India plus China in ICT

By D. Murali and G. Padmanaban

Is it ‘India and China’ or ‘India vs China’? It is the former, says Mr James M. Popkin, co-author of ‘IT and the East’ (www.tatamcgrawhill.com).

There is an increasing recognition, he observes, that India and China possess significantly complimentary skills in most areas of the ICT (information and communication technology) ecosystem.

“For example, China’s overall success in the hardware segment and India’s overall success on the software front, China’s success being driven by high levels of FDI (foreign direct investment) even in the ICT sector, and India’s primarily home-grown investment environment etc.”

Pooling best practices and learnings on what has contributed to the success in each of these areas will provide an order of magnitude greater benefit to both countries, foresees Mr Popkin, interacting with Business Line, over the e-mail.

“The important issue is that this is NOT a ‘zero sum game’. In other words, given the size of the potential global opportunity, India’s gain need not be China’s loss and vice-versa!”

‘IT and the East,’ the Harvard business School Press book, which Mr Popkin co-authored with Partha Iyengar, is about ‘how China and India are altering the future of technology and innovation’.

Excerpts from the interview.

How can India and China work together and move the technology innovation engine to the East?

In ‘IT and the East’, we lay out a Chindia framework which enables the measurement of progress China and India can make in driving innovation. It has two dimensions: geopolitical alignment and depth of relationship.

There are five categories of alignment: People, Politics, Policy, Patterns of trade, Patents and Policing. China and India can use this framework to identify and drive closer levels of relationship across these dimensions.

Do the two countries have to promote mutual trade in services too?

Yes I believe both countries would benefit from promoting each other’s IT services in their own country.

For India, doing business in China brings: 1) access to a large pool of well educated engineers; 2) access to China’s large domestic market; 3) access to North and East Asian markets; and 4) geographical diversity of supply.

India is suffering from a skilled IT labour shortage in its domestic market since many skilled Indian IT workers prefer to work in the export industry. I think this creates an opportunity for Chinese companies to sell IT services and outsourcing to domestic Indian companies.

Here too the skills are VERY complimentary. In China the focus is more on services to the ISV (independent software vendor) community – that is considered ‘sexier’ by the companies as well as individual employees, whereas in India the bigger focus is on delivering services to the end-user enterprises.

There are significant differences in both of these constituencies that need very differing kinds of investments in people, process, and infrastructure that each country can ‘teach’ the other.

In the current scenario what are the strategies that the firms in the West should adopt in doing business with India and China?

We believe there are eight priorities that Western companies need to focus on now. For each of those priorities we have identified a set of actions and competencies that they need to develop. The eight priorities are:

1. Government policy formulation by industry

2. Rural development investment programs

3. Research, design and development

4. Market development

5. Chindia opportunity

6. Resource development

7. Local expertise

8. Cultural understanding

What are the daunting internal and external challenges India and China are facing in their quest to become global IT super powers? And what can be the strategies to overcome these challenges?

We have identified two critical uncertainties for each country in terms of the future of their ICT industries; and in some sense their economies overall. For India the state of the physical infrastructure is a major drain on economic activity and progress.

More specifically for the IT industry is the question of whether India can educate and train enough people to propel IT into being a far larger contributor to overall economic activity.

In China we believe a key issue for its future role in the IT industry is whether it can show itself to be a source of significant technological innovation. The current level of government involvement in the economy creates a dampening effect on innovation.

Have India and China been able to bridge the cultural gap even as the two countries race ahead in IT? Can joint ventures between companies from the West and the East help in this regard?

Many cultural gaps between the people of the two countries still exist, caused perhaps by relatively low levels of tourism. Food remains an issue of course, e.g., it is hard for Indians to find veggie meals in China and the Chinese tire quickly of curry for every meal in India. Joint ventures at the company level have and will continue to show the power of the Chindia model as we demonstrate with case studies in ‘IT and the East’.

India and China have had differing success levels in bridging different ‘cultural gaps’. India has been phenomenally successful in bridging the culture and language gap with the English speaking countries of the world, most notably the US and the UK, and to some extent Australia.

China on the other hand has had notable success in dealing with Japan, Korea and Taiwan (where India, especially in Japan, has had NO success or very limited success!). Again, these are areas where both countries can learn from each other.

