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Forbes Column 08: The Next Indo-China War

Posted on Friday, Mar 28th 2008

Here’s my new Forbes Column: The Next Indo-China War. I look forward to your comments and perspective on the issues discussed in it.

This segment is a part in the series : Forbes Column 08


. Connecting With Your Intimate Bot
. The Gap in Google's Defenses
. A Recession-Proof Corner of the Tech Sector
. eBay's Bounce-Back Opportunity
. How To Dig Out Yahoo's Treasures
. The Microsoft-Yahoo! Battle Plan
. What Microsoft Should Do While Yahoo! Dithers
. The Next VMWare
. The Smartest Unknown Indian Entrepreneur
. The Coming Death of Indian Outsourcing
. India - Cash Rich, Product Poor
. How to Save the World's Back Office
. Latin America's eCommerce Leader
. The Next Indo-China War
. The Real VCs of Silicon Valley
. Fund Envy
. Bootstrap Yourself
. The Coming Convergence
. Lighting The Way In India
. Hydro-Alchemy
. How Amazon Could Change Publishing
. A Technological Fix For Education
. How Technology Can Save Retailers
. Mobile Microfinance
. How To Heat Up Solar
. How Chip Toolmakers Can Survive
. Kill The Business Trip
. Water Firm Enlivens IPO Market
. Web-Savvy Authors Reap Fame, Fortune
. Peeking Inside the iPhone
. Bootstrapping, Montana Style
. Entrepreneurs Flock To Online Travel
. Silicon Lazarus
. Carts Ahead Of Horses
. Weapon Of Mass Reconstruction
. Barack Obama' s Finance Lesson
. Stimulus Package For Entrepreneurs
. Building A Smarter Corporation
. Deconstructing The Cloud
. 'SaaS-ing' Back At The Economy
. Web 3.0
. My Adventure With Amazon
. An S.O.S. To Silicon Valley
. OLPC’s Last Billion
. Capitalism Revisited
. Bargains For Private Equity
. President Obama
. Perilous Protectionism
. Healing Health Care
. Stop The Fear Epidemic
. Obama
. 'Edutainment' Needs Entrepreneurs

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Sramana,

You are too much about the company Vanceinfotech. You should considered a better company to compare with indian companies like Infy,TCS or Wipro. I checked their website just to understand their capabilities; it looks Tier4 IT company (as per Indian IT standards) and got listed just few months back in NYSE.

They don’t even mention about the total number of employees and no annual/earning statements.

One more thing I noticed is – They look like specialized in Localizing anything into chinese may be by following some pre defined templates from OEMs/Orginal companies.

If you look at the industries and skills; you name it they have all. 🙂 If you think it is the top company in Chinese IT;sorry you have to spend more time on reading and analysis than writing 10 articles a day about companies .

Kannan Friday, March 28, 2008 at 3:42 PM PT

The point is not about a single company. It is about a trend.

Sramana Mitra Friday, March 28, 2008 at 10:55 PM PT

I cant say about the specific companies and areas involved. But if one looks at China’s feats (so many people pulled out of poverty and into productivity en route to becoming the economic engine it is today) they certainly have executed on long term complex projects. The nature of the authoritative regime notwithstanding, the achievements of the last few decades could not have been easy to pull and clearly India doesnt nearly have something tangible that is comparable to show for it. So one has to take China very seriously.

I think the scenario being raised here is not unlikely or anything like that — At the same time its not a done deal. India (companies, Govt etc.) will have to rise to the occasion — which is hopefully going to be a good outcome of competition…

I think India and Indian companies need to get out of the comfort zone of working with the US and Western Europeans, and figure out how to work with the Chinese — If there is openness of mind, this is something Indians ought to be able to do easily.

Rakesh B Friday, March 28, 2008 at 11:58 PM PT

Sramana,

You have raised few issues that will obviously impact the outsourcing industry in coming years. You have raised two main points for the growth of China IT Outsourcing.

  1. High wages in India
  2. More number of engineers in China

Do we know that China will be able to put the wages low for software engineers? China has been able to do so in manufacturing. But can they control salaries in software industry. A report from Mercer http://www.newswiretoday.com/news/4319/ says that “Indian software development companies have good programming skills but Software developers in China earn nearly 30% more than them..”

An other point that favors India is favorable demographic distribution. I hope that Indian Government will put policies that support education (elementary education and high education). If we can use our demographic advantage and can convert young men and women into valuable human resource then India need not fear any one.

