ECONOMIC, POLITICAL TIES DISPLACING RIVALRY China's government has sentenced two of its citizens to life in prison for their role in securing prostitutes for hundreds of male Japanese visitors in the southern city of Zhuhai last autumn. The Chinese government is also pressuring Tokyo to turn over the Japanese businessmen who allegedly requested the prostitutes. This story made headlines around the world, and fits well with how the world press typically covers Sino-Japanese relations. Regrettably, such incidents recur with enough regularity to feed the media machine that continues to stir a nationalism rooted in conflicting historical memories. Japanese Prime Minister Junichiro Koizumi's annual visits to the Yasukuni Shrine -- which is widely viewed as a symbol of Japan's former militarism -- is a conspicuous example of this. The publicity that the press gives to these visits has helped impede an invitation to Koizumi from China's leaders for a state visit. Recently, the discovery of mustard gas canisters left behind by Japanese forces during World War II has also served to keep memories of the Imperial Japanese Army's wartime conduct alive among older Chinese. Moreover, rival Sino-Japanese claims to the Senkaku (or Diao Yutai) Islands resurfaced last year when the Japanese government leased three islets in the chain from private parties. The action, purportedly undertaken to reduce the prospect of landings and demonstrations by Japanese right-wingers, set off a brief, though frenzied, reaction in China, as well as in Hong Kong and Taiwan. Meanwhile, differences over Taiwan also foster tensions periodically, such as when former Taiwanese President Lee Teng-hui sought to visit Japan for medical treatment. But this is not the whole story. Although such incidents reveal a troubling level of mistrust between the Chinese and Japanese that is not merely a product of media coverage, it is noteworthy that both governments have worked consistently, diligently, and with considerable success to resolve such problems and contain their political fallout. Of course, official relations between the two countries are marked by much political and economic competition -- some of it healthy, some of it a possible harbinger of future strategic rivalry. The competitive strain in Sino-Japanese relations is especially visible in energy politics. Demand for oil in Asia is growing rapidly, and with China and Japan increasingly dependent upon imports, each has naturally sought to improve its energy security by diversifying sources of supply. Both countries covet access to Russian reserves, especially those located in the Angarsk fields of Siberia. Last spring, China appeared to have locked up a Russian commitment to build a pipeline to service the China market at Daqing. Japan, however, raised the ante with new offers of financial incentives. Its bid for an alternative pipeline to Nakhodka to serve Japanese, Korean and other markets remains alive, creating another point of competitive friction. In their rivalry for leadership in promoting Asian regional cooperation, meanwhile, China has taken an early lead. Nearly two years ago, China trumped Japan by offering a Free Trade Agreement to the members of the Association of Southeast Asian Nations, while front-loading its own tariff concessions. But this backdrop of contention and competition masks emerging collaborative aspects of Sino-Japanese relations that are profoundly important. For example, trade and investment flows continue to expand rapidly. Bilateral trade topped $100 billion in 2003, as Japan's exports to China increased by more than 10 percent, fueled by semiconductors, electrical equipment and automobiles. Meanwhile, China replaced the United States as Japan's biggest source of imports, and is now one of the few non-members of the Organization of Petroleum Exporting Countries with which Japan runs a trade deficit. Similarly, direct investment by Japanese firms is increasing as they relocate production facilities to China to capitalize on lower labor costs and high-quality engineering talent. Of course, there is no assurance that today's expanded commerce will preclude eventual strategic rivalry, or succeed in erasing lingering wartime animosity. But both countries now place a premium on extending their economic interdependence. Ultimately, the historical wounds that have long divided China and Japan, and the more current diplomatic flash points that the global media inevitably trumpet, tell only part of the Sino-Japanese story. There are economic and geopolitical rivalries between China and Japan that dwarf in importance the high-profile insults to national pride that make headlines. But there are also compelling economic and political inducements toward cooperation that prevent these rivalries from developing into full-blown crises. MICHAEL ARMACOST is a former U.S. ambassador to Japan and is a distinguished fellow at the Asia/Pacific Research Center of Stanford University. He wrote this article for Project Syndicate.

