firms wanted to risk only $20 million to get that company from start-up to IPO.
“For venture firms,” said Haque, “the big question became, How do I get my entrepreneurs and their new companies to a point where they were breaking even or profitable sooner, so they can stop being a draw on my capital and be sold so our firm can generate good liquidity and returns? The answer many firms came up with was: I better start outsourcing as many functions as I can from the beginning. I have to make money for my investors faster, so what can be outsourced must be outsourced.”
Henry Schacht, who, as noted, was heading Lucent during part of this period, saw the whole process from the side of corporate management.
The business economics, he told me, became “very ugly” for everyone. Everyone found prices flat to declining and markets stagnant, yet they were still spending huge amounts of money running the backroom operations of their companies, which they could no longer afford. “Cost pressures were enormous,” he recalled, “and the flat world was available, [so] economics were forcing people to do things they never thought they would do or could do... Globalization got supercharged”-for both knowledge work and manufacturing. Companies found that they could go to MIT and find four incredibly smart Chinese engineers who were ready to go back to China and work for them from there for the same amount that it would cost them to hire one engineer in America. Bell Labs had a research facility at Tsingdao that could connect to Lucent's computers in America. “They would use our computers overnight,” said Schacht. “Not only was the incremental computing cost close to zero, but so too was the transmission cost, and the computer was idle [at night].”
For all these reasons I believe that Y2K should be a national holiday in India, a second Indian Independence Day, in addition to August 15. As Johns Hopkins foreign policy expert Michael Mandelbaum, who spent part of his youth in India, put it, “Y2K should be called Indian Inter-depedence Day,” because it was India's ability to collaborate with Western companies, thanks to the interdependence created by fiber-optic networks, that really vaulted it forward and gave more Indians than ever some real freedom of choice in how, for whom, and where they worked.
To put it another way, August 15 commemorates freedom at midnight. Y2K made possible employment at midnight-but not any employment, employment for India's best knowledge workers. August 15 gave independence to India. But Y2K gave independence to Indians– not all, by any stretch of the imagination, but a lot more than fifty years ago, and many of them from the most productive segment of the population. In that sense, yes, India was lucky, but it also reaped what it had sowed through hard work and education and the wisdom of its elders who built all those IITs.
Louis Pasteur said it a long time ago: “Fortune favors the prepared mind.”
On December 11, 2001, China formally joined the World Trade Organization, which meant Beijing agreed to follow the same global rules governing imports, exports, and foreign investments that most countries in the world were following. It meant China was agreeing, in principle, to make its own competitive playing field as level as the rest of the world. A few days later, the American-trained Chinese manager of a fuel pump factory in Beijing, which was owned by a friend of mine, Jack Perkowski, the chairman and CEO of ASIMCO Technologies, an American auto parts manufacturer in China, posted the following African proverb, translated into Mandarin, on his factory floor:
Every morning in Africa, a gazelle wakes up.
It knows it must run faster than the fastest lion or it will be killed.
Every morning a lion wakes up.
It knows it must outrun the slowest gazelle or it will starve to death.
It doesn't matter whether you are a lion or a gazelle.
When the sun comes up, you better start running.
I don't know who is the lion and who is the gazelle, but I do know this: Ever since the Chinese joined the WTO, both they and the rest of the world have had to run faster and faster. This is because China's joining the WTO gave a huge boost to another form of collaboration– offshoring. Offshoring, which has been around for decades, is different from outsourcing. Outsourcing means taking some specific, but limited, function that your company was doing in-house-such as research, call centers, or accounts receivable-and having another company perform that exact same function for you and then reintegrating their work back into your overall operation. Offshoring, by contrast, is when a company takes one of its factories that it is operating in Canton, Ohio, and moves the whole factory offshore to Canton, China. There, it produces the very same product in the very same way, only with cheaper labor, lower taxes, subsidized energy, and lower health-care costs. Just as Y2K took India and the world to a whole new level of outsourcing, China's joining the WTO took Beijing and the world to a whole new level of offshoring-with more companies shifting production offshore and then integrating it into their global supply chains.
In 1977, Chinese leader Deng Xiaoping put China on the road to capitalism, declaring later that “to get rich is glorious.” When China first opened its tightly closed economy, companies in industrialized countries saw it as an incredible new market for exports. Every Western or Asian manufacturer dreamed of selling its equivalent of 1 billion pairs of underwear to a single market. Some foreign companies set up shop in China to do just that. But because China was not subject to world trade rules, it was able to restrict the penetration into its market by these Western companies through various trade and investment barriers. And when it was not doing that deliberately, the sheer bureaucratic and cultural difficulties of doing business in China had the same effect. Many of the pioneer investors in China lost their shirts and pants and underwear– and with China's Wild West legal system there was not much recourse.
Beginning in the 1980s, many investors, particularly overseas Chinese who knew how to operate in China, started to say, “Well, if we can't sell that many things to the Chinese right now, why don't we use China's disciplined labor pool to make things there and sell them abroad?” This dovetailed with the interests of China's leaders. China wanted to attract foreign manufacturers and their technologies-not simply to manufacture 1 billion pairs of underwear for sale in China but to use low-wage Chinese labor to also sell 6 billion pairs of underwear to everyone else in the world, and at prices that were a fraction of what the underwear companies in Europe or America or even Mexico were charging.
Once that offshoring process began in a range of industries-from textiles to consumer electronics to furniture to eyeglass frames to auto parts-the only way other companies could compete was by offshoring to China as well (taking advantage of its low-cost, high-quality platform), or by looking for alternative manufacturing centers in Eastern Europe, the Caribbean, or somewhere else in the developing world.
