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BlackBerry in Red China: Research in Motion Navigates Institutional Barriers in an Emerging Market
By Prescott C. Ensign Nicholas P. Robinson
Research in Motion’s (RIM’s) entry into the Chinese market during a time when many distractions—principally a patent dispute with NTP—occupied management’s attention was not a foregone conclusion. China remained a difficult market to crack. One holdup was an impasse with regard to RIM’s use of encryption technology and the Chinese authorities’ desire to monitor e-mail traffic and content. Here the technical and political concerns were entangled. To further complicate things, the entirety of RIM had until recently been preoccupied with the legal settlement with NTP in the United States. Issues in this study highlight real-world dilemmas in a thriving firm. The founders are still in charge, and new markets present themselves regularly. A very real challenge is divided attentions. The standstill over market entry calls for integrative thinking—bringing together disparate and contradictory elements for resolution. RIM’s way out will invariably involve embracing complex relationships in order to find a resolution to the various conflicting institutional forces. © 2008 Wiley Periodicals, Inc.
Correspondence to: Prescott C. Ensign, University of Ottawa, Telfer School of Management, 55 Laurier Avenue East, Ottawa ON, K1N 6N5, Canada, 613.562.5800 x4925 (phone), ensign@telfer.uOttawa.ca.
Published online in Wiley InterScience (www.interscience.wiley.com). © 2008 Wiley Periodicals, Inc. • DOI: 10.1002/tie.20184
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Introduction
T
his case study provides a glimpse at Research in Motion’s (RIM’s) entry into the Chinese market during a time when many distractions—principally a patent dispute with NTP—occupied management’s attention. Norm Lo had been in charge of the Asia Pacific region for eight months, though he had been with RIM for five years. Lo was successful in signing new partners throughout Asia, but China remained a difficult market to crack. One holdup was an impasse with regard to RIM’s use of encryption technology and the Chinese authorities’ desire to monitor e-mail traffic and content. Here the technical and political concerns were entangled. Even calling in Ontario Premier Dalton McGuinty to pay the Chinese federal authorities a visit (during a trade mission) provided no resolution. To further complicate things, the entirety of RIM had until recently been preoccupied with the legal settlement with NTP in the United States. There was much concern that NTP’s patent infringement claims could sink or substantially stymie RIM’s economic progress. Even as the NTP matters were settled, additional distracting infringement suits arose. Those holding patents thought they could get rich just by having a lawyer knock on RIM’s door. The study shadows Norm Lo trying to bring BlackBerry’s entry into mainland China to fruition. Should he “play hardball?” Is slow and steady going to do it? Is RIM getting walked all over in China, or is this what an outside firm should expect? Wishful thinking and a great product are not enough. Incentives must be properly aligned with the local partner China Mobile. Meanwhile, China Mobile moved to introduce products that compete at the low end—which may be the best point of entry into this market. RIM could introduce a stripped-down product, but this would be uncharted territory for a BlackBerry, and potential customers may not be satisfied. Even the authorities would likely reject the inferior technology, knowing a more sophisticated and capable device exists. Alternatively, RIM might partner with outsiders. Embracing other organizations as customers or perhaps aligning with suppliers (intermediaries) to assist in market entry may prove beneficial. Issues in this study highlight real-world dilemmas in a thriving firm. The founders are still in charge, and new markets present themselves regularly. A very real challenge is divided attentions. Norm Lo is focused on China and future opportunities, while most at RIM have been concerned with North America, which represents the bulk of revenues. But North America’s future prospects, though substantial, are knowable and finite.
The standstill over market entry calls for integrative thinking1—bringing together disparate and contradictory elements for resolution. RIM’s way out will invariably involve embracing complex relationships in order to find a resolution to the various conflicting institutional forces. Breaking down the problem into simpler components or individual pieces to work on separately will not prove successful in launching the BlackBerry into this market.
The Situation
The Chinese personal digital assistant (PDA) market is dominated by many niche players—homegrown companies that have developed a full range of PDAs and applications. This includes everything from devices that allow full Internet access to simple day planners and electronic dictionaries. Despite the strength of local brands, such as Lenovo (which had grown to acquire IBM’s PC division), Meijin Computer, GSL (Group Sense International Limited), Digital China, Legend, and Hi-Tech Wealth, the most popular devices in China continued to be ones that either incorporated imported technology or were imported altogether. Palm’s operating system and Linux-based systems both found application in Chinese PDAs, while Palm continued to attempt to market its hardware to Chinese consumers.2 Other firms, such as Research in Motion, found themselves in a peculiar position as they attempted to navigate a very competitive PDA market surrounded by institutional barriers. Although obstacles were substantial, the Chinese market could not be ignored. In February 2006, China had a base of over 400 million cell phone users (which had eclipsed landline phone users in late 2003 or early 2004 at the 250 million mark) and the highest growth rates in new cell phone sales in the world, making China a destination that could make or break a company and determine its long-term success in an industry that continued to mature. China Mobile Communications Corporation (China Mobile), RIM’s partner in China, held two-thirds of the domestic cell phone market, with over 250 million customers. In contrast, the entire U.S. wireless market was 204 million subscribers. The latest statistic from the government’s official Xinhua News Agency was that Chinese mobile handset users “thumbed” 22.8 billion text messages in March 2006, 66% more than in March 2005. Meanwhile, the Canadian Embassy in Beijing continued to intervene on RIM’s behalf in efforts to help RIM pass technical tests and finally enter this market. On April 6, 2006, Jim Balsillie, co-chief executive officer of RIM, announced that BlackBerry’s unveiling in
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China was imminent: “We are on the verge of launching BlackBerry service with China Mobile and expect to launch by the end of May.” A week later, Norm Lo, VP of Asia Pacific for RIM, told reporters that mid-summer was more likely: “Our talks with China Mobile are going very well. We are working very tightly with them, and a deal is expected very soon, probably by the middle of this year.” Then Lo discovered that China Mobile would introduce a rival service, “PushMail,” in Shanghai the following month that would allow China Mobile customers to receive e-mail on their existing handsets. Lo learned on April 10, 2006—after an almost twoyear regulatory delay blocking the introduction of RIM’s BlackBerry to mainland China—that a “RedBerry” had just been launched by China Unicom. The state-owned enterprise China Unicom—the second largest mobile operator in mainland China—revealed in a press release, “The RedBerry name extends the vivid name of BlackBerry that people are already familiar with, and it also combines the new red symbol of China Unicom.” The RedBerry was driven by software from the Chinese firm Facio. Tony Chan, CEO of Facio Software, believed that they could win the battle with RIM: “The RedBerry is not afraid, neither did David fear Goliath!” Lo began to feel like he was David; RIM was the one going to battle against giants. China was not a universal constant—monolithic in some respects, but its policies were not delivered uniformly. While some institutional forces work in one direction, others work in opposition. Market-entry challenges (pushes and pulls) are, to some degree, idiosyncratic and differ from one firm to another. Assuming that all multinational enterprises (MNEs) face the same obstacles would be improper. Every company faces unique challenges, so there may be no simple, singular formula to embrace. One MNE’s best practice may become another’s worst nightmare, “and otherwise commonly followed advice can be wasteful, even harmful, if applied to the wrong situations.”3
Founded in Waterloo, Ontario, in 1984, RIM had enjoyed a high level of success in the North American market, seeing its position rise from being a distant competitor to market leader.