China's government has sentenced two of its citizens to life in prison for their role in securing prostitutes for hundreds of male Japanese visitors in the southern city of Zhuhai last autumn. The Chinese government is also pressuring Tokyo to turn over the Japanese businessmen who allegedly requested the prostitutes. This story made headlines around the world, and fits well with how the world press typically covers Sino-Japanese relations. Regrettably, such incidents recur with enough regularity to feed the media machine that continues to stir a nationalism rooted in conflicting historical memories. Japanese Prime Minister Junichiro Koizumi's annual visits to the Yasukuni Shrine -- which is widely viewed as a symbol of Japan's former militarism -- is a conspicuous example of this. The publicity that the press gives to these visits has helped impede an invitation to Koizumi from China's leaders for a state visit. Recently, the discovery of mustard gas canisters left behind by Japanese forces during World War II has also served to keep memories of the Imperial Japanese Army's wartime conduct alive among older Chinese. Moreover, rival Sino-Japanese claims to the Senkaku (or Diao Yutai) Islands resurfaced last year when the Japanese government leased three islets in the chain from private parties. The action, purportedly undertaken to reduce the prospect of landings and demonstrations by Japanese right-wingers, set off a brief, though frenzied, reaction in China, as well as in Hong Kong and Taiwan. Meanwhile, differences over Taiwan also foster tensions periodically, such as when former Taiwanese President Lee Teng-hui sought to visit Japan for medical treatment. But this is not the whole story. Although such incidents reveal a troubling level of mistrust between the Chinese and Japanese that is not merely a product of media coverage, it is noteworthy that both governments have worked consistently, diligently, and with considerable success to resolve such problems and contain their political fallout. Of course, official relations between the two countries are marked by much political and economic competition -- some of it healthy, some of it a possible harbinger of future strategic rivalry. The competitive strain in Sino-Japanese relations is especially visible in energy politics. Demand for oil in Asia is growing rapidly, and with China and Japan increasingly dependent upon imports, each has naturally sought to improve its energy security by diversifying sources of supply. Both countries covet access to Russian reserves, especially those located in the Angarsk fields of Siberia. Last spring, China appeared to have locked up a Russian commitment to build a pipeline to service the China market at Daqing. Japan, however, raised the ante with new offers of financial incentives. Its bid for an alternative pipeline to Nakhodka to serve Japanese, Korean and other markets remains alive, creating another point of competitive friction. In their rivalry for leadership in promoting Asian regional cooperation, meanwhile, China has taken an early lead. Nearly two years ago, China trumped Japan by offering a Free Trade Agreement to the members of the Association of Southeast Asian Nations, while front-loading its own tariff concessions. But this backdrop of contention and competition masks emerging collaborative aspects of Sino-Japanese relations that are profoundly important. For example, trade and investment flows continue to expand rapidly. Bilateral trade topped $100 billion in 2003, as Japan's exports to China increased by more than 10 percent, fueled by semiconductors, electrical equipment and automobiles. Meanwhile, China replaced the United States as Japan's biggest source of imports, and is now one of the few non-members of the Organization of Petroleum Exporting Countries with which Japan runs a trade deficit. Similarly, direct investment by Japanese firms is increasing as they relocate production facilities to China to capitalize on lower labor costs and high-quality engineering talent. Of course, there is no assurance that today's expanded commerce will preclude eventual strategic rivalry, or succeed in erasing lingering wartime animosity. But both countries now place a premium on extending their economic interdependence. Ultimately, the historical wounds that have long divided China and Japan, and the more current diplomatic flash points that the global media inevitably trumpet, tell only part of the Sino-Japanese story. There are economic and geopolitical rivalries between China and Japan that dwarf in importance the high-profile insults to national pride that make headlines. But there are also compelling economic and political inducements toward cooperation that prevent these rivalries from developing into full-blown crises.

Silicon Valley cannot be replicated-not even in the US, leave alone India.

But there is no underestimating the complex and high end nature of information technology work that's increasingly being done in India.

