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

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).