India Leading IT Comment on China

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• Publié par: Ficir
• Nombre de lectures: 22
• Langue: English

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India’s Leading IT Outsourcers Comment on China China has been cited as the only country capable of challenging India’s outsourcing dominance. Sridhar Vedala and Nick Rossiter from Mithras Consulting Group, China (www.mithrasgroup.com) speak to the China heads of India’s leading outsourcing firms, and offer an analysis of China’s opportunities and threats. Conclusions regarding the potential of China as an IT and business process outsourcing destination have been mixed. China backers would have us believe that the country will present a formidable challenge to India’s dominance within the space of a few short years. Others point to China’s disadvantages and believe the gap is too large for China to bridge even within a decade. Regardless, the outsourcing industry in China is now experiencing a shakeup, as leading global providers such as HP, BearingPoint, and IBM setup IT and BPO centers in China. All the top Indian providers have also setup in China, and several are planning transformative growth strategies. According to Infosys’ Head of Sales & Marketing for Greater China, Vineet Toshniwal: “China will be a strategic base for us, as we view that the next generation Global Delivery Model will have integrated capabilities of India and China”. Satyam’s China head expressed similar views, while Chandra Sekaran, Managing Director of Cognizant stated that they view China as a: “potential global delivery center to provide offshore services to US, Europe and Japan.” Of India’s top five providers, Satyam and TCS have been operating in China for a couple of years, while Infosys setup earlier this year. Wipro recently announced their entry into the market, and HCL is anticipated to make a similar announcement sometime soon. Mediumsized Indian companies Mphasis, Zensar and iGate, also entered the market some time ago. The latest entrant is Cognizant, with a host of others expected to follow. As V. Rajanna, General Manager of TCS in China commented: “Sooner or later most of the Indian outsourcing firms will setup operations in China. Therefore TCS is continuously reinventing itself in China”. While whollyowned subsidiaries have been the most popular entry mode, joint ventures or acquisitions of local Chinese firms have also served as entry vehicles for Indian firms in the past, and may also be used to expand in future. For example, Wipro’s Chief Strategy Officer, Sudip Nandy stated: "Wipro sees opportunities to potentially leverage the capabilities of leading local providers through acquisition and integration, in order to offer a truly compelling and localized China capability for its global customers". While each provider has somewhat differing rationales for entering China, the key to a successful expansion into the country rests on a deep understanding of the market and a sound business strategy.

China Market Landscape Having transformed much of its economy into a basicmanufacturing powerhouse over the last couple of decades, the proactive Chinese government is now focused on developing higher valueadded manufacturing and service industries. Outsourcing has been identified as one of the key ‘knowledge economy’ focus areas, and therefore a lot of government attention has been devoted to developing the industry. 1.China’s Software Cities In 2000 the Chinese government decided to setup ten software bases to promote outsourcing and attract investment. Each city contains a software park, and offers attractive tax policies and other incentives to promote development of an export focused software industry. However the cities do differ in terms of tax holidays and other government incentives, availability of technical resources, business infrastructure and proximity to customers. China’s major cities may be roughly classified as tier 1, tier 2 or tier 3 in terms of their level of economic development. Importantly, there are vast differences in operating costs between cities and provinces at different stages of economic development in China. However in general, the level of public physical infrastructure throughout China far exceeds that within India. Prakash Menon, CEO of NIIT China, which operates over 120 franchised IT training centers, with over 20,000 students, opined: “The country will now need to closely focus and build its human infrastructure, especially in IT. The key question really is how fast can this be done, the building of the human mind.” Figure 1: Map of China’s Software Cities

Copyright 20032005, Mithras Consulting Group.All Rights Reserved.

Figure 2: Details of Outsourcing Bases Location Tier Description Beijing Tier 1 Many of the large Chinese technology companies emerged from leading universities based in Beijing. A large number of Fortune 500 firms also have their local headquarters in China’s Capital City, particularly if government is a key industry stakeholder or customer. Shanghai Tier 1 China’s largest and most prosperous city, Shanghai has been the traditional gateway to the outside world, and is also home to many major multinationals. Shanghai has been dubbed China’s Silicon Valley, although it faces competition for this title from Dalian, Shenzhen, and nearby Hangzhou. Dalian Tier 2 Dalian’s proximity to Japan and Korea, and availability of workers fluent in these countries’ native languages, has facilitated a thriving outsourcing industry serving the Japanese and Korean markets. Guangzhou Tier 1 A city inland from Hong Kong and Macau, Guangzhou boasts around 65 of the Fortune 500 companies, including P&G, Ericsson, Pfizer, LG, Mitsubishi and Kraft foods. Hangzhou Tier 2 Lower wages, good universities, rapidly

Copyright 20032005, Mithras Consulting Group.All Rights Reserved.

