My slant on the Chinese IT Bubble
I was just completing the first year of college when the dot com bubble burst. I remember one of my lecturers coming into the class, tears brimming in his eyes as he related to us how all of his shares in Ericsson had lost most of their value. Quite a substantial amount of money at the time.
So in 2000, the bursting of the information technology bubble had marked economic implications for Sweden. Ericsson, the world's largest producer of mobile telecommunications equipment, shed thousands of jobs, as did the many of the world's once fast-expanding Internet consulting firms and dot-com startups. Ericsson's shares nosedived from $20 to $0.98. My lecturers warning about how quick things can change really rang loud and clear.
With America's economy now in crisis mode, everyone is now looking towards the next cash cow, which astonishingly to quite a lot of peoples surprise is now China. Well, its not astonishing now but 10 years ago it was unknown for IT and B2B solutions. I moved over to China in 2005 working for a large Chinese software company and although I was confident about taking quite a step into the unknown I was very excited about the industries future. The industry was bouncing back. At the time India was regarded as the main outsourcing capital of the world with many jobs from America being outsourced there for a long period. Having entered the Chinese software market just when things were beginning to get interesting I am now starting to get extremely apprehensive about where things are now heading in the Middle Kingdom.
So to date Microsoft, Intel, Oracle, GE, Google and Yahoo have committed their futures to the Chinese market. Intel Corp, the world's largest chipmaker, won China's approval to build its first semiconductor manufacturing factory in a small place called Dalian (Awesome place, I recommend JD's nightclub for the uninitiated). With many new graduates coming on-stream from second and third tier Chinese cities institutes of technology these companies are guaranteed a large talented workforce for years to come. China is incredibly hot right now and everyone wants to get in on the act. It doesn't hurt that the Chinese Yuan is unbelievably good value for money with a very cheap and affordable workforce with an extremely low corporation tax rate.
With these well established companies now gaining a foothold in the country there are now an enormous amount of startup Chinese IT companies in China being incorporated. Many of these business are getting very high valuations even though they are not even making a profit yet. Venture capitalists have been pumping large amounts of money into small Chinese startups that are by and large clones of existing applications for the past 3-4 years. Many of these startups have been formed by 20 something talented Asian developers with little management experience and it certainly reflects in todays industry. When youtube initially surfaced in the west, there were hundreds of clones created by Chinese developers. Today it has whittled down to about 3 Chinese companies, the most popular of which, toudou, has not made had a single profitable quarter. Leasing thousands of servers around the country is not a cheap enterprise, especially when most Chinese couch potatoes like nothing more than watching their favorite version of Mandarin dubbed Heroes. Seriously, Hayden Panettiere sounds very cute when speaking in Mandarin. /me does a french whistle.
Although much of the investment has been on individual websites, however there are many other areas where China are beginning to take over as world leaders, most notably on telecommunications devices, chip design, biomedical devices and many more. There are many more places for the venture capitalists to invest in however all valuations are sky high right now. People have reason to be worried, with the credit crunch in the US investors have perhaps over extended into the Chinese market. If the Chinese economy even shows the slightest sign of slowing down then the entire world will feel shock waves and scream in Unison.
Many of the changes that have overcome China in the past few years are astonishing. Billions of dollars has been invested in the smaller cities of China with education being a priority for the people. Software parks have been cropping up all over with the Oracle being the latest to open up shop in Shenyang, Liaoning. Indian companies were seeking relationships with any outsourcing company who would have been interested in forming a partnership. With prices in India beginning to rise much of the outsourcing is being transferred, Chinese accents are slowly replacing the Bangalore Kannada slang.
So where does the future rest? The cost of living in the main cities of China is starting to increase exponentially. Rent is rising as are salaries, it is only time before the Chinese government re-values the Chinese Yuan which will mean that it will cost even more to do business with China, however as China will have most of the expertise, local infrastructure, desire to succeed and innovate it will be absoloutely impossible to not do business with China in some form or other. The world has too much vested in China to see the entire IT industry there implode. China may be in a bubble but it is not just the IT sector that is floating within its confines. The Chinese government actively promotes its citizens to invest in Chinese companies and so patriotism and national pride is certainly alive and kicking especially when investing in the likes of Baidu (Also the name of my favorite BBQ joint in Dalian, I wonder who would object to the name).
So to leave on a lighter note I embedded a video below that has caused some controvesy over the past few weeks around the tubes. Anyhow, its worth a look if your interested in the bubble that is the American IT industry. Enjoy. By the way, with this post I am officially declaring that my writers block has vanished. Clarity has entered my life and I have officially become enlightened. I should get drunk more often.
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Nice post, and that vid was an instant classic. China + the Internet makes a volatile match made in heaven. Though the Chinese Internet market is getting bigger, use of some technology common in the West's 'net, like RSS (for me the most simple but awesome innovation in recent Internet history) isn't used heavily here. Regulations here are big, forcing the Internet to converge around licensed sites - want a blog or personal website - the only long term sustainable option really, is to host overseas or host on sina.com etc. This herding, I think, is supported by the Chinese concept of 热情, or love of hustle and bustle, furthering the draw to established portal sites. I understand tudou.com launched a few months before youtube.com as a video blog site, and transformed slowly away from the initial focus, just like Youtube did. But... to invest in the Chinese Internet is an easy way to part a fool with his money, unless he knows exactly what he's doing. Heck, Jerry Yang, ethnically Chinese and the head of Yahoo, hardly turned up trumps. As for IT in general... surely outsourcing is an industry where wages are kept down, to keep competitive. It's not hot or sexy, it requires logistics and a production line. Within IT is about as far from Internet-based economics as can be. BTW, I'm frankly shocked you're recommending JDs as a good Dalian nightclub!
Here's an interesting piece on what 2008 might hold for the video sharing sites. Personally, I think there are enough videos about web-cam girls Japanese devils to keep it going for a while at least. I hope that as mobile tech advances, we start seeing people using it as "The People's Video Surveillance." That protest in Shenyang would have been way more interesting if the technology was there too upload the stuff in real time.
@Alex, About JDs, well I did recommend it for the uninitiated! That place is such a cattle market and I hope to never darken its doors again. I'm in complete agreement about the IT outsourcing industry, it is definitely classed as a production line. With so many qualified(?) engineers coming on stream companies can certainly afford to milk the talent in that reason and then ship them out if they are not performing, an incident where an engineer was fired after refusing to work longer than 48 hours comes to mind. The Chinese software model is now beginning to mature. As they work more and more with foreign tech companies they begin to learn their methods and their procedures and all of a sudden those procedures are common practice around the company. The question remains to be answered, will these companies suddenly start going out on their own? I am very sure that many of them have IPO aspiration.
BTW, it would be cool if this comment box could be made longer, and line breaks allowed. Would make longer comments easier to draft.
Yeah, I know. I'm going to be revamping the comments area over the next week or so with a few nice goodies. Thanks for the input. It is after all a work in progress.