Some Alcatel-Lucent employees in China still miss the days in the 1990s when trucks from buyers formed long lines outside the campus of Alcatel-Lucent Shanghai Bell Co Ltd (ASB), waiting for phone call switching machines to roll from the production lines. At the time, the company was the dominant player in the market and the thirst for communications had boosted demand for phones and hence switching equipment.
However, for Yuan Xin, chairman of the board of the joint venture between Alcatel-Lucent and its Chinese partners, the best time is still to come. That is when ASB becomes a real player in the international telecommunications market and a strategic unit in Alcatel-Lucent's global business.
To realize that, it means multinational companies must rethink their strategy in China and really elevate the China market to become a key part of their global maneuvers, which some other international giants are already doing.
"Only by integrating into the world can we change the world," said Yuan, 48, who joined ASB only one year after it was established.
Launched in 1984, ASB was the first high-tech joint venture after China began its opening up and reform in 1979.
Now, it has become one of the most successful businesses of the Paris-headquartered telecom company. ASB's sales were about 20 billion yuan ($3.13 billion) in 2010 with almost a half from markets outside China.
In the second quarter this year, the China market grew by more than 40 percent year-on-year, compared with Alcatel-Lucent's global growth of 2.4 percent.
"And what is interesting - what's very interesting and what has changed over the last 18 months, 24 months - is that the newest technology is the hottest technology in this particular market. So while in the past, maybe, you would have a time lag, it's now happening there, '100G' in China. Look at it. It's happening there," said Alcatel-Lucent Chief Executive Officer Ben Verwaayen in a conference call after the company announced its second quarter financial results, referring to China and Asia as a whole as not only being a follower in the adoption of new technologies, but becoming a leader now.
The story of ASB is an example of how the China strategies of foreign companies have been evolving.
In 1984, the Shanghai-based ASB was awarded a joint venture license numbered 008, the first high-tech business between the Chinese and foreign investors.
Yuan joined the business in 1985 after graduating from Shanghai University in computer sciences. His first job was to inspect imported equipment until late at night because the imported equipment was the life blood of the company. Elite college graduates with a good command of English were assigned to take care of the "treasures" of ASB.
"It was a smart decision that the decision-makers then resisted the challenges and pressures from planned-economy thinking and opened China's telecom industry to the world in the 1980s, especially with the establishment of ASB," Yuan said.
In the 1990s, ASB grasped the opportunity of the fast growth of the country's telecom industry when embargos by Western nations on high-tech exports were lifted and people's demand for fast communication with their business partners, family members and friends exploded.
The company soon became a huge success as telecom operators lined up day and night outside waiting for products. It came at just the right time despite the fact the Chinese had to pay almost one year's salary on a landline phone.
ASB also became the master of the future Chinese telecom equipment makers, including Huawei Technologies, the world's No 2 player now in terms of sales, and ZTE.
"Benefiting from the rollout of programmable control switching machines, ASB played a crucial role in the popularity of phones in China in the 1990s," said Tina Tian, a telecom analyst with US research company Gartner Inc.
However, in the 1990s, very few international telecom giants believed China could be a significant part of their global strategy. ASB remained a manufacturing plant and a negligible part of Alcatel-Lucent.
The real change came after China joined the World Trade Organization in 2001 and promised to open up its telecoms market.
Alcatel-Lucent again swiftly responded to the change, seeing the opportunities in a market with a population of about 1.3 billion. Six months later, Alcatel-Lucent decided to inject all its operations in China into Shanghai Bell. In exchange, the French company received a 50 percent stake in the joint venture with one extra share so that it could consolidate ASB's revenues into its global total.
ASB became the first telecom company with foreign investors holding the majority stake after China's WTO accession, marking a milestone in the country's opening up.
"At that time, there were about 10 to 20 joint-venture telecom equipment makers like us. If we did not reform our shareholding structure, we would not have been able to survive and now we are the only survivor among all those companies," Yuan said. In January 2002, when intensive talks were under way, Yuan, then only 39, had already been promoted to the position of chairman.
With the change to the stake-holding, ASB became the primary focus for Alcatel and Alcatel-Lucent, which were merged in 2006.
It became a key link of Alcatel-Lucent's supply chain and a core manufacturing base. In 2002, ASB's revenues were about 7 billion yuan but, eight years later, the number grew by almost three times.