There is almost nothing that is not doable, except certain high investment, high value manufacturing, like microprocessors.

This year stands out for the speed with which India, still very much a poverty ridden developing country, has emerged as a partner of mature econom-ies in a wide ranging field that covers information technology, business processes and research and development.

Unsurprisingly, such a major development has been accompanied by drama, excitement, anguish and misunderstanding. The rapid acceleration in trends, which in some cases date back to over 10 years, has given little time to players on both sides to rationally assess and adjust to new realities.

Some don't seem to know what has hit them and have therefore gone on to make unrealistic assumptions.

In the west, particularly in the US, there is a backlash against outsourcing to countries like India, China, the Philippines and Russia, with India being the most visible and so taking most of the rap.

Correspondingly, there is an element of euphoria in India in the belief that it has arrived. Some are making unrealistic assumptions that it is on the way to becoming a new Silicon Valley to the world.

Significantly, the knowledgeable and those who are in the vortex of change have a realistic view of what exists on the ground and an enlightened foresight of the shape of things to come.

In this survey of opinion leaders in the information technology industry, we try to come to grips with the new, rapidly emerging reality what is the exact nature of the high tech work taking place in India in information technology and what are the precise contours of the emerging cross border partnerships?

First, the Silicon Valley red herring. Sridhar Mitta, managing director of the incubating firm e4e Labs, almost snorts at the mention of Silicon Valley.

He recalls how the good professors at Stanford University started to get too many visitors who came and asked the same questions what makes Silicon Valley tick and can we replicate it in our country?

They undertook a methodical study for a couple of years and helped define the uniqueness of the creative process that occurs in a small geography 30 miles by 10 miles, near the Californian city of San Francisco.

To Mitta, the Valley's defining characteristic is that some of the best brains in the world are concentrated in a small geography. "It is an innovative high tech cluster. There is an ecosystem of companies which add value to each other."

In Silicon Valley people are willing to share ideas and are not worried about theft. Business discussions are concluded very fast as people want to get on with a project. A project can be started in a week.

There is no concern over individual ideas being stolen as it is assumed that if you are bright you will have many more worthwhile ideas. In the Valley, people don't care about religion, creed or nationality. "There is only one religion, business," Mitta says.

Another industry insider concurs. "Silicon Valley is not a service, but a risk taking model, whereas the Indian software model is largely based on cost effective and efficient delivery of services," he differentiates.

Many of tomorrow's problems are first defined in US universities and then get crystalised as business opportunities. "Firms in the Valley work closely with those universities to quickly grasp the business ideas that emerge from diagnosing and solving a technical problem, for example."

Where does Indian expertise and capability stand then? "The Indian environment still lacks the original ideas that create the new business models. This is because of the lack of proximity to markets," the industry insider explains.

"Once an engineering problem is defined, it can be executed in India." The key and growing Indian competency now is that it has crossed the technical hurdle, there is little that cannot be technically done in India.

If Silicon Valley scores 100 for the purpose of our present discussion, Mitta gives Bangalore 15.

"Bangalore has passed criticality in technical prowess but is still abysmally low in interaction. The culture of networking is better in Bangalore than in the rest of India but nowhere near what exists in the Valley. Here a major part of the load is carried by multinationals which guard their secrets very jealously," Mitta says.

Bangalore also scores on its educational institutions which can deliver the raw materials or skills. Like the Valley, it has some of the best brains, relatively speaking, and some companies have reached criticality of size. Some complex work gets done here in a serial way within companies.

"I know that a US company can start a complex work group here which involves doing many things, though not all. But I don't know what the company on the floor above mine is doing," notes Mitta.

Subroto Bagchi, COO of MindTree Consulting, who is based in the US, explains that in the 1990s people thought that any work that required a high degree of customer knowledge and collaboration, design and architecting had to be done exclusively in the US.

"Anything that required innovation had to be done near the water cooler. So now there is hardware, software and wetware the coffee machine and what's between your two ears, as most of the human brain is water."

