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Software: Competition gets stiffer - Views on News from Equitymaster
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  • Dec 24, 2001

    Software: Competition gets stiffer

    Software sector in the country is facing competition from two quarters: at one end technology majors across the globe are setting up offshore development centres (ODCs) in India and on the other hand Chinese companies too are coming to India to gain expertise and process maturities in the area of software services.

    To avail the advantage of offshore development, viz. access to skilled human resource and low cost of operations, many companies have opted to open ODCs in India. Another advantage is that the time difference between the US and India allows work to be done round the clock. The list of those companies that have ODCs includes Ford, GE, HP, Sun Microsystems, Texas Instruments, Cisco and Sapient to name a few.

    Till date the Indian ODCs of these companies were handling IP (intellectual property) related work, as most of the technology related companies would ideally like to keep such sensitive work within the company. Other IT requirements are outsourced to Indian software companies. However, as these technology majors are looking at all possible opportunities to cut costs in wake of a tough economic environment, the concern is that they may increasingly choose to outsource to their own Indian subsidiaries, instead of outsourcing to Indian software companies.

    Stiff competition from the Indian software majors like Infosys has forced pure play service companies like Sapient to replicate the lower-cost global distributed delivery system pioneered by the Indian software companies. This means that the competitive edge of the Indian software companies is waning. Thanks to ODCs these companies can now offer services at rates competitive to those provided by the Indian companies. The edge these companies have as compared to the Indian counter parts is a larger mind share. Also, their presence in the major markets is far superior to their Indian counter parts.

    On a more positive many of the large corporates in the US are setting up ODCs jointly with the Indian software companies like Satyam has set up for Ford. In a recent development CSC, a software services major, signed up an outsourcing contract with Satyam. CSC can now offer competitive rates to its clients by outsourcing to a third party like Satyam. The Indian software sector is likely to see more of such partnerships in the future. But this is till the time when others do not under cut. The threat looms large as countries like China are fast catching up.

    The US$ 3 bn (Rs 144 bn) telecommunications gear maker Huawei Technologies from China has set up a dedicated software development facility, with a cumulative investment of US $40 (Rs 212 m). The ODC develops applications for areas that include wideband switching, 3G mobile communications, wireless infrastructure, network management, data communications and intelligent networks.

    Of the 500 employees the company has, 150 are from China who work on a rotational basis. One of the reasons for setting up the development centre in India could be to gain the expertise in software development. The software industry in China is still in its nascent state; the process maturities are yet to be achieved. Today China has more than 10,000 software companies, but most of them are small in size and employ less than 50 people.

    The Chinese software sector is expected to grow to a size of US $ 14 bn (Rs 682 bn) in 2005, which is six times the present level. According to the association representing the Chinese software industry CISA, 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 1 Gbps. 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. While companies that have already established themselves like Wipro, Infosys and Satyam in the global arena, are sure to be around, the concern is will second rung stocks manage to compete?



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