Why China

India is Overheating
In the early part of the decade India's software industry started to overheat 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 alone. This has lead to upward pressures in prices and reduced quality of service in some cases. After several years of decline, NASSCOM reports that in 2004 prices in India stabilized in the US$18-$24 per hour range for junior technical resources. Buyers of outsourcing services are aware of the rising wage inflation. As a result, some are quickly establishing a presence in China to mitigate this risk.(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 IT outsourcing will increase 860% by 2015. Despite its enormous population, India will not be able to supply 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 the 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 and often provides leverage when negotiating with one's primary vendor in India. Once in a state of "over-outsourcing" to one vendor, 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 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 of supporting multilingual systems 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’s population is larger than India and has a higher average education level. Since 2000, the Chinese government has identified software as one of the country’s 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. In 2003, India added only 98,000 jobs to its software payrolls. This trend is sure to continue as the Chinese government continues to invest heavily in software industry, resulting in a talent pool as large as India’s.

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. In fact, this gap is so large that 28% of the current talent pool in India is from these secondary education sources. (3) At the same time, Chinese leaders noticed the importance of technical education in India and have begun to make serious investments in higher learning academies to train resources specifically for IT outsourcing providers. 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.(4)

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 incredible. 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 travelled from the airport to downtown Bangalore,  understands 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. It is obvious that poor infrastructure in India has reached crisis proportions, K.S. Suryaprakash of Infosys technologies stated 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. Hotels in India are significantly more expensive than those in China due to the low supply of quality accommodations. 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.