketplace, where a great idea one day is copied by a raft of profit-seeking competitors the next, and falling margins in China are forcing mainland and Hong Kong companies to up their IT budgets.

"Five years ago, manufacturing plants in China were enjoying margins of around 14 per cent," the IBM executive says. "Now this is down to 5 per cent and some mainland manufacturing firms are finding that even they can't compete at this level. We are seeing real buyer pressure in China, with prices being pushed down ever further.

"Chinese manufacturers are now asking `Where can we drive value?', and the answer is in things like branding and distribution, both of which can build back the margins, but also require some pretty sophisticated IT services to support them.

We are even seeing Chinese companies looking to buy overseas firms with established brands in order to drive themselves back up the value chain."

Willinge says this is essential to China's long term growth if its ultimate goal is to keep pushing up income levels across the board. The days when national incomes could be boosted by a multiple factor in a single decade, as happened in Germany, France, the UK and the US in the 1950s and 1960s, has come and gone.

"Chinese companies are now committed to driving down costs and driving up quality. This is helping expand China's middle classes and pushing up per capita income each year, but if China wants to keep this wealth increasing, this (continual innovation and use of high-tech IT services) is going to have to keep going."

All of this has caused an upswell of interest in IT services in China. While 50 per cent of mainland IT spending is still being used on much needed infrastructure involving PCs and hardware such as mainframe computers for advanced data-storage purposes, the IT services sector is expected to grow at a compound rate of 20 per cent a year over the next six years.

Total IT service spending in the Greater China region - including the mainland, Hong Kong and Taiwan - is widely expected to reach US$13.3 billion a year by 2007. IT services spending by Hong Kong corporations alone was US$899 million in 2002 and US$927 million last year, and is forecast by consultancy IDC to grow by 4 per cent a year over the next five years.

But perhaps this is an apposite example of how IT services work in the real world - and how they can help firms improve service levels, increase market penetration and drive down costs.

Willinge provides just such an example by relating a story of one company using IBM's "on demand" data centres that link companies' disparate corporate entities directly with each other in "real time" wherever they are in the world.

"One Asia-focused firm approached us after a US audit had found there was too much of a risk factor in having its headquarters in Singapore," he says. "We created a plan covering logistics, transport and reliability that had all the risk factors built in, but also allowed the firm to take advantage of its hugely growing China operations.

Now the company has its command centre and data centre in Hong Kong, and its print services in Singapore, and can link them up with any of its services and operations on the mainland," he says.

Linking up firms' operations in this way is the natural next step in the globalization process. In fact, one could say that the utilization of such technological advances personifies globalization, or perhaps the end stage of its evolution.

Allowing enterprises to link any one of their operations with any other operation theoretically allows them to operate as a unified entity. IBM took a huge gamble that the market for such "on demand" services would rise over the past decade, and has been amply rewarded for its efforts.

It could have broken the company; it didn't and now China is the next market expected to push IBM to the next level.

The world's largest IT firm has invested US$10 billion in "on demand" services around the world, and the extent of its client roster on the mainland - from many of the big State-owned commercial banks and large-scale State-owned enterprises all the way down to SMEs and sole proprietorships - shows how serious it is about China.

The company's history on the Chinese mainland and in the SAR is a long one. The first IBM system on the mainland was installed in Beijing Union Hospital in 1934, and the first IBM office opened in Shanghai two years later. In 1967, it delivered its first 360 mainframes to Hong Kong, to banking giant HSBC, on a sampan, and since 1979, has increased its mainland presence, setting up representative offices and PC (personal computer) joint-ventures.

In 1995 it cut the tape on its Beijing-based China Research Lab, one of just eight IBM research labs in the world and one which employs over a hundred Chinese computer specialists. This year it consolidated a large part of its mainland IT services infrastructure when it opened its China Contact Centre in Shenzhen.

All of this is helping Chinese firms increase their ability to compete head-to-head with the largest global firms.

This is the stated aim of the State Assets Supervision and Administration Commission (SASAC) - the creation of 30 to 50 national firms acting as China's "flag bearers" in the corporate world.

Some will not make it of course - in the world of information technology nothing is certain - but Willinge believes the willingness of Chinese firms to learn how to innovate and re-orient their focus to compete globally, will see them through. Certainly, as Willinge points out, there is plenty of scope to generate more value in the supply chain in China.

"There is a hell of a lot of value to be squeezed out of the manufacturing and value chain in China," he says. "China doesn't want this to lead to fewer jobs (on the mainland); it wants to generate more high-skilled jobs for highly-skilled workers."

Again, this is something that will benefit IBM in China, as well as the Chinese economy and people as a whole.

(HK Edition 05/13/2004 page16)