#79: Digital Industry: A China Perpsective

Good day everyone, and welcome to the latest Momenta Partners Podcast. My name is Leif Eriksen, Insights Partner here at Momenta, and our guest today is Tom Rowley, Beijing technology start-up executive. He was Executive Director IT at China National Offshore Oil Company (CNOOC) for six years, and spent a total of 10 years in China, working in the IT industry. Whilst at CNOOC, he led the implementation of a plantwide IT project for Yeosu Refinery, Asia’s largest refinery at the time. He is fluent in Chinese.

Welcome Tom.

Thank you Leif, it’s good to be with you.

Let’s talk a little bit about your background and tell us a little bit of how you got involved with IT, and specifically how you got involved with IT in China.

Sure. I had started out initially in IT working for a systems integration firm, it was actually based in Taiwan, and I had an opportunity to start some work in a very early systems integration firm, and actually the founder of that firm was ex-Dec fellow, and he’d come from the mainframe Dec world. It was the beginning of when we were getting to client server architecture, and we were responsible for putting together business applications using Oracle, Oracle database, and now of course, things have moved to packaged implementation, so with SAP and Oracle itself and all those other providers have their own package. At that time things were hand built a little bit more. So, I decided to start off, and that was in the early nineties.

And so, where did it go from there? You ultimately ended up in mainland China as I understand it.

Correct.

Did you go directly there from Taiwan, or did you come back to the US?

I had a little bit of a stop back in the US where I picked up a couple of degrees in the United States, particularly at the University of Pittsburgh, where I’m originally from. After that I had worked for SAP, doing a stint for a few years, and then I got an opportunity as you’ve mentioned, to join with CNOOC, which is China National Offshore Oil Company as their Executive Director of IT, and that launched a period that I’d spent in China for 10+ years. So, that’s where I worked back into mainland China.

What a great experience. So, based on that experience, what do you think the difference is between the US approach to digital technology, and digital transformation of business, and how its approached in China? How do cultural norms come into play, what are the primary differences that you’ve noticed on the different sides of the ocean there?

Well, just to abstract it, everybody’s approach towards IT generically is kind of similar, but there’s a lot of historical-cultural differences that may drive changes into how things are implemented, and how technology is adopted. In China there are a couple of things that are driving that, one of which is China is a communist country, and its base of the government’s communist. They had a long period where the government management is based as a central power. So, the central power of the government, they lay out plans particularly on a five-year plan schedule, and those plans are passed down to the large companies, what we call in China state-owned enterprises, or SOEs of which CNOOC was one of the major ones.

Those five-year plans get passed down to the SOEs, or the State-Owned Enterprises in China. Those plans are digested by the SOEs, these large companies, and they create additional sub-plans from them. Those plant could be in technology, or in production and so-forth, and since I was in technology, we were responsible for taking the five-year plan and trying to map out the IT transformation based on those plans.

That’s kind of at the high level, and I could go into some examples of that.

No, that’s great, let me explore that a little bit more with you. One of the biggest challenges that organizations in the US, and across the Western world face with digital transformation, is it often means significant organizational change, or cultural change. Even in a capitalist society that can be a challenge, organizations are structured to conduct business a certain way, and therefore there’s an internal resistance to it.

The other part of it of course is companies inevitably work with other organization’s partners and customers that you may need them to cooperate to enact digital transformation. So, those are our challenges over here, would those be the same in China, or be different, maybe greater or less; how would you view that?

I think they have similar changes. One thing you have to keep in mind is, a lot of these SOEs are very large. Just because of the size of China, the population, the SOEs are seen as these large state-owned enterprises, again I’ll use that phrase SOE but state-owned enterprises are SOEs, they’re not only seen as driving industry, but also as a catalyst to help employment and ensure social stability. So, there’s a balance there that I don’t think we have in the United States, or at least it’s not prevalent, it’s not the main focus. So, there’s a direct tie between the government and these enterprises, as actors in the industry, and in the social fabric. So, making sure there’s stability, but yet some kind of level production, this is something they have to balance.

Now that’s definitely a different approach. As we all know, certainly in the US you’re an employee at will, so companies will if they need to – although I think there is still also a bit of sense of social responsibility here.

I just want to add to it really quickly, one example with another SOE that I’d worked with, another large one called CAM China, we had to shut a number of plants, and particularly on the West shut a plant and that would be it, they would get their notice, make sure HR did its rounds to notice everybody. But within China, when you shut your plant, you’re responsible to ensure that those employees are moved off to somewhere, where they can find employment, or maybe move them into another plant, so there’s a lot of moving around. It’s quite different just from that, and I know this is not a technical component, but this is still very relevant I think in the way of the difference between the two models.

