China and India losing cost advantage

With rising costs eroding their low-cost advantage, Asian powerhouses China and India will need to find alternatives that can help maintain their edge in the technology space, says a new report by the Economist Intelligence Unit (EIU).

Commissioned by the Business Software Alliance, the study, The means to compete: Benchmarking IT industry competitiveness, was conducted from November 2006 to April this year, and surveyed 64 countries across seven regions. The study compares the countries' performance in building an environment for IT industry competitiveness.

According to the study released on Wednesday, China and India are among the few countries which have IT sectors that are able to compensate for major weaknesses in their business environment by parlaying unique factors, such as workforce size, low wages or language attributes, into strong sector performance.

Although this is a "feat" few other countries are able to manage, the report noted, China and India will need to "improve on their enablers, as their cost advantages will erode".

"There has been an assumption that India and China equates to cheap or inexpensive, and that may not necessarily be the case in a few years' time," Tony Nash, Asia director for Country and Economic Research at EIU, said at a media briefing held in Singapore on Wednesday.

Wage inflation in both countries is between 15 percent and 25 percent per annum, according to Nash. This means that for some jobs, "Indian companies are actually going outside of India to find people to fill those jobs, because the Indian staff are becoming too expensive", he said. "Those cost advantages are eroding."

However, a growing number of Indian companies are finding ways to compete in terms of quality and responsiveness. Nash said local businesses are "doing quite a lot to combat" the erosion.

"Companies resident in those countries are changing [and] are adjusting their way forward, because they recognise this very well," Nash noted. "From their HR department to their sales [and] throughout their company, they are living wage inflation and they see their cost increasing, so they know that they have to adjust."

Emerging competition
Competitive pressures continue to mount as several emerging markets are poised to rival China and India in the availability of low-cost IT skills, said the report. They include Malaysia, Brazil, Vietnam, as well as East European countries such as Russia, Hungary and Poland. Smaller emerging markets such as Lithuania, Estonia and Chile will also develop niches in software development and services.

The US, Japan, South Korea and the UK provide the strongest environments for IT competitiveness, noted the report. These countries possess winning factors or "competitiveness enablers" such as an ample supply of skills, an innovation-friendly culture, a world-class technology infrastructure, a robust legal regime, a well-balanced government support and a competition-friendly business environment.

According to the EIU, the report is the first global effort to benchmark industry environments for IT production, which encompasses hardware, software and IT services. The study is based on 25 indicators in six categories: business environment, IT infrastructure, human capital, legal environment, R&D (research and development), and support for IT industry development.

"There is a strong link between the presence of IT industry competitiveness enablers in the countries and the strength of their IT sector," Nash said. "Governments and industry leaders must pay close attention to these enablers if they wish to boost the global competitiveness of their IT industries."