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Rising Elephant, Hidden Dragon

May 2005
Rising Elephant, Hidden Dragon

India's IT success provides valuable lessons to China


Beyond the usual diplomacy, business and boundary talks, a defining aspect of Chinese Premier Wen Jiabao's recent visit to India was to learn about the IT powerhouse that India has become. Indeed, Jiabao's first stop in India was Bangalore, India's Silicon Valley, rather than New Delhi. Noting that the development of the IT industry depended on the human brain, human resources and the market, Wen said China and India have a lot of intelligent people for which the world provided a broadening market. As he pointed out, "Though the digit ?0' was discovered in India, its brainpower is being used to work with computers capable of millions of calculations.''

India's software superiority

Indian IT czars are happy about China's interest in India's software industry because the synergies only stand to help the Indian IT giants. All the top Indian IT companies such as Infosys, Tata Consultancy Services, Satyam Computer Services and Wipro have now established bases in China to meet the growing business demands from the West. From India's point of view, over 80 percent of China's demand for software is for domestic consumption, thus not infringing with India's predominantly export-oriented software sector as well as creating a global competitor. The situation that India envisages is that most modern gadgets in the world will have China's hardware with India's software embedded.

China may have stolen a march on India in manufacturing but it will take years before it can catch up with its neighbor in IT on a global scale, a recent study conducted by consultancy firm McKinsey has observed. "It will be many years before China poses a threat to India in it. For starters, the Chinese must consolidate their highly fragmented industry to gain the size and expertise needed to capture large international projects. Currently, there is little movement in this direction," the study said.

With a head start of over 10 years Indian IT firms have reached scalability levels that will take a while for the Chinese firms to match. A second-rung Indian software firm employs over 15,000 employees compared to the 3,000 employed by just a handful of IT firms in China.

The most important reason why Indian IT business is migrating to China is the cost advantage ? China at the moment has an excess supply of well-trained engineers willing to work at wages lower than in India. According to estimates, China has 200,000 IT workers compared to India's 850,000, with over 50,000 Chinese software programmers added to this pool annually. Their wages are much less when compared to an Indian engineer. A recent study by KPMG study has predicted an acute shortage of IT personnel to the tune of 250,000 by the year 2009 in India. Thus, the numbers and economics works very well for increased forays into China by Indian IT firms, without losing their position as the number one IT player in the world.

India's trade relations with China are miniscule compared to Sino-Japanese or Sino-USA business relations. There is not much hope that India's final products will be able to penetrate Chinese markets in the near future and India will remain a supplier of raw materials to China, without challenging the manufacturing-led Chinese economy.

There are other business synergies being worked out ? in steel, pharmacy and the auto sector (especially auto-components). India and China are looking to hold joint positions in WTO and cooperate in the hunt for oil. India is looking to turn into a major food supplier for China as well as double bilateral tourism every three years. But the fast-growing Chinese economy is essentially looking toward India to feed its ever-increasing need for raw materials (the domestic market is valued at $615 billion).

While conceding India's superiority in software China wants to build its trade relations with India and is pushing for a free trade area, a move that Indian manufacturing is apprehensive about. India, on the other hand, will look to build on its strengths in the services and knowledge-based sectors such as biotechnology, IT, health, education, tourism, industrial R&D and financial sector. One more way is to establish Indian production bases in China to take advantage of lower costs. But this will be a long-drawn process. China is now India's second largest trading partner after USA and India for the first time figures in the list of top 10 Asian nations trading with China.

What India fears

India is a services-led economy and it is any challenge to the service sector that affects it the most. If there is apprehension about Chinese competition, it is the threat to India's IT-services outsourcing that involves such businesses as call centers and back end processing of data. Recently, the chairman of Wipro Limited Azim Premji said that though English language was a major constraint for the Chinese at the moment, this handicap was likely to be overcome in the next five to ten years. Premji said that the Chinese would be able to overcome any odds because they are very hardworking, competitive and dedicated. He emphasized the fact that China had chalked out a massive programme on primary education with focus on training in English. Premji warned that India should not remain complacent and the IT companies and the Government should invest in quality processing and other related areas to stay ahead in global competition.

It may be recalled that India has the lion's share of the outsourcing market. According to the research firm Gartner Group, the global IT services market is worth $580 billion, of which only $19 billion is outsourced, but India has 80 percent of this offshore market. The figure for outsourced IT services is expected to grow at a very rapid pace. The IT services market is broadly divided into two sections ? the IT/Tech segment, which requires the skilled manpower that China possesses, and the business and process outsourcing segment, which requires a knowledge of English and thus cannot be further outsourced to China. India garners the bulk of the outsourced BPO business as well.

However, there is not much fear in the core business of tech services, which require skilled manpower. When it comes to software, India has developed the cutting edge with several advantages by engaging China. As Jiabao put it, "China has about 100 million computers and the Internet penetration has also reached the 100-million mark. It only goes to show that our IT industry has been developing very fast. With our strengths in hardware and India's domain expertise in software as two Pagodas, both the countries can take the leadership position in the world by combining our respective resources."

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