India and China-two superpowers in the waiting. The biggest challengers to American supremacy. And two neighbors that have never been hyphenated so much in history, not at least in modern times. That is the view through the Western looking glasses. Come to the ground. There couldn’t be bigger contrasts than these two. And we are not talking of political systems, freedom of media and such issues.

We are talking about IT and software. The prevalent perception is: India is the undisputed leader, with China trying to catch up.

Here are some facts. In 2004, China’s total software market was more than $26 billion, which was almost double of India’s-which stood at $14.2 billion. Surprised?

India’s cult status as IT superpower comes from its software export industry. China, on the other hand, has a huge domestic consumption. And overall is far bigger than India.

Consider this. Out of the total $14.2 billion (excluding BPO) industry in India, only $2.2 billion comes from the domestic market. That is just about one sixth of the total market. In China, the domestic market accounts for close to 90 percent of the total industry-that is a staggering $23.4 billion. In other words, China does not need to learn the software. It just needs to learn software export business.

Going purely by Zhang Qi’s, (director-general in charge of software development in China) quote on China’s aim to take over India in software outsourcing, it is on track.

Qi says that China is planning to build an even larger outsourcing industry. China already has 8,700 software companies, according to the ministry of information industry. Exports, though still a small component has been growing by more than 70 per cent a year for the past three years. The Chinese believe they can sustain this level of growth far into the future.

Outsourcing Consultant DiamondCluster, in its popular IT outsourcing study has acknowledged that this claim may not be tall. In the 2004 study by the firm, only six per cent of survey respondents said they planned to establish offshore operations in China. In 2005, that number has soared to 40 per cent. This year China has emerged as the third-best preferred location for growth opportunities by both outsourcing buyers and suppliers. And it is second only to India and the United States. That is an added boost to China’s growth morale.

Says DiamondCluster partner Thomas E Weakland, “China is starting to look like India did 10 years ago. As outsourcing capability in China takes off, it will put deflationary pressure on the traditional providers of commoditized outsourcing services and set an entirely new price point. The most aggressive providers are establishing operations in China now to grab market share. Taking a wait-and-see approach is not an option.”

The Chinese environment has traditionally been grounded in manufacturing and hardware, but now that appears to be changing. The Chinese government recently placed great emphasis on teaching English to students and IT workers, which is an extremely important skill requirement for American firms looking to outsource.

In the last two years, both Indian and Western companies have made a beeline to China to set up offshore facilities. Apart from IBM, Accenture, AtosOrigin and BearingPoint, Indian majors such as TCS, Infosys, Wipro, MphasiS and Satyam have also set up Chinese operations.

Private and foreign software players dominate the market while many Chinese companies are attempting to qualify for international standards with an eye on the international markets. Currently, Japan is the biggest market for Chinese software exports, followed by the US. They could build on that as a niche, as that is a weak point for India.

Hurdles

China’s software industry could grow even faster if the government cracked down harder on piracy. Piracy seems to be a big problem in this country and US officials say it’s the worst in the world. Chinese government claims that it imposed almost 8,000 penalties and fines on copyright violators last year. As an added measure, the government lowered the threshold for prison terms and made piracy of intellectual property punishable by as much as seven years in jail.

While the language barrier has kept a lot of work in India so far, China could boom in four or five years if its denizens become more adept in English. Even though language is a problem, infrastructure in China is better than that in India, so there is definitely a trade-off between these two. As far as software itself goes, the Chinese can help most on standard tool sets, such as Java, and not as much on large packaged software, such as SAP.

China has 400,000 Chinese software professionals, 35,000 of them qualified to do the kind of high-level, systems-integration projects that are so coveted in India. Most of China’s high-tech laborers are well qualified to work on software applications maintenance and migration projects, and these workers come at a significantly lower salary than do their Indian counterparts doing the same work.