Indias IT vs China, Morocco, Hungry and Pakistan

(To be updated periodically)

India’s IT industry is facing its most serious threat from the Chinese–what’s called the Walmart effect. China is wholesaling Call Centers in practices which would remind the US steel industry of “dumping”. The much touted Indian software industry was essentially call centers dealing with large corporations. India has not produced any software labels or created any major value added software programs.

The Indian software industry is about $50 Billion and employs about 6 million Indians. The global $560 Billion software market is open to a lot of expansion, and it seems that China is capturing most of the new growth as well as the market share. Several reorts out of the UK and the US point to a growing trend where companies now prefer China to India as a software destination.

The operating revenue of China software industry reached RMB378.499 (approx $45 billion )in the first three quarters of 2007, up 23.6 percent compared to the same period last year and being higher than the growth rate of 20.1 percent for electronic information industry. Research and Markets

In 2008 the Chinese market translates to more than $55 Billion comparable to the Indian numbers. However the growth rate of the Chinese market is growing exponentially while the sluggishness in the US market is impacting the Indian software industry both in revenues and in market share. So the Indian software industry is hit by a double whammy. First the US economy is slowing down the growth and renvenue. Secondly the high rates are pricing the Indians out of he market.

Large US corporations have already been pouring large projects into China for the past few years. Companies like Google, Intel or Microsoft are making their China centers even larger than the India ones.

The main difference with India is in the market approach. No Chinese outsourcing company can go compete for the large deals in the USA or Europe. The Chinese leaders certainly knew the “Art of War”, and instead of fighting a lost battle, they created the conditions to attract foreign business to China, and they have been quite successful at doing that.

China aims at becoming the world favorite destination for building software, like it has become the manufacturing center of this planet. India surfed this wave a few years ago, and it yielded to the emergence of a few world-class giants (TCS, Infosys, HCL, etc.). The challenge of these giants is now to compete with their US and European counterparts

Indian Software Industry

…its contribution to the country’s GDP will increase from 1.4 per cent (2001) to about 7 per cent (2008). More importantly, it is expected to contribute nearly 20 per cent of incremental GDP growth between 2001 and 2008. The industry, which employed 0.8 million people in 2001, is expected to employ over 2 million people directly and create direct employment opportunities for at least an additional 2 million people by 2008 (Nasscom, 2002). The industry’s contribution to India’s total exports has been rising (Tables 1 and 2).

The global software market is estimated to be about US$550 billion (2002), and has been growing at about 15 per cent per annum (five-year, trend rate) (ESC Data, 2003). India’s share in this market is 1.5 per cent (2000) and is estimated to rise to less than 5 per cent (2008). This may look good in comparison with India’s overall share in the world trade, which is less than 1 per cent. Even countries such as Ireland and Israel have exports of about US$6 billion and US$3 billion. Sources and references listed below

There is an overwhelming of evidence that the Indian software industry that effects about 6 million people is on the decline.

Diversifying the services beyond the American market would help the industry earn total revenue of US$64 billion (euro53 billion) from April 2007 to March 2008, said Som Mittal, president of the National Association of Software and Services Companies, or NASSCOM, while releasing the study.

NASSCOM is the trade body of technology companies operating in India

The Indian workforce is being priced out of the market by the Chinese, Moroccans, Hungarians and the Pakistanis. Pakistan software industry is expected to reach $11 Billion mark.

China has proven that it can build credible and successful businesses in new segments very rapidly and in every parameter, ….. China scores higher than India. A Times

Some analysts are predicting a dark future for Indian IT outsourcing.

The reasons commonly advanced are:

A depreciating dollar versus an appreciating Indian Rupee with no sign of recovery for the US dollar

India, the current industry leader is suffering from skyrocketing attrition rates and salary increases. Tier-1 companies which already have established a significant presence in countries with cheaper labor rates like China or Eastern Europe can mitigate these risks; however the bulk of Indian providers cannot afford to go global and are left with little options; a situation that negatively impact the quality of their deliveries.

