China, so far the world's manufacturing superpower, is making a credible play for a share of the IT outsourcing pie, much to India's chagrin. China's well-oiled machine, once it makes up its mind about rolling out a policy, is capable of doing so more effectively than most other governments.

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Somehow, its Communist past comes in handy: China has created an education system that is scaling well in the engineering disciplines. Statistically, the United States graduates roughly 70,000 undergraduate engineers annually. China graduates 600,000 and India 350,000. Although India compensates with an additional 300,000 IT graduates through non-engineering programs, in higher education, China is racing ahead, producing engineering Ph.D.s at a much faster pace than either the US or India.

As India struggles to cope with raging attrition and salary inflation challenges, and a generally unstable, mercenary workforce, let's take a look at the situation in China.

Entrepreneur Chris Chen founded VanceInfo in 1995. It is headquartered in Beijing. The company has become one of a half-dozen companies leading China's forays into software outsourcing.

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Vance got its first breakthrough when IBM gave the start-up a project to localise its OS2 operating system into Chinese. That contract blossomed into testing projects and then led to development assignments. With 3,800 employees spread across Beijing, Shanghai and six other cities, Vance today does work for IBM, Microsoft and a host of other multinational corporations.

TIBCO, a Palo Alto, Calif.-based banking middleware company, which has an annual revenue of $570 million and is run by an India-born chief executive, recently kicked out a major Indian outsourcer because it could not meet TIBCO's offshore project staffing needs in a timely manner. TIBCO subsequently also downsized its captive development center in India from 150 employees to 100. Both moves were compensated by Vance in China, whose TIBCO-specific operation grew from nothing to 200.

Vance and a handful of other Chinese companies are growing rapidly due to American multinational companies' desire to diversify out of India while continuing to control costs. The US downturn has accelerated the process, as companies are looking for alternatives to India's rising costs. It's a natural choice, particularly because most multinational corporations already have significant Chinese operations, either in manufacturing or to reach the Chinese market.

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Vance has found it relatively easy to sell software testing, maintenance and research and development services to these operations without having to incur the larger cost of selling to the US headquarters. The company went public recently on the New York Stock Exchange. Net revenues for the year 2007 were $62.7 million, up 115.9 per cent from 2006.

Chinese companies aren't the only ones building up resources in China. The Indian outsourcers, reeling under rising cost-structures and eroding profits, are also looking at China. "We are not committed to using Indian resources," says Virender Aggarwal, who heads up Satyam's [Get Quote] Asia Pacific and Middle East efforts. Satyam is among India's top five or so outsourcers. "We will go where we find the right skills at the right price," Aggarwal says. And for now, that points Satyam to China.

Satyam's Nanjing operation will grow to 2,500 people this year. Within three years, the company expects that 20 per cent of its total workforce (currently at 50,000) will be outside India, China being the obvious next largest destination. Testing and Engineering Services for high-tech and automotive companies are obvious areas where China offers 'near-shoring' opportunities for multinationals, since so much of the manufacturing already takes place there.

Customer intimacy, in fact, is a bonus. For this type of work, language does not create any barrier. Software programming is also a strength area for the Chinese, in which, language skills are not integral.

Trainable skills matter and are, surprisingly enough, in short supply in India. "The Indian government is not spending enough on education. As a result, India cannot keep up with the demand," says Aggarwal.

China is spending; China can keep up. So, all the major Indian outsourcers are looking at China as a strategic alternative.

A smaller Fremont, Calif.-headquartered Indian outsourcer, Sierra Atlantic, has made China a key competitive advantage. Sierra's chief executive, Raju Reddy, says that, to deliver products globally, companies must have a significant presence in both India and China.

One of Sierra's recently acquired clients, a $4 billion revenue high-tech manufacturing company, asked for 60 to 70 people in India, plus five to 10 people in China to support its manufacturing operations. Reddy believes that Sierra won the customer because he could support the China needs, not just offer Indian resources.

Reddy also finds the Chinese workforce eager to learn new things like business application development, traditionally not a Chinese strength. The work ethic is sincere and motivated, unlike the sense of entitlement that prevails amongst Indian engineers who hop from job to job every six months developing excellent salary negotiation skills but not much else that matters. "It is a blessing that China is developing as a meaningful competitor to India," Reddy says.

Ultimately, optimists may hope that this competitive force from the Chinese contingent will whip India's youth back into shape. But in the meantime China may well gobble up a third of India's outsourcing lunch!

Sramana Mitra is a technology entrepreneur and strategy consultant in Silicon Valley.