FIRST HAND: IT and the East: An Interview with James Popkin and Partha Iyengar

A growing concern for any Western high-tech firm is what to do about the increasing importance of Indian and Chinese IT companies. These two countries are not only producing some of the world’s best trained computer scientists and engineers — which more and more
Western firms are tapping into — but also creating intellectual property and innovation that is posing a challenge to the same Western companies that are sourcing from them.

CSC World: In addition, there is an emerging alliance between Indian and Chinese IT companies that is allowing them to compete globally in the IT services market, among others. So say James M. Popkin and Partha Iyengar in their book, IT and the East (Harvard Business School Press, 2007). Popkin, group vice president and research fellow emeritus at Gartner, Inc., and Iyengar, India-based research vice president at Gartner, discussed with CSC the growing importance of and challenges posed by the “Chindia” bloc.

Your book, IT and the East, reviews how the center of technology has been shifting steadily west for over 200 years, from Europe, to the Eastern U.S., to the Western U.S. and now, most recently to China and India. Why is this occurring?

Popkin: There are two things happening within the IT industry that make the Asia Pacific region interesting. One is that you have a very large number of people living in emerging economies and roughly 60 percent of the world’s population in Asia-Pacific. The economies themselves are growing very rapidly, and modernizing. Along with this economic growth comes a very fast growing adoption of Information and Communication Technologies (ICT). And ICT is going to be adopted in those economies a little bit differently than in the United States and Europe because there are differences in culture, in the way they think about process, in the way they transact business, in the way people conduct their daily lives. On the supply side, wealth is being generated in low-cost manufacturing, which is very important to the ICT hardware
industry. And with Y2K, the Indians hit the world stage with IT services and outsourcing
application development. That created a new service industry, based on a highly educated, low-cost labor force.

CSC World: Are China and India beginning to create innovation that drives products and services, as opposed to innovation coming from the West?

Popkin: Yes, we’re beginning to see that in a couple of different ways. The Indian business process outsourcing industry is exploring innovative ways to deliver outsourced services. And that has led to new types of business process improvements, or, in many cases, Indian companies are writing software to help them automate processes that they were supporting through outsourcing arrangements. They are not solely relying on low-cost labor arbitrage to build their business; they are focusing on ways in which they could actually do those processes better and, in some cases, new types of software products are created, as well as the services that are being provided.

We’re also seeing a lot of investment by Western companies. For example, the Microsoft Development Lab in Beijing is generating a significant amount of patent
activity for Microsoft. And they’re not there simply because it’s a low-cost location. They’re taking advantage of very smart people who think differently and are interested in dedicating themselves to the ICT industry.

Iyengar: The trend, especially amongst the Tier-1 Indian providers, is to do an increased quantum of “higher end” work in addition to the low-end — and increasingly commoditized — work. This definition of higher end is significantly broader than just business process  improvement, and I’m not sure we could specifically characterize or segregate that category from the remaining areas. However, if I broadly interpret business process improvement to mean things that have direct business value — characterized by business-level SLAs as opposed to “technical” SLAs — then I’d have to say that, conservatively, probably 25 to 30 percent of the work being done by at least the top 10 providers out of India would be in this bucket. For the next 10 to 15 vendors down, that percentage would still be somewhere in the range of 10 to 15 percent.

CSC World: You devote a section of your book to an examination of the possibility of China and India (“Chindia”) combining their complementary economic strengths to compete for world dominance in IT. What has to occur before “Chindia” can dominate? And when do you think it will happen?

Popkin: There are a couple of points that we’re making. Regarding “Chindia,” we think there will be significant measurable progress over the next five years. It means that there will be Chindian companies that take advantage of working together and either provide services for export in a way that is unique or they develop scale, such that they become very large in serving not only the international markets, but the Chinese and Indian markets. And, these Chinese and Indian companies will have the potential to disrupt international markets outside
the IT industry as well.