Prashant Trivedi Saturday, March 29, 2008 at 11:11 AM PT

As I have said many times before, the whole challenge for India is to invest in infrastructure and education to spread out the development, increase supply of trained HR.

http://sramanamitra.com/2008/03/14/forbes-column-how-to-save-the-worlds-back-office/

Sramana Mitra Saturday, March 29, 2008 at 2:41 PM PT

[…] And you can access my Forbes columns here. […]

An Open Letter to IIT Students - Sramana Mitra on Strategy Monday, March 31, 2008 at 9:37 PM PT

The basic premise of your Forbes piece is based on China’s ability to replicate India’s success in managing complex off-shore projects.

I don’t completely disagree with you – in the short-term, China will possibly be able to show some success, riding a cheaper workforce (no surprise),and an ability to execute regimental tasks. But cost advantages are lost easily in a few years – wages don’t remain static even in China. Notice how Chinese exporters are getting squeezed right now to the extent that increasing worker wages, regulatory overhead and inflation (not to mention a fast appreciating Remnibi) are all pushing manufacturers toward Vietnam (and even India. Yes, even India!) As we have seen with India’s tech-offshoring industry, purely lower cost as a value proposition does not last long.

Where I disagree with your overall conclusion is based on a theory that i have propounded: Good software (read: IP related) work
thrives in open, democratic societies; WHEREAS autocratic and authoritarian societies will succeed mostly in businesses such as manufacturing (whether its circuit boards or toys) – which mostly demands workers who do as told and do not ask “why”.

If you look at the microcosm of any Indian company – be it a small one, or a large company (like Infosys or TCS) what strikes you in comparison to a Chinese company, is the innate openness, and an atmosphere that welcomes disagreements, fresh & newer ideas and in general, a non-deferential attitude toward any “authority.” Most Indian techies will agree that Indian technology companies are in fact far ahead of even their non-tech Indian counterparts when it comes to being open. An open culture is not only the life blood of pure IP play companies (like those in the Valley), but plays an increasingly crucial part in technology companies that provide services.
During complex technology engagements, openness is vital for the right questions to be asked, designs to be questions, managers to
be contradicted by their reports, and even customers to be challenged in their beliefs by their outsourcing partners.

But where does this innate openness come from? It comes from an open, democratic society in which an individual grows up. That is the same openness which transcends to the workplace. And that is the culture which ultimately leads to innovation, whether its in processes or in products.

China comes up woefully short on this critical measure. A simple dipstick test is how open the Internet is in India, and how so it is
in China. If ideas cannot flow freely, how can an intensely intellectual business such as software succeed? And if ideas have to flow
freely, you cannot crimp ideas that you don’t like, and only filter those that you want. If individuals grow up scared of voicing their dissent, they will take those same mindblocks to their workplace.

The other aspect which will definitely hinder China is the lack of a meaningful industrial / corporate structure. A simple example will prove this point – if you compare India’s financial markets & the banking industry; the wealth of experience in these businesses which exists in India is far superior to China. India’s financial systems closely mirror western counterparts and as a result domain expertise built locally is universally applicable – both in the financial markets of the US as well as Europe.

A factory approach will possibly work in China — limited engagements such as large QA teams may be successful. But it is doubtful
whether large software endeavors will really succeed in China without the underlying political and social factors being
addressed effectively.

One certainly assumes that in the mean-time, Indian service providers will innovate their business models (for e.g. moving their pricing structure from a cost-plus to a value-minus,
or a profit-sharing structure), move much higher on the technology ladder and keep at least 5 years of a lead over China.

Prasad K Tuesday, April 1, 2008 at 6:21 AM PT

Most of India’s software industry is pretty unimaginative, and I am pretty sure China can do what India can do in that area.

India hasn’t shown ANY imagination in high tech yet.

Sramana Mitra Tuesday, April 1, 2008 at 9:19 AM PT

India’s offshore services model evolved out of certain unique circumstances. The imagination shown by the industry was more in process innovations (such as getting global delivery models right), rather than delivering high technology IP, because the microcosm that is needed for technology innovation was completely missing. Just as water finds the path of least resistance, early-day entrepreneurs started with on-site body placements and innovated toward the off-shore model. What every one takes for granted today – that IT work can be done offshore – came about after a lot of initial skepticism, customer resistance and cultural blind spots were overcome. These entreps took large risks and big bets; they had the gumption to forsake what could easily have been a comfortable life for them in the US (which undoubtedly – was the path taken by a lot of your readers here.)

