Indian tiger joins forces with Chinese dragon

Some time ago nobody had convincing answers to the question of whether China was a threat or an opportunity for India IT Inc. Things have changed today and Indian IT majors are making a beeline for the dragon kingdom, unfazed by language, cultural and regulatory issues. Srikanth R P writes about this breed of aggressive Indian IT companies who are all set to control a massive 40 percent of China’s IT services exports by 2006

Around a year ago, when the shadow of the Chinese dragon loomed large over India’s burgeoning software services industry, jittery Indian companies were worried that the Chinese juggernaut would recreate its formidable manufacturing prowess in software services too, wiping out competition. But instead of being cowed down by the Chinese threat or fighting the Chinese tooth-and-nail, some forward-looking Indian organisations extended a hand of partnership. And today, even as research and advisory firm Gartner says that China could catch up with India in software by 2006, there are no alarm bells ringing here. Indian firms are unfazed because in the same report Gartner also says that Indian IT services companies will eventually control 40 percent of China’s IT services exports.

If you take a look at the list of Indian firms who are doing business on the other side of the Great Wall, either by way of alliances, JVs or acquisitions, one thing is clear—every Indian company worth its salt is looking at China as a strategic base. Big names in the Indian IT industry, such as TCS, Infosys and Satyam, have already started operations while mid-sized companies like Mphasis and Zensar have formulated aggressive strategies using China as a base. The coming dominance of Indian IT firms can be seen from Aptech’s case—the education giant has over a hundred centres in three years, and more importantly, was declared the number one organisation in professional software training in China by the Chinese Ministry of Information Industry.

The importance of China

China’s IT market was estimated to be close to $36.48 billion, growing at a CAGR of 20.3 percent, in the year 2002. Also, with China becoming part of the World Trade Organisation (WTO), analysts expect local banks and other firms to fire up their technology spends to boost competitiveness. But while the domestic market in China is a huge opportunity, China does not have the required technical manpower to service its customers. For instance, Gartner estimates that though China has more than 6,000 software and application development (AD) service companies, the majority of them have less than fifty employees on their payroll. Due to their smaller size, these companies cannot participate in large projects. In contrast, India has more than 3,000 software companies—roughly half that of China, but the important point is that many software companies here are of a significant size, employing thousands of employees.

This issue has resulted in MNC firms servicing a bulk of the Chinese domestic market, with low-end work being given to Chinese firms. But there is a huge gap between the two segments and this is where Indian firms can position themselves for targeting mid-size companies.

According to Virender Aggawal, getting trilingual skills (Japanese, Chinese and English or Korean) is much more easier in China

Further, process maturity and quality certification is a major problem for many software services companies in China. That’s certainly not an issue in these parts—of the 58 software companies around the world with SEI CMM Level 5 certification, 32 are based in India while China has only one. Chinese software companies are increasingly realising that to become a force in the global markets quality certification is a must. By partnering with Indian companies, Chinese companies can achieve process maturity and Indian companies in turn can gain business opportunities. Besides, China’s pre-dominance in hardware offers a tremendous business opportunity for Indian firms in the area of embedded software—specifically as a majority of Chinese hardware firms are looking at differentiation in terms of add-on software in their devices. Similarly, a strong telecom infrastructure offers a good market for service providers in the area of telecom software and billing solutions.

Window to Japan

The importance of China as a strategic base grows when you consider the fact that Indian companies can use China as a base to tap into the Japanese market—a market that is estimated to account for close to 70 percent of the entire Asian market, and contributes approximately 11 percent of the global outsourcing pie. Currently, only 4 percent of India’s software services exports go to Japan; there is obviously a huge gap to be filled.

Though Indian IT firms have established bases in Japan, it still remains a tough market to crack. This is because in contrast to the US, Japanese companies have been slow to catch on to the outsourcing wave. But, the Japanese economy, which is in the throes of a recession, is slowly but surely chanting the outsourcing mantra. According to industry estimates, spending on IT outsourcing in Japan is likely to exceed $15 billion in 2005. These figures are roughly one-third of the market size in the US.

China has been a favoured nation for Japan’s software imports. The synergy is easy to fathom. One, Japanese is the second language taught in the north eastern parts of China, where most Chinese companies are located. Also, most Chinese programmers are familiar with the double byte system used to generate Chinese and Japanese characters. China also offers a great location advantage to Japanese companies looking to outsource their projects. Therefore, it comes as no surprise that Japan continues to be China’s largest trading partner. Indian companies get access to two large markets by setting up base in China.

The Indian invasion

Though troubled by an unfamiliar language, culture and even cumbersome government regulations, Indian firms have nevertheless surged ahead using a variety of modes like alliances, acquisitions and JVs. Take the example of Asia’s largest software services player, TCS, which recently completed a year of operations in China. More importantly, TCS has made huge inroads in the Chinese domestic market in industries like manufacturing, telecommunications and financial services and has also subsequently scaled up its manpower from 50 to around 200 currently.