Background on Research in Motion
Founded in Waterloo, Ontario, in 1984, RIM had enjoyed a high level of success in the North American market, seeing its position rise from being a distant competitor to market leader. The firm’s presence outside of the United States, the world’s largest PDA market, had been notably weaker but was improving; RIM boasted BlackBerry service in over 60 countries through more than 160 carriers. The U.S. market, however, accounted for over 75% of RIM’s sales in 2004; RIM had been working hard to diversify geographically, though by the end of 2005, only one in five subscribers resided outside of North America. RIM
continued to forge new partnerships internationally, specifically in Asia and Europe, to distribute its products. RIM provided users with handheld units, the BlackBerry (available in many models), and the accompanying software needed to use the BlackBerry for numerous functions, while telecom carriers provided access to servers and networks needed to use the product. PDA makers like RIM offered a product that was comparable to any of the major mobile phone makers. As with mobile phone makers, RIM’s role was limited to manufacturing and providing software and updates. It was no coincidence that mobile phone makers such as Motorola, Nokia, Samsung, Siemens, and Sony Ericsson were often viewed as direct competitors to RIM’s BlackBerry product. However, all of these manufacturers made hardware that interfaced with BlackBerry software and applications. The bulk of RIM’s revenues were derived from product sales. Service fees paid by telecommunications companies like Bell (Canada), Rogers (Canada), AT&T (United States), T-Mobile (United States and United Kingdom), Vodaphone (United Kingdom), and Orange (France) to RIM as a share of revenues from product users also contributed substantially and provided a stable long-term revenue stream—“the service tail.” In fact, 70% of revenue for the first quarter of 2006 was derived from handhelds, 21% from service, 5% from software licenses, and 4% from other sources. Research in Motion aimed to increase sales by forming new partnerships and continuously entered Asian markets through alliances with local wireless carriers. By
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April 2006, RIM had ties with 21 telecom providers in 11 markets, including India, Singapore, Malaysia, Hong Kong, Australia, New Zealand, Indonesia, Sri Lanka, Thailand, and the Philippines. RIM offered services in all major European markets; in total, RIM had 3.65 million subscribers worldwide by mid-2005, more than double the 1.66 million users of a year earlier, and this number reached 5 million at the end of fiscal year 2006. Despite signing a memorandum of intent in the fall of 2004 with Chinese wireless service provider China Mobile—the largest mobile telecommunications firm in China, and one of six Chinese state-controlled telecommunications firms—RIM had yet to launch its BlackBerry on the mainland. Nevertheless, it was estimated that there were hundreds of BlackBerry devices in mainland China that were paying hefty roaming fees for service, all beyond the watchful eye and eavesdropping ability of the Chinese authorities. For an entrepreneurial organization like Research in Motion, facing stifling obstacles was a serious setback. RIM’s history had not prepared it to confront such sizable barriers and forces as those it faced in the Chinese context. Previously and subsequently, every new market welcomed both them and their marvelous product.
Prior Experience in Asian Markets
RIM signed agreements with Hutchison Telecom and CSL of Hong Kong in 2002, but by October 2004 Hutchison Telecom had landed only 500 corporate customers for the BlackBerry device. The deals in Hong Kong, how-
ever, gave RIM the opportunity to test its product and business strategy in a Chinese market. Cultural similarities—not to mention language and political attachment—with the mainland made Hong Kong a perfect experiment. Analysts concluded that RIM’s limited success in Hong Kong was due to the company’s “pricing structure” and the fact that demand for product “has been hit by the high licensing fees for the BlackBerry server software in Hong Kong.”4 Competing with technologically inferior, but cheaper, local PDA products was expected to be the key to succeeding in Hong Kong and would also be vital to success in mainland China. This said, BlackBerry had been welcomed as a godsend by many Chinese firms, including Hutchison and China Mobile; the product would help them offer “higher margin data service,” improve profitability, and slow the “rapid decline in average revenue per user.”5 The BlackBerry had been seen similarly in other Asian markets, where anxious telecom companies partnered with RIM to launch the BlackBerry in hopes of improving margins and increasing value of services provided to customers. Vivian Yeo of ZDNet Asia reported on May 26, 2005, that “RIM emerged as the worldwide leading seller of PDAs in the first quarter of 2005, growing 75.6% over the same period last year.” Increased volume had occurred mostly in the United States, but the pace of growth in overseas markets had passed that of the North American market. Considering that Asian telecommunication markets (specifically India and China) accounted for much of the growth in telecommunications worldwide, partnerships with mobile service providers in these countries were projected to be the most promising prospect for growth in BlackBerry subscribers.
