Crouched for the kill

India's infotech tigers are preparing to gnaw a large chunk off China's mouthwatering software services market

Early this month, Infosys Technologies board member Srinath Batni flew to China to kick off one of the company's most significant new initiatives this year.

His mission: to sign letters of intent with Shanghai Zhangjiang Co. Ltd and the administrative commission of the Hangzhou Hi-Tech Development Industry Zone to set up two development centres.

The sprawling new facilities "" expected to cost $65 million over the next five years "" will ramp up the number of software engineers employed by Infy's Chinese subsidiary from the current 250 to 6,000.

"China will be the second largest software hub for us, after India. Our aim is to recreate the same global delivery model in China that we have perfected in India," says Batni.

Bangalore-based Infosys is not the only Indian infotech tiger crouched for the kill. Having stalked the elusive "" and often frustrating "" Chinese outsourcing dragon for the past four years, an entire pride of Indian software services and solutions providers is now hoping to gnaw a large chunk off China's mouthwatering market.

From a mere $2 billion in offshore revenues this year (compared to India's $17 billion), China is expected to pull in $27 billion from IT services (including call centres and back-office work) by 2007, according to Gartner, which predicts Indian companies will carve out 40 per cent of that figure.

Dual Strategy

China is being seen not just as an offshoring hub. Its domestic market is growing, too. Chinese companies will spend over $25 billion on information technology this year, and the market is growing at a rapid 30 per cent annually.

According to research house IDC, $9.4 billion will be spent on technology services alone in 2006, up from $3.74 billion in 2002. Little wonder Indian companies are hoping to use their Chinese operations to gain a domestic foothold.

Take Mumbai-based Tata Consultancy Services (TCS). The ink has barely dried on the agreement signed last month between TCS, Redmond (Wa.)-based Microsoft and a clutch of state-owned Chinese partners to set up a joint venture services company by early next year.

To be located in Beijing's Zhongguancun Software Park, the new facility - in which TCS has a majority stake - will employ 1,000 engineers. That's four times the existing strength at the infotech major's three-year-old Global Delivery Centre at Hangzhou and Shanghai.

"Our aim is to create a role model for the Chinese IT industry and it will serve both the global as well as the Chinese market," says Girija Pande, head of Asia-Pacific at TCS, which was awarded the prestigious project in the face of stiff competition by the Chinese government on the advice of IT consulting firm Gartner.

Hyderabad-based Satyam Computer Services has plans that are just as ambitious. Satyam has around 300 engineers, mostly Chinese, at its facilities in Shanghai and Dalian. With plans to set up a third development centre - probably at a university town in western China - the company hopes to multiply its workforce to 3,000 by 2007 and 5,000 by 2010.

Says Sailesh Shah, senior vice-president and director at Satyam : "The Chinese market is three to four times bigger than India. You have to be an early bird. Also, it is part of our company's policy to globalise in non-English-speaking markets".

Software education major NIIT, which has had a presence in China for almost a decade now, is using a different model to scale up: it is tying up with local universities and setting up education centres on their campuses.

The Delhi-based company has already set up 25 such centres across China. Says NIIT chairman Rajendra Pawar: "Today, 50% of our business is from centres in universities and another 50% from centres which we run directly."

Elusive Quarry

Others are more cautious. Bangalore-based Wipro Technologies, for instance, is sticking to the needs of its global customers who have a presence in China. It has only a small development centre consisting of 25 engineers, which could go up to 150.

Says Sudip Banerjee, president of Wipro's enterprise solutions division: "China is a big market. We have a skeletal presence and will see how it develops before we make more investments."

Such caution is not unwarranted. Indian software companies have battled against language, culture and local regulations ever since they established a token presence in mainland China four years ago largely to service multinational clients or specific offshore requirements. Together, they employ less than 1,000 people and the contribution of Chinese subsidiaries to overall revenues is still minuscule.

That is now set to change very dramatically. One of the biggest advantages that Indian companies have is, of course, scale. China's IT services market is highly fragmented, with half the 6,000 domestic firms employing less than 50 people. Indian subsidiaries and joint ventures, such as the one signed by TCS, hope to showcase the cost advantages of large-scale operations by creating additional hubs outside India.

"We partner with Chinese companies and bring in global solution expertise to modernise their business so that they become global players," says Pande.

There's another lure. Universities in the people's republic now churn out 350,000 software engineers every year, significantly higher than the 250,000 from Indian campuses. That's a large pool of talent which no IT services company hoping for a global presence can ignore.

According to Batni, it is now Infosys strategy to become a global company by setting up hubs in countries where the relevant skill sets are available.

