Chapter 3
The Silicon Paddies of China
My host for the day at the Suzhou Industrial Park (SIP) International Science Park was a petite, articulate Chinese government official, Daisy Gao. Ms. Gao directed the promotional affairs of the Science Park, which is SIP’s magnet campus for attracting information technology (IT), business process outsourcing (BPO), and R&D companies to the city of Suzhou. Suzhou is a short, 25-minute ride by bullet train due west from Shanghai. Chinese call Suzhou the Venice of China because it is laced with canals that run through the city and connect it to the Pacific Ocean and Lake Tai, China’s third largest freshwater lake. Daisy represented the latest generation of Chinese government officials. She was in her late twenties, a newlywed when we met, spoke perfect English, and was professional and relaxed with Westerners. I first encountered the bespectacled promotion officer four years before, when I represented an American manufacturer looking for potential investment sites in China. Now, like SIP itself, she had shifted her focus to the services sector, especially the information and knowledge management industries. “We know manufacturing is very important to China’s development,” she told me, “but it is not enough to employ all the people. We have to develop the services industries, too.”
The global growth consultancy Frost & Sullivan estimated in 2007 that the worldwide market for outsourced services was worth US$930 billion in 2006. The group forecasted that sector IT outsourcing (ITO), business process outsourcing (BPO), and outsourced R&D together would grow at a compound annual growth rate of 15 percent to reach a market size of nearly US$1.5 trillion by the end of 2009. By 2020, the global market for services outsourced to third parties could reach US$6 trillion.
IT outsourcing involves an outside organization of software and hardware engineers and project managers who support company computer systems, typically those for back-office functions such as accounting, payroll, and human resource systems management. Other IT outsourcing companies write programs called “embedded systems” that are found in everything from computer games to automobiles and manufacturing equipment. Businesses outsource repetitive tasks done by, for example, call center operators, payroll processing, medical recording, payments processing, and the like. In the instance of accounts payable processing, the Chinese service provider receives a scanned image of an invoice that must be paid by its American client. Relevant information such as the invoice date, due date, purchase order number, delivery date, product codes, and the like are manually entered into a computer system in China. The Chinese company then uploads the data to the client’s financial accounting software. Now, the client has the order in its computer system and can track shipment progress and payment to the vendor accurately. The sectors that outsource the most back-office and IT support operations are banking, financial services, and insurance followed by high technology and then the healthcare industry, which primarily outsources its R&D expenditures.1
The Chinese government officials and entrepreneurs see that the shared services pie is increasing in size and want a slice of it. Entrepreneurs are in it for the riches and glory. The Chinese government, however, wants the many jobs that the services outsourcing sector can potentially provide. Jobs are important to the Chinese government because unemployed citizens are seen as a source of destabilization of the society. For those in power in China, social stability with economic progress is the key to prolonging their mandate to rule the country.
China—especially in east coast cities such as Shanghai and Suzhou—is focusing on service industries—or tertiary industries—which accounted for 67.4 percent of international direct investment in China in 2006, according to the United Nations Conference on Trade and Development. Official Chinese sources cited that in the first three quarters of 2005, the service sectors in 16 major cities in the Yangtze River Delta amounted to 39.2 percent of their combined GDP. Total output of China’s tertiary industries accounted for just 32.3 percent of its entire economy, rising at an annualized rate of about 8 percent. The average rate in the industrialized world is as high as 64 percent according to official Chinese sources, so China has a long way to go to tertiary sector maturation.
The Chinese government has several motivations for promoting the tertiary industries in China: job creation, wealth creation, and to benefit the environment. Beijing knows that the light manufacturing sector—sneakers, toys, cigarette lighters, and other commodity-driven, labor-intensive manufacturing—will only employ a certain proportion of the working-age population. Issues, such as land use, resource intensity, technical training, and experience, constrain the degree to which China can industrialize. In particular, over the last two years, land for building manufacturing facilities has become highly restricted, and economic development zones in China can no longer expand the size of the land available for investment. The cost of materials has increased, too, as Chinese factories have sucked in greater amounts of metals, plastics, wood, and other resources to meet production quotas inside and outside China. The havoc unregulated light manufacturing has wrought on the environment will take decades to reverse. Air, water, and soil in some regions of China are poisoned to the extent that pollution has even entered the food chain.