Ofcourse, when one looks at every activity with Valley-tinted glasses, one tends to scoff and belittle such business models.

Innovation in technology can take various forms, and India needs innovation that solves its unique set of problems. Although the Indian tech industry has a real long way to go, its current business model so far has certainly attempted to generate large employment – something that is very valuable to India. If you consider IIT KGP’s RSUG (the male contraceptive), thats another innovation best suited to India.

Obviously, the same business models don’t work all the time. For technology innovations a large local market is necessary, which in India is just about beginning to happen. The biggest example of which is the exploding wireless (cellular) market. And Indian companies are grabbing this opportunity with both hands – such as the financial services industry already delivering real-time functionality to customers over mobile hand-sets (i don’t even see companies in the US doing this as aggressively.)

Prasad K Tuesday, April 1, 2008 at 10:39 PM PT

Hello Ms. Mitra,
At the risk of my post being deleted let me make a few statements:
1. The high tech industry in India — VLSI etc are doing quite well when it comes to product development. Of course, for design starts you need experienced people and that’s the same case for India and China. Are expatriates working in the valley (take your very own example if you may) willing to come back and startup design centers out here? Quite difficult to imagine. I can recall the case of Intel which had to give up on its Whitefield processor designed out of Bangalore center — you can’t expect a 3-4 year old BE Electronics to understand the length and breadth of electronics and that problem’s exactly the same anywhere else. US pays more so it’s got more experienced people.
2. Low cost product development knows no masters and it would go where cost is cheapest. However, let’s not forget one basic premise here — data security. The Chinese are not exactly known to have a great data protection environment. In fact go to China and you’d see how big the issue is. This concern remains paramount in the eyes of MNCs and will not subside till China has a overtly powerful Communist regime.

Kindly don’t attempt to undermine what the Indian companies have done. Providing a lifestyle to a million plus people most of whose parents lived life on a sub 200 USD/per month is a BIG BIG achievement.

Regards,
Arpan

Arpan Wednesday, April 2, 2008 at 5:25 AM PT

Let me add a reposte, to erase any impression that my earlier response may have created – in no way am i expressing any glumness or satisfaction with what the Indian industry (and the IT industry in particular) have accomplished so far – we are probably just 5% there. Neither do i advocate resting on our laurels. A lot of hard work stares India in the face.

But an opinionated statement that India’s software industry being unimaginative is neither here nor there – its like saying that India needs high-tech automation at its gas stations (like in the US) – NOT! We don’t – because we have a billion plus people, and we need to continue with the existing model of providing gainful employment to individuals as gas attendants. Someone can easily misconstrue this as “Indian gas-stations being unimaginative and not high-tech!”

Besides, up until now in India, the cost of capital was way too much! For entreps to be “imaginative”, they should have easy and low cost access to capital. I am always amazed by how easily some of my Valley friends (could) drive up SandHill Road & walk away with Series A funding for what i would honestly call were ridiculuous ideas. But then, the flip side is that nobody knows what will click as the next best high tech or social phenomenon; though after funding a hundred such ideas, the chances certainly increase. Sadly, the Indian landscape lacked this ecosystem.

Anyway, i think nearly all of us ended up digressing from the original thread of the discussion which was China eating India’s IT lunch.

Its certainly fashionable within the analyst & “strategist” community to predict how China will crush India in nearly all spheres including IT, but the assumption that Indian IT companies and the bright management minds that brought them to this stage are sitting on their accomplishments doing nothing to move to the next rung of the ladder, is simplistic and naive to say the least.

But China does not have a magic wand; sure we are all impressed with its spectacular progress but that does not necessarily require us to be alarmists.

Let me close (finally!) by saying that nobody should believe that to be a fait accompli!

And let me laud Ms. Mitra for the open mind with which she accepts comments on her blog that (most of the time) don’t agree with her!

Prasad K Wednesday, April 2, 2008 at 7:34 AM PT

Arpan,

Very few chip companies are getting started at all, anywhere right now. Including in the valley. Chips have become very expensive to build, especially in 90nm and below, getting more so in the 65nm level. So I don’t see the point in India focusing on starting chip companies, and I agree, the skill-level needed is very high to be able to.

