As with many sectors in Indian industry, the Indian software industry too is worried over

the threat from China. Yet in software and hardware, India might have an opportunity
that more than makes up for any threat, say Srikanth R P and Rajneesh De

For 40 years now, since border skirmishes erupted just after some emotional posturing
in 1962, Indians and Chinese have viewed each other with mutual suspicion. Over the
years, although the two gigantic countries have settled some differences, they still seem
to warily circle each other. In recent times, Indian industry on the receiving end of dirt-
cheap Chinese imports has been at the forefront of a ‘Save Us from China’ campaign.
And now even the czars of the Indian software industry are acknowledging that China
poses a serious threat to India’s ambition of becoming an IT superpower. That Nasscom
is finalising a white paper on the implications of the Chinese foray into software exports
shows the general alarm that has set in.

There’s no doubt about China’s competitiveness in the IT sector, considering its

hardware and telecom markets are much bigger than India’s. And even in software,
China has a huge captive domestic market, as compared to India’s relatively tiny
domestic market. There are some other alarming figures for India: the ratio of China’s IT
spend to its GDP is nearly 5 times that of India’s. If India’s current growth rate in IT
doubles, it would still take us 25 years to catch up with China, and that only if China’s
growth rate remains stagnant.

Frankly, these numbers do seem to put a huge question mark over

India’s much talked of aim of becoming an IT superpower.

Large domestic market

But, rather than throwing in the towel, there is a school of thought

developing in India which believes that the Indian IT industry can convert
D-Link’s Naik has this apparent Chinese threat into an opportunity. Nasscom president
evolved a formula
whereby the Indian
Kiran Karnik is one of the main votaries of this opinion. He believes that
IT industry will while China will always remain a formidable competitor, a policy of
have its cake and engagement rather than a policy of isolated approach would perhaps be a
eat it too
better strategy. First, it would give Indian companies a door to enter the
Chinese domestic market which is today dominated by MNCs. Plus, Indian IT companies
based in China can address other East Asian markets like Japan and Korea. This view is
also endorsed by Noshir Kaka, principal, McKinsey & Co.

It is a well established fact today that Indian IT firms have an excellent opportunity
waiting to be tapped in the

Chinese domestic market, which is estimated to be four times the size of India’s. Also,
with China becoming a part of the WTO, local banks in China will soon be forced to start
upgrading their technology. As local players have not been able to provide the required
expertise and technology in the domestic IT market, the Chinese market is currently
dominated by MNCs. This in itself offers an excellent opportunity for Indian IT firms,
whose development expertise is no way inferior to these MNCs.

Another important aspect is the growing purchasing power of the China’s 1.3 billion
people which in turn is creating a strong massive base to build domestic technology
companies. China is also expected to be the largest market in the world by 2004 for
mobile phones and digital cameras, and the second largest for PCs after the US. A key
reason why India is miles ahead of China in software exports is due to the simple fact
that the efforts of Chinese software firms were spent in addressing the huge domestic
market (estimated to be worth $16.2 billion).
But things are about to change, as China wants to emulate India’s success in the
software sector and become a major global force. China has initiated a series of
measures, which include plans to set up specialist IT training institutions on the lines of
our IITs and Chinese firms are following the same strategy India’s IT
majors did (bagging projects based on price) before going on to become
software majors.

Yet, there is a bigger opportunity for Indian IT players in China. One,

according to Infosys chairman N R Narayana Murthy, is that Chinese
firms cannot meet the full demand from the Chinese domestic IT
industry, resulting in the government allowing foreign firms like
Microsoft, Oracle and IBM to operate through joint ventures. In addition, Infosys’ Murthy
Kaka feels that Indian IT firms can take advantage of the fact that China believes China is an
opportunity since
offers Indian IT firms lower trade barriers, lower taxes and excellent its IT industry
infrastructure. No wonder Infosys is on the threshold of setting up cannot even
facilities in Shanghai to tap the Chinese domestic market. provide for
domestic needs

Window to Japan

The second premise for looking at China as an opportunity is that it can provide Indian
companies a gateway to Japan, a market hitherto virtually untouched. This logic is
significant as currently, Japan is the world’s second largest economy-estimated to be
worth a gigantic 70 percent of the entire Asian market and which contributes
approximately 11 percent to the total outsourcing global market. There is obviously a
huge gap to be filled as only four percent of India’s software exports go to Japan.

