Beware The Dragon

This season last year, there were vague mur-murs about China in the Indian IT
industry. "They are cheaper than us," these mur

murs said. "Do you suppose they are a possible threat to the Indian
software industry?"

The murmurs have now turned into something more significant… The ‘China
Challenge’ was an important issue at Dataquest’s ‘Look up India’ in
January, as well as Nasscom’s ICT 2002 last month. Suddenly, experts on China
are hot in demand everywhere. Dataquest takes a detailed look at China’s IT
Industry. Also, we pass the verdict on whether India needs to be worrying about
competition from the Middle Kingdom. The ruling–Yes. Here’s why…

Don’t send your marketing chiefs, your vice-presidents or
your secretaries to China. Don’t take their word for it. Go there yourself and
check out the new China. It’s got energy, it’s got enthusiasm, and it’s
got vigor. It’s also got a new generation that’s been untouched by
communism. Today’s generation has not seen the stark side of communism and 20
years of reform have changed China," Jesse Parker, executive director of
The Murrow Center told India’s IT CEOs at Nasscom last month.

The Middle Kingdom’s ‘New Economy’ has taken off. And
how! What matters more is that it has taken off in directions no one ever
thought of. Often dismissed as having created nothing since the abacus"
(though people often forget paper, printing and gunpowder), China today is the
third largest electronic hardware supplier to the world after the US and Japan.
Derided among western economic writers as a hawker of cheap plastic toys, China
today produces micro-controllers and Integrated Chips as it does everything else
- by the millions. Accused of giving the world nothing more than Confucius and
Communism, China is now getting ready to give the world an unending supply of
computer programmers.

And that was why Parker–armed with 20-plus years of
business experience with China–was at Nasscom, and also why IT Industry CEOs
were sitting there listening to him. The world seems to have suddenly woken up
to the fact that China does not connote images of millions of peasants toiling
away in the vast countryside under an oppressive communist regime. No doubt, the
peasants and the countryside are still there. As is the communist regime. But
the new China also has bustling coastal towns like Shanghai–ultra-modern,
neon-clad and rich. The country has 22.5 million Internet users, almost eight
times more than India, and an installed PC base three times as large. Its export
revenues are five times of India’s and the per capita GDP twice as much. It
also owns one Special Administrative Region–Hong Kong–whose per capita GDP
is higher than that of its former owner, Britain. Says Parker, "China is a
modernizing economy and has been seeing structural reforms for the past 20
years. It is already becoming the world’s manufacturing base. The pace is
vigorous and the infrastructure is growing at a terrific pace. Eventually, China
will build software." While the world wasn’t paying much attention, China
it seems, has quietly changed within.

From the cultural to the computer revolution

It’s not a change that came easily. China’s history is littered with
rebellion and revolution in capital letters –The Boxer Rebellion, the May
Fourth Movement and finally the Long March led by an assistant librarian from
Beijing University in October 1934. Fifteen years later, an assistant librarian
called Mao Zedong, established the People’s Republic of China and led the
country through a series of programs–the Great Leap Forward in 1958 and The
Cultural Revolution of 1964 in which millions died.

