David on IT Outsourcing in China: [news] The "Bangalore of China" (from The New York Times AND the Associated Press)

Tuesday, June 29, 2004

Dateline: China

And which city are we talking about? Dalian. Let's face it, you can't buy this kind of publicity!! This is a direct quote from a column which appeared last Thursday in The New York Times ( http://tinyurl.com/3ctnk ; this article was picked up by several newspapers in the States and by an Indian trade, http://tinyurl.com/2hkuz ). A copycat, but more in-depth piece appeared on the AP Wire ( http://tinyurl.com/3caq4 ) too, as did a related piece in Asia Times (http://tinyurl.com/2wy8c ). I will be quoting and referencing all three articles in this posting.

Let's start with The New York Times column. "It is not just impressive for a Chinese city. With its wide boulevards, beautiful green spaces and nexus of universities, technical colleges and a massive software park, Dalian would stand out in Silicon Valley." True. And their taxi drivers are polite and decent drivers, and their residents don't spit as much -- a lesson Qingdao -- and several other cities in China -- could learn from (although I'd give the natural beauty of QD a slight edge over DL). In short, Dalian, with a population of 6 million (although I've learned that population stats in China are not calculated in the same way as they are in the States), is the most prosperous city in northeast China -- although Shenyang and Harbin are hardly serious competition.

GE (everybody's favorite company

), Microsoft, Dell, SAP, HP, Sony, Accenture and IBM have ops in Dalian (mostly for BPO), along with nearly 3,000 Japanese companies. (And the Japanese restaurants in Dalian are superb!! My comment, not in the column.) DHC is also mentioned as one of the "biggest homegrown companies" which grew from 30 to 1,200 employees in six years. Personal observation: It's also one of the most professional looking companies I've seen in China, not quite as nice as Oracle's main campus, but on par with Microsoft's HQ campus in Redmond.

The Times column notes that "Japanese companies can hire three Chinese software engineers for the price of one in Japan, and still have change to buy a room full of call-center operators (starting salary: $90 a month)." Dalian's mayor is extensively quoted in the Times column and AP feature. He proclaims that Dalian has 22 universities and colleges with over 200,000 students and that more than half graduate with engineering or science degrees. He also states, "In the past one or two years, the software companies of the U.S. are also making some attempts to move outsourcing of software from the U.S. to our city." Hmmm ... he uses the word, "attempts." Like a variation on the word, "try." Frankly, the firms in Dalian haven't had much success in IT outsourcing to U.S. clients.

The Associated Press piece goes into much greater detail. First, it mentions that the four-year-old Software Park is expanding by more than five times. I've seen the plans and they're quite impressive. My only concern is that the new location is kind of in the boondocks. The AP feature notes that the city is offering five-year tax breaks and will pay bonuses to the most desirable workers, to the tune of $2.4 million. Their mayor, Xia Deren, stated that the Chinese government has better management ability than the Bangalore government. (Let's not get too carried away!!) However, an official with the Dalian Information Industry Bureau was honest enough to state that the "(i)nsufficient supply of qualified talent is a bottleneck restricting the development of the whole chain of the software industry." Still, Dalian's software industry has managed to grow 50% annually in the last five years in terms of export volume, reaching $605 million last year. (Note: This can't be an ITO figure; it must be mostly a BPO figure. I know what the top dozen software companies in Dalian are doing, so the $605 million figure must be over 70% BPO -- and the ITO is almost exclusively for domestic or Japanese clients, even at Accenture.)

DHC got some more ink in the AP feature. (Matter of fact, DHC was the only native company to get ink for anything related to ITO. Neusoft was mentioned, but only for training -- and their HQ is in SY.) I guess it's now public knowledge that Microsoft has outsourced some product testing to DHC. (I knew this, but I thought it was a secret. Stay tuned for more action!! I know other secrets, too, but I won't tell.

