Subba’s Serendipitous moments

June 4, 2007

China no threat to India in IT services

Filed under: Business,Competition,India,Model,Strategy — Subbaraman Iyer @ 12:58 am
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The China – India growth story often leads to the question whether China could pose a threat to the India’s offshoring success. A couple of years back many advised Indian offshoring firms to set up operations in China to take advantage of the huge engineering talent there, which could be leveraged for IT service operations. Some even speculated that China could be the alternative to India. Even last year, a reputed consulting firm suggested that US firms would move over to China in view of the rising costs in India. In fact many IT services firms based in Singapore, set up operations in China, only to be disappointed with the operations.

I, for one, never believed that China could be a threat to India.

However recent research from Forrester seem to support my view. I guess there are many reasons for that:

  1. Chinese firms are just targeting the Japanese firms and some of the US MNCs for low end work. Given that Japanese are not adept at managing offshoring work, more so in the IT services area, Chinese firms have not been successful in scaling up operations. Moreover, Chinese firms have not managed to inspire confidence and credibility to deliver the IT services, despite their superior physical infrastructure.

  2. Chinese firms lack the necessary management expertise to deliver IT services. Even their technical resources are geared for manufacturing and perhaps design, not for software deployments or consulting.

  3. Chinese firms also lack the necessary intellectual capital to build and manage the processes for the global delivery model.

  4. Even in China salaries have shown an increasing trend, more so amongst people who are bilingual.

  5. The Yuan has also shown an appreciation trend compared to the dollar, and more so compared to the Indian rupee.

The evidence that China can never be a threat is clinching. The top 20 Chinese firms employ close to 15000 professionals, while the top 5 Indian service firms employ more than 300,000 professionals. In 2007-2008 alone, the top 5 Indian firms plan to increase their headcount by another 30%.

Hence despite all the Government initiatives and the superior physical infrastructure, China poses no threat to the Indian IT services industry. Clearly the likes of Accenture and IBM see this trend because while they have been reducing their headcount in US and Europe, they are increasing their headcount in India, not China.

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  1. Subbaraman,
    You make a few interesting points. However, the fundamental premise of your argument is that China is a ‘Threat’? Why do you feel so?

    Most consultants agree that the ‘global pie’ for technology services is large enough to support everyone, so the debate over who beats whom is a moot; right?

    Comment by Mohan Babu — June 6, 2007 @ 9:23 pm | Reply

  2. Hi Mohan:
    Perhaps, I didnt make my point clearly. All the factors that I have listed are things that seem to place China at a disadvantage vis-a-vis India.
    I do not think that China is a threat to India, and it is unlikely to be for the next few years.
    While the size of the pie may be large enough, my research indicates that the pie is just growing at about 5-6% and there is severe pressure on operating margins. In another post on my blog, I mentioned about the margins of IBM global services — the largest services vendor in the world.
    I think gaining and sustaining competitive advantage amongst firms and even countries is critical. And hence who beats whom is definitely important, and I would give that serious thought.

    Comment by Subbaraman Iyer — June 6, 2007 @ 11:55 pm | Reply

  3. Point well taken Subbaraman,
    But seeing the world flatten as we speak, I would caution “Never Underestimate Your Adversary” [assuming Chinese are the “Adversary”]


    Comment by Mohan Babu — June 7, 2007 @ 5:46 am | Reply

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