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Cablegate: Leading Indian It Companies Bullish On China Market

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RR RUEHBI RUEHCI RUEHCN RUEHGH
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R 110905Z DEC 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6521
INFO RUEHBJ/AMEMBASSY BEIJING 1572
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RUEHKO/AMEMBASSY TOKYO 0240
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7040

UNCLAS SECTION 01 OF 04 SHANGHAI 000785

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR STRATFORD/WINELAND/KATZ/WINTER
USDOC FOR 4420
USDOC FOR ITA/MAC DAS KASOFF/MELCHER/MCQUEEN/SZYMANSKI
NSC FOR SHRIER AND TONG

E.O. 12958: N/A
TAGS: ETRD EFIN EINV ELAB PGOV PREL CH IN
SUBJECT: LEADING INDIAN IT COMPANIES BULLISH ON CHINA MARKET


(U) Sensitive but unclassified. Not for dissemination outside
USG channels or posting on the internet. Please protect
accordingly.

1. (SBU) Summary: Poloff met with high level managers of three
Indian information technology (IT) companies operating in
Shanghai -- Tata Consultancy Services, Infosys Technologies,
Satyam Computer Services -- to discuss their current operations
and future outlook for the China market. They explained that
their companies established operations in China in order to: 1)
Tap China's huge domestic market; 2) Service multinational
corporations operating in China; and, 3) Gain access to the
Japan and Korea markets. They also detailed reasons for
choosing specific cities within China, including cost
considerations, infrastructure, and availability of local
talent. Although they expressed concerns about rising labor
costs and problems with retention, they were upbeat about the
current business climate and generally bullish about growth
prospects for the near future.

Overview of Business in China
-----------------------------

2. (SBU) Poloff spoke with the head managers of three Indian IT
firms in Shanghai: Tata Consultancy Services (TCS), Infosys
Technologies, and Satyam Computer Services. All three companies
provide IT software solutions, IT consulting services, and
business process outsourcing (BPO) services to Western,
Japanese, Korean, and some domestic Chinese firms in China.
According to Anantha Murthy, General Manager of TCS in Shanghai,
a division of the Tata Group, TCS began its operations in China
in 2002. Its offices in Shanghai and Hangzhou service Western
(mostly U.S.) firms, such as Motorola, Bloomberg, GE, Johnson
Controls, and Eaton while its Beijing office mainly provides IT
banking solutions to its largest domestic client, the Bank of
China. (Note: Murthy is an Indian national living in Shanghai 5
years. He stated that he established TCS' offices in Shanghai
and Hangzhou in 2002 and is currently the head manager of these
offices. End note.) According to James Lin, CEO and Managing
Director of Infosys Technologies China, Infosys set up its first
subsidiary in China in 2003 and began operations in 2004. Like
TCS, Infosys has offices in Shanghai, Hangzhou, and Beijing.
Its Shanghai and Hangzhou offices cater to Western
multinationals while its Beijing office mainly engages in
marketing and government relations. (Note: Lin is a
Chinese-American fluent in both English and Chinese. He stated
that he established Infosys' offices in Shanghai and Hangzhou
four years ago and is currently responsible for all operations
in China. End note.) Raghvendra Tripathi, Head of Greater
China, Satyam Computer Services (Shanghai) Co., stated that his
company set up its first China office in Shanghai in 2002.
Currently, Satyam has offices in five locations throughout
China: Shanghai (head office), Nanjing, Dalian, Guangzhou, and
Beijing. Its clients include mostly Western multinationals
operating in China as well as Japanese and Korean firms but very
few Chinese domestic firms. (Note: Tripathi is an Indian
national living in Shanghai five years. He stated that he
established Satyam's office in Shanghai in 2002 and is currently
responsible for all operations in China. End note.)

