China is very special to me. I've had the privilege of visiting your country many, many times over the past 20 years. And I believe you know how proud we are of our business here, and the IBM China team lead by my colleague, Henry Chow.
We employ about 2,000 people in IBM China. We've established 7 joint ventures with an additional 3,000 employees in areas including application software, software development, and manufacturing. We enjoy relationships with hundreds of local Chinese business partners, and we continue to invest very heavily in China. Our storage business is among IBM's most strategic and fastest-growing, and China is home to developments and manufacturing facilities that feed our assembly plants all over the world.
We've spent about $200 million in the last two years in these facilities, including a joint venture in Shenzhen Storage Products Co. In April, we opened the IBM China Mega-Call-Center to provide technical support for a full range of our products and services. It's the most advanced such call center in all of Asia. And the IBM China University Program -- a collaboration with China's State Education commission -- has donated about $70 million in IBM equipment, training, and services to information technology training centers at more than 20 Chinese universities.
Last fall, I was personally honored to host President Jiang during his trip to the United States. And at his request, we demonstrated some of IBM's latest technologies, including one we are extremely proud of: a speech recognition program for Mandarin -- a fantastic product developed right here in our advanced research laboratory in Beijing.
Yesterday, I had the pleasure of meeting with President Jiang once again. We shared a lot of positive ideas of how we can strengthen IBM's relationship with China and serve China's interest in the reformation of Chinese state-owned enterprises.
IBM has enjoyed a relationship with China that has endured for more than half a century. But I do not believe there has ever been a more exciting time to be doing business here, as vast new opportunity is created by your sweeping modernization and ambitious, government-led reform programs for thousands of state-owned enterprises.
This transformation, I believe, will underscore the critical importance of information technology as a driver of competitive success and real economic growth for China.
So today, I want to talk to you about what I believe has to be the agenda of a leader of an enterprise -- business, government agency, university, hospital, bank anywhere in the world -- the agenda regarding this technology. I will do that from the perspective that I brought to IBM.
Some of you know that before I came to IBM, my background was a lot like yours. I was a customer of IBM. I was a customer of the computer industry. I arrived at IBM with a firmly held conviction that this technology is one of those transformational technologies that comes along every hundred years or so and changes everything in our society. I wasn't alone in this opinion, but at that time, it wasn't so easy to find a lot of examples of entire industries being changed by the application of information technology.
Today, in almost every industry in almost every part of the world there are many examples of enterprises applying this technology to seize competitive advantage and to create enormous challenges for their competitors. I think we're seeing information technology reach the point that all transformational technologies reach when they are no longer controlled by just a small group of skilled professionals, and they cross over to mass acceptance and ubiquity.
Networking technology is still in its infancy, yet it's reached already the point where we can call it a new mass medium. Consider that in the U.S.:
* Radio took about 30 years to attract 50 million users.
* Television took 13 years.
* Cable television took 10 years.
The Internet did it in half that. Less than 5 years after the birth of the World Wide Web, some 90 million people are online around the world, and that number will be hundreds of millions before too long.
Of course, right now, the U.S. has embraced the Net more fully than other nations, both in terms of individual users, and business use. But, clearly, this is a global medium. Very soon there will be equal numbers of people accessing the Web in English and other languages. Five countries other than the U.S. have around ten percent of their populations using the Web.
Here in China, the number of Internet users has nearly doubled since just last October, to more than 1 million users. And I've seen statistics that say your Internet population will exceed 7 million people by the year 2001.
Some people are talking about a phenomenon they call "Internet Leapfrog", a high-stakes game in which countries and geographies that make the most astute use of networked technologies quickly bypass other regions in production, productivity, and profitable growth.
Today, this contest of Internet Leapfroging is played on a wide-open field. We hear about 90 million connected users... and some equate that with universal connectivity. But consider that if just 4 percent of the populations of your nation and India got connected tomorrow, the worldwide number of Internet users would double.
These numbers are interesting, but the real important question is: "What are all these individuals, and the world's leading institutions, doing on the Net?"
Not too long ago, the prevailing view was that the Net was about looking up information, or that it was a medium for interpersonal communication, a replacement for the telephone or post office.