The BlackBerry Phenomenon
RIM’s history had not prepared it to confront such sizable barriers and forces as those it faced in the Chinese context.
Despite holding less than a quarter of the U.S. PDA market, RIM’s BlackBerry had a cult-like following. The product’s cutting-edge technology, nifty ergonomic design, user-friendly keypad, and exceptionally simplistic interface led it to win many awards. Of these features, RIM’s push technology, used to notify users instantaneously when e-mail was present, had been the source of the product’s reputation as “addictive.” For the first time in the history of communications technology, people could stay connected—continuously—with real-time, streaming e-mail, accessible whenever and wherever, provided that a service provider with coverage existed. Real estate agents, businesspeople, and public servants all found the device indispensable, to such an extent that in December 2005
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the U.S. government issued a legal statement indicating that it might oppose an injunction against RIM in the event that the company lost its U.S. patent dispute. The BlackBerry itself was basically the size of a handheld calculator or deck of cards; it was a wireless device with a built-in keyboard that enabled users to send and receive text messages and e-mail. Its more advanced units, with a color display, included Internet browsing and phone capabilities. The purchase of the device and subscription to the service gave customers access to a wide array of specialized software, which could be downloaded from RIM’s Web site. Much of the software was designed by RIM, as was the operating system that made the BlackBerry run. Unlike competitors such as Palm, RIM’s status as a relative newcomer to the PDA market had meant that far fewer applications were available to BlackBerry users. However, this had not been enough to stop rival Palm from admitting defeat to RIM. Tom Krazit of IDG News Service reported on May 6, 2003, that Palm would allow its licensees to use “Research in Motion’s BlackBerry wireless e-mail software in their Palm OS handhelds and smartphones.” According to RIM, the popularity of the push technology e-mail system was due to the fact that there was “no need to find your e-mail or data—it finds you.”6 This feature, combined with numerous other attributes—such as Bluetooth technology, allowing for easy data transfer from a computer to the PDA and vice versa (“syncing”), day planner, word processor, and SMS messaging—meant that many consumers were replacing their laptops with PDAs. In addition to these features, communication streams to and from BlackBerry devices were incredibly secure. The use of encryption technology originally developed by the U.S. military further added to the value of an already indispensable device. Businesses recognized PDAs in general, and BlackBerrys in particular, as tools to enhance productivity and provide a “competitive edge,” as increased connectivity and better communications could mean the difference between securing a contract or not.
using a BlackBerry. According to one Toronto-based newspaper:
China is worried that the high-level encryption technology used in BlackBerrys could make it difficult for security authorities there to gain access to email messages on China’s Internet servers, which are all state-controlled . . . without being given the key to RIM’s security algorithms, the Chinese government would find it virtually impossible to tap into the highly secure communications stream between portable BlackBerrys and desktop email accounts . . . although BlackBerry hardware and software is Canadian technology, the encryption algorithms that underlie it were developed years ago by the U.S. military.7
The Red Factor
In early 2006, more than 16 months after signing a letter of intent with China’s largest mobile telephone company—state-controlled China Mobile—RIM had yet to see its product launched. A variety of China-specific problems seemed to pose barriers to RIM’s entry into the vast market. Of these, the most pressing issues revolved around the technology used by RIM that would make it near impossible for the Chinese government to monitor the communication activities of private citizens and businesses
Having China decrypt the algorithms used in the software could constitute a security risk for the United States—RIM’s single largest market. Given these issues, many observers foresaw that the “U.S. would try to prevent the sale of encryption technology to China.”8 Navigating this predicament would require that either RIM (with the consent of the U.S. government) or China make a compromise in order to give China Mobile’s customers access to the best PDA technology on the market. Either RIM would have to reveal its secrets (an unlikely option given China’s reputation for respecting intellectual property) or China would have to soften its hold on communications in the country (even less likely). In response to improvements in communications technology and burgeoning Internet and cell phone usage, laws regarding telecommunications were becoming ever more stringent. In 2005, China announced that it would require mobile phone users to register, claiming that the government wanted to stop phone fraud, while citing the need to monitor communications for the good of the Chinese people. “The new rule, announced by the Ministry of Information Industry, is part of a crackdown on telephone fraud and illegal text-messaging practices”—practices that typically involved the discussion of issues that were considered to be off-limits to Chinese citizens; this was expected to help authorities curb “improper political commentary.”9 As far as the Internet was concerned, government monitoring of communications had grown in tandem with the technology. In addition to this, individual Internet users had to “register with the police” and were “not allowed to publish, discuss, and spread any state secrets through the email systems.”10
All traffic to the computer networks outside China must be effectuated through the gateway maintained by China Telecom and other approved public networks . . . no person or units may establish or use other gateways for Internet traffic without prior approval from government.11
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Altogether, these rules ensured that the government retained control over information transmitted over Internet networks, though actual monitoring of all traffic would be a near impossibility. Further complicating the issue for a company like RIM offering the BlackBerry device in China were laws regarding encryption technology in China.
