Emergic: Rajesh Jain's Blog

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China and IT Services

December 25th, 2004 · No Comments

WSJ writes:

In India, Infosys employs tens of thousands of English-speaking employees to handle back-office software projects for U.S. clients including Citigroup Inc. and American Express Co. Now, the company wants to re-create that high-tech, low-cost model for software development in China, where many of its biggest clients are beefing up operations.

“China will be a useful source of skills for Indian companies,” says Girija Pande, a regional director for Tata Consultancy Services Ltd., another Indian software company expanding in China. 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. “These are two countries that are going to be collaborating,” he says.

For U.S. companies still struggling to compete with cheap foreign labor in industries ranging from textiles to computers, it sounds like a double-outsourcing nightmare. But the trend toward Indian-Chinese business cooperation is likely to continue, analysts say, particularly in information-technology services where both countries have a wealth of engineers.

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.

McKinsey Quarterly asks if China’s can compete in IT Services:

To compete effectively in global outsourcing, China’s software industry must consolidate. 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. Furthermore, 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 someincluding Infosys Technologies, Tata Consultancy Services, and Wipro Technologieshave garnered international recognition and a global clientele.

Without adequate scale, Chinese players are unlikely to attract top international clients. In general, smaller companies are riskier and less reliable partners. 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.

With greater size and an improved talent base, Chinese software-services companies will be in a better position to address other issues, such as building credible brands in international markets and developing knowledge of specific industries, including finance and pharmaceuticals. Organizational and operational changes are also needed to protect the intellectual property of clients. Last, most companies will have to abandon their project-based mentality and adopt a new focus on giving clients long-term value.

Tags: Emerging Markets

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