My favorite case study in the book is the manufacturing pact between India’s Bharat Forge Ltd., the world’s second largest forging company and the largest in India, and China FAW Group. ThyssenKrupp, the No. 1 forging company in the world, has now found a formidable challenger in the growing economies of China and India. Bharat Forge/FAW has the strength of being local, including understanding what the local markets are like, and having the relationships and political connections that come with that.

There is certainly a lot that the Chinese and Indian governments can do to make this happen more quickly. But ultimately it will get played out in individual markets and industries. In our book we advise companies of the need to understand their competitive stance in both existing markets and new markets, and that they will need to eventually contend with “Chindian” companies.

CSC World: What are the major hurdles — political and infrastructure — to doing IT work in India and China? And what about the issue of foreign direct investment (FDI)?

Iyengar: The biggest single hurdle to doing business in India is the quality of the workforce. That needs to be addressed above all else. Indian companies have proved themselves to be quite adept at working around the other major hurdles, like political impediments — which have all but disappeared from the scene now — and infrastructure issues — most companies rely on their own infrastructure, for the most part. Companies are quite effective in mitigating country-level infrastructure shortcomings, or increasingly are effective in lobbying with the government to address these issues. An example is the fast-track approval (by Indian standards!) of international airport status for Bangalore. However, the issue of workforce development at a macro scale is something that is the most challenging issue for all these companies.

FDI is more of a macro country-level issue and not an issue of relevance specifically for the IT industry in India, since they themselves do not rely on FDI for investments in this sector; the majority of them are quite cash-rich and have the capacity to make significant investments to support growth through internal accruals or by directly tapping the investment community locally or globally.

Popkin: As for China, they have been masters at pulling in foreign direct investment in enormous numbers — $60 billion a year. And, because of the government structure, they’re able to direct where that spending occurs, where the infrastructure goes, so they’re able to build things very quickly.

Therefore, if there is a disruption in the capital flow, either from FDI or in trade, that can cause a disruption to the Chinese economy. Also, local government corruption or the possibility of social unrest could slow or disrupt the economy, or it could slow and disrupt the way people think about China.

The 2008 Olympics will be a significant milestone. The way in which China handles it and the face that they put forward to the rest of the world will have a very important effect on how China develops, as well as on the “Chindia” scenario.

CSC World: Should your scenarios play out, will Fortune 500 companies have their IT shops and/or their CIOs headquartered in India, possibly even China, within the next few years?

Popkin: I think you’re beginning to see the Fortune 500/1000 multinationals beginning to look at that question, looking at what kind of IT services they need for their operations there. In some cases they may simply be selling to those countries, but not necessarily doing any manufacturing, or direct service provision. In other cases, they will have operations in both of those countries, and once they have the direct operations there, then they might have a country-level CIO or regional CIO. And they may have to provide IT services directly, either for infrastructure reasons, or because it makes sense economically or because of language issues.

At this point, I think there’s a relatively low level of multinationals’ executive IT management in those countries. Many companies have data centers in Singapore or Hong Kong. I think, over time, as their operations in each of those countries increase, the IT departments will follow.

When would you have your global CIO there? I’m not sure. But you may very well see an increase in the level of IT executive management that gets posted in those countries because of the scale of the IT that they require.

CSC World: So should Western IT organizations be at all threatened by this shift? If so, what should they be doing right now to prepare for this?

Popkin: We’re certainly not trying to be alarmists, but, yes, I think they should be concerned about it. Many companies need to constantly find new markets as a way to keep their revenues and profits rising. And Asia-Pacific represents a very large emerging market. Operations will most likely need to be local and, as those operations grow, so will the IT demand influence the proportion of the IT budget spent in those countries.

Second, regarding the Indian service companies, I think of them as multinational corporations that happen to be headquartered in India. Therefore, IT executives can buy from them and get service from every region of the world.

In summary, there’s not only the threat in terms of the competition that’s going to arise within India and China for those emerging market consumers, but also what happens when those Indian and Chinese and “Chindian” companies compete in international markets? Western companies need to prepare for that.