Even as China makes inroads into Indian markets, one Indian company has been busy fighting that tide. Tata Consultancy Services (TCS) has already chalked out its strategy with reference to what it will have to do in order to gain a foothold in China.

While fears about the issues that may confront Indian businesses on entering Chinese markets loom large, Girija Pande, regional director, Asia Pacific region, TCS, believes that Indian IT companies should be able to deal with the risks. He says, "I perceive some risks — the rising costs of software professionals in China (as the demand is greater than the supply), the language barrier, and the lack of clarity on regulatory frameworks and IP protection."

They are risks worth taking as China has excellent infrastructure. A Gartner study has estimated that the size of the Chinese software development market will grow from $1.8 billion in 2002 to $27.1 billion by 2006. TCS also plans to use China as an outsourcing base to address the requirements of Japan, South Korea and Taiwan.

Currently, the Asia Pacific market contributes close to 10 per cent of TCS’s overall revenues. This explains why the company wants to develop its presence here.

The initiative in China is in line with its focus in the region. TCS has taken sound measures to this effect. These measures include establishing the headquarters of Tata Information Technology (Shanghai) Co in Shanghai. The TCS office in Beijing will undertake marketing activities for the company’s China operations and cover client relationship management, public relations and legal areas. 

In Hangzhou, the TCS development centre will provide end-to-end services for clients over the Asia Pacific region, along with TCS’s delivery centres in India. The Hangzhou centre will add to TCS’s network of global development centres.

TCS’ three-pronged strategy for China is:

• Serving the requirements of its multinational customers, such as GE Medical Systems, who have expanded operations in China and need quality IT support there.
• Leveraging its China-capability to address markets such as Japan, South Korea and Taiwan.
• Tapping the huge domestic market in China, where TCS has services and solutions to offer.

In all three instances, Mr Pande clarifies, "we will be working with local partners and our Chinese employees as part of TCS-led teams. We will have several hundred employees by mid-June." The company also works with two local partners, Zoom Networks in the telecom space and eBis in banking and financial services. It also works with human resource agencies and Chinese universities to tap the best talent across China.

But the going is far from easy. There have been a number of obstacles in the way. The principal drawbacks in the market are the lack of talent and delivery capability, and the language problems.

Besides, the cost of manpower is around 10 to 20 per cent higher in China than in India due to higher social security costs. However, TCS is impressed with the commitment of the administrative machinery and the political system in China to develop the information technology sector.

China has created IT clusters in terms of special economic zones in 14 major coastal cities, like Shenzhen, Shanton, Zhuhai, Liamen and Haimen. Also, there are many development zones and inland cities, along with free ports and bonded zones, in Dalian, Tianjin, Shanghai and Guangzhou. China has also set up various IT ports in different cities in line with India’s STP initiatives.

The process of embarking on an operation in another country demands the setting up of a representative office. There are also some formalities that need to be complied with. Mr Pande clarifies, "Foreign companies are allowed to set up independent and wholly-owned subsidiaries/operations in these specified zones. A foreign company does not need a joint venture to enter China. Foreign investment policies have also been significantly liberalised over the years and foreign investors are now allowed to manufacture and sell in the domestic market." 

Incentives such as a reduction in national and local taxes, land rentals and import and export duties have been given to ease processes.

The company has realised that the way to build and ensure excellence is to invest in people and technology and relate them to the businesses through domain experts. Since technological changes will impact the future, and companies will have to invest in building capabilities in those technologies so as to be in sync with their businesses. 

In this respect, TCS already has an edge over the competition. It possesses maturity in quality practices, project management methodologies, diversity in a number of platforms, and experience in handling large industrial projects. 

In terms of business opportunities, China offers four revenue stream options: offering services to multinational companies operating in China, developing an alternative software development base in China, exploiting China’s domestic market, and using China as a route to enter Japan and South Korea.

China’s market is becoming a strong magnet, with investment flowing in from the world’s biggest players. Intel plans to spend $100 million on a microprocessor assembly plant in Shanghai. IBM intends to invest $300 million there. Dell has moved its PC-making facility from Malaysia to China.

Mr Pande says, "The Chinese market is seen as a huge business opportunity, particularly in terms of embedded software, because of China’s predominance in hardware. China also offers a good market for mid-range software service providers, especially in the banking, telecom and retail sectors." Computer penetration in China is 13.2 per 1,000 persons, as against 6.2 per 1,000 persons in India.

The areas that have been identified as having potential for Indian software companies are:

• Education software/training
• Integrated circuit manufacture and research in embedded software
• Enterprise resource planning
• Traditional industrial firms
• Financial institutions
• E-commerce application software, especially in business centres
• Electronic payment, online shopping, B2B applications, security tools and opportunities likely to arise from Beijing’s hosting of the 2008 Olympic Games

The small and medium enterprise (SME) sector accounts for 30 per cent of the total IT market in China, with IT products and application consumption in SMEs expected to touch $27 billion in 2006.

In a market in which the potential for growth is so high, the companies need to ensure that the competition is understood. "Our strategy," says Mr Pande, "is to build and position the TCS brand in China, train the local workforce using TCS’s unique training model, build alliances and partners, collaborate with academia in China, and focus on customer relationships."

Chinese IT firms are engaged in systems integration work for government-owned enterprises that lack scale. Some of them have developed small business applications of accounting and billing processes. So far the Chinese market has been hardware-driven. The software sector is not developed.

Most Chinese software firms are small. Over 50 per cent of them employ less than 50 people. Local software companies are able to meet only 50 per cent of domestic software requirements. Most customers believe that the services are part of the hardware and that software should not be priced separately.

TCS has already begun to establish warm relationships with the local government and other stakeholders. The company has produced a comprehensive compliance manual to guide operations in China. It has also actively participated in trade seminars and conferences organised by the Indian Embassy in China.

It is making an attempt to understand key cultural differences in order to improve management effectiveness. Management effectiveness lies in making the local workforce comfortable with the idea of working in a global organisation. "We need to motivate them to use English in the office. We have to devise programmes to improve teamwork and collaboration between the local and the Indian workforce," says Mr Pande.

TCS has undertaken initiatives where employees can meet the senior management to share issues and concerns. Such programmes help to increase motivation. Although its primary focus is on services and solutions, the company is strengthening efforts to customise its varied products in telecom, banking and financial services.

TCS has paid so much attention to detail and taken so many efforts to ensure the success of its efforts that there is no doubt that the company will be able to successfully scale the Great Wall of China.