Sleeping with the Enemy Forging a partnership with the Chinese would be the best way to deal with a potential competitor Is the Indian IT sector under threat from the Chinese IT industry? Just as the Indian IT sector has reached world class levels of quality and performance, is a new threat emerging in the East? Should Indian software and services companies ‘protect’ their competitive advantage? Should Chinese Premiere Zhu Rongji’s ‘invitation’ to Indian companies to establish offices in Shanghai be viewed as a legitimate request to establish commercial links or a Chinese ‘trick’ to learn the secrets of India’s astounding success? Debating and answering these questions avoids the more fundamental questions. Indian IT executives have matured in an environment of dramatic and rapid change. Ask anyone who has worked in the Silicon Valley how rapidly competitive advantages are eroded and replaced with new business propositions generated by young companies with new ideas. Indian IT executives should not be discussing how they can protect their current # 1 position in the outsourced software and services segment. Instead, companies should be developing innovative strategies to begin to establish new value propositions which respond to new or anticipated realities: i.e. the rise of the Chinese software industry. We still remember how pundits in America had disqualified low quality Japanese imports! Ask any successful product manager in an IT company and he will readily subscribe to the ‘eat your own children’ strategy of developing new products and services. Successful companies replace their best selling product or service with a new offering before that product/service reaches full maturity. If a company fails to do this, its bestseller will soon be replaced by a stronger competitor. In fact, the company may not even see the competitor coming. What is causing the Chinese IT industry and Chinese technology entrepreneurs to be a threat to the Indian IT sector? China has found its ‘groove’ after more than 30 years of political and economic turmoil starting from the May 4 Movement to the beginning of the Deng Xiaoping-led reform program in the early 1980s. The PRC (Peoples’ Republic of China) government made a conscious decision to initiate rapid economic reforms first, placing political reforms on a much slower trajectory. The result has been socioeconomic stability. Of course, Chinese society has changed dramatically in the last 20 years and there remains substantial unrest in certain sectors of Chinese society. However, this broad stability continues to enable blinding modernization. Besides, this stability has allowed the domestic economy to develop extremely rapidly, especially the manufacturing sector. By employing joint venture and technology transfer structures to facilitate foreign direct investment during the late 1980s and 1990s (many of which were not favorable to foreign investors), Chinese enterprises of all sizes have been able to modernize their production processes and produce a much higher quality product. While the Chinese manufacturing sector still has a long way to go, enterprises such as Ha’er have begun to export consumer durables under their own brand name rather than just being low cost OEM suppliers. From the Japan example, this is the first indication that an export economy is developing. This vital and rapidly growing manufacturing sector needs software. Interaction with software entrepreneurs in Beijing and Shanghai showed that the biggest IT opportunities exist in continuing to modernize Chinese industry and connect industries together through advanced supply chain management communications and software. These firms are not replacing out-dated software packages, but are installing software for the first time. When will another opportunity to build software infrastructure for an economy the size of China’s present itself? Not in my lifetime! Third, the government has invested in, and largely completed the building of national IT infrastructure. Firms like China Netcom and others have completed national fiber backbone projects and are now expanding their metro offerings. In addition, the Special Economic Zones (SEZs), first promoted by Deng Xiaoping in the early 1980s, have, for more than 20 years, encouraged and enabled entrepreneurs to start leading edge companies. Many firms have failed, many have succeeded, but what is clear is that the government policy of enabling business has produced spectacular results. New SEZs in Shanghai’s PuDong commercial area are dedicated to IT, especially software. Another factor is that the Chinese are very entrepreneurial (just like Indians). Throughout Chinese history, there are several examples of individuals taking their destiny into their own hands and developing substantial businesses. The Indian IT sector must continue to expand its global leadership position. At the same time, Indian firms will find it beneficial to encourage an engagement with the Chinese market. Whether it is starting a development center in Shanghai to lower costs or establishing a Chinese subsidiary to exploit the Chinese domestic market, or another innovative strategy, an engagement will serve to reinforce India’s leadership position and simultaneously identify new markets. The message to Indian IT executives is: Engage with the Chinese economy as the world leader that you are–don’t avoid a potential competitor and become defensive.  Jesse Parker The author writes, teaches and consults on international business subjects at The Fletcher School of Law & Diplomacy at Tufts University and is CEO of Changsha Consulting, Inc. He is the co-founder of Indo-China Business Cooperation Institute (ICBCI), a new venture to facilitate business relations between the two countries

This much we know. What most people don’t know is that the
man who led what is called China’s ‘Second Revolution’–Deng Xiaoping–was
Mao’s fellow traveler in The Long March. At about the same time that Mikhael
Gorbachev was experimenting with Perestroika and Glasnost in the former USSR,
Chinese premier Deng Xiaoping was creating an ‘opening to the world’ on the
mainland. Gorbachev did it under the world’s spotlight. Xiaoping kicked off
the economic reforms innocuously at the Communist Party’s 15th five- yearly
Congress in 1977 when he suggested that tens of thousands of small and medium
state enterprises be thrown in private waters to swim or sink.

