FOCUSING ON THE FUTUREWhat went wrong in China and how to get back on track – A Strategy for the Indian IT operations to become Leader in China

Submitted By -

NITIE, Mumbai

Shanu Singh, PGDITM5 (shanuchaudhery@gmail.com, 9702018520)

Srivatsan R, PGDIM 18(vatsa88@gmail.com , 8108355198)

(Category - Strategy and Consulting)

Overview

Until recently, India has been a very lucrative and attractive market for the top IT firms. However, as the competition increased and the market saturated, Indian IT firms started looking at other potential markets. Luckily, they did not have to look far. As one of the fastest growing economies of the world, China holds exciting prospects for the IT industry and that is where the IT companies have trained their guns on.

The Chinese attraction

Given the current economic situation, China, with a GDP growth rate of 10.4%, is one of the safest countries to try to enter without fear of any financial risks. Apart from that, China was chosen because of the following main reasons:

The first wave of major expansion was seen during 2002-2004, when TCS, Wipro, Mphasis, HCL, Cognizant & Infosys opened up center in China and these were located in regions as shown in Figure below.

An Unsuccessful beginning

However, the sailing was not so smooth and the Indian IT majors started facing heat on all four fronts as they had not anticipated the intricacies in the Chinese market. India and China, though being geographically close, are culturally and linguistically distant (Drivers of Success for Market Entry into China and India- Joseph Johnson et. al., Journal of Marketing Vol. 72 (2008)). Indian companies‘ neglect in the gaps of culture and education between China and India, as well as failure to fully consider language-related factors have resulted in their being unable to adapt themselves to the following situations in China:

1. Human Resources: The main strategic objective of Indian companies entering China was the strong human resources reserve and the complete talent gradient level. Now, even after ten

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Locations of Indian IT

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Strategic Objectives of Indian IT companies for entering China

years of efforts their position in terms of human resource development isn’t very promising. The graph below shows the human resource statistics of Indian companies in China and the world.

TCS Infosys MphasiS

50006000

4001100

3000

200

Fig1: Human Resource Growth (China)

Planned Strength Actual Strength(2010)

TCS Infosys Wipro

54000 58000 55000

160000127779

108000

Fig2: Human Resource Growth (World)

Strength (2006) Strength (2010)

Judging from the fact that recruitment in China is negligible when compared to worldwide recruitment, we can conclude that in a sense, the human resources reserve strategy of the Indian service outsourcing companies in China was a failure.

2. To make China a regional business supply base (Below-expectation Development in the Chinese Market): Compared with the Top 100 (China) growing companies in Service Outsourcing, Infosys/TCS/HCL China are just medium-sized service outsourcing companies, far behind the Top 10 leading Chinese companies. Also their development in the Chinese market is still at the early stage. For example, the projects of TCS in the finance and banking sector in China have not been promoted all over China as a successful case in its development in the Chinese market.

3. To serve multinational companies in China: The original language advantages of Indian companies in the global market are also lost in the Chinese market, because, in addition to local companies, they have to face a group of powerful rivals including multinational companies like IBM and Accenture, who were once the contracting parties of these Indian companies, but who have now become rivals in the Chinese market. Under such circumstances, their language advantages disappeared.

4. To enter the Chinese IT market and to develop the Japanese and Korean markets: Another major objective of Indian companies entering China is to exploit the Japanese and Korean markets. However, depending on the advantages in language, culture and geographic location, Chinese companies have secured a relative monopoly position in the outsourcing business targeting at Japanese, Korean as well as Chinese IT market.

Roadmap

So how do the Indian companies counter these issues? The answer, obviously, lies in what measures they take to tackle each of the four issues mentioned above. However, they must not jump the gun and take on everything at once. Issues such as development of Korean and Japanese markets can only be handled in the long term. So the need of the hour is a perfect mix of long term and short term strategies focusing on branding, resource association & development, strategic geographic positioning and new business focus.

