CHINDIA: TALES OF SYNERGY PREMATURE

1. (SBU) SUMMARY: During a January swing through India's high-tech
heartland, including Hyderabad and Bangalore, visiting
Washington-based econoffs met with India's leading software firms
and discussed the challenges these firms face in the China market.
Most felt that the media hype about "Chindia," the teaming of
China's high-tech manufacturing with India's software prowess, was
premature. Interlocutors felt that the two countries would be
increasingly competing in high-tech manufacturing, while the demand
for the type of high-end information technolgy (IT) services for
which Indian firms excel is still small from indigenous Chinese
firms. Most Indian software firms continue to view China as a
location to provide services for multinational customers who have a
presence there. Several companies expressed concern about the
challenges of doing business in China. Business representatives
mentioned onerous registration policies and the increasing cost of
doing business as barriers to expanding their china presence.
Nevertheless, all of the leading Indian IT firms told econoffs they
planned to increase their presence in China in the near term. END
SUMMARY.



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INDIAN SOFTWARE FIRMS LOOK TO EXPAND MARKET PRESENCE


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2. (SBU) During January visits to leading Indian software companies,
Infosys, Wipro, and Satyam, econoffs discussed the current state of
key software sectors where Indian companies compete globally. These
include business process outsourcing (BPO), information technology
services, and application programming (AP). India's software
exports are expected to reach $60 billion by 2010, with 40 percent
stemming from BPO and 60 percent from AP and IT services. Leading
Indian IT firms also talk about moving up the "value chain" to
so-called transformation BPO and knowledge process outsourcing
(KPO), which involve efforts to become deeply enmeshed with a large
multinational firm's entire business process and to help it move in
new directions.



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THE CHINA CONNECTION


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3. (SBU) In Hyderabad, visiting econoffs met with Satyam Computers,
India's number four software player. After taking econoffs through
an elaborate high-tech multi-media introduction to Satyam, which was
laced with the jargon of globalization and software development,
Satyam Corporate Strategy Chief Subbarao Machiraju Subbu described
Satyam's overall posture in the software market. The firm employs
35,000 "associates" and has a market capitalization of $7.0 billion.
Satyam currently has 26 global solution centers, including a newly
opened site in Egypt. The firm services over 520 customers (mostly
in North America and Europe) providing application development,
consulting and BPO, and infrastructure management services.
Satyam's customers tend to be smaller multinational corporations.



4. (SBU) Satyam appears bullish on the China market, and has opened
offices in Shanghai (Pudong), Dalian, Beijing, Guangzhou, and Hong
Kong. Satyam has found the China market challenging because of the
requirements placed on foreign businesses, such as the need to
register in each different city in China where it opens an office.
Satyam executives also were concerned about the cost of doing
business in China. Social security costs are very high, according
to Machiraju, and because there is no bond system in place, Satyam's
investment in training personnel is not protected. It is also very
difficult to move associates in China because of the requirements
for Hukou (residence permits), which increases costs. Machiraju
mentioned a new labor law which is quite stringent and will, he
believes, further increase the cost of doing business in China.
Like most companies looking to expand their BPO and IT services in
China, Satyam is trying to attract back Chinese PhD students
studying in the United States who want to work in a global market
environment.



5. (SBU) In Bangalore, econoffs met with Wipro, the third leading
Indian software firm. Corporate treasurer R. Rajesh Ramaiah
provided a detailed look at Wipro's global operations and its views
of the China market. Wipro has been the most cautious of the
leading Indian IT firms in expanding its China presence. As an
older more established firm, Wipro provides traditional global IT
services (such as BPO services) and is also a reseller of hardware
for leading U.S. firms, such as Sun Microsystems and Cisco Systems.
Wipro also has other business lines such as a line of hydraulics
equipment.



