You would need to have been asleep for a hundred years to not know that the Chinese and Indian economies are booming. Combined, they account for approximately 50 per cent of the world’s gross domestic product (GDP) growth. The economic centre of gravity is still the US, but could that change by the end of the century? Will the 21st century belong to Asia?
Sceptics might think the Indian economy is doomed because a few UK firms have brought their call centres back in-house, but this could not be further from the truth.
Last year, India’s IT and IT-enabled services (ITES) industry grew by 31 per cent to £15.8bn, and business process outsourcing grew by 37 per cent to £3.4bn. Hardly a moribund market.
A recent study by consultancy McKinsey estimated that the business process outsourcing (BPO) industry could grow to 12 times its current size. Although call centres are an important part of India’s service exports, many Indian BPO firms are moving up the business value chain.
Architecture planning, engineering design, infrastructure management, and research and development (R&D) are the fastest growing areas of India’s service exports.
In July, Accenture launched a new R&D facility in Bangalore. ‘Bangalore is rapidly becoming a global hub for technology, R&D and software engineering,’ says Dr Lin Chase, director of the IT services firm’s new lab. ‘Some of the best researchers and developers in the world are based here and Accenture wants to tap into this wealth of talent to build on our research culture.’
There are many business opportunities to be had in China and India, not just as sources of untapped talent, but as enormous markets for goods and services. China, for example, is the world’s biggest buyer of mobile phones and the second biggest buyer of PCs. It also has the second largest community of internet users.
China’s economy has been growing even faster than India’s, at approximately nine per cent since 1995, compared with India’s eight per cent.
While India and China have long had a frosty relationship, there are signs of détente, both politically and economically. In 2003, India formally recognised Tibet as belonging to China and a year later China reciprocated by recognising Sikkim as a part of India.
On the economic front, last year, Indian IT services provider Infosys announced a £35m investment programme in China. Likewise, Chinese telecoms kit manufacturer Huawei built an R&D centre in Bangalore. While these are small gestures, a more united India and China will make a formidable economic force.
‘History shows that Asia can adopt Western models, learn from our mistakes and improve on them,’ says Neil Munroe, external affairs director at credit rating agency, Equifax. ‘Add to this the availability of larger and lower cost workforces, and it is clear that an economic shift is on the horizon.’
China’s economic success can be traced back to 1979 when the government started to dismantle the centrally planned economy. ‘What is driving the current boom is liberalising previously repressed sectors,’ says Dr Linda Yueh, a Fellow in Economics at Pembroke College, University of Oxford.
Economic lift-off
Reforms in China over the past 27 years have really allowed market forces to take hold, stimulating economic growth and drawing foreign investment.
‘How far it will go will depend on the extent to which these reforms continue to provide more market-driven forces into the centrally planned economy,’ says Yueh. ‘If China can maintain the momentum of reforms it’s quite likely to continue to grow at a good rate.’
India’s economic lift-off began slightly later. In the late 1980s, the Indian government, after years of socialist government meddling, began a programme of economic reform. But it was not until 1991 that the government started to seriously reduce export barriers and reform its monetary and regulatory policies.
Over the past three years, India’s GDP growth has averaged 8.1 per cent. With their large pools of highly skilled, low-cost labour, China and India are attractive places for companies to do business – whether on an outsource basis or setting up a subsidiary company in those countries, known as a captive site.
Unquestionably, much of India’s service industry boom has been driven by its low-cost labour. But Pascal Matzke, a principal analyst at Forrester Research, does not believe the benefit from labour arbitrage – the tendency for jobs to go to where they can be provided at the lowest cost – will hold for much longer.
‘In particular, India is suffering from significant employee attrition,’ says Matzke. ‘You have people, particularly senior and experienced people, demanding higher wages or changing jobs much more easily than they used to.’
But Indian IT trade association Nasscom says that, as an industry average, prices have remained more or less unchanged over the past two years.
‘The value-add you provide to your customer should be reflected in the price that the customer is willing to pay,’ says Sunil Mehta, vice president of Nasscom.
What’s more, Indian IT and ITES companies have been able to offset their labour cost increases. ‘Large companies have maintained their prices despite salaries going up,’ says Mehta.