Short Term strategies

1. Talent nurturing (Association with universities)

Indian IT majors should work with Chinese universities to develop the loyalty & required talent pool; this can be done by having partnerships in educational programs like;

“2+3 Matrix”, in which 2 stands for the two public courses and public specialized training that run through the whole process of academic education, while 3 means the three specialized courses of theory learning, real project operation and enterprise internship (Model used in Suzhou Industrial Park Software and Outsourcing Vocational College)

Engineers from the organization take up “double titles” (teacher and engineer) and “double positions” (teaching position and development position) in the form of guest faculty (Model used at Neusoft Institute of Information in Dalian by Neusoft, Cisco and SAP)

“three-three” system, namely a third of the teachers is foreign teachers, another third of them part-time teachers from enterprises and another third of them high-level professional teachers. (This Model is operational at Hangzhou Institution of Service Engineering (HISE))

2. Overcoming Language Barrier through Domestic Tie-ups: Indian IT companies should look for tie-ups with the regional companies, in-order to explore the potential of the huge ITO market in China (easy access to local market and local talent). Such kind of tie ups already helped TCS (tied up in 2006) in scaling; Infosys also followed the footstep and tied up with DHTZ recently in 2011.

3. Focus on developing IT-BPO, BI and Analytics business: These industries can be independent of three key factors: 1) good foreign language communication skills and basic computer knowledge and application skills; 2) rich professional domain knowledge of the offshore outsourcing industry; 3) legal requirements, business norms, standards and habits on information privacy and intellectual property. Since Chinese are strong at mathematical problem solving skills therefore they should be leveraged to provide the backend solutions to support analytics and process oriented ITO tasks.

4. Upcoming IT Services Opportunities: Apart from being an outsourcing destination, China itself is a huge market and holds great promise for the IT businesses. Here the vertical sectors spending the most on IT services are finance, telecommunications and manufacturing. Under China's 12th Five-Year Plan, healthcare, utility, transportation and retail are likely to be the focus of further development. Gartner believes the major IT services opportunities in China are:

Communications: Investment in rolling out 3G networks and investment in R&D for new technology, such as LTE

Healthcare: By the end of 2011, China should have established hospital information system trials, for which the core system is the electronic medical records, in 22 provinces, regions and municipalities

Retail: Optimizing or migrating supply chain systems into end-to-end business processes, including procurement, storage, selling, pricing and accounting, and data analytics of BI and CRM

Transportation: The development of a smart transportation system based on the smart city concept

Utilities: Green IT technology and solutions are necessary to help the Chinese government realize the promise of cutting environmental pollution and reducing the carbon footprint

Long Term Strategies

1. Setting up centers in upcoming locations near to North & South Korea, Japan and TaiwanFrom the current distribution of the major Indian companies in China, we can find that they have not established enough branches in Shandong Province and the northeast China. They should look up for opening up delivery centers in the suggested regions including Jinan and Qindao so as to have right people on board to serve prospective customers in their language.

2. Trust building Exercise to capture local business opportunities (Cultural alignment)Hofstede Model can be used to design business practices to align with Chinese culture; it can be worked upon at five levels:

Power distance – Higher officials are responsible for decision making (Similar to India) Collectivism versus individualism – Individualistic decision making (In contrast to India) Femininity versus masculinity – Masculinity (India - balanced) Uncertainty avoidance – Do not feel threatened by uncertainty (In contrast to India) Confucian dynamism – Lookout for long term orientation (Similar to India)

Above guidelines can be used to conduct business and to build up the trust for long term business associations. Branding can be done by developing and sharing successful case studies long with client recommendations especially for the local business development in Chinese market

3. Focus on setting up small delivery centers in multiple geographies instead of large IT Parks: There is a continuing and significant imbalance between supply and demand for skilled IT labor, in the major cities. Gartner reported that IT companies offering pay increases between 20% and 30% to attract or retain highly skilled technology workers, especially in the Tier 1 cities such as Beijing, Shanghai and Guangzhou. Therefore to remain competitive Indian IT companies should focus on building up small delivery centers in the upcoming IT hubs such as Chengdu, Qingdao, Xiamen, and Xi’an. There delivery centers then can be expanded as the talent base increases at those locations.

