Fragmented China Software Sector No Match For India, Report FindsFragmented China Software Sector No Match For India, Report Finds

BANGALORE, India — Despite its emergence as a technology powerhouse, China's software industry remains years behind Asian rival India, according to a new report.

Consultants McKinsey & Co. said Friday (Feb. 18) that China remains years behind India in software development. A key reason is that China's software sector remains fragmented. The market researchers said consolidation is needed in China's software sector before it can attain the scale and expertise needed to win big international projects.

China has almost three times as many software service companies as India, but that has not translated into gains. "Fragmentation exacerbates the Chinese [software] industry's other problems, including weak process controls and product management," the study said.

China's IT services revenues are rising, but are barely half of India's $12.7 billion. China's growth is driven by internal demand, and software exports make up only 10 percent of total annual revenues. By contrast, software accounts for 70 percent of India's. Both countries derive most of their business from a single customer: Japan for China and the U.S. for India.

"Many projects [in China] are below optimal scale, suppliers often compete on price and collecting payments can be problematic," the report found. China has 8,000 software service providers, most with fewer than 50 employees. India has under 3,000 software companies, but three — Tata, Infosys and Wipro — have about 25,000 workers. Some could acquire Chinese software developers, the study added.

Just six Chinese firms have been certified under the Software Engineering Institute's Capability Maturity Model. Each of the top 30 Indian firms hold this certification. China's training and employee incentives are also lacking, the study found. Chinese "companies must attain scale and abandon their project-based mentality and adopt a new focus on giving clients long-term value," it concluded.

Some industry observers have noted that India and China together could become a economic juggernaut if they built closer technology ties.