Interview with Dinesh Paliwal
Dinesh Paliwal is group executive vice president of ABB Ltd. and member of the Executive Committee and chair of ABB Inc. An 18-year veteran of ABB, he has global responsibility for ABB's automation business and is in charge of the company's North America region operations. CBR Editor Catherine Gelb recently spoke with Paliwal about ABB's operations and goals in China.
Q: What are ABB's main lines of business in China today?
A: ABB employs 7,000 in China, and an additional 2,000-3,000 are employed on a contract basis. This year our revenue base in China will reach $2 billion. ABB has 17 production and manufacturing facilities throughout eastern China that produce motors, drives, electrical switchgears, and high-power transformers, among other products. The company provides such products for power infrastructure development, automation, and controls.
ABB has invested $600 million over 10 years. The company started operations along China's eastern coast. Six years ago we opened our first facility in Chongqing; we are now moving into Chengdu. In part, this is because the Chinese government wants us to begin drawing more western resources. But we are also attracted to the labor pool in western China.
Our philosophy is to establish only joint ventures [JVs] in which we have majority stakes, or wholly foreign-owned enterprises [WFOEs]. We don't find a significant difference in control between a JV in which we have 80 to 90 percent equity and a WFOE. Our holding company in Beijing acts as our headquarters for China and Hong Kong. We've had our headquarters in China since 1994.
Q: What are the company's plans for future expansion in China?
A: In 1994, our revenue base in China was $500 million. After a wonderful 10 years, we are looking at revenues of $2 billion. Our internal goal is to double revenues by 2008, to $4 billion. This is feasible—with our recent growth rates of 30 to 40 percent we would reach this goal by 2008. Our mission in China—like our mission in the United States—is to develop strong management for our indigenous operations. For this reason, another goal by 2008 is to have entirely local management. At first, we employed large numbers of expatriates in China. We are now undertaking a significant degree of mentoring and training of Chinese managers.
We have also announced plans for a research and development [R&D] center geared toward Chinese needs. One difference between China and other countries in terms of technology is the willingness at times to employ very advanced technology without having any prior, indigenous experience [with that technology] within the country. Elsewhere in the world, countries prefer to go with proven, if less advanced, technologies and tweak the technologies locally.
Because Chinese standards differ, and because there is pressure in all industries to use local suppliers and contractors, R&D can bring these suppliers up to standard. This year, we are starting up the research center with only about 20 or 30 people, though eventually we will reach 50 or 100. The center is headed by one of our top scientists, Dr. Gan, who happens to be Chinese, and is now working for us in the United States. He was recently appointed "fellow" of our research and development program, a very high honor within ABB.
People generalize too readily about China's move up the technology ladder. Both India and China are picking up relatively easy-access technologies. There is a big gap between these countries and the West in the medical field, in large power transformers, and in HVDC [high voltage direct current], gas chromatography, pollution analysis and control, and process control and facility optimization technologies.
Q: How does China fit into ABB's global strategy?
A: For ABB, two regions are most important strategically: North America and China. We have a five-year strategic plan for the two regions. The respective plans aim to exploit China's growth and to take advantage of the $50 billion North American market.
Q: I understand that you are currently serving as one of a group of economic advisors to the governor of Guangdong Province. What does this role entail? What kinds of issues have you been called on to address?
A: We are generally called on to give macroeconomic views. We meet with 12 well-qualified departmental governors and conduct, in effect, business workshops. They are eager to learn from an experienced company like ABB.
The Chinese are already thinking about 2010, 2015, 2020. Guangdong is very good at exporting and manufacturing. We have discussed how to take advantage of the full value chain, beginning with R&D and product design. We challenged the officials to think about the education front—an inherent strength in China—and to ask themselves what sorts of scientists they should cultivate.
Q: Recently the PRC government has undertaken some measures to cool down its overheated economy. What economic trends do you see as most important to your company's future growth and stability in China?
A: The overheating has to be handled carefully. Loan approvals have slowed, showing that the government's strategies—such as going after the construction industry on the coast—are working. Also, China has been slowing investment in its aging steel industry, known for its poor quality steel and pollution of the environment, and construction of multiple shipyards.
One area they are not slowing is the power sector—they realize they're vulnerable to shortages and that they need reliable power sources. They are spending $10 billion per year now on developing their grid, compared with $2 to $2.5 billion that the United States spends on its grid. The Three Gorges Dam will eventually produce 1,000 MW, which will help industrial users nationwide. Recently ABB won a $390 million order from China for a third HVDC power line supplying power generated by the dam to Shanghai.
Of course, they are also still putting money into high-quality steel. ABB is actively supplying equipment to top steel and cement producers, and is cooperating on the gas pipeline that will supply gas from Urumqi in remote western China to its eastern industrial development base.
Q: What are the main challenges for ABB in China? How is the company going about meeting those challenges?
A: Our number one challenge is finding the right people: trained engineers who don't make mistakes. We have no error margin. Today, as soon as we train people we lose them to new competitors. Thus, we have to be a better employer than our competitors.
Our second major challenge is resource availability for production of transformers, motors, and machines. However, this is becoming increasingly less of a problem.
Intellectual property protection is also a big concern—of course the United States has a big role in working with the Chinese to improve this situation.
Q: Based on your experience, what are the main challenges for China in terms of its future growth and stability and, in particular, its increasingly important role in the global economy?
A: Political turbulence—from Taiwan or terrorism, potentially aimed at power or other infrastructure—would have an adverse effect on China's progress.
Infrastructure weaknesses in general are a major concern—for example, 24 of China's 30 provinces lack good, reliable, power sources. If for some reason the government failed to continue its power development plans, growth would suffer. And foreign investment will depend on steady progress in infrastructure. Intellectual property rights improvements, and opening of markets, are also key for foreign companies. Most foreign companies in China are taking the long view, yet China must address these issues in the next five years.
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