India, China warily refocus IT sector

Indian and Chinese officials have talked a lot recently about helping each other reposition their respective IT industries, to take advantage of cost efficiencies as well as software, hardware and services trends. But the countries are engaged in a cautious dance, with some industry insiders fearing that some toes may get stepped on.

The IT industries of the two neighbors have grown quite independently of each other. Now India wants to move up the value curve from its core strength in software services to hardware design and manufacturing, while hardware manufacturing powerhouse China plans to invest millions to become a software developer.

Even Chinese premier Zhu Rongji has weighed in. Speaking of developing Asian markets while addressing the staff of Bangalore-based software services company Infosys Technologies Ltd., during a visit in January to the company’s campus, he said: “It is widely recognized that India is number one in software exports and China is number one in hardware. Together we can become the world’s number one.”

A number of Chinese official delegations have visited India over the last one year to study the Indian software industry, and to invite Indian software companies to set up operations in China. Shenzhen-based network solutions provider Huawei Technologies Co. Ltd. was the first Chinese technology company to set up a software development center in India in 1999. The company announced in March this year that it is ramping up its Bangalore-based software subsidiary, Huawei Technologies India Pvt. Ltd. from its current strength of about 500 employees to 850 by the end of this year, besides investing US$30 million in the center.

The company plans to have an employee strength of 2,000 over the next three years. Besides doing software development at its subsidiary, the company has also contracted for $4 million worth of software development to Indian companies last year.

Indian companies are also setting up operations in China.

Hyderabad-based software services company, Satyam Computer Services Ltd., has announced plans to set up a software development center in Shanghai. Delhi-based software services and training company, NIIT Ltd., plans to have over 100 training centres in China during this year. NIIT first introduced its computer training program to China in March, 1997 as part of a plan to start software development in the country. But NIIT found that although Chinese programmers were very talented, and that the cost of doing software projects in China would be lower than in India, most programmers lacked experience of working on large software projects and hardly have any knowledge about project management, which was an opportunity for NIIT’s training business.

Some other Indian computer training companies have also made a beeline to China. Indians are however wary that if they set up development centers in China, and train Chinese engineers, they may arm a potential competitor in the global software services market.

“It would not be in the interest of Indian vendors to train Chinese engineers in software development skills, as it would be self-defeating in the long term,” said Ravindra Datar, senior analyst for IT services at Mumbai-based Gartner India Research and Advisory Services Pvt. Ltd., a wholly owned subsidiary of Stamford, Connecticut-based Gartner Inc. “Rather than setting up development centers in China and training Chinese engineers, Indian vendors should be focusing on spotting opportunities where they can team up with Chinese hardware companies to offer joint solutions to clients in the Chinese market as well as in the global markets.”

Setting up development centers in China may not give Indian software companies a significant cost advantage. “The real opportunity is not in China’s manpower but in selling to China. I don’t think China is a lower-cost location (than India). The urban centres are expensive places,” said Matei Mihalca, a Hong Kong-based consultant to technology companies in China and India.

By selling into China, Indian software services companies can benefit from China’s economic growth of about seven to eight percent per year, according to Mihalca. “China’s entry into the WTO (World Trade Organization) will also give rise to new opportunities in industries like financial services in which India has the strength in terms of delivering IT services to companies in these industries,” he added.

China does not as yet figure prominently in the business plans of most Indian software companies as a market for software services. ” There are opportunities that are still untapped in the U..S and Europe, and the revenues and billing rates in these markets are far higher than in China or in Southeast Asia,” said Byanna Ramaswamy, managing director of Bangalore-based software services company, Sonata Software Ltd.

Getting access to the Chinese market may also not be as easy for Indian companies, unless they partner with a local Chinese firm to front-end the marketing, because of language and cultural barriers, Datar said. Chinese customers are as yet not willing to pay for software services, which makes a joint venture with a hardware company like Beijing-based PC maker, Legend Holdings Ltd, that can bundle the services with its hardware, a good idea, according to Mihalca. “Would a company like Legend in this scenario ‘suck out’ the know-how from the Indian partner? Probably,” added Mihalca.

Indian apprehensions that China may want to ride piggy-back on India into becoming the next software services power in the region may be exaggerated, however.

“China can pose a threat to India but I am confident that India can hold its own against China,” said Kiran Karnik, president of the National Association of Software and Service Companies (NASSCOM) in Delhi “India with its large pool of skilled, English speaking manpower, is at least 5 years ahead of China at the moment in the IT software and services sector. China’s software exports are close to $1 billion, while India’s software exports are expected to touch $8 billion in the fiscal year of 2001-2002 (year ended March 31, 2002).”

Indian software companies are also ahead in terms of quality of services and maturity of processes, with currently about 32 software companies in the country assessed at level five of the Capability Maturity Model (CMM) of the Software Engineering Institute (SEI) of Pittsburgh, Pennsylvania-based Carnegie Mellon University. In contrast, there are only a few software companies in China at around level three, except for two subsidiaries in China of Schaumburg, Illinois-based Motorola Inc which are at level five, according to Mihalca.

Satyam is unfazed about potential competition from China. “Competition will definitely be there, but Satyam is confident of facing that when the time comes,” said Samaga Venkataramaswamy Lakshmi Narayan, a vice-president at Satyam.

Except for a few electronics and embedded systems companies, U.S. and European companies are as yet to outsource information technology services to China, according to Ed Yourdon, chairman of the Cutter Consortium, an Arlington, Mass.-based research and consultancy firm. However that may change.

“Particularly in today’s economic recession, cost is a big, big factor, and if China can undercut India’s prices for programmers, on a dollar per hour basis, then they will certainly be a competitive force,” Yourdon added. “In certain areas, for example embedded systems and operating systems, it appears that China is almost on par with India. I think that India is probably ahead in the area of business applications development.”

While there seems to be large opportunity for cooperation between India and China in information technology services, there is still a great deal of hesitation among Indian software companies about doing business with China. “We want to sell into China, but the Chinese want our know-how which would help them narrow the gap with India in software services,” said the chief executive of a large Indian software services company on condition of anonymity. These apparently irreconcilable interests could prove to be the largest stumbling block for cooperation between India and China in software services.