Is the mighty Chinese dragon threatening the Indian outsource suppliers?

I get positive signs from clients and research firms (even though I am a bit sceptical on their reports, see here) on the performance of various Indian suppliers. They continue to mature and this also helps them to penetrate the continental European market further. Why? One of the differences I see between American outsourcing engagements and European/Dutch projects is that in America it is not uncommon to have a contract stating the scope as “50 IT employees performing network management”. The company basically hires resources and maybe somewhere in the future the contract changes into a more sophisticated model where the client demands certain functionalities and quality levels (e.g. providing 100Mb network bandwidth to desktops with a response time of X and an availability of Y for price $$ per connection).

In The Netherlands at least (and I think the same applies for Germany and France) we typically start with the second type of ‘service description’. We focus here less on resources, but more on deliverables, processes and performance indicators. But what has this to do with China versus India? Well, quiet a bit as I expect that Chinese vendors which are now starting to penetrate the outsource market in the U.S. will come and visit us Europeans in a couple of years (after practising and learning from their engagements in the U.S. like the Indians did before).

My main interest I want to explore in this post is however what the effect will be of China differentiating it offshore production capabilities into the service industry. There are still very strong ties between the Chinese government and the corporations and if the central governments decrees: we want to become a serious destination for IT or BPO services, I believe that India has something to be seriously worried about.
Here China can also play out one of its ‘advantages’ over India: it is not a democracy and if China puts its might behind something (and a couple of billions of its reserves) things could get ugly fast for the traditional ITO and BPO destinations. Of course does India (and many other countries) have a huge advantage in terms of language skills and experience, but China always plays for the long run. They do not think in one or two years, but in ten or twenty years.

That China is also starting to probe into the service market is demonstrated by China's Neusoft which entered the group overperformers of Black Book’s 2009 survey. So China is already getting slowly into the market traditionally dominated by India and a few others, but I wonder what will happen when China starts to align its education, infrastructure etc with the aim to become a service industry. I believe the board members of TCS and Wipro have then really something to worry about (instead of the tax ideas from Obama, see previous post).