But the big change has come with the availability of high bandwidth which has made the water cooler virtual.

"If earlier we looked at India for just development or maintenance work, now we are able to look at co-development and co-architecting," Bagchi notes.

Till two human beings meet, trust is not established. Innovation-related activity, co-development and co-architecting are not done by two entities but by two human beings.

Two techies have to accept each other as "buddies" before they can innovate together. "That happened after Y2K. It established the cross cultural comfort. In a nutshell, India has become legitimate," Bagchi adds.

Higher value add projects are now coming to India and company boards across the world are increasingly being asked, 'What is your India strategy?' Investors in venture capital funds are asking them, 'What are your plans for India,' and they in turn are asking companies 'What are your India development plans?'

The software insider says India's current role is to "complement" not "replace" Silicon Valley. "If present trends continue, maybe India can equal Silicon Valley in seven to 10 years. But the approach cannot be 'We versus they.'"

Another authority adds his support to this scenario, making a deft distinction between what is on and not on.

Says Madhukar Angur, David M French distinguished professor at the Flint School of Management, University of Michigan: "Today almost nothing is too high-tech for India. In technology (IT, designing, R&D) India has taken significant strides. It is pretty close to self-sustaining growth. But it is not quite there. So MNCs will look at India as a location for startups but not standalone ones."

So they will also seek out partners, as Intel has done with startups like Tejas Networks.

The cooperation and joint development approach is underlined by K P Balaraj, managing director of WestBridge Capital Partners.

He feels that "the vast majority of the work being done by start-ups in India is led by teams located in the Valley. What is changing though is the timing of an India ODC (overseas development centre) which is being set up much earlier in the life cycle or even at the seed stage."

What is more significant is that as multinationals which follow the example of early leaders such as GE, TI, Intel, Oracle and others start to do more cutting edge work here, there will be a large base of India-based engineers and managers who will have the experience of building and bringing a world-class product to global markets, primarily the US.

"From this base, we will see a future generation of product entrepreneurs emerge who will have the vision and market credibility to attract high quality VC funding for their plans," Balaraj adds.

Innovation means developing new technology or products. Product development in India is already taking place but as a secondary exercise.

Sanjay Kalra, CEO of the HCL-Deutsche Bank joint venture DSL Software, explains the sequence of what came first and then what followed. At any point of time more than 70 percent of spending takes place on sustaining investments in existing technologies.

This, like work on new technologies, also requires high end work that is innovative. But a majority of the effort is in tasks that are process and procedure bound.

In such tasks, innovation is focused on how to deliver the subcontracted tasks better (process improvement, quality).

High end startups are now beginning to allocate and locate a high percentage of employees (or contractors) in India.

In the past it was the large technology players that leveraged the lower costs and high availability of talent. The smaller startups would contract to small and large players on a need basis.

But of late a lot of smaller startups are also beginning to factor in India as an integral part of their business plans right from the beginning.

What is more, several start-ups are now using India as the base to also conceptualise and then produce in India for markets in Asia.

The good news on products is that Intel is in India in a big way and is going in for the joint effort startups that hold the key to the future. Intel's own agenda, says Ketan Sampat, president of Intel India, is to establish leading edge design capability.

Says Sampat: "At Intel's development centre (its largest non-manufacturing site outside the US), we are engaged in some of the most advanced development activities not just in India but anywhere in the world. For example, the flagship next-generation enterprise processor that Intel will have in volume production is being designed entirely in Bangalore."

But he sees an important milestone that has to be crossed Indian firms still have not broken into the ranks of product companies with their own intellectual property and branded product lines.

"The i-flex's of the world are still too few and far between," Sampat says. So Intel Capital, the company's strategic investment programme, has been an investor in several Indian technology companies. Sampat mentions the investment in Sasken Technologies.

"Its product GSM/ GPRS software stacks complements our "Manitoba" (wireless Internet on a chip) product and it has customers worldwide."

He also mentions another telecom company, Tejas Networks. "It is starting with the Indian market which is sizeable now and is using it as a springboard to the global market."