6. (SBU) Wipro currently has a China-based staff of 100 located in
Shanghai and Beijing and plans to increase to between 500-1000 by


2008. It currently views China primarily as a delivery center for
IT services for global customers in Asia. Ramaiah noted that Wipro
has major concerns about the protection of intellectual property in
China. So far, Wipro has primarily recruited in China via the
traditional route of receiving and evaluating resumes and has not
yet visited the campuses of leading Chinese IT educational
institutions. Ramaiah indicated, though, that this is likely to

CHENNAI 00000223 002.2 OF 003


change soon as Wipro considers increasing the size of its China
footprint.



7. (SBU) Ramaiah noted that China had some advantages in the
software sector including heavy government support for software
companies, as well as educational support. He noted that Chinese
software firms tend to be small; there are no firms in China as
large as the four major Indian players. Wipro sees Chinese software
firms as a threat on the low-end of the IT services continuum, such
as localization, and in the R&D area, where China remains a pricing
threat because of the low cost of its engineering talent. Ramaiah
echoed Satyam officials in noting that Indian firms such as Wipro
are hoping to move farther up the value chain as China begins to
nibble at the lower end of the software and it services sectors. He
mentioned specifically KPO as an area for future Wipro emphasis.


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INFOSYS: SHOWCASE OF THE STARS


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8. (SBU) Bangalore also features the plush headquarters compound of
Infosys, the "Microsoft" of India. (COMMENT: As Infosys had been
the target of some recent terrorist threats, security was tight at
the compound entrance. END COMMENT.) Infosys Associate Vice
President and head of the "China Effectiveness Center" Srinivasulu
Mallampooty provided a tour of the campus and outlined the Infosys
vision during econoffs' stay.



9. (SBU) Infosys currently has a staff of 750 in China, primarily
in Shanghai and Hangzhou. The Infosys China vision, as explained by
Mallampooty, was two pronged. First, Infosys views China as a
platform for serving its global customers. He cited the example of
Motorola China. Infosys had recently lost a BPO contract for
Motorola China to IBM China. However, because IBM China did not
perform up to standard, Infosys had been invited back to
participate. To do this Infosys had pulled together a global team
composed of 1) Indians with telecom experience working in the United
States, 2) Indian staff engineers with some China experience, and 3)
local Chinese staff. Second, Infosys was targeting Chinese telecom
companies such as China Mobile. Infosys believed that these Chinese
companies needed more sophisticated business processes to manage
their growth. One major difficulty for Infosys in China was finding
sufficient local project management talent.



10. (SBU) Interestingly, econoffs' visit came just hours after
Mallampooty had honchoed a Chinese group through the Infosys campus,
which is a frequently visited showcase for India's IT sector. A
major all-government Chinese delegation headed by China People's
Political Consultative Conference (CPPCC) National Committee Deputy
Chairwoman Liu Yandong, who is also the Director of the United Front
Work Department, had toured the premises as part of a swing through
the Indian IT heartland. Mallampooty noted that Liu had been
surprised by the extent of the media center on the Infosys campus;
she wondered why an IT company needed a state-of-the-art
broadcasting facility. Mallampooty explained that Infosys can stage
and broadcast its own news conferences -- a fact demonstrated the
day before when Infosys leaders had broadcast their third quarter
earnings results from the campus. (COMMENT: Our host stated that
part of the reason for the media center was the difficult traffic
situation in Bangalore brought on by the high-tech sprawl within the
city and outside. Travel into Bangalore and back to the Infosys
campus was very difficult and had helped Infosys decide to install
its high end media center. END COMMENT.)



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TRUNCATION OF EDUCATION LEADS TO SHORTAGE OF PHDS


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11. (SBU) Interlocutors touched on staffing and education as major
issues, both in India and in China. Wipro, for example, continues
to recruit heavily in India and finds that 25 percent of the
graduating class of Indian engineers every year are "readily
deployable," due to tailored training during the last year of study.
This is mostly the result of the pre-placement offer (PPO) system
that many Indian firms are using. (COMMENT: This practice is not
widespread at China's leading engineering education organizations.
END COMMENT.) In addition, Wipro can tap into a large annual
graduating class; Ramaiah estimated that there are 1.1 million
individuals annually graduating from Indian institutions with
three-year degrees.



