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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.