) And IBM has chosen Dalian to set up its second R&D center in China. The center, with less than 400 employees now, may employ as many as 5,000 "after IBM shifts some operations from Bangalore." I've seen the plans for the new IBM building and it's quite impressive.

The mayor does come clean on one issue. He admits that Dalian lags behind Bangalore in one crucial aspect: Education. He also admits a lack of English-speaking workers has created a need to bring in as much as 70% of workers in the software industry from outside the city. I think the AP feature is wrong. I'm sure it is the lack of educated workers and not the lack of English-speaking workers that has led to the importing of workers. But it's clear -- at least to me -- that a lack of English-speaking workers is hurting Dalian and gives an edge to south China (which I visited all last week), Shanghai and Beijing.

It is also noted that the city's low salaries may attract companies, but have the reverse impact on "much-needed software talent, who would prefer to go to Beijing or Shanghai and earn twice as much money." Amen!! Further, the features states that "Dalian's biggest competitor now is not India but other Chinese cities. A college graduate can earn $1,000 a month at a software firm in Beijing or Shanghai, but might get only half that in Dalian" (and a third or fourth that in places like Qingdao, Tianjin, Shenyang, Jinan, Changsha, Hainan, Harbin or even Zuhai). A CEO of a software firm in QD once said, "The best engineers in Qingdao go to Shanghai and the best engineers in Shanghai go to the United States." Skipping the latter part of his statement, there is a definite quality issue in favor of south China (HK/GZ/SZ/ZH), the Shanghai area, and Beijing. You get what you pay for. Frankly, I'd rather make the argument from Shanghai that "we" (i.e., SH) have the best engineers rather than making the argument from a low-cost area stating that our engineers are a lot cheaper. I don't care how many local universities you have, too. The real issue is whether you can attract good talent. Let's be honest: Silicon Valley has only two good universities (and one of them really isn't in Silicon Valley). But Silicon Valley attracts the best talent. Ditto for south China and Shanghai. (Beijing has the best universities, kind of like Boston.)

BTW, my comments in the preceding paragraph are not really directed at Dalian. I think Dalian provides a nice working and living environment, and Dalian could become the Austin or San Diego of China: Perhaps not exactly a Silicon Valley (or Bangalore), but a good, respectable place for software firms. Good talent paid relatively reasonable wages. And there's nothing wrong with this strategy. What they need is a non-stop flight from the States -- and that's in the making, too. (Probably from L.A., although I've made my pitch that it should be from SFO.)

I'll close with yet another quote from Mayor Xia (and it's a doozie): "In Shenzhen, there are so many opportunities that after one does software work for a time he'll think of running off to start his own company. Northerners (as in northeast China) are better at sitting down and doing research." Ooo ... ouch!! I can't believe he really said this. Of course, there's another way to look at this: The tech folks in SZ are masters of innovation and eventually decide to stake out their own turf due to their highly creative, entrepreneurial spirit, whereas tech folks in other parts of China are nothing more than robot programmers.

Regardless, Mayor Xia -- and especially the staff of the Software Park -- has done a superb job in building Dalian ... and in creating China's Austin or San Diego.

Bottom line: All three articles point to the fact that Dalian is the best place in China for ITO for Japanese clients. The jury is still out regarding U.S. clients. I have warned Chinese companies to avoid Europe like the plague: Russia, the Czech Republic, Ireland and Israel will win Europe. Wasting marketing RMB on Europe is just that: A waste!! OTOH, for Japanese clients, there is no better plan than ITO in Dalian. For U.S. clients, Dalian should be considered, especially for software testing and embedded programming. (There is a migration path for embedded to enterprise apps; fodder for a "Commentary" piece.) BTW, the columnist and journalist show that they didn't get into very much detail with the local Dalian firms: None of them mentioned my point about embedded programming. With a firm spec, an embedded programming job might be well-suited to one of the top firms in Dalian. Need to know who they are? Drop me a line ...

Cheers,

David Scott Lewis

President & Principal Analyst

IT E-Strategies, Inc.

Menlo Park, CA & Qingdao, China

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