On October 7, 1999, the State Council adopted Administration of Commercial Encryption Regulations governing the sale, distribution, use and production of encryption products in China, including a ban on the sale of all foreign products.12
The use of RIM’s technology in China was subject to government approval, as encryption was a crucial part of the BlackBerry platform. That approval had yet to be received, even after the intervention of several high-profile political players, including Ontario Premier Dalton McGuinty, who showed off the gadget to a Chinese cabinet minister on a recent trade mission. Despite efforts, little had changed. The product had yet to be formally launched in China. Nevertheless, hundreds of people— paying costly roaming charges—did use BlackBerrys in China, unbeknownst to the Chinese government. It was thought that those users from Hong Kong, Singapore, the United States, and elsewhere living in China brought the product into the country and refused to give it up. This led some to argue that the Chinese government could do little to stop the use of new communications technologies in the country, as monitoring the everincreasing volume of information, and cracking the increasingly complex encryption algorithms, was not feasible. In fact, the world-renowned Nobel economist Milton Friedman argued that the threat posed by rapidly advancing technology and a rapidly growing middle class would ultimately lead to “future Tiananmen Squares.”13 Improvements in technology and the general welfare of Chinese citizens may hasten the march toward democratization, just as maintaining an authoritarian regime could constitute an economic disadvantage.
telecommunication companies were, at a minimum, partly government-owned. China’s entry into the World Trade Organization (WTO) was forcing the country to give increased access to foreign investors who were anxious to profit from China’s booming telecom market. More specifically, in the mobile market, the number of subscribers “continues to increase at the phenomenal rate of 5 million per month,” giving China the “mantle of the world’s largest mobile phone market.”14 Another reason for China to keep investment in its telecom sector restricted was that telecom had been “an extremely profitable” industry and a substantial source of government revenue.15 Outsiders like Nortel Networks and Lucent Technologies saw lack of transparency as a major barrier to investing in China. “Foreign companies noted the difficulty in finding and obtaining copies of regulations and other measures undertaken by various ministries,”16 and the issue had forced China to change its practices and establish a set of national gazettes to inform the business community of Chinese laws and regulations. In March 2002, preparing for China’s accession to the WTO, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) issued an order identifying mobile phones and mobile communications systems as being sectors in which foreign investment would be encouraged. Although the only outright control on the importation of PDAs and other mobile telecommunications devices was a stipulation that imports be subject to tendering, there were numerous other regulatory, legal, and political barriers that made it possible for the Chinese government to halt imports without any sort of government decree. Furthermore, the fact that the industry had been identified as being of national importance to develop could make RIM’s entry into China more difficult than initially assumed. RIM’s manufacturing and design facilities were almost exclusively located in North America, and the firm would simply be creating new competition for domestic manufacturers of similar products.
Telecommunications Industry in China Institutional Environment
The Chinese telecommunications industry was characterized by high government involvement and extraordinarily tight controls on foreign investment and private enterprise. This sector—which had been identified by the Communist People’s Party government as being key to China’s economic development—was controlled by a plethora of provincial and federal organizations, with the State Council ultimately having power to override other decisions. Adding to this control was that all the major Entering the Chinese market involves overcoming challenges that are unique to economies that have made, or are in the process of making, a transition from a controlled economy to a freer, market-oriented economy. In China, an immature financial system, weak intellectual property protection, and tight labor controls characterized an economy shedding the vestiges of socialism. Though many of these issues might not be of direct con-
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cern to RIM, all would likely have impact on the firm’s experience in China.
Repatriating Profits
China’s financial system was tightly controlled by the Chinese government and contained minimal private involvement. The most pressing concern that Chinese banking raised for RIM—or any firm involved with China—was getting paid. The process of repatriating RMB to the home currency typically involved receiving approval from the Foreign Exchange Adjustment Centre, which registered the firm’s foreign exchange and completed the transaction.
Intellectual Property
China’s reputation as a safe haven for companies involved in piracy and other violations of intellectual property was grounded in cultural attitudes toward ownership. After years of socialism, the importance of private property to the Chinese people had been eroded and was reflected in weak enforcement of intellectual property laws. Officially, however, China was a party to the Paris Convention and thus recognized patent protection. Despite this assurance, other Canadian companies had had difficult experiences protecting their intellectual property in China. For instance, Canadian bomb-suit and riotgear maker Med-Eng Systems was upset to discover that— notwithstanding commitments to the contrary—suits provided to a Chinese government agency had been cloned in near perfect detail and were then marketed throughout the world by a Chinese company.17 Med-Eng’s response was to take legal action against buyers—a maneuver that was both successful and costly. The threat for RIM was incredibly significant, as the BlackBerry was valuable precisely because of the intellectual property involved. Any violation of the company’s proprietary intellectual property, or patents involving key elements of its technologies (hardware or software), could run the firm out of business.
China’s reputation as a safe haven for companies involved in piracy and other violations of intellectual property was grounded in cultural attitudes toward ownership.
Transition from a centrally planned economy to the socialist market economy in China is expressed by many contemporary Chinese legal philosophers as the transition from the rule of man (renzhi) to the rule of law (fazhi) or from supremacy of power to supremacy of law.19
Cultural Barriers
Business in China was not as impersonal as it was in North America, where RIM had seen the majority of its success. As the former CEO of Ericsson, Kurt Hellstrom, put it, “personal relationships based on mutual understanding are the key to success” in the Chinese business environment.18 From an outsider’s perspective, Chinese attitudes toward relationships almost bordered on corruption, as favoritism and camaraderie might take precedence over such factors as price and quality. In fact, some Chinese scholars theorized that this emphasis on relationships could be partly due to old mind-sets, which were gradually changing in China.
Chinese attitudes toward relationships were reflective of the pre–laissez faire mindset, which some expected would gradually dissipate as Chinese businesspeople were held accountable to their shareholders, partners, and international institutions (like the WTO). The emphasis on guanxi (a Chinese word for social connections) meant that businesses in China must cultivate meaningful relationships, which could be the “difference between getting the contract or not.”20 For this reason, many Canadian businesses in China chose to hire Chinese nationals “with contacts in China to help promote their business.”21 RIM was hoping that Norm Lo, VP for the Asia Pacific Region, would be able to make such inroads.
Labor
In China, nine out of ten foreign enterprises had unions. The strength of unions in China and meeting the stringent requirements set by the government and its agencies could be daunting obstacles.22 Fortunately, China was continuing to liberalize rules with regard to labor, and the rules were really only relevant for labor-intensive industries such as manufacturing. Service industries, such as RIM’s BlackBerry, would find the rules to be less of a barrier.