The Chinese government sees outsourced service industry jobs provided by the travel and leisure sectors, financial services and banking, logistics, even arts and entertainment, as a social release valve to soak up the labor pool. Currently, Chinese universities are annually churning out hundreds of thousands of graduates who are un- and underemployed. Further, with per capita GDP in the nominally poorer interior of China rising, more students go beyond the compulsory nine years education to complete twelve years. The Chinese government will have the additional responsibility of creating jobs for the millions who do not go on to the university level but who are better educated than previous generations. The tertiary industry provides an outlet for this labor pool, one that light manufacturing cannot.
The Hi-tech Face of China
Suzhou Industrial Park (SIP) is the largest, most successful joint venture negotiated between the national government of China and Singapore. Originally, when Singapore was the majority shareholder, the area was called the Singapore Industrial Park. The Chinese side of the investment—administered by the local Suzhou government—held 60 percent of the shares in the venture for more than a decade, while the Singapore government and various private groups maintained the remaining 40 percent. But to call SIP an industrial park is misleading. SIP is more of a new city, an incorporation of four townships inside a 350 square kilometer plot of river delta that abuts downtown Suzhou with a highway separating old Suzhou from the new industrial park. Suzhou’s government is intent on seeing all new industrial and high-tech developments established in SIP. The contrast can be seen in old Suzhou’s cityscape of white-washed traditional structures now punctuated by the high-rises going up in SIP.
SIP—and its cousin on the west side of Suzhou, the Suzhou New District (SND)—started out courting foreign direct investment for manufacturing enterprises in the 1990s. Foreign investment in SIP is nearly 50 percent Western companies, followed by Taiwanese, Japanese, South Korean, and domestic Chinese firms that established offshore entities and then reinvested in China as foreign companies. (Foreign manufacturers had, until 2008, been able to garner tax advantages that domestic companies could not.) SIP has been very successful in attracting Western companies—especially in the hi-tech and knowledge industries. Its success is attributable to the Singaporean model of government administration. SIP administration has a greater number of English speakers than other foreign investment zones in China. SIP administration also has a sense of propriety and structure that Singapore inherited from the British. Emulating Singapore’s business environment has helped to attract and retain Western investors, who find establishing operations in other parts of China problematic.
Since 2006, SIP and SND have excluded manufacturing that pollutes or produces low-value products. The zones have favored hi-tech, R&D, IT, and BPO companies to gentrify Suzhou and increase tax revenues.
To encourage more R&D and information management companies, SIP created the International Science Park. The Science Park was quite different from the rest of SIP. The Science Park was a sprawling complex of post-modern architecture. The total size of the campus was 690,000 square meters. The Science Park was built in four phases. The fourth phase was completed mid-February 2007. The first phase was primarily an incubator building for young IT companies that developed software and provided animation outsourcing services. The building itself seemed transported from the 22nd century. It was shaped like an elongated donut facing a small lake and divided by a strip mall of offices. Phase 2 focused on corporate R&D companies. Phase 3 was a high-rise building with R&D and IT outsourcing companies; Phase 4 consisted of two high-rise buildings, one that offered furnished apartments and the other an R&D complex. Phase 4 looked rather like a great, upright magnetron, with two curvilinear buildings erected in such a way as to spin around each other in opposition. Young Chinese, with sparks seemingly flying from their can-do faces, crowded outdoor corridors and walkways of the campus while inside the corporations themselves, one had to strain to hear even a whisper. The Phase 4 structure also featured a large, glaring flat panel display that showed advertisements for the park.
“Employment for people in their twenties and thirties is one of the issues China has to solve,” said Daisy Gao. “We call it the 20/30 problem.” After my tour of the Science Park, we sat down to talk at a restaurant on the SIP campus overlooking Golden Rooster Lake. We dined on vegetable and meat dim sum dishes. Daisy explained that the 20/30 problem was critical to the success of the economic and social reforms China was making in the run-up to 2020. The development of Chinese society could be compromised by the kind of unrest other nations faced when large numbers of young people were underemployed.
