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Home > Debates Last Updated: 14:32 03/09/2007
Debate: Commentary (July 22, 2003)

Comparing the Software Industries of India and China: Will They Be Fierce Competitors or Collaborators?

Venkat Kommineni (University of Southern California, Los Angeles)

This paper will explore the history of the software industries in India and China, the present condition, and expectations for the future. India has made significant strides in the software industry because of its labor force, educational system, and government policy to rank near the top in outsourcing of software development and services. China has done exceptionally well in the recent years and is poised to be a strong competitor of India in the next decade. The question that I will tackle is whether India and China will be in competition with each other in the coming years or if they will find some mutually beneficial agreement in the software industry that they can attain in order to dominate the world market.

One of the reasons India has been so successful in the software industry is because most software is written in English. "India now has the largest pool of English-speaking software engineers outside the US, with operating costs at roughly 25 per cent of US levels. The resource pool is constituted of about 300,000 high-level software professionals compared with estimates of about 30,000- 35,000 in China." (China Hopes to Overtake India in Software Exports) Raju Chellam of Business Times believes that it would take China at least a decade to overcome this lack of English proficiency because they have only recently begun to emphasize English in their schools. (China can Become New Software Superpower) The ability to speak, write, and read English is critical in negotiating and maintaining contact with foreign clients, especially when the US is the biggest foreign market for these countries.

The educational system used by India trains software engineers in a manner that includes real world application versus strictly a classroom education which is found more in China. "The Government has placed emphasis on IT training and education with sustainable development which it does in three ways: through (1) Universities/Colleges; (2) Private training institutes/organizations; and (3) By providing conducive policies, and incentives to those coming back from abroad and opening their own companies, or working as software engineers. Compared with India, China relies too much on the universities and colleges that tend to limit the training of software engineers, and also their own development." (China Software Industry vs. India's software industry) The well-rounded education instituted by the Indian Government creates a well-rounded and highly skilled worker who has the government's support to start their own business.

Government Incentives

In the 1970's the Indian government acted as the regulator of computer products and services. In 1971, the Electronics Commission, which formed policies, and the Department of Electronics (DOE), which implemented policy on a day to day basis, was formed. The government relaxed its control in the 1980's and let the state, the DOE, and Electronics Commission foster the production of the computer industry. One of the first measures taken by the Electronics Commission was the creation of the Santa Cruz Electronics Export Processing Zone (SEEPZ) which offered incentives such as tax breaks, cheap land, duty free import of inputs and a streamlined permit process in order to establish export units. In the mid 1980's there were many policy liberations aimed especially at the software industry with the New Computer Policy in 1984 and the Policy on New Computer Export, Software Development and Training in 1986. The main objective of these two acts were "promoting software sector in the country and broadening the base of computer application areas. It also began a process of simplifying procedures for setting up software units in India." (Software Industry in India: A Case Study) In the 1990's, other government incentives have been enacted such as Export Processing Zones (EPZs), the 100% Export Oriented Units (EOUs), Electronics Hardware Technology Parks (EHTPs) and Software Technology Parks of India (STPIs). The economic liberalization of the software industry by the Indian Government focused on policy changes, tax incentives, and infrastructural support.

The Chinese government started its reform for the science and technology industries in 1985 which led to the strategic research program known as "863" in 1986. This purpose of this program was to provide money for information technology research and development and to support information technology enterprises. "By the end of 1999, "836 project" has successfully completed 421 projects in IT sector. 7848 papers are published, and 48 of the technological innovations patented. The estimated the economic values of the products are about US$40 million." (Information Technology in P.R. China: Government Policies)

The other major government project that the Chinese Government initiated, under the State Science and Technology Commission, was the Torch Program which made public discoveries by government research institutes and universities and also provided facilities which served as "technology incubators." "The Torch Program co-locates technology-rich enterprises in order to create new technologies through synergy." (Information Technology in P.R. China: Government Policies) In 1995, the Torch Center launched the "Torch Plan" which created and supported software parks and software enterprise groups.

China has set up high-tech zones where startups can enjoy five years of significant tax breaks. The Chinese Government offers preferential tax treatment for businesses in China for their research and development expense as an incentive to set up business in the country. "The business Tax and Value-added Tax (VAT) for software development or technology transfer have been dramatically reduced. Possibly, the foreign –invested enterprises (FIEs) can deduct 150% of their R&D expenses. Recently, the Government also grants domestic high-tech enterprises that meet certain conditions the right to directly import and export high-tech products and equipment. "(Information Technology in P.R. China: Government Policies)

Software Technology Parks

In 1986, the Ministry of Information Technology (MIT) created a policy document called "Computer Software Export, Software Development and Training" which recognized the potential of the software industry and started to create policy to foster growth in this industry. This led to the creation of the first software technology park of India (STPI) in Pune in 1990 and two more in the subsequent months in Bangalore and Bhuvaneshwar. The purpose of these software technology parks is a "100% export oriented scheme for undertaking software development for export using data communication links or in the form of physical exports including export of professional services for rendering consultancy services and development of software." (Software Technology Parks of India)

