Are Infosys, Wipro, TCS, HCL, etc. losing to China’s outsourcing companies?

Infotech Lead India: IT service companies — Infosys, Wipro, Tata Consultancy Services (TCS), HCL, etc. — have shaped India’s IT growth due to their differentiated offerings. But China’s emerging outsourcing companies Gamutsoft, Pactera and iSoftStone are emerging as big threats to India’s leadership position.

The Chinese IT services industry has developed rapidly due to growing domestic demand and government support. In the five years through 2012, industry revenue has been growing at an annualized rate of 7.1 percent to an estimated $92.1 billion, according to IBISWorld.

IBISWorld says that large enterprises with comprehensive service abilities and competitive technological advantages will continue exploring foreign markets, especially in the U.S. and Europe.

Look at emerging IT services companies in China

According to a report by Chinese news site Xinhua, China’s software and IT services raked in 1.84 trillion yuan ($292.2 billion) last year, and the growth was 4.4 percent higher than the industry’s average growth rate during 2006 to 2010.

The following companies may be clinching small value deals, but posing threats to India grown companies.

iSoftStone Holdings

iSoftStone Holdings, a China-based IT services provider, has been featured as a “2012 Global Services 100 Provider”, as well as a “Leading Engineering Services Vendor” and a “Mid-market Enterprise Applications Deployment Leader” in the Global Services 100, a study of the world’s leading outsourcing providers published by the Global Services magazine.

With its head office in Beijing, strategic offices in major cities of China such as Shanghai, Chengdu, and Guangzhou, Gamutsoft employs 630 staff including 560 professionals and certified engineers.

Gamutsoft

Gamutsoft is delivering IT services to its customers in 146 cities in China totaling over 50,000 PCs, with resident engineers in 40 cities. Gamutsoft’s customer base exceeded 110 in the year 2008, of which over half are China branches of Fortune 500 MNCs. In the past five years, Gamutsoft had a compound annual growth of nearly 30 percent, making it one of the leaders in service outsourcing providers.

HiSoft

HiSoft, a part of Pactera Technology International after its merger with VanceInfo, says the U.S. accounted for $36.4 million or 45.7 percent of net revenues during the third quarter of 2012, followed by 22.8 percent for Greater China, 17.9 percent for Japan, 7.7 percent for Asia South and 5.9 percent for Europe.

In the third quarter, Greater China continued its strong growth momentum of 77.2 percent year-over-year. The United States and Japan also continued to demonstrate solid momentum recording year-over-year net revenue growth of 21.8 percent and 41.6 percent, respectively.

Asia South recorded a 68.8 percent increase in revenue year-over-year primarily due to an acquisition in Australia in the third quarter 2012. Growth from Europe was negatively impacted by adverse macro-economic conditions resulting in a 7.6 percent year-over-year decrease.

In the third quarter of 2012, HiSoft achieved strong year-over-year net revenue growth based on the location of contract signing entity across most of its key markets: the United States grew 6.3 percent, Japan grew 32.2 percent, Greater China grew 49.7 percent, Asia South grew 53.1 percent and Europe grew 20.3 percent.

VanceInfo

VanceInfo says Greater China accounted for 69.3 percent of total net revenues in the third quarter of 2012, while the U.S. accounted for 23.5 percent in the same period.

VanceInfo provided four service lines: R&D Outsourcing Services (RDS), Consulting and Solutions Services (C&S), Application Management Services (AMS) and Other Solutions & Services (Others).

VanceInfo says its growth strategy enabled the IT services provider to grow net revenues from C&S 107.8 percent over the same period in 2011 and contributed 13.2 percent of total net revenues in the third quarter of 2012.

Net revenues from AMS increased 35.5 percent from the third quarter of 2011, accounting for 37.1 percent of total net revenues in the third quarter of 2012.

Latest IT service trends in India

Each time there are new technological, economic or socio-political developments or changes in the global scene, people sound the death knell for the Indian outsourcing industry and announce that the outsourcing bubble has finally burst. Yet the Indian IT industry seems to find ways around every new hurdle and is thriving, if various reports and analysis are to be believed.

According to an analysis published last November by Gartner, India is likely to maintain a three-to-five-year lead over rival nations,  as an offshoring destination. However, Gartner cautioned that the rate of infrastructure development has to keep pace with customer demand, as labor and other costs continue to rise.

