The Current State of Services Outsourcing in China

You can never know what’s going to come out of David Scott Lewis’ mouth next — but you should know whatever he says will be insightful and you’d better pay attention. An ex-METAGroup analyst who — along with many others — lost his job when the company was acquired by Gartner Research, he had never been to China, aside from Hong Kong. But not so many months ago, he moved overseas because little was keeping him in the US and love beckoned from afar (and online). The last time we caught up with him — in July 2005, when he'd returned home for a brief visit to speak at the AlwaysOn conference at Stanford University — he was providing consulting services in China, primarily to US clients trying to locate just the right service providers to work with.In this interview, Mr. Lewis supplies a no-holds-barred rundown on the current state of the outsourcing business in China. Part 3 of the three-part article.

Talk about the size of Chinese companies.

…You have to realize, China doesn't have that many large companies. It's mostly SMEs [small and medium-sized enterprises]. There are 1,000 instances of SAP in China. We all joke, "Can anybody name any successful implementation from SAP in China?" But then the follow-on joke to that is, "Well, are there any successful SAP instances anywhere in the world?" So there are 1,000 instances, mostly state-owned enterprises. They haven't been successful. But I suspect that it's not SAP's fault.

One venture capitalist…was telling me utility computing; that is the way to go for China — because that way they can't copy it, right? Software is a service, and you can't copy it. There is a problem with that… Do you have the icon to press payment to the local official, payment to the provincial official? What do you do about that kind of stuff?

It just isn't the way Chinese do business. It's all relationship — all guanxi, all payments.

I call it, "The Dancing Envelope." You sit at a table. You pull out your envelope and put it down. Ten minutes later it's there. Ten minutes later, it's there. Fifteen minutes later it's here. And then 10 minutes later it's in somebody's briefcase. You watch the envelope move around the table and then it gets in the guy's brief case and that is the payment.

This is actually how it works? You have seen this?

I have seen this. I have seen the dancing envelope. The guys are giving driver licenses there, and they all fail the test. First of all, you walk there, and the Chinese guy takes the test for you. And then he fails, and so then the guy that runs the administration — he comes back out with the answers to give to him.

…The longer I am there, the more I realize that we are different planets. We are not different countries.

…I tell everybody, don't ever try to understand the Chinese. Just learn to accept what they do, realizing you are in their playpen so you have to play by their rules. Don't try to understand them. That is not important; but what is important is to accept them and to try to figure out where they may be coming from… You don't understand it, but you need to empathize with them — try to see the framework which they are working under.

How should a company prepare to start working in China?

My most valuable service is the short list… I know what everybody is doing in China and say, "OK, these are the three companies." You don't want to be traveling all over China and trying to figure this out yourself. You will go crazy. Three companies will save you a lot of money. Come over here and these are the three guys to talk to.

What does it cost a company to get that type of service?

Between $5,000 and $20,000, depending on how much they want.

Does it have to be a million dollar project to make that pay?

No. Half that. Most Chinese companies couldn't handle a million dollar project, so I wouldn't go in with a million dollar project. Even a half million would be stretching it for a lot of them.

When a company is working with any service provider, frequently they're brought on site in the US or in Europe or wherever the primary internal team is to work with them for a while and get the specifications worked out. Does it work that way with the Chinese?

The Chinese have more visa problems than the Indians do. There is some indication that it might get resolved. What I have said to some of the US officials in the US Embassy in Beijing, is, "Look, guys, you know this is stupid. How many Chinese do we know strap bombs to themselves and blow themselves up or run jets into big buildings?" We don't have any history of the Chinese doing this. I understand that we have to be very equal to everyone, so let's make it miserable for everyone; Indians, Chinese and everyone. Well, that is just not practical. We are losing out because of that. So there are going to be some ways of fast tracking some of the visas for the Chinese.

But you still have a language problem. That is going to be one of the key barriers. The language problem won't go away quickly.

It's a serious problem for them. The people that they get that speak English more often than not are 25-year-old females who studied international business in school. Usually not at a top tier school, either. So they are enthusiastic; they have a lot of energy; but even within the company, they are not the sharpest tacks.

And the Chinese companies basically are cheap. They don't want to spend any money. That is another one of my complaints. When they go to the US, they send a 28-year-old guy — it's almost always a guy that just finished his graduate degree in engineering. So he has three problems. One, he is young; he has no experience. Two, he is an engineer, not a salesman. Three, he doesn't have any cultural affinity. Although, he thinks, "Oh, I watch American TV and I can speak English, therefore I can understand Americans." No, you don't, OK?

They don't like to hear that either. Most of the overseas Chinese really think that they understand Americans. I find that when it gets right down to it, they don't understand us at all, but they think they do and that creates a little bit of a problem.

I talk about the dancing envelope, and all the Chinese laugh because they know what I am talking about. I say, "Look. Americans, we can't do that stuff. That is your culture. You know how to do the guanxi payments and all that nonsense. Karaoke bars. All-night massage parlors. That is the deal. That is the way they do business. That is one reason the Chinese and Japanese businessmen can get along well, even though countries fight.

But then they come here — business deals being done at golf courses, done at French restaurants where you are ordering a different bottle of wine for each course. And they don't know anything about that. To them a good bottle of wine costs $6.

