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Is China a threat or an opportunity?

As with many sectors in Indian industry, the Indian software industry too is worried over the threat from China. Yet in software and hardware, India might have an opportunity that more than makes up for any threat, say Srikanth R P and Rajneesh De For 40 years now, since border skirmishes erupted just after some emotional posturing in 1962, Indians and Chinese have viewed each other with mutual suspicion. Over the years, although the two gigantic countries have settled some differences, they still seem to warily circle each other. In recent times, Indian industry on the receiving end of dirt-cheap Chinese imports has been at the forefront of a Save Us from China campaign. And now even the czars of the Indian software industry are acknowledging that China poses a serious threat to Indias ambition of becoming an IT superpower. That Nasscom is finalising a white paper on the implications of the Chinese foray into software exports shows the general alarm that has set in. Theres no doubt about Chinas competitiveness in the IT sector, considering its hardware and telecom markets are much bigger than Indias. And even in software, China has a huge captive domestic market, as compared to Indias relatively tiny domestic market. There are some other alarming figures for India: the ratio of Chinas IT spend to its GDP is nearly 5 times that of Indias. If Indias current growth rate in IT doubles, it would still take us 25 years to catch up with China, and that only if Chinas growth rate remains stagnant. Frankly, these numbers do seem to put a huge question mark over Indias much talked of aim of becoming an IT superpower.

D-Links Naik has evolved a formula whereby the Indian IT industry will have its cake and eat it too

Large domestic market

But, rather than throwing in the towel, there is a school of thought developing in India which believes that the Indian IT industry can convert this apparent Chinese threat into an opportunity. Nasscom president Kiran Karnik is one of the main votaries of this opinion. He believes that while China will always remain a formidable competitor, a policy of engagement rather than a policy of isolated approach would perhaps be a better strategy. First, it would give Indian companies a door to enter the Chinese domestic market which is today dominated by MNCs. Plus, Indian IT companies based in China can address other East Asian markets like Japan and Korea. This view is also endorsed by Noshir Kaka, principal, McKinsey & Co. It is a well established fact today that Indian IT firms have an excellent opportunity waiting to be tapped in the Chinese domestic market, which is estimated to be four times the size of Indias. Also, with China becoming a part of the WTO, local banks in China will soon be forced to start upgrading their technology. As local players have not been able to provide the required expertise and technology in the domestic IT market, the Chinese market is currently dominated by MNCs. This in itself offers an excellent opportunity for Indian IT firms, whose development expertise is no way inferior to these MNCs. Another important aspect is the growing purchasing power of the Chinas 1.3 billion people which in turn is creating a strong massive base to build domestic technology companies. China is also expected to be the largest market in the world by 2004 for mobile phones and digital cameras, and the second largest for PCs after the US. A key reason why India is miles ahead of China in software exports is due to the simple fact that the efforts of Chinese software firms were spent in addressing the huge domestic market (estimated to be worth $16.2 billion). But things are about to change, as China wants to emulate Indias success in the software sector and become a major global force. China has initiated a series of measures, which include plans to set up specialist IT training institutions on the lines of our IITs and Chinese firms are following the same strategy Indias IT majors did (bagging projects based on price) before going on to become software majors.

Yet, there is a bigger opportunity for Indian IT players in China. One, according to Infosys chairman N R Narayana Murthy, is that Chinese firms cannot meet the full demand from the Chinese domestic IT industry, resulting in the government allowing foreign firms like Microsoft, Oracle and IBM to operate through joint ventures. In addition, Kaka feels that Indian IT firms can take advantage of the fact that China offers Indian IT firms lower trade barriers, lower taxes and excellent infrastructure. No wonder Infosys is on the threshold of setting up facilities in Shanghai to tap the Chinese domestic market.

Infosys Murthy believes China is an opportunity since its IT industry cannot even provide for domestic needs

Window to Japan The second premise for looking at China as an opportunity is that it can provide Indian companies a gateway to Japan, a market hitherto virtually untouched. This logic is significant as currently, Japan is the worlds second largest economyestimated to be worth a gigantic 70 percent of the entire Asian market and which contributes approximately 11 percent to the total outsourcing global market. There is obviously a huge gap to be filled as only four percent of Indias software exports go to Japan. A significant gainer in the Japanese market is China, which has been a favoured partner for Japans software imports. The synergy is easy to fathom. One, Japanese is the second language taught in the northeastern parts of China, where most Chinese companies are located. Also, most Chinese programmers are familiar with the double byte system used to generate Chinese and Japanese characters. Location wise also, China offers a great advantage to Japanese companies looking to outsource their projects. Due to these synergies, it comes as no surprise therefore that Japan continues to be Chinas largest trading partner. Though Indian IT firms have established bases in Japan (the list includes the likes of Wipro, Infosys and TCS and L&T Information Technology), it remains a tough market to crack. The reason primarily being that Japanese companies have traditionally resisted external help relating to their IT systems. But a gradual change is happening. The Japanese economy, which is in the throes of recession, is slowly but surely catching on the outsourcing mantra in a big way. According to industry estimates, spending on IT outsourcing is likely to exceed $15 billion in 2005. These figures are roughly one third of the market size in the US. Since China is a natural trading partner for Japan, it makes more sense for Indian companies to set up base in China by following a strategy of partnerships with local players who have knowledge and expertise about local markets. Since the Japanese culture is not as open as US culture, tapping the Japanese market will undoubtedly require a lot of patience. But as experts say, once bonds are established they stay for a long time. Hence, it makes even more sense for Indian companies to tie up with Chinese players as China has been a long-time preferred trading partner for Japan. Also, Indias edge over China could come from the fact that it has a good record in quality and protection of intellectual property rights. Global software majors are wary

