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China's Fast Catching Up With India

India is now the undisputed world leader in software services outsourcing but China will become the next dominant player in the same space by 2006, according to a new report by Gartner. By then, both countries will be generating more than US$27 billion each in revenue.

Said research director at Gartner, Dion Wiggins: "China is not often thought of as a center for software development but changes are afoot ..."

The Drivers
China's membership in the World Trade Organization (WTO) and the country playing host to the 2008 Olympics games will serve as major drivers for the Chinese software and application development service industries.

"China is in a unique position. Its' WTO membership and the 2008 Olympics will be significant drivers over the next seven years. But, as China reaches milestones, such as reform of its banking system required by WTO membership, growth in the software and application development services should start to slow in 2007 and reach growth rates similar to India's 35 percent by 2010," said Wiggins.

"Chinese entrepreneurs are also now returning home with the knowledge of western business and entrepreneurial skills just like when Indian entrepreneurs returned to India seven years ago. The cycle that started the Indian software industry seven years ago will therefore be replicated in China," Wiggins added.

An early market driver in China was the establishment of laws requiring software developed after March 2000 to support a Chinese national standard.

Enterprises wanting to sell their software products in China must support this standard and have to engage in the localization of their existing software. For the most part, this work will be done in China because it requires developers to read and write Chinese.

A Win-Win Situation
According to Gartner, while China may pose as a long-term competitor to India as it becomes the next major software outsourcing hub for the world, Indian software and application companies will also realize that there will actually be more opportunities for them to expand their businesses into China.

Take for instance the two leading Indian companies, Infosys and Satyam. They have taken the opportunity to expand their operations into China and are well positioned to work with large multi-nationals there.

According to Wiggins, Gartner believes that by 2004, 60 percent of the top 25 Indian software and application development service companies will have a direct presence or a joint venture in China.

"Forty percent of the software and application development service revenue generated in China will be from companies of Indian origin, with much of the profits leaving the Chinese economy and boosting the Indian economy," Wiggins commented.

As Indian software and application development service organizations expand into China, they will transfer their process and methodology across China, enabling Chinese competitors to evolve quickly over the next two years. However, they will not be in a position to challenge the majority of Indian companies until 2004.

"If Indian software and application development service companies do not fully engage in this opportunity, they will only delay the inevitable growth by another two or three years, missing significant short-term and long-term opportunities that can be derived through the Chinese market," Wiggins cautioned.