The success of TCS is also a pointer to the strategies other Indian software majors need to adopt. For instance, instead of setting up its own office like other players who tried but failed, TCS rather concentrated on its known strategy of setting up alliances with local players. In China TCS has tied up with Zoom Electronics, a leading IT and telecommunications service provider and eBis, a leading financial services provider. The efforts have paid off and TCS has already signed new contracts worth $20 million. Besides addressing the requirements of the domestic market, a foothold in China also gives TCS the opportunity to service global giants like GE who are looking at technologically competent players to service them in China.

V Balasubramanian says that Aptech’s focus in China is on the higher education market

TCS also religiously follows a policy of employing local manpower. The locations have also been strategically chosen. TCS has announced plans of opening a development centre in Hangzhou, which is home to many Chinese educational universities. This has helped the company to actively tap the talent base available in the country.

In contrast, Indian IT’s blue-eyed boy, Infosys, had its share of troubles in setting a development centre in Shanghai despite Chinese premier Zhu Rongji’s seal of approval in Bangalore. But despite the red tape, Infosys has managed to establish a representative office in China and has also signed up a few customers. Though past experience has not been rosy for Infosys, the company is still bullish on China.

Says an Infosys spokesperson, "With a huge economy and entry to the WTO, Infosys believes China has a large potential for software services. In addition to being a potentially attractive market, China also has potentially large pool of resources who can join the software services industry. With the similarity of languages, these resources can be leveraged to service our customers in markets like Japan, Taiwan and Korea." Infosys is aiming at lucrative sectors like telecom, financial services and manufacturing.

Another big Indian major, Satyam, is also betting big on its Chinese operations to help the company establish higher growth in the Asia Pacific region. Satyam started operations in China in January 2002, through a representative office, becoming the first Indian software services company to establish operations in China. At that time, an announcement was made about the establishment of a software development centre in co-operation with the Shanghai Pudong Software Park in order to serve Satyam’s global clients who operate in China and related markets. This was then followed by a decision to set up a 100 percent wholly foreign owned enterprise (WFOE) in October 2002.

Says Virender Aggarwal, senior vice president and head of APAC operations at Satyam, "While Satyam caters to some of its existing customers who have operations in China, there are many other opportunities that are untapped. We believe that the China operation will help Satyam continue its growth in the Asia Pacific region and the world."

Besides servicing customers who have set up operations in China, Satyam is also seeing good demand coming from large system integration companies who are keen to use Satyam’s capabilities to win big projects. Satyam is also bullish on using China as a base for servicing Japan. Says Aggarwal, "Getting trilingual skills (Japanese, Chinese and English or Korean) is much more easier in China."

Indian firms are not averse to even acquiring Chinese firms when the opportunity presents itself. Last year Mphasis BFL acquired Chinese software firm Navion Software as part of a strategy to use the firm for servicing Japanese companies and also other companies in the Far East. The acquisition is significant since Mphasis derives around 12 percent of its revenues from the Japanese market. And like other companies, Mphasis too is taking the Chinese domestic market very seriously.

Says Vivek Dayal, global head for Corporate Communications at Mphasis BFL, "We are extremely bullish on China and feel that China offers a huge opportunity in the banking and financial sectors as most banks in China are looking to invest substantial amounts in upgrading their technological infrastructure. Our integration process is well on track with the involvement of key senior people."

Zensar Technologies, another mid-sized company, has taken the JV route to enter the Chinese market. Zensar has signed a JV with a listed entity called Asia Logistics, with a development and support centre in mainland China. Says Ganesh Natrajan, CEO of Zensar Technologies, "While it is too early to count revenues, we have already signed two consulting contracts and are also in negotiations for the first development centre for a major client in China. We are bullish on opportunities in the quality process consulting and ERP implementations space and expect to hit revenues of $1 million by 2004."

Localisation

The key to conquering the Chinese market is localisation, without losing the Indian advantage. For example, TCS hires Chinese programmers but ensures that project heads are Indians. Adds V Balasubramanian, executive director and head, International Operations, Aptech, "In China, our focus is the higher education market with the two-year course, unlike in India where the market is moving towards short-term courses. Also, in China most of our partners are colleges who have set up Aptech centres, as compared to India where individual entrepreneurs have set up the centres." Aptech tapped the market at the right time and has seen its JV, Aptech Beida Jadebird IT Co grow substantially and is probably the first Indian IT firm to declare profits ($1.31 million) in China for the period ended December 31, 2002.

While the routes that different players have taken to tame the dragon are different, one thing that is crystal clear is the fact that no Indian IT company can afford to ignore a presence in China—a fact seen by the presence of around 14 large Indian IT companies. And for once, Indian players can be optimistic about the fact that even if China makes huge inroads in the software services space, Indian IT companies will be in same boat, and with a hand on the wheel.

Software and application development service revenue opportunity