of outsourcing their projects to Chinese companies as China has a terrible record in software piracy. And on the quality front, as of December 2001, India had 36 companies at the SEI CMM Level 5 assessment out of 58 organisations worldwide, while China had none. It is thus a win-win situation for both Indian and Chinese companies as organisations who were earlier wary about Chinese firms but wanted to avail of the cultural and locational synergies, can now do so in the case of a IndoChinese tie-up. The hardware angle Even the hardware sector could gain from Chinas traditional strengths in this segment. K R Naik, managing director of D-link India proposes that Indian companies should set up hardware manufacturing facilities with technology know-how from companies both in mainland China as well as Taiwan. Most of the very few manufacturing facilities in India today deal merely in assembling, and unless they replicate the Chinese model of hardware development, the MAIT-E&Y estimate of $62 billion by 2010 in hardware will only remain a pipe dream. Naiks formula for success: Form a JV with a Chinese hardware major, procure the technology expertise, the R&D set up and then do actual manufacturing in India. You can even supply to the Chinese market, as our labour force is not only cheaper but much more intelligent, he adds. The key part of the strategy for Indian IT firms is to forge partnerships with Chinese firms and participate in the countrys explosive growth. Some Indian companies have already done this. NIIT, for instance, has seen huge demand for its courses due to its unique English and Mandarin courses. As Kaka says, Going forward, Indian software companies can outsource their work to Chinese companies to boost productivity, while maintaining a strategic relationship with the client. Indian software companies have an exponential opportunity to be tapped in the field of telecom software. Currently, major telecom players in China like Zhongxing and Huawei export their telecommunications equipment to India, while Indian IT firms develop the requisite software for them. Thats a great example of combining Chinas strengths in hardware manufacturing with Indias strengths in software. With Infosys receiving the green signal to set up a branch in China and Satyam too likely to jump into the fray, the future seems bright for Indian IT companies in China. While it is in the best interests of Indian IT companies to view China as a formidable competitor, the opportunities far outweigh the threats. Perhaps the question should be rephrased from, Is China as a threat? to Is China as a land of opportunities? For India Incs sake, we sure hope it is.

LATEST UPDATES Infotech China's Rising Wages Threat For Indian IT REUTERS Posted online: Tuesday, October 12, 2004 at 0239 hours IST Updated: Tuesday, October 12, 2004 at 1101 hours IST

SINGAPORE, OCTOBER 11 : China, already the workshop of the world, will give Indian IT firms a run for their money before long in the market for outsourced services, an executive of India's largest software services firm said on Monday. Girija Pande, Asia-Pacific director of Tata Consultancy Services Ltd (TCS), said China's information technology firms were still small and were no match yet for Indian companies when measured against international quality benchmarks. But Pande told an Indian IT forum that Chinese companies were growing fast and could draw on outstanding skills. "They are poised to challenge the Indian IT industry. There is no doubt in my mind about that," Pande said. "It's a question of time." TCS employs 200 people in Shanghai, and Pande said the quality of the staff was as high as in any of the company's other locations. TCS, which launched India's largest-ever initial public offering in August worth $1.2 billion, employs 35,000 worldwide. "The surprise to us was the English language. All of them understand, write, read and occasionally speak English as well. So it was not an issue, which was the worry we had," he said. The Philippines, meanwhile, had done a good job in voice training and was proving a stiff competitor for India in the call-centre market, Pande added. The Indian IT industry reported revenues of $15.9 billion in the year to March 2004, up from $12.4 billion a year earlier, led by a 30.5 percent jump in software and service exports to $12.5 billion, according to Nasscom, the industry's trade group. RISING WAGES Just as China's fast growth in manufacturing is putting upward pressure on factory wages, Pande said brisk global demand was causing India's IT wages to rise 10-15 percent a year. Srikanth Ramachandaran, chief operating officer of a Singapore-based IT firm, said India had an edge in labour costs only when it came to employing relatively inexperienced staff. "Once you start getting into fairly senior people who have 10-plus years of experience, it's cheaper for me to hire them in Singapore than to hire them in Bangalore. "And it's probably easier for me to retain them in Singapore than retain them in India. So I think there are some challenges," said Ramachandarn. His firm, Knowledge Dynamics, is a data warehousing and internet solutions provider. But Pande expressed confidence that India could draw on a deep enough reservoir of science and engineering graduates, thanks to its emphasis on tertiary education, to retain an edge. "The answer very clearly is that India has the skill and the scale that is required to handle global services," he said.

