Not a smooth ride

Indian software companies are finding the going tough in China. Nevertheless, it is the best time to finalise strategies for interacting with the Dragon, say industry watchers.

HURDLES in the way - Sampath Kumar G.P.

The flirt with the Dragon has turned out be somewhat of a disappointment for Indian IT firms.

Contrary to initial expectations, the ramp-ups in China for Indian software vendors have suffered setbacks due to client concerns over protection of their intellectual property (IP) rights, non-availability of sufficient trained manpower, language and cultural issues.

Grappling with these issues, China is yet to evolve as a major global offshore and outsourcing destination. Reports indicate Beijing is making all efforts to develop 10 outsourcing base cities by 2010 to transform China into the most favoured outsourcing destination for multinationals.

But, China may take at least five years to emerge as a global offshoring and outsourcing destination to service the US or the UK markets, says Avinash Vashistha, Chairman and CEO of Tholons, a Washington-based Investment Advisory and Management Firm for IT, Business and Knowledge Services Globalisation.

China, because of IP security and other issues, will not be able to provide people for servicing the US and the UK, the traditional markets of India, for the next five years. Aware of these issues, multinational clients are not willing to give work, Vashistha says.

"Add to this, the domestic demand is pretty strong in China, where several multinationals are emerging," says Vashistha.

In high-growth mode

"IT is gaining importance in China, which is in a high-growth mode like India, with a GDP growth of 7-9 per cent. This makes it imperative for Indian IT firms to look at that country seriously," says Prakash Menon, country head (China), NIIT.

Over the past five years, major Indian IT firms, including TCS, Infosys, Wipro, Satyam, NIIT, i-flex solutions, Mphasis, Subex and Zensar, have set up their operations in China. Most of these vendors entered China following their key global customers. As a result, ramp-ups were directly linked to the performance of their global customers in China.

Subsequently, the Indian firms started looking at servicing the Korean and Japanese markets from China because of the similarities in language and cultural issues. Japan is the second largest IT market after the US.

"Further, a Chinese presence will help Indian IT firms to bid for larger global deals," adds Menon.

Recent Indian wins

With the emergence of the Chinese IT market, Indian vendors are looking at tapping it seriously. The recent wins accentuate the belief that China is a big market for Indian IT firms. TCS has signed up a $100-million deal with Bank of China while Infosys announced its first million-dollar win in the recent quarter.

The $100-million win by TCS was a major breakthrough for Indian firms in the Chinese market.

Banking product vendors, such as Infy's Finacle and i-flex, have already customised their product for the Chinese market and have managed to sign up a few clients. Telecom software vendor Subex Azure has also achieved initial success with some three to four wins for its revenue maximisation solution in the past few years.

Piracy concerns

However, piracy has been a major stumbling block for Indian IT firms, which were gung-ho about leveraging China as an offshore base. Infosys, which charted aggressive growth plans for China several years ago, recently said that its ramp-up has not happened on the expected lines as its clients were wary over protection of their IP in that country.

"Our clients are diffident to our proposition of getting serviced from China," says S. Shibulal, head of global delivery at Infosys. "Though the clients are still not yet convinced about China as an ideal location for offshore outsourcing, we are trying to convince them."

Infosys, which started talking about the big Chinese potential since 2002, has managed to add 700 people at its facilities in HangZhou and Shanghai. Despite the sluggish pace of growth, the company is committed to investment plans and add 6,000 people over the next five years, he adds.

Positive moves

Notwithstanding concerns over piracy issues, the Chinese Government seemed to be reassuring the companies worried over their IPRs. "The Government, in the recent past, has come down heavily on those violating IPRs, which itself is reassuring to a certain extent," says Menon.

Moreover, the Chinese IT firms have to drive their IPR issues, says Menon. Earlier, the Chinese industry was unclear whether to collaborate or compete with the Indian IT industry. But with the recent visit by the Chinese President, the confusion seems to be disappearing.

Now is the time

"It is the best time for Indian firms to finalise their strategy for China, say either in the form of joint ventures or strategic partnerships," says Menon.

TCS recently forged a joint venture with three Chinese partners, supported by the National Development and Reforms Commission and Microsoft. The joint venture TCS China, where TCS APAC owns 65 per cent stake, Microsoft 10 per cent and Chinese partners 25 per cent, will focus on providing technology solutions to Banking, financial service and insurance, manufacturing, telecom and government sectors.

The CEO, S. Ramadorai, says the non-availability of sufficient trained manpower has slowed down the company's growth plans. "Sufficient talent is not available at one place.

You have to go looking around for talent in different provinces," he says. TCS currently has some 500 people. With the take-off of TCS' joint venture with Microsoft, Ramadorai feels that his firm would hire some 5,000 people in the next five years.

Prakash Menon admits that the availability of trained manpower with bilingual skill sets is still an issue. "With millions graduating every year, the raw material is available in plenty. But it may take a while before it turns productive." NIIT, which has been operating in China for the past eight years, has been training some 20,000 students a year. The company has signed up with some 23 provinces to train students.

"China, which has made tremendous progress in the physical infrastructure space, is now focussed on developing manpower and it's a matter of time before it emerges as a strong contender for India," he adds.

Menon says the programming skill sets are available in plenty in China. "In fact, Chinese programming skills are better than ours. But the country lacks expertise in the project manager, architect and above levels." Vashistha says that the entire layer of mid-level managers, which is non-existent, has to be developed.

"It's a Catch 22 kind of situation," says Vashistha. "Unless, the mid-layer is developed, work from global clients will not flow in," he says. However, with the ambitious bid by the Chinese Government to encourage 100 multinationals to shift offshore outsourcing services to China, one has to wait-and-watch whether the Dragon will take-off as an outsourcing destination.