They don't understand culturally what we do. I even tell them this, and this kind of upsets them… I tell the Chinese, you can be cheap and keep your 28-year-old, but don't complain. Then they complain to me, "We don't have any sales." I say, "Look at what you are doing. You are sending the wrong people in. You can't do that." They don't want to spend the money.

Some of the Chinese firms are still trying to figure out how to handle this well. So far I have not seen one firm that handles it well, but there are firms that handle it better than others.

What do [American companies] do after they have that short list from you? What happens next?

Then it's a matter of figuring out who they actually want to work with — and oftentimes it's none of the above. They are just really not ready to work with anybody yet. Maybe they go to a couple of cities. It becomes more justifiable to at least check out the landscape and see what they should be doing. It's fine to come back with a negative decision saying there is just really no one we should be working with.

If somebody said they wanted to do manufacturing as part of a major supply chain operation, I would say, "Well, good luck. I can give you your three best companies, but none of them is going to match." That is OK. Sometimes it's still worth checking out those three companies and kind of saying, "You are right. It's not going to work out. And we can just skip this for another year or so and just mark it off our plan."

What does that trip look like? What are they doing over there?

Usually it's going to be a day-long meeting with each [vendor]. It could be a half a day, but usually it's going to be a day long because the Chinese host is going to take him out. That is guaranteed.

It starts about 10 and will end about 2.

That quick?

I mean 10 in the morning until 2 at night. It goes all day. Maybe at 5, there will be a break until 7 or 8. They want to go back to the hotel and change and freshen up or whatever, and usually the Chinese want to do that. They want to get back to their other core businesses, and then they go out. I tell the Chinese, "You know, you have to watch yourselves when you are with Americans. They are not Japanese businessmen. You don't take them to those certain bars. Now if they want to get a legitimate massage, that is cool. They will appreciate that, but make it legitimate."

Are companies going to send women over on these business trips? Is that a bad idea? Have you seen women come over?

No. There are some senior women in companies, but it's rare. They may join you for dinner, but then after that, the boys go out to play.

So I may be the top person in my American company coming over there as a female, checking things out but I am not going to join the late night activities.

Honestly, if there was a situation like that, I would probably recommend some of the Chinese firms that have senior management all educated in the United States because then they will know that that is not going to be appropriate. I would warn them ahead of time, "Here is what you are going to be up against and either you go for it or you don't. If you are comfortable with it, that is fine." We tend to moralize about a lot of stuff, so don't complain, "Oh, that is not right." It's their culture. So either you accept it or you don't play there.

Here is another problem with the Chinese. They don't focus at all, and there is a big push in the Chinese government to work with the EU. They are really against what they view as our unilateralism, which could be argued one way or the other. But regardless, they view the US as unilateral world domination, and it scares them. So they want to build up the EU relationship. There are problems with this. The problem is that on the IT side, the Europeans will not do anything with China. So I wrote an article… I got a lot of letters from people, and they are telling me, "Look, we are never going to work with the Chinese." One guy, a CIO of a major German automotive company, said to me, "I can drive [to new EU member countries] in an hour and a half. They speak German." And he said, "Remember also, as EU countries — the advanced EU countries — we get tax benefits for giving work to the new EU countries. Why would I go to China when neither one of us speaks English as a first language?" [Central] Europe has that whole range so there is really no reason for any of the European countries to go to China. Although there are political reasons why the government would like that to happen, in reality, they don't want to do that.

The Chinese don't see this. They just hear the central government saying, "EU, EU, EU." So one of the software parks actually sent a delegation to Italy, and I wrote them up. I said, "You are not going to come back with anything. Here is your European vacation." That is exactly what happened. It turned out to be an Italian vacation. They came back with no orders whatsoever — nothing. Because the Europeans will simply not commit to China. They'll commit for manufacturing but not for service outsourcing. There are zero reasons.

I say, "America is your market to lose. As India goes up the food chain, you are the only country that has enough resources and talent to actually capture the US needs." That should be its market; the US. Japan, they already have. There is nothing for them to do in Japan. The Japanese will not give them any higher level work. The Japanese give them specs this thick and say, "Do it." It's Java programming, embedded applications to a spec or C++ programming to a spec. The Japanese won't give them anything higher. Usually the contracts are from a Japanese solution provider, so it's a subcontract on a Japanese solution, so they don't get any real interface directly with the customer.

So they're not getting practice at [working directly with clients]?

No. They have gone as far with the Japanese as they can go. The Koreans only pay about 20% more than domestic clients, and Korea itself is not big enough. The city I am in is actually the only city that does anything really with the Koreans — . Chingdao. We have over 70,000 Koreans. We will have 150,000 in five years. We are about 40 or 50 minutes from Seoul. It takes longer to get from downtown Chingdao to the airport than it does to get from the airport to the Seoul airport.

Useful Links:

Analyst David Scott Lewis Shares His China Perspective, Part 1

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Your China Strategy Development: Advice from an Analyst, Part 2

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David Scott Lewis on IT Outsourcing
http://chinasourcing.blogspot.com/

His column, "What China Needs is Emily Post" on Always-On
http://www.alwayson-network.com/comments.php?id=P6486_0_11_0_C

MIT TechnologyReview coverage of Microsoft's Beijing lab
http://www.techreview.com/articles/04/06/mag_toc.asp