Since then, it’s been a steady march upwards. For most of
the last two decades, China’s economy has shown double digit growth with an
average CAGR (Compound Aggregate Growth Ratio) of 10% in the last decade.
Coastal cities have been boomtowns. But even in inland provinces, collectives
and communes are changing into privately held enterprises. In 1999, guarantees
that acknowledged the private sector were written into the Constitution for the
first time.

Export orientation

The Indian industry sometime tends to forget that communist state or not,
China’s economic reforms started a full 20 years ago while in India, they
started a decade later in 1991. More importantly, Chinese policy makers in the
last decade have paid special interest to high-technology industries. Apart from
incentives and tax breaks, in recent times this has included easy loans from a
Government Venture capital fund that lends money to students returning from
abroad to set up high-technology companies in China. Apparatchik (government
official)- led though they may be these policies have paid off. From exporting
toys and textiles, the country has today grown to be a major exporter of IT
hardware, overtook Taiwan in 2000, and is now yapping at the heels of Japan.

The government has also encouraged foreign direct investment
in China, which is at least five times that of India and has very high
utilization rates. However, access to domestic markets is carefully screened and
most FDI is pegged to technology transfer and exports. China has now become what
is called, an Export Economy.

A Finger in the Chinese Pie Most MNCs come to China lured by the size of the market–a population of 1.3 billion cannot be ignored. For long, however, foreign investors in China were welcomed only for their export potential... access to domestic markets was strictly regulated. This is still the case in many segments. However, after entering the WTO, China is committed to opening up the domestic market. Here’s a sampling of the activities of some large IT MNCs in the Middle Kingdom IBM opened its China Research Lab (CRL) in Beijing in 1995- one of the Big Blue’s eight research labs worldwide. It was also the first labs to be opened in a developing country by IBM. The CRL has nearly 100 researchers and focuses on Chinese speech and language technologies, including ViaVoice for simplified Chinese. It also conducts research in areas like pervasive computing, networking and e-business solutions. IBM’s OEM tie-up with China’s leading PC manufacturer, Legend Holdings in November last year, was a marketing coup for the company. According to an IDC report released last year, IBM was China’s largest software company with revenues of $77.99 million in 2000 and a market share of 6.08%. The company has two labs in Beijing and an estimated investment of over $100 million in China. One lab is involved in the localization of Microsoft products and the other is an $80-million facility involved with developing, among other things, software that recognizes speech, handwriting and gestures. According to the IDC report, Microsoft’s China revenues in 2000 stood at $65.07 million with a marketshare of 5.07%. Intel’s Beijing lab focuses on intuitive computer interfaces and wireless technologies. The company is committed to expanding its presence in China and has pledged that it will put in another $50 million in the Beijing laboratory by 2003. Intel also has a software laboratory in Shanghai. This is an MNC with probably the longest history in China. It has 25 R&D centers all over the country, and more than 1000 people on its rolls. Its research and development work in China is focused on developing new semiconductor materials, micro-controllers and cellphone chips. The company sources 80% of its microchips from China.  Late last year, the company acquired 18.35% stake in Shanghai Bell in a $312-million cash deal. The deal made Alcatel the market leader in China’s telecom infrastructure space. The company plans to combine its Chinese telecom equipment interests–Alcatel China, Shanghai Bell and Shanghai Bell Alcatel Mobile–into a single company called Alcatel Shanghai Bell (ASB). The new entity is likely to become one of Alcatel’s global R&D centers with total annual revenue that would be close to $2 billion. This global telecom giant has invested an estimated $1.7 billion in China and employs over 5,500 people in eight joint ventures in the country. The company recently announced that it would also be setting up a third generation (3G) mobile telecom research and development center in Hangzhou in collaboration with the Zhejiang provincial government. This would be Nokia’s second R&D center in China.  Note: This is not an exhaustive list, but a representative sample of MNC initiatives in ChinaÂ

