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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