2005-02-02

IT industry Called for Consolidation

China's highly fragmented software-outsourcing industry would prevent it from matching neighboring India's success in the global information technology services market for many years, McKinsey & Co. said. "For starters, the Chinese must consolidate their highly fragmented industry to gain the size and expertise needed to capture large international projects," the global consulting firm said in the McKinsey Quarterly journal. "Currently, there is little movement in this direction."

China and India, two of the world's largest and fastest growing economies, have pursued different models of development, with China having emerged as the world's manufacturing hub and India as a global provider of IT services.

McKinsey said China's IT industry was certainly showing signs of "healthy expansion." The number of engineering graduates and software professionals has grown considerably and the ranks of English-speaking graduates in the workforce have doubled to 24 million over the past four years. Furthermore, annual revenue in software and IT services have risen 42 percent on average since 1997, reaching US$6.8 billion in 2003.

But that was still barely half of India's revenue of US$12.7 billion a year from the sector, said McKinsey.

Foreign outsourcing business accounts for just 10 percent of the global industry's revenue compared with around 70 percent for India.

"Growth (in China) is driven by domestic demand most customers are small and midsize Chinese enterprises that want their software customized to their own needs," it said, adding that many projects were below optimal scale, suppliers compete on price and collecting payments could be problematic.

Noting that the top 10 IT services companies in China have just a 20 percent share of the domestic market compared with a 45 percent stake commanded by India's top 10, McKinsey said that to "compete effectively in global outsourcing, China's software industry must consolidate."

Without adequate scale, Chinese players would not likely be able to attract top international clients that Indian firms such as Tata Consultancy Services Ltd., Infosys Technologies Ltd. and Wipro Ltd. had been successful at doing, it said.

Smaller companies were "riskier and less reliable partners," said McKinsey. They are more vulnerable to the loss of key personnel and may not have the financial muscle to survive for the duration of a project.

Yet only 12 percent of Chinese software service providers saw mergers, acquisitions and alliances as a priority, said McKinsey, citing a survey it conducted of 32 Chinese firms. In contrast, several Indian firms are considering takeovers of Chinese firms to expand operations.

McKinsey recommended that Chinese software firms should "manage their talent better" and do more to develop their employees to reduce the annual employee turnover rate that it estimates at about 20 percent. Even in the United States, where the IT labor market was very fluid, the turnover rate averaged 14 percent, it said.

"With greater size and an improved talent base, Chinese software-services companies will be in a better position to address other issues, such as building credible brands in international markets and developing knowledge of specific industries, including finance and pharmaceuticals," the consulting firm said.

Source: Shenzhen Daily

[Back]