Chinese IT companies new mantra to counter Indian rivals
Source: timesofindia.indiatimes.com View: 263 Date: 2013-08-14

Chinese technology outsourcing companies, once seen as a rising threat to Indian software services exporters, are beating a retreat from US stock exchanges with the help of private equity firms, but the development also raises the spectre of stiffer competition in the fast-growing Asian markets.

During the last three quarters, at least five Chinese IT services companies, including iSoftStone, Pactera, AsiaInfo-Linkage, Camelot and Yucheng Technology have all announced receiving proposals from Private Equity (PE) firms, including Blackstone, to go private.

The push towards privatisation has been a response to US-listed Chinese companies facing accusations of weak corporate governance practices, leading to depressed valuations. But analysts are keeping a close watch on this movement away from investor scrutiny, with support from deep pocketed funds, because Chinese IT companies now have a chance to regroup and better compete against the Indian IT services giants, especially in emerging markets in Asia.

"Going private is a key part of the larger business strategy being adopted by Chinese IT service firms. This is aimed at rationalising the service portfolio to be more solution-oriented. This will definitely help them improve operational efficiency and access local capital markets with better price-to-earnings ratios," Mike Liu, chief operating officer of Infosys China, told ET.

The Communist Party-led state intervention nearly a decade ago to promote Chinese software services sector was seen as the rise of a formidable challenge to India’s dominance in the global technology outsourcing market. But Chinese companies saw very little traction in markets other than Asia.

In the January-March quarter, iSoftStone, which is evaluating a $332 million (Rs 2,000 crore) takeover proposal from China Asset Management Company, saw its global revenue fall 13%, hurt by slowing business in the US and Europe. Pactera — itself a combination of three Chinese IT services players — received a proposal from private equity giant Blackstone in May that valued the company at more than $600 million (Rs 3,600 crore).

A consortium led by private equity firm CITIC Capital is taking AsiaInfo-Linkage private for about $900 million (Rs 5,400 crore). ISoftStone declined to comment for this story, citing its evaluation of the going-private proposal, while Pactera and others did not respond to emails seeking comment.

The Chinese IT services players have language and cultural similarities with several Asian markets, but have been unable to articulate their value proposition to clients in more mature and lucrative outsourcing markets such as the United States and Europe.

Some of this has been blamed on their plain-vanilla service offerings. The largest IT outsourcing company in China Neusoft reported revenue of about 6.96 billion yuan or $1.1 billion, about a tenth of India’s largest service —provider Tata Consultancy Services. iSoftStone, one of the largest players going private, had revenue of $381.1 million, less than that of mid-sized Indian IT firm Mindtree.

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