Chinese companies are increasingly hiring Indians at senior levels to help them ‘crack’ the English speaking market, while Indian companies are trying to leverage their China presence and Chinese resources to try and better address the Japanese market.

Are alternative locations coming up to threaten the momentum of fresh business to India and China?

Certainly labour arbitrage is not unique to China and India and you see significant development of offshore/nearshore locations in Southeast Asia, South America and Eastern Europe.

There are 53 distinct countries that Gartner is tracking that are all trying to take some piece of the global sourcing pie away from India (primarily) who is the undisputed leader at this point in time.

However, the biggest challenge that most of these countries face is the issue of population and the size of the graduate pool entering the work force. India and China are the only two countries that have this basic ingredient to address large-scale resource requirements.

Ireland, which was an offshore ‘star’ earlier is a classic example, where its success as a low cost location dwindled because of population issues, and today it is no longer talked of as an ‘offshore’ destination.

Can the infringement of intellectual property right (IPR) crop up as a major roadblock?

Yes IPR is an issue in both countries. India still lags somewhat in the development of a legal structure for IPR protection. China has a more developed legal system of protection but enforcement remains spotty. This is a major concern of western companies doing business in both countries.

Do you find the cost arbitrage losing its edge as a trigger for offshoring, with costs rising in these two countries?

Outsourcing based on cost alone has not always paid off strategically for many companies. While cost is an important factor, other considerations come into the success equation for companies thinking properly about their multi-sourcing strategy. Rising costs in both countries will force buyers and sellers to develop more sophisticated value propositions.

Those that cannot identify or articulate a long term value proposition beyond cost arbitrage should really re-think their global sourcing strategy or not view it as a strategic but more as a tactical time-bound initiative and make decisions accordingly.

Should India and China also focus on domestic IT business as a strategy?

Certainly each economy will begin to develop outsourcing demand if current rates of economic growth continue over the next 5-10 years. I think today’s Indian domestic economy is particularly ready for outsourcing because of the skilled IT labour shortage I mentioned earlier.

Further, to develop and propose higher end capabilities in the global market, it is imperative that these capabilities and skills be honed in the domestic market as the opportunities arise – and they definitely are today in India for sure, and will shortly appear in China as well – since it is more difficult to make a pitch for these services globally if a vendor has no track record in doing that kind of work.

Why would a global client trust that a vendor can do some really high competence work in a particular industry (e.g. telecom) if that vendor has lost to their competition (primarily global vendors) for exactly that kind of work in the domestic market. It will hurt the credibility of the local vendors in the global markets if they do not take up some of these domestic projects as well.

Is there anything that the developed countries should be doing, but they aren’t, to reverse the offshoring trend?

I refer again to the eight priorities we lay out for companies building their India, China and Chindian strategies. Developed countries should consider these priorities and develop policies and programs as appropriate to take advantage of these opportunities.

There is no ‘reversing’ the offshoring trend – it will only get refined (e.g. morph more to global sourcing) and fine tuned as time goes on. Eighteen months ago we said that ‘offshore sourcing has become mainstream’, which meant that for many enterprises – and an INCREASING number of enterprises – offshore / global sourcing was becoming the default way they addressed their sourcing needs.

It will be difficult to ‘turn the clock back’ on this trend. We’ll see some realignment in terms of where the work gets done, the ‘sweet spot’ of each of the countries on the supply side may evolve or change, some of the work may go back to the developed countries (work which should probably have never left there in the first place) etc., but there will be no mass scale reversal.

Bio:

Mr James (Jamie) M. Popkin is a group vice president and Research Fellow in Gartner Research responsible for the Business Intelligence and Information Management research group. Prior to this position, he was responsible for Gartner research content strategy in China, India and Korea. He has 15 years of experience at Gartner, and 18 years in the IT industry.

Prior to joining Gartner, Mr Popkin was with the Deloitte & Touche LLP IT practice, managing a variety of technology strategy and development engagements. Previously, he served as a board member of the Association for Image and Information Management (AIIM) International Board of Directors.

An economics graduate from Connecticut College, Mr Popkin holds an M.A. in Public Policy from Kennedy School of Government at Harvard University, and a Certificate of Management from Darden School of Business at the University of Virginia.

Named one of the ‘50 Most Influential People’ by ImagingWorld (IW) Magazine, Mr Popkin is Senior Advisor to the China Business Continuity Management Association.

