Labor arbitrage

Some interesting numbers from this blog post by a software industry veteran operating in China. As a rule of thumb, it seemed to me that in non-tourist Beijing the buying power of a yuan (1 rmb) was very roughly equivalent to a dollar here: a cheap meal for 5-10 rmb, a supermarket beer for 1 rmb, etc. So, even at the 5 to 1 labor arbitrage rate suggested below a software developer in China has roughly similar buying power in local products as a developer here in the US (current exchange rate is 6-7 rmb per dollar). Of course, that buying power equivalence doesn't apply to "tradeables" like laptops, gasoline, automobiles, etc.

In the National Academies Press 2005 report, Rising Above The Gathering Storm, it was noted that "for the cost of one chemist or engineer in the U.S., a company can hire about five chemists in China or 11 engineers in India." In fact, I have personally observed that the labor arbitrage difference is the largest in an absolute sense the higher a firm opts to go on the value chain. For example, a Ph.D. who is paid $125 per hour in the States (whether fully-burdened or on contract) can be billed at about $25 per hour, whereas a $75 per hour Java programmer (an average Joe Java programmer, not a superstar) can be billed at between $16-18 per hour. And a superstar Java programmer: $100-125 per hour in the States, whereas a Tsinghua equivalent is billable by us at $20-23 per hour. As to the 11-to-1 ratio noted by the COSEPUP report, it's certainly doable (not always, but sometimes) in certain areas such as software testing where talent in Tier 2 cites can be tapped. Advice: Don't go to Beijing, Shanghai or Shenzhen for software testing or localization/globalization. And even though I personally don't like BJ, the best high-end talent is in BJ, not in SH, SZ, DL (Dalian), or anywhere else in the mainland.