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The power of Chindia

The Exponential Power of 'Chindia'

New joint ventures between Indian IT service firms and their Chinese counterparts hint at the formidable bilateral economy that could emerge

by Partha Iyengar and Jamie Popkin

If you are a strategist or a decision-maker in almost any enterprise anywhere in the world, you can't help but see the impact being made by India and China. It is visible not only in the new waves of technology products and services but also in the decisions and strategies featured on corporate Web sites and in international news coverage. In our next two articles we will explore the impact of China and India's ongoing IT industry growth, what lies ahead for each country, and the possibility of China and India combining strengths across several industries to compete globally.

While the bilateral economy of China and India is still in its infancy, new momentum suggests a powerful relationship is building. China-India—"Chindia"—enterprises will have access to complementary skills and resources and, in turn, will have the potential to lead many global markets.

Modest steps recently under way provide only a hint of what India and China could collectively bring to the global economy and global balance of power in coming decades. Patterns of widening bilateral commercial partnerships are evident in increasing numbers of high-level official visits and pronouncements, conference participation, cultural exchanges and, most of all, forecasts of accelerating goods, services, and investment flows across the Himalayas.

An Unbeatable Team

We are witnessing new joint ventures between Indian IT service firms and their Chinese counterparts, early illustrations of how a formidable Chindia economy could develop. Indian firms bring to the table world-class software expertise and leadership in global markets. Chinese partners have legions of capable, low-cost employees and greater know-how with clients in Japan, Korea, and other Asian countries where English is less prevalent.

To date, much of the West's attention on China and India has focused on the West's outsourcing of manufacturing and low-end service jobs. Optimistic observers believe the current flow of jobs across the Pacific is immaterial in the long run because innovation remains strong in Western countries, and innovation produces new jobs and economic growth.

This view is absolutely correct on the surface, but it hides the underlying truth of what is happening in India and China today: Both countries are getting better at driving technological innovation. Today, China and India are producing some of the world's best-trained computer science and electrical engineering graduates. No longer simply a source of cheap labor, both countries soon will be able to compete favorably for global business—as India's IT service firms have done—not only on price, but on competence and capability.

Western Executives Must Take Notice

There is no denying that the power China can potentially wield could affect every major corporation in the world. It is therefore essential that all businesses, whether directly engaged with China's economy or not, have a China strategy. At the same time, we can expect to see China transforming the IT industry in ways that executives and managers in the West must address. For companies that embrace advancing IT for strategic and operational advantages, this is particularly true. China's spending on its IT needs in 2005 was about $119 billion, about four times that of India's. That the majority of this spending went toward telecommunications equipment and services (79%) reflects the priorities of an infrastructure that is still growing.

China's IT spending has been forecast to grow 6.5% annually through 2009, well below the 7.9% rate forecast for Asia Pacific and well below the 25% forecast for India. China's spending will be led by the purchase of software (17.5%) and IT services (14.5%). As the software market expands, IT leaders of Western corporations operating in China need to consider the availability of locally provisioned software and services and if they will be competitive with foreign software and services.

The most significant inhibitor of China's vast potential for innovation is continuing government control over the most basic levers of the economy.

The pivotal issue in forecasting the country's future is China's ability to set a practical course to ease government influence in its economy and to promote innovation.

Don't Ignore Chinese Politics

The first reaction to this for many people might be that government policies and government relations are "not my specialty and not my problem." The lawyers and government-relations pros, not chief information officers and IT executives, are the ones who worry about what the politicians and regulators are up to. Their job is to place calculated bets on big issues and market trends in cost-effective, innovative IT.

For business and IT leaders, such views are not only flawed but dangerous, especially when it comes to China. The government is often the biggest factor in IT issues and trends in China, and business leaders can't afford to delegate these relationships or distance themselves from the core analysis.

The direct challenge for China is whether it has the ability to move from a low-cost, high-volume manufacturer to the top of the global value chain commanding the heights of innovation and global marketing prowess. Can China transfer its demonstrated expertise in low-margin, high-volume hardware manufacturing into high-margin software and IT services?

Chinese Brands on the Rise

By 2008, it is highly likely that we will see China generate intellectual property at a rate comparable to developed countries and, in the same year, actually surpass the U.S. as the population with the largest English language capacity (in terms of English language comprehension and proficiency). However, China will remain a challenger, not the global leader.

We anticipate at least eight Chinese IT brands will be recognized internationally by 2010. If government restrictions are loosened and the Chinese instinctive talent for entrepreneurialism continues to be encouraged, we will witness the birth of a real IT superpower.

You might not realize this now, but whether China emerges as a global leader in science and technology innovation relevant to the information and communications technology (ICT) industry is in fact a crucial issue for you as a business strategist or IT decision-maker in a Western organization. The result will play a key role in which global suppliers can establish a strong presence in China for the long haul, as well as helping to decide which of China's strongest domestic companies can compete in international markets.

While the answers may not become clear for several years, the questions of China's and India's role in the global IT market cannot be ignored. The potential rewards from being involved in China greatly outweigh the risks of watching from afar.

In our next article we will explore India's role in the global IT market and what companies need to do to develop a Chindia strategy.

Partha Iyengar is vice president and distinguished analyst at Gartner Inc. [IT] Jamie Popkin is Gartner group vice president and research fellow. They are the authors of "IT and the East" published in May 2007 by Harvard Business School Press and distributed in Australia by McGraw-Hill (which also owns BusinessWeek). The book examines how China and India are altering the future of technology and innovation. For more information on Gartner Books, visit www.gartner.com.