Crossing the Himalayas: China and India's IT Partnership Is a Force That Won't Be Ignored

“I strongly believe if we join hands together, we will certainly be able to set a new trail in the IT business world.” This was the message from Chinese Premier Wen Jiabao on his last visit to Tata Consultancy Services (TCS), Asia’s largest IT services company, based in India. The premier’s words couldn’t be more true. The two-way trade between China and India reached $13.6B in 2004, up dramatically from $3.0B just four years ago. The IT industry was already playing an important role in the increase in trade between the two countries, and will continue to do so, potentially growing to a market worth $30B as part of the partnering countries’ five-year plan.

The Bottom Line: Working together, China and India, the world’s fastest developing countries, will dramatically speed their penetration of the global IT services markets.

What It Means: China’s software industry didn’t really start until the late 1980s. Like many other industries, it remains highly fragmented, with the top 10 companies holding only 20% of the market share. This compares to India’s top 10, which command 45% of its market. Also consider that only 5 of the 8,000 software service providers in China have more than 2,000 employees. Lessons can be learned from India, with not only a software industry that is double the size of China’s, but with global companies competing heavily around the world, including TCS, Infosys, Satyam, and Wipro.

All of these companies have operations in China now because China has what India needs:

* Talent—More than 100,000 IT engineers graduate from colleges every year in China, and many students come back from U.S. and European assignments with Western software development thinking. This helps Indian companies ease the fierce competition for skilled programmers they are seeing at home.
* A rich market—China is the hottest Foreign Direct Investment (FDI) destination, with numerous global companies present that need IT services. Domestic organizations are also improving their IT infrastructure, a result of business demand and government encouragement.
* Support—Like India, China has established software parks in many cities, with associated policies to support software companies. The Premier’s visit is another important indication.
* Proximity—Indian consulting companies need to be physically closer to existing Western and Asian clients that are selling more products inside China.
* Better programs for the market—The heavily regulated Chinese market requires better customized programs, including the accounting and billing software used by Western companies. India Inc. partnerships with Chinese companies will facilitate this.

India has what China needs

And China wants to boost its own IT industry by learning from the experience of Indian companies. The similarities between China and India—economy, culture, and geography—together with the successful models of India software companies create an extraordinary prospect for the partnership.

Take TCS, for example, which has already derived benefits from the relationship. As the first Indian IT services company in China, TCS has developed a strong presence in Hangzhou, with more than 200 associates forming an integral part of its delivery centre. This is also the first TCS engineering services centre outside India, which is supporting customers from the United States, Europe, and Asia-Pacific with multilanguage ability. This, in turn, reduces the pressure on its internal facilities.

TCS has also been adding consistent value to China’s IT industry. Consider the following:

* Training local professionals in China on software project management, which will help manage teams and deliver large projects from China.
* Delivering software and engineering systems from China
* Collaborating with some of the leading universities in China to carry out joint applied Research and Development (R&D).
* Developing renowned quality process theory, which will be beneficial to Chinese software companies.

All these build up a solid base for collaboration

For Western companies still struggling to compete with low-cost labor in the manufacturing industry, it sounds like a double-outsourcing nightmare. Professionals won’t just look at IBM and Accenture when they search for their next job or business system. But the road for this collaboration is rough. Uncertain factors between China and India and how to maintain stable growth are testing this partnership (see the AMR Research Alert article “Explosive Growth: Can India, Inc. Handle It?”).

Nevertheless, Western service providers should not underestimate the impact of this partnership. In their efforts to reach global goals, all companies in China are facing similar difficulties, such as regional protectionism, the reluctance to support companies in which Intellectual Property (IP) does not stay in China, the disregard for IP in many cases, plus language issues and more. How to handle these will determine who wins.

Conclusion: The partnership between China and India will shape the global IT industry. No one should neglect this inertia. But just like climbing the Himalayas, it is not easy to predict the size of peaks and troughs, nor how long each will last. One point, however, is unquestionable: China plus India is greater than China versus India.