Indians can be at peace regarding competition from the Chinese software outsourcing industry in the coming years.

A recent McKinsey study of China's software outsourcing sector revealed that it will be many years before China poses a threat to its continental rival, India in this arena.

China's spectacular economic success has prompted speculation that the country's software outsourcing industry could soon compete with India -- and that was what prompted McKinsey to undertake the study to check ground realities in the country.

"To compete with India, China will have to consolidate its highly fragmented industry to gain the size and expertise needed to capture large international projects. Currently, there is little movement in this direction," said McKinsey in the study.

The study showed that only about 12 per cent of Chinese software services providers saw mergers, acquisitions and alliances as a priority.

"Managers in China have little M&A experience, while several Indian companies are considering acquisition of Chinese firms to expand their operations," the study said.

The top ten Chinese IT services companies have only about 20 per cent share of the market compared with 45 per cent commanded by India's top ten. Furthermore, China has about 8,000 software-services providers, and almost three-quarters of them have fewer than 50 employees.

"No company has emerged from this crowded pack. Only five have more than 2,000 employees. India, on the other hand, has fewer than 3,000 software-services companies. Of these, at least 15 have more than 2,000 workers and some, including Infosys Technologies, Tata Consultancy Services, and Wipro Technologies, have garnered international recognition and a global clientele," says the study.

Only six of China's 30 largest software companies are certified at level five or four of the capability-maturity model, by contrast, all of the top 30 Indian software companies have achieved these rankings.

"But shortcomings in the structure of China's IT industry prevent it from taking full advantage of an increasing English speaking graduate force. Although revenues from IT services are on the rise, they are barely half of India's $12.7 billion a year. Growth is driven by domestic demand-most customers are small and midsize Chinese enterprises that want their software customised to their own needs," McKinsey said.

According to McKinsey, Japanese customers, which seek mostly low-value application-development contracts rather than more lucrative ones for design, supply about 65 per cent of this sector's income.

Despite lower costs, operating margins in Chinese software services companies average only seven per cent, compared with 11 per cent at similar companies around the world, because many projects are below optimal scale, suppliers often compete on price, and collecting payments can be problematic.

Without adequate scale, Chinese players are unlikely to attract top international clients.