Shift away from China After 25 years: IBM closes two R&D centers in China

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It sounds a little like the two companies have grown apart. Quite surprisingly, those responsible at IBM have announced the closure of two research facilities in China. The move had already been on the cards in the recent past.

IBM is closing two research and development centers in China, reports the Chinese business portal Caixin. Around 1,600 employees are affected by the closure and have apparently been caught off guard by the news in a very "American" way, the report suggests. "We are pulling all of our development missions out of China," said Jack Hergenrother, VP Global Enterprise Systems Development, according to a transcript of his speech to the workforce in China that was made available to Caixin. He justified IBM's decision with the "dynamics of the market" and the "fierce competition" in China, according to the report.

IBM's China Development Lab (CDL) and China Systems Lab (CSL) will be closed. CDL specializes in the development of application software and has more than 1,000 employees. CSL develops system software, for example for mainframe databases, and has just under 700 employees, writes Caixin.

Both R&D centers were founded in 1999. The news of their closure, although not entirely unexpected, nevertheless sent "shockwaves through the local tech community", as the South China Morning Post (SCMP) newspaper observed.

Flagship employer goes American

For many years, IBM was one of the most sought-after employers in the People's Republic for young graduates from China's top universities. For a quarter of a century, employee training, wages and the corporate culture were regarded as absolutely exemplary in China.

However, some employees discovered on Friday last week that they suddenly no longer had access to the company intranet. Some initially thought it was a system error, until they later received phone calls and the sad news of their termination. It was not until the following Monday that IBM management had time for a three-minute online meeting with the affected employees, as the SCMP reported, citing an employee. However, the IBM employees who had just been fired were not allowed to ask any questions. "More than 1,000 employees will be laid off in Beijing, Shanghai and Dalian," the newspaper quotes various Chinese media reports from the affected cities.

India as an alternative to China

In the first three decades since IBM began investing heavily in China in 1984, the company's business there had been very lucrative, including the sale of servers to Chinese banks and telecoms companies. However, relations between Washington and Beijing began to deteriorate rapidly after Chinese army officers were accused of various offenses in the US and convicted in absentia.

In 2014, the communist leadership in Beijing therefore accelerated a "De-IOE" campaign, which demanded that its state-owned companies turn away from American software products. The abbreviation "IOE" here stands for IBM, Oracle and EMC (which has since merged with Dell). The decline in IBM's China business has accelerated even further since the US began its trade and chip war with the People's Republic in 2018. Last year, IBM's sales in China fell by 19.6 percent, while in Asia-Pacific as a whole they rose by 1.6 percent, according to the company's latest annual report.

China's companies, whether state-owned or private, are increasingly buying from IBM's Chinese competitors. Since 2018, IBM has begun to withdraw some of its R&D employees from the People's Republic. The "China Research Laboratory" has already been closed in 2021 - 26 years after it opened.

An Indian-born IBM CEO is obviously not ideal for business in China either, commented Chinese media. "In 2020, after Arvind Krishna became CEO, the relocation of R&D jobs to India has accelerated, despite his multiple visits to China and assertion of the importance of the Chinese market," writes the SCMP.

IBM is currently investing in its Indian R&D centers in Bangalore and Gurgaon and also in a new cybersecurity hub in Bangalore. "It's no secret that IBM is expanding rapidly in India, replacing its R&D in China," an IBM official told Caixin.

IBM's cutbacks from China are part of a wave of American tech companies withdrawing from the People's Republic. According to media reports, Microsoft asked Chinese employees in May of this year whether they would consider moving to the USA. LinkedIn, which is owned by Microsoft, closed its Chinese platform around a year ago. Airbnb has given up after the harsh coronavirus measures in China decimated its local business. Amazon's e-book store in China has also already closed down. (sb)

*Henrik Bork is the Managing Director at Asia Waypoint, a consulting agency specializing in China, based in Beijing. "China Market Insider" is a project of Vogel Communications Group, Würzburg, Germany