Ushering In China's service revolution

China is no stranger to revolution, so it's hardly surprising that the country's business leaders and academics are talking about an approaching service revolution that will transform the manufacturing behemoth into a leading global services provider. "The future of China is services," said Gary Bridge, senior vice president of Cisco Systems, to a packed and enthusiastic Shanghai audience at the recent inaugural "Creating Value Through Service" symposium organized by the Center of Service Marketing and Management at Fudan University and the W. P. Carey School's Center for Services Leadership.

China is no stranger to revolution, so it's hardly surprising that the country's business leaders and academics are talking about an approaching service revolution that will transform the manufacturing behemoth into a leading global services provider. "The future of China is services," said Gary Bridge, senior vice president of Cisco Systems, to a packed and enthusiastic Shanghai audience at the recent inaugural "Creating Value Through Service" symposium organized by the Center of Service Marketing and Management at Fudan University and the W. P. Carey School's Center for Services Leadership.

But as many speakers were quick to point out, the lack of an international service standard represents a great challenge to China as its economy moves away from manufacturing — though not without corresponding opportunity. "There is no Edward Deming of services," Bridge said, referring to the American statistician who developed Total Quality Management (TQM), a widely used manufacturing strategy.

"Many people believe that is right around the corner. Someone in this room could revolutionize services by applying the principles of statistical consistency, statistical control, and an understanding of human behavior. If you want to be someone someday, that is a worthy thing to do."

Looking for the bellwether

The mayor of Shanghai was among prominent Chinese government and business leaders and academics who heard Bridge's call to arms. China has been looking westward for guidance in the service industry but often coming up empty handed. The U.S. economy has grown dependent on services, with the service sector now accounting for 80 percent of the country's GDP, but it has done so largely on a company-by-company basis that varies widely between companies and even more so between industries.

"We have more things at lesser cost than any other time in history because of productivity. We are masters in productivity. The problem is we don't have the equivalent in services — it's all company-made, it's all individual. And that is an opportunity," Bridge said. Despite the lack of a generalized service model, China can still learn a lot from key successes of overseas corporations.

The easiest service models for China to emulate are perhaps the most accessible — those multinationals presently expanding in China. One such company is hotel giant Marriott International, which currently operates 36 hotels in China with plans to have 100 running by 2010. Training its Chinese service staff is one of the company's most daunting challenges.

Marriott spends millions of dollars a year on outside customer research, hiring third parties to conduct internal and external evaluations and charting employee satisfaction. In addition, Marriott's whole system of measurement and evaluation is inseparable from, and borne out of, the company's values; what Marriott measures and what Marriott rewards is specific to Marriott.

"We need operating standards, marketing standards, and service standards that are as clear and rigid as manufacturing specifications. So we have standards for everything you can imagine — how to answer a telephone, how many rings it should take, how to check in a customer, how to clean the room.

This brings science and consistency to services," said Mike Jannini, executive vice president of Marriott International. Marriott plans to hire 50,000 people in China over the next year alone, all of whom will gain exposure to Marriott's highly regimented and scientific service culture. IBM's manufacturing-to-service transition, on the other hand was much less capital-intensive.

Though IBM started out selling computers to corporations and government agencies, by streamlining processes, focusing on core competencies, and outsourcing — strategies easily within reach of Chinese companies — IBM became a world leader in information technology solutions, and now makes $1.27 from services for every $1.00 it makes from products. But the transition doesn't come easily. "The traditional way of thinking was that the only reason you need services is to fix things that break," said Bridge. Companies have to overcome significant resistance to redefining the very core of their business.

There needs to be companywide enthusiasm for the change. General Electric, which had sold jet engines for years, redefined its business as selling airtime. "That is, pay me the number of hours you want to be in the airplane and I will be in charge of the maintenance, I will be in charge of the parts. You just fly the plane," explained Bridge. "That is the story of services and profit. That is the next stage for China."

Transition has begun

Some Chinese companies have already begun the transition. China Telecom has moved away from providing basic connectivity to selling consumer-driven service bundles. China's largest automaker, the Shanghai Automotive Industry Corporation (SAIC), which set up the country's first auto-finance venture in 1994, is planning for a large-scale shift in focus with plans to outsource non-core businesses and implement integrated management schemes to cut costs and improve service quality.

SAIC Board Chairman Hu Maoyuan told the Symposium audience, "Right now, manufacturing remains our biggest source of revenue. But it will be services in the future." Despite the country's reputation for producing cheap copies, many Chinese companies are realizing that mindless reproduction is a relic of the manufacturing era. Services require trend-setting behavior, and Chinese companies are discovering on their own that the real secret of service is constant innovation.

One of China's homegrown service success stories is China Merchants Bank, the country's sixth largest. "China Merchants Bank is not government sponsored — we cannot survive without a focus on creation and innovation," said its president, Ma Weihua. While the bank was still a young venture, it began offering free drinks and food to its customers.

The larger state-owned banks scoffed but the gambit paid off, helping the fledgling bank cement its reputation for forward thinking and understanding customer needs. The initially ridiculed free refreshments were the first in a series of ground-breaking innovations: the country's first "all-in-one" bankcard, giving out numbers to curb long lines, and reliable online banking. "Service is the number one reason for China Merchants Bank growth," said Ma.

Writing the book on services

Regardless of where the sparks for the Chinese service revolution originate, because of today's global recognition of services' added value, China may have an advantage in the race to "write the book" on service. Ctrip, the country's leading travel booking agency, recently implemented one of the world's first Six Sigma service management systems. "We are in the service science frontier," said Christian Gronroos, a professor at the Swedish School of Economics and Business Administration in Finland.

It's a frontier that Stephen Brown, executive director of W. P. Carey School's Center in Service Leadership, feels is essential not just to China's development but to the development of the rest of the world. "In today's globalized economy, services are the major area of economic growth and this is very relevant to everyone, not only in China but also in the Western world," he said. "All parts of the world are recognizing that service growth is the route to economic prosperity."

Even in the early stages of its manufacturing-to-services transition, China has already proved a fertile testing ground for a multitude of individual domestic and international service systems. As the revolution gets underway in earnest, China may just develop the service management system that the rest of the world will be copying tomorrow.

Bottom Line:

• China's sustained economic growth is dependent on the successful transition from manufacturing to services.
• No comprehensive service blueprint exists as American industries developed service strategies internally, company by company.
• China should look to successful Western service models for guidance but the country is uniquely positioned to develop its own service management systems.

The W. P. Carey MBA-Shanghai, launched in 2003, is an accelerated executive program for CEO-level participants and top government officials. The vision of the program is to cultivate world-class executives for China's state-owned enterprises and to advance Sino-U.S. trading relationship.