In Offshore Outsourcing, China's A Different Ball Game

China is like no other country on the offshore outsourcing landscape.

It has a rapidly growing base of low-cost IT pros, but other dynamics dominate the picture. With economic growth of more than 11% a year, China's poised to become the world's third-largest economy, and many CIOs think they need a presence in the country. Call it the "just gotta be in China" syndrome. Yet the last decade of offshoring has taught them the risks--like not getting the right talent for projects--of jumping into a hot market.

British telecom provider BT Wholesale has established a small IT center in China and a relationship with an IT services provider there. "Our philosophy is not to study it to death, but to get in there with a relatively modest approach and see what results we can deliver," says CIO Clive Selley. "It's a massively important, vast population with a fast-growing economy, and we need to be able to understand the marketplace."

Tata Consultancy Services plans to hire slowly in China so it can focus on keeping those it recruits. "We would like to go from the 1,000 people we have in China now to 20,000 or 30,000, but in a way that the attrition rate is low," says N. Chandrasekaran, chief operating officer at TCS.

Companies specializing in China-based IT outsourcing include ChinaSoft, DarwinSuzsoft, NewSoft, Symbio, and WorkSoft. In August, private equity firm Francisco Partners invested $48 million in DarwinSuzsoft, a U.S. company that employs 800 Chinese engineers, and Sierra Atlantic, a U.S. company with 1,100 developers in Hyderabad, India, acquired ArrAy, which has 200 technologists in Guangzhou and Shanghai. Challenges include a much lower rate of English competency than India has and looming risks of inflation from an overheated economy.

Five years ago, would-be customers focused on the security of their data and intellectual property in China, says Dean Stevens, general manager at Symbio, which has offices in China and Maryland. He rarely hears that concern today; now the focus is on how China will avoid India's dilemma. "The No. 1 concern I hear is, 'Can you get the engineers and resources I need to get my job done, and what's your retention like?'" Stevens says. "They'll often say, 'The problem I ran into in India was availability of resources and attrition, and don't give me that same problem.'"

The Father Of Indian Outsourcing

Mumbai, India -

In the days leading up to India's '90s outsourcing boom, one of its pioneers remembers starting presentations to prospective American clients by telling them, "You probably think I travel to the office on a bullock cart."

At a time when India is firmly established on the global map, that line seems outdated, slightly offensive even. But Raman Roy, CEO of outsourcing firm Quatrro, says he often had to pinpoint India on a world map to global clients, who'd heard little of its business potential before the outsourcing industry changed the country's global standing.

The numbers tell the story. The software and services sector employs 1.6 million people, is hungrily looking for more to join the ranks, saw growth rates of above 30% for the last five years and exported products worth about $24 billion last year, a fifth of India's total exports.

Roy, who set up outsourcing centers in India for both American Express (nyse: AXP - news - people ) and General Electric (nyse: GE - news - people ) in the late 1990s, says the robust growth of software and services firms has brought about tremendous changes since. "People now know about India; the industry has gained acceptability," says 49-year-old Roy, who also founded the outsourcing firm Spectramind Services that was acquired by Wipro (nyse: WIT - news - people ) in 2002.

In a conversation with Forbes.com, Roy, who's often called the "father of the Indian BPO [business process outsourcing industry]" talks about the growth of his business baby, the biggest challenge to software services firms and how an industry has changed the way Indians live.

Forbes.com: You've been in this industry since its inception. What's changed?

Roy: There's an acceptance of India globally now. In the late '90s my favorite line at the beginning of a presentation was, "You probably think I come to the office on a bullock cart." People now know about India. There was a time when I sold it by pointing out the country on a world map, showing prospective clients pictures of popular historical monuments.

In the U.S., we were considered dangerous when software and services was a 300,000-strong industry because people saw what a potential threat we could be. Some of those fears have materialized in terms of the growth of Indian firms. But with our companies rapidly expanding abroad, now there's also a realization that outsourcing doesn't hurt the economy.

Indian businesses are far more self-confident today, so there's the ability to experiment and move up the value chain. And they're willing to make large investments globally.

What's different on the domestic front?

When I was setting up the first call center for American Express and went to the government to take bandwidth for operating it, policymakers thought I was into espionage because no one had ever asked for that much bandwidth earlier.