A report compiled by Angel Broking that looks at 13 of the top global IT outsourcers – eight MNCs and five Indian – reveals that that the Indian outsourcers’ share in the total revenues of the 13 companies has risen from 7.7 percent in fiscal 2007 to 14.3 percent in fiscal 2012, and that of the MNCs has dipped correspondingly from 92.3 percent to 85.7 percent.

 

Angel Broking’s report attributes the gain of Indian companies to a substantial 20-25 percent cost saving for clients along with availability of a young workforce. This factor has considerably made up for the decline in the labour cost advantage which has been Indian companies’ USP so far.

Pradeep Udhas, partner and head of IT/ITeS in consultancy firm KPMG India, says that Indian companies have developed people capabilities and moved up the value chain to be able to pitch for bigger contracts.

According to him, Indian companies are no longer grouped together based on low-cost offerings without any other point of differentiation. In the past few years, Indian IT companies have improved their strategy to be able to sell a differentiated proposition while deepening the client relationship.

Siddharth Pai, partner & MD of outsourcing advisory firm ISG, noted that other regional IT players are steadily winning market share. He noted that  companies like Xchanging and Atos are chipping away market share from MNCs with their specialized offerings.

Nasscom is confident to tackle any challenges

Indian IT industry body Nasscom is confident of the future prospects for the likes of Infosys, Wipro and HCL. Nasscom estimates that aggregate revenues will reach $300 billion by 2020.

In the long term, the industry has good growth prospects, as corporations all over the world are always in need of cost effective providers of technology services that improve their processes and efficiency. The Indian IT industry is is also benefitting from a large number of technology outsourcing deals signed nearly a decade ago that are due for renewal now.

According to Nasscom, deals where corporations are looking to reduce the number of smaller deals and service providers had increased by 25 percent in 2012.

Chinese outsourcing companies challenge

India’s main competitors in the outsourcing game, China and the Philippines are quickly catching up with their large pools of skilled but cheap labor.

According to a recent Forrester report, chinese outsourcing vendors like Gamutsoft, Pactera and iSoftStone have taken to an aggressive marketing approach to win over multi-national companies, especially in areas like software development and infrastructure management. It may be a while before they catch up though, as the industry is still very young and has  weaknesses in higher-level skills such as project management. They are yet to overcome the barriers of language, time zone and stark cultural differences.

Though there are several global firms wanting to service their APAC operations from China, Gartner’s Roy believes that China is at least 6-7 years behind India, with no guarantee that it will be able to catch up as long as India can mature incrementally.

The other rival country Philippines has been getting a lot of attention, especially in areas like back office processing and contact centre work. Outsourcing advisory firm Tholons released the annual ranking of the top 100 global outsourcing destinations in January, placing Manila and Cebu in the top ten.

Principal analyst at Forrester, Frederic Giron told The Reg that the country had caught up strongly with India in terms of its call centre capabilities owing to its strong language skills and cultural fit with Western clients, but it still  isn’t as strong in higher value services, which is a strong point with India.

“India has more equity research analysts than London and New York combined, which is an interesting proof point that skill levels in the country have improved quite a bit,” he said. “I see providers in India focusing on higher value add – consulting and architecture, that type of task. This gives those firms an edge over other destinations like China.”

It is yet to be seen whether cloud computing is a threat or an opportunity for Indian outsourcers. Gartner’s Roy says that Indian providers are already adapting to the rapid adoption of cloud computing globally, in order to protect and grow revenue. Rather than focusing on hosting and running cloudy data center operations, their strategy seems to be to focus R&D on integrating the activities buyers need when they move to a cloud delivery model. This is what Gartner calls “cloud services brokerage”. Roy highlighted  Infosys’ plan to grow its revenues in this area from five per cent currently to around a third of total revenues in the next five years.

A huge amount of revenue is still generated from traditional IT services, but there are undeniable signs that this new direction is gaining momentum.  In what can be called a “wake up call to Nasscom”  to ensure that software is an integral part of its strategy, a new thinktank, the Indian Software Product Industry Roundtable (iSPIRT), was launched by a group of 30 local software firms, aiming to promote India as a global software hub.

China’s outsourcing companies are becoming a major challenge to India. The local IT services industry needs to find synergies to compete with them.

Sangeeta Sudhakaran
[email protected]