Mirror, mirror on the wall

Democracy doesn't win brownie points

By Roopen Roy Aug 16 2016

Tags: Op-ed

Let's face it, there's no point in waiting for the Chinese to self destruct its software industry

Economists often make mistakes in predicting outcomes. When they wear glasses tinted with politics, they blunder. Here is a perfect example. Jagdish Bhagwati and Arvind Panagariya have written a book that is grandiosely titled India’s Tryst with Destiny. In the book they have concluded that India has a great advantage in the software industry over China: “Finally, China’s authoritarian regime, compared to India’s democracy, leads to two important consequences that militate in India’s favour. First, China is fearful of samizdat: it cannot afford to have software develop to a point where people can communicate freely and even dare to undermine political control. The result is that that the PC (the personal computer, and all that it implies today) is incompatible with the CP (the Communist Party). But much technical progress comes today through software developments. So, India, which is a freewheeling democracy like the US, has an enormous advantage over China”.

I am not a great admirer of the one-party rule of China. But I must humbly submit that this political grand-standing is not supported by data. In 1921, CP Snow wrote an essay on journalism for The Guardian newspaper to mark its centenary. In it, he famously said: “Comment is free, but facts are sacred.” In other words, you are entitled to your opinion but not to your “facts”.

There is no data that proves a decisive correlation between “democracy” and “software development”. There is evidence, on the contrary, that software development has thrived in those countries which have strong traditions of education in mathematics, science and technology. Large investments in defence have also spawned inventions and breakthroughs in information technology. In early 1961, the “authoritarian” Khrushchev regime was successful in sending Yuri Gagarin to outer space — ahead of the “democratic” US. There were many famous scientists and mathematicians in societies that were not “freewheeling” democracies. For instance, Hitler’s Germany.

Coming back to China, IBISWorld, a US-based market research firm has published a report in September 2015 titled: Software Development in China: A Market Research Report. In it, the revenues of this industry is estimated at $690 billion of which “products” account for 30.4 per cent. For the past five years, China’s software development industry has grown annually at 21.4 per cent. Downstream users and the government have fuelled this tremendous growth.

In contrast, India’s software industry is still largely manpower-intensive. We sell IT services and a large chunk of it to off-shore clients. According to Nasscom India’s software revenues crossed $146 billion in FY 2015, of which $ 98.5 billion was described as “exports”. Domestic market is growing @ 15 to 17 per cent and exports are growing 12 to 14 per cent. The domestic market growth, according to Nasscom, is fuelled by e-commerce. Thus, in absolute revenue terms we are about 22 per cent of China and our growth is much lower as well. If you project this data into the future, the predictions of Bhagwati and Panagariya will go haywire.

The sage economists may argue till the panda comes home that the Chinese are cooking their books. But the data tells us that China will emerge as a formidable player much ahead of India unless we change course. To begin with, we need to be sceptical about the prediction of false dawns. The Nasscom-Mckinsey report predicts that the Indian software industry will grow to $ 225 billion by 2020. Even in that year, $185 billion will constitute “exports” and $45 billion will be derived from “the domestic market”.

China has turned the argument of India’s English-advantage on its head. They have created an impenetrable fortress of 1.2 billion mandarin-speaking people. Google is not the most prominent search engine in China. It is Baidu. Rooted in its native language and culture, Baidu provides an index of over one billion web pages, 200 million images and 30 million multimedia files. It is listed on the US Nasdaq. China also has its own Facebook called Renren which claims to have 219 million users. While the Donald Trump is screaming about the Bangalore man taking away US jobs, these Chinese companies are listing on US stock exchanges and raising funds from American investors! Did you know the market cap of Alibaba is $244 billion against Amazon’s market cap of $366 billion and Facebook’s of $358 billion. Earlier this month, Uber accepted defeat in China. It swapped its China business for a minority stake in the country’s homegrown champion, Didi Chuxing Technology. Uber will have a minor stake in Didi. Didi’s valuation is $28 billion, Uber’s global market cap is $62 billion.

Can we change the outcome? India has thriving IT services companies and a vast reservoir of software engineers. The Indian diaspora is well-connected and successful. Americans of Indian origin are CEOs of companies like Microsoft and Google. We have an opportunity to reimagine the IT and software industry through innovation. But there are a number of urgent “to dos” on the agenda: 1. Significant investments in our academic institutions in science and technology 2. Expansion of our domestic market 3. Diversification of our portfolio with a tilt towards product development and 4. Forging of global partnerships to co-create a new generation of applications.

It would be foolish to wait for our “freewheeling” democracy to conjure some black magic or for the Communist Party of China to destroy its own software industry. Thought leaders in our software industry must chart the new road map into the future through the mist of disruption and uncertainty. Indeed, we have another tryst coming up and the destiny is in our own hands.

(The writer is the Founder and CEO of Sumantrana, a strategy advisory firm)