Get Ready For Some Chinese Take-Out...

….of Silicon Valley tech companies, that is. A depressed dollar, a booming Chinese economy flush with more cash than the U.S. has debt (which is a lot, in case you are wondering), a superbly educated, low-cost work force, ultra-low cost technology development and manufacturing expertise already in place and an internal market capable of dictating the new rules could mean big changes are coming.

I've been spending a lot of time attempting to really understand the Chinese market over the last few years – as a consumer of U.S. (predominantly) data center products – which I figured was a good idea considering that's how I make a living. Everybody knows China has been the world's hottest economy, so everyone wants to sell their stuff there. Here are some of the things you should know or at least consider:

1. The China IT market doesn't operate like U.S. or Europe – at all. Most of the economic growth in China has been recent, so prior to the last 10 years there was no real overall data center infrastructure in place – at least not widely. That's good and bad – mostly good. No previous infrastructure means that while they are "late" to the market, they also aren't burdened with 57 generations of staggered, incompatible legacy bets to contend with. For the most part, the Chinese are able to start from a clean sheet of paper. The bad news on this front is that the IT consumer market has to be educated at every level. As capitalism and decentralization have taken a foothold for Chinese business initiatives, there has been very limited local senior IT talent with any long term experience, and as such it is only natural that Chinese IT leadership is forced to learn on the fly. If someone has never experienced the pure joy of making the decision to dump the mainframe for the mini-computer and adopt DECnet as a networking standard, they simply are not armed with the experience to see some potential pitfalls. This is why global system integrators like Accenture have done so well in China, and more global brands have grabbed big market share.
2. The opportunities have only just begun. For example, because of the Olympic Games, China has a massive push to move their thousands of pure analog cable operators to bypass straight digitalization and move directly to HDTV – all within about 9 months. I figure the storage capacity requirements for this little endeavor will eclipse 2 exabytes – to start. As business grows in China, so will their IT needs. The only way to circumvent practical experience is to buy your way to success – and that is what the Chinese are doing.
3. The decision makers for the majority of IT opportunities are not internal IT people – they are the system integrators. Chinese SIs – which really are more like VARs in the N.A. and Europe – are the perceived (and often real) knowledge experts, and as such command more influence in the Chinese market than anywhere else on Earth that I can think of. That will change as the IT community becomes more strategic and skilled, but for the foreseeable future if you want to sell into China and don't have a huge global direct presence, you better figure out who the SIs that control your accounts are. If they say no, you don't sell anything.
4. The Chinese government still has deep influence and ownership in most commercial enterprises. For example, there are about a dozen major global banks in China, and all of them are owned by the government. They operate fairly autonomously however, and the government has been a very large supporter of commercial expansion and modernization.
5. The Chinese are in it for the long haul. They are spending and building infrastructure that is second to none. From cell phone systems to WiFi, the Chinese are ready for whatever is coming next. They have the economic strength to afford to do it right and the centralized power to force it to happen. This will be the largest consumption market globally for IT products for at least 15-20 years I think. It really has only just begun.

Myself, and I think most industry people, have correctly viewed China as a land of unabashed opportunity. We think of China as the recipient of the things we bring to market – and for the next 5 plus years that will certainly be true. Sooner or later, however, the Chinese are going to reverse the roles – they are going to be the ones globalizing their own tech companies, and acquiring ours and others along the way.

A year ago I was introduced to H3C, a Chinese mega-company that came about after its predecessor, Hua Wei, effectively had to halt their own global initiatives due to a major IP piracy suit leveled by Cisco. After years of legal wrangling, Cisco and Hua Wei came to terms. Along the way the Chinese realized that they didn't need to steal and copy to design and build world-class technology products. They have the money, the market, and the manufacturing to take anyone on. They set up a joint venture/merger with ailing 3COM in the U.S. and went on to form H3C. H3C took all the internally developed IP and left behind anything that was challenged. The company now builds its own high-end core switching products, GSM infrastructure, storage products, security, and slew of other things. They sell their networking and core infrastructure products outside of China – mostly in Europe and South America thus far, and the rest has been captive to the local Chinese markets. Hua Wei does billions of dollars in revenues, and H3C over $700M, but no one has really heard of them in North America or most of Europe.

I became interested in the company when Jon Oltsik told me that technology and capability wise he felt that Hua Wei/H3C could pose the only true legitimate second choice to Cisco globally. How could a company I've never heard of threaten Cisco? His logic, which I agree with, is that there really is no true number 2 – that as great as the next level of big guys all are, if you add them all up they still don't come anywhere close to Cisco. We know from history that N.A. and European IT buyers like to always have a number 2, if for no other reason than to try to keep number 1 honest. It happens with servers, storage, and every other area of IT, but as a general rule not at the core network. With the right technology, built to be sold profitably at a huge discount to Cisco, and enough marketing money, Jonny figures they could grab significant overall global share even if they never even really threaten Cisco – just to let Cisco know that the IT guy has an alternative. I like the argument. Human nature is a tough thing to beat. With billions in revenues already, clean IP that works (they have over 700 patents), and a bankroll big enough to pull it off, the only remaining question is does H3C really want to be a global provider?

