Last month I led a panel discussion at the Washington Council on International Trade’s annual trade conference.  Brad Smith, Microsoft’s General Counsel, gave a great speech at that event and today I just learned that the full transcript of that speech is online. Mr. Smith spoke on what it takes to compete internationally and he stressed the benefits that come from diversity:

Around the world one hears a lot of bravado. Certainly as somebody who attended both political conventions this year, one even hears a certain amount of hyperbole about what makes our country or another country great. But as I look around the world, I actually believe that there is one objective, statistically verifiable, factor that makes the United States of America unique. In a world in which we have less than 5 percent of the planet’s population, we have a population that reflects the 95 percent of the rest of the world more so than any other country.

If there is a language spoken somewhere else in the world, it is almost certainly spoken here in the United States. If there is a group of people that is talented in another part of the world, we probably have a population that has come from that place, oftentimes quite recently.

And it’s not just that they come to our country. One of the things that stands out in our region is that they come to our state.

I know, because every day I go to work at a company that employs people who come here from 157 countries. And every time I get in the elevator in my building, I have no idea what language I’m going to hear spoken.

If there’s one thing I’ve concluded, even when it comes to technology, where engineering is vital and products are the life’s blood of what you create, it’s still the case that technology is fundamentally a people business. And I believe that every business in this country has fast become a people business.

It’s all about whether we can create the products that the world wants, and whether we can offer the services that the world needs. One thing we should stop and really reflect upon is that when it comes to those challenges – as a company, as a state, as a country – diversity is our strength. It gives us the ability to understand customers around the world in a manner that is unmatched.

We really need to think about how to nurture that strength and develop that strength, to recognize, for example, that when there are 588 million people that live south of our border who speak Spanish and Portuguese, the fact that we have people who speak those languages is a national asset.

If we can focus not just on public policy but private sector and the civil society efforts on nurturing this diversity, we can turn this into a greater competitive advantage each and every year.

I am always talking about (though with less eloquence) how diversity is one of the United States’ greatest strengths and on how we have just about every country beat on this by a fairly wide margin.  Whenever someone (usually this is someone who has spent a few weeks in China) talks about how China is going to “take over the world,” I always voice my skepticism and I then usually talk about diversity, education, transparency, political stability, and innovation.

But for purposes of our discussion now, I ask just one question.  Is China diverse enough to really succeed in a globalized economy?  And by “really succeed” I mean becoming a country with a strong middle class and a country that competes in high tech and other added value industries.

Came upon an excellent article in Prospect Magazine, thanks to the China Bystander’s post entitled, “Getting Off The Bottom Rung In India And China.” China Bystander had this to say on the article, itself entitled, “The Silicon Valley of China“:

Here is one of those snapshot statistics that throws into sharp relief an entire economy, or two in this case. It comes via journalist Rob Gifford, writing about Hefei in Prospect magazine.

The is one crucial difference between China and India, and a perfect example of it is coated in black tarmac and runs east and west through Hefei. China is a brutal place to live if you are on the bottom rung, but there is an exit. And, just as important, there is a real possibility of a job at the other end. India’s 1.1bn population is rapidly catching up with China’s 1.3bn. But India has only about 10m manufacturing jobs, compared with about 150m in China. So there are simply more opportunities in China to improve your life

The Prospect article is itself fascinating for its portrayal of Hefei’s (misguided?) aspirations to become China’s Silicon Valley. If I had to name the ten places in China likeliest to become China’s Silicon Valley or even something close to Silicon Valley, Hefei would not be on that list.

Are there more opportunities to improve your life in China than in India? What about five years ago and what about five years from now? And does anyone have any experience with Hefei as an up and coming IT center?

In a recent article, entitled, “China: The Next Software Center,Leonard Liu, CEO of Augmentum, a Silicon Valley software services company with offices in Shanghai, states China is still years away from becoming a software outsourcing center.

Liu notes that no Chinese company comes close to rivaling Indian outsourcing powerhouses like Wipro (WIT), Infosys (INFY), or Tata Consultancy Services, and those predicting a quick rise for China’s software industry do not understand the business:

While it’s easy to build up a manufacturing base, creating a knowledge industry takes a lot more time, he says. “Software experience is nothing that you can get very quickly,” Liu points out. “You can rebuild a TV factory that you had in Japan, because most of the work is automated, and workers can be trained very quickly. However, software is a knowledge effort and it takes time for team members to form.”

Liu goes on to predict it will take another ten to twenty years for China to be a big player in the software industry.  Is he right?  Who will actually lead that charge?  Will it be “American” companies like Augmentum, Indian companies like Wipro, Infosys, and Tata (which are already in China and expanding), or will it be local Chinese companies?

For more on China software outsourcing, check out the following:

For an interesting and thoughtful post on perceived evils and dangers of outsourcing, check out “Outsourcing to Hell.

Just a few days ago we did a short post on whether China is ripe for duplicating Silicon Valley.  To which we gave the lawyer’s favorite answer: maybe.

Today, the hugely popular Silicon Beat blog, has a post, entitled, “Wikia & Northern Light: The sucking sounds continue in Silicon Valley and China,” on how key people are leaving Silicon Valley for China.  The post describes China as a “sexier draw” than Silicon Valley “if you are Chinese-born” and (jokingly?) asks if there is “anyone staying behind in Silicon Valley these days?”

