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Software: Enter the dragon? - Views on News from Equitymaster
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  • Mar 9, 2001

    Software: Enter the dragon?

    The new fear that is showing first strains in the software industry is of the eminent competition from China. But this fear is not limited to the software industry, almost every industry from steel to garments have their own trepidations. Why is this? For the simple reason that Chinese goods are available for cheaper prices and are of a far superior quality. Why should the Indian software industry perspire? For the same reasons.

    A hard fact of the Indian software success story is that it has not exactly created a wealth of intellectual capital. Of the US$ 3 bn how many dollars worth of operating systems that were developed in India were sold? We are sure the figure would be very low if at all there was any. The software story if we might dare to say has been one of cheap labour. And that is what the Indian software industry’s USP (unique selling point). In wake of the US economic slowdown more companies will push work offshore to avail billing rates that are one-fourth of those charged by the US companies. Good? Not quite. If we can then China can too. Fortunately India was the only place in world that had the right kind of skill sets required for the software industry and got the head start. But unfortunately for India the entry barrier into the industry is low. China just lacks knowledge of the Queens language.

    China woke up late (fortunately for India) and found that there was immense opportunity waiting to be tapped. And now it wants its piece of the pie. China has got going. China has a dedicated ministry of Information Industry (MII) since 1998, to take care of the issues regarding the information technology industry.

    The Chinese software story began almost along side the Indian software industry. About sixteen years ago, the Chinese software industry began to emerge. By 1992 the industry had grown to a size of US$ 240 m. China's software industry saw total estimated sales of US$ 2.4 bn in 1999. For 2001 the output of the total computer industry (including hardware, software and services) is expected to be US$ 33 bn. Actual export numbers have not been released yet, but analysts with the China Software Industry Association (CSIA) said they would be quite small. Today China has more than 10,000 software companies, but most of them are small in size and employ less than 50 people. However, the exports were very low because of legislative restrictions (high export taxes).

    The Chinese authorities recently announced that that the nation's software companies will enjoy a complete rebate on all export taxes. According to a new policy worked out by the State Administration of Taxation, the Ministry of Foreign Trade and Economic Co-operation and four other government bureaus, the software companies will now have the benefit of a tax refund after their products are successfully exported. In addition to being eligible for the tax rebate, all software companies that have registered capital of more than US$ 0.1 m can now export directly.

    Among the other initiatives, the Chinese government reduced the value-added tax for software companies from 17% to 3%. Curbs that blocked software companies from going public were eliminated and all software companies were encouraged to raise money on the stock markets.

    CSIA said the software sector is expected to earn US$ 14 bn in 2005, which is six times the present level. According to the association China's software industry will keep a growth rate of above 30% in the coming years. A relatively modest growth expectation compared to the figure of US$ 50 bn (exports) for the Indian software industry by 2008.

    The two key inputs for the developments of the industry are manpower and bandwidth. China produces far less skilled manpower than India. For example, output of science graduates from the universities in China is just 50,000 compared to 250,000 in India. But considering the manpower availability and the ease of acquiring the skill sets this should not be much of a problem. On the infrastructure front China is in a better position with 55 Gbps of bandwidth compared to the Indian availability of 325 Mbps. Therefore, weakness in the development of the software industry in China is availability of skilled manpower.

    But the race is on and the advantage is in favour of India. Till the Chinese industry gains expertise to compete at a one to one level, India has a breathing space. In the meantime Indian companies can concentrate on two things to make the entry barrier high – quality and creating intellectual property. This would eventually lead to strong brands. And strong brands are something very different from a cheap job work. A brand is very difficult to create and even more difficult to compete with. Only this can guarantee a competitive edge for the Indian software industry in the long run, and not the head start.



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