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China joint venture, advantage Tata Consultancy Services

— PHOTO: AP Photo

HIGH ON AGENDA: A visitor to the third China International Software Product Expo walks past a display of major companies taking part in Nanjing, eastern China’s Jiangsu province.

Framed by the rolling bulk of Beijing’s Western Hills, the blue and white TATA logo adorns a 2,000 square metre-large building that is home to the new joint venture between India’s top software exporter Tata Consultancy Services (TCS) and three Chinese partners. Located amidst the giant glass and chrome structures that dot Zhonguancun Software Park, the Chinese capital’s showcase high-tech zone, the TCS (China) building is, in fact, the physical embodimen t of the first real example of the long-hyped potential for Sino-Indian collaboration in information technology (IT).

Indian IT majors have been dipping a cautious toe in Chinese waters for several years now. Apart from TCS, Infosys, Satyam and Wipro have China operations, as do a slew of smaller, specialised companies such as iGate Global Solutions, Newgen Software and Zenzar Technology.

However, despite ambitious plans and a strong commitment to the Chinese market, Indian companies have, on the whole, struggled to ramp up their operations across the Great Wall. Even after four or five years in the country, majority of Indian IT heavyweights in China, thus, remain surprisingly light, with an average of 300-600 employees largely restricted to servicing the China needs of existent multinational clients.

The lucrative domestic Chinese market for software, valued at $50 billion plus, has remained out of reach for most Indian companies. According to Jonathan Lam, CEO for TCS (China), the reasons for this inability of Indian firms to crack the domestic market are manifold.

“For a foreign company in China there is the question of lacking relationships with key decision makers in government,” he says, adding that language and cultural barriers are obstacles as well. Moreover in the IT sector, foreign-owned companies have usually been kept out of the really large, multimillion dollar deals at the state-owned enterprises.

This is where the new TCS joint venture (JV), with its strong government backing and partly Chinese ownership, is set to make a real breakthrough, fundamentally changing the nature of the Indian IT game in China thus far.

The joint venture was formally established in February with TCS taking a 65 per cent stake. A further 25 per cent is owned by three Chinese partners — Beijing Zhonguancun Software Park Development Co. Ltd (where the joint venture is located), Tianjin Huayuan Software Park Construction and Development Co. Ltd. and Uniware Co. Ltd. The remaining 10 per cent is expected to be taken up by Microsoft.

Already TCS (China) is winning substantial domestic contracts including a $100-million one for providing banking solutions to the Bank of China. Another multi-million dollar contract to implement a comprehensive international trading system for the China Foreign Exchange Trade System (CFETS), a sub-institution of the People’s Bank of China, has also been bagged.

“We are finally being able to make real inroads into the banking and financial sectors in the domestic market in China,” says Mr Lam. This is, in fact, an area with strong growth potential in China. The country is now undertaking massive IT-related projects including the computerisation of its banking behemoths. Moreover, last December China fully opened up its banking sector to foreign competition under its WTO (World Trade Organization) obligations, creating even more opportunities.

Mr. Lam says the TCS joint venture will be in a prefect position to leverage and benefit from these developments because partnering with the Chinese government has put it in a unique position. Indeed the joint venture is the first and last such company that has the backing of the powerful National Development and Reform Commission (NDRC), a supra-ministry that was formed out of the erstwhile Planning Commission.

But while the joint venture clearly provides TCS with a prized break into China’s domestic market it is also pertinent to ask why the Chinese government has been so obliging. The answer, says Mr. Lam, is that China wants the joint venture to act as a “role model for Chinese industry that sets the standards and which other local companies can then imitate.”

Indeed, for the Chinese side, a partnership with TCS will be a substantial learning opportunity. Both quality standards and processes that the Indian titan brings with it as well as its experience in handling large, industrial-scale projects are lacking in most Chinese IT firms.

The joint venture plans to employ at least 5,000 people over the next five years (up from its current workforce of around 1,000) which would make it one of the largest IT companies in China. Although the Chinese software industry has been growing at around 30-40 per cent annually in recent years, it remains fragmented and lacks scale. Only about ten Chinese IT firms, among some 8,000, employ more than 1,000 people; the very largest numbers only some 10,000.

From the Chinese point of view, the TCS joint venture is, thus, one with the classic strategy of opening up a market to foreign investment, learning best practices from the world’s star performers and then encouraging local competitors to imitate and perfect these.

Following precisely this strategy, Chinese companies have gone on to become world beaters in the manufacturing sector. But will this approach meet similar success in IT?

The market intelligence firm IDC predicted in a report out earlier this year that when it came to the software sector “Chinese cities were nipping at India’s heels” and would overtake Indian cities as the preferred destination for offshore back-office functions by 2011.

The reasons, the report identified, for this China optimism were the government-supported massive investments in infrastructure, Internet connectivity and English-language training.

However, Mr Lam is dismissive of the report. “The day China can catch up with India is the day that customers feel as comfortable that they will get the same quality and security in China as in India and that day is not close,” he says.

Just the size of China’s software exports when compared to India’s is an indication of the gulf between the two. In the fiscal till March 2007, the software and services exports segment in India was worth $31.4 billion, compared to $2.5 billion for China

China’s biggest drawbacks, according to Mr. Lam, are its reputation for lax intellectual property rights protection, continuing inadequacy of English-language skills and lack of mid-level project management talent.

While China graduates an impressive 6.50 lakh engineers a year (compared to 4.50 lakh in India and 1.20 lakh in the U.S.) he says only around ten percent of these are usable on Day One. Moreover, while it is easy to find code writers with competence levels and salaries on a par with their Indian equivalents, qualified middle-level managers are in short supply. They are, thus, both more expensive and more difficult to retain than their counterparts in India.

Mr. Lam predicts that within the next few years China may begin to give India some competition in the lower-segment of the IT and IT-enabled services world. However, on the really lucrative, value-added, high-end services India will retain an advantage for a while to come, he says.

Nonetheless, the TCS (China) CEO cautions that China should not be dismissed either. Over time, China’s evolution into an IT power is more or less assured. It is the only country comparable to India in terms of the size and cost of its skilled labour force. In addition, given its infrastructure and manufacturing prowess the market for related IT solutions is likely to keep growing.

It is thus small wonder that virtually every Indian IT company of consequence not only has a China strategy but is, in fact, in the process of expanding China operations. Infosys Technologies recently announced plans to open two development centres in China that will eventually employ 6,000 people. Earlier this year, Satyam Computer Services also began construction of a 2,500 seat software development centre in the eastern city of Nanjing.

HCL Technologies is the latest Indian IT major to look to China. It has opened up an office in Shanghai and is close to finalising three collaborations with local Chinese partners in the fields of enterprise software, engineering and application testing

In all the India vs China debate, the point that is sometimes obscured, is that ultimately the growth of China’s IT industry will only be to the advantage of Indian companies operating out of China.

According to Gartner, a research agency, Indian companies could come to account for up to 40 per cent of the domestic Chinese market for software. Mr. Lam believes this to be a conservative estimate.

“In banking, insurance and finance we can take over the majority of the market,” he smiles pointing out that IDC already rates TCS (China) as the best provider of call banking solutions in China.

“So far we have been walking,” concludes Mr. Lam, “Now its time for us to run.”

PALLAVI AIYAR in Beijing

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