Absolutely, and of course as I mentioned, there’s organization and cultural challenges here as well, so it’s never just about the technology. But speaking of technology, let’s explore another subject which is information and data; of course, digital transformation does require different approaches to data, how you share data, and how you share it with business partners, customers, and collaborate around that data. I understand in China that could be a challenge, those different approaches to data, and the free flow of data in China, than there is in other parts of the world.

Yes, one of the big things is, and I don’t know how much the audience is aware, in China there’s an establishment what they call the Great Firewall of China, it monitors and blocks websites and content outside of China, and that’s actively monitored and managed by China central government. They have their own version of some of the major websites that we have, including for example Baidu which is basically China’s version of Google. So, China through Baidu effectively manages the flow of information, and this management steers visible content to the consumers in one way or another that’s different than we would have in the West, where it’s open.

So, does that mean more and more companies in this part of the world are moving data to cloud-based services, whether it’s from AWS or Microsoft, or even Google?  I say moving like it’s a seamless thing and everybody’s doing it, but there’s still some resistance over here for security, and confidentiality reasons, but definitely it’s a trend. How might that play out in China, are there equivalent services over there, how do they deal with that?

Absolutely, so with a lot of things you’ll see, as I mentioned China is not supporting Google, I think there’s other platforms they’ve shutdown, or have very limited access in China. So, China also has encouraged their own domestic technology platforms that would mimic what we’re doing with AWS. Alibaba has what they call Aliyun, which is Ali cloud if you were to translate that, so they have their own domestic indigenous setup that the government tries to encourage. If you think of it as a glass half empty, China is trying to manage the content to their own extent, the other side is they’re just trying to build up their own industry. So, it’s how you look at it! But definitely they do tend to build up their own industries, and I don’t think technology is any different there.

That we’re seeing front and center in the current trade dispute, aren’t we, in terms of the protection of specific industries.

Correct, absolutely.

So just in general, if you think about our approach to technology and digital transformation, versus theirs, what do we do well, what do they do well?

That’s a great question, it depends on who you talk to in the West. There’s a group of folks that seem to want to bash China, and there’s another group that say they’re going to overrun us with their own products and so-forth. But if you stand in the middle and look at it, there are some things that I think they did do well, I found that whilst over there China is very good at obviously top-down driven types of projects. Once the Chinese were able to go ahead, and the employees were able to get on the same page, the execution was very quick, and I was surprised because there’s oftentimes a large number of employees, and it takes a lot of orchestration, but the execution oftentimes is very quick. So, I think we could take a page from them on the planning execution side of some of that.

On our side I’d say the US is particularly strong in its ability to continuously improve. We’ve got the ability and framework structures that allow us to undertake something, and constantly re-evaluate it, tweak it, and so-forth, and I think China is still struggling with that area. I think that speaks towards the ability to get a quality product on time, and always constantly trying to strive to improve on that product, and the delivery of the product.

Interesting.

Then I think on the US side, we’re particularly good in terms of having an innovative fabric or foundation at the very bottom, that helps percolate a lot of different ideas and so-forth, that bubble up from that. I think this helps the whole concept of ideation to realization, which I think is just not established very firmly in China as of yet.

That brings up another point, which is there’s been a lot of talk in the last year or two about the area of artificial intelligence, or machine learning. Maybe because of the reason you mentioned earlier that top-down approach, they’re investing a lot of money, and there’s some speculation or predictions that they’re going to race ahead of us in this area. Is that realistic, or do you think it’s a little bit overblown? What’s your thoughts on that?

Exactly, so in addition to doing some of the work over there, I’ve also taught at a university in an engineering institute in China. I did see the governments pushing AI, pushing machine learning, and I’m not surprised to hear they’ve spent a lot of money on it. I’m sure they’re going to get to producing a group of people that are out there, focus on that, and they’re going to make some inroads in that area. The problem is, sometimes with the direction they take at times, there’s not a base to receive it, so even though they push it down, there’s not the underpinnings that help allow for traction to develop, and then as I mentioned, continuously improve at the base. I think that’s where they don’t have quite the mechanisms that we have. So, work through a bottom-up if you would look at it, and approach there top-down, and while they lead by that direction, sometimes when it hits the base there’s not enough of a platform, or a foundation to allow it to continuously develop on its own, absent of the constant pressure or money inflow from the top.

Interesting. So, despite the resources that they’re throwing at it, that doesn’t imply necessarily that they’re of course going to race ahead of us.

I think it’s like how much traction do you get, what’s the return on the investment, and I think in that model sometimes the return’s not as high as they’d like to have, or that you would expect. I can say that.