4. Competitiveness: The 12th Five-Year Plan signifies key aspirations to close the income gap between the richest and poorest citizens. As a consequence, all IT services providers should expect increasing labor costs and increasing domestic competition. In order to remain competitive, IndianIT companies should consider transferring some business into low-cost south Asian countries, such as Vietnam, Indonesia or Malaysia.

Refer: Appendix A – ‘IT Hub Spread’

Appendix B – ‘Geographical Spread’

Appendix C – ‘Chinese IT Market Segmentation’

Appendix A - IT Hub Spread in China

IT Hub Location Name Region IT Companies (indicative, not

More than 50% of the total IT business (China) is generated from domestic clients

Locations (under oval)such as North & South Korea, Japan and Taiwan are the neighboring countries which provide 45% of the outsourced IT business in China

Indian IT companies have setup their delivery centers in competitive eastern cities leaving upcoming hubs like Chengdu (except Wipro), Chongqing & Xi’an

Geographical spread of IT hubs in China

exhaustive)

Xiamen South Eastern ChinaCall center of Shanghai OnStar Telematics

Guangzhou South Eastern China  

Shenzhen South Eastern China TCS

Qingdao North Eastern China Genpact (2011)

Shijiazhuang North Eastern China  

Jinan North Eastern China Microsoft (2011)

Dalian (Liaoning Province) North Eastern ChinaPatni, Annik, Infosys BPO (2011), DHC, IBM, Accenture

Beijing North Eastern China TCS

Tianjin North Eastern China TCS

Shenyang North Eastern China Upcoming

Changchun North Eastern China UpcomingXi'an-Shaanxi province (Engaged in this new educational revolution) Central China Vanceinfo

Nanjing Eastern China Vanceinfo

Nantong Eastern ChinaCtrip, Baidu, Google, Tencent, Acxion, Vanceinfo

Shanghai Eastern China TCS, Infosys, Wipro, Mphasis, HCLHangzhou (Engaged in this new educational revolution) Eastern China Infosys BPO 2006

Chongqing Eastern China Microsoft (2011)

Guangdong (Nanhai district of Foshan) Eastern China Upcoming

Chengdu Central China Wipro, Vanceinfo

 Semi Saturated IT hubs

  Saturated IT hubs

  Upcoming IT hubs

Appendix B – Geographical Spread of IT Hub in China

Geographical Findings

--> Red dots represents the major locations where IT companies have setup their delivery centers.

--> 9 out of 11 outsourcing hubs are located on the eastern part of the country

--> More than 50% of the total IT business is generated from China itself

--> Locations (under oval) such as North & South Korea, Japan and Taiwan are the neighboring countries which provide 45% of the Outsourced businesses to IT companies in China

--> Indian IT companies have setup their delivery centers in competitive eastern cities leaving upcoming hubs like Chengdu (except Wipro) and Chongqing

Appendix C – Chinese IT Market Segmentation

References

1. Drivers of Success for Market Entry into China and India by Joseph Johnson & Gerard J. Tellis - Journal of Marketing Vol. 72, 1–13

2. Entry modes of multinational corporations into China's market: a socioeconomic analysis by Haishun Sun - International Journal of Social Economics, Vol. 26 No. 5

3. Multinational Companies and China: What future? An Economist Intelligence Report, The Economist

4. IT Services Outsourcing Market in China 2010-2015 - Technavio.5. Market Trends: IT Services, Asia/Pacific, 2011-2012 - Gartner.6. China market forecast, segmentation and market overview report – DATAMONITOR.7. chinadaily.com.cn for latest technology industry development news in China.8. en.chinasourcing.org.cn for latest information technology industry news.

9. ibisworld.com.cn for latest information technology news.