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IT Services – China Trip Takeaways
Beijing ≠ Bangalore; Beijing = Beijing
Broad Takeaways from China Trip — In recent months we got a heightened number
of queries from investors about China-based IT companies. Some were defensive –
asking if the growth of China IT would hurt the growth rates of non-Chinese IT
companies. Some were in "offensive mode" – could the growth of China IT yield the
next INFY / TCS / CTSH? Following our recently concluded trip to China, we can safely
say the answer to the first question is a resounding "No". The answer to the second
question is unfortunately not so straightforward. The Chinese IT market is different from
the Indian model in more ways than one. We are not really worried about the growth
prospects in that market – but profitability and cash metrics could present a challenge.
China IT Demand Robust….. — Initially, Chinese outsourcers seemed to emulate the
India model of migrating work from a higher-cost location (e.g., U.S., Japan) to a lowercost location (in this case, China). However, the combination of the global downturn
and the Japan earthquake seems to have led many of these companies to change their
strategy – they are now focused on domestic demand. This is not a bad outcome from
a demand perspective as China's IT appetite is large and fast-growing. The quality of
the demand is a separate matter – more on this later….
….But Supply Issues Abound — China clearly has a huge pool of available
graduates – but we came across two key obstacles. (i) Are the graduates employable
in the Services industry? (ii) Are the graduates willing to work in the Services industry?
It turns out most graduates require extensive training, even for "China China" work –
this is without considering the English language issue that is a clear problem for global
work. More importantly, graduates seem to prefer working in other, more established
industries. Combined with strong demand and a rather young industry, this leads to a
shortage of experienced talent and significant wage inflation.
Comparing with Indian / US IT Companies — (a) Chinese companies are multiple
years behind Indian companies in the domain competency/process orientation curve
(b) Indian Companies are focusing on the “Global Global” (global operations of
MNCs) space while Chinese companies are a play on “Local Local” (domestic) and
“Global Local” (Chinese business of MNCs) space (c) Price points/margins/return
ratios for Chinese companies are meaningfully lower – not surprising given the
difference in focus and part of value chain they are currently operating in (d) Inorganic
growth a bigger focus for Chinese companies than Indian companies at that stage.
Other Factors To Consider — Corporate governance and accounting were recurring
themes in our investor meetings, for obvious reasons. Intellectual property protection
also came up in some meetings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IT Services – China Trip Takeaways
Beijing ≠ Bangalore; Beijing = Beijing
Broad Takeaways from China Trip — In recent months we got a heightened number
of queries from investors about China-based IT companies. Some were defensive –
asking if the growth of China IT would hurt the growth rates of non-Chinese IT
companies. Some were in "offensive mode" – could the growth of China IT yield the
next INFY / TCS / CTSH? Following our recently concluded trip to China, we can safely
say the answer to the first question is a resounding "No". The answer to the second
question is unfortunately not so straightforward. The Chinese IT market is different from
the Indian model in more ways than one. We are not really worried about the growth
prospects in that market – but profitability and cash metrics could present a challenge.
China IT Demand Robust….. — Initially, Chinese outsourcers seemed to emulate the
India model of migrating work from a higher-cost location (e.g., U.S., Japan) to a lowercost location (in this case, China). However, the combination of the global downturn
and the Japan earthquake seems to have led many of these companies to change their
strategy – they are now focused on domestic demand. This is not a bad outcome from
a demand perspective as China's IT appetite is large and fast-growing. The quality of
the demand is a separate matter – more on this later….
….But Supply Issues Abound — China clearly has a huge pool of available
graduates – but we came across two key obstacles. (i) Are the graduates employable
in the Services industry? (ii) Are the graduates willing to work in the Services industry?
It turns out most graduates require extensive training, even for "China China" work –
this is without considering the English language issue that is a clear problem for global
work. More importantly, graduates seem to prefer working in other, more established
industries. Combined with strong demand and a rather young industry, this leads to a
shortage of experienced talent and significant wage inflation.
Comparing with Indian / US IT Companies — (a) Chinese companies are multiple
years behind Indian companies in the domain competency/process orientation curve
(b) Indian Companies are focusing on the “Global Global” (global operations of
MNCs) space while Chinese companies are a play on “Local Local” (domestic) and
“Global Local” (Chinese business of MNCs) space (c) Price points/margins/return
ratios for Chinese companies are meaningfully lower – not surprising given the
difference in focus and part of value chain they are currently operating in (d) Inorganic
growth a bigger focus for Chinese companies than Indian companies at that stage.
Other Factors To Consider — Corporate governance and accounting were recurring
themes in our investor meetings, for obvious reasons. Intellectual property protection
also came up in some meetings.
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