However, there is a downside too. For one, Chinese government
figures are believed to be notoriously unreliable. Analysts have suggested that
China’s domestic economy may not be as healthy as the figures show. Overseas,
the mainland has earned itself a reputation for ‘low cost, low quality’
goods. A lot of China’s exports are aimed at the Third World where price takes
precedence over quality. Even in the rest of the world, China faces a record
number of anti-dumping cases (including some with India). This suggests that
Chinese State enterprises are being forced to sell abroad at little or no
profit.

The issue becomes far more imperative in the global IT
market, which is very sensitive to quality. There are indications that China is
preparing to deal with the transition to high-quality, low-cost products. But
that transition will not happen overnight and that is pretty much the only
window of opportunity India is left with.

China’s challenge: The hardware story

China’s challenge: The hardware story

What exactly is the nature of this challenge? China is already way beyond being
a threat to the Indian hardware industry. China’s hardware exports last year
were an estimated $ 26.4 bn compared to India’s estimated $ 425 mn. The same
vast hiatus also applies to domestic consumption figures. Compare China’s
installed PC base of 22 mn PCs against India’s 7 mn or the PC penetration of
13.2 per 1000 for China compared to India’s 6.2.

Spurred by an expanding consumer electronics market, wireless
computing industries and ever-expanding telecom infrastructure, China’s
domestic demand for ICs (integrated circuits) is expected to have crossed $10
billion. Within three years, it is slated to be the largest market in the world
for mobile phones, the second-largest for PCs (after the United States) and the
third largest market in the world for semiconductors.

Tango with Taiwan Taiwan is the big story–both politically and economically. It is also illustrative of the schism in China’s political and economic philosophies Taiwan broke away from China in 1949 when mainland nationalists fleeing from the rising Communist dispensation came to the island. Since then, there have been periodic bouts of tension between China and Taiwan. The latter’s suggestion that it be treated on a state-to-state basis led to a massive confrontation in 1999. In March 2000, things got worse when Chen Shui-bian, leader of the pro-independence Democratic Progressive Party (DPP) ousted the Kuomintang and came to power in Taiwan. The inauguration of his government was followed by a week of live fire military exercises near Taiwan by China.  Economically however, things could not be better. As a vendor from Taiwan says, “Almost every hardware manufacturing company in Taiwan has a manufacturing base on the mainland. They give us tax breaks and land at amazingly low prices. The incentives for manufacturing in China are very high. And of course, labor is extremely cheap.” Of the $24 billion of hardware exports from China in 2000, $14.6 million came from Taiwanese companies on the mainland. That was also the year China overtook Taiwan as the third largest hardware supplier to the world after the United States and Japan. It is estimated that by 2005, 80% of all of Taiwan’s hardware manufacturing will be done on the mainland. And this is not just because of the incentives China provides. Most Taiwanese companies are eyeing the vast mainland market to which they have limited access. In fact, it’s at the top of their wish list. More importantly however, Taiwan believes that its hardware prowess combined with China’s growing software skills could together make them the world’s top IT destination. It’s a belief China shares. Says Congress Party Economic Advisory Committee secretary Jairam Ramesh, “The Chinese strategy is to leverage Taiwan’s manufacturing expertise and link it with the software expertise from the mainland. So we’re really looking at a combined Taiwan-China threat, particularly after both of them have entered the World Trade Organization.” If these expected synergies work out, it will be a formidable challenge to the Indian IT Industry.Â