Indeed, the Central Government had long been well aware of the country’s shortfall in jobs for its people. The Minister for Labor and Social Security, Tian Chengping, cited in 2006,
“While employment is a difficult issue for all countries, it is more acute in China due to its huge labor force. The huge population and the weak economic foundation will put China under heavy employment pressure in a considerably long period of time. In the next few years, the urban labor supply will keep at 24 million plus annually. However, there will be only 11 million jobs available from economic growth and retirement. Thirteen million people will have no jobs. The difficulty is even sharper for central and western China, old industrial bases and resource exhausted cities. In rural areas, the labor force stands at 497 million, of which about 200 million have transferred into non-farming activities and 180 million remain in agriculture. There is still around 100 million labor surplus. Therefore, it is a rather arduous task to promote employment transfer and develop vocational training for the rural workforce.”2
The key to jump-starting the technology-intensive services industry—the central government believed—was to entice overseas Chinese home to the motherland with their international training and experience.
If You Build It, They Will Outsource
Juliet Zhu, a government official from the promotion department of Suzhou’s other economic development zone, SND, told me that the central government has made IT and BPO “encouraged industries” and has given Chinese cities the go-ahead to attract foreign investors with various incentives. To that end the Chinese government designated ten Chinese centers in 2006 as hubs for the development of IT, BPO, and R&D sectors. These centers were meant to provide the wedge that would open up China to knowledge-intensive industries valued at US$100 billion by 2020.
In late 2006, the national government identified certain cities as kejibu—literally, technology divisions—Beijing, Shenzhen, Shanghai, Nanjing, Hangzhou, Chengdu, Dalian, Xi’an, Wuhan, and Suzhou. According to government sources, the plan involved persuading 100 multinational corporations to transfer some of their outsourcing businesses to China, as well as to create 1,000 large-scale international service-outsourcing enterprises by 2010. The central government was going to channel hundreds of millions of dollars over several years into the cities to provide tax benefits to trained IT professionals and subsidies, and provide support for their families in the kejibu cities. Each would receive nearly US$8 million annually, which the city would then share with its economic development zones to spend on infrastructure and as incentives to woo investors and staff.
Juliet told me local technology centers provided residence permits, or hukou, to professionals and their families. A hukou from the city offered many benefits to families coming from rural townships. They could enjoy the city’s education system, medical facilities, and social welfare benefits. City benefits were more generous than those in poorer regions in China. Prior to the easing of the hukou system, residents of particular cities were not allowed to live in other parts of China. It had been Mao’s way of controlling the inevitable influx of farmers from the countryside into the more prosperous cities along China’s east coast. Beijing’s central planning, however, did not deal well with rationing resources to locations in which populations were in flux.
Technology centers made themselves attractive for talented professionals in the hi-tech fields by providing apartments at a rate of ¥600 (a little more than US$100) per month. In some instances, managers and specialists received steep discounts to buy a home. Foreign nationals, too, in high-value fields could also get long-term or permanent Chinese residency. If the foreign national had to travel out of the country frequently on business, he or she could acquire a multi-entry visa with a five-year term.
China’s technology centers enticed Chinese nationals who held master’s degrees to return and work in China. If they qualified to work in the hi-tech sector, they could be approved for subsidies that ranged from ¥50,000 to ¥100,000 (about US$7,500 to US$15,000) to buy a home in kejibu cities. For hi-tech companies that set up operations in technology centers, there were one-time subsidies of ¥200,000 to ¥500,000 (about US$30,000 to US$60,000). In addition, the companies could get the first year or two of operation rent-free, and enjoy a preferential tax rate for the first few profit-making years. R&D centers could also have their instruments and equipment imported into China duty-free.
Another kejibu that had its sights squarely set on becoming a base for high-end service offerings was Nanjing, a three-hour drive west of Shanghai. Nanjing is the capital of Jiangsu province. Nanjing’s Jiangning district was the site of post-modern facilities used to house hi-tech incubators. In 2003 the district’s economic development zone had only a smart looking administrative headquarters embraced by a tree-stitched hill, frantic construction projects, and a great modern metal sculpture that would come to mark the center of the first phase of the industrial park. There were few factories back then. During a tour around the Park the then-Director was always making sweeping gestures about where this residential area would be rooted and that set of manufacturing compounds would be built. It was difficult for me to visualize. The zone’s plan involved developing industries such as automobile manufacturing, electronic information systems, and electrical controls for automobiles. Jiangning also had its sights set on being an R&D and software development hub. The opening of the iHub in 2008 was a milestone in the realization of the district’s services outsourcing goals.
