India is Overheating Now

In the late 1990's India's software industry became overheated with the only relief supplied by the IT recession in the early part of this decade. The gradual improvement in the world economy is increasing demand to levels that the Indian service industry cannot handle, leading to price pressure and reduced quality of service. After several years of decline, NASSCOM reports that in 2004 prices in India stabilized in the US$18-$24 per hour range. Leading technology outsourcers have become aware of this shift of creeping wage inflation. As a result, some are fast establishing a presence in China to remain competitive with their peers(1).

As talent supply dwindles, one can expect prices to start climbing again similar to the IT bubble burst of 2001. Gartner and other offshore analysts forecast that global demand for offshore software outsourcing will increase 860% by 2015. Despite its enormous population, India will not be able to fully capture this surging demand.

Because there are effectively two classes in India, (the educated and uneducated) the portion of the population with an education suitable for software development is small when compared to China, which enjoys a literacy rate over 90% compared to India's 64.8%(2). This effectively limits the ability of the Indian industry to continue absorbing demand. Although revenues for offshore outsourcing increased 34% in 2004, the number of Indian computer science graduates only increased roughly 10%. As this gap between supply and demand widens, one may reasonably expect price increases to accelerate and quality of service to erode.

Multi-sourcing Improves Outsourcing Results
To reduce geographic and vendor risk, global corporations are increasingly turning to a strategy of Multi Sourcing. This strategy enables customers to diversify their geopolitical risk of having "all their eggs in one basket", and often provides leverage when negotiating with one's primary vendor in India. Some organizations have found that they have outsourced too much work to one vendor and lost negotiating power. Once in a state of "over-outsourcing", firms may find that they have lost the internal ability to support their mission critical systems, and become beholden to a single vendor.

Multinational companies may also experience a geographic or cultural benefit by adding a China-based vendor to their portfolio. Asia plays an increasingly important role in the operations of multinationals resulting in increased demand for systems that can adapt to the language and regulatory environments in those markets. While India's English heritage results in a perceived advantage for English-based systems, China has the advantage when considering multilingual systems supporting operations in the Far East.

Talent Pool
The biggest advantage for the future of the Chinese software industry is the incredible ability of the Chinese government to mobilize resources. China has a larger population than India with an overall higher level of education. Since 2000, the Chinese government has identified software as one of the countries six favored industries. The progress made in the past few years has been dramatic. From 2001 to 2004 the number of computer science graduates in China has increased from roughly 40,000 per year to over 140,000(3). In 2003, India added only 98,000 jobs to its software payrolls, clearly showing that in a matter of a few years China will achieve a talent pool as large as India's and keep growing.

India's inability to keep pace with the growth of offshore outsourcing demand for talent directly translates into an eroding quality of service. With an inelastic university system, second-tier technical colleges and institutes have emerged, endowing candidates with a substandard level of knowledge. This gap is so large, in fact, that 28% of the current talent pool in India is from these secondary education sources(4). At the same time, Chinese leaders noticed the importance of technical education in India and have begun to make a serious investment in higher learning academies to train the kind of people outsourcing service providers employ. The Chinese government is following the original Indian model to ensure that a steady supply of IT talent is available. The government has established 35 national schools to provide software training, especially in technologies such as .Net, Linux, Java, and Web services. Its goal is to have 800,000 trained software professionals by the end of the year, versus 600,000 in India(5).

Talent in China benefits from a culture that appears to take the best from two extremes, Japan and India. From the discipline point of view, Chinese developers are more inclined to work diligently and follow a defined process. On the other hand, the more individualistic and entrepreneurial culture of China leads to more creative programmers and out-of-the-box thinking than one would find in Japan. Chinese culture balances these two important behaviors, creating a foundation to create world class teams for software development.

Infrastructure
Infrastructure is a critical factor when selecting a country for offshore software outsourcing. The ability of the Chinese government to dedicate enormous resources to an initiative such as improving basic infrastructure without the debate required in undeveloped democracies like India's is simply awesome. In a few short years China has transformed itself from an Asian backwater into a modern state, with high tech infrastructure rivaling most developed countries. From new airports and highways to broadband internet access widely available in China's major cities for as little as $12 per month, China is wired for business.

When considering infrastructure, China is a much more suitable country for offshore development than most of its neighbors. Anyone who has ever tried to travel from Bangalore airport to downtown will quickly understand that India's high tech industry is choking from a result of poor government planning and development.

Rather than weaving through the chaos of Bangalore's roads to get to one's hotel from the airport, visitors to Shanghai can rocket from the airport to downtown on the 430 km/hour MagLev train in relative comfort. Evidencing that poor infrastructure in India has reached crisis proportions, K.S. Suryaprakash of Infosys technologies was quoted in an article for ComputerWorld in 2004 stating that if India, "can't resolve its infrastructure problems soon, China will increasingly become a more attractive place to do outsourcing."

Furthermore, travel to China is relatively easy. There are daily direct flights to major cities in the US, Europe and Japan. Once in China, one can easily find hotels and restaurants meeting the highest international standards for reasonable prices. Many international business travelers have found hotels in India are much more expensive than in China, due to the low supply of quality accommodation. In fact, Bangalore is at the point where it is now advisable for executives to book their hotel two months or more in advance. On the other hand, major cities in China boast premium world class hotels, and for the budget conscience, 3 and 4 star accommodation featuring free broadband internet access may be found for as low as US$20-30 per night.