Why China? Why Shanghai?
------------------------

3. (SBU) All three companies cited similar reasons for their
companies' entry into China: 1) Tap China's huge domestic
market; 2) Service multinational corporations operating in
China; and 3) Gain access to Japan and Korea, two large
potential markets for BPO services. All three companies
currently have few Chinese domestic clients, but Murthy of TCS
and Lin of Infosys see potential in certain sectors, such as
banking, since Chinese banks have recently begun upgrading their

SHANGHAI 00000785 002 OF 004


IT infrastructure to become more internationally competitive.
The main line of business for the three companies in China,
however, remains IT services, offshore support and back-office
support for Western multinationals, many of whom have
significant operations in China, especially in the Shanghai
area. Although all three mostly have English-speaking local
employees, they also have a significant number of Japanese and
Korean speaking Chinese employees who provide offshore support
to clients in Japan and Korea. Murthy noted how linguistic and
cultural differences make it difficult to provide such services
to Japanese and Korean clients from India. He explained that
geographical proximity, linguistic and cultural ties, and a
large pool of Japanese and Korean speakers make China an ideal
foothold for entry into the Japan and Korea markets.

4. (SBU) Both TCS and Infosys set up one of their first China
offices in Hangzhou, a city located 115 miles southwest of
Shanghai. When asked why they chose Hangzhou, Lin of Infosys
simply stated "the Chinese Government selected the location.
The government wants foreign firms to invest in certain places."
(Note: Hangzhou is the capital of Zhejiang Province just south
of Shanghai. Hangzhou is not only a major tourist destination
renowned for its natural beauty, it is also a prosperous
business and industrial center with high per capita GDP and one
of the best universities in eastern China -- Zhejiang
University. End note.) Lin also mentioned that personnel costs
in Hangzhou are lower than in Shanghai, and due to their
physical proximity, the Hangzhou office is manageable from
Shanghai. However, both Lin and Murthy of TCS stated that
Hangzhou is probably "not the right place" to further expand
their operations, mainly due to its relatively limited pool of
local talent. Murthy explained that although Shanghai is more
expensive in terms of personnel costs, its larger pool of talent
(i.e. young professionals and new graduates who are highly
educated and fluent in English, Japanese, or Korean) and superb
infrastructure make up for the higher costs.

5. (SBU) Unlike TCS and Infosys, Satyam did not set up an office
in Hangzhou because, according to Tripathi, the city was already
"saturated" by its competitors (i.e. TCS and Infosys). He
agreed with Murthy and Lin that Shanghai offers the largest pool
of talent, and Satyam has maintained its largest office in
Shanghai. But he revealed that higher costs in Shanghai led his
company to seek expansion in other cities with lower costs and
relatively untapped resources. When deciding on a location for
Satyam's new service center last year, Tripathi said he surveyed
five locations: Tianjin, Xian, Nanjing, Guangzhou, and Chengdu.
The finalists were Chengdu and Nanjing due to overall cost and
availability of local talent, but he finally decided on Nanjing
because overseas customers would be able to access it more
easily.

6. (SBU) All three companies revealed that local government
entities aggressively approached (and still approach) them to
invest in their cities. Murthy and Tripathi feel that local
governments act largely independent of the Central Government in
pursuing investors. Murthy mentioned how the local government
of Hangzhou even bestowed Tata Chairman Ratan Tata the title of
Honorary Economic Advisor to Hangzhou. Murthy further stated
that he receives "several visitors" every week from various
cities and provinces seeking investment from TCS. (Comment:
These three Indian companies are not alone in this regard. As
central authorities seek to cool foreign direct investment,
local governments continue to ply U.S., Taiwanese, Korean and
many other foreign companies with incentives to win their
investment dollars. End comment.)

Non-Linear Growth of IT Sector
------------------------------

7. (SBU) Murthy of TCS said his company experienced "gradual

SHANGHAI 00000785 003 OF 004


linear expansion" from 2002 to 2005, with the total number of
employees reaching 300 by 2005. However, after signing large
deals with the Bank of China and other multinationals in 2005,
TCS China entered a phase of accelerated "non-linear growth,"
expanding to 1200 employees in 2007. Murthy expects this pace
of growth to continue, with his company expanding to 1700
employees by March 2008, 3500 by March 2009, and 5000-6000 by
2010 to become the largest IT company by revenue in China.
According to Murthy, TCS worldwide has had 40 percent growth in
revenue year on year, but annual growth in the Asia Pacific
region has been 66 percent, and he expects 100 percent annual
growth during the next three years in China. Although its
operations are centered in Shanghai, Hangzhou, and Beijing,
Murthy said that TCS recently opened another office in Tianjin,
which will commence operations in the near future.