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Man on a Mission
Norm Lo was appointed VP for Asia Pacific in July 2005 after five years with Research in Motion. His mandate was to expand RIM’s regional presence and “drive BlackBerry mindshare and market penetration across the AsiaPacific.”23 RIM had offices in Hong Kong, Singapore, and Australia with a staff of about 50 employees. His initial plan included doubling the number of carriers RIM worked with in Asia. This represented a substantial increase from the 16 alliances RIM had in eight countries, but in the eight months since taking charge, RIM moved closer to this goal—the April 2006 tally was 21 partnerships in 11 countries. According to Lo, RIM was just “scratching the surface. . . . Everything in Asia-Pacific is wide open. We’re talking to basically everybody. There isn’t one country that we are not currently involved in a business discussion.”24 Lo’s career spanned 20 years in high-tech research, product development, management, sales, and marketing. Prior to his present task, Lo had been responsible for two business units focused on the North American market. Before joining RIM in 2000, he worked at Nortel Networks. He had a B.Sc. in engineering physics from the University of British Columbia, M.Eng. and PhD degrees in electrical engineering from Carleton University, and an MBA from the University of Ottawa. Like everyone at RIM, Lo had followed daily accounts of the saga between RIM and NTP. The tech analysts Gartner placed RIM as the market leader but at the same time recommended clients not go with BlackBerry
devices until legal issues were resolved. Gartner’s December 5, 2005, news release suggested BlackBerry users in the United States might lose service. While current U.S. customers and potential ones were being made nervous, headquarters in Waterloo, Ontario, was scrambling. Executive attention had been focused almost exclusively on this issue. Market development and the stalemate in China were well off the radar for most everyone back in Canada.
U.S. Patent Dispute
Back in the North American market, RIM continued to wage a legal war against NTP, an obscure American patent holding company that had managed to successfully convince two courts that RIM’s product infringed on eight patents held from as early as 1991. The patents concerned a key element of BlackBerry’s “push” e-mail technology—a major selling point of the device. NTP had originally been awarded damages of U.S. $23.1 million for the infringement, but upon appeal by RIM, that number climbed to over U.S. $53 million (as well as 8.55% of future U.S. BlackBerry sales). In March 2005, NTP and RIM entered discussions to settle the dispute, which resulted in RIM agreeing to pay NTP U.S. $450 million.25 However, NTP failed to ever finalize the agreement, supposedly in the hope that the U.S. Patent Office would find that all eight patents were infringed by RIM, creating the possibility of a far larger award for damages. In response to this, RIM attempted to have a court enforce the discussed settlement but failed to prove the existence of an agreement between the parties. Almost immediately, RIM stockholders reacted by dumping shares at record volumes, in fear that an injunction could be the next threat against RIM, making it near impossible for RIM to sell its product. RIM countered this scenario by asserting that it had developed an alternate technology that could be substituted for the infringing portion of the patent, in case an injunction were to be imposed. But this ethereal technology was never revealed, and most analysts questioned its existence. Meanwhile, the U.S. government filed a legal brief in a U.S. court indicating that it might have an interest in seeing that BlackBerry service not be interrupted by an injunction, as “hundreds of thousands” of U.S. government employees counted on BlackBerry technology to get their jobs done each day.26 The technology was credited with giving government workers “a lot of infrastructure,” making it the “lifeblood” of government communication.27 Despite directives from Gartner and others
The tech analysts Gartner placed RIM as the market leader but at the same time recommended clients not go with BlackBerry devices until legal issues were resolved.
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against new BlackBerry purchases, it seemed that RIM had support in powerful places.
A China Entry and the Balance of Probabilities
RIM was facing an increasingly complex web of issues. Over the past few years, RIM had seen its PDA become the market leader in terms of sales and reputation for quality. The firm had successfully built a multibillion-dollar company out of a start-up, and had managed, against the odds, to conquer a U.S. market filled with competition from companies such as Nokia, Samsung, and Palm. Despite past triumphs, the future of RIM was at stake. The NTP threat had subsided with a U.S. $612 million payout to prevent the devastation of BlackBerry’s existence in the U.S. market, but events had taken their toll. The threat to the BlackBerry network caused some customers to delay purchases and others to defect. More importantly, however, RIM understood that its overall corporate performance would be dependent on its successes overseas. China had emerged as the largest telecom market in the world. An incredible opportunity seemed to lie ahead for any firm that could make sense of the government’s complicated regulatory scheme and win favor with local decision makers and organizations, which would be essential in order to put BlackBerrys in the hands of people in mainland China. RIM needed to tout its potential to contribute to the economic and technological advancement of the country, perhaps by generating support from local and regional government—not just central authorities. Had RIM invested too heavily in China or not committed nearly enough resources? It was really hard to determine, but 18 months after saying that the BlackBerry entry into China was imminent, nothing happened. How often can a CEO cry wolf? Management attention was clearly diverted to other matters through much of this time period (i.e., the NTP patent dispute). More recently, in March 2007, co-CEO Jim Balsillie resigned his post as chairman over stock option accounting errors. If a CEO promises something is imminent and it transpires—he or she receives accolades for foresight and daring; Balsillie would be congratulated for his strategic stretch.28 But if predictions fail to materialize, proclamations are dismissed as wishful thinking and empty promises. Damned if you do, damned if you don’t. RIM could have spent (wasted) more time and money with no returns (attention that could be focused elsewhere on other markets). But because RIM did not plunge forward, they are subject to the criticism that they did not try nearly
hard enough—they pulled back too soon, falling short of the goal. What action is more conservative? Proceeding with caution and exercising diligence, perhaps even doing nothing fits with our conventional view of conservative behavior. But under many circumstances, moving ahead with complete commitment—exhibiting daring, even abandonment—is less risky. Was it caution, procrastination, or fear holding RIM back? The challenges in China remain enormous, and there are substantial risks to either action or inaction. There are no guarantees that market opportunities will be realized. Executives inside MNEs think that they can tackle China and make it work. These brazen managers believe that they cannot afford to bypass this market. Forging quality links is pivotal. But how does one know if those alliances and partnerships are strong unless you test them? Staying with China Mobile may be wise— most outsiders would point out that RIM already has the best partner—but RIM could pursue other options. Unless waiting it out is the tactic arrived at, offending China Mobile is likely: RIM could light a fire under China Mobile or pursue other (competing) partners. It is clear that time is not on RIM’s side; other handheld devices are proceeding. RIM may soon have to get to pushing and shoving to see where it stands with China Mobile and other carriers.
