China for decades was a cozy world for techies with a U.S. education, ethnic Chinese roots, and an interest in coming to the mainland to work, especially for a multinational company. Joe Chang knows: He once lived that life.
“I was at Cisco and Microsoft (in China), and the game we played was that we would jump from one to the other and get a better package,” he recalled in an interview. “Life was good. You had expatriate allowances and even locals had local allowance packages. People were happy. Nobody wanted to go out and take risk and be a startup because you had to out against the likes of a Cisco or IBM, or Microsoft. You could make good money working for these multinationals.”
Things have changed in a big way. China’s software localization efforts have accelerated since Microsoft in 2008 launched an anti-piracy effort called “Windows Genuine Advantage” that allowed the U.S. industry giant to identify unauthorized copies of Windows. Many locals, however, saw it as proving that a foreign company could shut down their IT. That was followed by revelations of U.S. National Security Agency contractor Edward Snowden of snooping by the American government.
“NSA-Snowden really catalyzed the localization that was inevitable,” Chang said. “China from the very beginning wanted to rely on its own technology for national security purposes” and leapfrog rivals. “Fifteen years ago, they weren’t ready to do it. NSA-Snowden helped all of the people that wanted to move faster to the end game.” In the aftermath, multinationals fell deeper under a cloud of suspicion that hurt business; the era of easy job hopping for Chinese engineers wound down.
The changing environment, along with a long-term boom in demand for business software, has turned the country into a land of opportunity for enterprise IT talent and the investors that know how to help newcomers build their own business. “What we are witnessing right now is an unprecedented migration of talent from the multinationals,” both from those already in China and others working in Silicon Valley but open to coming home, Chang said. Chang today has become an investment partner with Eight Roads, a proprietary venture capital and private equity investment arm of Fidelity.
“My thesis here is that China is really at a moment in time where it is at the precipice of exploding” as a hub for IT innovation, 45-year-old Chang said. “It is already the largest market in the world in many respects and will get much larger. We’re at the beginning of the wave of industry demand that has an underlying economic basis.”
That thesis is backed up by industry figures. Increased data flows tied to cloud services, big data collection and other types of demand will help China will surpass the U.S. as the world’s biggest spender on new-generation “third wave” information and consumer technology by 2020, according to IDC. Among private-sector companies, rising demand for web-linked services will likely force business to spend more for enterprise IT. Government enterprises that once were less aggressive now also want the best software available and will be spending more, Chang said.
“Government customers that may have once been run by political appointees are now run by professional management,” Chang said. “Ten years ago, there was a lot of focus on cost. Today, companies have a lot of money. They’re hiring people with Harvard MBAs, and people from the Standard Chartereds, the HSBCs, and the Citibanks of the world. You have now professional management that has respect for IT.”
Chinese manufacturers being squeezed by rising wage and other costs in the country and ultimately will need to spend more on IT. “China used to be very low-cost driven and that pervaded everything that they did. Things like productivity didn’t really mean much to them. That labor advantage has eroded; it’s become a disadvantage compared to the likes of Mexico and Vietnam. You add on power cost and energy costs, and China does not have an advantage there as well,” Chang said.
What technology is Chang looking to invest in? “Just take a look at what’s getting funded and coming out of the Valley. My premise is simple: It’s not that China has a thing for this or that. It’s that given the innovation that’s coming out of the Valley, there’s going to be a piece of it that is going to come home because of the market environment.” More specifically, he said, it is data and the technologies to manage data and enable data analytics in a secure way that he is particularly interested in. “With the vast amounts of users doing everything and anything on the Internet, China will likely be a distinctive source of innovation,” he said.
And in today’s environment, with so many web users and businesses moving to cloud storages, “hybrid cloud is becoming the big thing” -- especially for companies such as banks that don’t want to trust all of their information in a public cloud, Chang says. “How do you get these different databases to access data, transfer each other’s data and achieve that agility that you would need?” One of his portfolio companies offers a solution: D-Uni. The company’s China-born founder, Charlie Zha, is building up much of the company in the mainland.
U.S.-born Chang, the son of Chinese parents that grew up in Taiwan, earned undergraduate and master’s degrees in engineering fields and an MBA from Northwestern University. He has worked in China since 1995. Chang believes Eight Road’s ties to Fidelity give it advantages in enterprise IT investing because the company itself is one of the world’s most demanding enterprise IT users. As part of its due diligence, it can bring in business and IT resources to help. Fidelity also brings a good name and can also be a potential customer for investee companies, Chang notes.
The way Chang sees it, it’s not only burgeoning market demand in the here and now that will keep his business in China busy. The supply of Chinese engineers in Silicon Valley remains large at about 30,000, and many could be open to changing locale as China’s market and rewards grow, he said. New U.S. visa policies under President Donald Trump also could hasten the return of young talent to China, too. The large potential of the China enterprise IT market doesn’t seem likely to recede anytime soon.
--Follow me on Twitter @rflannerychina