8. (SBU) Lin of Infosys was similarly bullish regarding growth
prospects for his company in China. Although his company's
China operations have grown exponentially from 40 employees in
2004 to about 750 now, Lin believes this increase has been "too
slow" and looks towards accelerated growth in the near future.
He revealed that Infosys is currently looking to set up offices
in other areas, such as Nanjing and Suzhou, where personnel
costs are lower and he feels there is still room for expansion.
Although Tripathi of Satyam also claimed to be "reasonably
bullish" about his company's growth prospects in China, he
actually sounded less optimistic than the others, revealing that
his company's total investment in China was beginning to "taper
off." (Note: Tripathi was not clear about the total amount of
his company's investment in China, though he estimated it to be
about USD5 million. End note.) He said that his company plans
to expand from its current 700 employees in China to about 2000
in 2010, with the majority being relocated to their new service
center in Nanjing, which commenced operations this February.
However, Tripathi did not envision his company setting up any
new offices in the near future, stating that it was now "time to
consolidate" its current operations.

Possible Constraints on Growth
------------------------------

9. (SBU) The three companies Poloff spoke with characterized the
Chinese business environment as "very good" and were generally
optimistic about future growth. None expressed concerns about
Chinese regulatory hurdles or red tape. However, they commonly
mentioned rising personnel costs and difficulty in retaining
talent as possible constraints on future growth. Murthy cited
figures showing Chinese employees cost 20-30 percent more than
their Indian counterparts. Lin attributed much of this added
cost to benefits, such as retirement pensions and health
insurance, and believes this cost is rising and will continue to
rise because of new labor regulations. According to Lin, hiring
talented employees is not a problem, but retaining them is very
difficult. He said that Infosys' annual attrition rate is about
25 percent, the "industry average" according to him. Murthy
stated that his company's annual attrition rate has been about
15-18 percent, lower than the average, and that he has been
"very lucky" in this regard. Tripathi agreed that retention has
been difficult but was careful to differentiate between the
"highly skilled" (i.e. Oracle, SAP, and other advanced software
experts) and "lower skilled" (i.e. general computer
programmers), stating that the "highly skilled" have been
particularly difficult to retain.

Chinese Competition: Changing the Local Mindset
--------------------------------------------- --

10. (SBU) Tripathi also mentioned difficulties inculcating a
"service mindset" in local employees, saying this has been the
most time-consuming part of training new employees since Chinese
workers have little experience in services and still embrace the

SHANGHAI 00000785 004 OF 004


"mindset of manufacturing industries." Related to this, Lin
pointed out that this is one of the reasons why his firm does
not feel threatened by the increasing number of Chinese
competitors. According to Lin, although the Chinese are "good
at learning and copying," it will take a while for them to
become competitive in services since "this industry involves
people, not just simple manufacturing." Murthy estimates that
about 20 Chinese delegations visit India every month to learn
about the outsourcing industry, and China has a strong interest
in developing this sector as exemplified by the establishment of
software parks in Nanjing, Tianjin, and Wuxi. However, like Lin
and Tripathi, he believes TCS is well ahead of the game, and it
will take Chinese competitors years to even get into the game.

Comment
-------

11. (SBU) Like the majority of foreign businesses we have talked
to in Shanghai, all three Indian IT firms were optimistic about
their companies' current and future business prospects in China.
They also reflected concerns similar to other foreign
enterprises seeking to grow their operations in China.
Retaining experienced employees remains among the top issues
along with general unease over changing labor regulations and
rising labor costs. (Note: Shanghai AmCham surveys have cited
these among the top business issues for U.S. companies in the
Shanghai area over the past several years. End note.) Many,
like Infosys, are bullish to expand but remain frustrated that
rising personnel costs and retention problems are inhibiting
more accelerated growth. Like thousands of other foreign
companies in China, these Indian IT firms face the challenge of
finding areas with low cost, sufficient infrastructure and local
talent as they expand further inland.
JARRETT

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