Tuesday, February 01, 2005
China Vs India in IT services
When it comes to comparisons between India and China, pretty much the only sector where India has a commanding lead is in IT services. The possibility that this lead may be eroding has caused considerable heartburn in India. McKinsey did a study of IT services in both countries and the McKinsey Quarterly is carrying a brief analysis of the report. Briefly, the reports sums up China's troubles in one word -- fragmentation.
Signs of healthy expansion abound in China's IT industry. The number of engineering graduates and software-applications professionals has grown considerably in recent years. Since 1997, annual revenues in software and IT services have risen by 42 percent a year, on average, reaching $6.8 billion in 2003.2 Moreover, the number of English-speaking graduates in the workforce—particularly crucial in software outsourcing—has doubled since 2000, to more than 24 million in 2004.
But shortcomings in the structure of China's IT industry prevent it from taking full advantage of these changes. Although revenues from IT services are rising, they are barely half of India's $12.7 billion a year. Growth is driven by domestic demand—most customers are small and midsize Chinese enterprises that want their software customized to their own needs. Moreover, the country's nascent foreign-software-outsourcing business accounts for just 10 percent of the industry's total revenue, compared with around 70 percent for India.
To compete effectively in global outsourcing, China's software industry must consolidate. The top ten IT-services companies have only about a 20 percent share of the market, compared with the 45 percent commanded by India's top ten. Furthermore, China has about 8,000 software-services providers, and almost three-quarters of them have fewer than 50 employees. No company has emerged from this crowded pack; indeed, only 5 have more than 2,000 employees. India, on the other hand, has fewer than 3,000 software-services companies. Of these, at least 15 have more than 2,000 workers, and some—including Infosys Technologies, Tata Consultancy Services, and Wipro Technologies—have garnered international recognition and a global clientele.
Without adequate scale, Chinese players are unlikely to attract top international clients. In general, smaller companies are riskier and less reliable partners. They are more vulnerable to the loss of key personnel, may not have the financial muscle to survive for the duration of a project, and often don't have the capacity or breadth to absorb large projects easily. Fragmentation exacerbates the Chinese industry's other problems, including weak process controls and product management. Only 6 of China's 30 largest software companies are certified at levels five or four of the capability-maturity model (CMM);3 by contrast, all of the top 30 Indian software companies have achieved these rankings.
Chinese software-services providers will also have to manage their talent much better. Most do little to develop their employees, and very few use stock options, training programs, or other incentives to build talent. Among the companies in our sample, annual employee turnover was about 20 percent, compared with an average of 14 percent in the United States, which itself has a very fluid IT labor market. Scale would help—larger companies tend to attract more interesting projects, provide better training opportunities, and offer more generous incentives.
Signs of healthy expansion abound in China's IT industry. The number of engineering graduates and software-applications professionals has grown considerably in recent years. Since 1997, annual revenues in software and IT services have risen by 42 percent a year, on average, reaching $6.8 billion in 2003.2 Moreover, the number of English-speaking graduates in the workforce—particularly crucial in software outsourcing—has doubled since 2000, to more than 24 million in 2004.
But shortcomings in the structure of China's IT industry prevent it from taking full advantage of these changes. Although revenues from IT services are rising, they are barely half of India's $12.7 billion a year. Growth is driven by domestic demand—most customers are small and midsize Chinese enterprises that want their software customized to their own needs. Moreover, the country's nascent foreign-software-outsourcing business accounts for just 10 percent of the industry's total revenue, compared with around 70 percent for India.
To compete effectively in global outsourcing, China's software industry must consolidate. The top ten IT-services companies have only about a 20 percent share of the market, compared with the 45 percent commanded by India's top ten. Furthermore, China has about 8,000 software-services providers, and almost three-quarters of them have fewer than 50 employees. No company has emerged from this crowded pack; indeed, only 5 have more than 2,000 employees. India, on the other hand, has fewer than 3,000 software-services companies. Of these, at least 15 have more than 2,000 workers, and some—including Infosys Technologies, Tata Consultancy Services, and Wipro Technologies—have garnered international recognition and a global clientele.
Without adequate scale, Chinese players are unlikely to attract top international clients. In general, smaller companies are riskier and less reliable partners. They are more vulnerable to the loss of key personnel, may not have the financial muscle to survive for the duration of a project, and often don't have the capacity or breadth to absorb large projects easily. Fragmentation exacerbates the Chinese industry's other problems, including weak process controls and product management. Only 6 of China's 30 largest software companies are certified at levels five or four of the capability-maturity model (CMM);3 by contrast, all of the top 30 Indian software companies have achieved these rankings.
Chinese software-services providers will also have to manage their talent much better. Most do little to develop their employees, and very few use stock options, training programs, or other incentives to build talent. Among the companies in our sample, annual employee turnover was about 20 percent, compared with an average of 14 percent in the United States, which itself has a very fluid IT labor market. Scale would help—larger companies tend to attract more interesting projects, provide better training opportunities, and offer more generous incentives.
