| |
China ready for Indian
invasion
By Tony Allison
Part
1: Indians take IT battle into Dragon's den
Indian information technology companies looking
to set up business in China will, according to India's
Manufacturers Association of Information Technology,
find that the country offers a "combination of excellent
infrastructure, logistics and incentives that make it an
attractive business proposition".
China has
vigorously created IT clusters in terms of special
economic zones that are located in 14 major coastal
cities, including Shenzhen, Shanton, Zhuhai, Liamen and
Haimen. Similarly, their are many development zones and
designated inland cities, along with several free ports
and bonded zones, in cities such as Dalian, Tianjin,
Shanghai and Guangzhou.
Foreign companies are
allowed to set up independent and wholly-owned
subsidiaries/operations in these specified zones, and a
foreign company does not need to have a joint venture to
enter China. Foreign investment policies have also
significantly liberalized over the years and foreign
investors are now allowed manufacture and sell in the
domestic market.
Incentives for investment
include significant reduction in national and local
taxes, land rentals and import and export duties. The
clearance processes of government departments such as
customs are streamlined and generally efficient.
In terms of business opportunities, China offers
four major options of revenue streams to Indian software
firms: offering services to multinational companies
operating in China, developing an alternate software
development base in China, exploiting China's domestic
market and using China as a route to enter Japan and
Korea.
China's market is becoming a strong
"magnet", with investment flowing in from the world's
biggest players. Intel proposes to spend US$100 million
on a micro-processor assembly plant in Shanghai. IBM is
also planning to invest $300 million in the same area.
Dell has moved its PC making facility from Malaysia to
China. Even Microsoft plans to invest $750 million in
China, covering areas such as software, research,
training and hardware. There are obvious linkages for
Indian companies to establish connections with these
multinationals.
The local China market itself is
seen as a huge business opportunity, particularly in
terms of embedded software, because of China's
predominance in hardware. According to industry experts,
China also provides a good market for mid-range software
service providers, especially in banking, telecom and
retail sectors. Computer penetration alone in China -
where, it should never be forgotten, the population well
exceeds 1 billion - is 13.2 per 1,000, against 6.2 for
every 1,000 persons in India.
Experts say that
the China software market can be divided into two parts:
One is the high-end market, which is primarily dominated
by multinational consulting firms such as IBM Global
Services, and the other is a low-end market of systems
integration and small software applications, catered to
by local Chinese companies.
"There is a huge gap
between the two segments where Indian companies can
position themselves. Indian firms can target mid-size
companies looking for reliable enterprise-wide
applications and services at a cheaper rate compared to
multinational consulting firms," says the National
Association of Software and Service Companies (NASSCOM),
India's apex IT organization.
According to a
report of India's Electronics and Computer Software
Export Promotion Council (ESC), Chinese firms are mostly
engaged in systems integration work for government-owned
enterprises, while a few firms have developed small
business applications of accounting and billing
processes. The report also stresses that as the China
market has been hardware driven so far, there has not
been much development in the software sector.
"Most Chinese software firms are small,
employing less than 50 people. There are only about a
dozen firms employing between 500-1,000 people," says
ESC executive director D K Sareen. According to China
Media Intelligence (CMI), of a total of 5,000 companies
with software interests, about 55 percent employ less
than 50 people. Another 42 percent employ 50-100 people,
and there are only a handful of companies with an
employee strength of more than 1,000 people. For
instance, CMI says that Yongyou, the largest domestic
player, has only 500 people in software development. The
country's largest company - Oriental Software - has a
little over 1,300 people. Compare that to the 10,000
people at the Indian giant Infosys and the 15,000 at
TCS.
Further, local software companies are able
to meet only 50 percent of domestic software
requirements, so there is a long way to go just to fill
this gap. Most of the Chinese software companies are
located in Beijing, Shanghai, Shenzhen and Shenyang.
China’s software services market remains small
as most customers believe that the services are part of
the hardware, and that software should not be priced
separately. "However, the market perception is gradually
changing and the opportunities for services like
application integration and implementation jobs are fast
emerging," says NASSCOM.
The organization,
however, feels that the standard application software
market is more competitive in China. A number of new
software products were launched in 2001 in the areas of
management, security and education. Chinese office
software packages such as Kingsoft, WPS office, Redflag
2000 and Red Office compete with Microsoft’s office
programs.
Chinese software majors include
Kingdee Software, China Software and Services
(CS&S), Legend Holdings, Yunnan Nantian Electronics
Information Co Ltd, Neu-Alpine, Vanda Systems and
Communications Holdings, IceChina Tech, Netec Co,
Emerging IT Group, Keyou Software and NeuSoft. Dalian is
fast emerging as the hub of software development, where
the government is aggressively trying to attract
investment for offshore development centers, especially
from Japan and Korea.
Taking the
plunge
In January, during Chinese premier Zhu
Rongji's visit to Bangalore, India's "Silicon Valley",
he fielded an informal request from Indian software
giant Infosys Technologies chairman NR Narayana Murthy
on setting up shop in Shanghai, "I am giving approval
right here." Such is the keenness on the part of the
Chinese to expand their IT industry, and to embrace
India at the same time. And they have worked hard to
reduce red tape and to make doing business in China as
smooth as possible, and with maximum incentives.
