From Business World of 3 May 2005.
How China did it – and India can
Oh, my God, there are so many of them, and they all look so serious, so eager for work. And they just keep coming, wave after wave. How in the world can it possibly be good for my daughters and millions of other young Americans that these Indians can do the same jobs as they can for a fraction of the wages?' That was what Thomas L Friedman thought as he stood at the gate of Infosys in Bangalore watching a river of young educated people flowing in and out. The answer he worked out stretches over an entire book (The World is Flat: A Brief History of the Twenty-first Century, Farrar, Straus and Giroux, New York).
How did these young people in India come to do the jobs Americans should have been doing? Friedman attributes the shift to two changes that occurred towards the end of the last century. First, telecommunication companies laid thousands of miles of optical fibre across the seas expecting to trawl riches out of international calls. But their feverish investment led to excess capacity and a collapse of call rates. Many of them went bankrupt – that is how Reliance Infocomm, Bharti and VSNL came to acquire huge chunks of world cable capacity. But as a result, distance collapsed: calls and data transfer across thousands of miles cost no more than across the street. And the collapse of distance brought Bangalore close enough to compete with Seattle.
The other big change was the collapse of the IT boom in the US. Suddenly many companies were in trouble and looking to cut costs; that is when they were struck by the difference in wages between Bangalore and Seattle. The lower costs in India would eventually have had an impact, but the slowdown in the US gave them a special edge. Nothing could have more dramatically demonstrated that edge than the Y2K scare; Indian software engineers corrected billions of lines of code so faultlessly that not a single plane crashed, not a single cheque was wrongly dishonoured. The smooth passing of the millennium gave American companies the confidence that they could trust Indian IT companies halfway round the world to give them seamless service.
I had looked at this story in a study I did with London Business School; my take from a window in India was somewhat different. The coming of the personal computer in the late 1970s led to decentralization of computing in the US. But the data in the big US companies were in their old big IBM 1620s and 360s; these had to be made to communicate with the new PCs being installed. The software had to be written in C+; soon there was a shortage of programmers in this and other old languages.
In India, however, our indestructible, incorrigible Fernandes had thrown out IBM and rendered many programmers who knew C+ surplus. American IT businessmen – especially the Indians amongst them – started coming and taking them away. That caused a shortage of programmers in the IT firms that were selling PCs and managing business information systems. To retain programmers, these Indian companies started hiring them out to American companies. That was the beginning of body-shopping. Body-shopping was profitable but unstable, for programmers hired out to American companies found jobs in America and were lost. So when Texas Instruments set up a wireless link between Bangalore and Dallas and demonstrated the feasibility of sitting in India and working for American companies, Indian IT companies eagerly followed.
But the real miracle is the rise of manufacturing in China. Data and programmes can be sent almost free across the world; goods cannot. But still China has become the world’s workshop; 5000 of Walmart’s 6000 suppliers are Chinese. How did the Chinese do it? By annihilating material transport costs with meticulously coordinated combinations of factories, highways and ports. When we talk of infrastructure, this is what we mean. The Chinese were not the first to set it up; the Japanese and the Koreans had shown the way. But they are the best now.