India on the other, hand does not even figure very
substantially on the world’s hardware map. Skewed government policies have
often meant that it was cheaper to import hardware than to manufacture it
locally. To begin with, what little manufacturing took place was limited to the
assembling of components. Lack of local language software–a big thing in China–also
meant that volumes in the PC segment were too low to provide an incentive to
local manufacturing–either for domestic companies or for MNCs. If, despite all
that, companies did think of setting up local manufacturing plants, the
harrowing state of physical and IT infrastructure was a turn-off. Last month,
when a Taiwanese delegation was in Bangalore to promote Indo-Taiwan ventures in
the IT industry, they were appalled by voltage fluctuations in their hotel room
(a standard thing actually–most foreign visitors in India react the same way).
Finally, in the 1990s, enterprises were a lot slower to computerize in India
than was good for the health of the hardware industry.

That is not, however, the end of the Indian hardware story.
In the 1990s, enterprises in India were slow to computerize, but that is
beginning to change. More and more people are getting on to the net and the home
segment is widely expected to be the fastest growing segment in the near future.
Besides, both the industry and the government are beginning to give the hardware
sector the attention it deserves.

The Indian government had promised to advance the zero import
duty target on all IT finished goods and several key components from Jan 1, 2005
to Jan 1 this year. When that happens, the hardware sector hopes to get a big
boost. The question is–should India fight a losing battle? Can it ever hope to
overtake China’s hardware achievements?

The software story

Probably not. But the growth of the hardware sector is crucial to India
where it matters most and right now, its software exports industry. For many
reasons. A robust domestic hardware market means a lot more investment (consider
the FDI in China) and a stronger basis for innovation, R&D and a much better
performance on IPRs (intellectual property rights). It also means a strong
domestic demand for software and services that will go a long way in protecting
the industry from the vagaries of worldwide recession cycles.

And that is pretty much where the challenge lies. The
American industry grew because of a strong domestic base in both hardware and
software. The Chinese IT industry is a threat to Indian software exporters not
simply because it has more bodies to export at cheaper rates, but it also has an
existing, healthy domestic market.

But how imminent is this threat? Says Ashank Desai, MD of
Mastek, "It is definitely not a next quarter threat." More like three
to five years. China’s software exports though rising, are a fraction of India’s.
More importantly, they are currently hampered by a number of factors.

One of them is the fact that the mainland has number of
software firms, but they are small and fragmented. Of a total of 5000 companies
with software interests, China Media Intelligence (CMI) estimates that about 55%
of them employ less than 50 people. Another 42% employ 50-100 people and there
are only a handful of companies with an employee strength of more than a 1000
people. For instance, CMI says Yongyou, the largest domestic player in China has
only 500 people in software development. The country’s largest company–Oriental
Software–has a little over 1300 people. Compare that to 10,000 at Infosys and
15,000 at TCS.

The fragmented nature of the industry implies not just
fragmentation of human and financial resources, but also the inability to
articulate long term strategies and create technological depth. Most firms are
involved in low level systems integration for government offices and SOEs (State
Owned Enterprises) and according to CMI, most domestic software companies are
confined to either mid to low level security software, office applications or
translation software.

There are other issues, including a significant shortage of
skills in the sector which could be exacerbated with China’s WTO entry as
domestic companies will have to compete increasingly with MNCs for the limited
human resource pool. More importantly, quality is not a top-of-the-mind concern
in China yet. A recent study showed that while some of the top companies had
obtained CMM certification, a large number of middle level companies hadn’t
even heard of it. Lack of comfort with the English language and the cultural
confusion that comes with it has already been written about a great deal.
Besides, says Parker, "The software industry in China is immature. It has
great raw programming talent. but needs management talent. It needs localization
not only in language but also business processes. Business processes are very
different in China."

India on the other hand, recently surpassed Ireland as the
prime software-outsourcing destination of the world and Indian companies have
won a reputation for low-cost, high-quality software delivery. There are still
issues of skill shortage in India, but nowhere near as bad as in China. India
has had at least a five-year lead in software outsourcing. While that’s not a
lead that cannot be overcome, (India did overtake Ireland after all) it will
take time and more than a little effort. Says Arun Kumar, president and MD,
Hughes Software Systems, "India still has a tremendous lead. We have been
hearing about China’s efforts, but it will take some time to catch up. Because
unlike toys, there cannot be low quality in IT services. We took five years to
develop and cross the various quality milestones- ISO levels of SEI CMM and Six
Sigma. China can’t leapfrog this. But yes, China will have more qualified
people and lower costs, when it catches up."

