26 April 2007

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).

24 April 2007

(Anti-)China Bashing For Dummies: "The Coming China Wars" (and Other Hysteria)

China is a remarkable country. Within her borders one can find pristine, upper-class enclaves similar to Woodside, Bel Air and the Upper East Side, but also Fourth World shantytowns. During my three years living here, I've seen the glitter in Shanghai and the tranquil beauty in the expat suburbs of Beijing (truly sights to be seen; the cast of characters looks like something out of “Desperate Housewives”). But I've also experienced the flip-side of China, such as horrific poverty in parts of Henan Province (China's second most populous Province), a place misunderstood within China as being synonymous with HIV/AIDs, prostitutes, thieves and murderers. (The most popular meme in China's blogosphere is about the rampant discrimination faced by Henan migrant workers.)

I've also had the good fortune to talk with many "citizens" and "villagers" (more "citizens" than "villagers", but at least I've had a lot of feedback from the disenfranchised, too). Good ties to the best in China's academia, mainly professors and researchers affiliated with Tsinghua University, China's MIT. The company I'm with is the outsourcing hub for Tsinghua, so our affiliations run quite deep. And, thanks to Startech, I also have some links to Beida's elite (“Beida” is better known in the West as “Peking University”), as well as connections with Undersecretary equivalents within the Ministry of Science and Technology (MOST). Yet, although the intelligentsia is superb for a round of dialog and debate, the best discussions I've had have been with patrons of various Starbucks and some other (trendy) coffee bars.
(They're called "coffee bars" in China.)

I like to frequent the coffee bars, especially a particular Starbucks, one of the nicest Starbucks I've seen; not the fanciest or largest, but nicer than any I can think of in the Mid-Peninsula. I go there with my laptop (of course), but I also go armed with printed copies of China Daily, Shanghai Daily and Beijing Review, plus any current notes I have from China's two science and technology daily newspapers. (Yes, China has two national science and technology dailies.) And I have a little trick that I use to attract attention -- I'm trying to engage Starbucks patrons (primary market research). My trick: While I'm reading Shanghai Daily, for example, I leave my laptop open and displaying the title page of a report or article with a catchy (preferably provocative) title. My favorite, and the one that has attracted the most attention, is titled Simulated U.S. and Chinese Nuclear Strikes. Download it and you'll see: It displays quite nicely on a laptop; hard to miss even with a casual glance. My trick is often successful; in a short time, I'm off in discourse with a "citizen". I know that my audience is skewed: In China, Starbucks is mostly for the young, spoiled (or affluent), often with some overseas experience. But although it's a skewed audience, it's certainly different (and a generation younger) than my Tsinghua cohorts.

One of my most interesting encounters was with a women who is the equivalent of a First Lieutenant in the PLA (People's Liberation Army). She walked into Starbucks holding a carry-out bag from KFC and then ordered a vanilla latte. I have no love for photography, but this was one moment I wished that I had a camera (or a mobile phone with a camera): Young, female (and fairly attractive) PLA officer munching on KFC fried chicken and sipping a Starbucks latte. As you might expect, her attention was caught by my Simulated U.S. and Chinese Nuclear Strikes article. We talked about the article for ten minutes, but then she switched the topic to China bashing, noting a recent article published in the Global People bi-weekly People's Daily supplement (the links are listed below; the articles are in Chinese). Fortunately, I was aware of the article so I wasn't caught by surprise. The Global People cover story titled "Who is Viscously Attacking China?" goes on to discuss numerous China bashers. (An episode in finger pointing, as noted by the cover.) She was visibly upset by the article, feeling that there is way too much China-bashing coming from America, Japan and even Russia. To her total surprise, I was on her side.

People who have read my columns know that I'm hardly Polyannish about China. I don't pull my punches -- and I see a lot of problems in China. When I saw "Borat," I almost fell off my couch laughing: Many parts seemed like they were straight from China. All sorts of problems here: Nationalism/neo-Fascism, pollution, the widening gap between the rich and poor, endemic corruption, a lousy (almost non-existent) social net, atrocious health care (and to call some physicians here a "quack" would be paying them a compliment), food and pharmaceutical safety issues, moral decay. But there is way too much China bashing, which I define as stupid, unsubstantiated, anti-China (almost xenophobic) remarks, regardless of venue. What the PLA officer didn't know (and what the Global People cover story failed to mention) is that there's a new cheerleader among the China bashers: Peter Navarro, a professor at UC Irvine. His new book: The Coming China Wars: Where They Will Be Fought and How They Can Be Won.

I'll take a two-pronged (two-part) approach to countering his arguments. First, I'll scrutinize his scholarship, really his lack of scholarship. In the second part, I'll counter the arguments he made in his cover story that appeared in the December (2006) issue of Financial Executive. Neither space nor time permits a more thorough analysis.

