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The Bill Gates Effect

By Brian P. Watson  |  Posted 08-27-2008 Print

What do you see happening in China's business community over the next 10 to 15 years?

McFarlan: The chief economist and personal financial advisor to the president of China was in one of our programs. His perspective was extremely interesting: He says, basically, it's more of the same.

China ends up losing because it winds up being the sweatshop of the world. That doesn't improve the quality of life for anyone. He pointed out very clearly that the key to their success lay in the combination of information technology services and the ability to climb up the value chain on the services side.

That's where the Chinese are really scrambling today. They've allowed their currency to roll up about 20 percent. Inflation is pretty high in southern China. The result is that a number of textile factories have had to shut down, and the work goes off to Cambodia, Laos and the cheapest parts of the world.

Are there any instructive case studies of American companies that have gone into China and found success?

McFarlan: Microsoft is a case study in how they turned their original strategy around. In China, something like 97 percent of all desktops are run on software from Microsoft, and almost all of it is pirated. The basic concerns the Chinese worried about was that there was spyware in there and that it was a tool for the CIA to infiltrate China. So Microsoft basically gave the Chinese government all their source code and said, "You look at it for yourself." They looked into it and couldn't find anything wrong.

When the president of China visited Bill Gates, the first thing he said was, "It's terrific to see you, because when I wake up in the morning, you're the first person I think of." When the president wakes up in the morning, he fires up his PC. So word went out from the Chinese government that people should start paying royalties, and the pirated software in the government and state-run enterprises has dropped dramatically.

China also has intellectual property it wants to protect. The problem in China isn't the laws--it's the enforcement of the laws that's the issue. Bill Alfred studied this at Harvard Law School and took our class through it. He said it was quite clear that there's nothing wrong with the laws; it's all how it's been enforced. Now that China has more intellectual property and continues to come up the value chain, everything changes in their direction. Patterns have begun to come together.

Do the Chinese have a secret weapon?

McFarlan: They have a huge population (1.3 billion). And they're an intellectually able population. Literacy rates are at 90 percent, contrasted with 60 percent in India. They've put a lot of resources into developing universities and are beginning to climb up the curve there.

They're also hard working and very comfortable with technology. They've made huge investments in infrastructure: Their highways, railroads and electricity operate at another level than they do in India, for example. India has had a much more difficult time dealing with democracy, unrest, protests, etc.

In China, though, they don't have the safety valves to let the pressure out, so you're always worrying that the political pressures will build. Traditionally, when the pressure built up, China solved the problem this way: Dynasties fell, either by war or by death, and leaders were replaced.

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