Key Players EDS, IBM, some of the Indian firms have marketing offices.

Infosys, Satyam, Wipro, BearingPoint, Cognizant, Mphasis

Accenture, IBM, GE, HP (call centre), Dell (call centre)

Cap Gemini

TCS

developing Zhejiang province and easy access to Shanghai has made this location an attractive IT base. Nanjing Tier 2 These cities have all been designated as software Intel, Infineon, Xi’an Tier 2 industry bases, offering government incentives Fujitsu, NEC Chengdu Tier 3 and a software park. They all contain universities, providing an ongoing supply of Jinan Tier 3 talent. They are likely to gain more importance Changsha Tier 3 as firms realize the cost saving potential of operating in second and thirdtier cities. Shenzhen Tier 1 Though not identified as one of the 10 bases, this Zensar, IBM city is perhaps the most modern in China, benefiting immensely from its status of being in one of the first Special Economic Zones, and its immediate proximity to Hong Kong. As costs continue to rise in China’s developed cities, second and thirdtier locations will become more important. Figure 3: China’s Software City Universities Location Universities Beijing Peking (Beijing) University Tsinghua University Shanghai Fudan University Shanghai Jiaotong University Tongji University Dalian Dalian University of Technology Hangzhou Zhejiang University Guangzhou Guangzhou University Nanjing Nanjing University Chengdu Sichuan University Jinan Shandong University Changsha Changsha University of Science and Technology Xi’an Xi’an Jiaotong University Note: only the most famous universities in each location are listed. All 10 software bases boast major universities nearby. According to TCS’s V. Rajanna: “We chose Hangzhou based on an evaluation of critical parameters such as the talent pool, cost, availability of infrastructure and government support”. 2.Talent Availability

Copyright 20032005, Mithras Consulting Group.All Rights Reserved.

According to government statistics, in 2001 there were almost 2000 universities and colleges in China, boasting 11.75 million enrolled students, and producing 1.97 million graduates annually. The government claims there are currently around 500,000 workers with IT skills in China, with about 140,000 new computer science graduates in 2003 (up from 62,000 in 2001). The number of graduates with Accounting and other skills relevant to BPO is said to be even higher. While some would question these government figures, the key issue however is the availability of experienced professionals. Here there is no doubt that a shortage exists, and professionals with experience or specialist skills can command high salaries. As Satyam’s Regional Manager for China, Raghavendra Tripathi explained: “Employee retention will be a key issuefor sustainable growth. It may be a good strategy to look at establishing development centers in secondtier cities in order to recruit local talent from universities around the city, and provide training. This may foster loyalty, which would curtail the high employee turnover in China”. Chief among the skills that are easily available within China are the traditional programming languages. However there remains a dearth of talent with substantial project experience, or with skills in areas like ERP and the latest technologies. Such talent is primarily only available in small numbers in firsttier cities, and even then only at relatively high compensation levels. According to Rao Talasila, General Manager of iGate in China: “The biggest challenge is finding the right human talent to power our growth needs. We have often had to turn away projects because we couldn't find the proper talent. The Recruitment Supply Chain for IT professionals in China is still in its infancy”. While experienced talent may be scarce, nevertheless “IT worker skills here are on a par with their Indian counterparts” stated TCS’s V. Rajanna. However, while the majority of current university graduates can read and write in English, only a small percentage can speak fluently. This language issue is more pronounced in tier 2 and tier 3 cities. Challenges in China Though the China IT and business process outsourcing industry is developing rapidly, there remain challenges that Indian entrants must recognize and overcome. Languagethe most oftencited challenges China faces in outsourcing is the Among lack of English ability. However, Mithras’ work has shown that with new project management approaches, this can usually be overcome in the IT outsourcing arena. Nevertheless language skills remain a major hurdle to voicebased BPO. “The lower levels of English skills relative to other outsourcing centers such as India and the

Copyright 20032005, Mithras Consulting Group.All Rights Reserved.

