How Indian IT Firms can ‘Crack’ the China Market

China has become the world’s largest economy. Consequently, it is also one of the world’s largest markets for IT and IT-enabled services. While Indian IT service providers have a large presence in western markets (for example, the Americas provide 60% of Infosys revenues), their presence in China is negligible. Why? This question has troubled the top managements of these firms for many years. Based on the views presented in the recent article, it seems that managers are still far away from finding all the answers to this riddle.

The Indian IT industry, which has of late been eyeing the Chinese market, will have to sweat to gain entry here, a top Infosys official has said.

via China IT market a hard nut to crack for Indian companies: Infosys China CEO Rangarajan Vellamore – Economic Times.

 

It is often said that the first step to solving a problem is acknowledging it. IT service providers from India seem to be stuck in a time-warp – a bubble of their own making. The challenges they face in the China market are not replicas of the hurdles Indian firms overcame when they entered the US or European markets. These are unique challenges, which call for a unique approach. Entering China requires a China-specific strategy and anything less does not do justice to the potential revenue growth possible from the world’s largest economy. Below are a few challenges that have not been identified in the above article, and some ideas by which these can be turned into opportunities.

English: China, Shanghai

English: China, Shanghai (Photo credit: Wikipedia)

Language Barriers: Historically, the Indian IT services industry was able to grow in the US and other western markets due to the language advantage – client facing personnel were able to communicate effectively in English. In contrast, China’s market has significant language barriers and a working to excellent knowledge of Mandarin is essential. To overcome these barriers, Indian firms should have ‘localized’ client facing personnel who will be able to understand client problems and deliver feasible solutions.

Price-Arbitrage Disadvantage: Another key advantage that Indian service firms have historically had is the low cost of labor in India. However, compared to China, there is no real price advantage of India based software engineers. Once coordination and communication costs are taken into account, it might actually be cheaper to hire talent locally. Many Indian firms have been attempting to do so (for example, Infosys runs a development center in Shanghai), but complain that they are unable to get high quality talent. The reason is not the unavailability of talent – rather, Indian firms are not employers of choice and hence fail to attract the best people.

Reputation Barriers: The challenge is not that Indian IT firms do not enjoy any brand recall in China. Indian firms have to actually overcome a negative reputation. Low costs are associated with a perception for bad quality work. To overcome the reputation barrier (in context of both potential clients and potential employees), firms should use a counter-intuitive approach. Use their success stories with F500 companies as a basis for a premium positioning.

No Guanxi: Doing business in Greater China is heavily dependent upon the ability to leverage personalized networks of influence, or Guanxi. Indian firms need to hire business development managers and top management who bring not only business acumen, but contextual information and guanxi on board.

Services versus Solutions: It is believed the size of the US IT market as a percentage of its economy is larger than the ‘perceived’ size of the China market. This has been explained by the following logic:

“In terms of purchasing power parity, the US will have a revenue productivity of two-and-a-half times compared to China. …It translates the market size by less than two-and-a-half times,”

In line with this argument, it can also be said that the potential productivity gains from IT in China are much more than the potential gains in the US market. Therefore contrary to the ‘common perception’, the IT market in China is not oversaturated a-la the US. However, unlike their US counterparts, firms in China may not be actively soliciting IT services as many are unaware or more likely, unconvinced of the potential benefits. The size of the potential market is huge; the size of the market (of addressable) that is actively looking for an IT service provider is small.

Indian IT firms can penetrate the market by offering solutions, not services. This is not a market where sales personnel cannot passively wait for a RFP (request for proposal) to be floated by a possible client. An active sales approach is required. By the same logic given above, the gains per dollar of IT investment in China would be more than the gains per dollar of IT investment and thus easier for IT service firms to create business cases and deliver value.

In a nutshell, to crack the China market, Indian IT service providers should re-position themselves as premium players who offer a value-for-money proposition to F500 firms. They hire local talent for business development and client facing roles that are well versed in the nuance of business (and guanxi) in China. Finally, instead of waiting to answer requests for proposals, firms should actively solicit business and focus on growing the market by offering solutions.

The New World Order: China, US, India

The Financial Times is reporting that China is expected to overtake the United States as the world’s largest economy in 2014. India, is now the world’s third largest economy.

These numbers are based on Purchasing Power Parity calculations done by the International Comparison Program of the World Bank. Considered to be the authoritative source for global GDP figures, the first round was conducted in 2005. Results of the second round, in which country GDPs were calculated for 2011, were released today.

The International Comparison Program (ICP) is a worldwide statistical partnership to collect comparative price data and compile detailed expenditure values of countries’ gross domestic products (GDP), and to estimate purchasing power parities (PPPs) of the world’s economies. Using PPPs instead of market exchange rates to convert currencies makes it possible to compare the output of economies and the welfare of their inhabitants in real terms (that is, controlling for differences in price levels).

via ICP 2011: International Comparison Program.

