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China's Consolidation

si Team
Wednesday, February 16, 2005
si Team
United we stand, divided we fall. This is so true for Chinese IT companies, if they have to outdo or match India’s IT sector, says McKinsey, an international research firm. Today fragmentation has kept the Chinese IT industry from grabbing a larger share of the global software-outsourcing market. If China needs to win over its competition then it needs to consolidate was the underlying theme of the report.

The reason for the Chinese companies making no headway in global IT outsourcing is that they concentrate more on the domestic market where growth exists and this prevents the IT companies from tapping the lucrative foreign market.
This is in sharp contrast with the Indian IT companies who tapped the global markets that accounts for 70 percent of the revenues, neglected domestic demands that were too negligible. Such shortcomings in the structure of China’s IT sector are preventing it from taking full advantage, say analysts. Although revenues from IT services are rising, they are just half of India’s $12.7 billion. Moreover China’s nascent foreign software outsourcing business accounts for just 10 percent of the total revenue.

Most of China’s foreign IT business is concentrated on Japanese customers who mostly seek low value application development. Although like India, China banks on low costs, operating margins average only seven percent when compared with eleven percent with Indian companies because projects are below optimal scale; there’s heavy competition among companies on price.

The top ten IT-services companies in China have only about 20 percent share of the market, compared with the 45 percent that India’s top ten companies have. Though China has about 8,000 software-services providers, almost three-quarters of them have less than 50 employees. Only five have more than 2,000 employees.

India on the other hand, has fewer than 3,000 software companies. Of these, at least 15 have more than 2,000 workers. Without appropriate scale, Chinese companies won’t be able to attract international clients that Indian firms such as TCS, Infosys and Wipro have been doing.

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