China's hardware, India's software

China’s cultural sector, like everything else in the country, is undergoing a mass construction boom. This is evident in large-scale projects like Beijing’s National Grand Theater, a giant egg shaped complex designed by French architect Paul Andreu with a controversial price tag of nearly 3 billion yuan. Not to be outdone, Shanghai’s government recently announced plans to build a ‘cultural network’ to be completed by the time it hosts the world expo in 2010. The ‘network’ will comprise one cultural institution within 15 minutes walk of any spot in the city and include 40 libraries, 150 museums and 200 community cultural centers. Skeptics worry, however, that these venues are being built with little regard for their management and content. It’s one thing to have the hardware, these critics contend, but what China now needs is to concentrate on software.

Across the border, India faces the opposite problem. Bangalore, the country’s ‘silicon plateau’ is groaning under the weight of a crumbling infrastructure. Frequent power cuts and paralyzing traffic jams are forcing the big IT companies to look elsewhere to expand. India has the software, they complain, but lacks the hardware to sustain it.

Much attention is being paid to the fact that with over a third of the planet’s population and two of the fastest growing economies in the world, Asia’s giant neighbors are entering a new era of cooperation. Enthusiasm for increasing cross border trade makes much of the two nations hardware/software divide. When China’s premier Wen Jiabo’s visited India last year his first stop was not the political capital New Delhi but the IT hub of Bangalore. In this he was following in the footsteps of his predecessor Zhu Rongji who, in his 2002 trip to India made a point of visiting the Bangalore headquarters of Infosys -- one of Asia’s most successful software companies. Addressing a crowd of 4,000 IT professionals Zhu delighted those present by promoting a new era in Sino-Indian cooperation. ”You are number one in software. We are number one in hardware,” he said. “If we put these together, we are the world's number one." Zhu was given a standing ovation. Speaking to a similar audience at TCS - one of the only companies that rivals Infosys in both size and success - Wen predictably reiterated Zhu’s famous remark: “Cooperation is just like two pagodas (temples), one hardware and one software, '' Wen said. “Combined, we can take the leadership position in the world. When the particular day comes, it will signify the coming of the Asian century of the IT industry.”

It is no surprise that Asia’s giant neighbors would seek to combine each other’s reciprocal strengths in IT. According to a recent Forrester report entitled ‘How India, China Redefine the Tech World Order,’ over the next five years markets in India and China will account for nearly 40 percent of all PCs and a significant share of all cell phones sold worldwide. Production sectors in both countries stand to gain enormously from this potential growth.

Yet as vital as these high tech trends are there is more to the idea that India and China are split along hardware/software lines. To view the rise of Asia’s giants through the prism of IT reveals an uncanny complementarity that has emerged between the two nations. India and China are each weak in precisely those areas where the other is strong.  In India, for example, manufacturing remains strangled by red tape while cities are hobbled by potholed roads and frequent power cuts. Yet, its world-class media, free flow of information and democratic institutions offers a stark comparison with the authoritarianism and censorship imposed by China. As critics of cities like Shanghai note, it isn’t enough to have designer coffee shops. Great metropolises also depend on the ‘newspapers you read with your coffee’. The rise of Asia’s giants is now, to quote reporter Thomas Friedman, “the greatest show on earth.” But if both India and China are to continue growing fast it is essential that they start learning from each other.

China’s booming hardware sector – now amongst the strongest in the world – is at least twenty years in the making. The country’s development in the 1980s and 90s coincided with an intense concentration on the manufacture of electronic goods. High tech companies headquartered elsewhere in Asia soon took advantage of low labor costs and favorable investment conditions setting up offshore factories on the Chinese mainland that would help power the countries export led growth. By 2003, writes Morgan Stanley’s Andy Xie, “high technology goods accounted for 20 percent of the total but 40 percent of the growth in China's exports.”

India’s development, on the other hand, owes much to its emphasis on software and IT services - by far the fastest growing sector in the Indian economy. The industry was aided by a host of factors including a large English language workforce, a handful of world-class educational institutions and a lack of talent in the West especially around the period of the Y2K ‘Millennium Bug’.  Today the Indian software engineer has taken a place alongside McDonalds and MTV as one of the key symbols of globalization.

Most of the big players in India’s software industry -- companies like Satyam, TCS and Wipro -- have set up offices in Shanghai or Beijing. Infosys is set to expand its presence in China, investing US$65 million to build development centers in the ‘information corridor’ of the Pearl River Delta. The business strategy is to build up local talent and expertise, which can then be used, not only to serve customers in the West, but also to reach important markets in East Asia -- especially Japan. In addition, Indian software companies are eager to tap the growing Chinese domestic market, forecasted to become one of the biggest consumers of software services in the world.

