It's “IPR Week” in China (or, "Why I Watch '24'")

For better or worse, this will likely be the first of many columns addressing IPR issues in China. In fact, the key reason for not doing software development in China has to do with IPR. It's not about English-language skills (even though they're much worse than most imagine; don't believe the hype from China's government or the drivel from American “tourist” executives fooled during visits to elite Chinese universities), it's not about technical capabilities (in hard skills sans apps integration, China can easily match India; only in soft skills like project management does India do better).

For our sector, there is an adequate supply of English-capable (I didn't say “fluent”) engineers. And, let's be honest, at the grad level, China's technical universities absolutely kick India's butt. (Once again, back to my “China vs. India” thread.) What about cost issues? I laughed when I read about Indian firms complaining about high costs in China. The joke is on them (re: TCS, among others), which I'll explain in a forthcoming column, “Why the Indian Globals Will Fail in China” (working title). Cost isn't an issue. It may not be as cheap in Beijing, Shanghai or Shenzhen as some American firms would like, but it's still cheap compared to numerous global alternatives, and let's not forget that BJ, SH and SZ are not the only options in China. So it's not about English or technical skills, or costs. It's really about IPR.

IPR: A Real Concern in China; “IPR Week”: A Total Sham

Fortunately, IPR protection is a recurring them in China's tech policy press: It's recognized as the greatest bottleneck to innovation in China. To some (re: many Americans), China makes a good living by copying others. But within China's tech policy community, there is an understanding that China can't continue to copy and must invent its own technology. China also knows that if it wants to attract FDI in high tech sectors, they need to address IPR issues, although foreign concerns are not the driving force behind advancements in IPR protection. So what's the driving force? Answer: Protection of domestic innovation, i.e., innovations by Chinese companies within China's borders.

“IPR Week,” on the other hand, is much more for show to Westerners. For example, there was a disproportional amount of coverage on “IPR Week” in China's English-language press (e.g., China Daily) versus in China's leading national and trade dailies. China's tech policy daily did mention “IPR Week” on its front page, but it was the shortest article on its front page; it was supplemented by a nearly identical article (written by a different author) buried on the last page of that particular edition. But CCTV showed a crowd of thousands interested in learning about IPR. Gotcha!! In fact, the camera showed maybe just a dozen or so ... at most. Hardly a pressing issue on the Chinese psyche.

However, there was one fascinating article on IPR protection that was the lead article in another edition of China's tech policy daily this past week (i.e., during “IPR Week”). It was a report on a conference session held in Beijing that featured five companies from south China. Their topic: How Western firms abuse IP laws to keep Chinese companies off their domestic turf!! Bottom line: According to the Chinese, foreign companies and countries bully Chinese companies by taking advantage of their domestic court systems, challenging Chinese firms with Section 337 actions. Well, this is certainly one way of looking at the world.

One problem with IPR protection in China is a lack of knowledge about IPR fundamentals. Often Chinese firms don't know what is legal, what is illegal. For example (as this is good one), many Chinese companies really don't know that they can't use existing technologies still under patent protection to create a newer technology without paying royalties to the patent holders of the existing/core technologies. This absolutely stuns the Chinese.

However, the biggest impediment to IPR protection has nothing at all to do with the WTO, WIPO, or the legal systems in China or the United States. Fact is, the greatest challenge to IPR protection in China is culture. The anecdotal consensus among mainlanders is that it will take a couple/three generations (yes, generations) for Chinese to fully appreciate IPR. The key problem is that Chinese people don't perceive that they're doing anything wrong when they use/borrow/steal someone else's IP! I give a lot of credit to the Chinese government for taking a gazillion steps in the right direction. But, sorry Beijing, you can't easily legislate cultural habits (although turn the clock back 40 years and maybe they think it's still doable).

Who Says That Watching “24” is a Waste of Time?

Want to enter the China market? Good for you. Think you can do it without using Chinese service providers? You're in for a big surprise. Sure, you can service MNCs in China without too much interference from some entity of the Chinese government. But if you have grander visions of broader market penetration, you might already know that there are unwritten rules to playing in the China market. (In some ways, India can be much worse. Think retail in India. But this column is about playing in China's sandbox.)

Some American firms believe that they can best control their IP developed in China by running a captive operation. Probably true, although not likely the best way to start. Either the captive operation would be too small to matter or there would be too much risk in launching a significant development operation. ODCs – offshore development centers – are a better way to go. Our firm does this: One of our offerings is to help American ISVs set up R&D or software development ops in China, starting with an ODC, often staffed with Tsinghua grads, coupled with a BOT (Build-Operate-Transfer) option that enables the ISV to flip a switch and turn the ODC into a CDC – captive development center. Enough of a commercial, though.