Sanjay Nayak, CEO, Tejas Networks, sees only the beginnings of high end startups in India, like his company. "It will take some time before we see a major shift in startups originating in India, though the enablers are all there."

The most common trend is to have an "engineering backend" in India of a US originating startup. Within this, the major amount of work that is being done is "software" centric not much system design or hardware design work is done.

He expects that "once we have a few success stories of high-end product companies from India, it will accelerate the trend." In the past, countries like Israel and Taiwan have witnessed such trends.

Srini Rajam, chairman and CEO of Ittiam, another startup product company, sees high end start ups becoming increasingly dependent on designs done in India.

"There is a strong push coming from the investors of the start ups to locate a large part of their design team in India or source their key designs/IP from Indian companies, in order to improve R&D budget utilisation and time-to-market."

He sees early revival worldwide in one segment-the semiconductor and embedded systems. "This is in turn is enabling the growth of chip design, embedded software and system design activities in India."

Several factors are likely to encourage more high end work to come to India and help it become an increasingly important partner of Silicon Valley.

First, the reverse brain drain or brain gain that has been taking place in the last few years, especially since the tech bubble burst in early 2000 and the recession that set in in Silicon Valley.

One person who has been plotting it carefully is Rafiq Dossani, a senior research scholar at the Asia-Pacific Research Centre of Stanford University.

"My guess is that 6,000 jobs have been lost from Silicon Valley in IT to India. Looking ahead, the flow will depend on both opportunities in India and here."

The Silicon Valley economy is picking up rapidly and hiring should soon increase, feels Dossani. In addition, it remains unbeatable on new product development because of its global reach of talent and proximity to markets.

So the younger and more innovative will be attracted to the Valley. India will continue to attract those in the 30-40 age group interested in raising families in India and those interested in a rapid rise up the executive ladder through a stint at a senior level in India.

Also, a key security factor is enabling high end work to shift to India, argues Angur. India will be a country of choice for location of partnerships on considerations of economic stability.

"Multinationals gamble on technology but are cautious on geography. Even China and Taiwan have a security downside. India-Pakistan relations is indeed perceived as a security risk but still India is on the preferred US list."

He sees a significant historical parallel. Technology and IT will be to India what the automobiles industry was to the US.

"One out of every three in the US has something to do with automobiles. The IT revolution has the seeds of becoming something like that. In the immediate future mutlinationals will consider India more and more for high-tech startups and there will be more high tech jobs."

Bagchi shares a deeper insight rooted in Indian history and social development. India, he feels, has two cards up her sleeve: "One is the power of diversity and two the power of pluralism, imparted to it by its institutions."

The future of the global economy is in more trade but post 9/11, the west is also looking for a sense of comfort a degree of security and cultural fit.

How many countries are there with world class capability in IT services from which an American company can source? Out of the choices available, how many countries are both diverse, so that there is a democratic-cultural fit, and believe in institutional pluralism - executive, judiciary, legislative system? "These institutions give a guarantee of continuity," he says.

To become an innovation partner to Silicon Valley, an economy must innovate. Innovation is invariably linked to diversity. The US has been at the cutting edge of technologies because it has such a pro-immigration policy.

"We did IT services for 15 years and moved up the value chain. But the next big value chain is about innovation. That innovation depends on the fertility condition on the ground. That condition is necessarily about diversity," Bagchi adds.

With the next round of presidential primary elections coming up Tuesday, billboards are popping up across South Carolina with a political message that might resonate with any Democratic contender: "Lost your job to free trade and offshoring yet?"

The issue of employment is high on the agenda in this political season. President Bush can take credit for an economic recovery, but he is vulnerable when it comes to jobs. The stock market is up, but job growth is dismal -- only 1,000 jobs were created in December, a fraction of the 300,000 new jobs the Bush administration projected.

As the temperature rises over disappointing job growth, the practice of "offshoring" -- sending jobs overseas to cheap labor markets -- has worked its way into the rhetoric of the presidential campaign trail.

