NEW DELHI: One of the perpetual fears of the export-oriented Indian software industry is that one day it is going to be overtaken by China. Well, there is cause for cheer - at least for the moment - as a recent McKinsey study says that it will be quite a while before China can really threaten India in this sector.
"To compete with India, China will have to consolidate its highly fragmented industry to gain the size and expertise needed to capture large international projects. Currently, there is little movement in this direction," says the McKinsey study. It shows that only about 12% of Chinese software services companies see mergers, acquisitions (M&As)and alliances as important in their agenda.
"Managers in China have little M&A experience, while several Indian companies are considering acquisition of Chinese firms to expand their operations," the study says. "No company has emerged from this crowded pack. Only five have more than 2,000 employees. India, on the other hand, has a little less than 3,000 software services companies. Of these, at least 15 have more than 2,000 workers and some, including Infosys Technologies, Tata Consultancy Services and Wipro Technologies, have garnered international recognition and a global clientele," says the study.
Only six of China's 30 biggest software companies are qualified at level five or four of the capability-maturity model. On the other hand, all of the top 30 Indian software companies have surpassed these benchmarks. While China has about 8,000 software services providers, close to 75% of them have fewer than 50 employees. Without adequate scale, Chinese players are unlikely to attract top international clients. "Chinese software services providers do little to develop their employees and very few use stock options, training programs or other incentives to build talent," McKinsey notes.
The top 10 Chinese information technology (IT) services companies have only about 20% share of the market compared with 45% garnered by India's top 10. "Shortcomings in the structure of China's IT industry prevent it from taking full advantage of an increasing English-speaking graduate force. Although revenues from IT services are on the rise, they are barely half of India's $12.7 billion a year. Growth is driven by domestic demand - most customers are small and mid-size Chinese enterprises who want their software customized to their own needs," says the report.
According to it, Japanese customers, who seek mostly low-value application-development contracts rather than more lucrative ones for design, supply about 65% of the income. Despite lower costs, operating margins in Chinese software services companies average only 7% compared with 11% at similar companies around the world because many projects are below optimal scale and suppliers often compete on price.
Optimism belied
In the past, studies conducted by McKinsey as well as NASSCOM (National Association of Software and Service Companies, a body that represents the Indian software industry) have warned that China could pose a major threat to the Indian IT industry. In 2002, while McKinsey sounded an optimistic note about India's IT sector, it cautioned that if India did not promote itself aggressively, China, the Philippines and Singapore could walk off with most of the business from global majors. McKinsey was especially concerned about China, despite the fact that the top 10 Indian companies exported more software than Russia and China put together. "The country has recognized the opportunity and both the government and the industry are making a concerted effort to give a fillip to the IT space," McKinsey had said.
Another study by the global consulting major had even said that India would be left behind by a Chinese government and industry program that is channeling billions of dollars to nine Chinese universities, shaping tie-ups with colleges abroad and investing millions of dollars in research laboratories and equipment. With more than 100,000 Indians migrating to the United States each year for better-paid software jobs, Indian industry has already started hiring from China to meet the shortfall, the study said.
"Many Indian companies have already started recruiting from Chinese universities. China has a systematic program of funding universities." The studies by McKinsey and NASSCOM showed that Indian technical institutes would be unable to meet the projected demand of 500,000 professionals in 2006. Experts warned that the only stumbling block preventing China from overtaking India, given its cost advantage and large trained manpower, was the language barrier, which could be surmounted.
The future
Clearly, in the continually changing business paradigm, it is never easy to predict definitively how a particular sector is going to shape up. The latest McKinsey study comes in response to intense speculation that China, inundating the world with cheap manufacturing goods, will beat India in the software sector as well. But while technical expertise and manpower are one aspect of a booming IT industry, fresh management practices, economies of scale, mergers and acquisitions, access to finance, client interface and relationships are equally important in the longer run.
The rules of the game are changing by the year. As Indian IT firms reach global scales, there is talk of reverse outsourcing - engineers from the West finding employment in overseas operations of Indian firms. This, in addition to the many out-of-work executives from the US who have shifted base to India in search of better opportunities. Faced with rising business from the West, spiraling salaries of high-cost employees who constantly hop jobs as well as a predicted shortage of skilled workers, Indian IT firms are doing the next best thing - outsourcing work from the US to China, with the added advantage of leveraging more intra-Asian business from Korea, Japan, Hong Kong and Taiwan.
According to research firm Gartner Group, the global IT services market is worth $580 billion, of which only $19 billion is outsourced, but India commands 80% of this offshore market. The figure for outsourced IT services is expected to grow very rapidly. The IT services market is broadly divided into two sections - IT/tech services that require skilled manpower, which China possesses, and the business and process outsourcing (BPO) segment which requires a knowledge of English and thus cannot be further outsourced to China. India garners the bulk of the outsourced BPO business as well, which makes its position in the international IT industry rock solid, for now at least.
Priyanka Bhardwaj is a New Delhi-based writer
Asia Times