The iHub was nearly 20,000 square meters, with five multi-story buildings that supported office space, an exhibition center, and a car park. It was most recognizable from the highway by the huge, partly-submerged sphere that anchored the complex of buildings. Inside the sphere was an open, flexibly decorated exhibition hall and adjoining reception area. Staggered along the open corridors of the second and third floors and facing into the atrium were great open frames painted in primary colors that echoed the Microsoft Windows logo: yellow, blue, orange, white. More empty frames rooted to the floor greeted entrants into the five-floor administrative building fixed to the sphere. It was in the exhibition hall that the Singaporean development company responsible for the project had constructed a long, high stage from which the great and the good of government and business in Singapore and Jiangsu Province pronounced the iHub officially open for business.
Ms. Pan Yin Yin, a small, nervous native of Jiangning, showed me around the compound. Clad in black military style fatigues, jack-booted security teams patrolled the area for miscreants, thankfully ignoring our stroll around the buildings. Typically in China security is presented as young men in oversized gray-green uniforms with peaked caps who lean back in the chairs of guard houses gateside. I suppose the Singaporean developer wanted to give the impression that not only was the complex going to see a movement up the industry value chain for investments in the area, but a new-found seriousness in security, as well.
The iHub was within easy access to supermarkets, hospitals, hotels, and even golf courses, Ms. Pan told me. She pointed at the open entrance to a lobby: iHub housed a business center for young start-ups, as well as a post office, restaurants, cafes, a travel agency, and banks. The facility was meant to be as self-contained as possible, just short of actually having residences within the compound, as did the International Science Park in Suzhou. Within a couple of years the campus would house scores of IT/BPO businesses, software development companies, and R&D centers. At the outset, though, few of the companies inhabiting the facility would be homegrown. China still had to rely on the Indian services outsourcers to illustrate how to meet the international standards multinationals required.
Crouching Dragon, Leaping Elephant
China began its daring attempt to go up against the Indian giants in the global market for IT and BPO as early as 2005. China saw tens of billions of dollars to be made and millions of jobs to be created in these sectors. The larger Indian companies, such as Infosys, Tata, and Mahindra Satyam employed thousands of Chinese staff by 2010. Chinese homegrown outsourcers had an uphill battle ahead to catch the Indian transplants.
Outsourcing was a US$70 billion-a-year business for Indian companies in 2011. Meanwhile, the Chinese sector was valued at about US$20 billion.3 CLSA, the investment firm, projected China’s reach at $30 billion in 2014.4 The Chinese, however, were looking to break the Indian hold on IT-based outsourcing services by 2020. China’s government, however, had a long march ahead of it to attain that goal.
The Year 2000 (Y2K, as the IT industry called it back then) software re-engineering effort was a gift to the Indians. The West had millions of lines of programming code that needed to be reviewed and re-figured to take into account the changeover from the year 1999 to the year 2000. The change in the century would see computers record a “00” for the new year’s dates instead of “2000.” Calculations, of course, would no longer be accurate. Executives, governments, and the Western public (encouraged by the media) expected the worst: bills would be wrong, payments wildly out of whack with reality, airplanes would crash, and the world as we knew it would end. Arguably, India saved the West; or rather, its armies of software engineers updated the software that ran the financial record-keeping computer applications of the West.
India also learned about Western computer systems, Western systems development methodologies, and Western back-office business processes. Western executives figured after 2000 that if the Indians had managed Y2K well, they could cut their teeth on other computer applications in their businesses. And so the Indian ITO industry as we know it today was born.
China, though, is different. China had no Y2K to finance or educate its armies of fresh-eyed programmers in the hard-as-nails realities of Western business practices and operational processes. The Y2K crisis provided the Indians with opportunities for exposure and training in the business processes of Western companies, multinational corporations (MNCs), and non-MNCs alike. China does not have the troops of English-speaking, customer-focused, go-getters that India does to launch an industry to the stars. Instead, China is going to have to boot-strap itself to become a world-beater in both the ITO and BPO realms.
Certainly, the Chinese government has its heart in the right place and its intentions firmly set on services outsourcing preeminence. Newly fielded economic development zones throughout China were flush with cash by 2010, already investing in platoons of engineers and hi-tech infrastructures. Chinese were gaining success in forms processing and data entry, repetitive and detailed tasks. The most accessible areas for Chinese BPO operations at the end of the first decade were insurance claims processing, personnel records data entry, patient records entry, and invoice processing. Though gradually changing, the Chinese education system has for thousands of years emphasized rote learning and the regurgitation of facts and figures. As a result, Chinese tend to be more detailed and heads-down in their work than their Indian counterparts, albeit less innovative.
