Talks between the prime ministers of China and India last week to forge closer ties between the two countries could hasten the region's emergence as an IT powerhouse and center of innovation. Such ties also could yield benefits for companies looking to tap offshore workers--and spawn tougher rivals for U.S. IT vendors.

"I strongly believe that if we join hands together, we will certainly be able to set a new trail in the IT-business world," Chinese Premier Wen Jiabao said, speaking at Tata Consultancy Services' headquarters during a visit to India's Bangalore technology hub. He envisions a "two pagodas" alliance in which China concentrates on hardware and India on software and services. "We will be able to lead the world IT industry," Wen said, predicting "the coming of the Asian century of the IT industry."

Prime Minister Manmohan Singh of India and his Chinese counterpart, Prime Minister Wen Jiabao, want to bring their countries closer together. Photo by Manish Swarup/AP

Wen's visit was part of a larger effort to strengthen ties between India and China, which have been strained by a long-simmering border dispute. So far, discussions haven't gotten specific, but any lessening of trade and immigration barriers between India and China would help IT-services vendors that operate in both countries and their customers.

For the past year, Los Angeles financial-services provider IndyMac Bank F.S.B. has used software developers in India to help build its loan-processing system. IndyMac officials like the price they get and say the quality is top-notch. The bank may offshore other critical IT projects but is hesitant to depend too much on Indian workers. "We would be uncomfortable with the risk level," executive VP Mark Nelson says.

IndyMac is looking at China as a possible source of additional labor. If it could use its existing services vendor, Cognizant Technology Solutions Corp., to provide workers from both countries, then so much the better. "It would keep our management overhead to a minimum, which is critical for us," Nelson says.

Cognizant has offices in China, and company executives say they welcome any initiatives that would help integrate operations in the two countries. "We're clearly pleased with signs that the Indian and Chinese governments intend to work more closely together," Cognizant CFO Gordon Coburn says. Cognizant sees China's 800,000-plus trained software professionals as workers-in-waiting for the company. "China is fundamental to our growth plans and our ability to offer risk mitigation," Coburn says.

Cooperation could benefit IT-services companies on several fronts--from easing rules governing cross-border training of workers to facilitating joint operations. A number of other Indian IT-services companies, including Infosys Technologies, Satyam Computer Services, Tata, and Wipro Technologies, also recently established tech centers in China.

To take full advantage of liberalized trade, Indian companies will have to prove they can attract and retain Chinese talent on par with Western companies such as IBM and Accenture that are competing for top IT talent in China. Some observers question whether Indian businesses will be able to make the cultural adjustments needed to attract Chinese workers. Tata has made big strides in that area, says Girija Pande, regional director for the company's Asia-Pacific operations. "We don't have a problem recruiting in China," he says, adding that the company's turnover there is less than 10% annually.

The impact of collaboration between India and China likely would extend beyond IT services to everything from the PC business to software. "Both countries will become a major force in the development of software standards," predicts Kim Polese, who co-founded software company Marimba and is CEO of SpikeSource, a provider of open-source software-integration services. Because of its low up-front cost, open-source code is used heavily in India and China, and Polese says that will help push its acceptance worldwide. "We've just scratched the surface in understanding what a global phenomenon open source will be, and a lot of the innovation around it will come out of Asia, where it's seeing heavy adoption."