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China vs. India IT Part 2 - Perspectives from the
industry leader
As a follow-up to our report dated June 29th, 2011, “China vs. India IT - Will
the strong growth of China IT have a structural impact on Indian IT?”, this
report (or Part 2) lays out detailed perspectives on this subject from TCS, the
industry leader. Mr. Vish Iyer, head-Asia Pacific of TCS, spoke to us about the
China market, competition, cost and supply dynamics in China on a general
basis and more specifically on TCS’ plans for China in the future. What we
gather from the conversation only underpins the conclusions in our prior report
that the business models of premier offshore-services players (TCS/Infosys) and
of China IT players (VanceInfo, iSoftstone) are fundamentally different from
each other with distinct target markets, value propositions and offerings.
On TCS’ China plans in the coming years. China is a good market for TCS’
banking products with the Bank of China implementation establishing TCS’
pedigree in this space. In addition, TCS is positioning itself for grabbing its
share of opportunities in the ‘Smart City’ initiative spearheaded by the various
provinces within China. This is a multi-billion dollar project framed by
provinces to establish smart infrastructure and state-of-the-art facilities which
will facilitate the transformation of China from a domestic-driven IT market
into an export-led one in course of time. In fact, TCS is already in the initial
phase of breaking through in the areas of healthcare, infrastructure and network
management. Separately, TCS is also working with several of its leading global
clients in servicing their local China/ASEAN/Hong Kong needs out of China.
On whether Chinese companies are preferred vendors to address
opportunity in the government and SOE segments in China. TCS believes
than when it comes to large, complex, high-end system integration,
transformation-like projects, the governments/SOEs take a fairly rational
approach to selecting vendors and prefer those with case studies, global best
practices and referenceability. In this context, the likes of IBM/Accenture
become natural vendors for such tasks – thus, it is not surprising that they
dominate the China market. For meeting the needs of mid-sized enterprises,
there may be a bias towards local China IT service providers (e.g. VanceInfo).
On people costs in China versus in India. Mr. Vish Iyer corroborated our view
that people costs in China are slightly higher than India and this difference rises
with seniority. Costs vary significantly across locations in China and thus, TCS
follows a multi-location strategy with a limited presence in Tier-1 cities such as
Beijing/Shanghai. It has greater presence in Tier-2 and Tier-3 cities in China.
On TCS’ low-key presence in China so far (about 1,600 employees)
compared to closest peer Infosys (about 3,300). We believe that in framing
this debate, the likes of Infosys/TCS should ask themselves whether expanding
to China to address the global outsourcing needs of clients expands the
addressable market or cannibalizes the GDC opportunity normally serviced out
of India. If the latter, then ramping up in China is not necessarily a good strategy
when ramping up can be done in India itself in the first place.
Conclusion. TCS’/Infosys’ China strategy is not likely to move the needle on
these companies’ financials in the near-to-medium term. But what their presence
does is ensure their readiness to tap into their desired China opportunities as and
when they open up. TCS (OW) remains among our top picks in the sector.
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