India-China IT partnership takes
giant step By Pallavi Aiyar
BEIJING - Framed by the rolling bulk of
Beijing's Western Hills, the blue and white TATA
logo adorns a 2,000 square meter-large building
that is home to the new joint venture between
India's top software exporter Tata Consultancy
Services (TCS) and three Chinese partners. Located
amidst the giant glass and chrome structures that
dot Zhonguancun Software Park, the Chinese
capital's showcase high-tech zone, the TCS (China)
building is in fact the physical embodiment of the
first real example of the long-hyped potential for
Sino-Indian collaboration in information
technology (IT).
Indian IT majors have been dipping a
cautious toe in Chinese waters for several years
now. Apart from TCS, Infosys, Satyam and Wipro
also have China operations, as do a slew of
smaller, specialized companies such as IGate
Global Solutions, Newgen Software and Zenzar
Technology.
However, despite ambitious
plans and a strong commitment to the Chinese
market, Indian companies have on the whole
struggled to ramp up their operations across the
Great Wall. Even after four or five years in the
country, the majority of Indian IT heavyweights in
China thus remain surprisingly light, with an
average of 300-600 employees largely restricted to
servicing the China needs of existent
multinational clients.
The lucrative
domestic Chinese market for software, valued at
US$50 billion plus, has remained out of reach for
most Indian companies. According to Jonathan Lam,
CEO for TCS (China), there are many reasons for
the inability of Indian firms to crack the Chinese
domestic market.
"For a foreign company in
China there is the question of lacking
relationships with key decision makers in
government," Lam said. adding that language and
cultural barriers are obstacles as well. Moreover
in the IT sector, foreign-owned companies have
usually been kept out of the really large,
multimillion dollar deals by the state-owned
enterprises.
This is where the new TCS
joint venture (JV), with its strong government
backing and partly Chinese ownership is set to
make a real breakthrough, fundamentally changing
the nature of the Indian IT game in China thus
far.
The JV was formally established in
February this year with TCS taking a 65% stake. A
further twenty 5% is owned by the three Chinese
partners, Beijing Zhonguancun Software Park
Development (where the JV is located); Tianjin
Huayuan Software Park Construction and
Development; and Uniware. The remaining 10% is
expected to be taken up by Microsoft.
TCS
has already some substantial domestic contracts
including a $100 million one for providing banking
solutions to the Bank of China. Another is a
multimillion dollar deal to develop a
comprehensive international trading system for the
China Foreign Exchange Trade System (CFETS), a
sub-institutionof the People's Bank of China has
also been bagged.
"We are finally being
able to make real inroads into the banking and
financial sectors in the domestic market in
China," said Lam. This is in fact an area with
strong growth potential in China. The country is
currently undertaking massive IT-related projects
including the computerisation of its banking
behemoths. Moreover, last December China fully
opened up its banking sector to foreign
competition under its WTO obligations, creating
even more opportunities.
Lam said the TCS
JV will be in a perfect position to leverage and
benefit from these developments because partnering
with the Chinese government has put it in a unique
position. Indeed the JV is the first such company
backed by the powerful National Development and
Reform Commission (NDRC), a supra-ministry that
was formed out of the erstwhile Planning
Commission.
Lam said China wants the JV to
act as a "role model for Chinese industry that
sets the standards and which other local companies
can then imitate."
For the Chinese side a
partnership with TCS will be a substantial
learning opportunity. Both the quality standards
and processes that the Indian titan brings with
it, as well as its experience in handling large,
industrial-scale projects are lacking in many
Chinese IT firms.
The JV plans to employ
at least 5,000 people over the next five years (up
from its current work force of around 1,000) which
would make it one of the largest IT companies in
China. Although the Chinese software industry has
been growing at around 30-40 % annually in recent
years it remains fragmented and lacks scale. Only
about 10 Chinese IT firms amongst some 8,000
employ more than 1,000 people; the very largest
number have only some 10,000.
From the
Chinese point of view, the TCS JV follows the
classic strategy of opening up a market to foreign
investment, learning the best practices from the
world's star performers and then encouraging local
competitors to imitate and perfect these.
Following precisely this strategy, Chinese
companies have gone on to become world beaters in
the manufacturing sector. But will this approach
see similar success in IT?
The market
intelligence firm IDC predicted in a report out
earlier this year that when it came to the
software sector "Chinese cities were nipping at
India's heels" and would overtake Indian cities as
the preferred destination for offshore back-office
functions by 2011.
The reasons the report
identified for this China optimism were the
government-supported massive investments in
infrastructure, Internet connectivity and
English-language training.
However, Lam
dismisses the report. "The day China can catch up
with India is the day that customers feel as
comfortable that they will get the same quality
and security in China as in India, and that day is
not close," he says.
Just the size of
China's software exports when compared to India's
is an indication of the gulf between the two. In
the fiscal till March 2007, the software and
services exports segment in India was worth $31.4
billion, compared to $2.5 billion for China
China's biggest drawbacks according to Lam
are its reputation for lax intellectual property
rights protection, continuing inadequacy of
English-language skills and lack of mid-level
project management talent.
While China
graduates an impressive 650,000 engineers a year
(compared to 450,000 in India and 120,000 in the
United States) he says only around 10% of these
are usable from day one. Moreover, while it is
easy to find code writers with competence levels
and salaries on par with their Indian equivalents,
qualified middle-level managers are in short
supply. They are thus both more expensive and more
difficult to retain than their counterparts in
India.
Lam predicted that within the next
few years China might begin to give India some
competition in the lower-segment of the IT and
IT-enabled services world. However on the really
lucrative, value-added, high-end services India
will retain an advantage for a while to come, he
said.
Nonetheless, the TCS (China) CEO
cautioned that China should not be dismissed
either. Over time, China's evolution into an IT
power is more or less assured. It is the only
country comparable to India in terms of the size
and cost of its skilled labor force. In addition,
given its infrastructure and manufacturing prowess
the market for related IT solutions is likely to
keep growing.
It is thus small wonder that
virtually every Indian IT company of consequence
not only has a China strategy but is in fact in
the process of expanding China operations. Infosys
Technologies recently announced plans to open two
development centres in China that will eventually
employ 6,000 people. Earlier this year Satyam
Computer Services also began construction of a
2,500-seat software development centre in the
eastern city of Nanjing.
HCL Technologies
is the latest Indian IT major to look to China. It
has opened up an office in Shanghai and is close
to finalizing three collaborations with local
Chinese partners for enterprise software,
engineering and application testing.
In
all the India vs China debate the point that is
sometimes obscured is that ultimately the growth
of China's IT industry will only be to the
advantage of Indian companies operating out of
China.
According to Gartner, a research
agency, Indian companies could come to account for
up to 40% of the domestic Chinese market for
software. Lam said this is a conservative
estimate. "In banking, insurance and finance we
can take over the majority of the market," he
smiles pointing out that IDC already rates TCS
(China) as the best provider of call banking
solutions in China.
"So far we have been
walking," concluded Lam, "Now its time for us to
run."
Pallavi Aiyar is the China
correspondent for The Hindu.
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