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Will China dominate outsourcing's future?

Wipro's Sudip Banerjee explains why many Indian companies fear being left behind by an emerging--and less expensive--China.

File this one under the heading "what goes around, comes around."

After a run of stunning good fortune, India's tech community finds itself dealing with a looming challenge from a flourishing Chinese economy. Just as American companies saw jobs disappear to less-expensive venues in India, China has begun to figure as an alternative for the practice of shipping tech tasks offshore.

The shift has not gone unnoticed by leading technology outsourcers in India, who are dealing with creeping wage inflation. As a result, some are fast in China to remain competitive with their peers.

How big this trend will become remains unclear. Revenue from IT services is rising in China, but it is still barely half of India's $12.7 billion a year, according to a recent report from consulting firm McKinsey.

Part of the problem is a fragmented market, McKinsey said. And China faces other challenges, not the least of which is a lack of management talent.

CNET recently spoke with Sudip Banerjee, president of enterprise solutions at Wipro Technologies, about the relative cost of software operations and other issues surrounding the future of outsourced tech work in China.

Q: What are the advantages and disadvantages of being in China right now?
Banerjee: The advantages are twofold. You have a large labor supply pool like you have in India. The other advantage is that if you're dealing with customers or companies who have an Asian headquarters, there is a language and cultural advantage. (That is brought by) some of the Chinese, particularly in cities like Shanghai, which has bilingual engineers who speak both Japanese and Chinese.

In terms of the areas where they still fall short, I think one is the intellectual-property protection issue. The second is their English language capability, and the third is their lack of project management expertise.

Is there is a particular example of things going well in China? Have you been surprised at something working out where you didn't expect it to?
Banerjee: I think they have very dedicated people. The programmers that you get there are very hardworking, very dedicated, and they produce content as good as anyone else. When we went there first, we were not sure what kind of output we would get, but we're very happy.

I think the challenge there is only in the project management area--project lead area or the specialized consultant area. But at the grassroots level, the attitude as well as the ability to do hard work and the quality of output--all that is very good.

People have a lot of misconceptions about China.
When you're talking about this dedication and quality, are these Chinese programmers and other professionals developing in computer languages using Chinese characters? Or English alphanumeric characters? How does it work?
Banerjee: We only hire people who can do it in English, except where we have to do a local office implementation. So we do tend to get bilingual people. We have a requirement sometimes of people who know Chinese characters.

Can you give an example of a time when things didn't work out well? Or you ran up against an obstacle that you hadn't expected? Were there any intellectual-property scares you had there in China, for example?
Banerjee: We ourselves haven't had those, because of the nature of work that we have done. We have not exposed ourselves in any area where it could be in trouble with IP. But I've lived in Shanghai, and I've met people, and they certainly do have those concerns.

What kind of steps have you taken to ensure your customers that they aren't going to be losing their intellectual property in China?
Banerjee: We've made sure that wherever we've done work for our customers, only the local implementation and what was required was passed on. And we were doing that in a secure environment within our own development facility or in the customer's development facility.

We've treaded very carefully, I have to admit. We have just made sure that we have only the documentation which is required--not anything more.

Do you see the Chinese market as a place where you might expand given what seems to be pretty high wage inflation rates in India and high turnover? Can you speak about what those levels are right now that you're seeing at Wipro? And what is the corresponding information for the Chinese labor market?
Banerjee: I don't see much of a difference. The turnover for Wipro this quarter--I think it's just under 10 percent. Having talked to people in Shanghai in the Pudong Software Park, which is like their version of Bangalore, you (find) pretty much the same range. It keeps fluctuating from company to company.

This whole notion of 'it might be cheaper to do work in China'--I don't believe that's true. The programmer cost (difference) between India and China--China is about 10 to 15 percent lower. But (when it comes to) the supervisory staff, project lead, project managers, etc., China is about 25 percent higher.

When you take a project and you do it on a 10-member team (or a) 20-member team, the net cost is the same. The other thing which you have to remember is that the Yuan currency is likely to get revalued at some stage. It's currently in a very artificial stage, and I think the U.S. will be the government which will really put pressure on China to get that Yuan revalued, because the U.S. economy is hurting as a result of the current evaluation of the Yuan. When that happens and the Yuan gets firmer, the cost of the local Chinese talent is going to be even higher.

I don't believe that there's going to be any advantage or disadvantage, from a salary perspective, in operating in China.
So I don't believe that there's going to be any advantage or disadvantage from a salary perspective in operating in China.

What is the wage inflation, wage increase rate, that you're seeing in India for programmers?
Banerjee: In India, the total wages have risen up between 10 percent and 12 percent.

Ten percent and 12 percent annually?
Banerjee: A 10 percent to 12 percent offshore wage increase. And I believe that that's going to be rising at the same level or a little higher in the next 24 months.

People have a lot of misconceptions about China. I think China is associated with low cost, at least in the software industry. I haven't found any evidence of that with any customer or anybody who has done any business there.

What is Wipro's presence in China?
Banerjee: We have a small development center out of Shanghai...The plans are to have a beachhead from where we're able to implement software development activities for people who have a China (presence).

So it's not so much the India model of taking work from, say, a U.S. customer or European customer and doing that application development or integration work in India?
Banerjee: No, we don't do that.

Do you have specific head count growth plans in China?
Banerjee: Yes, we have an internal head count plan. But it's not really public. It's not in the thousands; it's in the hundreds.

This is the stuff that's being done for the China market predominantly, it sounds like.
Banerjee: It's stuff not even for the local Chinese companies. It's for global companies who have a strong China presence, and plenty of large companies around the world now have very significant operations in China.

Do you see yourself as playing a role in consolidating the software outsourcing industry in China?
Banerjee: We and some of the other top-tier Indian players are all in China. Everyone is kind of waiting and watching, looking at what's happening. The Chinese software companies are typically 200 to 300-person operations. They are not very large in size. I think (consolidation is) possible, but I think it will really depend on the nature of engagements that people have.

Can you give an example?
Banerjee: If people's engagements lend themselves to getting large numbers of programmers, yes. If the nature of engagement is of the type that you have multisite implementations, then you may not be able to consolidate. Because what you don't have in China are companies in one location being very big. Let's say if we had a requirement of an implementation job which required 100 people, but in four different cities. It is very unlikely that we would get a company which has branches in four cities.

So they tend to be located in one region and pretty small?
Banerjee: They are very fragmented, yes.

Is there also concern that it might be hard to move in and acquire a number of those companies because you run the risk of irritating or setting off alarms on the government's part?
Banerjee: No. The government has come to India, they've met with large companies, and they want us to set up a large presence in China. We're actually there as a "wholly owned foreign enterprise." The advantage is that we're like a 100 percent-owned subsidiary, so we don't have to have a partnership with a local Chinese company. This is really an exemption granted to the IT services industry, and it's not very common.