And these same analysts to conclude that with overall cost savings under the 20%, and a mediocre quality level, the goods days of outsourcing are over.

This reasoning might apply to India as a destination, but definitely not to the industry. The demand keeps growing in the USA, but ot new destinations, most to the advantage of China.

Outsourcing is not to fade away in the USA any soon:

The tier-1 Indian companies are becoming global players; their cash situation (Infosys generates over $ 1B in profit each quarter!) associated to the favorable exchange rate between the rupee and the dollar give them a significant purchasing power, which they are eager to use. By becoming truly global players, they have the capability to adjust their offerings to every single market’s conditions

The tier-2 and tier-3 Indian companies have lost their competitive edge, and do not have the breadth to go global. The future I can envision for them is to become either very specialized or privileged subcontractors of tier-1 Indian companies. I am sure that Indian leaders would prefer to tap into a domestic pool of talents, even if no longer at the best quality/price ratio

The client base of the tier-2 Indian companies has started to move to other destinations, and China is leading the pack by far. Other booming destinations include Eastern Europe, Latin America, and Vietnam. These countries offer overall savings that are still over the 50%

That said, prices in China and the others countries are also increasing rapidly. These newcomers must create a sustainable model, or they will likely face a situation similar to India’s.

China for instance can certainly take advantage of the vast discrepancies that exist between its provinces to balance the prices in Beijing or Shanghai with the more affordable ones available in cities like Chengdu or Hangzhou, a luxury that many other destinations cannot afford, either per the small size of the country or per the poor country’s overall infrastructure.

Unfortunately, there is another factor, and that is the decline of the education level in the USA. The country does not only produce enough engineers, but more tragically the overall education level is decreasing rapidly to say the least.

Each party involved is faced with a major challenge:

India is faced with a profound reorganization of its IT outsourcing industry, both a flagship industry and a major source of revenue for India

China is yet to create its own unique outsourcing model to accommodate the growth of its tier-2 providers. Since the Chinese industry is still very fragmented, China has no heavy-weight leader, and therefore this new model should be aimed primarily at tier-2 and tier-3 companies

The USA must rethink their educational system entirely, a long haul and very complex task.

IT outsourcing will remain a growing industry in the coming years, and certainly for as long as the country does not produce enough engineers to cover its own needs.

US large companies are likely to continue using the services of tier-1 leaders, that include the Indian ones

US smaller size companies are likely to continue to massively redirect their sourcing to China and to a minor extent Vietnam or other emerging destinations.

Morocco, Hungary, China hot new BPO Meccas Press Trust Of India

Published on Wed, Mar 05, 2008 at 16:27, Updated at Wed, Mar 05, 2008 in Business section IBN Live

London: India’s dominance as a low-cost outsourcing destination seems to be on the decline, with countries like China, Morocco and Hungary fast emerging as the preferred choices by IT services providers, a recent study says.

Focused on UK’s top IT service providers, a study by Pierre Audoin Consultants (PAC) showed that China, Morocco and Hungary are the new locations of choice to set up offshore sourcing centres.

 Pierre Audoin Consultants is a European market research and strategic consulting firm for Software and IT Services Industry (SITSI).

According to the study, since the beginning of January 2007, UK’s 20 largest IT services suppliers have opened 21 new global delivery centres. However, of these only two are were located in India. Four such centres were set up in China, while Eastern Europe and Morocco had three each, the study added.

The 20 largest IT services vendors in the UK are based on rankings in PACs annual SITSI report. These include EDS, IBM, Fujitsu, Capgemini, Capita, Accenture, CSC, HP, BT Global Services and LogicaCMG.

The two new facilities launched in India were both outside the traditional hot spots of Bangalore and Mumbai, IBMs new centre has been set up in Noida, while Tata Consultancy Services’ expansion site has come up at Hyderabad, it said.