Where’s the hottest, fastest growing, and most promising IT industry in the world? Hint: It’s not India. China, long a global leader in manufacturing, is gearing up to provide high-quality, low-cost IT services to anyone who will come. Already a $4 billion-per-year business, the Chinese software industry is forecast by the Gartner Group to be as big as India’s by 2007.
Labor rates are remarkably low-programmers earn about $500 per month-and few experts expect the kind of wage inflation that is already plaguing the Indian IT sector. All of this makes China a required stop on the global IT highway.
But China is not India, and doing business in China requires tailoring your approach. The problems many western IT executives encountered in India-slower delivery times, higher costs and lower quality than expected-will be exacerbated in China, at least for now. Despite high-quality programmers, the Chinese do not have the project management experience of the Indians. English skills are generally poor. And piracy is still a major problem.
This doesn’t mean China’s not worth the effort. But Western executives need to be realistic about what they can accomplish there.
Earlier this year I sat on two panels to discuss how American companies can participate in the booming Chinese IT market. One panel was in Silicon Valley, the other in Beijing. Those discussions, coupled with my experiences in China over the last 10 years, highlight some important considerations and lessons for Westerners looking to enter the Chinese market:
* Get started now. The Chinese IT boom is already in full swing. IBM, Microsoft, Sun, and Intel have operations in China, and more companies are following. Top-tier IT firms on both sides of the water are pairing up in collaborative partnerships. Foreign investment in privatized state-owned businesses is spiking. And U.S. venture capitalists are zeroing in on potential Chinese portfolio companies. Silicon Valley Bank recently led a delegation of 25 top-tier venture capitalists to scout Chinese investment and partnering opportunities.
* Sell the Honda, not the Cadillac. Recently I met with a leading Chinese telecommunications company on behalf of one of my portfolio companies, which makes a wireless integration product. When I showed my Chinese contact the product, he was impressed. Then he told me his group could build something that was 60% to 70% as good in six months-at one-quarter of the cost. Even that product, he said, had more functionality than the market required. To sell in China, Western companies need to offer stripped-down, low-cost versions of their products, and be prepared to accept lower prices.
* Localize and customize. Localizing in China doesn’t just mean translating text into Mandarin (though that’s a good start). China has different accounting rules, different reporting customs, and back-office processes that vary greatly by company. For Western vendors, this means setting up a local team that can quickly tailor products to individual customer needs.
* Find a good partner. China can be a confusing place. Having a well-connected local partner is critical to doing business there. But be prepared to invest in your partner. I know several U.S. IT firms that send personnel to China to train their counterparts in project management, programming and English.
* Manage IP piracy. Piracy is still a real concern in China, especially if you’re looking to outsource IT work. But the reality is that the cost advantage of doing business in China is too big to pass up. Not revealing core architecture or source code is one obvious way to limit piracy. Another is to work in open-source code, such as Linux.
Perhaps the most effective strategy is to align interests with your partner, such as through a joint venture, in a way that limits your partner’s incentive to steal your IP.
Despite the difficulties of doing business in China, no IT executive who is serious about staying competitive can ignore this huge country. With IT wages that are 20% to 30% lower than India’s, and with an economy that’s growing 7% to 9% per year, China is a huge emerging market with a long-term cost advantage. For the companies that get in early, commit to their Chinese operations and invest for the long haul, the rewards in China will be well worth the trouble.
Jim Boettcher is a General Partner in Focus Ventures, a Palo Alto-based late-stage venture capital firm. He has extensive experience in the Asian IT market.