The Hindu Business Line : China: The hidden dragon

DOES China present a threat to India in the offshore software outsourcing space? In the short run, probably not. But from a long-term perspective, China will probably be the leading threat for the Indian software industry. Speaking to Business Line in 1996, the Infosys Chairman and Chief Mentor (to be), Mr N. R. Narayana Murthy, immediately after a trip to China, said that that nation could emerge a strong outsourcing base and represent a threat to India in software. India appears to have resisted this threat for well over six years now. But with the recent accession of China to the World Trade Organisation, in keeping with its global image makeover, it has the potential to grow into another offshore software base comparable to India in the years to come.

Prominent research agencies such as Gartner, Meta Group or Giga Group and the software industry's leading luminaries have forecast that India probably has a five-year lead over China in offshore outsourcing. But the key question is: What is the probability that this lead is shorter than that? To comprehend this question in all its dimensions and examine China's potential as an outsourcing destination, it is important to first compare the relative strengths of China and India.

China strengths

Infrastructure: The general infrastructure of China is superior to that of India. Both the fixed-line telecommunication subscriber base and Internet penetration is over four times higher than India's (see table). A study by PricewaterhouseCoopers for the Cellular Operators Association of India demonstrated that China in absolute number terms was investing about 10 times more than India in telecom, and as a percentage of GDP, China on an average was spending three times more on telecom than India.

FDI flows: China attracts more foreign direct investment (FDI) flows than any other developing country and many times that India. And a significant chunk of this FDI flows is going into the Chinese IT industry and creating significant employment opportunities.

Attractive policies/quick clearances: China has divided itself into five special economic zones and the current tax policies favour the setting up of software and hardware technology parks by foreign companies in these zones. Moreover, based on the government policy framework, clearances and approvals in these parks are rapid compared to India.

Low-cost labour: China's labour costs in the software industry are equal to, if not lower than, India's. China, with nearly three lakh trained IT professionals, may be in a position to match the over four lakh professionals in India.

Strong domestic sector: China has a strong domestic sector to fall back upon, if its export offshore outsourcing initiatives fail for any reason. India does not have that luxury.

India's strengths

Fluency in English: Apart from our software skills, as an English-speaking people, India has managed to capture a significant chunk of the offshore outsourcing business from the developed world such as the US and UK. That is one area, where India probably scores over China and has helped it maintain the lead.

Offshore experience: For Indian players, the experience in offshore software outsourcing has been over a decade. Over this period, Indian software players have honed this expertise into an extremely attractive value proposition. For China, catching up will be a difficult proposition.

Favourable government policies: The Government has clearly favoured the software industry with a liberalised tax policy such as tax holidays and concessions under Section 80 HHE of the I-T Act. The Government has also chosen not to interfere with the businesses of these software majors.

Quality processes: India has probably the highest number of SEI-CMM-Level 5 certified players in the world. This certification — the hallmark of quality — and the well-orchestrated management systems and processes (developed and refined over the years) have helped Indian software vendors undertake highly repetitive projects with greater efficiency, tighter deadlines and higher employee productivity.

A comparative view

A comparison of the relative strengths in the offshore outsourcing arena seems to show that India has a headstart over China in the short run. But the critical question is: What strategies must India employ to ensure that it does not lose its secure foothold in the offshore arena, especially in the lower end of the software value chain (comprising application maintenance, migration or re-engineering of legacy systems). To sustain India's software success story, the software players must:

Engage in collaboration: Mr Kiran Karnik, President of Nasscom (National Association of Software and Service Companies), the apex association for the software industry, says that India must adopt the strategy of "complimentarity and collaboration". According to this strategy, we must link Chinese/Korean/Taiwanese manufacturing expertise with India's software skills, say, in the area of embedded software. These collaborations can help India develop new markets for the future.

India development centres in China: To capitalise on opportunities for bagging software orders in the Asia-Pacific region or to sub-contract work to Chinese, Indian software players may have to actively explore avenues for setting up India development centres in China. Satyam Computers was among the first to establish and launch a software development centre in the Shanghai Pudong Software Park in China in late January. Around the same time, the Chinese Premier, Mr Zhu Ronji, who visited India, also invited Infosys to set up a software centre in China.

These overtures from China are not to be taken lightly. According to a recent research report by the Aberdeen Group, the United States Information Technology Office has forecast that China's software industry will record more than 30 per cent growth between 2001 and 2005, reaching $26-30 billion by 2005.

Attract Indian entrepreneurs in Silicon Valley: To maintain India's lead over China, it is important that the Indian policy-makers create an ideal policy environment to attract successful Indian entrepreneurs in Silicon Valley to India. Unless we do this successfully, India may start losing out on its headstart in the software arena over China. It is likely that Chinese entrepreneurs in the US may be more compliant to the wishes of Beijing than Indians will ever be of New Delhi.

Move up the value chain: From the competitive efforts of Chinese companies such as Huawei Technologies (a Chinese company that has operations in Bangalore) to learn from the Indian software success story, it is obvious that the lower end of the software value chain is getting commoditised very quickly. For the Indian software industry to branch out and grow, it is imperative to move up the software value-chain by undertaking more high-end projects in consulting/systems integration or target newer markets in the Asia-Pacific region or undertake more product- or framework-based R&D initiatives.

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