China vs. India: A Think Tank Perspective

More often than not these days, U.S. firms have to make the dyadic choice of China or India, in essence, pitting China against India, India having the perceived advantage in all things IT and China having the perceived advantage in all things manufacturing. For reasons I'll describe in my forthcoming “Lou Dobbs is Right – and Wrong” column, it's a perfectly legitimate and often desirable situation for U.S. firms. In this column I'm going to discuss the findings of an 18-month study by a U.K.-based think tank that were recently published as The Atlas of Ideas, with a specific focus on their two chapters on China and India. But first, a bit of background.

Although the “China vs. India” debate is hot and few international business topics in our sector generate more discussion (some do, like IPR), the impetus for this column was the recent survey results published by The Chicago Council of World Affairs titled, The United States and the Rise of China and India. It's the first multination survey I've seen that does a deep dive specifically focused on this issue.

Many results were a bit surprising (well, at least to me). For one thing, “Protecting the jobs of American workers is the top-ranking foreign policy goal, considered very important by more Americans than any other.” (Note: There were 14 choices, with two pertaining to terrorism and nuclear weapons; both ranked lower in importance than job protection.) And, “A majority (of Americans) believes outsourcing is mostly bad because of job losses in the United States.” “(T)he top-ranking foreign policy goal”? I find this interesting – and odd – since offshoring is a minor blip on Washington's radar. And if you don't believe me, take a look at the tech-related hearings on Capital Hill: Don't see much about offshoring or outsourcing, do you? Some smart Senators and Congressmen may opt to jump on an anti-outsourcing/offshoring bandwagon next year; it might be a wise political decision, even though nobody reading this may think it's desirable (since I'm in the outsourcing/offshoring biz, I hardly believe it's desirable).

I was also surprised that Indians view their influence in today's world and in Asia as ahead of China. Let's see: Which country has a permanent seat on the U.N. Security Council, which country (by default) has funded the U.S. war effort in Iraq, which country has a vastly superior infrastructure, ...? (Indian nationalism, I guess. Kind of like Chinese nationalism. And in both cases, it's more like neo-Fascism.) “Among the publics in China, the United States, and South Korea, India places at the bottom of the list of nine countries asked about in terms of world influence today. In ten years, India's influence is seen as rising, but not by much, placing last again in almost all cases.”

“India is also not recognized as a leading source of innovation today, and while it is seen as rising in ten years more than other countries, it still places low compared to other countries.” Also kind of cute that both Chinese and Indians perceive that in ten years their country will be second only to the U.S. in innovativeness. (My eyeballs are spinning in opposite directions.) And for all the hype about U.S.-India relations, Americans have a “mainly negative” view of India, albeit a better view of India than China, desiring decreased influence for both countries. However, both Chinese and Indians want decreased influence for the States, with Indians wanting significantly decreased influence. I did find it interesting that there are a lower percentage of Indians versus Americans who believe that globalization is mostly good for their country. No surprise here: 87% of Chinese view globalization as a good thing.

The Demos Report

The Atlas of Ideas chapter titles pretty much give their take on China and India. The chapter titles: “China: The next science superpower?” and “India: The uneven innovator” Need I really say more?

How's this for a lead paragraph: “China in 2007 is the world's largest technocracy: a country ruled by scientists and engineers who believe in the power of new technologies to deliver social and economic progress.” “Right now, the country is at an early stage in the most ambitious programme of research investment since John F Kennedy embarked on the moon race.” In contrast to President Bush (and Clinton, GHWB and Reagan), China's President (Party Chairman) Hu is an engineer by training, a graduate of Tsinghua University, China's MIT. (Full disclosure: The company I'm with, Startech Global, is the IT and engineering services outsourcing hub for Tsinghua.)

And when it comes to R&D prowess, note the following: “In December 2006, the OECD surprised policy-makers by announcing that China has moved ahead of Japan for the first time, to become the world's second highest R&D investor after the U.S.” China's leadership acknowledges that their country faces acute challenges, such as pollution and a scarcity of energy resources, but also believes (perhaps idealistically) that these can be overcome only through a new focus on “zizhu chuangxin” -- “independent innovation.” Yes, there's life beyond the illegal copying of DVDs.