Today, it's evident that the Net represents a transformation far more profound than online "chat" groups or giving people access to sports scores and weather reports. It has emerged as a powerful means for parties of every type to conduct interactions of every type.
Certainly, it's changing the way things are bought and sold. Electronic commerce is booming. Even the most conservative estimates say that it will be at least a $200 billion marketplace by the turn of the century (which is only 500 days away) -- most of that volume in business to business transactions.
And while 86 percent of Internet commerce was generated inside the U.S. last year, the rest of the world is getting into the game in a serious way. Internet commerce generated outside the U.S. will represent more than 35 percent of the world total by the year 2002. But what's going on isn't just limited to commerce, to buying and selling.
At IBM, we use a slightly more descriptive term. We talk about e-business to describe all of the vital transactions that will be conducted on the Net.
E-business includes transactions among employees inside an enterprise; among trading partners in a supply chain; and of course, the networked transactions that transform the way educators teach students, physicians treat patients, and the way governments deliver services to citizens.
All of these interactions will become digital. They won't necessarily replace the kind of physical transactions we know today, but they will augment them.
For example, Duoyuan Electronics Group is using the Net to strengthen the ties between all the suppliers, wholesalers and retailers in its electronics manufacturing and distribution business. They're in the early stages of development, but they see networking technologies as the key to building production capability to compete with large enterprises.
Another example: With the support of China Telecom, IBM is working with Hunan Post and Telecom Administration to develop an online payment system. The first application will give customers the convenience of paying telephone bills over Internet using Bank of China Great Wall credit cards.
In projects with customers around the world, we're learning that when they make the move to e-business, they follow a fairly predictable, three-stage process.
First, putting up information on a Web site. Product catalogs. Academic course listings, a list of phone numbers to call for more information.
The second stage is, enabling some form of interaction, typically for customer service. Allowing a customer to track the status of an overnight package is one example. Yamato Transport in Japan and United Parcel Service in America are among companies doing this. And now United Parcel Service in America is launching an entirely new business, going to the third, and most important stage of electronic commerce.
This third stage is the one that represents the real transformation and the major payoff. It's when the enterprise takes the step to allow real Net-based transactions.
For UPS, they're offering secure, confidential delivery of documents over the Net. The service is as reliable as putting the document in an envelope or package and handing it to a clerk or a route driver. And 20 percent to 50 percent cheaper.
Think about what they're doing. They're essentially competing with their traditional package and delivery services by creating an Internet courier service. But UPS sees a digital future -- one in which 30 percent of all such deliveries could take place online -- and they're going there, fast.
This kind of decision-making is the real revolution in the networked world. It's not just about technology. Because when banks and schools and airlines, hospitals and governments use the Net to allow people to execute transactions, they have to make fundamental changes to the way they currently do things.
And as we all know, institutional change is hard. But more and more institutions are deciding to change because the incentives are powerful. Let me just list a few.
First, networks alter the basic economics of industry. They slash the costs of transactions. Airlines around the world estimate that, on average, it costs about $8 to process a ticket. The same transaction on the Net costs only $1.
Banks estimate that a face-to-face transaction with a teller in a branch office costs a dollar or more. On the Net, that same transaction can be completed for about one cent, one-hundredth of the cost.
Across most of Asia, the time-honored ways of trading stock remain in place. But that's beginning to change. Daishin (Da-shin) Securities in Korea this summer took the plunge into secure online trading over the Net. It's estimated that 5 million people worldwide now use the Net to execute trades in this way.
One strictly online brokerage based in the U.S., E-Trade Securities, has been in business for only six years. They already have more than $10 billion under management, and the only way they deal with their customers is over the Internet. And the leader in the field of electronic stock trading, Charles Schwab, trades more than $2 billion in securities every week on the Net.
Another incentive very important to China:Networks dissolve barriers like time and distance that once limited market opportunities. This means that networks fundamentally alter the nature of competition. The networked world levels the playing field, especially for smaller businesses, in a way that has never been true with prior generations of information technology.