Regardless which route an ISV chooses, it's best to take Andy Grove to heart: Be vigilant, be paranoid. This is where the Jack Bauer analogy comes to mind. Security, security, security. Physical and data. Don't take any unnecessary chances. Chinese companies tend to rely on Rent-a-Cop guards and easily crackable access cards (I know, trust me) for the bulk of their security measures. Sorry, but this isn't enough.

Physical and data security is best ensured through a combination of CCTV video surveillance, biometric access control and verification systems, intrusion detection, perimeter protection, keyloggers, no removable media, restricted Internet access, document destruction, randomized polygraph testing, counter-eavesdropping and zero-day exploit shields. Sounds like something out of Ft. Meade? Perhaps. But most of these measures are a lot easier to implement than they may sound.

For the latest government developments on IPR protection, see my recent Tech China blog post titled, “China’s Action Plan on IPR Protection (or, Why I Have “12312" on My Speed Dial)”. A copy of “China’s Action Plan on IPR Protection 2007” is included in the post. The post mentions the new Blue Book as well.

NEXT: IPR: What Beijing Wants YOU to Know

Based in China, David Scott Lewis is SVP with Startech Global Corporation, the outsourcing hub for Tsinghua University (China's MIT). In addition to his bizdev/GAM responsibilities, he authors their Tech China blog.

Originally posted on 30 April 2007 on the Sand Hill Group "Letter from China" blog.
Image courtesy of MIT.

Make IT in China, Integrate IT by India

It's all about the Golden Triangle: The U.S., China and India (in this order, although “USIC” makes for a better acronym – and I still prefer “Golden Triangle”). There is some talk about the BRIC countries, stressing that Brazil and Russia should be added to the equation, but this is farcical. Even BRIC protagonists acknowledge the fact that China has a GDP that exceeds the combined GDP of Brazil, Russia and India – and this won't change for the foreseeable future. Frankly, China stands on its own, with India a distant second, and Brazil and Russia both small objects in India's rear-view mirror.

Within the framework of the Golden Triangle, the most important question to be answered has nothing to do with IT, IPR or R&D, but “whether the conceivable rise of China and India to become potential great powers in the coming decades, (and) the accompanying relative loss of power of the USA ... will lead to a renaissance in the power rivalries of great actors and possibly even to violent conflicts.” The February report issued by the Friedrich Ebert Stiftung Foundation goes on to note that “many neorealist authors consider military conflicts between rising and declining hegemonic powers as almost inevitable,” something implied by Henry Kissinger during his recent trip to China. And whether the dawn of a de facto East Asian NATO will make war less likely is anyone's call, especially since China is already developing capabilities designed specifically to thwart U.S. Pacific Command forces. (See the 2007 RAND Report titled, Entering the Dragon's Lair: Chinese Antiaccess Strategies and Their Implications for the United States.) This column, however, assumes that armed conflict is not inevitable. Wishful thinking on my part? Perhaps, but I hope not.

On the macroeconomics level, it's all about trade (which I'll cover in another column) and the RMB. As we all know, there is seemingly endless chatter about the need to revalue (actually, upwardly value) the RMB, although there are voices of reason from the likes of Morgan Stanley's Chief Economist as noted in his testimony a few weeks ago before the U.S. Senate Finance Committee. Besides, a discussion paper published by Japan's Research Institute of Economy, Trade & Industry found that a unilateral appreciation of the RMB wouldn't have a major impact on addressing trade imbalances. (Uh ... hasn't Greenspan been saying this for the past several years?) Fortunately for China, there are also voices, such as Lloyds TSB, crying out for revaluation of both the renminbi and Indian rupee. Very slight advantage to India, if for no other reason than the fact that revaluation of the renminbi gets a lot more mind share in the States than revaluation of the rupee.

Although revaluation is a “big picture” item, it's hardly a show stopper to doing business in or with China, especially when comparing options versus India. So, how does China stack up against India, especially as a destination for software development? This is the main issue I will address in this essay, albeit primarily from the perspective of third-party offshoring and outsourcing options for ISVs.

One key point to consider is that sales of “Made in China” software exceeded $30 billion last year – and this is a conservative estimate. This is a larger number than the combined top line of the top Indian globals, but I realize that it's not an apples-to-apples comparison. Nevertheless, $30 billion is a huge sum, especially considering the ASP of a typical software package in China. Translation: That's a lot of units!! And although some may think that it's primarily embedded, well, think again: UFIDA alone employs over 10,000 software engineers (possibly as many as 20,000) – and their focus is on the enterprise space, not the embedded sector. How many software engineers are employed by Infosys?