When it came to call centers, we used dedicated lines we bought from service providers. And to route calls from abroad to India, we needed to put international links into public service phone numbers. That was illegal in India. Convincing the government that changing regulations like that one would not hurt its revenues took a lot of running around.

For the same call center, I went to meet bureaucrats after they sat on our application for months. A government official said he could approve a call center, but could not approve a center to handle "incoming and outgoing calls." So we had to print definitions of a call center from the Internet and take them to him to show him that's what a call center did.

There were laws that forbade employing women in jobs after 10 p.m. In each state that we planned on setting up call centers in, we had to persuade its government to change that law.

After the initial hiccups, the government seems to have left your sector alone, and the backlash abroad is a tale of the past. What are the industry's challenges now?

The biggest challenge is the lack of talented manpower. High attrition rates [an average of 12 % to 15%] are the first signs of what will become a big issue. The top five companies spend a combined $1 billion per annum just on new hire training. Unless we upgrade our educational and training systems, we won’t be able to meet the opportunities the industry is creating.

The lack of proper infrastructure is also a problem that we're facing across industries.

The U.S. still accounts for an overwhelming portion of the revenues of India's top outsourcers. How much is that likely to change in the next couple of years?

The U.S. accounts for 75% to 80% of revenues, but if you look at global statistics, about 56% of outsourcing comes from that country. So it is the largest market. Though Indian firms are now seeing plenty of opportunities in Europe as they shift toward services of a higher order.

The first phase was just arbitrage and substitution. But increasingly countries like China are turning to Indian outsourcers because they can't find people domestically. The impact beyond the U.S. is growing as firms move to meet different outsourcing needs--in industries like health care, law and education. Growth depends on our ability to scale up effectively.

Indian software firms are not really known for innovation. Has it suffered because of the focus on services? Is there a move to change that now?

We're still evolving, but as Indian firms move up the services ladder innovation is becoming a requirement. Few companies have a nascent culture of innovation. Is the industry realizing that? Yes. Has it become a trend? No yet, but we're in the early stages of it.

You've started outsourcing units from scratch four times already, and all of them have been successes. What did you do right?

We listened to customers, and that's easy to talk about, but tough to do. We kept changing our models based on exactly what our customers wanted. In the early stages, getting the government to give us a hearing and change laws so we could operate was a big challenge, but now the shoe is on the other foot. If we raise issues, policymakers listen.

We also focused on our employees. In the initial period of call centers, mothers, grandmothers, uncles, aunts would come to meet me looking for assurances that it was OK for their daughters to leave the house at night to come to work. They were worried about what the neighbors would think. I met all these people and talked their concerns through. Today, there are too many young women working to worry about neighbors any longer.

There was no spending power among the college graduates earlier [software firms hire about 70% of their employees straight out of college]. Now when you walk into malls these are the people spending all the money. Tech industry employees don't utilize their money for conspicuous consumption, BPO employees do. I'm not siding with either side, but we've made a fundamental change in spending habits, consumption, the way these people live.

On the global front, where is India's competition coming from?

A few years ago, countries like China, Philippines and Mexico were among the few on the outsourcing radar. Today, there are over a dozen attractive destinations--from Sri Lanka to Malaysia to a host of Eastern European nations. But I don't think there's a big threat, because the outsourcing pie is large and only growing.

Right now, more than half of what is outsourced comes to India. When outsourcing is spoken about, India is spoken about in the same breath. The big challenge is for us to continue to evolve as customers' needs change. We need to now focus on innovation. But the future's looking bright. It's an exciting time to be an Indian in India.

Checklist: Outsourcing in China

Finding a company to outsource with in China is an important undertaking. Our expert offers this checklist of the key factors you need to consider when selecting a partner.

By David Dan, D Square Transformation Consulting -- Electronic Business, 5/29/2007

China is a hot choice for hardware outsourcing, as we've seen three major industrial clusters build a sufficient supply of engineering talent and labor capacity, which are required for the growth of this industry.

Although we have seen more labor-intensive projects move to western provinces, in general China is still quite competitive in this market segment.

Below I have highlighted some of the factors you need to consider when going through the process of evaluating whether or not you should establish an outsourcing program in China.

1. What are your business objectives?

When you are evaluating an outsourcing project, you have to clearly define what your business objectives are. Is this going to be 100% exported from China, or 100% domestic sales inside China? Perhaps your objectives are a mixture of the two. Your objectives matter when you select service providers.