Well, we’ve faced that same challenge here, right? We have VC firms that will chase markets, just look at what’s happened with WeWork over here, in a different area, but there is that. And you could argue the same thing for AI and machine learning; sometimes we’re chasing something that’s more than we need, which is a lot of companies would benefit from just basic improved information sharing, improved decision-making around information, instead of something sophisticated.

Correct. And I think the difference is, in our star model if you will, there’s a market with different forces, sometimes seen or unseen that are at play, that help dictate that direction, whether it goes forwards, slows down, or stops. But in China that may not be there, that communication is broken, and that market is maybe not there, it’s not well-formulated.

In other words, we can pivot more quickly.

Exactly.

Force correct if you will.

Right, force correct at different levels of granularity. I don’t know how effective it works, sometimes it’s not as effective as others, but I would say by large theirs is not as effective, and given I think theirs is a little bit more prone to overshoot or undershoot. Then inefficiencies come out from that, and you see that in terms of waste and manpower, money, so-forth.

That takes us as a good segway to thinking a little bit about the future of technology in China. How do you see it evolving, do you see convergence with US in the Western world in terms of approaches, or divergence, or pretty much business as usual going forward?

I would say there’s going to be a lot more convergence in China with the US technology, where the technology is more linked towards what I would say B to C, or business to consumer, retail, because I think those technology companies have a lot more autonomy from the Attorney Central Government, they’ve kind of been left alone, and I think you see a lot more innovation there. So, I don’t know how much of your audience is familiar with the Chinese protocol WeChat, which is like WhatsApp, something like that, it’s very easy to use, very well-developed, and has lots of different functionalities that the US platforms maybe are just catching up to, and they’ve been enjoying that for a while.

Yes, I think we’re familiar with it, if only because of the trade dispute. Because I think it’s come up as something that might be blocked because of security concerns. That’s my familiarity with it anyway.

Quite possible that there are security concerns there! But just in terms of the technology which is related to your question, I think there’s some convergence there, and a lot more free-flow ideas, and I would say the Chinese components, the social tools are pretty advanced.

However, on the flip side, maybe some of the technologies get a little closer towards core concerns for the central government, so those ones that are closely tied to the SOEs, and manufacturing supply chain, some of that innovation; and I think innovation means domestic innovation in China, might be continuing to lag behind what we would see in the West. And possibly that schism if you will between the Western model, and the Chinese model is going to continue. I would say that it’s probably continuing in that vein under the current administration within China, because they seem to be somewhat retracting back from the West, and more focused on developing their own domestic capabilities at different levels of cost, I guess.

Interesting, of course a lot of that is playing out in the public right now, again with the trade dispute.

Let’s switch gears a bit here and talk a little bit about some of the challenges that China faces. One of them I’ve heard is in the area of labor, where the former one child policy, and the grain of the population, is it true that there are some challenges there, in terms of their labor force and getting the right people, the right trained people?

Yeah, absolutely. Again, I can speak a little bit more towards the technology area where I’ve had the most exposure. I would say China has made a lot of improvements to bolster the post-second area educational system, the system of universities. If you look back in the sixties to the seventies, there was a big gap where the educational system was disrupted over the cultural revolution, and basically the universities were shut down. So, after that into the eighties and beyond, the government really pumped a lot of effort and money into bolstering that system, and I think for the most part they have done a good job in recovering and gaining ground, they’ve produced a lot of young engineers and so-forth. But focusing on that meant that they didn’t focus on some other areas as much, relative to that investment, and some of that is an area of technical or vocational training.

So at present I believe there’s still a very large gap that has not been filled with trained young folks coming out of vocational technical schools, and I think there’s an increasing need for those people to be trained up that are going to be supporting, and working in higher value-add kind of jobs in manufacturing and so-forth. Especially as China is trying to move up the production value chain, traditional China was producing low-end, low-quality products. In China now, they’re obviously making a big push to move up the value chain and produce products that have a higher value content. So, they need the base to support that. I think they’re now realizing that in this case they may have undershot, maybe not paid enough attention to that. So, there’s kind of a gap there I believe.

Interesting, and that takes us back to your comment earlier about the top-down approach, and not having the market checks if you will, to pivot. If they’re dictating everything from the top, then they’re not reacting to the needs of the market as quickly, correct?

Correct, and like I’ve said maybe that communication has been disrupted from bottom to top. So maybe there were a number of larger companies saying, ‘Hey, we need these kinds of technology people’, and it’s just not getting translated up, or maybe it’s not translated down, I don’t know. But that communication free-flow information on needs and market needs is kind of disrupted.