The Indian education system with its emphasis on English language skills also encouraged growth of the ITO business, and facilitated entry into the BPO space. Credit card processing, insurance claims processing, call centers, and more were natural extensions of the knowledge base and experience the Indians were gaining through their business analyses and IT implementations.
The Chinese capacity with English as a working language is far behind the Indians. India had the advantage—from an industrialization point of view—of 350 years of British colonialism. The English language had become an integral part of Indian society. English is also the primary or secondary language of the wealthiest countries in the world, countries with economies that are primarily service-based. These service-based countries have, for the past decade, been trimming the costs of the services they provide by outsourcing functions to India. The English language—and the desire to adapt and refine their English to suit customer requirements—has been a key factor in the success of Indian companies. An American in Ohio or a Brit in Birmingham can pick up the phone and discuss a customer issue with someone in Bangalore. That is near impossible to do with someone in Xi’an or even Shanghai. China currently has very little talent in the outsourcing space with such capabilities.
So, the Chinese have little credibility with Westerners when it comes to understanding and articulating the kinds of back-office applications that matter to knowledge-driven Western companies. Most Chinese IT companies cater to domestic Chinese customers; the vast majority of ITO companies support Japanese and Korean companies with programming projects for consumer electronic devices. Asian customers provide highly detailed specifications to Chinese programmers to leave little room for error. There is little opportunity for Chinese business analysts to gain access to corporate business processes outside of China. The Chinese need the access to develop the expertise and credibility Western companies look for when outsourcing their back-office functions to any vendor.
In the latter part of the next decade, before 2020, China will go through a mergers and acquisitions (M&A) phase that India has never really had to go through. India’s development of its BPO industry is a direct outgrowth of its ITO industry. The Y2K phenomenon forced Indian outsourcers early on to develop economies of scale. At the turn of the century Indian service providers needed to support thousands of programmers, their hardware, and communications infrastructures. The Indians were then able to take the economies of scale along with the access they had gained to back-office functions to directly move into BPO. China has had no such kick-start, no such opportunity or financial base from which to develop the economies of scale to support massive BPO operations. BPO is all about mobility and scalability: moving the back-office operations of a company to another country.
Like so many industries in China, the BPO industry is fragmented, with more than 90 percent of BPO operations supporting only several hundred staff. Indian BPO providers routinely offer tens of thousands of staff to support Western MNCs. The overwhelming majority of outsourcing companies in China, in contrast, lack capital and the numbers of skilled and experienced staff to run large projects of the sophistication Western companies require. The Chinese services outsourcing market will have to go through an M&A phase to build companies with the economies of scale BPO projects require. M&A in the sector will help domestic companies build the credibility they need to convince multinationals of their capabilities. China’s services outsourcing sector, however, has to first shake off the legacy of its manufacturing cousin: rampant copying of customer designs.
One of the greatest challenges facing the nascent Chinese ITO industry is the concern Western companies have over Intellectual Property Rights (IPR) treatment at Chinese companies. Chinese companies across industries—especially in manufacturing—have generated a great deal of bad publicity and ill-will with Western companies. Many Western businesses see it as part of the corporate strategies of Chinese companies to steal designs, counterfeit products, and trade in black goods. The ITO industry has been tarred by the manufacturing sector’s terrible record in this area, in a way Indian companies have never been affected. Western companies—even with their own domestic ITO partners—have historically been cautious about passing sensitive or proprietary information on to third-party vendors for processing. However, now Chinese companies have to prove to potential ITO customers they are able to prevent the leakage of customer information for illicit ends.
Chinese BPO providers have and will still predominantly support South Korean and Japanese companies. History and cultural affinity tie the Chinese, the South Koreans, and the Japanese together. The Indians are finding it difficult to enter these East Asian markets, mostly because of a lack of cultural affinity. The Indians through 350 years of British occupation were able to learn a great deal about Western proclivities; the Indians have had little opportunity to do so with the East Asian countries.
Chinese BPO providers continue to support South Korean and Japanese companies. However, Indian outsourcing companies, such as Tata and Mahindra Satyam, which have tens of thousands of employees worldwide, are well-aware of the potential for BPO in the East Asian markets and are aggressively establishing Chinese operations. The Indian operations based in China using Chinese staff will accelerate expansion of Indian market share in East Asia. Chinese outsourcers, however, are well aware of the threat at their doorstep, as visits to Indian and Chinese BPO shops showed me.