Conclusions and Lessons Drawn
Nokia, Motorola, and others are in China not as importers, but as insiders. In December 2006, Jim Balsillie, co-chief executive of RIM, was hoping to win approval from the Ministry of Information Industry to introduce the BlackBerry into China in early 2007. Balsillie publicly touted the strength of RIM’s relationship with China Mobile and repeated RIM’s resolution to stay the course, acknowledging that the Asia Pacific market would overtake the United States and Europe in the near future. RIM continued to strengthen its position in other markets, India in particular. The saga continued. Even with events still unfolding, there are already several takeaways from what has transpired. First, top management appears not all to be on the same page. Co-CEO Balsillie in April 2006 suggested BlackBerry’s launch in China would occur in May 2006, and VP of Asia Lo countered days later that it would be months away. At the end of 2006, Balsillie had to eat his words, promising a product launch in January 2007. China insiders suggest that it might be prudent for RIM to pursue other partnerships in China. According to Xiamen University Professor Guo Lin, there is no reason
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why one cannot simultaneously have multiple relationships in China. The Western notion of exclusivity may be misguided. This is not to say that partners or potential partners are to be played against one another. It is not merely a matter of keeping options open—RIM could go ahead with several service providers. Another avenue worth exploring would be to turn the gatekeepers into customers. The Chinese government, of which there are many levels, represents a substantial target market.29 While an increasingly prosperous business class could afford a monthly subscription to the BlackBerry productivity tool, it is really not individuals that pay the service fees, it is organizations—either forprofits or those in the public sector. If Chinese authorities can be brought in as subscribers, perhaps this quandary can be resolved. Alternatively, corporations (foreign and domestic) might be enlisted to lobby for BlackBerry’s acceptance. RIM is proceeding with the conviction that it is not a matter of if, but when approval will occur. This premise needs to be reviewed; delay in entry costs BlackBerry market position—burying RIM in a hole it is difficult to get out of. Multinational enterprises with operations in China are the ideal customers and should be attended to immediately. These firms are already familiar with and appreciative of BlackBerry capabilities. Network effects30—when a product or service gains value as the number of users increases—are worth bringing up. Obviously, there are still many people in China that are separated by the digital divide—that is, left in the dark without an e-mail address or access to the Internet. While RIM is presently compatible with most systems, there is likely to be some trouble in China. The variety in platforms for these devices is greater in mainland China with the local proliferation of operating systems. Standardization is not nearly as pronounced as elsewhere. If RIM can grab market share, it can rest in a much more comfortable position. But gaining market share in China can be expected to be costly. Price and a myriad of other factors confound any familiar approach RIM might employ. RIM is very much in uncharted waters. In contrast, India plays by rules similar to those that RIM is experienced with. Currently, every e-mail on the planet emanating from or destined to a BlackBerry is routed through Waterloo, Ontario. It is not clear if this model is acceptable to China. It is also not clear what concessions would satisfy the Chinese authorities. While the BlackBerry’s coverage is extensive (RIM has service in Iceland and Turkey), small markets pose less of a risk. China is a serious endeavor. There may not be a second chance to get it right
(is RIM’s window of opportunity still open, or is it closing?). It may also be that a final attempt is all that can be mustered. The situation seems to have progressed to the point where a “slow and steady” approach will not succeed. There must be considerable commitment to win over the market. Although the legal ramifications of patent disputes were being resolved, there would always be events that compete for resources and management attention.31 Trying to remain productive surrounded by such uncertainty is immensely distracting. Dealing with peers and superiors who are consumed by other matters is de rigueur for a high-growth, multinational technology enterprise.
Epilogue
Quick, creative, and clever, or persistent and patient? It is not entirely clear which tactics are best. By July 2007, there was evidence that after eight years of effort32 RIM had finally cracked the world’s biggest cell phone market.33 The announcement by Balsillie that Research in Motion expected to start selling devices by the end of August 2007 for about U.S. $700 also indicated that they were “considering a plan to manufacture the devices in China.” To obtain approval from the Chinese Ministry to Information Industry, it was reported that “under the deal BlackBerry has to strengthen their relationship with China Mobile.”34 But in terms of concessions, “it is not clear what censorship arrangements, if any, BlackBerry made with the Chinese government.”35 There is some evidence that RIM’s resolution in regulatory gridlock may have been tied to: the government’s snail’s-pace progress toward licensing 3G networks that have long been promised before the Beijing Olympic Games, in August 2008. In February 2006 the government released a timeline for the deployment of the networks that called for trials to be complete by a year ago. Earlier this year, the PRC’s state-controlled media reported that those trials will extend into the fourth quarter of this year.36
It was not clear whether a BlackBerry launch was dragging the 3G network launch forward or vice versa, but this was an interesting series of events. According to Deutsche Bank AG, a 3G rollout could mean network investments of up to U.S. $75 billion over five years. However, a major “sticking point” was China’s reliance on a homegrown version of 3G developed by the Chinese Academy of Telecommunications Technology that the Ministry of Information Industry set as the national standard in January 2006.37
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Prescott C. Ensign, PhD, is an assistant professor in the Telfer School of Management at the University of Ottawa, Ontario, Canada. He is a Fulbright Scholar and has been recognized for excellence in teaching and research. Ensign has written articles on the strategy and structure of multinational enterprises, and his current work investigates innovative efforts of entrepreneurs in high-growth, technology-based firms. This is his second article to appear in Thunderbird International Business Review. Nicholas P. Robinson is a member of the Canadian Bar Association and a graduate of the Faculty of Law at McGill University, Montreal, Quebec, Canada. He has been active in numerous areas of business and academia. Robinson has worked in the recording industry, run an IT-based business, conducted tax policy research for government, and worked in the insurance industry. He has written a number of case studies and research papers on international management, marketing, public policy, and law.
