European firms need to wake up to the "warning bell" being sounded by the globalisation of the software and services industries, industry experts have warned.

Analyst firm Gartner said that Microsoft's recent creation of a joint venture with Indian service provider Tata Consultancy Services and Chinese government interests will create a major new China-based global sourcing provider.

Gartner Research vice president Partha Iyengar said: "China's decision to partner with a leading Indian service provider, and the Indian company's willingness to participate, show that both nations see the potential for mutual benefit to their software industries.

"This sounds a warning bell for competitors, including global providers from the US and Europe. It also signals an opportunity for companies around the world to leverage global sourcing from China."

The international alliance was sealed at the end of June when China's Sino-India Cooperative Office announced that Chinese companies will partner with Microsoft and Tata to establish a software services company to compete in Chinese and global markets. Operations are expected to start by early 2006.

Iyengar noted that the partnership demonstrates the Chinese government's resolve to "dramatically improve the country's software development capability" and become a major force in the global software services industry.

"The success of this venture and the benefits it could bring for other providers could help propel China into a global sourcing leadership position," he said.

Iyengar added that it is also a coup for Tata to be selected as the Indian partner, since it gains an advantage over other Indian companies trying to break in to China, thanks to Chinese government sponsorship.

However, Gartner predicts that it may not all be plain sailing for the tri-national joint venture. "This deal may encounter some pitfalls," said Iyengar.

"Indian IT companies have had positive results in China lately, but some earlier attempts proved disappointing. Indian firms still worry that Chinese partners will use them just to gain expertise or competitive advantage before dissolving their partnerships.

"China still has a serious shortage of senior technical and managerial leaders and needs to drastically increase training for this and other large-scale software development efforts to succeed."

Gartner advised non-Chinese service providers, especially those looking to provide services in China, to seek similar partnerships with regional governments and service providers.

The analyst firm also stressed that global sourcing clients looking for China-based service options should have this venture, once operational, at the top of their shortlists.