A Tale of Two Outsourcers
Mahindra Satyam, one of the so-called “big four” Indian outsourcers, was based just outside Shanghai in the Zhangjiang Science and Technology Park. The other company I visited, Shanghai SAFE, was a Chinese outsourcer based in downtown Shanghai. The executives of both companies were cordial hosts and took several hours each explaining their operations and plans for development of the outsourcing market in Asia. They also showed me around various departments, introducing me to managers and programmers. Through the tours I quickly realized the IT industry in China is the new sweatshop—for white collar workers.
Services outsourcing spaces are also cubicle cities, with lots and lots of movable-walls separating “bright young things” with heads down at their computers. If you visit such places around lunchtime in China, you will also see heads down on computers as workers take naps. ITO shops are organized by teams placed in different rooms. Each team works on one project for one customer. During both visits, I had to pass through entrances to various departments that were locked with keycards to limit access to the teams behind the doors.
Michael Su met me at the entrance of Mahindra Satyam’s headquarters. Su was Marketing Manager for Mahindra Satyam’s China operations. An affable Singaporean, dressed in a white button-down shirt and tie and black slacks, he quickly guided me the few steps to the firm’s main conference room. Minutes later Su returned with his boss, Sushil Asar, head of the Business Intelligence and Data Warehousing division for Greater China. Asar personally delivered presentations about their global practice and the China-based development plans. These talks were followed by a presentation given by a Mainland Chinese engineering manager on Mahindra Satyam’s projects in offshore development centers (ODC).
Mahindra Satyam impressed me greatly as a truly international company. I did not get the feeling during my half-day orientation that it was an Indian company per se. Something I appreciated about Mahindra Satyam’s approach to meeting customer requirements was that the country desk drew relevant experience from its Asian operations. Asar gave me the example of an automotive customer in Japan: Mahindra Satyam used industry specialists from India and Japan to develop the business requirements and Japanese-proficient project managers and programmers in the Chinese city of Dalian to implement the project.
Mahindra Satyam was well aware of the rising labor costs and high turnover rates of staff in the Shanghai area. So, it had invested hugely in a campus in the Nanjing High and New Technology Development Area. The site was 70,000 square meters and would ultimately support a labor force of 2,500 professionals. It would be the largest Mahindra Satyam campus of its size outside of India. Private Chinese services outsourcing companies, though, travelled a different path in expanding their operations.
My hostess for the day at SAFE was Ms. Cai Jieru. Dressed in jeans and a white, short-sleeved blouse, this twenty-something met me in the marble lobby of SAFE’s headquarters in downtown Shanghai. SAFE was clearly a successful company with about 1,200 staff in China at the time. However, stepping into their conference rooms and offices gave me the same feeling I always had when I visited the offices of Chinese local government agencies: the labyrinthine corridors, dim lighting that makes you squint to see, dingy walls, and the same clunky dark-wood conference tables. Waiting for me in the dank meeting room was Ms. Liu Jia Liang, Director for Development of the U.S. Market, and the Deputy General Manager for the SAFE Group, Mr. Huang Shaobo. Ms. Liu delivered the hour-long presentation about the company. Over 90 percent of its customers were Japanese. Their major shareholder was NEC, the Japanese corporation. I think having a major investor like that was a blessing and a curse: It was great from a cash flow point of view in the regional markets but it was a drag on developing a truly global presence, especially in the West. SAFE wanted to break into the American market. The company was unsure of just how to go about it, though, strategically and tactically. Though they had programming staff in Shanghai, they also “outsourced” many of their own projects to less expensive locations in China where staff turnover was less of an issue than in Shanghai.
SAFE felt like a college study hall, with long rows of tables at which young Chinese men and women played on their computers. It was lunch time at SAFE, and so the atmosphere of course was a little relaxed; but it had also been near lunchtime at Mahindra Satyam, as well. Upon entering their respective, secure domiciles, I got a distinctly different feel for the cultures of both organizations. The Mahindra Satyam corporatized environment had an IBM-feel to it.