The post mentions the following four Silicon Valley luminaries as having recently left Silicon Valley for China:

1.  Yang Ke and Feng Deng, who co-founded Internet security firm NetScreen Technologies;

2.  Datong Chen, founder of Omnivision Technologies;

3.  Victor Tsao, co-founder of Linksys.

On top of this, Newsweek Magazine just published an article, entitled, “How China is Rivaling Silicon Valley,” [link no longer exists] focusing on Pudong in general and on Shanghai based software company, Augmentum, in particular.

Will China some day rival Silicon Valley? What do you think?

China Herald poses the question of whether China could have its own Silicon Valley and answers it with a “no.” China Herald answers its question using a list of ten criteria Paul Graham asserts are necessary to duplicate Silicon Valley elsewhere.

I do not disagree with The China Herald’s analysis of China pursuant to these ten criteria, but I do wonder whether each of these ten things is really required to have another Silicon Valley or whether many of these things apply only to duplicating Silicon Valley in the United States, and even on that I am less than sure all of these things are really necessary.  And what is really meant by “Silicon Valley“, anyway?

Lawyer’s prerogative lets me answer the same question with a resounding “maybe.”  I actually think the short term answer has to be “no,” but since China changes so quickly, I want to reserve the right to come back to this question in a few years.

The China media story du jour seems to have shifted recently from raves about two dollar meals to stories on how China is getting too expensive for business.  This new line says wages in China are up, good Chinese employees are difficult to find, and foreign companies are leaving China for cheaper and more abundant labor.  What’s a foreign company to do?  Not worry. 

Wages are rising in China, particularly in places like Shanghai and Shenzhen, but also in less “foreign populated” cities like Dalian and Qingdao — but much more slowly.  However, productivity increases are still outstripping wage gains and none of these newly reported economic ills are at all new.  The most cited of these “will the last foreigner in China please turn out the lights” articles, “How Rising Wages Are Changing the Game in China,” admits (buried deep within the article) that “improved productivity in China has so far offset higher wages.”

It can be exceedingly difficult to find good employees in China, particularly those with high level management or technical skills. But this is nothing new.

These “China is getting expensive stories” make the mistake of equating Shanghai and Beijing with all of China, effectively ignoring more than a billion people, whose wages are lower than those in China’s ex-pat centers.  The story I would be writing is how western companies are coming to realize there is more to China than just Shanghai and Beijing, and how they are beginning to consider a greater number of factors in deciding where to locate within China. The end of cheap China may be drawing near, but only if you focus on its first tier cities.

We are seeing more western companies interested in starting their China operations in cities outside more typical favorites like Shanghai, Gaungzho, Beijing, and Shenzhen.  We also are hearing more talk from companies already in those cities about expanding elsewhere in China, with reasons as varied as the companies themselves.  Some are interested in regional or city tax incentives.  Some are thinking about logistics.  Some want greater exposure to China’s internal market.  Some just want to be somewhere quieter and/or less polluted. And yes, some want to be where wages are lower or where the workforce they need is more accessible.  Westerners (in the footsteps of Japanese and Korean companies) are now starting to recognize that for many businesses, particularly low and mid range manufacturing operations, there are many reasons to consider China’s so-called second tier cities, such as Yantai, Tianjin, Dalian, Wuhan, Wuxi, Qingdao, Harbin, Chengdu, Chongqing, Shenyang, and Changzhou.

You can read more about China’s second tier city phenomenon in “Shanghai Seeing the Bigger Picture,” [link no longer exists] and in “Crouching Dalian, Hidden Dragon.” [link no longer exists]  Real estate mega-firm, Cendant, recently conducted an extensive executive survey [link no longer exists] that concluded that there would be a “sharp increase in executive assignment volume to cities such as Chengdu, Dalian, Tianjin, Qingdao, Shenyang and Chongqing.”

Many of China’s smaller cities are recognizing their ability to bring in foreign business and are aggressively marketing themselves.  A good example of this can be found in a recent San Francisco Chronicle article entitled “China Throws a New Pitch: Changzhou Hopes to be a Magnet for U.S. Companies,” detailing Changzhou’s recent Silicon Valley road show:

Located 100 miles west of Shanghai, Changzhou offers very low costs and an ease of doing business matched by few other places, according to Changzhou’s mayor, Wang Weicheng. Wang led a delegation of executives and municipal officials to San Jose on Monday in search of investors and U.S. firms interested in starting operations in his city.

For ambitious cities like Changzhou, Silicon Valley is a rich potential source of capital and technology. For Silicon Valley, Changzhou is a deep well of talent and an inexpensive place to operate, compared with bigger, more mature cities like Shanghai, where costs are rising fast.

The Chinese Academy of Social Sciences’ just released Study on the Competitiveness of China’s Cities, listed the following cities as Greater China’s twenty most competitive, in order: Hong Kong, Taipei, Shanghai, Beijing, Shenzhen, Guangzhou, Kaohsiung, Macao, Hsinchu, Keelung, Hangzhou, Ningbo, Suzhou, Tainan, Tianjin, Xiamen, Dalian, Wuxi, Shenyang and Qingdao.  Unfortunately, I could not find anything that clearly describes the criteria used to compile this ranking.

Bottom Line:  In considering where to enter or to expand in China, you will probably want to consider some combination of costs, taxes, quality of life, location, work force, market, logistics. Depending on the weight you give to each of these factors, you may find yourself joining the growing list of foreign companies that have realized China is more than just Shanghai and Beijing.