But India’s sweet-spot has been, for 20+ years, software. Software innovations need to come out of India. The entire SaaS movement is/was a discontinuity that played to India’s strengths. Software as applied to Education and Entertainment, Healthcare, etc. are more open areas for India’s “product” entrepreneurs to focus on. And as Prasad, you point out, wireless innovations specific to India’s market needs is well within the capability of Indian entrepreneurs.

And you can count on most overseas Indians who have been successful and have lived abroad for many years to NOT come back. Uprooting your life and rebuilding it elsewhere multiple times, especially at a later stage when your friends, family, business networks are all well-set is not feasible. Nor is India’s traffic, pollution, and high-friction day-to-day life attractive to people who are used to a different system.

I have done 2 ventures with heavy India spin, including a product company in 1998. It was hell, because I did it before the market was willing to accept that all my product dev team was based in India. It is more than likely that I will be doing a great deal more business with India over the later part of my career. But I don’t intend to live in India.

As for the India versus China question, my hope would be that India will do what is necessary to change. I’ve discussed the second/third-tier city and heartland of India strategies ad nauseum.

Of course China’s victory over India is not a fait accompli. But India needs to do things differently to be able to resist the onslaught from China.

Sramana Mitra Wednesday, April 2, 2008 at 9:58 AM PT

I see that most of the people in India tend to think ' we are the best' and are not open to any new idea or a perspective. It does not augur well . One has to be open to critical thinking and questioning to adapt to the fast changing world. we just can't afford to sit on our laurels and be complascent.

GoBaliga Tuesday, August 2, 2011 at 11:42 AM PT

Hi Ms. Mitra,
Like Prasad, I concur that you need to lauded for accepting comments which were not too kind. And I must that as a fellow Indian I am mighty proud of your accomplishments and I didn’t intend to be personal. Having said that there are 3 points that need to be brought out:
1. If we are talking hi-tech, serious hi-tech then we need experienced people. That kind is neither available in India or China. But at least in India we are slowly piecing in an ecosystem. Intel Capital had funded ArchPro a local product company in a niche VLSI domain which SNPS acquired in due course. India has a first mover advantage here no doubt.
2. Inter-disciplinary courses are the order of the changing world, biology with computer science or nanotech with robotics. India has very few such courses but then IITs are slowly coming up. China is very far behind in this game. I am not sure if they are at all attempting to scratch this genre — most likely what provides employment to masses quickly is what the RED Regime is after. That can bring in quick money but is not a sustainable solution. I am not saying India is first mover here, but work is in progress.
3. BFSI BPO can never succeed in China. The costs are already low there so why don’t Citi or UBS set up call centres out there that deal with directly customer accounts? Or will you be comfortable sharing your code with a Chinese s/w vendor who goes on to make a replica of it in no time? Remember Huawei?

Arpan

Arpan Thursday, April 3, 2008 at 10:29 PM PT

Arpan,

  1. Archpro is an EDA company. In EDA, there are others as well, but mostly with entrepreneurs in the valley. You can look at AJoy Bose and Atrenta.

  2. I can’t comment. I don’t know enough about China’s efforts in this area.

  3. There is PLENTY of SW being developed in China already, and more will be. China’s hardware industry has reverse-engineered a lot of products, and in the process, they have learned to build products of their own. India hasn’t yet. Hopefully they will too in due course.

Sramana Mitra Thursday, April 3, 2008 at 11:37 PM PT

[…] here are my related Forbes columns on the […]

India’s Future at VentureWoods - India's leading venture capital community Tuesday, April 15, 2008 at 8:05 PM PT

Hi Sramana,

I think the Infosys core banking solution Finacle is a very high-rated product according to independent research. [Forrester or Gartner I cant remember which]

Gartner places Infosys in the ‘leader’ quadrant with Accenture, Tata, and IBM

Are these not examples of an Indian comapny showing some imagination?

Infosys also claim to be doing consulting differently.

Their consulting arm is growing very rapidly.

I find it hard to believe, in their strategic planning, that they are so naive to rely totally on “body shopping” in the future.

I live in Taiwan, and my wife is Taiwanese. The two major problems with China are lack of fluent English speakers and the culture is more different from Western culture than India.

Regards, Simon

Simon Jacques Saturday, April 26, 2008 at 5:45 AM PT