2. What is the service capability you are looking for from your service providers?

Are you looking for a decrease in manufacturing costs, or do you expect your outsourcing service provider to provide more value-add to improve your competitiveness in the marketplace? Consider the following:

• They may be able to provide ODM design for your none-core or entry-level product-line design.
• They will be able to work with your engineers to review the BOM (bill of materials) and replace with locally sourced parts at lower material and supply-chain costs under your agreement and approval.
• They will be able to provide "lean manufacturing capability" to improve productivity.
• VMI (vendor managed inventory) is another key area of cost saving and improves flexibility.

You do have choices based on the model of cooperation you expect and how far you like to "instruct" instead of "cooperate" with your new outsourcing partners and take advantage of their capabilities.

3. What are the categories of companies in China?

There are several categories of companies you can choose from in China:

• WOFE (Whole owned by foreign enterprise): These are primarily for export. The majority of CMs (contract manufacturers) or ESMs (electronic service manufacturer) fall into this category.
• Taiwan/Hong Kong/Singapore companies: This category of company has engineering capabilities (ODM) plus CM (contract manufacturing) capabilities. Again, they are primarily export-oriented.
• Registered local Chinese companies targeting domestic-market sales (includes joint ventures).

4. Other factors to consider

Size or scale of the company: The right size match is critical for outsourcing success. You should never deal with a company that is so big that you end up with no attention from its executives. On the other hand, you don't want to partner with a company that is too small for you to grow. Flexibility and growth potential should be among your outsourcing objectives beyond cost.

Culture and management fit: You may not like to deal with a very traditional and non-Western management. I have seen US companies engage with a Chinese company where there aren't any English-speaking employees and they count on interpreters to communicate. This may not be the best situation for you to get involved with.

Compatibility, both technically and with experience levels:Make sure the partner can understand what you communicate and can do a good job of implementing your instructions before asking for innovation on technology and process.

Location:This is becoming even more critical for business dynamics and flexibility. There are three major clusters in China with focused industries, and your outsourcing providers should be located in the right cluster to take the advantage of logistics and supply-chain effectiveness. You will find many VMI hubs near these clusters.

Referral, record, and resume: Check with your candidates' existing customers and review the candidate's engineering and project manager's capabilities before you dive into any audit process. Due diligence in this situation is critical and is a key component of your future outsourcing success, especially in China.

Software park targets Japanese outsourcing

SHENZHEN: Hitachi Systems & Services (HSS) signed an agreement with Shenzhen Software Park yesterday to train outsourcing managers targeting the booming Japanese market.

The move will allow the IT-driven southern city to take a slice of the growing software outsourcing business from Japan, the world's second-largest technology market, said Zeng Guozhong, director of Shenzhen Software Park's management office. The park is a Shenzhen government-backed body for the development of the software industry.

The city used to concentrate its efforts on attracting outsourcing business from American and European clients.

The new program with HSS, an arm of Hitachi Group that focuses on providing system integration services, will train 300 professionals by the end of this year, Zeng said.

"HSS has developed a comprehensive and practical training program for software outsourcing, which is not only suitable for the company itself but for other Japanese companies," he noted.

Besides professional and project management courses and case studies, the five-month training program will include the study of the Japanese language, commercial cooperation and negotiation skills in Japanese community.

"These arrangement will help project managers better understand the requirements of the Japanese buyers and facilitate a more efficient cooperation and communication with Japanese technicians," said Cho Jakuko, IT talented person service center manager of HSS's investment in China.

Shinji Muramoto, executive officer of HSS, said the software development business is growing in Japan but the number of professionals is decreasing.

"It's estimated that the number of IT professionals totaled 600,000 seven years ago but has shrunk to about 550,000. Increased business has been outsourced to China, India, South Korea and Vietnam," Muramoto said.

His company has already cooperated with three other Chinese cities - Dalian and Shenyang in Northeast China's Liaoning Province and Jinan in East China's Shandong Province - in training outsourcing professionals.

China is already Japan's biggest software outsourcing base, taking in more than 60 percent of Japan's outsourced software trade in 2006, Mine Shentaro, of the Japan External Trade Organization based in Dalian, was quoted as saying.

Source: China Daily