Is the Indian IT sector under threat from the Chinese IT industry? Just as the Indian IT sector has reached world class levels of quality and performance, is a new threat emerging in the East? Should Indian software and services companies ‘protect’ their competitive advantage? Should Chinese Premiere Zhu Rongji’s ‘invitation’ to Indian companies to establish offices in Shanghai be viewed as a legitimate request to establish commercial links or a Chinese ‘trick’ to learn the secrets of India’s astounding success?

Debating and answering these questions avoids the more fundamental questions. Indian IT executives have matured in an environment of dramatic and rapid change. Ask anyone who has worked in the Silicon Valley how rapidly competitive advantages are eroded and replaced with new business propositions generated by young companies with new ideas. Indian IT executives should not be discussing how they can protect their current # 1 position in the outsourced software and services segment. Instead, companies should be developing innovative strategies to begin to establish new value propositions which respond to new or anticipated realities: i.e. the rise of the Chinese software industry. We still remember how pundits in America had disqualified low quality Japanese imports!

Ask any successful product manager in an IT company and he will readily subscribe to the ‘eat your own children’ strategy of developing new products and services. Successful companies replace their best selling product or service with a new offering before that product/service reaches full maturity. If a company fails to do this, its bestseller will soon be replaced by a stronger competitor. In fact, the company may not even see the competitor coming.

What is causing the Chinese IT industry and Chinese technology entrepreneurs to be a threat to the Indian IT sector? China has found its ‘groove’ after more than 30 years of political and economic turmoil starting from the May 4 Movement to the beginning of the Deng Xiaoping-led reform program in the early 1980s. The PRC (Peoples’ Republic of China) government made a conscious decision to initiate rapid economic reforms first, placing political reforms on a much slower trajectory. The result has been socioeconomic stability. Of course, Chinese society has changed dramatically in the last 20 years and there remains substantial unrest in certain sectors of Chinese society. However, this broad stability continues to enable blinding modernization.

Besides, this stability has allowed the domestic economy to develop extremely rapidly, especially the manufacturing sector. By employing joint venture and technology transfer structures to facilitate foreign direct investment during the late 1980s and 1990s (many of which were not favorable to foreign investors), Chinese enterprises of all sizes have been able to modernize their production processes and produce a much higher quality product. While the Chinese manufacturing sector still has a long way to go, enterprises such as Ha’er have begun to export consumer durables under their own brand name rather than just being low cost OEM suppliers. From the Japan example, this is the first indication that an export economy is developing.

This vital and rapidly growing manufacturing sector needs software. Interaction with software entrepreneurs in Beijing and Shanghai showed that the biggest IT opportunities exist in continuing to modernize Chinese industry and connect industries together through advanced supply chain management communications and software. These firms are not replacing out-dated software packages, but are installing software for the first time. When will another opportunity to build software infrastructure for an economy the size of China’s present itself? Not in my lifetime!

Third, the government has invested in, and largely completed the building of national IT infrastructure. Firms like China Netcom and others have completed national fiber backbone projects and are now expanding their metro offerings. In addition, the Special Economic Zones (SEZs), first promoted by Deng Xiaoping in the early 1980s, have, for more than 20 years, encouraged and enabled entrepreneurs to start leading edge companies. Many firms have failed, many have succeeded, but what is clear is that the government policy of enabling business has produced spectacular results. New SEZs in Shanghai’s PuDong commercial area are dedicated to IT, especially software.

Another factor is that the Chinese are very entrepreneurial (just like Indians). Throughout Chinese history, there are several examples of individuals taking their destiny into their own hands and developing substantial businesses.

The Indian IT sector must continue to expand its global leadership position. At the same time, Indian firms will find it beneficial to encourage an engagement with the Chinese market. Whether it is starting a development center in Shanghai to lower costs or establishing a Chinese subsidiary to exploit the Chinese domestic market, or another innovative strategy, an engagement will serve to reinforce India’s leadership position and simultaneously identify new markets.

The message to Indian IT executives is: Engage with the Chinese economy as the world leader that you are—don’t avoid a potential competitor and become defensive. 

Jesse Parker
The author writes, teaches and consults on international business subjects at The Fletcher School of Law & Diplomacy at Tufts University and is CEO of Changsha Consulting, Inc. He is the co-founder of Indo-China Business Cooperation Institute (ICBCI), a new venture to facilitate business relations between the two countries