India-China IT gap

If there is one long-term threat under which the otherwise confident and buoyant Indian software industry lives, it is the fear of being overtaken by China.

Industry leaders periodically air this concern so that the right strategy keeps evolving and everyone remains on his toes.

The Indian leaders' concerns will now acquire an edge from the Global Outsourcing Report, released by two consultancies, Geneva-based Horasis and US-based Going Global Ventures.

The study says that things are just fine for India right now (it is the global leader in attracting outsourced IT work), but the 10-year perspective is different: China, which is at No 2, will exchange places with India.

The study bases its assessment of the current position on costs and risk (geopolitical, human capital, IT infrastructure and competency, matters legal and cultural), but the position a decade ahead will depend on factors like GDP and population growth, skills quality, and the views of entrepreneurs and experts.

Going by the current Indian performance and confidence, the India-China gap, very much in favour of the latter in many areas, is likely to narrow over time.

This is true of GDP and population growth rates, as also the quality of human and physical infrastructure. Broadly speaking, whoever is the laggard in a particular sector is likely to catch up somewhat over time.

In the case of IT outsourcing, with India now in the lead, it is safe to work on the assumption that China will not remain so far behind.

This is all the more likely because IT is very high-profile and the Chinese political process is remarkably adept in devising and executing a policy of rapidly catching up once a decision is taken to do so.

But much as China will want to catch up on IT outsourcing, the current preponderant professional opinion is that it will not be easy to do so in the near future.

Thus, the latest study is out of line with received wisdom. A recent India-China comparison by The Economist picks out IT outsourcing as about the only area in which India is, and will remain, ahead.

This view is underlined by another recent study by consulting firm McKinsey. It finds the Chinese IT services industry fragmented and lacking an appropriate vision.

Outsourcing is all about comfort levels, and size matters.

Large firms which account for global volumes will only partner large outsourcers with global capabilities. The top 10 Indian software firms account for 45 per cent of the business; the comparable Chinese figure is 20 per cent.

There are 8,000 software firms in China; in India there are fewer than 3,000. This, when the Chinese software industry is about half the size of India's.

The Indian industry is also a clear quality leader. Perhaps the greatest Indian asset is its top software firms, which are already respected global brands.

So, in terms of strategy, the Indian industry has just about got it right and there is no need to fix what is not broken. All that the government needs to do is keep improving India's technical schools and make its cities more livable. In both, the IT leaders can play a proactive role.