Despite being a “foreign” investor in China, Mahindra Satyam had the clear advantage of the two in exploiting the Chinese market for its labor, its geographical position vis-à-vis the northeast Asia market, and even for the business of other multinationals already invested in China. Though SAFE was a Chinese company, it could be argued that it, too, was foreign-invested by a Japanese corporation. The intent of Mahindra Satyam’s investor and SAFE’s investor, though, determined the true trajectory of the companies: Mahindra Satyam came to China with operations already established throughout Southeast Asia and the West in order to use China as a platform to further address the international market.
NEC invested in SAFE as a job shop to specifically serve the Japanese market. The NEC investment would make it difficult for SAFE to break out of its East Asia orbit and establish beachheads in North America and Europe. The Japanese were high-maintenance, as it were, both technologically and culturally, and so would require resources and obligations that a budding company with a different kind of investor would be able to use in developing markets outside its immediate neighborhood. That’s not to say SAFE would not be able to develop business in other countries; it would just be a lot more difficult than if they did not have such sizable Japanese projects and investment.
SAFE was representative of many domestically grown ITO shops that did not start as global players—as Mahindra Satyam had. The markets in northeast Asia were close geographically, culturally, and historically. So, it was easier for Chinese start-ups to work with regional clients rather than obtain customers from the States. The proximity of Japan and South Korea, as well as the potential size of China’s domestic market, stunted expansion to the West. Conditions for domestic companies also reinforced the perception that Chinese companies would not be global players, with the exception of those that had acquired Western assets. However, even those companies would still have a difficult time convincing Westerners of their credibility in managing the assets to international standards.
Within the domestic Chinese market, as well, companies such as Mahindra Satyam would have more credibility working with the thousands of Western companies that had set up shop in China than would homegrown Chinese companies. Mahindra Satyam, and companies like it, would likely already be hosting services through its India centers for Western multinationals investing in China. Mahindra Satyam was more disposed than SAFE to speak the Western company’s language (business-process and corporate-cultural), even in China. Counter-intuitively, though, BPO operations in China’s interior could possibly leap-frog their East coast cousins in their share of the Western market and in their sophistication.
On the Hunt for BPO in Deepest China
Chengdu is a large, sprawling city of more than five million inhabitants who live under a Los Angeles-style canopy of haze and pollution. As the capitol of Sichuan province, the city has a reputation for its spicy food and friendly residents. It is also the largest Chinese city nearest Tibet. By 2010 the city had also gained a reputation throughout China and with many Western multinationals for becoming a services outsourcing hub that met international standards. In the spring of 2011 I made a visit to the Chengdu Tianfu Software Park Co, Ltd., where I was met by Cara Long, who worked in the business development department for the Park. Cara was a reserved, sober young lady with short, bobbed hair. After a formal presentation about the park, which she delivered in fluent English, she took me on a tour of the complex.
The area had more the feel of a university campus than an industrial park. Despite the frigid drizzle, maintenance staff ambled about the lawns pruning angular shrubbery and emptying trash bins. Few company employees, barricaded behind darkened windows, were outside during business hours. I was surprised how cold, it became in the six-seater golf cart that we drove around the campus. Perhaps because it was so cold, the driver drove the cart so fast that I could hardly take in the architecture of the place, which had the most modern design of any I’d seen elsewhere. Still, I was able to catch some of the names and identify some of the logos of multinationals that had landed operations in the Park: IBM, Accenture, Maersk, Amazon, Siemens, and more. Cara explained to me how such a remote city as Chengdu had come to attract so many brand-name multinationals to invest in the area.
The key to Chengdu’s success actually lay in the eastern seaboard cities with BPO enterprise zones becoming victims of their own success. Cities like Shanghai, Suzhou and Dalian—near the Koreas—were rapidly becoming expensive as salaries increased to reflect the dearth of experienced talent in the area. Local economies, as well, were also becoming more expensive as foreign and domestic investors bid up real estate property prices. Services outsourcers were amongst the first to build operations in Chengdu, to reduce the costs of their operations. Chengdu, in the mid-2000s, had a surplus of university graduates from schools built during the 1950s. Mao Zedong moved much of the military-industrial complex of the country to the remote region to more easily hide the sector from nuclear attack by the Soviets. The military had established universities and R&D centers in Chengdu and other locations in the Sichuan and Hunan provinces to bolster the country’s military capabilities. So, Chengdu already had a tech base upon which to build when high-cost services outsourcers on the coast needed to outsource some of their own projects.
