Tuesday, May 25, 2004

A Snapshot and Armchair View of China: Not Much Value-Added

China Sourcing Alert    
Monday, May 24, 2004
Dateline: Qingdao, Shandong, China
 
A Snapshot and Armchair View of China:  Not Much Value-Added (and Dead Wrong on Some Key Points, Too)
 
Since I'm going to cross post to the AlwaysOn Network (http://www.alwayson-network.com ), I've decided to comment on a post which appeared on the AO Network on 5 May.  Guy Kawasaki, managing director of Garage Technology Ventures, kicked off his post titled, "What's the Deal with China?  Opportunity knocks; know the rules of the game " ( http://tinyurl.com/yrqzr ) and four others chimed in.  (Disclosure:  I've known Guy since my Microsoft daze [no sic], we both taught Sunday School at the same church, and we were even the keynote and locknote presenters at a network marketing annual gig.  Hence, it's safe to say that I'm pulling my punches ... even if the title for this section appears otherwise.)  My analysis will take a point/counterpoint perspective.
 
Guy started out by noting that Shanghai is "kicking butt."  I concur 100%.  But then he begs the question, "does the United States have a chance against China?"  Give me a break!!  First, it is important to note, especially for those of us in or from Silicon Valley or the 128 corridor, that Shanghai is NOT representative of China-at-large.  Shanghai no more represents China than Silicon Valley represents the States.  Besides Shanghai, Dalian (which I've mentioned in a previous post) and a few other cities (which I'll mention in future posts; I'm deliberately keeping some info close to the chest), nobody is "kicking butt."  A lot of dreams, but in fact they're mere allusions.  I just don't see it in China.  Shanghai, Dalian and a few other places, yes; China in general, no.  I'll pick on an easy target:  Even though the Chinese government has afforded the Hainan province with special status, the Hawaii of China is NOT going to become a tech hub.  There is not the same breadth of tech talent in China as there is in the States, so it's silly (almost absurd) to talk about the greatness of China.  Think by region first, city next.  But a few regions and cities will not be able to match the dynamism of the States for at least another fifty years (barring some unforeseen natural disaster, massive terrorism, et al).  Remember, you're hearing this from China's IT sourcing evangelist, too!!  First China has to beat India; then it can worry about the States.  READ THIS LAST SENTENCE CLOSELY:  THIS IS WHAT THE GAME IS REALLY ALL ABOUT.  This might seem a bit surprising, but I can see Chinese companies cooperating with Indian companies in targeting the domestic market in China.  (Fact is, I *already* see this -- and it might be China + India vs. the States for China's domestic market.)  But in the battle for global dominance, it's China vs. India.
 
Joseph Chamie, the director of the population division of the UN's Department for Economic and Social Affairs, added his two cents.  Nothing new.  On one point he is dead wrong, though.  He stated that the Chinese "have all the values the Americans have."  Another "give me a break."  (I feel like John Stossel.)  A key problem I find, again sans a few regions/cities, is that there is a limited notion of quality.  Life in China kind of sucks and I live in one of the nicer cities in China (Qingdao) and in one of the nicer areas within the city (the CBD; I call it "Juscodao") and in one of the nicer buildings within the area (a penthouse-style townhouse).  And I can trace back the reasons for why life in China kind of sucks to quality consciousness in general.  The Chinese, like everyone else, like good quality.  The difference is that they accept poor quality without a blink of an eye.  (Not everywhere in China, but in most places.)  Will the Chinese (as a whole) be more quality conscious as per capita incomes increase?  Maybe, probably.  But for China, it's a long, long way to Tipperary.
 
I agree with just about everything said by Irwin Federman, a general partner at US Venture Partners, but I'll take him to task on one point.  Mr. Federman stated that China is hot NOW.  I disagree.  India is hot NOW.  China, however, is getting warmer each day.  The APEC is holding their tech conference and exhibition next week and I'm the speaker on global sourcing, with a focus on IT sourcing in China.  (I'm in good company.  There are only four speakers on IT issues and two of the others are the heads of IBM and EDS in China.)  One of my slides quotes from a DiamondCluster report.  (I'm going to upload my presentation to http://tinyurl.com/2r3pa AFTER I give it; you can read the quote for what it's worth.)  To paraphrase, the report accurately points out that China is on everyone's radar, but the images are fuzzy at best.  It's a stretch to say that China is hot, but one of my missions is to make China hotter -- and clarify the images.
 
Aaron Gershenberg, a managing director for Silicon Valley Bank, then added his two cents.  Nothing to challenge, but I'd like to expand upon his comments about the VC "industry" in China.  First, there's a VC industry in China which has almost nothing to do with Silicon Valley's VC industry.  Americans tend to view the VC industry as a Menlo Park phenomena, but China has a venture investing base which is very different from that in the States.  Can Silicon Valley VCs successfully play the China card?  Maybe.  Draper is trying.  But nobody can claim success.  And even if there is a bit of successful venture investing from the Sand Hill Road gang, I doubt it will amount to very much for at least another twenty years.  Yes, twenty years (maybe thirty or fifty ... if ever).  The clubbiness of Bay area VCs isn't a match with the social networking structure in China.  (VCs, take this to heart.)  If there are successes, it will be through investments in firms started by Chinese engineers and scientists who have been educated and trained in the States -- probably at Stanford  ;-) -- who have returned home.  Remember, most of the larger publicly-traded Internet plays based in China were started by Chinese nationals who were educated and trained in the States.  But how many of their ventures were backed by American VCs?  Sadly, not many.  Maybe this will change, but I wouldn't hold my breath.  I just don't see John Doerr as a frequent local diner eating things he has never seen before.  And, as VCs will be the first to admit, you can't manage this business by remote control.  Maybe through affiliated funds and the like (the Draper approach), but I'm skeptical.  Worth a try, perhaps, if the U.S. VC is willing to have a local presence in China.
 
Craig Johnson, a Silicon Valley icon, closed with his comments.  He's bullish on Silicon Valley.  So am I.  He feels it is the best place in the world to start a high tech company.  So do I.  But he hints that China may have its own distinct advantages.  We've all read Michael Porter ad nauseum, but how many of us have read his Competitive Advantage of Nations?  And just think about what the title implies, i.e., that there are competitive advantages for each nation.  China has a lot of bright, talented, and very, very young software engineers and programmers.  As the Indian software industry moves up the food chain, there are a lot of opportunities for China.  Will it be China vs. the Czech Republic or Russia?  (Forget the Philippines; they're yesterday's news.)  Sometimes, but the larger issue is China vs. India. 
 
Didn't sound like I was pulling my punches?  Trust me, I did.  However, I want to applaud Guy & company for dealing with the real issue:  Is China open for business?  It's NOT about the nonsense coming out of Beltway talking heads (e.g., job loss); it's all about business.  Bottom line:  In the final analysis, I'm VERY bullish on China.  In several areas (e.g., R&D outsourcing), China is on par with India TODAY.  (For R&D outsourcing, there are pros and cons for both China and India, but they pretty much balance out.  It really depends on specific needs.)  And in many other areas, e.g., custom application development, there are numerous (okay, a handful of) SIs based in China which can serve American CIOs at a much lower cost and with equal quality of the Bangalore bunch.  Come to China -- and be prepared for the ride of your life!!
 
Cheers,
 
David Scott Lewis
President & Principal Analyst
IT E-Strategies, Inc.
U.S. tel: +001.650.618.1475
China tel: +011.86.(0)532.577.8957
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posted by David Scott Lewis at 6:04 AM