NOTES
1. Martin, R. (2007). The opposable mind: How successful leaders win through integrative thinking. Cambridge, MA: Harvard Business School Press. 2. Levander, M. (2002, August 6). Handheld combat: As China’s PDA makers battle for market share, cautious global giants play a waiting game. Time Magazine (Asia). 3. Hansen, M. T., & Birkinshaw, J. (2007, June). The innovation value chain. Harvard Business Review, pp. 121–130. 4. Telco leader signs deal for BlackBerry. (2004, October 5). The Standard. 5. Ibid. 6. http://www.discoverblackberry.com. 7. Avery, S., & York, G. (2005, November 8). RIM runs into China security syndrome. Globe and Mail. 8. Ibid. 9. Associated Press. (2005, December 2). China wants mobile phone users to register. 10. Qingjiang, K. (2002). China and the World Trade Organization: A legal perspective. Singapore: World Scientific Publishing. 11. Ibid. 12. Ibid. 13. The Charlie Rose Show. PBS. December 26, 2005. Washington Post reporter Edward Cody observed: “By the hundreds of thousands, the urgent text messages ricocheted around cellphones in Xiamen, warning of a catastrophe that would spoil the city’s beautiful seaside environment . . . passionate opposition to the chemical plant generated an explosion of public anger that forced a halt in construction . . . It was a dramatic illustration of the potential of technology—particularly cellphones and the Internet—to challenge the rigorous censorship and political controls through which the party maintains its monopoly on power over China’s 1.4 billion people . . . Wen said he and his friends have since concluded that if protestors had been armed with cellphones and computers in 1989, there would have been a different outcome to the notorious Tiananmen Square protest.” Seattle Times, July 4, 2007. 14. Tao, J., & O’Brien, D. (2003). Non-tariff trade barriers in China. Hong Kong: Sweet & Maxwell. 15. Ibid. 16. Ibid.
17. L’abbe, R. (2005, August). CEO of Med-Eng, on-site interview Ottawa, Ontario. 18. Krott, M., & Williamsson, K. (2003). China business ABC: The China market survival kit. Copenhagen: Copenhagen Business School Press. 19. Wang, K. H. (2000). Chinese commercial law. Oxford, UK: Oxford University Press. 20. See note 18. 21. Ibid. 22. Luo, Y. (2002). Multinational enterprises in emerging markets. Copenhagen: Copenhagen Business School Press. 23. Yeo, V. (2005, July 12). New Asia-Pacific head drives RIM’s expansion. ZDNet Asia. 24. Ibid. 25. Restivo, K. (2005, December 8). NTP: The firm that may run RIM off the court. Financial Post. 26. Caterinicchia, D. (2005, December 1). Delay denied in BlackBerry suit. Knight Ridder Tribune Business News. 27. Larose, G. (2005, June 24). Study shows BlackBerry PDA has seized control of PDA market. Long Island Business News. 28. Hamel, G., & Prahalad, C. K. (1993, March). Strategy as stretch and leverage. Harvard Business Review. 29. Remarks made by Guanghua School of Management Professor Changhui Zhou at the 2006 Academy of International Business Conference: Beijing, China. 30. See Liebowitz, S. J., & Margolis, S. E. (1994). Network externalities: An uncommon tragedy. Journal of Economic Perspectives, and Arthur, W. B. (1996). Increasing returns and path dependence in the economy. Harvard Business Review. 31. Bouquet, C. (2005). Building global mindsets: An attention-based perspective. New York: Palgrave Macmillan. 32. RIM registered the BlackBerry trademark in China in 1999. 33. York, G. (2007, July 4). RIM cracks China market for BlackBerry. Globe and Mail. 34. Farrell, N. (2007, July 9). BlackBerry does China. The Inquirer. 35. Ibid. 36. Martin, R. (2007, July 6). RIM’s China move could catalyze mainland 3G rollout. EE Times. 37. Ibid.
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COMMENTARY
Case Comment: RIM in China
By Luc Fournier
W
hen I first saw the “BlackBerry in Red China: Research in Motion Navigates Institutional Barriers in an Emerging Market” case, my first reaction was: “Another business case about China. . . .” I have seen so many of these over the last years (including while doing my MBA) that I was curious if I would see something new. To my surprise, I truly enjoyed reading it and would consider it as one of the best I have seen. So what is my history with China and why do I have an opinion? Since 1986, I have spent over ten years in China traveling, studying, researching, and working in both the private and public sectors. Working at the Canadian Embassy in Beijing on all incoming ministerial and commercial delegations provided me with some valuable insight into the issues faced by foreign organizations and, most importantly, the reality when it comes to doing business in China. I have also spent most of the last seven years providing seminars and consulting services to North American companies dealing with China. In my opinion, when dealing with/in China, there are two separate issues that need to be considered: 1. Is the organization ready to face this challenge? How should my entry strategy be implemented in the Chinese context?
2.
This case presents these two issues very effectively: Was the timing right for RIM to enter into this venture, considering their current dispute with NTP? And was the entry strategy in line with the Chinese business/commercial/political reality?
