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.

India leads in Engineering R&D

India has a 22% share in the global engineering research and development(ER&D) outsourcing market, with current revenues of $10 billion expected to grow to $40 billion by the end of the decade. Hopefully, this export-oriented R&D will have spillover effects for local industry and help in improved manufacturing innovation for Indian firms, especially in fast growing sectors.

Cycle of Research and Development, from "...

Image via Wikipedia

With over 400 service providers employing nearly two lakh people and revenue of $9-10 billion, ER&D currently contributes 15 per cent of the $60 billion strong Indian IT-BPO export industry. During FY 2011, the cost savings by India-based ER&D Centres was over $20 billion.

Elaborating on sectors expected to have a bright future in India, Pandit said, “The Indian market is booming and as a country, we are no.1 when it comes to ER&D outsourcing. Sectors such as consumer electronics, automotive, energy, telecom and medical electronics have a great future.”

Read more in ‘Future bright for consumer electronics, automotive sectors’ – Indian Express and Business Line : Industry & Economy / Info-tech : Nasscom pegs engineering design market at $40 b by 2020.

Indian call center industry no longer the biggest

More people work in call centers in the Philippines than in India. The growth rate of India’s call center industry has slowed as it faces demand and supply side pressures. Many clients are moving work back onshore, operating costs are increasing and the jobs are loosing their luster.

An Indian call center

Image via Wikipedia

India now faces stiff competition from the Philippines, according to recent research from IBM. The study for the Contact Center Association of the Philippines estimates that 350,000 Filipinos work in call centres, compared with 330,000 Indians.

via BBC News – India’s call centre growth stalls.

Signs of slowdown in Indian IT sector?

Indian IT companies are delaying  joining dates of new hires. This may reflect an expected  slowdown in demand for IT services in mature markets. It may also have something to do with the double digit salary growth witnessed in this sector, which is reflected in lesser attrition – attrition is down from 25% to 15%.

This year, TCS has campus hired 40,000 students, Infosys 30,000, Cognizant 28,000, Wipro 20,000 and HCL 8,000.

via Slowdown: IT cos delay freshers’ joining letters – The Times of India.

Cognizant's Delivery Center in Chennai, India.

Image via Wikipedia

However, this is not dampening the current hiring spree, which reflects an expected uptick in demand for IT services within the next 1.5 – 2 years.

IT hiring in India reflects strong future growth

IT companies are hiring heavily at engineering campuses across India, with many students receiving multiple offers.

Take the case of Amrita University which has campuses in Bangalore, Coimbatore and Kochi. India’s second largest IT exporter Infosys and Nasdaq-listed Cognizant shared the first slot. While Cognizant picked up 1,263 students, Infosys went for 1,255. Around 970 students had common offers and finally, 83% of them opted for Cognizant while the remaining chose to go with Infosys.

However, this does not tell the full story.  Students who receive an offer today will likely join jobs after another year. After joining the job, most fresh engineers receive 3-6 months of training before they join projects. Thus the hiring of today reflects the projected demand for IT services, 1.5 -2 years into the future.

During 2011, over 4.3 lakh fresh engineering graduates are expected to pass out with 2.5 lakh will be graduates with an IT degree, says industry lobby Nasscom. However, not all of them are directly employable and hence the huge scramble for talent at top colleges. Companies know this and are making a beeline for the top-level talent.

via Recession? IT cos hire in large numbers – The Times of India.