Revenues in the Chinese software product and services sector are forecast to reach $140 billion (£70 billion) by 2010, and already hit $21bn during the first quarter of 2008 alone, close to the sector's $27.5bn revenue predictions for the entire year in the UK.
India's software sales and services revenues are forecast to reach $52 billion this year.
Sean Finnan, president of the UK trade association for technology Intellect and UK country manager for EDS, said it is time for Britain to forget any hopes of matching China and India in the low-cost software market.
Finnan says the country should instead carve out a niche for itself in high-value end of the sector.
An Intellect report into the state of the UK technology industry published today shows the European technology industry growing by 5.7 percent last year, compared to 33 percent in India and 28 percent in China.
Finnan said: "It is unsustainable to try and dominate the low-cost ground. China and India will always be able to win the volume game. We need to try and follow the lead of the financial-services sector to reposition ourselves at the high-value end of the market. We believe that the knowledge-economy services will be critical for the economy going forward."
Speaking at the launch of the report, Richard Holway, of Farnham Consulting, said that less software was being sold as companies tried to extend the life of existing products.
He said: "Seventy to 80 percent of the revenue is being generated by existing clients saying they are going to keep the software longer and spend more money on bolt- and add-ons."
Tom Wills-Sandford, deputy director general of Intellect, said China is yet to cut into the UK software market but this could change in future.
He said: "The UK software industry has seen steady growth over the last few years and is in good shape. The software sector in China is certainly growing fast, but we have not seen a significant impact in the UK from either Chinese software products or Chinese outsourcing.
"However, given their appetite for expansion into new markets and the staggering rate of development both internally and externally seen to date, this may well change in the future."
The Chinese first quarter figures released by the Ministry of Industry and Information showed software services has generated $4 billion, software outsourcing £258 million and software sales $7 billion in revenue during the first three months of the year.
The European Information Technology Observatory software revenues forecast for the UK for 2008 predicted €10 billion revenue from system software and €7.9 billion from application software.