A significant gainer in the Japanese market is China, which has been a favoured partner
for Japan’s software imports. The synergy is easy to fathom. One, Japanese is the
second language taught in the northeastern 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. Location wise also,
China offers a great advantage to Japanese companies looking to outsource their
projects. Due to these synergies, it comes as no surprise therefore that Japan continues
to be China’s largest trading partner.

Though Indian IT firms have established bases in Japan (the list includes the likes of
Wipro, Infosys and TCS and L&T Information Technology), it remains a tough market to
crack. The reason primarily being that Japanese companies have traditionally resisted
external help relating to their IT systems. But a gradual change is happening. The
Japanese economy, which is in the throes of recession, is slowly but surely catching on
the outsourcing mantra in a big way. According to industry estimates, spending on IT
outsourcing is likely to exceed $15 billion in 2005. These figures are roughly one third of
the market size in the US.

Since China is a natural trading partner for Japan, it makes more sense for Indian
companies to set up base in China by following a strategy of partnerships with local
players who have knowledge and expertise about local markets. Since the Japanese
culture is not as open as US culture, tapping the Japanese market will undoubtedly
require a lot of patience. But as experts say, once bonds are established they stay for a
long time. Hence, it makes even more sense for Indian companies to tie up with Chinese
players as China has been a long-time preferred trading partner for Japan.

Also, India’s edge over China could come from the fact that it has a good record in
quality and protection of intellectual property rights. Global software majors are wary of
outsourcing their projects to Chinese companies as China has a terrible record in
software piracy. And on the quality front, as of December 2001, India had 36 companies
at the SEI CMM Level 5 assessment out of 58 organisations worldwide, while China had
none. It is thus a win-win situation for both Indian and Chinese companies as
organisations who were earlier wary about Chinese firms but wanted to avail of the
cultural and locational synergies, can now do so in the case of a Indo-Chinese tie-up.

The hardware angle

Even the hardware sector could gain from China’s traditional strengths in this segment.
K R Naik, managing director of D-link India proposes that Indian companies should set
up hardware manufacturing facilities with technology know-how from companies both in
mainland China as well as Taiwan. Most of the very few manufacturing facilities in India
today deal merely in assembling, and unless they replicate the Chinese model of
hardware development, the MAIT-E&Y estimate of $62 billion by 2010 in hardware will
only remain a pipe dream. Naik’s formula for success: Form a JV with a Chinese
hardware major, procure the technology expertise, the R&D set up and then do actual
manufacturing in India. “You can even supply to the Chinese market, as our labour force
is not only cheaper but much more intelligent,” he adds.

The key part of the strategy for Indian IT firms is to forge partnerships with Chinese
firms and participate in the country’s explosive growth. Some Indian companies have
already done this. NIIT, for instance, has seen huge demand for its courses due to its
unique English and Mandarin courses. As Kaka says, “Going forward, Indian software
companies can outsource their work to Chinese companies to boost productivity, while
maintaining a strategic relationship with the client.”

Indian software companies have an exponential opportunity to be tapped in the field of

telecom software. Currently, major telecom players in China like Zhongxing and Huawei
export their telecommunications equipment to India, while Indian IT firms develop the
requisite software for them. That’s a great example of combining China’s strengths in
hardware manufacturing with India’s strengths in software. With Infosys receiving the
green signal to set up a branch in China and Satyam too likely to jump into the fray, the
future seems bright for Indian IT companies in China. While it is in the best interests of
Indian IT companies to view China as a formidable competitor, the opportunities far
outweigh the threats. Perhaps the question should be rephrased from, ‘Is China as a
threat?’ to ‘Is China as a land of opportunities?’ For India Inc’s sake, we sure hope it is.