A "reverse brain drain" of Indian engineers who emigrated to high-tech centres such as Silicon Valley during the dot-com boom would also shore up India's competitive advantage in IT, added Kishore Kapoor, chief executive officer of i-flex solutions ltd. i-flex designs software for financial services firms. PK Basu, head of Robust Economic Analysis, a Singapore consultancy, said services would continue to transform the Indian economy. IT's contribution to gross domestic product grew to more than 3 per cent in the year ended in March from around 1.4 per cent five years earlier, according to Nasscom. Basu said India's first-mover advantage in knowledge-intensive outsourcing left it well placed to capitalise on the expansion of internationally traded services such as medical diagnosis, architectural design and advertising. "India's lead in that area is really quite difficult for anyone else to significantly compete away in the short term -- and the short term in this case can mean 5-10 years," he said.

Chinese no threat to Indian IT sector: Study

M D Riti in Bangalore | March 27, 2003 17:05 IST

China's software industry is not a threat to Indian IT firms, according to a study by two Chinese scholars. Chinese and Indian software industries have different beginnings. Besides, the Chinese industry has a distinct structure and role in the country's economy that is quite different from India's export-driven software industry, says the study conducted by Ted Tschang of Singapore Management University and Lan Xue of Tsing Hua University. The more technology-intensive ones among Chinese software companies are spin offs from government research institutes and universities. This hardly happened in India, say Tschang and Xue. Beijing University and Tsinghua University are well known for their involvement in many software start-ups. The company Human Technology, for example, was set up by chemistry graduates from Tsinghua, who managed to produce educational software. Over 60 per cent of the firm's employees are also from the same university! Indian universities, on the other hand, are not known to inspire students to begin start-ups, especially in the software business. Even premier institutes like the IITs and IIMs tend to churn out graduates who work for big companies elsewhere. Chinese firms continue their relationship with research institutes and source lots of fundamental technology from them. Indian firms, in contrast, source the bulk of their technology and techniques from multinationals. China's product-focused firms are geared towards the domestic market. Indian firms focus on services exports.

China is expected to be the second fastest growing country for IT services in the world, although it lags behind matured IT services economies, such as US, UK, Japan and Australia. Analysts predict that Chinese IT services market will reach $4.9 billion in 2003, an 18.1 per cent increase from 2002 revenue of $4.2 billion. IT services revenue in China is projected to reach $8.9 billion in 2006, a compound annual growth rate of 19.6 per cent.

China, Philippines pose threat to Indian BPO

April 08, 2004 07:30 IST

Despite its BPO edge of skilled manpower and low labour cost, India's 'Advantage BPO' position may not be sustainable in the long run as nations like China, the Philippines and Mexico are fast catching up, an ASSOCHAM-IDC survey says. "While in India the advantages are availability of skilled manpower, linguistic capabilities, low labour cost, favourable time zone, sound Internet and telecom connectivity, the Philippines has also tremendously improved," a study undertaken by the BPO committee of ASSOCHAM and International Data Corporation says. It says that China offered the advantages of a low cost economy, Mexico was cheaper than the United States, and Ireland had a good brand equity. Slide Show: Threats to Indian BPO India and Outsourcing: Complete Coverage

Russia offered technological skills while South Africa, falling in the same time zone as Europe, could be a possible destination of BPO in the near future, the study said. In a short span of time India's BPO segment, a virtually non-existent segment a few years back, has grown to US $2 billion. However, the industry expected a steady growth in this segment, as India is still a favourable destination for back office jobs because of its well developed communications infrastructure, stable business environment and highly skilled technical talent pool. As of now, certain limitations of these countries put them a shade behind India. China has limited English-speaking capability, Mexico is good for low-end jobs and Canada and South Africa are costlier than India and in order to overtake India in BPO they will have to overcome these disadvantages. With the continuing slowdown in the global IT spending, declining revenues and depleting margins, the very business sustenance of the Indian IT players was under threat but BPO opportunity came as a blessing in disguise for IT providers, the study says. It indicates that BPO brought in the much needed new revenue streams at an additional cost from the same clients, as these players could leverage on their global marketing infrastructure and establish client relationship.

Daksh (which has been acquired by IBM), EXL service, Vcustomers are third-party service providers who have successfully staged themselves in the global BPO market. Most of these units are either professionally promoted or are funded by venture capital firms. "It has been really tough for the players in this segment," the study says, adding that upfront capital requirements, increasing competition, declining pricing and the much needed market reach in prominent markets like the US and Europe are business-critical issues that the players have to deal with. Also international BPO service providers like Convergys, Sitel, efunds and Sutherland Technologies have shifted base to India to exploit the cost advantage factors that India offers to service their International clients. This is another segment which would be experiencing steady growth. The study says that it is expected that there will be steady growth in this segment, as service providers move up to the value chain.