It’s hard to open a newspaper these days without reading some story or another about China and its economic locomotive.
Chinese gross domestic product powers ahead, more manufacturers open plants in China, the United States begs China to revalue its currency, and so it goes.
But despite this seemingly unstoppable economic momentum - last year China brought in US$60 billion ($85.5 billion) of foreign investment and saw its GDP grow by another 9 per cent - the country hasn’t really been able to attract any significant technological development or investment.
The real news as far as technology is concerned, in fact, lies to China’s southwest, in India.
India - the other Asian giant, with its well-educated, highly skilled workforce, superior English-speaking capabilities and low wages - has emerged from among the developing nations as the dominant player in information technology, software and outsourcing.
The numbers are staggering. As of March, India had control of 44 per cent of the global overseas outsourcing market for software and back-office services, with revenue of US$17.2 billion.
India’s National Association of Software and Services Companies (Nasscom) projects that share to expand to 51 per cent by March 2008, when annual revenue is expected to hit US$48 billion, out of total global outsourcing spending of US$96 billion.
China, with its similar low wages, pales in comparison with only 4.9 per cent of the outsourcing market.
India also has the second-largest number of English-speaking scientific professionals in the world, second only to the US.
And Nasscom says as many as 400 of the Fortune 500 companies now either have their own centres in the country, or outsource to Indian technology firms.
At the end of March, India’s outsourcing industry employed 1.05 million programmers and other skilled workers, while giving indirect employment to 2.5 million people in support services such as transport and catering.
More than 660 multinational companies each bring business worth more than US$1 million annually to India, where hourly software development rates range between US$18 and US$26, compared with onsite rates of US$55 to US$65 in the US and Europe.
The success is all the more remarkable when you think about how quickly India has progressed, says Samu Devarajan, managing director of Cisco Systems India.
"The IT industry today is the fastest growing sector in India," he says. "In contrast to markets that have deployed multiple generations of IT infrastructure over the years, India can leapfrog right to 21st-century solutions."
In the past five years alone, India has moved from being a nation of call centres and backroom coding to one that is spearheading some of the most innovative software development in the world.
Much of that innovation has come through the Indian centres set up by US companies.
From designing next-generation microprocessors to developing wireless broadband technology, these centres have filed more than 1000 patent applications with the US Patent and Trademark Office.
Chip-maker Intel, for example, announced last week it would establish a platform definition centre in Bangalore to develop new computing platforms and technologies specifically for India and South Asia.
In previous years, "India was largely recognised as a way for IT companies to outsource some of its backroom operations", says Ashe Lilani, head of global markets for Silicon Valley Bank, which helps US and Indian technology companies as well as private-equity firms pursue cross-border business.
"As American companies grew more comfortable with the way business was done in India, and were comfortable with the quality of the work, they started opening up their own development centres to do more core development work."
One company that recognised this potential early is networking giant Cisco, which opened a centre for global engineering and research and development in Bangalore in 1998. It is Cisco’s largest R&D centre outside the US.
For Cisco, the reasons to set up in India were numerous.
"The country has a large pool of engineering talent, and a commitment to educating in these fields," Devarajan says.
But it’s not just big US-based multinationals. India itself has spawned several indigenous companies that have become key multinational players, with the results to match.
Global IT consulting giant Infosys Technologies, which started up in Bangalore in 1981, recently announced an after-tax profit for the year ended March 31 of US$419 million on revenue of US$1.6 billion.
Wipro Technologies, also an IT services provider based in Bangalore, also posted similar results recently.
The company reported a profit of US$363 million, a 58 per cent increase, on revenue of US$1.87 billion for the year ended March 31.
Wipro’s sales of hardware and services in Asian markets, meanwhile, more than doubled in the most recent fiscal quarter.
So with India so far ahead in the global technology race, can China catch up? There are positive signs.
The number of engineering graduates and software applications professionals in China has grown.
Since 1997, annual revenue in software and IT services has risen by 42 per cent year, on average, reaching $6.8 billion in 2003. The number of English-speaking graduations in the workforce has doubled since 2000 to more than 24 million.
Yet some argue that India is so far ahead it would take China at least 10 to 15 years to bring its IT services industry close to what India now has. So what’s holding China back?
China’s industry is highly fragmented, with about 8000 software services providers. Almost three-quarters of these have fewer than 50 employees.
India, on the other hand, has fewer than 3000 software companies, of which 15 have at least 2000 employees.
Some of India’s IT companies, such as Wipro and Infosys, have gained international clientele and recognition. The fragmented industry in China means most companies there don’t have the scale to attract international clients - a key ingredient that has fuelled India’s industry.
Other factors include weaker process controls and product management and an employee turnover rate of 20 per cent a year.
Silicon Valley Bank’s Lilani says it’s not a matter of choosing one country over the other, it’s about leveraging the best of what each has to offer. Or namely: software development, services and outsourcing from India, and cheap hardware manufacturing from China.
"These are completely different markets, with different strengths," Lilani says. "Companies are asking themselves, how can I leverage both?"
The future is Indian
* India is powering ahead in technological development and investment. The country expects to control 51 per cent of the global outsourcing market by 2008.
* For all of China’s impressive economic statistics, the country has fallen behind India, with only 4.9 per cent of the outsourcing market.
* Not all of India’s success story is because of foreign multinationals looking for cheap labour. Infosys and Wipro are just two of India’s huge global IT players.
By Naomi Hamersley