Fact: The reason that China's ITO sector is behind India's is not because China's software industry is weaker than India's, but because the main driving force is the domestic (in China) demand for IT services and software engineers. Think Baidu. Think Alibaba. And keep thinking. It's a long, long list. My point is that China should not be discounted; China can do a lot more than just localization (L10N) and manual software testing. How about conversion of UML system models into a rigorous RTPA notation (let's face it, UML is hardly rigorous), model abstraction as a route to cost-effective model checking, using use cases for requirements validation through simulation, or mixed language programming (because sometimes Java just isn't enough)? This is all about state-of-the-art software development; it's also all about what can be done in China.

One problem is that India's ITO sector gets India's best and brightest; unfortunately, the ITO sector in China gets China's dumb and dumber, the better software engineers opting for MNCs or domestic ISVs. Fortunately, there are exceptions to this general rule. Of course, we're an exception. (Hey, we're Tsinghua. What can I say? MIT-ish talent pool.) And other exceptions include Augmentum (a Silver Sponsor of SOFTWARE 2007), Achievo, Freeborders, iSoftStone, HiSoft and Neusoft. Best-of-breed: You're looking at the list. For my money, I'd say it's us and Augmentum – but I'm biased. But any way you slice it, this is the short list. Don't believe the goofy awards you may have seen; they're an absolute joke, groundless or worse. A web design firm hailed as a top five player in China, a “Top Gun” awarded to a firm that has 90+% of their revs from manual testing and L10N. All the awards are meaningless, a better demonstration of a firm's marketing and PR prowess than its technical development capabilities. But show is big in China. Here it's often not what a firm can do, but how well they can dance. Better metaphor: How well they can sing at a KTV bar.

So am I foolishly claiming that China is on par with India? No, I'm not. What I'm suggesting is that there are some good firms and there's a lot of good talent in China. Enter, software development. But there's one area where China is weak, extremely weak: Packaged apps integration. This is really where China falls flat on its face. Freeborders and iSoftStone do some of this, as does Achievo, but few firms in China can do it well. The best, quite frankly, is the China ops of the old IBM Global Services (I don't recall which name they're using this week.) And with 1,900 applicants for every open req, trust me, they get good talent.

But if I really needed packaged apps integration, even in China, I admit that I'd look at IBM and an Indian global, maybe one domestic pure-play. And if I wasn't in China, I wouldn't look for a China-based integration firm, even if the firm is headquartered in the States (in other words, if the development team is in China and you're in America, run as fast as you can). I'd look at Cognizant, maybe one other Indian global, one American SI. I wouldn't waste my time with a China option. Bottom line: When it comes to packaged apps integration, India is your best port of call. But when it comes to software development and ADM, China should, at the very least, be a port of call.

Next: It was recently “IPR Week” in China. I'm not kidding. A report in my next column.

Based in China, David Scott Lewis is SVP with Startech Global Corporation, the outsourcing hub for Tsinghua University (China's MIT). In addition to his bizdev/GAM responsibilities, he authors their Tech China blog.

Lou Dobbs is Right -- and Wrong

Lou Dobbs, everyone's favorite offshoring gadfly, is right: Jobs are lost as a result of offshoring. The recently published Duke University, Pratt School of Engineering report titled Industry Trends in Engineering Offshoring supports Dobbs' claims. As noted in my last column, Americans view offshoring-related job loss as their greatest U.S. foreign policy concern, so discounting Lou Dobbs out of hand isn't appropriate: His brand of Populism may not be popular in a Libertarian enclave like Silicon Valley, Populism being the opposite of Libertarianism, but it has legs on Main Street, U.S.A.

But Lou Dobbs is also wrong: Companies that are multinationals with corporate headquarters in the States, regardless of size, have no moral or ethical obligation to do what's best for America or Americans – unless directed to do so by their shareholders. MNC executives only have one obligation: To increase shareholder value. That's it. It's that simple.

If offshoring will improve a Company's bottom line, then so be it. If a U.S.-headquartered firm's American shareholders don't approve of a decision to offshore, then they can raise their concerns in a host of ways. One timely example: Disgust over Intel's decision to open a fab line in Dalian as a prominently featured “Comment” in EE Times with the appropriately provocative title “Is Intel evil?,” proof that one does not have to wait for a shareholders meeting or take legal action in order to bring a concern into the limelight. (BTW, I agree with the comment, although more for national security reasons than the reasons noted in the EE Times piece. Fortunately, it's not a state-of-the-art facility.) Bottom line: Executives with multinationals based in the States need to do whatever is necessary to increase shareholder value and this often entails offshoring to China, India, Israel, Mexico, Ireland, pick your preferred offshore destination(s).