The upside

In 1999, despite the lack of software focus, China’s IT market was about $
11 bn and its domestic software market a little over $750 million. IDC estimates
that by 2004, China’s domestic software market will go up to over $5 billion,
implying an annual growth rate of 50%. Most of this is expected to come from the
development of customized software for big government agencies and SOEs. And
what’s more important, most of this business is expected to go to Chinese
firms.

Besides, the market draws the money. International software
firms are looking toward China as a low-cost development center not just because
of low-cost skills available there, but also because tie-ups with Chinese firms
will give them access to a huge domestic market. This is much like the rush of
international FMCG companies to India in the early 1990s in pursuit of the large
middle class consumer market. International investment in the software sector in
India is respectable, but still almost completely export oriented. Most
companies hope that China on the other hand, will not only provide a good base
for exporting software, but will itself be among the fastest growing markets in
the world.

And finally, the Chinese government has begun to take a keen
interest in the software sector. On the mainland, that means a lot since the
Chinese government tends to have a very no-nonsense approach to programs it
decides to implement. For instance, apart from the policy push recently given to
software, the government recently imported 20,000 English teachers to teach its
aspiring techies the language of the industry. It’s a little difficult to
imagine the Indian government doing that.

Says Navyug Mohnot, QAI India CEO, "If China has the
will to do something, it will go out and do it in full measure. Each and every
Chinese citizen does it with a nationalist fervor. Even though the Chinese have
a language barrier, they are all set to cross it and have also set a timeframe
within which they will manage it. The Olympics, scheduled in 2008, has been
targeted to overcome the challenge."

Besides, there’s precedent to back that up. If the job they’ve
done with China’s hardware industry is any indication–software should see
its own Great Leap Forward in a few years.

Agenda for the Indian industry

So what should the Indian industry do? The first and perhaps the most
important–upgrade the infrastructure. China already has an international
bandwidth five to seven times that of India and is aiming at 50Gbps by the end
of 2004. Its physical infrastructure allows companies to set up manufacturing
plants on the mainland on scales India wouldn’t even dream of at the moment.
That needs to change–and fast.

According to Ganesh Natarajan, deputy chairman and MD of
Zensar, "There certainly is competition if we continue to be a low cost
programming backyard to the world. The Chinese, with salaries half of ours, can
easily beat us." Ravishankar, CEO (international operations) at i-Flex
Solutions, believes that India has to move away from the fundamental perspective
of cost and create differentiators. "Even after our SEI CMM Levels and Six
Sigma, the competition in the global IT services market is still on cost. And
cost is easily replicable. Already in Singapore, we see Filipino programmers
delivering what India is, at half the cost.’’Mohnot of QaI agrees,
"Indian companies need to move up into R&D areas, which would allow
them to be able to develop products. We need to develop skills in design
development instead of pure coding."

Finally, many in the industry feel that broadly, the attitude
towards China should be one of ‘engagement’–a term American foreign policy
makers are partial to. Says Laxmi Narayanan, president and COO, Cognizant
Technology Solutions, "I believe China is not a market, but a source for
us. GE’s investment in China is more than in India, IBM has a significant
presence in China. And this exactly is the competition."

The China issue is here to stay. Perhaps three to four years
from now, but it’s here. The Chinese are acutely conscious of who their main
competitor a few years from now will be and there have been numerous Chinese
delegations to India in recent months. A Nasscom team is to visit China and
bring out a white paper. Says Nasscom chairman Phiroze Vandrewala, "The aim
is to address questions like–What is the size of the Chinese market? What is
the segmentation? Who are the MNCs there?"