Correct me if I’m wrong, but it seems to me, we also have another mechanism over here that’s called immigration, right. If we need skills, we not producing, people come here, right. Is there any opportunity for that in China?

Well, I guess I’m a product of that. Like I say, I was employed by two large SOEs in China, so I was for all intents and purposes hired on to help at that time. It’s interesting because right about the time when the new leadership took place and came in, a lot of those high-end jobs where some other executives were pulled in from the West to help out, it’s kind of all dried up. The contracts that were in place were just left to not be renewed, and I don’t think they were replaced with other newer contracts. Not to say that China’s not bringing in experts, but I just don’t think it’s at the same volume, and I think the focus has been shifted. So, certainly at the higher-end level, technical level, I think it’s been substantially diminished.

And given the nature of the government there, probably it’s not as an attractive place to immigrate to, for a lot of people as the US is. We continue to be a magnet for global immigration.

Correct, again one of our big strengths is this network of universities that we have, those fine establishments, and not just in the United States, in the Western more developed world. I think that China is still moving to… I think that’s definitely a goal of theirs, it’s a stated goal is to build up the universities. But I think the US is still the model in that, and I think it’s still an envious position.

That’s very interesting. Let’s wrap-up if we can on your thoughts on the future of technology in general, in the context of your time in China, where we go from here, and maybe even a bit of advice for organizations that look to deal with, and work in China. What’s should they be thinking about, again putting aside the current political environment, but the longer-term view of engaging with, collaborating with, etc. in China?

That’s an interesting question, particularly engagement of China. Like you’ve said I think the current environment is strange right now on both sides I think, as there’s been a readjustment from the previous let’s say 15-years, where there was rapid growth, I think China honestly was a lot more open. A lot of Western firms that invested heavily in China with the idea that they were going to be provided an open platform, and their investment was going to bear fruit over there, I think even larger firms in the West have shied away from that, or maybe they’ve turned away from that leading position, in China particularly.

I think this is what’s maybe perhaps a cyclical kind of thing. I think at some point some of that stress could be relieved, and I think China is in a position where they’re trying to understand perhaps leadership, what benefits China, and what’s more sustainable. I think the model they had before perhaps was, ‘Hey, we’ll try to get as much of this technology transferred into China to move up, then we’re going to be able to dictate things on our own, and craft our way to work, and maybe not engage with the West’. I don’t really know how that’s going to play out, I’m thinking that’s rather short-sighted, and I think they’re experiencing that retrenchment and what that means for them now.

So, to put that in context for the Western companies that might think about continuing on with China, let’s face it, it’s still a very large market, there’s still labor there which I think is not as cheap as it had been, but still relatively cheap. The Chinese, like you’ve said, there’s a lot of younger folks that are [inaudible 30:06] universities, and I think they deliver a quality offering in terms of what they bring to the table in value, and I think it’s going to continue with that trend. Hopefully things are opening up.

Yes, I tend to be an optimist myself; in the long term the human progress is never a straight line, but a lot of these young people coming out are looking to have a more outward facing view of the world than their predecessors, and that might influence the overall policy and relationship, is that correct?

Yes, I agree. I think a lot of the folks the younger group of people that worked with, they grew up during this period of time in China where China had rapid growth, it’s much more open, freer flow of ideas, and so-forth, engagement with Western companies. They either work for a Western company work with them as partners, and I think a lot of them have got used to that, and I think it’s just something that’s ingrained a little bit more now for this generation of Chinese employees. Whatever the government is crafting right now in China, I just don’t know again where that’s going to gain traction with the larger populous. I think that’s yet to be seen, and I think if I look at it in the next maybe 5 to 8 years we could see some correction in the current regime, where they maybe realize that it’s going alone and closing off, long enough, is not going to be in their best interest.

Well, that’s a good way to end it there Tom.

We also like to share with our audience, any recommendations you have on books or other resources that might shed some additional light on the subject.

Yes, just in terms of what I was talking about in China, there’s a book that’s written by Carl Minzner, called, ‘How China’s Authoritarian Revival is Undermining Its Rise’. It’s interesting, I don’t know how much I’d prescribe to you, it’s just something I’m looking at, reading through that, it’s interesting.

In terms of resources, life resources I have a plug for a company for Better World Books. This is an agency that you can buy used books, they’ll deliver to you sometimes free of charge. They also purchased used books and the proceeds go to literacy throughout the world, a number of different great things they do. So, a little plug for a non-profit organization that’s doing some good I think.

Great, that is super, thank you for that. And thank you for taking time today to share with us your insights on China.

Absolutely. Thank you.

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