The creation of the software technology parks was to provide high speed data communication, reduce time consuming approvals from the government, and offer smaller firms space, finance, and infrastructural support. "The availability of wide band high speed data communication (HSDC) facility has helped the growth of off-shore development centers and provided high skilled job opportunities to Indians." (Software Industry in India: A Case Study) A unique aspect of the software technology parks is the single window service, which allows decisions to be made much faster in the industry because all required approvals and clearances are granted by the director of the STPI's. The STPI's help connect foreign investors with Indian software developers and also help the software company get financed by acting as the intermediary between the lender and the company. Basically, these parks were created to help in the setting up of software firms, especially in increasing the amount of software exports.

The software technology parks of China are similar to those of India in that they are both government sponsored assistance programs to develop the software industry by providing incentives. The Hefei software park in east China describes itself as a "a bridge connecting government, other official organizations and the companies, an intermediary between the software companies and the investors, and a platform helping experts on information and software technology start their own business." (Brief Introduction to Hefei Software Park) More specifically some of the services they provide are "business establishment, training program, office rent, all level projects application, human resource management consultant, consultant on law, taxation, accounting, VC and etc..." (Brief Introduction to Hefei Software Park)

In 1995, China's Ministry of Science and Technology launched a similar initiative aimed at developing and supporting the high tech industry named "Torch Plan. "The Torch Plan offers funding to academic institutions and small, new companies to commercialize the products of academic research. Primarily engaged in specific aspects of high tech development such as photo-electronic, software, and biotech, the Torch Plan has been responsible for the construction of 19 software parks across the country." (Rethinking China's Software Market) In 2000, a market survey announced that the 2100 business located in the 19 software technology parks in China accounted for 80% of the software sales. Also in 2000, the State Development and Planning Commission, which coordinates long-term macroeconomic policies, announced the creation of 10 national software bases which would receive support from the central government. With the creation of these software technology parks, Wattanavitukul says China plans to increase revenue in the software industry from $4 billion USD to $20 billion USD in the next five years. (Wattanuvutikal)

Pros and Cons

India is thought of as the premier country by many U.S. firms (up to 82% chose India) to outsource their software development and services. The advantages of outsourcing a firm's software needs to India are the large labor force, high growth, high quality, and low cost. "It also has a growing bank of 3.5 million technical personnel. There are over 1,670 educational institutions including engineering colleges, technical institutes and polytechnics that train more than 41,000 people annually. The large, technically skilled manpower pool has fueled this growth which has expanded almost twice as fast as the world-leading U.S. software industry did during the same period, though from a smaller base." (Software Industry in India: A Case Study) "According to the Ministry of Information Technology (MIT), India is comfortably placed until 2008 to satisfy domestic demand for IT manpower, at present levels of demand." (Allison) Also, the quality of the technical training is one of the best in the world, which makes India a very large, stable, and technically proficient labor source in the software industry.

The Indian software industry's rate of growth has grown exponentially in the past decade showing the dominance it has attained in the industry. The Indian software sector has grown at a compounded annual growth of almost 55% between 1990 and 1997. Exports have spiraled more than 30 fold in just nine years between 1989 and 1998 from US $ 56 million in 1989-90 to US $ 1.8 billion at present." (Software Industry in India: A Case Study) India's software exports grew from $4 billion USD in 1999 to $10 billion USD in 2002, with almost 68% exporting to the U.S. and 21% to Europe.

The level of quality and low cost of the Indian software exports is unmatched, which is proved by the number of firms that receive the SEI CMM (Software Engineering Institute Capability Maturity Models) Level 5 certifications. 15 out of the 23 companies which received the Level 5 certifications were located in India: "worldwide, only the IBM project at NASA has achieved this unique distinction. (Software Industry in India: A Case Study) Of the leading 300 companies, more than 170 have ISO 900 certification, which is the highest number in the world in the software sector. The combination of high quality and low cost has caused one out of every four global giants to outsource their software requirements to India as well as more than 158 out of the Fortune 500 companies. "Outsourcing is becoming a strategy for forward-thinking IS managers. It is no longer merely a means for reducing costs but also a tool for adding value to business."

