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China's Consolidation
si Team
Wednesday, February 16, 2005
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.

Smaller companies are riskier and less reliable partners. They are more vulnerable to the loss of key personnel as they not have the financial muscle to survive for the duration of a project.

Only twelve percent of Chinese software companies see mergers, acquisitions and alliances as a priority. In contrast, it adds several Indian firms are considering takeovers of Chinese firms to expand operations. Also apparent is the Indian foothold in main land China with the big-three Indian firms TCS, Infosys and Wipro already having offices there.

Chinese companies are advised to manage their talent better and do more to reduce the employee attrition rate estimated to be about 20 percent.

‘With greater size and an improved talent base, Chinese software-services companies will be in a better position to address other issues, such as building credible brands in international markets and developing knowledge of specific industries, including finance and pharmaceuticals, the consultancy said.

Only six of China’s 30 largest software companies are certified at levels five or four of the capability-maturity model (CMM); by contrast, all of the top 30 Indian software companies have achieved these rankings.

And the report also paints a rosy picture of the Chinese IT industry. It says things are improving for the Chinese IT industry. The number of engineering graduates and software application professionals has grown over the years. The number of English-speaking graduates increased to about 24 million.

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