Where does IT fit in all of this? As a subscriber to China's science and technology policy daily newspaper, I can say that a plurality of coverages goes to ICT (not just IT, but also including communications; “ICT” is the acronym used in China). When the blurry line (and it's truly a blurry line) is broadened to include electronics and semiconductors, then a majority of coverage is devoted to the IT value chain – from semiconductors to enterprise software, with energy, agriculture, biopharm and environmental technologies also receiving extensive coverage.

Fortunately for American ISVs, China's technoeconomic environment provides many paths to tapping into China's R&D capabilities – for cost savings, staff augmentation and even for access to talent that is hard to find in the States. In the National Academies Press 2005 report, Rising Above The Gathering Storm, it was noted that “for the cost of one chemist or engineer in the U.S., a company can hire about five chemists in China or 11 engineers in India.” In fact, I have personally observed that the labor arbitrage difference is the largest in an absolute sense the higher a firm opts to go on the value chain. For example, a Ph.D. who is paid $125 per hour in the States (whether fully-burdened or on contract) can be billed at about $25 per hour, whereas a $75 per hour Java programmer (an average Joe Java programmer, not a superstar) can be billed at between $16-18 per hour. And a superstar Java programmer: $100-125 per hour in the States, whereas a Tsinghua equivalent is billable by us at $20-23 per hour. As to the 11-to-1 ratio noted by the COSEPUP report, it's certainly doable (not always, but sometimes) in certain areas such as software testing where talent in Tier 2 cites can be tapped. Advice: Don't go to Beijing, Shanghai or Shenzhen for software testing or localization/globalization. And even though I personally don't like BJ, the best high-end talent is in BJ, not in SH, SZ, DL (Dalian), or anywhere else in the mainland.

The Demos chapter on India begins in glowing terms, even noting that according to Goldman Sachs, India has the potential to grow faster than China in the long term. (From its smaller base, perhaps; in absolute terms, not likely. And the GS position is hardly a consensus viewpoint.) Nevertheless, whereas “India everywhere” was the slogan for the Davos World Economic Forum in 2006, it certainly wasn't this year. Even BusinessWeek has sounded a warning as noted by their recent cover feature titled, “The Trouble with India.” (The podcast can be fetched here.)

Now to IIT. As wonderful as IIT is – and I personally believe the IIT produces many of the best software engineers in the world – the Demos report correctly noted that “IITs are not prolific centres of research. They do not produce new inventions, and unlike MIT or Stanford, they do not excel in creating spin-off companies.” And hold on to your seats for this one: In all things I(C)T related (across the value chain), there are over four times as many English-language papers published in China versus India. Over four times as many!! In English. And as measured by the Science Citation Index and the two largest EE/CS databases. (See this data point.) Since Tsinghua publishes the most technical papers (SCI source journals) and has been granted the most patents of any university in China, it's quite possible that Tsinghua alone matches the output of the collective of IITs. Tsinghua (alone) = all IITs (combined). Please remember, it's not about Chinese versus Indians; it's about China vs. India.

In reality, both countries face significant development hurdles. Scientific and technical progress is not guaranteed, regardless how much money is thrown at it. Each country needs to build a culture that thrives on innovation. And both countries need to deal with deep systemic problems like corruption. According to Transparency International, China and India share something in common besides large populations: They both are among the most corrupt countries in the entire world. But as far as our industry is concerned, it's most likely that India will continue to lead China for the foreseeable future. My point, however, is that China should be considered much more than it is, especially by American ISVs. (Note that when it comes to packaged apps integration, don't bother with China; in anything and everything to do with packaged apps, India reigns supreme among all offshoring destinations.) Finally, in the new, hot area of engineering services outsourcing (NASSCOM's favorite new TLA – three letter acronym – i.e., “ESO”), China will most likely beat India for a host of reasons that I'll address in forthcoming columns.

Based in China, David Scott Lewis is SVP with Startech Global Corporation, the outsourcing hub for Tsinghua University (China's MIT).