Authors: Thomas L. Friedman
By the late 1990s, though, Lady Luck was starting to shine on India from two directions: The fiber-optic bubble was starting to inflate, linking India with the United States, and the Y2K computer crisis-the so-called millennium bug-started gathering on the horizon. As you'll remember, the Y2K bug was a result of the fact that when computers were built, they came with internal clocks. In order to save memory space, these clocks rendered dates with just six digits-two for the day, two for the month, and, you guessed it, two for the year. That meant they could go up to only 12/31/99. So when the calendar hit January 1, 2000, many older computers were poised to register that not as 01/01/2000 but as 01/01/00, and they would think it was 1900 all over again. It meant that a huge number of existing computers (newer ones were being made with better clocks) needed to have their internal clocks and related systems adjusted; otherwise, it was feared, they would shut down, creating a global crisis, given how many different management systems-from water to air traffic control-were computerized.
This computer remediation work was a huge, tedious job. Who in the world had enough software engineers to do it all? Answer: India, with all the techies from all those IITs and private technical colleges and computer schools.
And so with Y2K bearing down on us, America and India started dating, and that relationship became a huge flattener, because it demonstrated to so many different businesses that the combination of the PC, the Internet, and fiber-optic cable had created the possibility of a whole new form of collaboration and horizontal value creation: outsourcing.
Any service, call center, business support operation, or knowledge work that could be digitized could be sourced globally to the cheapest, smartest, or most efficient provider. Using fiber-optic cable-connected workstations, Indian techies could get under the hood of your company's computers and do all the adjustments, even though they were located halfway around the world.
“[Y2K upgrading] was tedious work that was not going to give them an enormous competitive advantage,” said Vivek Paul, the Wipro executive whose company did some outsourced Y2K drudge work. “So all these Western companies were incredibly challenged to find someone else who would do it and do it for as little money as possible. They said, 'We just want to get past the damn year 2000!' So they started to work with Indian [technology] companies who they might not have worked with otherwise.”
To use my parlance, they were ready to go on a blind date with India. They were ready to get “fixed up.” Added Jerry Rao, 'Y2K means different things to different people. For Indian industry, it represented the biggest opportunity. India was considered as a place of backward people. Y2K suddenly required that every single computer in the world needed to be reviewed. And the sheer number of people needed to review line-by-line code existed in India. The Indian IT industry got its footprint across the globe because of Y2K. Y2K became our engine of growth, our engine of being known around the world. We never looked back after Y2K.“
By early 2000, the Y2K work started to wind down, but then a whole new driver of business emerged-e-commerce. The dot-com bubble had not yet burst, engineering talent was scarce, and demand from dotcoms was enormous. Said Paul, “People wanted what they felt were mission-critical applications, key to their very existence, to be done and they could go nowhere else. So they turned to the Indian companies, and as they turned to the Indian companies they found that they were getting delivery of complex systems, with great quality, sometimes better than what they were getting from others. That created an enormous respect for Indian IT providersf.] And if [Y2K work] was the acquaintanceship process, this was the falling-in-love process.”
Outsourcing from America to India, as a new form of collaboration, exploded. By just stringing a fiber-optic line from a workstation in Bangalore to my company's mainframe, I could have Indian IT firms like Wipro, Infosys, and Tata Consulting Services managing my e-commerce and mainframe applications.
“Once we're in the mainframe business and once we're in e-commerce—now we're married,” said Paul. But again, India was lucky that it could exploit all that undersea fiber-optic cable. “I had an office very close to the Leela Palace hotel in Bangalore,” Paul added. “I was working with a factory located in the information technology park in Whitefield, a suburb of Bangalore, and I could not get a local telephone line between our office and the factory. Unless you paid a bribe, you could not get a line, and we wouldn't pay. So my phone call to Whitefield would go from my office in Bangalore to Kentucky, where there was a GE mainframe computer we were working with, and then from Kentucky to Whitefield. We used our own fiber-optic lease line that ran across the ocean-but the one across town required a bribe.”
