JPMorgan: China vs India IT - Will the strong growth of China IT have a structural impact on Indian IT?

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 First,  we  believe  that  framing  the  answer  to  this  overarching  question
should be done in the context of the length of time it took China to establish
manufacturing  excellence: It  took  decades  for  China  to  emerge  as  the
manufacturing hub of the globe. Such a global positioning takes time. Likewise,
it took  well  over a  decade  for  Indian  IT to emerge as the premier  offshore  IT
services  hub  in the  world.  India’s  tier-1  IT  companies  such  as  TCS/Infosys
today  boast a vertical-based, end-to-end positioning, but it took time to execute
this.  Chinese  IT  companies,  despite  several  enviable  advantages  accruing  to
them (most  significant  being the incentives provided  by the  government), will
have to climb this curve of business model evolution, in our view.
 Second, what is powering  the growth of  the leading Chinese IT companies
is the domestic market (China) dominated by the government, State-owned
enterprises  (SOE)  and  the  China-specific  needs  of  MNCs: The  Global
Delivery  Model  (GDM  or  offshore)  has  yet  to  evolve  rapidly  in  China, and
accounts  for  less  than  20%  of  the  US$10.6  billion  China  IT  market.  Global
system  integrators  such  as  IBM/HP/Accenture  enjoy  dominant  share  of  the
China business of MNCs, and there is no reason that we can see why Indian IT
cannot enter this market with their global case studies and references.
 Third,  middle-level  talent  (typically  those  above  project  manager level)  is
scarce in China. This is the group most in demand in a nascent GDM China
market and, according to Infosys, must often be found among expatriates. It
will  take  a  while  before  China  has the  requisite  base  of  home-grown  middlemanagement  talent  to  power  offshore  service  penetration  into China.  Also,
China is not necessarily cheaper than India for  IT professionals and, in fact, as
our studies find out, may be more expensive with premium rising with seniority.
 Fourth,  the  China  IT  industry  has  limited  overlap  with  the  Indian  IT
industry, not just  from the end-market  perspective  (global customers  for  India
IT  versus  the  domestic  market  for  China)  but  also from  a  service-line  and
vertical perspective. Chinese IT companies have a pronounced slant towards the
government, R&D and telecom in contrast to the enterprise focus of  Indian IT.
R&D and telecom constitute less than  20%  of  revenues  of  Indian  IT and more
than 60% for the leading China IT companies.
 Finally, in anticipation of the possibility that the GDM  (or offshore IT market)
could be significant down the line, Tier-1  Indian IT companies such as  Infosys
are  pro-actively  aggressively  building  out  in  China.  Infosys  has  over  3,000
professionals  in China  and  intends to  take this  strength  to  over  10,000  within
two years. This is almost on par with VanceInfo’s current employee strength.
Pulling all  of  the  above  together,  we  believe  that  the  rapid  growth  of  the
Chinese  IT market  and  China  IT  players,  such  as  VanceInfo  and iSoftstone
(covered  by  J.P. Morgan  China  Internet  and  IT-services analyst  Dick Wei),
can co-exists with  that  of  Indian  IT. The primary  drivers of the growth of both
the  industries  are  distinct  and  different.  Unless  near-term  convergence  of  the
drivers of the market and also of the business model takes place, we see less of a
chance of growth of either market/industry affecting that of the other. We remain
OW on the Indian IT sector with TCS (OW) continuing to be our top pick.