China and its impact on Indian IT business.

I'm based in Bangkok now, as part of a marketing project I'm working on for my current employer. Here China and its meteoric growth story seems to be on everyone's mind.

Our business has to deal with low cost manufacturing and lower prices coming in from china. The Thai community worries at large about flight of manufacturing, and increasing competition in services. Also in several commodities (coal and steel - to name just a couple) the demand from China keeps international prices so high, that other countries suffer consequently.

The often raised questions about China's broken financial systems , lack of English speaking workforce and its form of government are still valid. But of late , all three of these issues and several more are being ignored by the companies who are flocking to invest there. Clearly it IS becoming easier to startup and run in China.

I was browsing the internet and found this NASSCOM report on its website. Its on the impact China will have on India's IT industry. Given that this is one of India's few globally competitive industries - the report is worth pondering over.
Will look and post similar reports on other sectors. Guess this will be a bit of a long term endeavor from my end as well.

Only the 'Key Messages' is reproduced here. The report itself is free (for registered users - and registration is free too) and is a fascinating read.

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China has the potential to develop a large IT-BPO industry. Underlying this is substantial domestic market potential, a sizeable educated workforce and strong government emphasis on developing the IT -BPO sector.

- Domestic market potential: As one of the world’s largest and fastest growing economies with an increasing participation in international trade and high levels of technology adoption, China represents substantial market potential for IT software and related business services.

- Sizeable workforce: The large population and high literacy levels, translating into a large outturn of educated job seekers, has equipped it with the essential ‘raw material’ required.

- Government emphasis on services, especially IT-BPO: The Chinese Government is aware of the country’s heavy dependence on manufacturing and has identified the development of the services sector as one of the focus areas for its 11th Five-Year Plan (2007-2011).
However, currently the IT -BPO industry in China is still in its early phases of evolution. Frequent comparisons with India and commentary positioning China as a substitute destination is quite misplaced.

- Structure and Scale: China’s IT-BPO growth is being driven by its domestic market while India is a predominantly export led growth story. The scale of the sector in China is still less than a third of that in India. With both the countries witnessing strong growth, forecast to continue, it is unlikely that this difference will go away in the foreseeable future.

- Geographies Served: Indian IT-BPO exports are predominantly serving the US and the UK markets, which together account for more than 80 per cent of the total exports. On the other hand, China’s key export markets are Japan and Korea, where it has certain inherent linguistic / cultural advantages.

- Service Portfolio: The portfolio of IT-BPO services exports from China is dominated by application development, coding / testing and localization services.

The portfolio of services sourced from India is more broad-based including, application management, infrastructure services, offshore product development and engineering services.

- Process Maturity: India based providers have built robust processes for managing remote service delivery, transitioning of processes and integrating distributed workflows across large teams. This is still evolving in China. The average local Chinese service provider still suffers from sub-scale inefficiencies and lacks the experience of delivering on large contracts.
The current industry landscape in China bears some resemblance to earlier years of Indian IT-BPO. However, systemic weaknesses and comparatively evolved demand and competitive environments today pose some additional challenges.

- IT-BPO in China is witnessing early signs of growth: Leading Chinese firms have reported above average growth rates of 40-50 per cent over the past few years. Global venture capital investors have, over the past year, announced significant investments in 2-3 local firms – demonstrating their conviction in the China ITBPO story. Chinese firms are beginning to receive a steady stream of business enquiries – from western customers. Stakeholders are actively seeking to organize themselves, to build a concerted approach to industry development.

- China is also facing its share of challenges. Addressing sub-scale inefficiencies; building global recognition and addressing preconceived concerns about sourcing (IT -BPO) from China; recruiting, training and retaining talent were some of the key challenges highlighted in all our interactions.

- Complex tax and investment incentive systems across different provinces have encouraged companies to establish separate entities in each location. Highly controlled financial systems and regulation of ownership structures discouraging industry consolidation has resulted in a highly fragmented industry base.

- Another systemic challenge by the sector in China is the growing number of ‘unemployable’ resources being churned out by the expanding education system. The government has succeeded in significantly increasing the throughput of the education system in a relatively short span of time. However, the suitability of these graduates for employment in the global knowledge services industries remains questionable. It is estimated that over half of the 4 million students graduated without jobs in 2006 – and yet every firm met cited finding suitable
talent as one of their key concerns.

- Chinese firms are also beginning to face pressures of dealing with more evolved (western) outsourcers, intensifying competition from the indigenous players as well as global providers that have expanded their operations into China. The Chinese government is keen on promoting this sector. Rapid progress on the ‘tangible’ aspects of infrastructure and capacity creation is evident, softer aspects remain a challenge.

- Strong government support for the sector is evident in the various measures initiated since the start of the 10th Five-Year Plan. In addition to inducing industry capacity creation the government has identified 11 national software export bases that it will support private enterprises with interest rebates, R&D funding, personnel training, corporate qualification certification, export credit loans, credit insurance, commercial information and protection of intellectual rights.

- Results of the efforts being undertaken are very ‘visible’ – in the scale of physical and academic infrastructure created by the government over a short span of time. For example, the outturn of computer science and software graduates has increased from less than 100,000 in 2002 to about 400,000 in 2006.

- However, the softer aspects remain a challenge. The increased graduate outturn has not translated into a larger pool of employable resources. Language and cultural differences continue to bear on the experiences of working with Chinabased providers. Foreign-educated returning Chinese are seen as an essential bridge between cultures – but are in short supply. Despite continued efforts, IP protection and enforcement remains a key concern.

China is unlikely to bear on India’s lead in global services sourcing in any significant manner over the next 3-5 years. However, it must not be ignored. In fact, there is a strong case for increased partnership between the two countries as global corporations strive to strike a balance in their Sino-India co-sourcing models.

- First, the large domestic market potential makes China hard to overlook.

- Secondly, with most global corporations investing heavily in China and their
increasing adoption of the outsourced model, Indian firms are facing an increasing demand for onsite support (in China) from existing customers. In such a scenario, India-based firms will either have to develop such local service delivery capability or risk sharing their client relationships with locally present competitors. Learning how to do business in China will be integral to tapping these opportunities.

- Thirdly, India too can leverage China’s experiences. China’s programmed approach to rapidly developing key sectors of its economy and its demonstrated successes offer some learnings that may be adapted to the Indian IT-BPO context – to strengthen India’s proposition. Capacity creation in education and physical infrastructure is a case in point.

- Finally, while we have discussed the differences between the Indian and Chinese software and services sec tors, they also face some common challenges. Strengthening the education and training system to enhance the employability of graduates, developing products and service-models better suited for more price sensitive customers in the domestic markets, are prominent examples. Building on a collaborative approach, the two countries could seek innovative solutions to address some of these shared challenges.