• Analyses how China is developing itself  as an IT Software and Services destination
• Dispels the myth that China will overtake India as the preferred IT outsourcing destination in the short to medium term

NASSCOM, the chamber of commerce and “voice” of the IT software and services industry in India, today released ‘Tracing China’s IT Software Services Industry Evolution’, a whitepaper series of which this is the first. The quarterly series will focus on regions that are alternate markets, competitive destinations and/or potential partners for India. This report on China follows an earlier one (in 2002) provides an update on the current state of the IT software and services sector in China and reviews the policy approach adopted by China to develop its Information Communication Technologies (ICT) sector. This paper also reexamines the popular notion of competition (in IT software and services) between China and India, from the perspectives of firms (indigenous Chinese companies as well as multinationals) operating there, the talent pool dynamics, and the associated economics of running IT Services operations there.

This report builds on work previously undertaken by several leading academics, research and advisory firms, and is based on a series of interactions with Chinese Government officials, interviews with IT software and services companies (local Chinese companies as well as multi-nationals, including Indian players), independent analysts, and business consultants in China.

Speaking at the launch, Mr. Kiran Karnik, President, NASSCOM, said, “Comparisons between India and China have been a topic of interest for years and we are pleased to commence our ‘Country Report Series’ with China. China has come a long way in establishing itself as a destination for IT sourcing, with all stakeholders including Government, academia and industry working towards improving the regulatory environment, offering incentives to IT companies and  increasing the talent pool.  While India continues to be the most favoured destination – by far – for IT outsourcing and ITES-BPO we need to ensure that we maintain this position in the years to come. This will require a favourable policy and tax environment, a huge thrust in education and human resources and vastly better infrastructure.

Each month we host delegations from China which seek to learn from India. India too must learn from China’s experiences. China’s systematic and planned approach to rapidly developing key sectors of its economy and especially its strong focus on education and infrastructure offer key learnings that may be usefully adapted to the Indian context”, he added.

Talking about the findings of the report, Mr. Ameet Nivsarkar, Vice President,NASSCOM, said, “China has immense potential to develop its IT-BPO sector given its vast talent pool, huge domestic market and strong government support. However, presently the Chinese IT market is hugely skewed towards IT hardware which is 90% of the total market size. The IT software and services sector accounts for just about 0.5% of China’s gross domestic product in 2006. While this presents a tremendous opportunity, China has its own set of challenges to overcome such as scalability, global recognition, complex tax and investment incentive systems across different provinces, highly controlled financial systems and regulation of ownership structures, increasing number of ‘unemployable’ resources, pressures of dealing with more evolved (western) outsourcers and intensifying competition”.

“Given this, Chinese Government and industry has taken a systematic approach towards addressing the above challenges with ICT oriented industry policies under its Informatization Strategy 2006-2020”, he added. 

Developing China’s software and services export industry
To develop China’s capabilities as an outsourcing base for IT software and services, the Ministry of Commerce (MOFCOM) has initiated the ten-hundred-thousand program. Through this program China aspires to promote 10 (later increased to 11) cities as key bases for undertaking offshore services outsourcing; attract 100 multinational enterprises to China as an offshore destination and assist the development of at least 1000 enterprises having the capability and international qualifications to undertake offshore outsourcing with the goal of doubling service exports by 2010.
 
Key measures identified by MOFCOM towards achieving its targets under the 'ten-hundred-thousand' program include:

1. Creating a specific fund for providing specialized training of 300,000-400,000 university students over the next 5 years. This training will include technical qualification and certification, international standards and IPR.
2. Providing incentives and financial support to encourage enterprises to obtain international certification with the target of 700 enterprises obtaining CMM /CMMI Level 3 certifications and 300 enterprises obtaining CMM /CMMI Level 5 certifications.
3. Working with the State Development Bank to provide credit and loans to qualified enterprises to engage in outsourcing.
4. Collaborating with China Export Credit Corporation to provide credit insurance and guarantee services.
5. Working with the Ministry of Information Industry (MII) and other relevant departments to identify and support base cities under the ten-hundred-thousand program, through policy guidance in macroeconomic policy, program designing, human resource training, attracting foreign investment and creating a special fund to support the infrastructure creation required across the base cities.
6. Building a website / portal to provide information to enterprises, universities/ colleges, students, research institutions and provide a platform for business transactions.
7. Providing preferential treatment (such as discounted loans) for base cities in the Central and West regions.
8. Formulating a stronger IPR framework and establishing IPR complaint centers in the base cities to take prompt action against any kind of IPR violation.

China’s approach to developing its IT software and services sector reflects the pattern adopted earlier while developing its hardware sector, of exchanging market access for foreign technology, encouraging foreign MNCs to develop joint ventures with domestic companies, and letting them set up production networks in China to support domestic companies.