Diga: The key to cost control lies in the details

“Telecom manufacturing is no longer a high-margin industry.” Diga often reminds his employees, because he wants everyone to change their minds and control costs carefully.

Early last year, Gerard Dega was appointed President of Alcatel Shanghai Bell (ASB), responsible for the company's overall business and operations. It was a tough job, as the multi-billion-dollar telecom equipment maker, like all its rivals, faced a downturn in China's telecom market. "The total market volume is shrinking, and operators are constantly lowering purchase prices."

After Diga took office, in addition to helping ASB improve its position in Alcatel's global architecture, it has more product lines and R&D resources. In addition, an important measure is to comprehensively implement cost control in all areas of the company's procurement, production, R&D, sales and daily operations, in order to maintain profitability and sustainable development in the sluggish market. "Cost control should become a culture." He once asked all employees to fully support this culture in an open letter.

After more than a year of hard work, the cost of some of ASB's key products, such as optical communication products, DSL, and base stations, has dropped by more than 30%, and the cost competitiveness is being reflected. At the same time, the stable financial position with cash flow of 5 billion yuan also makes Dega full of confidence in ASB's competitive prospects in the upcoming 3G era.

Compared with China's local telecommunications equipment manufacturers, multinational companies usually emphasize that their competitiveness comes from technological advantages, rather than price advantages. Now that you emphasize the importance of cost control to ASB, does it stem from the price war pressure in this industry?

In the past, people believed that multinational companies had obvious technological advantages, while Chinese enterprises had the advantage of low prices. In fact, this difference is narrowing, Chinese companies continue to improve their technical level, and we also need cost competitiveness.

Especially in the past two years, the overall investment in China's telecommunications industry is in a downward trend, coupled with some uncertain factors, such as the uncertainty of the reorganization of telecommunications operators, and the lack of 3G licenses, etc. The major operators of our company, that is, our main customers, are becoming more and more cautious in their investment and pay more and more attention to the price of their products. Therefore, price reduction has become a weapon for everyone to fight for their share. In terms of price, we must be able to maintain the same level as our local competitors.

In fact, no matter whether the market environment is strong or weak, cost control always exists. However, when the market is in a downturn and the business volume shrinks, cost control is particularly important.

In your opinion, which parts of ASB's cost structure have significant room for reduction?

There are two parts. One is the cost associated with the product. ASB is now included in Alcatel's global procurement system, and can enjoy the group procurement advantages of international suppliers, which is very beneficial for us to reduce product costs. In addition, if ASB wants to maintain the same level of prices as Chinese companies, it must operate at Chinese costs. This means that procurement, production, and research and development must be localized, and there is a lot of room for cost reduction.

The second part is fixed costs, which cover all aspects of the company's daily operating expenses, and there is a lot of waste here. I expect employees to be very careful with every dollar spent. We have taken some actions to more rigorously review the company's various expenditures process and bring the cost base under control.

For example, ASB is currently implementing the "E-reimbursement" electronic reimbursement system. All expenses including daily expenses, travel expenses, and customer reception expenses are reviewed and reimbursed through this network system. The expenses incurred by each team and each employee can be easily counted and controlled, avoiding many unreasonable expenses in the past. Moreover, the full implementation of electronic payment has also avoided a large amount of cash flow within the company.

What specific practices does ASB have in terms of controlling product costs through localization?

The raw materials and accessories are sourced locally as much as possible. Last year, ASB's domestic purchases amounted to nearly 500 million US dollars. In addition, more Alcatel's advantageous products, such as microwave products, signal systems, etc., have been transferred from France and Canada to Shanghai for production, reducing costs and shortening lead times. In addition, we established a new R&D center in Chengdu this year to undertake more R&D designs in the global architecture.

Localization of R&D. On the one hand, because many of Alcatel's previous products were designed for the European or North American market, there are some functions that the Chinese market does not need, and the price is expensive. It is now very convenient to remove those redundant parts according to the needs of local customers, or to tailor new products. On the other hand, you know that compared with East China, the commercial costs and human resources costs in western China are much lower. The choice of Chengdu to build a new R&D center is also due to cost control considerations.

In China's telecommunications manufacturing industry, companies pay very high cost of sales in order to win customer orders. For example, maintaining customer relationships with large expenditures is often considered indispensable. What is your current attitude towards ASB's control of cost of sales?

This is a problem we have to face. In doing business, it is important to establish and maintain good communication with customers, and this part of the cost is unavoidable. But now ASB's principle is to minimize and use the money where it is needed, and salespeople must always keep cost-savings for the company in mind.

Compared with its Chinese competitors, ASB has a competitive advantage in the cost of sales in overseas markets, and the cost is much lower. Because we can take advantage of Alcatel's existing global network of customer relationships. Over the past few decades, Alcatel has established offices in almost every country and has accumulated a lot of market resources. ASB does not need to invest high market development costs like Chinese companies that have just entered the international market. We will try our best to take advantage of this. Next year, the proportion of overseas markets in the company's business will increase from the current 30% to 50%.

There must be some domestic salespeople who are used to the relatively unconstrained spending of the past. Will they complain? How do you communicate this with your employees?

There is a phenomenon that some employees don't pay attention to cost control because they have worked in that culture for many years, especially the telecommunications industry is very profitable in the past few years. Now they will come and tell me that they can no longer entertain customers with the best red wine, luxurious shark fin feasts, and customers will be unhappy. Therefore, we must first change the concept of front-line sales force. Telecom manufacturing is no longer a high-profit industry, and our way of thinking must change accordingly. It is impossible for customers to ask us to reduce the price to the lowest level, and also hope that we can maintain this luxurious life. I myself often communicate this with customers, and they can understand.

The key to cost control lies in the details, in each employee, so the first thing is to communicate. I spent a lot of time this year to let employees understand the current market difficulties, the intensity of competition, the gap between company performance and expectations, etc., which will let them know the importance of cost control. Every quarter, I conduct online communication with all employees. Every month, I write letters to you, hold employee symposiums, etc. There are many ways to communicate. The savings of tens or hundreds of yuan by one person may not be a big deal, but the accumulation of more than 6,000 people in the company every year is a considerable number. Cost control exists at all levels and in all areas of company operations. I hope that employees have this attitude at all times. This should be a culture.

I heard that you always choose economy class when you travel for business? What specific cost-saving actions have you and your top management team taken?

Yes, I never fly first or business class, not even on business trips to Europe. My management team is all the same, we can't fly first class by ourselves and ask employees to fly economy class in the back, it's going to feel bad. I live in a hotel like the staff, four-star, standard room, no more than 450 yuan, this is enough.

The top management team has cut down on unnecessary business trips and more opted for video teleconferencing for long-distance communication. Even on business trips, everyone tries to keep their schedules as compact as possible. Of course, more importantly, everyone needs to improve the efficiency of their own responsibility to speed up the operation of the business.

Are you satisfied with the effect of enhanced cost control?

Our key products are now down more than 30%. And we currently have a cash flow of 5 billion RMB to face the future market, especially the competition in the upcoming 3G era. When new technologies are just emerging, competition will be difficult, and it is often necessary to use gifts to expand business in some projects. At that time, a stable financial situation can give the best advantage. What we are doing now is laying the groundwork for the future.