This is China! BLOG

Hung Up in Hangzhou

A few days ago I spoke in Hangzhou on the development of China’s IT- and Business Process Outsourcing industries. The day before the conference I decided to play tourist in Hangzhou: visit some friends at a hotel in the Hangzhou Economic Development Area – just south of the city center - then back downtown to enjoy a walk around a part of West Lake.

Unfortunately and rather traumatically, I wound up being trapped for an hour and a half in a taxi with the most obnoxiously talkative taxi driver I’d ever encountered in my life while trying to escape sclerotic downtown traffic. With plenty of time on my hands in the cab I came to a dramatic conclusion about Hangzhou as an IT- and BPO center: diversify or die.

The Hangzhou City government and Ascendas, the Singaporean developer of industrial and commercial properties, sponsored the day-long event I attended after my entombment in the Hangzhou taxi. Several hundred industry pundits, end-users and hangers-on attended. The topic of my talk was “Hangzhou Pioneering Spirit and the Development of China’s Services Outsourcing Industry.” I chose the topic because I figured if I couldn’t gather enough information about Hangzhou’s IT- and BPO industries, I could always drone on about whether China will catch up with India in these high-tech industries.

In developing my talk I became convinced of several aspects of China’s development of its IT-/BPO industries: without the same sort of Big Bang the Year 2000 bug-fix gave the Indian industry, the Chinese development curve for services outsourcing will be markedly different; Hangzhou is behind other cities in developing its services outsourcing industries; the composition of Hangzhou’s services outsourcing industry will be quite different from that of other cities.

I’ve written several times before that without the sort of Big Bang India had to launch its services outsourcing industries China will take longer to develop its talent, its branding and its captive customer base. However, China’s strengths – the development of the infrastructures in its second- and third-tier cities; software and hardware education programs that are pumping out hundreds of thousands of graduates from universities each year; and central government diktat – are exactly India’s weaknesses vis a vis the services outsourcing industry. India’s success in the global marketplace has put extraordinary pressures on the infrastructures of its IT centers like Mumbai and Bangalore; it has a dearth of graduates able to support the burgeoning marketplace; and its coalition government – at national and local levels – are riven with self-interest and inertia.

However, China is not ready on a grand scale for prime time in the global markets. Certainly, there are individual success stories in services outsourcing from China – and I was quite happy to chat with a few of those early starters at the conference – but the quintessential fact is that China still has not had the kind of industrial combustion chamber that India had with Y2K.

Or has it? One thing China certainly has that India does not and will not for some time is a relatively rationalized marketplace domestically in which entire industries are scaling up rapidly and which will find it more cost-effective to outsource their back-offices. That includes Western companies that have or will be turning over management of their companies to Chinese nationals. The Chinese, of course, would prefer to outsource to China rather than to India. And it is a given that Chinese that own or manage Chinese companies will outsource to service providers in their backyard before they will send work over to India – or even to the Phillipines.

Hangzhou is a perfect case in point. I made the point during the talk that nearly half the pioneers that made Shanghai what it was in the 1920’s and 30’s, and a high proportion of those today are from Zhejiang province. In particular, Shanghai people feel a much higher affinity with Hangzhou than they do with my hometown, Suzhou. Indeed, Shanghai business people who have seen the cost of doing business in Shanghai escalate have been outsourcing back office activities to Hangzhou. This is especially the case in banking and finance, where the services outsourcing companies that either made a presentation at the Conference or with whom I chatted were already supporting such projects.

Certainly, Hangzhou needs to diversify its services sector. Tourism is not enough, what with the relatively small footprint of the West Lake District and the soul-rending traffic that has become as much a hallmark of the city as the Lake itself. Manufacturing now has to go upscale, because of the city’s sensitivity to environmental issues.

Now if only a guy can just find a decent taxi in the city…