Although it's hardly desirable, job loss that may result is irrelevant; executives need to act responsibly and this means choosing among the best shoring and sourcing options. For the record, a recent working paper published by the Stanford (University) Center for International Development notes “that trade with China is, on average, raising the wages of developed world workers and will continue to do so.” (My recent Tech China blog posting analyzes this paper in further detail.) And adding the other three BRIC countries + Mexico, Indonesia and Turkey (the BRIC + 3) into the mix may very well make for an even stronger case for higher wages in developed countries. Yes, offshoring does create job loss, but from a broader, strategic perspective – a global trading perspective – the benefits appear to outweigh the costs.

Taking this a step further from an operational perspective, the smartest and best American executives will pit China and India against each other. And they should. I know that a lot of Chinese and Indians don't like to hear this, but once again, it's a best practice if a firm is trying to optimize their bottom line. To put it bluntly, have China and India grab each other by the throat and go for each other's jugular. Profit from the spoils of war. That's what a responsible executive should do ... needs to do ... alas, must do. Sun Tsu would be proud.

Remember, it's these same American executives who are offshoring jobs and creating job loss back in their home country. Why in the world should they show any mercy whatsoever to China or India? Fact is, they shouldn't. They must not. They must take control of the situation, pit each country against each other as best as they can.

When it comes to manufacturing, look for alternatives to China. Maybe Vietnam. Maybe India (when India can learn to build decent infrastructure). Maybe Thailand. Obviously Malaysia. And don't forget the maquiladoras. Anyway, look for an alternative to China. And when it comes to ITO, look for alternatives to India. Maybe China (actually, probably China). Maybe Israel. Put pressure on China in the manufacturing sector; put pressure on India in the IT outsourcing sector (and BPO, too; don't forget the Philippines). Have no mercy: You've already implicitly approved of job loss in your own home country; to show mercy to China or India would be a sign not just of weakness, but poor executive decision making skills – and to some, it might even be considered an act of treason. Remember, you're not a Christian missionary trying to help Chinese or Indians; you're an executive with the single, laser-focused goal of doing your part in increasing shareholder value.

So now I've said it. I suspect that a lot of American executives feel exactly what I've expressed, but haven't had the courage or platform to make their case. (Yeah, I guess they could write a blog post.) In some ways it's not politically correct. But is creating job loss in your own country politically correct? And who is really, truly stupid enough to believe the nonsense produced by the likes of McKinsey stating that there is minimal or no job loss in the home country (re: United States). We all know in our gut that this is wrong, that McKinsey is being deceptive, trying to make a case that offshoring isn't such a bad thing after all. It's like saying that it was a great thing that your wife had an affair. After all, maybe she learned a thing or two. This is McKinsey's warped sense of reasoning. We all know that this is a pack of lies.

Personally, I'm delighted that RDO (R&D offshoring) is the only highly-skilled business function that results in a net gain of onshore jobs (see the
Duke University/Booz Allen Offshoring Research Network 2006 Survey, Exhibit 2). What I'm doing soothes my mind (as a business person) and soul (as a human being): I'm delighted that Startech – due to our unique relationship with Tsinghua University – is focused on RDO and ESO (engineering services outsourcing/offshoring), and on high-end software development for ISVs that is often merely transferring jobs not from the States to China, but from India to China (again, often in a decision pitting China against India). Given a choice, everyone would prefer to partake in an endeavor that results in job creation in their home country and optimizes shareholder value. But in the final analysis, if my soul is truly the driving force in my professional life, then I should go work for a humanitarian cause. (And some people choose this route. Good for them: The world needs humanitarians, not just business executives and engineers.) Yet, the "cake," so to speak, is business; niceties gained by doing something good for my soul is merely the “icing.”

We've all heard the phrase, "God & country." But it should really be "God & company" (assuming you believe in God). And if "God & country" is more to your liking, well, you can always get a job as a civil servant. Multinationals need executives with vision – a futures-driven global perspective – not executives biased by any sense of Nationalism. McLuhan was right: We're in a global village. Act accordingly.

Based in China, David Scott Lewis is SVP with Startech Global Corporation, the outsourcing hub for Tsinghua University (China's MIT). In addition to his bizdev/GAM responsibilities, he authors their Tech China and ADM blogs.

Originally published on Apr. 16, 2007