One of my main messages is: If you believe that because China is now a member of the World Trade Organization (WTO) this means they are now doing business the “Western/developed” way, you are mistaken. Chinese entrepreneurs have been doing business for over 6,000 years and are fully aware that, in 2008, you cannot afford to avoid them. In other words, whether you are buying or selling goods and/or services anywhere in the world, you will, at one point, have to deal with China. The saga of RIM in China raises a list of issues common to most stories of foreign enterprises trying to penetrate the fast-growing Chinese market. I have highlighted some of the main ones, presented in order of their appearance in the case. As mentioned earlier, the complexity of entering the Chinese market (even more importantly for the IT industry) requires full alignment with the internal overall business strategy. The fact that RIM initiated its approach to China while senior management was obviously preoccupied with a very serious dispute with NTP increased its risk of finding roadblocks. At the time, PDAs in China were still a fairly new product, and its “capacity” was clearly making the Chinese government cautious. Therefore, a clear involvement from all senior levels of RIM was needed. Was Norm Lo the best candidate to drive RIM’s expansion into the Chinese market? Most probably. But my experience in dealing with China has forced me to regularly reevaluate the justifications behind the nomination of the key person dealing with Chinese authorities, espe-
Correspondence to: Luc Fournier, National Bank of Canada, Manager, International Trade, Ontario & Western Canada, 350 Burnhamthorpe Rd. West, Ste. 216, Mississauga, ON L5B 3J1, Canada, 905.276.8789 (phone), 905.276.0544 (fax), luc.fournier@bnc.ca.
Published online in Wiley InterScience (www.interscience.wiley.com). © 2008 Wiley Periodicals, Inc. • DOI: 10.1002/tie.20184
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cially when it comes to market entry with or without a Chinese partner. I am absolutely convinced Lo did everything he could to successfully develop a wise strategy, but I am questioning whether he could have received stronger support from higher RIM executives, or also from a Chinese national linked to decision makers in China (with the IT sector preferably). Connections and relationships in China are key. Political “influence” from country leaders is much less a decisive factor in today’s reality versus 10–15 years ago. However, connections to Chinese government key players are essential for a smoother ride. A very interesting question is raised at the very beginning of the case: “Is slow and steady going to do it?” My quick answer to this: yes and you have no choice. I have seen too often foreign organizations hoping to complete deals the “North American way” and, unfortunately, on very few occasions have I seen it being a successful approach. Once again, the Chinese have been doing business for thousands of years and have mastered a process that has proven effective in their history: patience over speed, relations over information, holistic over segmented, and, most importantly, hierarchical over egalitarian. I do not see why they would change this proven method. It may sound obvious, but communication and media relations are totally different in China than in North America. Foreign firms often forget this in the Empire of the Middle, and the resulting damage can be extreme. It is vital that a knowledgeable “intermediary” be systematically involved in all communications with your Chinese partner. This intermediary needs to fully understand the cultural and linguistic reality of the partner. When dealing with China, translation goes beyond words, and interpretation goes beyond concepts. To make any public announcement without prior approval from your Chinese associates can be dangerous and will most likely create problems. Ensure that the flow of information is well understood by both parties and that there are no areas of ambiguity. The Chinese language is based on semantics, not phonetics. Therefore, it is essential that concepts are expressed clearly to avoid painful misunderstandings later. It is also important to be aware that there are many different dialects in China, so choosing the right interpreter is key. The “RedBerry” story is typical in China and highlights the following reality: Despite being a member of the WTO, in China, the games are different and so are
the rules. The authors refer refers to this reality throughout the case, so I can only reinforce it. Another important point here is that success in Hong Kong does not translate to instant success in China. Actually, the history between the two administrative entities is filled with disagreements and cultural issues. It would be wrong to believe they are the same, especially in the context of doing business. Another interesting issue about this case was the fact RIM relied on the signing of a Letter of Intent (LOI) when considering the partnership with China Mobile to be official. This is a frequent misunderstanding by foreign companies. Signing an LOI or Memorandum of Understanding (MOU) is not the end of the partnership agreement process—in China, it is only the beginning. MOUs and LOIs define the “philosophical relationship” between two partners, and the details must continue to be negotiated. Clearly, the key issue for RIM’s successful entry to China is linked to its encryption technology, and the Chinese authority’s desire to monitor e-mail traffic and content. If there was an easy answer to this issue, RIM would already be fully present in China, and this case would have never been written. So what is the best way to approach this sensitive problem and ensure cultural adaptation, business sense, and strategic alignment? In my experience, when dealing with China, I have realized that answering a very simple question is imperative before making any business decisions: What is in this deal for my Chinese partner? In other words, what are their motivations and business objectives for them to enter into this partnership? If you think they need you, think again. The Chinese have a proven record of learning and adapting efficiently in local and international markets. If China Mobile agreed to partner with RIM (even with just an LOI), it was essential to fully understand why. This in itself may provide clues as to why it is taking so long for the Chinese authorities to get back to RIM to explain the delay. Most importantly, understanding the real motivations for China Mobile would therefore help to establish the preferred way to approach negotiations with them. To conclude, I would agree with all the themes presented in the “Conclusions and Lessons Drawn” section. My final comment would be: Never underestimate the importance of “knowing” them. Being aware of the Chinese culture in all its components (including language, history, geography, etc.) can only help you make wiser decisions. See beyond the business deal!
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Luc Fournier received a B.Sc. (major in Chinese, minor in geography) from the University of Montreal; a Chinese Language Certificate from the University of Nankai in Tianjin, China; a master’s degree in medical geography of the Tibetans from the University of Montreal; and an MBA from the University of Ottawa. Fournier is fluent in French, English, and Mandarin. His main focus is China, where he has studied, conducted research, and worked in both the public and private sectors for more than a decade. Fournier has worked for the Canadian federal government and set up the Visits and Protocol Unit with the international branch, completed numerous legal and contract negotiations, coordinated refugee issues, and managed grants and contributions. He now works for the National Bank of Canada as manager of international trade for Ontario and Western Canada. He is also involved in the overall Asian strategy of the National Bank.
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