Sen. John Kerry of Massachusetts, the Democratic front-runner after victories in Iowa and New Hampshire, has been denouncing the Bush administration for rewarding "Benedict Arnold CEOs" who move "profits and jobs overseas." Howard Dean, the populist former governor of Vermont, has told his audiences that America needs a president "who doesn't think that big corporations who get tax cuts ought to be able to move their headquarters to Bermuda and their jobs offshore."

Significance unknown

There's no consensus among economists and experts over the long-term significance of the trend toward offshoring, jargon that combines the words "offshore" and "outsourcing." It generally refers to the export of white-collar jobs in information technology and other professional fields such as accounting and banking services.

But blue-collar workers have borne the brunt of the pain. South Carolina, a key battleground state for the Democrats, has been hit hard by overseas outsourcing in the textile industry, and has lost about 64,000 manufacturing jobs over the past three years, according to the American Manufacturing Trade Action Coalition, the Washington-based lobbying group that paid for the billboard ads.

Offshoring statistics are fuzzy at best. One report estimates that 300,000 of the 2.4 million jobs lost since the beginning of the recession in 2001 can be attributed to offshoring. Future projections are all over the map: One predicts 3.3 million service-sector jobs will go overseas in the next 15 years, while a University of California-Berkeley report estimated 14 million U.S. service jobs are at risk.

"I think the issue is going to be exaggerated and manipulated by both sides in the political debate," said Dean Davison, an analyst at the Meta Group, a technology research and advisory firm in Stamford, Conn. "There are distinct differences of opinion in what corporations should do to take responsibility, and what kind of public policy should be implemented."

Legislation has been introduced in Congress to address the issue, some of it intended to stir up debate rather than win passage. Kerry introduced a bill in November that would require call-center operators to disclose their physical location to consumers who phone in for customer service or technical help, ostensibly to discourage U.S. companies from moving such jobs overseas.

On the other end of the ideological spectrum, Sen. Craig Thomas, R-Wyo., won passage for his amendment to the Senate's omnibus appropriations bill last week that bans some federal contracts to vendors using offshore labor. News of this caused a furor over the weekend in the New Delhi press, on the assumption the lucrative Indian industry in back-office contracting operations was threatened by congressional sanctions. But that was a false alarm.

Few firms affected

The ban applies only to a relatively small number of U.S. companies bidding for contracts under a Bush administration program to privatize certain federal government services, such as architectural design work, explained John Palatiello, a Washington-based lobbyist representing domestic companies bidding for privatization contracts. The strategy, he said, was to prevent federal unions from claiming their jobs were being sent overseas.

"The motivation wasn't to stop offshoring per se," Palatiello said, "but rather to get it out of the debate on privatizing federal services."

Antipathy to offshoring has deep political roots. Manufacturers in the toy and apparel industries have gone overseas for decades to produce their goods from contractors using cheap labor. Gradually, electronics makers and Silicon Valley's computer brands all followed -- and more recently software and professional services.

Presidential wannabe Ross Perot immortalized this inexorable force of globalization as the "giant sucking sound" from Mexico when he campaigned against the North American Free Trade Agreement in the 1992 election. Twelve years later, many of those Mexican manufacturing jobs have moved to China.

The fuss over job loss in this presidential election year is of particular concern in India, the nation that is benefiting most from the offshoring boom. A Jan. 19 article in the Times of India, headlined "Why is the U.S. running scared?" captured the dismay: "The issue has become a political hot potato. It has even entered the presidential debate, with Democrat Howard Dean attacking his rival contender Wesley Clark for being soft on it. Why the big hoopla over outsourcing?"

Rafiq Dossani, a consulting professor at Stanford University's Asia-Pacific Research Center, published a study of companies moving operations to India last year. He is a proponent of the business efficiencies of offshore labor markets. But even he is concerned about the long-term political consequences.

"This may be a problem in the minds of some politicians now, even before there's been sufficient analysis of what is going on," said Dossani, a New Delhi native. "But I think over the next five years this is going to have a huge impact. The range of jobs that can be offshored is mind-boggling."