There's a little four-man brewery in a remote Scottish hamlet that's using the Net to take orders from beer lovers all over the world. They're reaching a global market at nominal cost. There's a supermarket chain in Peru that estimates it costs them $4 million to $5 million to open a new physical office. For an investment of about $100,000, they've created a virtual storefront that allows customers to shop online for thousands of items. Revenues are up, and with the Net they can advertise sales and specials without having to print up special materials.
One of my favorite examples is a little company called LeHigh Valley Safety Supply in Allentown, Pennsylvania in the United States. They make industrial workboots that workers wear in factories. The territory that they sell their workboots has always been limited by how far they can drive the truck, because the only way they sold boots was right off the back of a truck that they would drive to the parking lots of industrial sites. IBM put them up on the Web. Now, they are now taking orders from Thailand from workers and offshore oil rigs all over the world. They have became a global company overnight, without creating a new subsidiary, hiring a bunch of lawyers or setting up a new management system.
And all this isn't just about commercial transactions.
At Monterrey Tech in the University of Mexico 70,000 students use the Net to access 2,500 courses. At the MBA program at Athabasca University in Canada, they've gone a step further. There are virtually no students on campus, because there is no campus. All coursework is delivered over networks. The faculty is spread across Canada, the U.K. and the United States. And they have captured 30 percent of the executive MBA market in Canada.
Governments are using the Net to build competitive advantage, to improve services to citizens, and to provide very tangible evidence of efficient use of tax monies. The government of Valencia in southern Spain is wiring entire villages, allowing citizens to do online transactions with local businesses, to schedule a doctor's appointment, to get information from their kids' schools.
Shanghai and all the major Asian port cities are competing to gain an advantage as centers of regional and international commerce. Singapore has just upped the ante in that battle. Singapore is putting 10,000 suppliers online. If you want to do business with Singapore, you're going to have to do it electronically. They're building applications that reduce cost and cut down cycle times -- very important when your competitive advantage is based on the ability to move ships and goods in and out of port.
So governments that in the past have competed for industrial investment or jobs based on traditional incentives like tax structures or access to skilled labor will compete in the future in very large measure on their electronic capability.
The third thing the Net does is that it redefines traditional models of distribution.
Any institution that stands between the creator of a product and the consumer of the product is going to have to rethink its value because the Net is going to make direct connections between those parties possible, especially in cases where the product or service can be reduced to bits and bytes.
So in an age of electronic commerce, financial firms, banks, insurance companies, will have to ask "What does it really mean to be a bank?" which is by definition an intermediary between buyers and sellers, or between people who have money and people who want money. What does it mean to be a university when it's possible to deliver the expertise of faculty to students without regard to the physical limitation of classrooms or a centralized campus?
Next, and closely related to issues of distribution, are the implications around brand management in a networked economy. This one cuts both ways: The Net allows you to extend your brand, and it also creates new threats to your brand identity. Virtually any company with a Web site is positioned to challenge even the most entrenched brands, anywhere in the world.
And there's another dimension to the issue of brand management. This is the issue of online aggregation, a term that describes how certain companies are forming around the world that will pull together disaggregate products and services, and sell them under an electronic marketplace.
There are many examples of this today. In the U.K. many grocery store chains are getting into financial services. In the U.S. you can apply for a mortgage on your house through American Airlines. The airline won't process the mortgage, they'll just take a finders fee from their very best frequent flyer customers.
It is going to be very important as you think about your global reach whether your company and your customers see your brand or an aggregators brand. So utilities, cable TV companies, phone companies, Internet service providers, (and one very large software company) are all trying to position themselves as the aggregator between your customers and you.
This creates major issues. Not technology issues but strategic issues. How do we protect and propagate our brand if that brand can be hidden behind the brand of a software company or an online service provider? If we're going to offer our product or service on these electronic channels, who do we partner with? Who controls the transaction and the customer information?
Big decisions. Because control of the customer information means control of the customer relationship.
I want to wrap up this discussion with a few questions that I encourage all senior executives to start asking. They're the questions we ask ourselves inside of IBM.
First, do we talk about these issues in our company, in our government unit, in our healthcare institution, in our university? Are they part of our important agenda? Do we talk about what our competitors are doing? Do we talk about how we're going to take advantage of this electronic world?
And by the way, you know we can't assume that the competitors you have today will be the ones you have in the future. Because again, the Net alters the whole structure of competition in industry.
