Posted by: Bruce Einhorn on November 20, 2006
With Chinese President Hu Jintao in India, regional research house DBS has a timely look at the software rivalry between the two Asian countries. ‘What rivalry?’ scoff the India boosters out there, with good reason. India’s IT companies are so far ahead of their Chinese counterparts, maybe the two really are not in the same league. Just consider where the two industries will be by the end of the decade: According to DBS, Nasscom is targeting $60 billion worth of Indian exports by 2010, while the Chinese government wants software exports to hit just $10 billion that same year.
Still, the Chinese government is ambitious, and has made it clear that building a software and service outsourcing industry is a government priority. That’s one reason the DBS analysts, Ma Tie Ying and Aathira Prasad, aren’t ready to rule out the Chinese, despite the impressive lead that the Indians have. The Chinese industry may be small, but it’s growing at an impressive 40% clip. “By the rate the software industry is growing,” the DBS analysts write, “China may well be a future threat to established global suppliers like India.” Moreover, “Chinese policymakers and software entrepreneurs recognize their weaknesses in many aspects, and are keen to learn from international experiences, especially from India.”
That’s one reason that the Chinese are so happy to have the likes of TCS and Satyam set up joint ventures in China. (See, for instance, this BW story.) The game plan is pretty similar to what the Chinese did in manufacturing – open the market and encourage foreign investment, and then have Chinese managers who have gained experience thanks to the foreigners set up local-based competitors. It has worked in industries like telecom: See Huawei and ZTE. Ma and Prasad have their doubts about whether China can pull off the same thing in software services, where lax protection of intellectual property rights will be a much more serious problem. They point out that “massive infringement of intellectual property rights in China” makes it harder for the Chinese companies, which need to focus on their domestic much more than the export-oriented Indians. And the DBS pair hit on another major problem. For all of the enthusiasm about China’s deep pool of talent, it’s awfully hard to find qualified managers there. Ma and Prasad blame the Chinese education system and its emphasis on “rote-learning rather than compound capabilities such as innovation, communication, organizing and coordination.” Companies have ways of addressing the problem by putting in place training programs designed to teach Chinese how to think differently; more long-term, China’s schools are starting to change, with the goal of encouraging students to think more creatively.
But the Chinese have one big factor in their favor. India is getting expensive. Ma and Prasad point out that Indian IT wages are rising at about 16% a year, “and given that attrition rates are quite high, there looks like no option but for employers to continue increasing salaries every year to retain their employees.” The DBS pair think rising wages help make rivals in Southeast Asia and Eastern Europe more attractive. It probably will also give a boost to China. No wonder, then, that TCS and other Indian biggies are looking at major expansion of their Chinese workforce in the next few years.