The price of staff
‘The more employees you have, the lower the fixed-cost per employee. The other factor is productivity improvements, through just doing things better. Operating costs, such as telecom costs, have also declined significantly. So a lot of this eroding cost-competitiveness is a myth, he says.’
As evidence, Mehta refers to recent studies conducted by Everest Research Institute that suggest India will retain its cost competitiveness for the next 20 to 30 years.
As for staff attrition, the picture might not be so gloomy either. While call centres undoubtedly have high attrition rates, the rates are still lower than those in UK call centres, according to Mehta. And the further away from the customer the call centre is, the lower the attrition.
‘If you look at back-office work where there is no direct customer interaction, the attrition rates go down to 25 to 30 per cent,’ says Mehta. ‘For IT services, it goes down to 12 to 15 per cent.’
Phil Everson, a partner at consultancy Deloitte, agrees that the labour arbitrage argument is not dead yet, but he does not give India 20 or 30 years until this ceases, more like five to 10 years.
The reason Everson gives for this shorter window of opportunity is that the issue is not just one of cheaper labour, but one of effectiveness. If your developers are based in Mumbai, but your project is a rapid application development project, or perhaps a rapid prototyping project, where close work with the users is critical, then you immediately have a massive inefficiency in terms of time zones.
Everson says that if a firm is offshoring and its daily rate is a tenth of the charge in the UK, then it might put up with something being half as efficient because it is still making huge savings.
‘But in five to 10 years time when maybe the saving is only 50 per cent and you’re accepting an inherent inefficiency, then it ends up as broad as it’s long,’ says Everson. ‘That’s my fear because you are accepting systemic inefficiency in your supply chain.’
Of course, most chief information officers (CIOs) do not have plans that extend beyond five years, by which time they will have banked their savings. The problem comes after those five or 10 years when the wage arbitrage argument no longer stands.
Everson’s concern is that in 10 years, when IT operations are truly globalised, it will be difficult to retrench back into a centralised, co-located function.
‘CIOs might be forced to accept the inefficiencies of a globalised, distributed IT operation, but without having the labour arbitrage benefits that there might once have been,’ says Everson.
Innovation for the nation
‘If you are offshoring to India or China for cost, you are doing it for the wrong reason,’ says Nasscom’s Mehta. For those looking at cost alone, places such as Vietnam, Malaysia, and the Philippines are sources of cheap IT labour. India and China are moving up the value chain.
‘What we see is that clients, particularly in the UK, look to India, not so much as a source for lower labour costs, but for innovation,’ says Matzke. ‘This is particularly true for the BPO area where Indian firms are now developing specific niche skills that are becoming much more scalable.’
The Chinese government is also focused on trying to increase the amount of innovation in the economy through investing in R&D. ‘But it’s a very difficult task to generate technological advancement for any economy,’ says Oxford University’s Yueh. ‘And many of China’s science and technology personnel are trying to innovate within a very imperfect legal system.’
India’s problem is that while it has managed to shake off some of the perception of simply being a source of cheap labour, it is squandering its innovation potential by helping Western firms develop and deliver new types of services to the market.
‘What we don’t see is Indian vendors leveraging their innovation potential for themselves in the sense that they would develop disruptive solutions to sell under their own brand,’ says Matzke.
‘I don’t see the next SAP, for example, emerging out of India or China. Although there are great mindsets and capabilities in those countries, they don’t have the ability to market, promote and build relationships at the client site. We are now in a phase of the IT industry where, more than ever, brand and personal relationship rule.’
Indian companies are perceived as being more comfortable with engineer-to-engineer selling relationships. But in recent years, many Indian organisations have tried to build client relationships by hiring consultants from large consultancies as relationship managers.
But this does not always improve the situation, such as when the business-serving front-end does not know how to communicate with the technology back-end in India. Matzke says that Indian companies still have a long way to go before they become respected technology and innovation leaders in their own right.
But Mehta says that India may have been poor at marketing and brand building five years ago, but things have changed fairly rapidly. ‘Today if you see some of the leading Indian companies, they are known brands all over the world, particularly in the US and UK, and increasingly in Europe and Japan.’ And if you can’t build your own brand, you can simply buy someone else’s.
Mergers and acquisitions
In 2002, the Chinese government passed a mergers and acquisitions (M&A) law to make it easier for Chinese companies to acquire firms abroad.