Under the stake-holding agreement, Alcatel-Lucent also made a commitment that was unique among all multinationals: ASB would own all the patents developed and have the right to use all Alcatel-Lucent's global patents free of charge. At other companies, the intellectual properties developed in China belonged to parent companies.
Over the past eight years, ASB's research and development staff has grown to 6,000 from less than 1,000. Last year, ASB applied for 272 patents, 21 percent of Alcatel-Lucent's total. It also became the center of research for technologies such as time division-synchronous code division multiple access (TD-SCDMA), a Chinese-led third generation mobile technology, and its Long Term Evolution (LTE) technology.
Alcatel-Lucent, which was strong in wired communications, found itself witnessing the rise of mobile telecommunications at the start of the century.
By the end of 2008, one-third of landline equipment and broadband technology used ASB's systems, but its share in mobile communications was only one fifth.
"ASB products are mostly based on research by Alcatel-Lucent, which is a key disadvantage in competition against local competitors such as Huawei, because the costs of European and US-based companies are too high," said Tian at Gartner.
Yuan believes the future still depends on how multinational companies see the role of the China factor in their global strategies and how they can best utilize the strength of China.
Many multinational companies have regarded China as a strategic partner with whom they can capture the global market, rather than just looking at the low labor costs in the country.
One development increasingly occurring is that companies are relocating their top executives to China for better strategic decisions between top management and China.
US industrial conglomerate General Electric Co (GE) decided last year to base its Vice-Chairman John Rice in Hong Kong to head its global operations, mainly targeting emerging markets including China, India and Brazil.
Technology giants Intel Corp and Hewlett-Packard Co both appointed an executive vice-president to be chairmen of their China operations.
They are also using resources other than labor, such as finance and technology, for stronger competitiveness globally.
GE has formed joint ventures in the high-speed train and aviation sectors with Chinese partners. On the one hand, the company can supply its turbines to Chinese customers, while on the other hand, and maybe more importantly, it helps GE leverage the strength of Chinese companies to win more deals as many countries have shown an interest in Chinese-made trains and aircraft.
ASB's Yuan said he hopes multinational companies in China can become the regional operation and profit centers, which means companies such as his can become the regional investment, financing and settlement centers for their global companies.
The Shanghai-based company is aiming to realize revenues of 30 billion yuan over the coming three years and global operations will be a major boost to that target, according to Yuan.
"We should look at the future, continue to open up and reform, and achieve true globalization," he said.
Yuan hopes ASB can be a flagship for Alcatel-Lucent's international operations and be able to develop end-to-end products and solutions to the global market.
Zhao Hailin, a telecom analyst with US-headquartered research company iSuppli Corp, agreed that Alcatel-Lucent should think beyond local costs and seek other strategic resources in China, especially when Chinese companies such as Huawei Technologies Co Ltd have played the strengths of the China factor to market leaders such as Ericsson and Cisco Systems Inc.
"The solution is the company must increase the competitiveness of its products and accelerate the localization process to respond to customers' needs in a timely manner," he said.
One bet that Alcatel-Lucent is making is on TD-SCDMA, which is backed by the Chinese government and China Mobile, the largest telecom operator in the world in terms of subscribers. Alcatel-Lucent is one of the most active foreign equipment makers in endorsing TD-SCDMA.
On Sept 29, ASB and China Mobile said they had finished trials of TD-LTE in some areas in Shanghai, a step toward building a "Smart City Platform" in the Chinese metropolis.
More importantly, as China Mobile is trying to sell TD-SCDMA throughout the world and more than 30 telecom operators have started to build TD-SCDMA LTE networks, Alcatel-Lucent can also team up with China Mobile to sell the products and solutions it tests in China to other parts of the world.
However, Yuan admitted it is not realistic for ASB to become Alcatel-Lucent's regional operation center very soon and in a smooth fashion.
One challenge is winning the trust and commitment from Alcatel-Lucent headquarters. The French telecom equipment company must decide whether it is willing to make such a bold investment in China and if the company is ready to balance internal interests.
On the Chinese side, a regional operation center requires free flow of capital and people. With the current foreign currency exchange regime, multinational companies cannot freely direct their capital in and out of China. Without free capital flow, it would not be possible for Alcatel-Lucent to use China to manage its operations in Asia, Yuan said.