China threat to Indian IT

China poses the biggest challenge to India's IT outsourcing industry, which is expected to grow by an average 15 per cent over the next two years, according to the chief executive of India's biggest business processing outsourcer.

"China is a huge threat (to Indian IT groups). Long-term that is the only real threat we (Indians) have," Pramod Bhasin, chief executive of Genpact, told the Financial Times.

Mr Bhasin admitted that it was "pretty rough out there" for Indian outsourcing companies, but said some would pick up business from clients needing to cut costs and preserve cash. He said the Indian outsourcing sector, which commands about 51 per cent of global share, would slow from recent growth rates of 30 per cent a year, but would continue to expand.

On China, he said: "There are no big players at the moment, but their government is investing in the sector, (and) pushing out English education much earlier."

In January, Beijing started offering incentives, including tax breaks and subsidies, to the outsourcing industry, in an effort to help it grab more market share.

Egidio Zarrella, KPMG partner and IT adviser, said China was likely to become a global leader in IT outsourcing, serving domestic businesses and swathes of the Asia-Pacific region.

"China is on the ascendancy," said Mr Zarrella. "Not only are they learning English, but they are also training in Japanese, which is a very profitable market where the Indians have been struggling."

However, a recent McKinsey report said China's IT sector was too fragmented and that domestic companies were not as accustomed as other countries to outsourcing non-core activities. It also said China lacked graduates with sufficient professional management skills.

"China is doing very well compared with itself historically, but compared with the global industry, it is not growing fast enough to catch up," said Alex Peng, a partner at McKinsey. China's top 5 outsourcing companies have been growing at about 20 per cent annually, slower than their Indian peers.

Mr Bhasin agreed that China was not an imminent threat, but said Beijing's incentive package was a clear sign that it was aiming to encroach on India's $60bn IT services market. Including the Philippines and Malaysia, the global outsourcing industry will be worth about $150bn by 2012, according to McKinsey.

"When the Chinese set their mind on something they do it - and they tend to execute things a hell of a lot better than the Indian government does," said Mr Bhasin.

The Indian government had never supported the IT industry properly, Mr Bhasin said, for example failing to provide basic infrastructure: "We supply our own power, our own security, our own training and transportation ... If India doesn't do reform properly there is a possibility that its market share will drop."

Copyright The Financial Times Limited 2009