12. (SBU) This instantly deployable workforce, however, has a
potential downside. International Institute of Information
Technology (IIIT) Professor Balaji Parthasaraty later told econoffs
that the pressures of IT industry demand for engineers have created
major disincentives for people to pursue Master's and PhD degrees.
This "truncation of education" is as major problem for India and has
resulted in a huge shortage of faculty at Indian IT, science and
engineering schools. Foreign multinationals such as Google and
Microsoft are finding it hard to recruit PhDs for the research
centers they have established in India. The total number of
computer science PhDs being awarded by Indian institutes is no more
than 100, according to Parthasarathy.

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13. (SBU) In light of these problems, Parthasarathy also discussed
with econoffs the major German connection in Bangalore, where firms
like Siemens and Bosch have a significant presence in the same
office park where Infosys headquarters is located. The German
software giant SAP is currently working with International Institute
for Information Technology on an experimental program being
conducted only in Bangalore to help fill major personnel shortfalls
within the company. Under the program, SAP recruits students in the
eighth semester and puts them through a master's program. SAP pays
for two years plus a stipend, and the students have the assurance of
a job when they graduate with an advanced degree. Parthasarathy
indicated that these students are under no legal obligation to join
SAP when they attain their degrees.



14. (SBU) Many other companies are interested in this type of
arrangement and six more have lined up to participate. Such
industry-academic partnerships, designed in part to address the
"truncation" problem, were inconceivable 10 years ago according to
Parasarathy. The use of adjunct faculty from industry is also
flourishing in Bangalore. (COMMENT: Lack of a robust domestic, let
alone multi-national corporate-academic partnering of this type is a
major shortcoming of China's high-tech development. END COMMENT.)
Parathasarathy was quick to term this trend in India "industry
driven" rather than "industry led."



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IBM: THE REAL WINNERS IN THE "CHINDIA" GAME?


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15. (SBU) Inder Thukral, Director of Strategy and Business
Development at IBM India Private Limited told econoffs that
"Chindia" was actually at the front and center of IBM's Asia
strategy. While IBM has focused on hardware manufacturing in China,
and software, project management and services delivery in India, the
firm hopes to leverage both China and India as part of its global
strategy. IBM currently has a research lab in New Delhi, a BPO
operation in New Delhi, application and services businesses in
Hyderabad and Bangalore, and does systems development and
engineering services in India. Its biggest company partner in India
is Bharti, which provides mobile service under the Airtel brand.
IBM India runs the entire IT infrastructure of Bharti/Airtel, which
had 18 million subscribers at the end of 2005.



16. (SBU) In China IBM has a development lab, an R&D lab, a
procurement center, and a small BPO operation that serves primarily
customers in Japan, some multinational corporations, and a small
portion of the domestic Chinese market. According to Thukral,
Japanese firms have been slow to accept global delivery of services
from China, and IBM teams are reluctant to source global delivery
solutions from China, though this is changing. Echoing a common
theme, Thukral stressed that mid-level management expertise is a
skill sorely lacking in China. Thukral believed that when it
produces a cadre of individuals at this level of mid-management, BPO
and similar services will finally take off in China.



17. (SBU) In the meantime, IBM wants to have more Indian managers
"go global" in the next 2-3 years. Thukral noted a spread in an
Indian magazine that touted the ability of Indian managers to thrive
in global multinationals. Chinese managers, he observed, simply
could not stack up; most firms like IBM use experienced managers
from Hong Kong and Taiwan in their China operations. IBM felt
confident that its business model of pursuing a global delivery
strategy -- with India and China as major platforms -- would
ultimately be the real key to unlocking the "Chindia" potential.



18. This message was drafted by visiting Washington-based economic
officers and cleared by Embassy New Delhi.

HOPPER