VideoLast June IBM held its annual investors' day in the grounds of the Bangalore Palace, a fake Windsor Castle in India's equivalent of Silicon Valley. Big Blue pulled out all the stops to impress the 50 or so investors and Wall Street analysts who turned up, gathering 10,000 employees to hear speeches by the president of India, the country's leading telecoms entrepreneur and IBM's own boss, Sam Palmisano, all hosted by a Bollywood babe in a red sari.
The annual investors' day is usually held in New York, though it once took place in faraway Boston. By going to Bangalore, the technology giant was sending a strong message. With 53,000 employees, India is now at the core of IBM's strategy. With other big developing countries, including China, Brazil and Russia, it is fast becoming the firm's centre of gravity.
Just three decades earlier, IBM had quit India, which was in the grip of corporatist and nationalistic industrial policies. Only in the early 1990s did it gradually start to return, as the government began to deregulate and reconnect with the world economy. Now, as Mr Palmisano pointed out to his investors in Bangalore, the domestic Indian market has become one of the fastest-growing in the world for IBM, with revenues rising by 40-50% a year, albeit from a very small base. The firm now has more employees in India than in any other country except America.
Mr Palmisano announced that IBM would invest a further $6 billion in India over the coming three years, up from $2 billion in the previous three. That sum does not include any acquisitions of Indian companies. (It has already struck some big deals, notably buying Daksh, an Indian outsourcing company, in 2004.) Some locals wondered how IBM would manage to spend all that money. But booming demand is pulling wages higher in India and costly training is now needed to lure workers being courted by other companies.
Rethinking the Multinational
IBM's Indian adventure highlights three overlapping themes. Emerging economies increasingly count as a threat to established global firms, as well as an opportunity. Indian services firms such as Infosys and Wipro are starting to give IBM — and its old rivals, Accenture, EDS and Hewlett-Packard — a run for their money. As globalisation accelerates, this is forging a new vision of what it is to be a successful multinational company. Last, regardless of how well Big Blue fares, its strategy for growth has suffered because of those first two. The big, career-threatening question facing Mr Palmisano — and the reason other multinational companies will want to study IBM closely — is whether he can find a new way to realise the growth that his shareholders demand.
In a speech last year at INSEAD business school in France, Mr Palmisano set IBM's Indian move in the context of the modern multinational company. This, he said, had passed through three phases. First was the 19th-century "international model", whereby firms were based in their home country, but sold goods through overseas sales offices. Then came the classic multinational firm, in which the parent company created smaller versions of itself in countries around the world. This was how Mr Palmisano found IBM when he joined it in 1973.
The third model, argues Mr Palmisano, the IBM he is now building, is the "globally integrated enterprise". Rather than have a parent with lots of Mini-Mes around the world, such a firm shapes its strategy, management and operations as a single global entity. It puts people and jobs anywhere in the world "based on the right cost, the right skills and the right business environment. And it integrates those operations horizontally and globally." In this approach, "work flows to the places where it will be done best", that is, most efficiently and to the highest quality. The forces behind this "are irresistible", he says. "The genie's out of the bottle and there's no stopping it."
IBM's big investment in India is not just about getting cheaper workers. If it were, IBM might have been in and out of India almost as fast as Apple, which closed its Bangalore offshoring centre last year after about three months, apparently because rising labour costs meant that the expected savings failed to materialise. IBM is doing cutting-edge research and development in India and writing valuable software, as well as running low-cost call centres. One reason for holding the investors' day in Bangalore, says Mr Palmisano, was to show Wall Street analysts that "places like India do not simply mean 'cheap labour'."
Places like India: the other message that Mr Palmisano was keen to get across was the part other emerging economies are playing in remaking IBM — which he admits will take many years. Thus, IBM's financing back office is in Rio De Janeiro. It has call centres round the world. Last April, when Bangalore was paralysed by rioting over the death of Rajkumar, a movie star, IBM shifted data-centre operations to its facilities in Brazil and Colorado.
IBM used to have separate supply chains in different markets, now it has one for the whole company. Reflecting the growing importance of China, John Paterson, IBM's chief procurement officer, moved to Shenzen in October. He is the first head of a company-wide function to base himself outside America, though other top IBM executives may soon follow. Asia already accounts for one-third of IBM's $40 billion purchasing budget. Mr Paterson felt he needed to raise the quality of IBM's purchasing staff in the region and to develop its base of suppliers.
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