Is China a Threat to Indian IT Outsourcing?

February 08, 2009

Amidst the buzz in the Indian IT industry, articles have started to prop on whether India is a safe destination for outsourcing. The next obvious question is whether China will use the current situation to grab a piece out of the outsourcing deals. McKinsey has reported that China has an opportunity to grow its outsourcing industry at this juncture. It cites the reason that, in this economic crisis, many companies in the world are now looking to cut the costs by outsourcing their IT operations and China can benefit from this move. Along with this opportunity, the recent happenings in the Indian IT industry can be a bonus for China.

But, can China really pull deals that are being outsourced to India? Where exactly does it stand in IT Outsourcing? As of today, the Chinese IT sector is relying heavily on projects from the booming manufacturing industries in China and also from neighboring Japan. Since China's manufacturing sector (the heart of its economy) has slowed down due to less demand for exports, the government has identified the outsourcing industry as the next engine and has vowed to pull foreign money to China through outsourcing. Also, it has planned to improve the small-sized companies to grow from their current proposition by awarding them projects and by building cities and towns dedicated to the outsourcing industry. But when it comes to projects from US and Europe, Chinese companies were working on low-end applications and testing projects. When Western companies released products, Chinese companies were asked to test them before the deployment.

Now, things are changing. Companies have started working on mid-size application development projects which is very essential for developing domain knowledge and for getting bigger deals. Today, many of these development projects come to China from Japan and Korea. Also, if things improve, China can be a good alternative to companies that wants to de-risk their outsourcing strategy. Earlier today, SAP North Asia chairman joined Neusoft, the biggest Chinese outsourcing company. He is expected to oversee the International business. Neusoft on its website has called graduates and professionals to undergo its SAP training program. The Chinese companies are desperate on getting multinational deals to prove their expertise. All they need now is one success story in a complex enterprise project, which will trigger the next wave in their IT industry.

Now, as a competitor to India, China has a long way to travel to catch up on deals that are currently awarded to Indian companies. Having understood the booming manufacturing sector in China, Indian companies like TCS, Infosys, Satyam have setup shop in china to pull projects from the Chinese Industries. Some Indian companies even bought small sized Chinese companies, to understand the market and to merge themselves into the Chinese culture. These companies serve as threatening competitors to the home grown companies. Also, though Chinese companies get projects from the Western clients, the development work is more of product development (like networks, embedded systems etc..). For example, the biggest outsourcing company Neusoft, according to its website, offers IT services on Network support, back office, data center and asset management. But, to thrive with an Indian competitor, the companies should get projects that are executed in the in-house IT department of their clients. These kind of ADM(Application, development and Maintenance) projects generate money and also help in acquiring further development projects. They also help to gain knowledge in that particular business.

Another important factor where China has both advantage and disadvantage is 'cost' The per hour rate offered by Chinese is less than India's rate, about 30% less. But there are a lot of hidden costs which includes communication issues (More time, more rate), knowledge transfer time, data security protection and regulatory issues. These issues demand a completely new strategy for the companies to kick start their outsourcing plans.

The key issue in the Chinese IT industry today is the number of skilled professionals with good experience. Although, the number of computer graduates is more than India, the experienced professionals are far less and that prevents them from acquiring the big pie. Chinese companies are badly in need of senior project managers and they are looking outside China to recruit or poach them. More than 80% of the IT professionals in China have less than 5 yrs of experience ( 42% with less than 2 yrs). This was the situation in India, a few years ago. But as the market grows, maybe in another 10 years China will compete heavily with he Indian clients. At the same time, India would have produced more experienced professionals with higher domain (Finance, Retail, Telecom etc..) and architecture experience. But you cannot compare the China's current stage with India's early years. Indians' entrepreneurial approach helped to create thousands of small software companies, which later helped to produce skilled professionals. Also, the Y2K problem definitely served as a break point. Though, the Chinese are growing steadily, the backing of Chinese government is so strong that it can be a great trigger. Working under the multiple government projects in various domains will definitely improve their skill level.

If the Chinese companies grow at the current rate, there are more probable chances of India and China collaborating in the future. There are two main reasons:

1) Indian IT professionals' knowledge and global experience will be a great asset. Not using it will be a great mistake or it cannot be ignored

2) Indian companies' presence in China.

Today, Indian companies like Infosys and TCS have a good reputation in Chinese markets. For example, the website www.seecoco.com is a hub for the IT pros in China. Here they discuss about their company, Salary etc. Already, Infosys is third in the satisfaction survey and even Satyam is ranked among the top 10. Here,it should be noted that, Indian companies are now only in the investment stage. In future, you can see a great level of cultural mixture in these companies.

Considering the Pros and Cons, China cannot be definitely ignored in the outsourcing industry. So is India. We will see India gaining domain and execution expertise over the years and China growing on technical side. So, it is not India or China. It is India and China. After all, the Dragon and the Elephant can never fight against each other.

Madhan Karthikeyan, an IT professional in the finance industry, writes articles passionately on Finance and Business. He blogs about these topics at www.itonion.com. All views expressed by Madhan are his personal views.
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