Reply #17: `Dragon's Head' May Intensify U.S. Jobs Exodus

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`Dragon's Head' May Intensify U.S. Jobs Exodus: Andy Mukherjee
2004-03-15 16:10 (New York)

`Dragon's Head' May Intensify U.S. Jobs Exodus: Andy Mukherjee

(Commentary. Andy Mukherjee is a Bloomberg News columnist.
The opinions expressed are his own.)

By Andy Mukherjee
March 16 (Bloomberg) -- China has put together a software
industry group it unofficially refers to as ``Long Tou,'' which
in Mandarin means ``Dragon's Head.''
For what it's supposed to do, the name couldn't have been
more appropriate.
Just as a dragon's powerful head leads the rest of its long
body into battle, the 50-company group set up by the science and
technology ministry in Beijing will guide China's low-wage
onslaught into computer software.
If the China Offshore Software Engineering Project, as the
group is formally named, succeeds, hundreds of smaller companies
could follow.
Forrester Research Inc. has forecast 3.3 million U.S.
service-industry job losses between 2000 and 2015. If China
becomes a strong competitor for those jobs, the number could go
higher.
The question is, ``Can Chinese software makers do it?'' For
a possible answer, look at what makes Indian software companies
so successful.
Indian software developers typically have 60 percent to 70
percent of their people in India, where programmers earn a sixth
of what code writers charge in the U.S. The remaining 30 percent
to 40 percent of employees work in the U.S. and Europe, and bid
for business and manage projects. The geographical dispersion of
the workforce leads to a 24-hour workday.

Global Model

How do we know the Indian model works? Net income at Infosys
Technologies Ltd., India's No. 2 software exporter, was about
$12,850 per worker in the year ended March 2003.
In comparison, net income per employee at Plano, Texas-based
Electronic Data Systems Corp., the world's No. 2 seller of
computer services, was $8,150 in 2002, according to Bloomberg
Data.
Can Chinese companies replicate the Indian model? They are
doing just that. Take Bamboo Networks Ltd., a Hong Kong-based,
closely held company.
Bamboo is a five-year-old software developer, one of the 50
companies in the ``Dragon's Head.'' It has 175 employees and does
programming work in the southeastern Chinese city of Guangzhou.
By comparison, India's Infosys had more than 15,000 employees a
year ago, and is adding between 1,500 and 2,000 code-writers and
project managers in the current quarter.

Matter of Time

Scale isn't such a big deal. Chinese software companies can
grow just as fast as their Indian competitors did in the 1990s,
as long as they can tap opportunities worldwide, while keeping a
majority of their people in China, another low-wage country.
``While we're not an exact parallel, we're in very many ways
similar to Indian software companies,'' says Gene Kim, 34,
Bamboo's founder and chief executive. Kim says his priority is to
increase the services his company offers global clients, such as
investment bank Lehman Brothers Holdings Inc., consumer goods
maker Procter & Gamble Co., computer company Hewlett-Packard Co.,
and Japanese cellular phone maker NEC Corp.
Bamboo's Guangzhou unit received the highest quality
certification given by the Software Engineering Institute of
Carnegie Mellon University in December, two months after Newsky
Technology Group became the first company on mainland China to
win the Capability Maturity Model Integration Level 5
accreditation, the highest ranking.

Quality Assurance

Indian companies have routinely used certifications to make
their mark. Manoj Srivastava, managing director of New Delhi-
based Espire Infolabs, which won the CMMI quality recognition at
the same time as Bamboo, said the award was evidence that
``Indian organizations are constantly raising the bar in
comparison to our biggest competitor, China.''
Bamboo and Newsky show Chinese companies won't be pushovers.
They won't be held back by lack of manpower. India has a
pool of more than 2 million engineers, 8.5 times the size of
China's technical workforce. Still, college enrolment in China is
rising rapidly, and more students are learning English.
Bamboo's Kim doesn't rule out going into India at some
point. At the same time, Indian software companies such as
Infosys, Tata Consultancy Services Ltd. and Satyam Computer
Services Ltd. have already set up operations in China.

Global Competition

Ultimately, India and China may complement each other's
strengths. Indian companies will use Chinese programmers for
writing basic codes, wile Chinese software developers will use
the Indian talent pool to recruit systems architects, project
managers, and other top professionals, of whom there is a
shortage in China. To cite just one example, Rajesh Rao, Bamboo's
chief operating officer, is an Indian national who worked for
five years at Infosys in early 1990s.
``India has a much deeper talent pool, but China is going to
catch up,'' says Rao, 32.
For the U.S., it's time to get real about jobs outsourcing.
India and China will be formidable sources of wage-cost
advantage. And don't forget the Philippines, or countries in
Eastern Europe. Protectionism won't help, for it could only lead
to trade spats, which don't help anyone.
``No one said globalization would be easy,'' says Morgan
Stanley Chief Economist Stephen Roach. ``But in the end, it sure
beats the alternatives.''

--Editors: Ahearn, Henry

Story Illustration: See {TNI CHINA SOF BN <GO>} for other stories
on China's software industry. For a tour of trade stories, see
{CNP 02877200102 <GO>}. For statistics on U.S. employment
figures, type {ECST <GO>}, {19 <GO>} and follow prompts. To
comment on this column, go to {LETT <GO>} and write a letter to
the editor.

To contact the writer of this column:
Andy Mukherjee in Singapore (65) 6212-1591, or
[email protected].

To contact the editor of this column:
Bill Ahearn in New York (1) [phone], or
[email protected].