A major encyclopedia company in North America watching the rise of the Net created very inexpensive access to the entire world of learning. This encyclopedia chain decided to lay off its entire sales force.
Now we could have a very meaningful and important discussion this topic of job creation, and job elimination. Because in fact all of the great transformational technologies that have hit the world over the hundreds of years, whether it was the electric light, the automobile, the manned flight or new networked technology...they all initially tend to destroy jobs. But then they tend to be a net creator of jobs. And its a transition that all industrial societies must face. The jobs that are created also tend to be higher-paying jobs.
This dynamic comes with huge implications for any nation, its system of education, and its ability to compete for these new jobs in a networked economy. China has hundreds of thousands of children to educate. What role can the Net and distance learning play?
The second question I urge all of you to think about is: At a minimum, are we experimenting? Are we getting our feet wet in a networked world? You don't have to be a pioneer. You don't have to jump in and change your enterprise overnight. It is possible to be a watcher of the leader, and a fast follower.
But this technology is changing so fast that, I believe the most practical strategy will include at least some preliminary investment with e-business. You can't wait for every other institution or nation to move to fully capitalize on this technology.
So that includes getting started with e-business inside your own enterprise. At IBM, we're connecting every employee and increasingly an external network of partners-- over 300,000 people -- through an Intranet site, and a powerful collaborative software called Lotus Notes.
We are also driving to establish leadership in our industry based on our ability to move ideas and insights around and through hierarchical organizations. You may have heard of this described as knowledge management, or knowledge sharing.
I have no doubt that in the 21st century, the most important skill for any institution will be its ability to turn information into insight, and get that insight to the people who need it. We will still compete with the traditional tools of labor and capital. But the biggest winners will be the enterprises that can best capture, use and turn information into wisdom.
The third question we all have to ask: Are our systems ready for the networked world?
When you put your business on the Net, you have opened a new front door of your business or agency or education institution. At any point in time, you might find that there are millions of people at your new front door. So your Web presence has to be able to handle that volume, and it must do it while remaining open seven days a week, 365 days a year, 24 hours a day.
These are all issues we've had to work through at IBM as we've made decisions about our Web business. And the subject of how IBM is transforming itself to become an e-business leads very naturally to the next part of my talk.
My IBM China colleagues have told me that you are interested in some lessons IBM has learned during the last several years of a major financial, competitive and cultural transformation. Most recently of course, our transformation has centered on our own program to embrace e-business. In fact, we've defined and declared a goal to be the world's leading example of what e-business is all about.
So let me conclude with a few comments on the subject of IBM's transformation. I want to say first that I do this with a very deep sense of humility. I am not suggesting in any way that our experiences are applicable to any situation you might be facing. I will outline the major elements of our transformation in the hope that maybe some small part might be instructive to you.
Now it's no secret that IBM went through as thorough a restructuring as any institution in the world over the past five years. And before I describe the actions we took, I want to make one very fundamental point: Institutional restructuring, successful restructuring can't happen without a commitment at the top of the organization to embark on an effort that will take five years, minimum.
You must have an institutional commitment to stay with the program over multiple years. You must understand that the hard part isn't getting started. The hard part is seeing the changes through until you've achieved whatever objectives you've set.
Restructuring institutions is not just a matter of reassembling companies, and assets, and industries of shuffling around assets. Any truly serious, meaningful restructuring begins with a fundamental examination of everything you do, the processes by which you manage your enterprises.
IBM had to do this.
Of course, we had to address other critical issues -- our cost structure and the competitiveness of our products. These were difficult, but in many ways, they're not the most difficult part of the job. We also had to conduct a tough self assessment. We had to examine our strategic direction, our basic value proposition to our customers.
I believe that all enterprises have to do this kind of self-assessment. When you do it, you find that it leads directly to the core questions about where do you concentrate resources, where do you invest, where do you disinvest, where do you put your energy in order to lead.
The first aspect of restructuring, and a characteristic of every successful enterprise in the world today, is focus. By focus I mean:
* Fact-based, steely-eyed clarity about the markets you believe you can dominate and lead.
