The Global Reorganization of Knowledge Work: The Rise of India and China

1. The Global Reorganization of Knowledge Work: The Rise of India and China Martin Kenney UC Davis & Rafiq Dossani Stanford University

2. Outline of Talk • Introduction • Moving up the value chain • Global service economy • India • An example of the changing MNC services global footprint • Entrepreneurship • Consumers • Summary

3. An Inflection Point for the Global Economy • No longer any fields guaranteed to workers in developed nations • Taiwan/China in manufacturing • India for services • India is moving into judgement based work • Patent writing • Datamining

4. Shenzhen 1985, 1995, 2004 Kun Chen 2005

5. Bangalore’s Electronics City

6. Technical Enabling Conditions and Business Drivers Technical Enabling Conditions Business Drivers Any place that has two wires and a sufficiently large relatively skilled labor force at the right price can become part of the global service economy

7. The Technical Enabling Conditions • Separation of information from physical media • So they need no longer be done in close proximity to customers • Global availability of low-cost telecom bandwidth and computing power • Y2K increased penetration of standards and standardized SW packages, e.g., SAP, Oracle, PeopleSoft available globally. Today, you can be certified anywhere. • Increasing divisibility of services

8. Business Drivers • Pressure to bring down costs • Rivalry -- rivals have done it so must follow • Acceptance of reengineering and outsourcing various services • Experience w/offshore software production Today it is just part of doing business

9. Moving Up the Value Chain

10. Mexico China India

11. USPTO Patents per 10,000 Persons, 2004 • Taiwan -- 2.5835 (5,938) • Korea -- .9145 (4,428) • Japan -- 2.7436 (35,350) • U.S. -- 2.850 (84,271) • India -- .00336 (363) • China -- .00457 (597)

12. The Educational Levels of Web Posted Job Descriptions for Intel, HP and Oracle, February 2005

13. A Job at Intel India • CAD Engineer: Hardware Engineering is all about finding solutions. As a CAD (Computer Aided Design) Engineer with the Intel Hardware Engineering team, you'll work on teams designing, developing and implementing solutions. As part of Hardware Engineering at Intel, you'll have the opportunity to be involved from start to finish on the development of world-class innovations.ResponsibilitiesAs a CAD Engineer, you will be involved in developing new very large scale integration (VLSI) CAD tools and methodology solutions for design for testability (DFT) and test generation for high volume manufacturing of next generation microprocessor products. You will be responsible for development, deployment and maintenance of in-house fault simulation and test generation tools. This position will be based in Bangalore, India.QualificationsYou must possess a Ph.D. or Master of Science degree in Electrical Engineering or Computer Engineering with five to ten years of related work experience. Additional qualifications include: Extensive knowledge of Digital Design and Design-for-test principles, digital circuit/fault simulation and automatic test pattern generation. Good working knowledge in developing CAD tools using C++ in a UNIX*/Linux* environment. Excellent experience in a related people management role would be an added advantage. Accessed April 9, 2004 http://appzone.intel.com/jobs/uRequisition.asp?Posting=34339

14. Services Offshoring Growth Areas • Add segments of work within the existing functions • Add analytical work • R&D/design • Risk management • Consultancy on process reengineering • Software products in narrow segments

15. The Global Service Economy

16. Major Pathways for Services Offshoring Line thickness represents size of flows

17. India

18. Remarkable Diversity of Organizations • MNC in-house subsidiaries • Agilent, HP, SAP, Morgan Stanley, HSBC • MNC outsourcer subsidiaries • IBM, Accenture, EDS • U.S. startups • Tensilica, Sierra Atlantic, Ketera • MNC and domestic specialists • Thomson, Evalueserve, Kale • Domestic and NRI independents • e4e, GTL, ICICI OneSource • Indian IT subsidiaries • Progeon, HCL BPO, Wipro BP, TCS

19. ITES Exports from India, 2004-05 Call centers are declining as a share

20. 2005 -- Employment Growth CAGR 29.8% 18.5% 37.0% Employee numbers ‘000s Source: NASSCOM 2005

21. Employment for Global Operations in India by Selected Large Non-Indian Software Firms

22. An example of the changing MNC services global footprint

23. HP’s Regional and Global Consolidation Decentralized (1990-95) Regional Consolidation (1996-99) Off-Shore Global Consolidation (2000-03)

