Looking to the Future, India and China Target Software

Jehangir S. Pocha is the NPQ correspondent in Beijing.

Beijing — A new software joint venture spearheaded by India’s largest software firm, Tata Consultancy Services (TCS), and a consortium of Chinese companies with Microsoft as a junior partner could pave the way for Indian and Chinese technology firms to combine their skills and jointly penetrate the global IT market.

The prospect of the two Asian giants forming a potentially unbeatable combination has been the dream of many in their corporate circles, even while it has been a nightmare for American labor unions and outsourcing critics who say America has already lost 400,000 high-quality technology jobs to India and China.

The deal, which is expected to be signed within the year, will aim to “create China’s first world-scale software company, which will serve as a model for other Chinese companies,” said S. Ramadorai, CEO of TCS, after a letter of intent to this effect was signed by all parties in Beijing.

The new entity created by the joint venture will not only serve local Chinese clients but also look at expanding into international markets such as Japan, South Korea and the United States, TCS officials said.

“The objective of the joint venture is twofold,” said Girija Pande, TCS’s regional director for the Asia Pacific region. On one hand it will give NASDAQ-listed TCS, which is expected to control about 70 percent of the new company, “preferential access” to the huge IT projects the Chinese government is poised to undertake. And in exchange TCS will coach its new Chinese partners—Beijing Zhongguancun Software Park Development Co., Ltd., Uniware Co., Ltd. and Tianjin Huayuan Software Park Construction and Development Co., Ltd., which will own about 25 percent of the new venture—in the processes and methods that have allowed TCS to become India’s largest software company with $1.7 billion in revenues, Pande said.

The presence of Microsoft as a minor partner holding about 5 percent in the new company indicates that China, which has been experimenting with open-source software such as Linux, is also committed to using Microsoft’s technologies and standards, he added.

Learning how to build IT software and services companies has been a long-time goal of the Chinese government. China’s hardware industry is valued at about $100 billion, half of which is exports, making it the world’s third-largest hardware manufacturer. But the country has lagged behind India in the software and services field, and Chinese policymakers have been frankly envious of how India has morphed into the world’s software hub, with exports of $17 billion last year.

Over the last two years, Beijing has been implementing a series of measures designed to herald in a technology revolution that will transform it from being “a body country to a head country,” said Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress.

“We realize in China that we need deeper IT and services skills to enable us to improve Chinese industry and government overall,” said Duan Yongji, president of Beijing Centergate Technologies (Holding) Co., Ltd. (CENTEK) and chairman of Sina.com and the Stone Group. “IT-enabling industries can add points to our GDP growth every year.”

With China currently poised to undertake massive IT-related projects, including computerizing its huge but lumbering banking system, expanding its telecommunications networks, developing various e-government initiatives and modernizing its heavy industries such as steel, energy and mining, the Chinese government was keen to leverage TCS’s experience in handling large-scale, complicated projects.

Beyond that is the obvious goal of using the lessons learned from TCS to carve out a piece of the expanding market in software and services exports for China.

“Chinese firms lag Indian ones because Chinese students are not trained to discover their creativity, and they also have language issues when working with American companies,” said Steve Zhang, CEO of AsiaInfo Holdings, Inc., one of the few Chinese companies to have developed a world-class software design and implementation skills. “If we can partner and learn from Indian companies, we can push ourselves higher in the international market.”

Though NASDAQ-listed AsiaInfo, which is headquartered in Delaware, could itself serve as a model for Chinese software companies looking to go global, not many local firms can muster the resources required to take this approach.

Instead, Pande said he expects that the skills Chinese companies will learn from partnering and working with TCS to better position them to launch their own US initiatives from their low-cost home in China. While some Indian software managers have been privately critical of TCS’s decision to pass on its expertise to Chinese companies, Pande said such a close-minded approach was misguided.

“You have to give something to get something,” he said. “We know how to manage our intellectual property, and, anyway, the trick is not to hold on to what you know but to constantly be developing new IPR (intellectual property rights).”

Since successfully leveraging the skills and techniques of a joint-venture partner to build up indigenous companies has been a staple strategy of China, Inc., as the Chinese business-government nexus is called, there is every indication that China could soon become a major player in software.

A new breed of young, Western-trained Chinese entrepreneurs is “increasingly setting up IT business capable of servicing global clients in China,” said Kenneth Wong, an ethnic Chinese Malaysian citizen who runs a software company called Exoweb in Beijing. “American firms are getting comfortable working with us and the overall positive image of China is also a big help in getting people to say, ‘Hey, we must look at China.’ Today we might be working in the millions, but soon it could be in the billions.”

Global venture capital firms seem to agree and have invested $1.3 billion in Chinese IT businesses over the last year alone, said a report issued by the International Finance Corporation.

Because of the similarities in language and closeness in geography, Chinese software and outsourcing firms have already made inroads into Japan, Taiwan and South Korea. Many of them are based in China’s northeastern region that has many Korean and Japanese speakers, and CENTEK’s Yongji said many of these firms could soon leverage their expertise to enter the US market.

Many, Yongji said, would also be looking to do this in conjunction with Indian companies that already have well-established marketing operations in the US.

“India is a software superpower, but it has limitations,” said Yongji, referring to growing shortages in India of trained engineers and infrastructure, which are increasing the cost of doing business in the country. “China can provide all this, and with India’s marketing network in the US, together we can become unchallengeable.”