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Will Chinese IT firms rival Indian firms?

Jun 27, 2008

India has basked in the glory of an IT boom. India Inc. has played its IT card well and has been able to grow in leaps and bounds in the last 20 years. This is the time to analyze whether Indian IT firms can survive competition brewing across the emerging markets especially China, which is one of the fastest growing economies in the world. Today China has become the world's fourth largest software producer. The country's share of the global software industry rose from 1.2% in 2000 to 8.7% in 2007, with an annual growth rate of more than 30%. Chinese firms are attracting venture funding and expanding staff in an industry viewed as strategic for the country's future growth. The moot question now is - Can China emerge as a potential threat to the Indian IT industry? To understand the nature of competition between the two countries let us analyse the fundamental aspects of the software sector in these two countries. Size of industry: The industry size and the scale of operations in China is still very less when compared to India. The Chinese IT sector is less than a third of the Indian IT sector. The following tables highlight the fact that the size of the Indian top companies and their operations is much larger than their Chinese counterparts.

Top 4 companies from China
Company M Cap (US$) Revenues US$ (as on Dec 31 2007) No. of employees
VanceInfo Technologies 359 m 62.7 m 3,675
Chinasoft International 152 m 925.2 m 4,363
Sinocom Software 194 m 564.5 m 3,229
Shenyang Neusoft Co Ltd 118 m 410 m 6,740

Top 4 companies from India
Company M Cap (US$) Revenues US$ (as on March 31 2008) No. of employees
Infosys 25.3 bn 4.17 bn 91,200
TCS 20.2 bn 5.31 bn 111,400
Satyam 7.07 bn 1.97 bn 46,000
Wipro 1.61 bn 4.64 bn 82,100

Structure of industry: The IT-BPO sector in China is growing on the back of its domestic market while the growth of Indian software firms is led by exports. In China, the domestic market accounts for 85% of revenues. The total value of software and services exported from China in 2006 was US$ 1.8 bn, which is very less than the total value of software and services exported from India (US$ 23.6 bn) in the same year.

Service portfolio: The portfolio of IT-BPO services exports from China is dominated by application development, coding / testing and localization services. The portfolio of Indian firms is more broad-based and includes application management, infrastructure services, offshore product development and engineering services. This shows that India is in a different evolutionary phase. The Indian software sector has climbed up the value chain and is now providing more high-end services. Indian firms have built robust processes for managing remote service delivery, transitioning of processes and integrating workflow across large teams spread over different geographies. IT firms in China are still evolving, the average local Chinese service provider still suffers from sub-scale inefficiencies and lacks the experience of delivering on large contracts.

The IT-BPO sector in India is altogether in a different growth phase than that in China. Infact, India and China are operating in different spheres with few overlapping areas. Although China's software sector is booming, its small size and lack of experience will take years to emerge as potential rival to Indian software companies.

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