Leveraging that burgeoning skill base, companies like Infosys are hoping to use their Chinese operations to service Japanese and Korean clients who have a cultural affinity with that country.

"Japanese companies are offshoring low level work in China. We provide high level IT services work by convincing them that we will offer them the same quality as in India," says Batni.

Costly Campaign

But that quality doesn't come cheap. Pande says that while entry-level Chinese programmers ($145 a month, inclusive of social security) are paid around the same as in India ($135 a month), project managers and senior staff are at least 10-12 per cent more expensive.

Wipro's experience is similar: while programmers with three years experience can be hired at salaries which are 10 per cent lower than their Indian counterparts, supervisory staff is at least 25 per cent costlier. "You don't go to China because it's cheaper. That is a myth," says Batni.

Cost is not the only problem. While entry-level programmers may be increasingly more abundant in China, engineers with project management skills, domain knowledge expertise, and professionals with more than five years experience are not easily available.

Associates with bilingual skills "" Chinese and English "" also command a premium. Attrition rates are much higher than in India as well. Says Banerjee: "Most Chinese IT professionals work for two or three years and then decide to set up shop by taking away clients."

Finding out about local entrepreneurial instincts the hard way is not the only lesson that Indian companies have had to learn. For instance, software services used to come bundled with hardware in China. So, most IT services were delivered by hardware vendors or resellers.

Pande says that Chinese companies are not used to paying for IT services separately. It is a difference which they had to understand before approaching domestic clients.

The communist giant also has a complicated legal structure, problems of repatriation, wide variations in policy and law in the provinces, and opaque infrastructure pricing (two units in the same software park might be charged two completely different rents for the same space).

Infy, for instance, had to wait over two years to enter China "" its initial plan to set up a branch office was rejected. Finally, it decided to set up a fully-owned venture. With its newfound experience, Infosys now believes it is best to go it alone in China, even though it has been offered a joint venture with the government.

"We think a collaboration will not work as they are contradictory interests: one partner will want to reduce costs while we would like to maximise profits," says Batni.

China's record on protecting intellectual property rights (IPRs) can also be a major stumbling block for companies looking to set up offshore hubs there.

Says Wipro's Banerjee: "Many of our customers who have offshored work to us in India would be hesitant to take it to China because of IPR protection. It is an impediment as the laws are still not well developed."

Not everyone agrees. Batni argues that the Chinese government is making an extra effort to ensure that IPRs are protected.

As a result of these drawbacks and higher expenses - some of which, though, are offset by lower infrastructural costs such as telecommunications - several major Indian software companies are adopting a wait-and-watch attitude regarding China for the moment. One of them is Mumbai-based Patni Computer Systems.

"Virtually none of the Indian companies have been able to scale up in China. That's because IT professionals are not available there and it makes no sense to move them from India," says Patni vice-president Deepak Khosla.

He may have a point. But companies like Infosys, Satyam, TCS and NIIT are obviously banking on the prospect of rapid growth "" both in offshore work and in China's domestic needs"" and are making large investments in developing that country as a new hub. Clearly, these tigers don't expect their long-awaited quarry to be hidden much longer.

FIVE TIPS FOR INDIAN TIGERS

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• China isn't cheap. Experienced engineers are hard to find and can be up to 25% more expensive than in India. Bilingual professionals command a premium.
  
  
• Attrition rates are high. Chinese software professionals often turn entrepreneurs after a couple of years, stealing valuable clients.
  
  
• Chinese domestic companies are used to getting software services bundled with hardware. They do not spend separately for these services.
  
• You could get bogged down by a complicated legal structure, problems of repatriation, varied laws in different provinces, and opaque infrastructure pricing.
  
  
• Many software companies are still wary of China's track record of intellectual property rights protection, although Beijing is cracking down on offenders with tougher laws.

SATYAM COMPUTERS

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PLANS: To increase the number of development centres in China from two to three

HEADCOUNT: 300 to 5,000 in five years.

STRATEGY: To gain first mover advantage in non-English-speaking markets.

INFOSYS

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PLANS: Investments of $65 million on two new software development centres over five years

HEADCOUNT: 250 to 6,000 in five years

STRATEGY: Go it alone. Build a global delivery model equal to the one in India.

TCS

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PLANS: To set up another IT services facility as a JV with Microsoft and Chinese companies

HEADCOUNT: 250 to 1,250 by early next year

STRATEGY: Create a role model for the Chinese IT industry to serve both global and Chinese markets

NIIT

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PLANS: To tie up up with local universities and set up education centres on their campuses

HEADCOUNT: Currently around 700 (including franchisees)

STRATEGY: Growth through local universities as well as franchisees