There’s a massive battle brewing between China and India, and it has nothing to do with territorial disputes, the Dalai Lama, or military deployments; it’s all about competition for a narrow computer industry niche—the market for outsourced software development.

Until the mid-1990s, coders often lived near the company or organization that employed them. The advent of the World Wide Web, and the simultaneous explosion in demand for software development expertise, created a situation where full-time and contract coders could work remotely, rather than from corporate HQ. Companies in the United States soon began to look overseas for cheaper programmers, and quickly found the mother lode: India.

The National Association of Software & Service Companies, an Indian software industry group, says India's software-related outsourcing totaled an estimated $23.4 billion in 2006, a rise of 32% over the previous year and nearly four times the value of India's domestic software and software services industry in 2006. NASSCOM research found that the majority of outsourced work comes from clients in the Americas (68.4% in 2005), followed by Europe (23.1%) and Australasia (8%).

Many factors have enabled India to succeed as a software outsourcing destination. They include a large, well-educated technical workforce—according to NASSCOM, the more than 16,000 colleges and institutes of higher education in India will produce 501,000 technical graduates in the 2006 – 2007 academic year. India also has a strong foundation of transnational IT development experience based on global software development practices and standards. The Indian government has also played a role in nurturing the country’s high-tech industry by privatizing the electronics industry and streamlining bureaucratic procedures related to foreign investment.

But the number one factor driving the Indian software outsourcing revolution has been price. NASSCOM claims that Indian offshore operations provide cost savings of 40-50%. Base labor costs are strikingly low: Indian contract coders offer their services on the Internet for $7/hour, and the starting salary for a full-time, entry-level programming position might be $8,000. A 2006 survey conducted by Computerworld, a computing trade publication, found that IT contractors in the United States (22% of whom identified themselves as working in “software design” or “development”) charged $64/hour for their services. The survey also found the average salary for an entry-level programmer/analyst in the United States was $65,000.

But the price proposition is eroding in some Indian cities, where demand from foreign companies and Indian firms has outstripped the supply of I.T. talent. This has led to frantic poaching, increased turnover and, of course, higher wages—annual wage inflation in the Indian software and software services sector is 10%-15%, reports NASSCOM. It’s been a boon to Indian software professionals, but is worrying Indian firms and their foreign clients, who are focused on software projects being completed cheaply and without disruption.

The price and talent squeeze in India has led to an opening for China, which has been struggling to assert itself as an alternative to India for outsourced software development work. For more than a decade, China has been a center for computer hardware manufacturing, thanks to investment and technology transfer from American, European, Japanese, Korean, and Taiwanese companies, and government policies that have actively promoted high-tech development. China’s large, computer-savvy population includes more than 132 million Internet users and 455 million mobile phone subscribers. Statistics cited by state media place the present value of China’s “software exports” at $3.59 billion in 2005. While this is significant compared to the 1999 level of approximately $250 million, it is a fraction of India’s software exports for the same year, which NASSCOM estimates totaled $17.7 billion.

China also has an enormous domestic software industry. In 2005, Professor Gary Pollice of the Worcester Polytechnic Institute estimated that the number of trained software development professionals entering the workforce in China will soon total 100,000 per year, including 30,000 graduates of recently established software engineering master’s degree programs. As in India, wages for software professionals are lower than in more developed countries—starting at approximately $5,500 for an entry-level programmer.

But China faces a major disadvantage: language. By virtue of its colonial past and its need for a unifying language among its disparate ethnic and linguistic groups, India has long depended on English in commerce, education, and everyday life. China has made a strong push to expand English-language education—there are concentrations of people who are able to converse in English in major urban areas—but relatively few are highly proficient. This dependence on crucial English-speaking individuals can lead to communications bottlenecks and delays—and potential disaster should a key English-speaking staffer suddenly become unavailable.

Another factor holding foreign companies back from hiring Chinese programming expertise is the country’s poor protection of intellectual property. This is a common concern in the manufacturing sector, where a dishonest supplier can easily take a design for a piece of clothing or electronic device, knock off twenty thousand copies, and sell them in the gray market. In the entertainment field, the Western and Chinese music and movie industries have been bedeviled by Chinese pirates for years. Despite claims from the Chinese government that it is cracking down on the illegal copying and trade of CDs and DVDs, it is still easy to buy bogus copies from street vendors and shops across the People’s Republic. Shrink-wrapped software has encountered the same problem; the Business Software Alliance estimates an 86% piracy rate for business and consumer PC software in 2005, the most recent year for which statistics are available. And while software code intended for an in-house manufacturing or sales application may not seem to be as appealing a target for theft, the sale of programming code to a competitor or its reuse elsewhere can be devastating to the company that spent money and time developing it. 

The central government is working hard to counter these liabilities. In December 2006, the PRC Ministry of Commerce approved a scheme to create 10 “outsourcing base cities” as part of the 2006-2010 five-year plan, and raise the value of Chinese software exports to $10 billion by 2010. According to official media reports, the base cities will provide “interest rebates, R&D funding, personnel training, corporate qualification certification, export credit loans, credit insurance, commercial information and protection of intellectual rights.” The base cities include Dalian, Xi'an, Jinan, and Chengdu — metropolises that have thus far lagged in industrial development and investment when compared with cities on China’s booming east and southeast coasts.

Beijing’s central plan is a signal of the government’s desire to sap software outsourcing business from India. But to make significant progress in the next five years, the state must address the underlying concerns of language proficiency and legal stability. The China-India rivalry in software will ultimately be won by whichever side does a better job of providing the fundamental necessities that allow foreign business to thrive.

Ian Lamont is the senior online projects editor at Computerworld.com and a graduate student at the Harvard Extension School. His two blogs, Harvard Extended and I, Lamont, feature discussions of modern Chinese history and emerging media technologies.

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