Philippines makes voicerelated processes such as call centers difficult to outsource to China,” said Lee Chen of Mphasis. “However the nonvoice segment of BPO is set to expand significantly in China, with the market almost unexplored at present”. IP Protection One of the most inhibitive hurdles is the lack of a rigorous intellectual property rights protection regime in China. This deters firms from outsourcing critical projects to China, and is of particular concern to Western software companies wary of IP theft and reselling. Companies remain wary that protecting copyright and intellectual property through traditional contractual means may not be adequate or effective in China. Although the government is taking some steps towards more stringent enforcement of intellectual property rights, the country still has a long way to go. This concern has led many multinationals to turn to outsourcing firms with strong global reputations, that are perceived as more likely to proactively protect their client’s IP interests. LargeScale Project ExperienceMost of the IT outsourcing providers in China are small to mediumsized companies with limited experience in managing largescale projects. Their background is often in localization or in the development of non missioncritical systems. There is also a lack of domain knowledge in fields such as the Banking and Finance sector, that account for a large chunk of outsourcing business. At present China’s worldclass capabilities are limited to more lowerend tasks such as programming, testing and repetitive business processes. Convincing global clients to outsource large or missioncritical projects to their China development centers may initially be a challenge for Indian providers. Cultural DifferencesTo date, the majority of local Chinese providers have focused on customers in the domestic market and the Asian region. Chinese providers are currently not attuned to Western cultures and business nuances. This explains their relative success in Japan and Korea, but lack of progress in penetrating Western markets. These cultural differences also present challenges to Indian providers doing business in China. “Indian companies find it difficult to deal with local companies” noted Ashish Rahinj, Zensar’s China CEO. India’s Britishpatterned education system may also be a real advantage in certain areas. While Indians are trained to find the source of problems and the solution through critical questioning and analysis, Chinese are systematically taught to memorise the textbook answer. As a result Chinese are superb in execution tasks such as software coding, testing, and repetitive business processes. However they may struggle when asked to design a software system or solve logic or businessprocess related issues with it.

Copyright 20032005, Mithras Consulting Group.All Rights Reserved.

Variable Quality & Service LevelsThere are no clear outsourcing market leaders in China. And among those vying for attention, there are great disparities between different providers’ capabilities to execute projects successfully. Few Chinese providers have CMM certification, making it difficult for clients to assess different provider’s process maturity. This has left the door open for global IT giants such as IBM, HP and BearingPoint to clearly differentiate themselves. While Indian providers have been able to tout their CMM Level 5 certification and majorproject track record, they have yet to really stake out a defined niche for themselves; a fact that may hamper their future growth and profitability prospects. China’s Strategic Advantages Although all major Indian providers have now established operations in China, their reasons for investing here and their strategies for growth are quite different. Their rationales cited for entering China include (claimed) lower costs, a complementary and larger skills pool, better servicing MNCs in China, penetration of Japanese and Korean markets, access to China’s domestic market, and risk mitigation for global clients. However, China is less than ideal on all these parameters, so providers must look beyond the headlines in making key strategic decisions. Lower costsFor ITES workers with limited experience, wages in secondtier cities are believed to be 15 – 20 % lower than in India. Leading Indian firms such as Infosys and Satyam have already established operations in Shanghai and are now looking to expand into secondtier locations to benefit from this cost arbitrage. “Shanghai does not offer us cost savings; rather it is more expensive than India to operate out of Shanghai.” commented Satyam’s Raghavendra Tripathi. However most Indian providers have initially setup close to customers there, and are only now beginning to explore the substantial cost savings achievable by setting up development centers in less developed provinces. Complementary & Larger Skills PoolCombined with lower costs, China also offers skills that may be complementary to those available in India. Though not experienced, there is a large pool of IT programmers who are capable of carrying out coding and testing. In addition, BPO firms can utilize the large numbers of lowcost workers to execute back office processing projects in China. A number of providers believe this talent pool may one day dramatically alter their global delivery capabilities. Noting the potential, Zensar’s Ashish Rahinj commented: “The model Zensar has adopted is robust, in order to cater to the US, Japanese, and Korean markets.” Better Servicing MNC’s in China.As the world’s seventhlargest economy (India is twelfthlargest), and number one destination for foreign direct investment, China has

