Can China catch India without a Y2K?

Can China be as big as India in the IT offshore services space without a Y2K moment?

Can China be as big as India in the IT offshore services space without a Y2K moment?

China is currently the second biggest source of offshore IT services, but it is dwarfed by India.

Unless there is another event on the scale of Y2K, China will have to build organically on its cost advantage over India to close the gap.

Y2K, otherwise known as the Millennium Bug, was credited with enabling the meteoric rise of Indian software companies such as TCS, Wipro, and Infosys. Their software skills and relatively low cost were attractive to western businesses attempting to prevent the expected problems that Y2K would bring.

Although many of these Indian firms had been around for a while, it is at this time that they were introduced to the world's biggest companies, says Ashok Soota, who was the president of Wipro in the 80s and to late 90s, and is now chairman of Indian supplier MindTree.

How India got started

But there were many other IT landmarks that allowed Indian companies to get to where they are today.

Soota says that before 1994 Western IT companies largely ignored Indian companies because they were seen as mainframe maintenance providers only. Then, he says, client/server arrived and the Indian companies quickly got involved. The internet removed the handicap of distance and allowed small companies, without dedicated pipes, to connect to customers all over the world.

China, which could be considered the logical alternative to India, with a massive skills pool and relatively low cost, will have to build the hard way. With no Y2K of its own it is targeting organic growth.

In 2008 IDC predicted that offshoring services in China would increase 25% every year until 2013 when it will be worth $6.8bn (£4.8bn).

China must close the gap

Nigel Grieve, UK director at Bleum, which provides software development services from China, says that Chinese companies will have to close the gap on India gradually. "We need another Y2K-type of event but we are unlikely to get it. But strong organic growth with the resources we have is possible."

"India will 'top out' and people that would normally go to India will come to China."

But it is not just the absence of a global technology crisis that could hold China back. There are, for example, fears about the security of intellectual property, and worries that English language skills are lacking.

Mark Lewis, partner and head of outsourcing at law firm Berwin Leighton Paisner, says these are stumbling blocks for China's offshore services industry. "China is developing laws to protect IP but does not have them yet. It is also increasing its English language skills, but is short at the moment."

He says China does not offer business process outsourcing services extensively, which has been one of the sectors that has helped the Indian companies grow quickly.

US management input

Greive says the company is addressing many of these obstacles by having a US management team and owner. He says US and UK customers feel more confident as a result.

The company has also introduced biometric security at its sites to overcome security fears, and has a policy that states English should be the only language spoken in the workplace.

Duncan Aitchinson, head of Europe at sourcing consultancy TPI, says the company is working in China in support of its drive to increase IT offshoring services. "There is growing interest, use and supply in China," he says.

"China has a massive population and has the ability to generate a well-educated and hugely capable workforce that can work in a number of sectors."

He says that China has an "impressive ability to re-invest itself and then execute".

But the challenge for China is to create a brand like India has done in IT offshoring. "There is not yet an equivalent to Nasscom in China."

Whether it can catch India or not is uncertain, but Aitchinson says there is plenty of room for growth.

IT services might be a smaller opportunity than the packaged IT sector for China, according to Jean Louis Bravard, director at consultancy Burnt-Oak Partners.

He says China is more likely to dominate in the IT products space with its skills in software and hardware. "In five to 10 years time China will have companies like SAP, Microsoft and Oracle which may dominate."

He said companies such as HP and IBM have been integrating services into hardware, but Chinese companies will be in a strong position too.

Could a business model that sees China-based companies owned by Western organisations be an important element in overcoming fears associated with offshoring to China?

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