The article is based on the book, so let me rip to shreds the so-called “scholarship” supporting many of the most absurd claims made in his book. Regardless that some Amazon reviewers were impressed by his research, the fact is that his research is abysmal. Let's start with his footnotes (a downloadable MS Word document). My primary concern is that his sources are shoddy at best. I'm not terribly impressed with the sources he cited. Not too many scholarly or research publications. Frankly, I download more English-language scholarly or research pubs on China in one month than he cited in his entire book!! Even among English-language business mags and trade rags, he didn't cite a wide variety of sources. My reading list for this past week alone included sources from the Morgan Stanley Global Economic Forum, ADB, World Bank, Brookings, European Foreign Affairs Review, Journal of International Marketing, and the usual stuff published in everyone's favorite dailies and weeklies. For trades, this past week included articles about China published in a dozen different periodicals. All of the above -- consumed in just the past week (and this past week wasn't particularly special). In comparison, it's hard for Navarro to claim that he really did his homework. For a high school civics class, his research is fine. For a professor at UCI, it's pitiful, especially since he makes a lot of sweeping, breathless claims (and with confrontational verbiage).

Navarro didn't cite many English-language China (or related) online dailies, either. He had only three footnotes from Xinhua, only four footnotes from People's Daily, five footnotes from China Daily, four footnotes from Asia Times and nothing from China Economic Net, Shanghai Daily (or their Eastday online edition), Shenzhen Daily, or ChinaTechNews. And let's not forget Hong Kong's best: the South China Morning Post (SCMP; only one footnote) or The Standard. Or my favorite English-language source, the PLA Daily. (Rats, no business section! Perhaps they should add a “doing business with the PLA” section. I admit, I read this for amusement purposes only.) Unfortunately, many of these seventeen footnotes are rather dated, pre-Hu Jintao era. Considering what recently happened to Chen (the deposed Party chief in Shanghai) and many other Jiang Zemin cronies, what's important to consider today is the reality of the Hu/Wen dynasty ... a dynasty in power until 2012.

What's also unacceptable is that he didn't even cover the "basics" among China's leading Chinese-language dailies, namely the government-sponsored Renmin Ribao (the "real" People's Daily), Ta Kung Pao and Wen Wei Po; the three main government wires (sans Xinhua variants), i.e., Zhongguo Tongxun She, Zhongguo Wang (which has an English version) or Zhongguo Xinwen She (also with an English version; he had one footnote from ZXS); or, the relatively independent Ming Pao, Sing Tao Jih Pao (well, this is somewhat pro-Beijing -- kind of like the KMT kissing up to the CCP) or The Hong Kong Economic Journal.

I consider all of the above "must reading" for any writer of a book about China, and for Navarro to simply skip over a lot of potentially relevant sources is inexcusable. Perhaps he consulted some of the aforementioned sources and made a conscious decision not to use them. But if he did, then he's playing into his own biases; like it or not, there's some pretty good analysis -- let's call it what it is, "apologetics" -- in some of the leading China dailies and Party journals. Hard to give a balanced perspective when one chooses to ignore possibly conflicting sources. In order for his book to have legs, he needed to demonstrate not just pithy journalism skills, but true scholarship. Instead of the New York Times, his book has the credibility of the National Enquirer.

I have a problem with Navarro's tone, too. He sounds omniscient, as if he's the only one that can notice the problems that China is facing. In fact, the central government is well aware of the challenges facing China (as are most Chinese). But if you listen to the book's audio excerpt or to his Bloomberg interview (the link is to a MP3 file), you'd likely come away with the impression that he's an alarmist at best, racist/extremist at worst (and with a bad attitude, to make things even worse). Bottom line: Discount and skip Navarro (and I'll continue to substantiate and reiterate this conclusion in my follow-up column).

For one of the best and most balanced pieces I've read about China's rising, see the recent cover story in TIME. I feel that it ends way too abruptly, so I'll pick up the pieces in my forthcoming “Letter from China” column that also tackles Navarro's absurdum in FE (i.e., the second and concluding part of this column). And if you'd like to read a balanced e-newsletter that focuses on China's challenges, I'd like to suggest China Brief from the Jamestown Foundation; China Brief often cites Chinese-language sources, the lack of which is one of the main criticisms I have of Navarro's so-called “research”.


Links to “Who is Viciously Attacking China?” special section in Global People:







Note: “03” is an introduction to this special section; “11” and “12” have the most interesting analysis as to why there is a lot of China bashing. I don't agree with their reasoning (it's almost as paranoid as Navarro's drivel), but it's a good read.

Originally published as a Sand Hill Group "Letter from China" column on January 26, 2007.