Since then, there have been a number of Chinese acquisitions of foreign brands. Lenovo bought IBM’s PC division. China’s consumer electronics giant TCL bought the RCA brand from Thomson. There has also been a lot of activity in the energy sector, most notably China National Petroleum’s acquisition last year of PetroKazakhstan for £2.2bn – China’s biggest foreign acquisition to date.
‘As China begins to accumulate profits, these firms will be looking to expand overseas and one of the easiest ways to do so will be through acquiring an existing company or brand,’ says Yueh. ‘So as Chinese companies mature we are likely to see a lot more M&A activity, particularly as they position themselves to have global brands.’
So how will this change the IT landscape, and what does it mean to CIOs?
‘China is where the world goes to make products,’ says Deloitte’s Everson. ‘It has accelerated and continues to accelerate the transition of the British economy to a service-based economy. As a result, there is a host of implications for IT. One of the most obvious is the need for IT to be able to manage supply chains that are far longer in duration and more complex than the supply chains of decades past.’
Everson points to the UK’s textile and clothing industries, which over the past 10 years have shifted production to the East. ‘The systems underpinning those supply chains at the clothing manufacturers and clothing distributors have had to change dramatically,’ he says. ‘And I think the same will apply for all product related industries.’
Forrester’s Matzke believes it is absolutely mandatory that CIOs at least investigate the opportunities that might exist in China and India. ‘Every CIO must have an offshore or nearshore strategy,’ he says.
‘I don’t see any requests for proposals sent to vendors where a client would not at least invite one Indian or Chinese company to bid, even if it’s just to push the price down. Most of the global players are leveraging their own nearshore and offshore resources, so it’s becoming common to propose a combination of onsite, offshore and near-shore delivery, and then to negotiate with the client the balance between the three elements. We also see a lot of executive mandates driving CIOs to invest in offshore and nearshore resources.’
Personal development
Aside from business opportunities, CIOs cannot afford to ignore India and China in terms of career development. Simon La Fosse, head of the CIO practice at international recruitment consultancy Harvey Nash says the ability to do business in these economies is now seen as a core skill.
‘Anybody running substantial IT functions who cannot discuss the options intelligently, such as how to make it work and the pitfalls to avoid, and can’t discuss it at a strategic and a detailed level, is quite simply not a modern CIO,’ says La Fosse.
So what sort of skills should tomorrow’s senior IT executives develop? A recent report published by the BCS, Building a world-class IT profession in the era of global sourcing , listed the following skills for future IT professionals: soft skills training, supplier management, negotiation and relationship development, project and programme management, and general business skills.
But with so many entry-level IT jobs moving to India and China, whether outsourced or to local staff at captive sites, the entry point into an IT career is not as clear cut as it was. So where will tomorrow’s IT leaders come from? And are there enough IT jobs to go around?
‘If you think back 20 years, there was a significant amount of software development carried out in the UK,’ says Everson. ‘But the real technical people, 20 years ago, tended to find themselves moving towards customer support and software support. And I think that that’s going to be even more so going forward.’
A supportive start
There are very few UK firms that offer bespoke development. ‘A lot of companies use commercial off-the-shelf software and have done for the past 15 years,’ says Everson.
‘But the technological focus for those large IT giants in the UK is customer support. And I think there will be many more of our IT graduates going into that, which will be quite different from today where a lot of mid-level IT managers have grown up doing development work. I suspect that in the future many mid-level IT managers will have grown up doing IT support, which is no bad thing.’
While CIOs shop around China and India, looking for the next crop of corporate talent, Everson says they should save their airfare and invest in their own people instead. ‘You might not get the labour arbitrage and the day-rate efficiency savings,’ he says. ‘But the real challenge here is for IT organisations to develop their own people and to improve those people’s skills so as to make effectiveness gains instead of day-rate efficiency gains.’
At least Nasscom’s Mehta and Everson agree on this point. Mehta says that while China is investing in eight-lane motorways, hotels and office blocks – many of which are still empty – India needs to invest in its people. ‘Which is not to say you should not have airports,’ he adds. ‘But the emphasis should be on investing in people.’
Further reading:
Facts and figures: China and India
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