India didn't benefit only from the dot-com boom; it benefited even more from the dot-com bust! That is the real irony. The boom laid the cable that connected India to the world, and the bust made the cost of using it virtually free and also vastly increased the number of American companies that would want to use that fiber-optic cable to outsource knowledge work to India.
Y2K led to this mad rush for Indian brainpower to get the programming work done. The Indian companies were good and cheap, but price wasn't first on customers' minds-getting the work done was, and India was the only place with the volume of workers to do it. Then the dot-com boom comes along right in the wake of Y2K, and India is one of the few places where you can find surplus English-speaking engineers, at any price, because all of those in America have been scooped up by e-commerce companies. Then the dot-com bubble bursts, the stock market tanks, and the pool of investment capital dries up. American IT companies that survived the boom and venture capital firms that still wanted to fund start-ups had much less cash to spend. Now they needed those Indian engineers not just because there were a lot of them, but precisely because they were low-cost. So the relationship between India and the American business community intensified another notch.
One of the great mistakes made by many analysts in the early 2000s was conflating the dot-com boom with globalization, suggesting that both were just fads and hot air. When the dot-com bust came along, these same wrongheaded analysts assumed that globalization was over as well. Exactly the opposite was true. The dot-com bubble was only one aspect of globalization, and when it imploded, rather than imploding globalization, it actually turbocharged it.
Promod Haque, an Indian-American and one of the most prominent venture capitalists in Silicon Valley with his firm Norwest Venture Partners, was in the middle of this transition. “When the bust took place, a lot of these Indian engineers in the U.S. [on temporary work visas] got laid off, so they went back to India,” explained Haque. But as a result of the bust, the IT budgets of virtually every major U.S. firm got slashed. “Every IT manager was told to get the same amount of work or more done with less money. So guess what he does? He says, 'You remember Vijay from India who used to work here during the boom and then went back home? Let me call him over in Bangalore and see if he will do the work for us for less money than what we would pay an engineer here in the U.S.'” And thanks to all that fiber cable laid during the boom, it was easy to find Vijay and put him to work.
The Y2K computer readjustment work was done largely by low-skilled Indian programmers right out of tech schools, said Haque, “but the guys on visas who were coming to America were not trade school guys. They were guys with advanced engineering degrees. So a lot of our companies saw that these guys were good at Java and C++ and architectural design work for computers, and then they got laid off and went back home, and the IT manager back here who is told, I don't care how you get the job done, just get it done for less money,' calls Vijay.” Once America and India were dating, the burgeoning Indian IT companies in Bangalore started coming up with their own proposals. The Y2K work had allowed them to interact with some pretty large companies in the United States, and as a result they began to understand the pain points and how to do business-process implementation and improvement. So the Indians, who were doing a lot of very specific custom code maintenance to higher-value-add companies, started to develop their own products and transform themselves from maintenance to product companies, offering a range of software services and consulting. This took Indian companies much deeper inside American ones, and business-process outsourcing- letting Indians run your back room-went to a whole new level. “I have an accounts payable department and I could move this whole thing to India under Wipro or Infosys and cut my costs in half,” said Haque. All across America, CEOs were saying, “'Make it work for less,'” said Haque. “And the Indian companies were saying, 'I have taken a look under your hood and I will provide you with a total solution for the lowest price.'” In other words, the Indian outsourcing companies said, “Do you remember how I fixed your tires and your pistons during Y2K? Well, I could actually give you a whole lube job if you like. And now that you know me and trust me, you know I can do it.” To their credit, the Indians were not just cheap, they were also hungry and ready to learn anything.
The scarcity of capital after the dot-com bust made venture capital firms see to it that the companies they were investing in were finding the most efficient, high-quality, low-price way to innovate. In the boom times, said Haque, it was not uncommon for a $50 million investment in a start-up to return $500 million once the 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.
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.