Copyright 20032005, Mithras Consulting Group.All Rights Reserved.

attracted almost every major MNC to setup operations there. India’s IT providers have proved adept at marketing to and serving these companies in their home market. By establishing operations in China now, Indian providers can grow the value of these client accounts without spending heavily on business development activities. At the same time, they can temporarily help keep the legions of small Chinese outsourcing companies that hope to become the “next Infosys” at bay. According to Masaki Nagao, Wipro’s Chief Executive of China and Japan: "Our initial strategy is to support our global clients operating in China in projects that they need to execute locally; for example, localization of software to the China market, testing of locallydeveloped software, and enterprise applications with substantial local requirements”. Indeed, the vast majority of work currently being carried out by Indian firms in China falls into these categories. Penetration of Japanese & Korean Markets. Currently around 70% of IT outsourcing export dollars in China are earned from Japan. This is in stark contrast to India, where Japan represents somewhere around 5% of exports. So far Chinese providers have been significantly more successful than their Indian counterparts in sourcing projects from Japanese companies. However by locating in China, Indian firms can leverage the same advantages of cultural and geographic proximity, along with availability of Japanesespeaking workers. Thus the easiest route to penetrate this hitherto difficult market may be through China. Indeed, firms such as IBM, Dell and GE have already established call centers in Dalian to provide customer service to their clients in Japan, Korea and Greater China. Indeed Dalian, a city which has been famously successful in selling outsourcing to Japan and Korea, also recently attracted Satyam to setup its first branch office outside their China base in Shanghai. Other Indian providers are also leveraging China’s geocultural advantages in various ways: “TCS’ strategy is three pronged  China for global customers, China for APAC, and China for China”, commented V. Rajanna. Access to China’s Domestic Market. China’s domestic IT market has been hampered by lax IP protection policies, resulting in a lack of value being placed on software. Furthermore, Stateowned enterprises in particular have been reluctant to implement software that may result in jobs being automated, given that their traditional role has been to provide employment. Most businesses in China – particularly Stateowned ones – are overstaffed, and know it. Despite these challenges, some have pointed to the substantial existing hardware infrastructure, emergence of Chinese multinationals, and increasing IP protection reforms, as being potential catalysts for future growth. Some Indian providers hope that these trends will eventually open more market opportunities for obtaining outsourcing projects domestically.

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Risk Mitigation.In recent years religious and ethnic violence in India’s NorthWest and occasional nuclear tensions between India and Pakistan have made international headlines. Combined with the trend to outsource more missioncritical applications, and an increased focus on business continuity following September 11, companies have been looking to mitigate such risks. As Cognizant’s MD, Chandra Sekaran explained: “Multinationals are seeking credible alternate options to India, in order to diversify their sourcing base, and China is certainly being viewed as a country that holds promise”. However China is not a riskfree destination. With popular dissatisfaction over endemic government corruption, a chasmlike gap between rich citydwellers and rural peasants, a banking system saddled with billions in bad loans, and an estimated US$43 billion in unpaid wages owed to lowwage migrant workers, the seeds for potential unrest are plentiful in China. However, so long as China’s growth continues apace, and the economic fundamentals remain intact, it will continue to be an enticing destination to at least spread the risks. India’s Future in China In terms of entry rationale, Wipro has placed more weight on risk mitigation, TCS has focused more on servicing their MNC clients in China, while Satyam and particularly Infosys see the potential to leverage China’s talent pool to extend their Global Delivery Model to China. These different emphases also directly influence their investment and growth strategies. While some leading Chinese providers may pose serious competition to Indian firms in future, the Indian’s are also well positioned to leverage China’s advantages themselves. With ambitious growth plans already underway it seems certain that China will be the largest offshore development center for Indian firms, after India itself. And currently in both the Chinese domestic market and the offshoringtoChina market, there are no clear leaders. This fact offers Indian providers the biggest opportunity (and the biggest potential threat to their incumbency) since the early 90’s upsurge in offshoring. Future success depends on how well Indian providers understand the market opportunities and position for leadership now. Related website:www.mithrasgroup.com

Copyright 20032005, Mithras Consulting Group.All Rights Reserved.