This is the time for concern, awareness and action–not
paranoia. Nasscom president Kiran Karnik put it very succinctly at the Nasscom
meet last month, "Do not get overawed by the China threat. But let us not
get too complacent either. If you looked at the rear-view mirror for the past
two years, we didn’t have much of a global competition from any other country.
Now we are beginning to see China. But look at it this way– in which other
industry do you factor in a potential threat of four to five years and start
acting on it?

Sarita Rani in
Bangalore

Snakes & Ladders in China Town

China’s IT industry prides itself on a number of strengths, not the least
of which is world-class IT infrastructure in major cities, apart from a
substantial hardware industry. However, if China is to make inroads into the
world’s software market, there are key issues that need to be thrashed out

STRENGTHS Cost: Export driven Asian economies like Malaysia and Singapore are already losing manufacturing jobs to the mainland. The cost of a factory worker in a hardware plant in Shenzen is, for instance, half of that in Bangkok and one-third of that in Kuala Lumpur. The Indian software industry will soon begin to feel the heat of low cost Chinese programmers who today cost at least 15% less than their Indian counterparts. At the lower end of the software value chain, especially in areas like coding and software maintenance, this 15% margin will be important. Economic growth : China has been witnessing double digit growth rates through most of the last decade. Between 1990 and 2000, China’s GDP grew at a CAGR (compound aggregate growth ratio) of 10 % compared to India’s 6%. Even in the rather harsh economic environment of 2001, the Chinese economy grew by 7.9%. This has given the country the ability to fend off the harsher affects of the ongoing downturn and has helped sustain domestic demand for goods and services. Infrastructure: This is by no means uniformly great in all parts of the country. But where it does exist, it is world class. China today has 53 high-tech parks that the government plans to link with a dedicated broadband network by 2003. China’s international bandwidth as of December 2001 was 7.5 Gbps compared to India’s 1 Gbps. The ambition? 50 Gbps by 2004. China’s CNC Net already provides a 40 Gbps broadband network linking 17 cities. According to Gartner, by 2005 China could have one of the world’s most advanced national backbone networks. The Central and various provincial governments continue to pour money down the infrastructure road with a proposed IC corridor that will link Zhangjian high tech park — Shanghaai’s top IT location–with the Waigaoquao free trade zone (the largest free trade zone in China). Large domestic base: Look at the numbers. An installed base of 22 million PCs compared to India’s 7 million. In 2000, when India celebrated the 1 million PC mark, China’s top PC manufacturer alone — Legend — mourned the fact that it had missed it’s one million PC target by 20,000. In the telecom sector, China has 175 million fixed lines compared to India’s 30 million and 136 million mobile phones compared to India’s 3 million. Also, China has the world’s largest subscriber base for pagers. Large hardware consumption makes for a large domestic hardware market, large investments and the ability to export in large quantities. In 2000, China surpassed Taiwan as the world’s third largest hardware exporter (after the US and Japan). By next year it is slated to surpass the US as the world’s largest telecommunications network. Growing domestic demand: China’s domestic hardware requirements are expected to continue their current rates of growth. This and a bounding economy are ushering the nascent Chinese software industry into a new league. GDP growth rates of 10% have meant growth in various sectors including manufacturing and a commensurate growth in demand for IT hardware and software services. The government’s own stated commitments to getting online and a policy of computerization of various government departments and SOE (state owned enterprises) is expected to fuel this growth further. Proactive government policies: Much like a master puppeteer, the government does hold a lot of strings that tie the country’s IT efforts together. The hardware industry in China has for long been pampered with tax breaks and various other incentives. Now the Chinese government has turned its eyes on the software sector. In the ‘Polices on encouraging the development of software and integrated circuit industries’ announced on July 4, a lot of these incentives have been extended to software companies. This also includes a $ 120 mn dollar venture capital fund from the government for NRCs (non-resident Chinese) returning home to set up companies locally.

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