IBM agreement with Beijing to develop IT infrastructure

Computer Industry Report, May 13, 1994

Do "Golden Projects" Mean Golden Opportunity for Big Blue?

IBM and China's Ministry of Electronics Industry have announced a broad agreement on several IT projects. They will collaborate on supporting China's "Golden Projects" -- national networks for information exchange, banking and financial services, electronic mail, and taxes. IBM will provide products and consulting services. It will also establish a software development office in Shanghai plus three open-system networking centers. China also asked IBM to accelerate the introduction of PowerPC technology. The most important aspect of this announcement will be the long-term revenue opportunity for IBM. The company will be installing prototype systems in 12-18 months; revenue should pick up thereafter.

The announcement represents a significant long-term revenue opportunity for IBM and is tangible evidence of management's intention to address new (for IBM) market segments even as the company downsizes elsewhere. Highlights include the following items:

* IBM and the government of the People's Republic of China signed a "memorandum of understanding" covering a range of technology and development issues. No specific contracts have yet been signed.

* The first commitment establishes a networking joint venture between IBM China Company, Ltd., and Ji Tong Communications Company, Ltd., affiliated with the Ministry of Electronics Industry (MEI). Based in Beijing, this venture will produce advanced networking and related technologies to support the Golden Bridge Project. This is China's plan for building a national information network. It will connect all the State Council's ministries and commissions with 30 provincial capitals, 500 major cities, and 12,000 large- and medium-sized enterprises. The network will eventually support voice, graphics and data.

* IBM's equity investment in the joint venture will "not be huge right now." IDC expects that IBM will end up investing several million dollars in the venture when details are finalized in the near future.

* IBM will consult with the MEI on all of the other Golden Projects, including:

* Golden Card, the national banking and financial network that is designed to expand credit- and ATM-card payments in the PRC. The first phase of the project is already under way and will focus on 16 cities.

* Golden Port, a national e-mail system for the exchange of foreign trade information. The project's goals are EDI and e-mail for external/internal communications, a custom accounts payable and receivable system, an import/export licensing system, and a foreign trade information management system.

* Golden Tax, the project to computerize "hundreds of thousands" of tax collecting units. It will eventually be internet-worked with banking organizations to improve the circulation of currency in the PRC. This project will be jointly financed by MEI and the Ministry of Finance.

* IBM has agreed to establish a software development center and three open-system networking centers in Beijing, Shanghai, and Guangzhou. The software center will focus on the development of software for domestic PRC use and for export. The networking centers will assist Chinese users in evaluating and developing client/server solutions.

* IBM's PowerPC technology has been chosen by the MEI as one key microprocessor technology of the future. IBM and MEI have agreed to introduce PowerPC technology into the Chinese market and will jointly develop Chinese language software the exploits the PowerPC platform.

* Finally, this announcement is the result of the involvement of top IBM management. Both Louis Gerstner and Ned Lautenbach, V.P. of international operations, have invested significant time in developing IBM's business in the PRC. Gerstner met with Chinese President Jiang Zemin in March.

In the long run, IBM's opportunity is huge. China accounts for approximately 20% of the world's population and 10% of the worldwide economy. Despite its growing economy, China is currently responsible for only 2% of the worldwide IT market. The unprecedented growth of the Chinese economy will drive that proportion far higher in the next decade.

In addition, this announcement further solidifies IBM's previous investments in the PRC. IBM jointly owns an assembly plant with a Chinese company, Great Wall. It has several other, smaller investments in the PRC. With this announcement, IBM puts some distance between itself and its competitors. Dell and Compaq are among the major PC companies with manufacturing facilities in the PRC. Intel assembles 386s there. Apple opened its first office in Beijing less than a year ago, but has recently unveiled ambitious plans for expansion.

Several other considerations are noteworthy. Selected individual contracts with Chinese customers like financial institutions will be of greater short-term importance for IBM. IDC does not expect the IBM China Company's involvement with the "Golden Projects" to produce significant financial benefits for at least another year, and possibly for two or three. It may, however, raise IBM's profile in less-visible semi-private sector tenders. The recent sale of 40 ES/9000s, 100 AS/400s, and 2,000 PS/2s to one of China's four largest banks may be just the beginning.