If we assume the answer is yes, then H3C – who is widely watched by a lot of other Chinese tech companies who would love to be able to follow in their tracks – is only missing one piece – a go to market strategy and execution plan. Just like U.S. vendors have often totally misunderstood the Chinese market and how it differs wildly from N.A. and European markets, so too do many of the Chinese. The difference that I have seen, however, is the Chinese appear willing to learn whereas Americans tend to take a more 'ready, shoot, aim" type of strategy, only to clean up the messes we make well after the fact.

I met with the President and several executives of H3C's Storage business in Orlando a few weeks ago. They were on a quest to better understand the markets here. What impressed me most about them (besides their tenacity – I think I met with them 4 times) was that even when I abruptly suggested that they had some basic fatal flaws to their core assumptions, it didn't set them back. (Yes, I made sure they knew what I was saying, and yes, I had a smarter person than I attending to see to such things). They really seemed to want to learn. I found it interesting to finally realize that cultural differences are bi-directional. In China a VAR controls the deal, but in the U.S. or Europe the VAR fulfills most of the time. In China a "partner" such as H3C can bring huge revenue opportunities to foreign companies. In North America and Europe, unless you are an OEM you probably are not going to be in a position to really move the needle for H3C. We all know that getting a major U.S. or European OEM is no easy task.

To be ultimately successful internationally, however, the Chinese will have to learn exactly what the rest of the tech world learned the hard way – that you will need to be "American" to really succeed in the U.S. and "European" to succeed in Europe. A transplanted national fresh from Beijing won't be any more successful running a European operation than a kid from Boston College sent over to Belgium. If you don't believe me go ask the Israelis, or the Japanese. It took Hitachi many years to move control of HDS to the U.S., but it was the only way to ever become a true competitor in the U.S.

If and when companies like H3C begin their international quests, it is only logical to assume they will do so both organically, and by acquisition. They will require localized market capabilities, which mean they will buy up VARs, service providers, and other manufacturers. They will make mistakes, and they will learn. Since they have incredible amounts of cash and answer to very few, they have the ability to buy just about anyone they want. They also have the capability to act faster than most U.S. entities. In order to create a global consumption base, why not just buy someone who has already done the heavy lifting? There are very, very large deals that are possible in this scenario. China owns the largest oil company in the world (Unocal) – by acquisition. They own property throughout Europe and South America, and have been slowly entering joint ventures and making equity plays in the U.S. markets. They have the money and opportunity to be global players in any industry they chose, so it's probably naïve to assume they aren't going to start buying up chunks of Silicon Valley. People will start complaining about anti-trust issues, etc. but let's face facts – the world runs on the economy, and while we will continue to be paranoid about allowing sensitive security oriented technologies to go, at the end of the day can anyone really prevent anyone else from getting to whatever end they want if they have the means? It's not as if we aren't getting hacked and attacked and defrauded by every other country on the planet already. At least the Chinese provide N.A. and European companies an opportunity to sell their goods – which is more than I can say for the 7 eastern bloc hackers who just stole another million credit card numbers. We used to fear the Japanese in the same way, but now the global economy wouldn't survive without them.

For what it's worth, I had one of my American Express cards compromised two weeks ago – and yesterday I found out that the replacement card had already been stolen. I don't know how, but besides being annoying, this has got to stop. Thankfully AMEX is great about situations like that – others, not so good. We freaked out every time the Russians did anything a few years ago, but now we welcome their security companies openly (Kaspersky Lab). Hermes in Slovenia develops OEM code for just about every major software/hardware person on the planet. U.S. companies send out development to everywhere from India to the Ukraine and everyone is fine with it. Perhaps we should rethink our outdated ideas about who we will do business with and why – since the ability to control anyone from sending a hunk of data to anyone else anywhere went away a long time ago. I think we should mandate protection schemes and encryption policies, since clearly the other ways don't work. Look at the public relations mess our friends at Hannaford, the grocery chain in Maine, got into – and they did everything right. They followed the credit card PCI rules to the letter, still got hacked by people stealing data in flight before it even hit their systems, and have done nothing but be stand up people since it happened. They didn't try to hide it, they brought it out. They didn't blame anyone else, they took responsibility. They spent more money encrypting data at the source – which isn't mandated by anyone – just to try to ensure it doesn't happen again. They have done everything right – and are still getting slaughtered by the local Maine media – who would really be appalled if they had any idea how often this happens and how most companies hide from it.

Comments

[Lily Li]

I couldn't agree more. American companies can either develop relationships within China to leverage the superbly educated, low-cost work force and ultra-low cost technology development today or lose to it in the long term. Young Chinese developers have an amazing work ethic, are highly driven and super competitive. You can't underestimate this rising power.

[Pete Steege]

This is really insightful. We've learned these lessons from years on the ground in China. H3C and others like them are key guys.

It seems common sense, but it's easy to forget that markets develop locally, not top-down from someone's "global HQ" vision.