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Saturday, December 25, 2004

China : No Big Force In IT Services. Its India All The Way

A just released Mckisney report says, Fragmentation is keeping china’s IT services industry from grabbing a larger share of the global software-outsourcing market. China's spectacular economic success has prompted speculation that the country's software-outsourcing industry could soon compete with India's. A recent McKinsey study of China's software sector, however, shows that it will be many years before the country poses a threat to its continental rival in this arena. Excerpts with edits and my comments added:

The Chinese must consolidate their highly fragmented industry to gain the size and expertise needed to capture large international projects. Currently, there is little movement in this direction. While signs of healthy expansion abound in China's IT industry. The number of engineering graduates and software-applications professionals has grown considerably in recent years. Since 1997, annual revenues in software and IT services have risen by 42 percent a year, on average, reaching $6.8 billion in 2003.2 Moreover, the number of English-speaking graduates in the workforce—particularly crucial in software outsourcing—has doubled since 2000, to more than 24 million in 2004.
But shortcomings in the structure of China's IT industry prevent it from taking full advantage of these changes
- Although revenues from IT services are rising, they are barely half of India's $12.7 billion a year.
- Growth is driven by domestic demand—most customers are small and midsize Chinese enterprises that want their software customized to their own needs.
- Moreover, the country's nascent foreign-software-outsourcing business accounts for just 10 percent of the industry's total revenue, compared with around 70 percent for India.
- Japanese customers, which seek mostly low-value application-development contracts rather than more lucrative ones for design, supply about 65 percent of this sector's income.
- Despite lower costs, operating margins in Chinese software-services companies average only 7 percent, compared with 11 percent at similar companies around the world, because many projects are below optimal scale, suppliers often compete on price, and collecting payments can be problematic.
- The top ten IT-services companies have only about a 20 percent share of the market, compared with the 45 percent commanded by India's top ten.
- China has about 8,000 software-services providers, and almost three-quarters of them have fewer than 50 employees. No company has emerged from this crowded pack; indeed, only 5 have more than 2,000 employees.
- India, on the other hand, has fewer 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.
- Only 6 of China's 30 largest software companies are certified at levels five or four of the capability-maturity model (CMM);3 by contrast, all of the top 30 Indian software companies have achieved these rankings
- About a quarter of the Chinese companies we surveyed are trying to implement the CMM quality standards, but more than half of the companies in the survey said that such efforts weren't necessary, feasible, or worthwhile
- Most do little to develop their employees, and very few use stock options, training programs, or other incentives to build talent
- Annual employee turnover was about 20 percent, compared with an average of 14 percent in the United States, which itself has a very fluid IT labor market
- They are more vulnerable to the loss of key personnel, may not have the financial muscle to survive for the duration of a project, and often don't have the capacity or breadth to absorb large projects easily
- Most companies will have to abandon their project-based mentality and adopt a new focus on giving clients long-term value.

Indin headquartered companies beleive China will be a useful source of skills for Indian companies Tata now has more than 200 people working at three China offices and plans, like Infosys, to market services to multinational companies operating in China as well as domestic ones.Now powerful Indian outfits such as Infosys, Tata, Satyam are putting down roots in China, too. There are risks: The Indian companies must spend extra money to train Chinese engineers, many of whom lack strong project-management and consulting skills, including good English. But the Indian companies feel they need to be physically closer to their existing Western and Japanese clients who are now selling more products inside China. The idea is that Chinese programmers are best-suited to deal with material written in Chinese and can better customize programs for the heavily regulated Chinese market, including the accounting and billing software used by Western companies.The Indian companies also are worried about their bottom lines: With competition for skilled programmers getting fiercer in India, and salaries soaring, the companies need new, affordable sources of labor to maintain a competitive edge over Western rivals such as IBM.

Infosys estimates that wage costs for software engineers are rising about 15% a year in India, but increasing just 4% in China. That makes China an alluring alternative to India for all types of programming, not just software built specifically for a customer's China business.In terms of producing software, China is "the only country that comes close to India in cost, quality and scale," says Vineet Toshniwal, Infosys' head of sales and marketing for greater China. The English-language skills of Chinese engineers also are improving rapidly, and Chinese infrastructure -- including roads and power supply -- is often superior to that in India, he says. Mr. Toshniwal, is moving to Shanghai from Hong Kong to help open the new China office, which now employs more than 100 people. Company officials expect that figure to double by March. One thing is clear : Its going to be the Indian Headquartered companies all the way in future ruling the IT services market.

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