24. HP’s Global BPO Footprint with Regional Specializations Scale of Operations: 4,700+ professionals Presence: 56 local front-offices, 7 regional business centers, 7 global business centers Language capabilities: Expertise in 30 languages Main Global HubLow-Cost, Transaction Processing Center(Bangalore & Chennai) • Activities • Finance & Accounting • Billing • Order & rebates management • Customer fulfillment • Employee services & payroll • Procurement/SCM • Reporting • Workforce • 3,800 FTEs, HP employees • 2 years to scale • Language fluency in English, French, German, Spanish, Japanese, Chinese Support CentersSpecialized Language Transaction Processing (Barcelona, Singapore, Guadalajara, Dalian & Costa Rica) • Activities • Country-specific regulatory transactions • Customer support for exotic languages (e.g., Serbo-Croatian, Chinese) • Back-up and disaster recovery services • Workforce • 250 FTEs Barcelona 92 FTEs Singapore 380 FTEs Guadalajara • 60 FTEs Dalian • 120 FTEs Costa Rica • 1 year to scale Onshore Centers (Colorado Springs & Houston) • Activities • Call center support (A/P) • Vendor refund & escalation • Tax reporting • Mail room & scanning • Workforce • 65 FTEs, contract labor • 1 year to scale Source: Hewlett-Packard: Working Council for Chief Financial Officers research.

25. HP BPO’s Business Growth over the Last 5 Years

26. Actual Transition of Projects at a Major US Firm Product Development EDA, T&M ASIC Design Professional Services Network Design Collections Web Development IT ADMS Finance Audit COMPLEXITY QA Product Development ERP Reporting CAD Support Accounts Receivables Biz Process – Order Mgmt Vendor Payables Global Trade & Logistics Data Entry (Engineering Services) Nov 01 Feb 02 Nov 02 Nov 03 Nov 04 Bold = unplanned

27. Entrepreneurship

28. Small Silicon Valley Startups Now Have Indian Operations • Software upgrades, product extensions, technical writing • Debugging and testing • Remote support • Semiconductor design Increasing number of firms using this model Startup team in Silicon Valley (1st 25 employees) By 100 employees (50-50) After this (40-60)

29. Entrepreneurship Growing Rapidly in China, India Is Just Beginning • Venture capital is growing in both nations • China so far me-too firms but also some new business models (Focus Media) • Some close to world class firms may emerge in India the next five years • Already some acquisitions by U.S. firms of Indian firms • So far only established Indian firms have exited on the U.S. market. Indian firms exit in India.

30. Japan Hong Kong 3 → 5 firms 1 10 4 7 Beijing 1 → 13 firms SF Bay Area 15 5 2 6 2 4 Singapore 1 1 1 Shanghai 4 → 13 firms Other U.S. 6 1 1 2 London Taiwan 2 The Location of the NASDAQ-Listed Chinese Firms and Their Venture Capitalist Directors

31. Consumers

32. They Will Be the World’s Largest Market for Many Products • China already is the largest market for cell phones, televisions, and soon PCs • India is following but rapidly growing in significance • Enormous new markets for steel, cement etc. • E.g., Three countries, China, India, and the United States account for 60% of worldwide cable TV households.

34. Summary

35. Strengths of Both Countries • Enormous labor pools • China has well-educated factory workers • Both nations have large numbers of college graduates • Low wages • Increasing infrastructure investment in both nations • China has enormous FDI inflows, India less, but is picking up rapidly • Overseas Chinese and Indians transferring knowledge and investing

36. Problems for Both Countries • Income distribution • China built on manufacturing which brought in the relatively uneducated (all Chinese had at least primary school and were literate) • India built on services which does not integrate the uneducated (India has a large number of illiterates, not competitive with Chinese workers) • China weak on English • China -- the SOEs and bank difficulties

37. Problems for Both Countries (cont.) • India has weak infrastructure • Chinese universities have superior research capabilities • Chinese domestic market is large and growing rapidly. It is a focal market for some products. India not yet large enough • MNCs do R&D in China largely for domestic market. R&D in India for global market so there may be more knowledge transfer • IP rights more clear in India. Weak IP enforcement unclear effect on Chinese growth

38. Issues • Will this be a reprise of manufacturing? • How fast? Some firms expanding at 30% per year • In the firm there is a pyramid of activities -- how much is not place dependent? • For what is moveable, how much can be done in lower cost locations? • If the middle of the pyramid relocates what happens to career paths in U.S.? • If the reorganization of the pyramid is profound, what will be new business model?

39. Concluding Thoughts • The complexity and diversity of services offshoring • We are at the elbow of the adoption S curve and this could be as important as the Internet in transforming our world • We have only begun to see the new business models that service offshoring will create. • Encouraging entrepreneurship in nations around the world • The organizational and spatial footprint of the firm will be profoundly altered by service offshoring

40. Thank You! Is Latin America going to be largely irrelevant in this new world?