Chinese businesses have been slower to establish bases in India. The most significant investment so far comes from Huawei, a Chinese electronic manufacturer which, seeking to take advantage of India’s software talent, has established an R&D institute in Bangalore. While in India both the production and consumption of consumer electronics is still relatively low, the country’s vast population and rising middle class make it a hugely important potential market. Building on the growing Sino-Indian friendship, Chinese companies, who understand the needs and constraints of customers in developing societies are well positioned to take advantage of this vast new opportunity. If bilateral trade continues to expand it is possible that, as Howard French writes in the New York Times, the near future will see “Indian employees in the back offices of rising Chinese corporations, implementing business systems devised not by Oracle or IBM, but by Indian companies like Wipro or Satyam.“

Potential trade between Indian software and Chinese hardware is not limited to the sphere of IT. China’s growth has depended on a deliberate concentration and mass investment in the country’s hardware. The skyscrapers, roads and bridges featured in images of the ‘New China’ extend well beyond the ‘model cities’ of Shanghai, Beijing and Guangzhou. Relative to most developing countries, China’s basic infrastructure - water, electricity, communication and transportation grids – runs smoothly and efficiently, despite inevitable stresses. The manufacturing sector accounts for 46 percent of the Chinese economy.  The ‘hard goods’ produced in what is now known as the ‘world’s factory’ are shipped to consumers across the world who are finding the ‘made in China’ stamp on everything from computers to clothes.

India’s development, on the other hand has followed a process of ‘soft’ industrialization. Focusing primarily on the service industries, India can now boast capital markets and a banking and legal system that are all more advanced than those of its faster growing neighbor.

Companies like Infosys are betting on this ‘software gap’. Though presently the amount spent on services is limited compared to the amount spent on hardware, large Chinese companies, particularly in areas like finance, will inevitably grow ever more reliant on the IT services that Indian companies can provide. “We believe Chinese banks are in the same state that Indian banks were in 15 years back,” says K. S. Suryaprakash of Infosys, “We rode that curve in India and we believe we can ride it here.”

Similarily NIIT -- the oldest and largest of India’s private IT education firms – which has been working in China for over five years, aims to eventually train hundreds of thousands of Chinese not only in the area of programming but also in high value skills like project management, analysis and system design. They will thus help China assimilate such ‘soft’ skills as the ability to work in ambiguous situations, to create structure where none exists, to problem solve in a largely chaotic environment and to handle projects with flexibility and creativity.

On both sides of the border, people are paying more attention to their neighbor’s strengths and weaknesses. India has been abuzz with China hype for years. Newspaper articles, magazine columnists, government officials and private entrepreneurs are all obsessed with the dragon next door.  “China holds a strange fascination,” claims techno-theorist Madanmohan Rao, “because to see another country like us grow so fast and so spectacularly has just left everyone spellbound.”

In particular it is becoming increasingly clear to most Indians that the backward state of their ‘hardware’ -- both in manufacturing and infrastructure -- is an enormous drag on the economy and one of the primary reasons that they lag so far behind their eastern neighbor. No matter how strong its growth, the relatively elitist software industry cannot hope to provide work for millions of rural poor. India’s development thus crucially depends on reviving its manufacturing sector.

Middle class Indians have also become intolerant of their shoddy roads and unreliable water and erratic power supply. In response the government has recently begun a huge infrastructure push, which includes a plan to “widen and pave some 40,000 miles of narrow, decrepit national highways, with the first leg, budgeted at US$6.25 billion, to be largely complete by next year,” according to New York Times reporter Amy Walden.  “It amounts to the most ambitious infrastructure project since independence in 1947 and the British building of the subcontinent's railway network the century before.”

At the same time Chinese are becoming ever more aware that there is a gulf between their country’s futuristic technology, well paved streets and glistening skyscrapers and the lack of flexibility and independent creativity in the culture. “We have the hardware but not the software” has become a cliché amongst urban Chinese. In Shanghai, goals for future growth all concentrate on improving the “software environment of urban development” the 2010 Expo website proclaims. There is a countrywide emphasis on education reform, improving HR, strengthening the legal system and developing cultural sectors.

The fact that India has thrived in software while China excelled in hardware is no accident. India’s greatest advantage is its political freedom, which has allowed the creativity and free flow of information that software requires. It’s most powerful limitation, on the other hand, is an economy strangled by state control.   
The strength of software is that it has been able to flourish outside this constraint. The virtual nature of the technology is far too futuristic for slow, archaic government bureaucracy to ever get a real grip on. Thus, for many years the Indian state was incapable of regulating software for the simple reason that it could not understand it. Moreover, since software development doesn’t require massive capital investment --there is no need to set up large factories or purchase vast, expensive machinery –the industry grew despite India’s lack of economic liberalism, which so hindered the growth of its hardware sector.
The situation in China is precisely the reverse. The country’s recent rise stems from the policies of economic reform and openness implemented by Deng Xiaoping. It thus counters India’s political freedom with relative economic freedom, which encouraged foreign direct investment and ensured that manufacturing centers could be established quickly and operate efficiently. In addition, the Chinese government was able to provide the security and help companies desire when putting up the massive investment required to set up factories that produce hard goods. Chinese hard industrialism also has a negative advantage. It benefits from avoiding the great weaknesses of Chinese authoritarian rule. Entrepreneurs who concentrate on manufacturing do not run the risk of censorship or have to worry about crossing politically sensitive lines.

The hardware/software divide thus stretches from the economic to the political sphere. To merge these two sides would clearly be a very potent combination. Yet, for this to occur India’s ‘soft’ power with its focus on services, the free flow of information, strong civil society and resilient democracy must acquire the discipline, focus and determination to implement the pro-growth policies that has allowed China to boom. While across the border, China’s traditionally rigid authoritarianism must soften enough to allow for the innovation, creativity and flexibility that the next stage of development requires.