The technology requirements of the domestic outsourcing companies became the blueprint for the kind of infrastructure multinationals would also need to support remote operations. Most of the multinationals—about 40 percent of which were Western—used Chengdu as a platform upon which to maintain backups of the data used in transactions in their home countries.
The government-run corporation that managed the Park also had its own software development outsourcing resources with which it supported its customers in the Park. Cara, who had relaxed considerably during the tour, showed me the offices of two groups: one was an application development department; the other was an embedded systems team, called Android Lab. The first group had about 40 programmers, nearly shoulder to shoulder, at desks separated by low partitions and upon each of which sat a flat-screen monitor and keyboard. Ninety-percent of the software engineers were young men, with a handful huddled in collaboration at the desks of co-workers. Park management had placed the Android group in a large hall with marble floors and little adornment. The Android engineering team was only about 20 people large. Facility designers had organized the desks to allow the team to expand at any time into the remaining space to easily quadruple the size of the group when necessary. Rapid expansion of engineering resources seemed feasible under the Park’s management regime.
Unique among the dozens of economic development zones I’d visited in China, the Tianfu Park Corporation offered training packages to companies in the Park. Training courses prepared staff for work in various programming languages and in business English, as well as other disciplines. The Park Corporation had also set aside space for business incubators and offered subsidies to startup businesses, much as was the case in Suzhou. The Park had about 100 companies in its incubator, each with three-to-five staff, mostly fresh graduates. It would be years, if not decades, though, before Tianfu and other services outsourcing campuses would make a substantial impact on employing the millions of university graduates pumped out of the country’s schools—China’s 20/30 employment challenge.
A significant challenge ahead for the country in promoting the services outsourcing industry was finding and matching eligible staff for positions in services outsourcing. Finding staff with good levels of English was a major challenge for China-based outsourcers. Another challenge confronting companies was excavating potential staff with a hospitality mentality. Though workers may not necessarily face customers in the same way as hoteliers and restaurant staff, they do require an education in how to be considerate of the needs of others. China’s go-go society does not support such an education in the home. Most parents want their children to distinguish themselves as high-income earners. The faster the better. Most university curricula are geared toward engineering and the sciences. Parents, children and the society at large see little value in studying the ins-and-outs of psychology, human interaction, and problem-solving.
School systems are more intent on harmonizing individual initiative into group behavior. Teachers and professors teach students to look to those in authority to proactively address potentially contentious issues. The society encourages citizens to take a passive-aggressive approach to conflict resolution. In some instances, passive-aggressive quickly morphs into explosive behavior. Neither approach is appropriate in solving a customer problem, whether across a sales counter, telephone line, or international dateline. It is increasingly incumbent on services outsourcing companies in China to train staff in weeks-long boot camps to instill many of the soft-skills Western and Indian service providers take for granted. The education system and lack of parental guidance are creating a dearth of talent in a sector the government is betting on to provide millions of jobs.
By 2010 the lack of skilled, experienced staff in the high-tech services industries was creating a huge drag on China’s development of its ITO and PBO industries. Escalating salaries for staff, compounded by companies poaching employees from other companies, was threatening to stall growth of the sector. Already, with the global financial crisis of 2008–2009 decimating millions of IT-related jobs in the West, salaries for such workers on the global market began normalizing. Salaries for Western IT and other services staff dropped near Chinese levels, eroding the cost advantage between workers in the two regions. The nearly free cost of working on the Internet platform accelerated the phenomenon after 2010. Chinese services may grow too expensive in the international marketplace before they can eclipse Indian competitors.
Beijing did not put all its employment-related eggs into the services outsourcing basket, however. The leadership has been intent on hanging on to its heavy metal manufacturing industries. Central planners are betting heavy metal sectors would provide millions of jobs in the coming decade, meet industrial demand in its own domestic market, and also provide the capital-intensive products that will conquer markets in other countries, as well.
Notes
1. “Global Outsourcing Market to Be Worth US$1,430bn by 2009,” Computer Business Review, August 2007. Available online at http://cbr.co.za/article.aspx?pklarticleid=4714.
2. Tian Chengping, “Labour and Social Security Development in China,” speech, September 14, 2006.
3. Ron Gluckman, “China’s VanceInfo Technologies Tries to Outdo Indian Outsourcers,” Forbes Magazine, October 26, 2011. Available online at www.forbes.com/global/2011/1107/companies-people-technology-service-provider-chen-outsourcing-india-gluckman.html.
4. Ibid.