While an "Informatization Committee" under the
premier is the highest agency for IT strategy, the
Ministry of Information Industry (MII) is the key agency
for implementation. However, powerful regional,
provincial mayors and Communist Party leaders with
cabinet ranking can supersede the MII. They can offer
incentives, which are often generous, negotiable and
most often merited on the size and strategic nature of
the investment. This cuts through a lot of red tape.
Incentives for investment in IT include
significant reductions in national and local income
taxes, land rentals, and import and export duties and
priority treatment in obtaining basic infrastructure
facilities. Tax holidays can run from one to three
years, with 15 percent tax for the next two to three
years. The standard corporate tax is 33 percent. Other
benefits include no restriction of sales into the
domestic market or for exports from zones; power
subsidies; employee compensation and training expenses
to be tax deductible; preferential credit rates, export
credit insurance and exports rights for companies with
at least $1 million in software exports; autonomy for
software companies to decide employee salaries and grant
stock options.
Areas that have been identified
with potential for Indian software companies include
education software/training, which currently accounts
for 10-15 percent of total software sales and nearly
half of all software sales in the major urban centers,
such as Beijing and Guangzhou. Other areas:
Integrated circuit manufacture and research in
embedded software
Enterprise resource planning (ERP) software
Traditional industrial firms
Financial institutions
E-commerce application software, especially in
business centers such as Shanghai
Electronic payment, online shopping, B2B
applications, security tools and opportunities likely to
arise from Beijing's hosting of the 2008 Olympic Games.
Further, the small and medium enterprise sector
has potential. SMEs account for 30 percent of the total
IT market in China, with IT products and application
consumption in SMEs expected to touch $12 billion in
2002 (up 23 percent from 2001), and $27 billion in 2006.
The China Center of Information Industry
Development (CCID) reports that the number of players in
China's IT market totals 46,000, of which over 10,000,
or about 22.2 percent, are in the south, while 8,300 are
in the east.
The CCID breaks the players into
brand-name companies, distributors, system integrators,
dealers, retailers and others, with retailers accounting
for over 50 percent of the total. Sales in China's IT
market are still mainly conducted through distributors
and agents, but specialized stores and chain stores are
rising quickly, according to the CCID.
The CCID
says that channel enterprises handle over 85 percent of
IT products in China sold to users. PC channel vendors
make up the highest percentage, 32.1 percent, while
channel enterprises for accessories and software
products account for a respective 17.2 percent and 6.3
percent.
One of India's largest software
exporters, and Tata group software supplier and
consultancy, Tata Consultancy Services (TCS), has made
its entry into the Chinese market by setting up a
subsidiary: Tata Information Technology (Shanghai)
Company.
TCS's entry into China is three-pronged
- headquartered in Shanghai, an office in Beijing and a
development center in Hangzhou. The Shanghai office
contains the development and demonstration lab and will
collaborate with local universities of repute in
research and development. The Beijing office will
undertake marketing activities for the company's China
operations and will cover areas in client relationship
management, public relations and legal areas, in
addition to providing support to the northeast and
northwest regions. The Hangzhou center will provide
end-to-end services for clients in the Asia-Pacific
region, in coordination with TCS delivery centers in
India.
Infosys Technologies plans to take a
two-pronged approach to China, which the company views
through the marketing perspective, while also having
designs on setting up a development center. "We are
currently trying to understand the legal and operational
requirements for the Chinese market. We are also working
on a business plan for the China market," an Infosys
(China) spokesman said in May. "In addition to being a
potentially attractive market, China also has a
potentially large pool of resources who can join the
software services industry. With the similarity of
languages, these resources can be leveraged to service
our customers in markets like Japan, Taiwan, Korea,
etc."
Satyam and NIIT, too, are eyeing China as
a hub for the Southeast Asian region. Satyam Computer
has a small sales office in Shanghai, which the company
plans to expand soon, while IT education major NIIT has
also set up a software training center in China. Wipro
Ltd, which has chalked out a strategy to propel itself
into the top 10 software firms in the world, is also
looking at China.
It is not all smooth sailing,
though, and apart from the obvious problems related to
language, culture and costs, Indian companies find it
difficult to deal with local companies because of the
difference in the way in which business is conducted in
China, especially the legal and business framework where
often a signed contract - in Chinese eyes - is simply an
expression of intent rather than a legally binding
document.
The business practices related to
copyright and patent protection are also rather
flexible, say industry analysts. Indian companies,
particularly small and mid-size firms, eyeing the local
market are forced to work with a local company or
consultant to get over the problem of language and
business practices. Moreover, there is the investment in
converting the interfaces of their software applications
to the local language.
The cost of operations is
another major disadvantage for a company that is
planning to set up development operations in China. The
cost of real estate and manpower is around 10-30 percent
higher in China compared to India. The other challenge
is finding suitable middle-level software professionals
(project managers and quality analysts) who are willing
to migrate to China.
But as one Indian IT
analyst comments, "Though Indian software majors took
some time to realize that they can't fight shy of China
forever, they now feel the Chinese market should be
invaded rather then ignored. And now that they have shed
their fears and inhibitions, China has taken a prominent
place in their future global plans. The opportunities
are immense. But they need to be capitalized from
different directions and diverse approaches. China may
be neither friend nor foe, but it can certainly be an
ally to help India realize its dream of becoming an IT
superpower."
Additional reporting by Anil
Sharma in Jaipur
(©2002 Asia Times
Online Co Ltd. All rights reserved. Please contact content@atimes.com
for information on our sales and syndication
policies.)
|
| |
|
|
 |
|