* Clarity about where all your resources will be concentrated, what businesses you'll invest in, and what businesses you'll get out of.
Of course, this requires a high degree of sophistication in your ability to segment markets, which in turn requires excellent information systems, how you collect information, and how you analyze it.
It also means a commitment to a corporate culture driven from the marketplace. For us at IBM, that meant we could no longer start everyday with invention, which was the way IBM operated for decades. Today, we start the day with the marketplace, with customer needs, with marketplace changes, and competitive understanding. We continuously ask ourselves: What are we good at? What can we be unique at?
These are very hard questions -- and they lead to directly to the next aspect of restructuring: Competitive benchmarking.
How can you restructure unless you know what you are trying to accomplish? What is the objective of the restructuring? Is the goal to be the best global competitor? To be the best within your nation? The best within your industry?
Once you've answered those questions, how do you quantify what it will take to be the best? You must be able to measure and understand your current position and where you stand relative to your competition on whatever criteria you decide is relevant, such as product quality, customer service, development costs, or cycle time.
So everything we do at IBM is measured against the best of class in our industry and, in some cases, other industries. That begins with our cost structure. I don't think you can be successful in a global economy unless you have best-of-class cost economics.
We went out and benchmarked, and we said to every one of our managers, "You must be equal, or better than the best." No exceptions. The benchmarking process told us we had to take $8 billion out of our cost structure. We decided to get it over quickly, and it's completed.
We also benchmarked quality, cycle time and speed. Cycle time to us is the early indicator of success. In fact, the imperative for speed is greater today than I have ever seen in 30 years.
You can almost argue today, "First is better than being right." Not quite, but almost. So when any of our businesses report their monthly results, we also ask for reports or progress on cycle time. It never ends, and entails the restructuring of the core processes of the enterprise.
The third aspect of restructuring is Re-engineering.
Many companies will take on one or two major re-engineering projects at a time. Rather than approaching it piecemeal, we attacked the entire organization at once. At any given time, we had more than 60 company-wide re-engineering projects underway, and hundreds more among individual units and divisions.
Because our re-engineering depended on global information systems, we discovered very quickly that we were going to have to completely re-engineer our internal information infrastructure. We sought to achieve common worldwide data bases, common marketing systems, common financial systems, fulfillment systems, manufacturing systems, and centralized data centers to avoid excessive cost and duplication.
As a result of this reengineering effort, we achieved our $8 billion in savings and we lowered the cost of our information technology structure expenses by 47 percent. We have cut hardware development time from four years to an average of 16 months, and for some products, to as fast as six months.
We've also improved our on-time shipment rate from 70 percent to 95 percent; we've reduced inventory carrying costs by $220 million and inventory write-offs by $800 million; we've reduced materials costs by close to $300 million; and delivery costs by $270 million.
And we've also seen our customer satisfaction indices rise significantly.
Of course, re-engineering isn't just a matter of cost savings. Our key objective is to move our business to the Net.
We're using the Internet to sell our products, to provide services and support to customers and business partners, to buy goods and services.
We're doing millions of dollars a day in business on the Web --- and we have customized extranet sites with our largest customers and Business Partners.
Finally, all restructuring must address issues of cultural change. This is the aspect of our transformation that I probably spend the most time on right now: How we get the most of our most precious asset: 270,000 IBM men & women.
We are working to build a culture of high-performance based around a few fundamental concepts.
* First, an obsession with the marketplace, focusing our entire efforts on delighting customers and overwhelming competitors.
* Speed of execution: building a culture that encourages and rewards speed, flexibility, risk-taking and continuous learning and adaptation.
* Finally, a culture built on teamwork -- one that puts the good of IBM ahead of any individual, department, unit or division.
Let me touch on just a few of the actions we've taken in this area.
First, training: As a company, we're investing $800 million every year in training and development of our employees. By the way, that's about $100 million more than we invested last year. Here in China, Henry's team has a total commitment to focusing on the skills of his people. So far this year, IBM China has conducted more than 20,000 student days in employee training.
No matter what stage of transformation are, we understand that the skills of IBM people will always be critical to our ability to compete.
