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company went public. After the bust, that same company's public offering might bring

in only $100 million. Therefore, venture 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.

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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."

Flattener #6

Offshoring

Running with Gazelles, Eating with Lions

On December 11, 2001, China formally joined the World Trade Organization, which meant

Beijing agreed tofollow the same global rules governing imports, exports, andforeign

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 andCEO 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,

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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 toauto 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.

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By joining the World Trade Organization in 2001, China assured foreign companies that

if they shifted factories offshore to China, they would be protected by international

law and standard business practices. This greatly enhanced China's attractiveness

as a manufacturing platform. Under WTO rules, Beijing agreed-with some time for

phase-in-to treat non-Chinese citizens or firms as if they were Chinese in terms of

their economic rights and obligations under Chinese law. This meant that foreign

companies could sell virtually anything anywhere in China. WTO membership status also

meant that Beijing agreed to treat all WTO member nations equally, meaning that the

same tariffs and the same regulations had to apply equally for everyone. And it agreed

to submit itself to international arbitration in the event of a trade dispute with

another country or a foreign company. At the same time, government bureaucrats became

more customer-friendly, procedures for investments were streamlined, and Web sites

proliferated in different ministries to help foreigners navigate China's business

regulations. I don't know how many Chinese actually ever bought a copy of Mao's Little

Red Book, but U.S. embassy officials in China told me that 2 million copies of the

Chinese-language edition of the WTO rule book were sold in the weeks immediately after

China signed on to the WTO. To put it another way, China under Mao was closed and

isolated from the other flattening forces of his day, and as a result Mao was really

a challenge only to his own people. Deng Xiaoping made China open to absorbing many

of the ten flatteners, and, in so doing, made China a challenge to the whole world.

Before China signed on to the WTO, there was a sense that, while China had opened

up to get the advantages of trade with the West, the government and the banks would

protect Chinese businesses from any crushing foreign competition, saidJack Perkowski

of ASIMCO. "China's entry into the WTO was a signal to the community outside of China

that it was now on the capitalist track for good," he added. "Before, you had the

thought in the back of your mind that there could be a turning back to state communism.

With WTO, China said, 'We are on one course.'"

Because China can amass so many low-wage workers at the unskilled, semiskilled, and

skilled levels, because it has such a voracious appetite for factory, equipment, and

knowledge jobs to keep its people

employed, and because it has such a massive and burgeoning consumer market, it has

become an unparalleled zone for offshoring. China has more than 160 cities with a

population of 1 million or more. You can go to towns on the east coast of China today

that you have never heard of and discover that this one town manufacturers most of

the eyeglass frames in the world, while the town next door manufacturers most of the

portable cigarette lighters in the world, and the one next to that is doing most of

the computer screens for Dell, and another is specializing in mobile phones. Kenichi

Ohmae, the Japanese business consultant, estimates in his book The United States of

China that in the Zhu Jiang Delta area alone, north of Hong Kong, there are fifty

thousand Chinese electronics component suppliers.

"China is a threat, China is a customer, and China is an opportunity," Ohmae remarked

to me one day in Tokyo. "You have to internalize China to succeed. You cannot ignore

it." Instead of competing with China as an enemy, argues Ohmae, you break down your

business and think about which part of the business you would like to do in China,

which part you would like to sell to China, and which part you want to buy from China.

Here we get to the real flattening aspect of China's opening to the world market.

The more attractive China makes itself as a base for off-shoring, the more attractive

other developed and developing countries competing with it, like Malaysia, Thailand,

Ireland, Mexico, Brazil, and Vietnam, have to make themselves. They all look at what

is going on in China and the jobs moving there and say to themselves, "Holy catfish,

we had better start offering these same incentives." This has created a process of

competitive flattening, in which countries scramble to see who can give companies

the best tax breaks, education incentives, and subsidies, on top of their cheap labor,

to encourage offshoring to their shores.

Ohio State University business professor Oded Shenkar, author of the book The Chinese

Century, told BusinessWeek (December 6, 2004) that he gives it to American companies

straight: "If you still make anything labor intensive, get out now rather than bleed

to death. Shaving 5% here and there won't work." Chinese producers can make the same

adjustments. "You need an entirely new business model to compete," he said.

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China's flattening power is also fueled by the fact that it is developing a huge

domestic market of its own. The same BusinessWeek article noted that this brings

economies of scale, intense local rivalries that keep prices low, an army of engineers

that is growing by 350,000 annually, young workers and managers willing to put in

twelve-hour days, an unparalleled component base in electronics and light industry,

"and an entrepreneurial zeal to do whatever it takes to please big retailers such

as Wal-Mart Stores, Target, Best Buy and J.C. Penney."

Critics of China's business practices say that its size and economic power mean that

it will soon be setting the global floor not only for low wages but also for lax labor

laws and workplace standards. This is known in the business as "the China price."

But what is really scary is that China is not attracting so much global investment

by simply racing everyone to the bottom. That is just a short-term strategy. The

biggest mistake any business can make when it comes to China is thinking that it is

only winning on wages and not improving quality and productivity. In the private,

non-state-owned sector of Chinese industry, productivity increased 17 percent

annually-I repeat, 17 percent annually-between 1995 and 2002, according to a study

by the U.S. Conference Board. This is due to China's absorption of both new

technologies and modern business practices, starting from a very low base.

Incidentally, the Conference Board study noted, China lost 15 million manufacturing