 

The summary report, available here, states that India’s GDP in 2011 was $5.75 trillion, China’s was $13.5 trillion and the US was $15.52 trillion.  In the period 2005-2011, China and India’s economies doubled in size as a percentage of US GDP. China’s GDP grew from 43% to 87% of the size of the US economy, while India went from 19% to 37%.  Based on economic growth estimates for the period 2011-2014, it is expected that the China will overtake the US this year.

 

World's Largest Economies

A surprising finding of the ICP is that India has one of the lowest price level indexes in the world. Or in other words, India has some of the lowest priced goods & services in the world. [This is something the average Indian will find hard to digest due to the double digit inflation witnessed over the past decade!]. Unsurprisingly, India ranks 127 in per capita GDP.

 

World Economies as a percentage of US Economy

Indian IT Market [Infographic]

This infographic, which presents the findings of the IDC Report on the state of the Indian IT market, has several parallels to my own findings in the field. The Indian IT market is poised on the cusp of a boom, which will hopefully result in massive improvements in productivity and customer service. However, the use of enterprise IT in India is geographically concentrated in specific high growth/high income states. Infographic bmohitlakhmani on Visually.

IDC Indian IT Market report

Global IT Services growth in 2012 down to 2%

 

 

Gartner’s latest report says that the global IT services industry grew by 2 percent in 2012, down from 7.7 percent in 2011. The report also mentions that the top Indian IT service providers grew faster and Cognizant has overtaken Infosys as the number 2.

 

The top five Indian providers* grew 13.3 percent to reach $34.3 billion in 2012, exceeding the IT services industry growth of 2 percent according to Gartner, Inc. The growth decelerated for both industry groups, from 21.8 percent and 7.7 percent, in 2011.

“Cognizant displaced Infosys to become the second-largest Indian IT services provider (see Table 1), and Cognizant experienced the highest growth rate among the top five providers with an increase of 20.1 percent in 2012,“ said Arup Roy, research director at Gartner. ” TCS closed in on the top 10 worldwide market share leader, with less than $1.5 billion separating it from the 10th ranked provider, Hitachi.”

Indian IT Marketshare

Image via Gartner

 

 

See the original report here.

Facebook offers free mobile talk time in India

Facebook is giving away Rs. 50 worth of mobile talk time (minutes) to new mobile users in India. This pilot scheme was launched last week and offers the give away as part of a referral program. Many have suggested that this may lead to a flood of fake Facebook profiles – however, it seems that there are sufficient preventive measures in place. Instead, this is a clear play by Facebook to increase its penetration of the nearly 1 billion mobile user population in India and comes on the back of earlier offers of free Facebook access. Will it work? This is a long term play – don’t expect a bump in share price due to this in the short term.

 

facebook free talktime offers

via fivepoint5.com

 

  • Scheme is only for new users and not for existing people on Facebook and is valid for registrations through mobile only.
  • New user has to registers himself/herself to Facebook through mobile using the URL – m.facebook.com/tt.
  • After registration he/she has to provide his mobile number on the Facebook Talktime page.
  • Once you sign up and confirm your accounta talktime of Rs. 50 will be credited to his/her account within 3 days.

via http://www.newstrackindia.com/newsdetails/2012/10/18/127-Register-on-Facebook-mobile-and-get-Rs-50-talktime-for-free.html

Apple: finally making a play for riches at the bottom of the pyramid?

Apple’s iPhone 3GS is now available in India for less than 200 USD (Rs. 9999).

Image via Wikipedia

This represents a price reduction of 50% over the past year or so and might signal a change in strategy. Apple might be finally moving to tap the riches at the bottom of the pyramid and trying to gain a foothold in the fast growing smartphone market of India. As this article correctly points out, the iPhone 3GS is still a superior when compared to the low-end Android phones offered to the Indian consumer. Coupled with its ability to upgrade to IOS 6, Apple might finally have a winner.

Or this might just be another ‘inventory clearing exercise’ as Apple readies for the launch of the iPhone 5. Either way, one hopes that increased iPhone sales in India will lead to an improvement in the Apple Experience and service coverage available in India.

Free 3G connection with Android phones sold in India

Reliance Communications, India‘s second largest telecom operator, has announced that all Android smartphones sold in India for the next two years, will come with a free bundled 3G connection (albeit, with a 1GB limited download capacity). This marks the first major competitive move by a telco in this fast growing market segment, to grab market share by providing free connections. This will help moving consumers from the slower and cheaper 2G data connections (which cost 2$ a month for 2.5 gb) to the more pricier 3G connections (which cost $15 a month for 3 gb).

Android currently rules in India’s small, but fast growing smartphone segment. With its large installed base of cellphone subscribers, it offers a huge market opportunity, which Google seems determined to tap.

Image via Economic Times

 

RCOM and Google have entered into a two-year deal according to which all Google-endorsed android mobile devices from companies like Samsung, HTC, Sony Ericsson and LG will come with the telco’s third generation, or 3G, mobile connection with 1 GB of free downloads for the first six months.

 

Read more at Google-endorsed Android smartphone will come bundled with a Reliance Communications connection – The Economic Times.