Secondly, technology: Our information technology infrastructure supports our drive for speed, cycle time, as well as skill building. Our global intranet and collaborative Notes software rollout is reaching out to all of our employees, and to our customers and business partners.
As I mentioned earlier, over 350,000 people on our own internal network. It is the largest undertaking of its kind anywhere in the world, and it's all done to support institutional change, improve our ability to share knowledge and break down hierarchy.
For example, via our intranet site, we teach thousands of IBMers about new solutions and sales programs without any of the traditional physical requirements or costs associated with this kind of training.
Lotus Notes and the Internet are also central to our communications strategy. I personally use our Lotus Notes structure to reach every employee, simultaneously, any time I want, on issues of strategic importance.
These tools allow us to design virtual teams, manage them, get things done across without having people travel to meetings and lose productive time.
Finally, measurements: They are fundamental to cultural change. People must be told what is expected, and then rewarded based on the results they deliver.
We have changed our compensation systems to make sure we differentiate our top people from our average people, individuals and teams. And we've linked employee compensation directly to company performance.
But enough about IBM. I'd like to close with a personal comment on China.
China is embarking on an extraordinary new stage of its economic and industrial development. The restructuring of the state-owned enterprises is as big a transformation as any country has ever seen let alone implemented.
The process of transformation of the state-owned enterprises is well underway, as we discussed with Minister Sheng and President Jiang yesterday. Today it is working at the first stage of enterprise restructuring, which is to align industries, align assets, merge companies, and to create an industry infrastructure that is organizationally capable of becoming a globally successful enterprise or globally successful industry.
However, there's another phase to economic reform of state-owned enterprises that goes beyond structure, that goes beyond merging, that goes beyond aligning. It's about the processes by which the enterprises are managed. It goes to the kind of things I just talked about that we've been through with IBM.
Building the systems of cost control, of accounting, of inventory management, of supply chain management, of cash management, of customer relationships, and of benchmarking. These are all systems that aren't created through structural change. They're created through process and cultural change.
And underpinning all of those systems -- what drives the creation of those systems -- is information technology. Information technology is the science -- the underlying science -- of institutional restructuring. It is the science you use to restructure institutions. It is the basis and the tools by which you build systems that allow institutions to be efficient and globally competitive.
China's information technology industry needs to evolve today along with the state-owned enterprises to support the transformation of China enterprises.
Today China's information technology industry is principally a hardware based industry. But it is absolutely critical that China build a software and services industry along with its hardware industry if the transformation of the state-owned enterprises is going to take place.
Because what we need in China is applications.We already have the computers, but what China needs now are the applications that run on the computers that will allow the state-owned enterprises to achieve this transformation.
I'm not talking about simple, unsophisticated software like spreadsheets, word processing, or games. I'm talking about large, complex software that allows these companies to do all the things I talked about before: transaction processing, data management, billing, cash management, managing platforms, e-business opportunities.
China needs to build the industry that will adapt applications for abroad and build new applications out of the intellectual capital of the Chinese people.
And then a services industry has to emerge that will help China's institutions apply these technologies to their state-owned enterprises.
And finally there is, in my opinion, a very big opportunity for China to lead in the transformation of small and medium sized companies, including smaller state-owned enterprises. Because what will happen in the future is that software applications that allow companies to become efficient and globally competitive will be embedded in a network.
Small and medium sized companies will not have to build those applications. They will not have to pay for those applications. If China's telecom industry develops in the way we expect it will, and if focus is given to these Chinese applications, small and medium sized businesses will be able to, in effect, rent the applications, dial up on their telephone, and have a billing application, an accounting application, or an e-business application, to use without having to build it, pay up front, or maintain it.
But again, this requires a focus in China on the next stage of development of the information technology industry, which is to move beyond just making PCs and hardware to making intellectual capital. To making the real heart of an information technology system which is the application, not the hardware.
So it's interesting to see how China's extraordinarily important priority of restructuring the state-owned enterprises aligns very clearly and carefully with the next stage of development of the information technology industry in China. It aligns very clearly with the next phase of the information technology, which is e-business.
And through the evolution of Chinese-based applications, building on the e-business concept, there's a lot of opportunity and, I think, a lot of optimism about the success of the state-owned enterprise reformation program.
Thank you very much.