Despite the aforementioned advantages, their lies some issues of concern that might stagger India's exponential growth which include difficulty in retention of workers and poor infrastructure. The low cost attribute which contributes to India's growth may be diminished because of the increase of wages domestically and internationally. When multi national companies settle in India, it pushes wages up so they can attract qualified engineers. Also, highly trained personnel tend to leave the country for higher paying or more attractive jobs in the foreign market. "There is a high attrition rate of at least 15% to as high as 50% in certain firms and certain periods." (Software Industry in India: A Case Study)

The substandard infrastructure increases the burden on firms to remain cost effective. For example, all of the software companies generate their own power, because the cities power system is unstable. Also, companies usually run their own transportation system for their employees since the roads and driving condition in India are not well organized. "India's telephone density is abysmally low, at about 1.3 per 100 in 1995 compared to 62.6 per 100 in the USA Bajpai and Sachs (1998). Besides the telephone density being low, new connections are difficult; require payment of fees, queues, waiting period and harassment from the telephone department." (Software Industry in India: A Case Study) As far as the Internet, breakdowns and disruptions in connectivity are common and need to be resolved. The problem of retention of workers and poor infrastructure are problems that could stunt foreign investment in India in the future.

Although China has lagged behind India in the software exports, the Chinese software industry has a promising future with a large domestic market. "China has a GDP per capita of 3,800 dollars compared to India's 1,800. Its exports are three times more than India and while China has 100 million telephones, India has only 18.95 million." (China's software industry to compete with India) "The domestic market of telecom, bank, transportation, consumer electronics, digital-controlled machine tool, hospital, social security has increased demand. The large population, vast land, West Area Development, and the Olympic Games in 2008, provide a huge market for the Chinese software industry." (China's software industry vs. India)

China's software exports are growing at a high rate while costs are decreasing. "In the 10th Five Year Plan (China's economic planning document covering 2001-2005) there is a growth target of more than 30 percent annually for the software and IT industry. Such growth will bring market sales up to nearly $20 billion by 2005." (Rethinking China's Software Market) "While until about a year ago top Indian service firms were charging American companies $75 to $90 an hour, today the figures are merely $6 to $9. Murthy believes that China will very soon do the same job at about $3 an hour -- and that will bleed Indian firms to death. (Joseph) This exponential growth of exports and undercutting of costs will give China an increased market share in the software industry exports.

The disadvantages that China faces are the lack of government understanding about the industry, lack of highly developed technology, and lack of track record. The Chinese government "still adopts the kind of administration prevailing in the general industry to the software sector, without understanding the character of software companies." (China Software Industry vs. India's Software Industry) Many of the software companies lack the advanced technology to produce quality software products and lack operational management skills. China is also deficient in research and development technology which will be crucial for such a proposed growth in exports. The Chinese software industry has had a poor showing in locally develop software applications and has not attracted the types of foreign investment that signal the growth of an up and coming industry. The firms in the software industry are characterized by small to medium sized companies. Its slew of small software companies would prohibit it from making it big as a software player globally where giant software firms rule and it has no well-known software firms unlike Tata Consultancy, Satyam and Infosys in India that will give it top-of-mind recall worldwide." (China can Become New Software Superpower)

The Future of the Industry

Even though India and China have been competing in the software industry for the past decade, the future of the two countries may see an alliance as a way to leverage them and create a win-win situation for both parties. Because of China's large and growing domestic software market, multinational companies will want to outsource their software development to gain a foothold in China. However, since Chinese companies are small and don't have an international track record unlike the large well-known companies of India, they may partner with Chinese software makers and earn some of the software outsourcing market in China. (China and India can Both Win at Software Development)

Another scenario that could occur is the collaboration of Indian software designers and Chinese hardware designers working together in a mutually beneficial situation. "For instance, India exports about 70 per cent of its software to the US and Europe, while China exports about 90 per cent of its hardware goods to the western markets. But in turn the US exports 90 per cent of software to China, and 60 per cent of its hardware to India. If India and China can come together, they can not only cater to the entire world, but also dominate their own domestic markets." (India's Software Companies Eye China's Market)

I believe that in the future of the Indian and Chinese information technology industry will collaborate on mutually beneficial alliances such as the aforementioned predictions in order to avoid bitter competition for an agreement that makes both countries win.

Works Cited

Allison, Tony. "Software – The Arrowhead of India's IT Weaponry." (2000)

Bajpai, Nirupam and Vanita Shastri; "Software Industry in India: A Case Study. (1999)

"Brief Introduction to Hefei Software Park." (6 July 2003)

Chellam, Raju. "China can Become New Software Superpower." (18 April 2003)

"China and India can both Win at Software Development." (3 July 2003)

"China Hopes to Overtake India in Software Exports:Report." (23 January 2002)

"China Software Industry vs. India's Software Industry." (August 2002)

"Indian Software Companies Eye China's Market." (8 February 2002)

"Information Technology in P.R. China: Government Policies." (6 July 2003)

Joseph, Manu. "Software Wars: China vs. India",1367,51706,00.html (25 April 2002)

"Rethinking China's Software Market." (March 2002)

"Software Technology Parks of India, Scheme." (2 July 2003)

Wattanuvutikal, Piset. "The Software Side of the Digital Dragon." (October 2001)

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