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Outsourcing in China is the future

By Betty Zhang

The Current Situation

After years of doing software outsourcing for Japan, Chinese IT companies are now raring to take to foothold on the US market.

America is the largest market in offshore outsourcing projects,making up the 63% of the total outsourcing export market, following by Europe 26%,India, Ireland and Japan the total of the other 11% according to United Nations Conference on Trade and Development.

In 2004, the Chinese trade volume in software offshore outsourcing projects from America witnessed the robust growth of 56.3%, compared to that in 2003, ranking the top list in all markets.

According to IDC1, China is the next favorite destination for software outsourcing next to India, Canada and Ireland. The market is expected to gain a compound annual growth rate of 44 per cent in the next five years and reach 4.7 billion US dollars in 2009.

At the present, most of the software offshore outsourcing projects in China are mainly on the software testing work. As for the software development and structure design involving more technology and also more profit margin, Chinese companies are taking a relatively small portion.

Forrester forecasts that, in this same timeframe, offshore outsourcing will account for 28% of IT budgets in US and Europe, and by 2017 expects 3.3 million US-based services jobs to move offshore, with the IT industry on the leading edge of the first wave.

From the perspective of offshore outsourcing demands, due to the increasing globalization of the world, the pressure in reducing cost makes offshore outsourcing even more appealing to the developed countries. According to the research released by Mckinsey, developed countries can outsource more projects outside. But why can’t we see a dramatic increase in that?

Firstly, As for China, the most cited concern is the worry of weak protection of intellectual property rights. But things have changed greatly. The Chinese government has attached great importance to the intellectual property rights protection. As part of its entry into the World Trade Organization (WTO), China has been adopting laws and enforcement practices conforming to the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

The country is now passing laws that protect private ownership and intellectual property, a crucial step for outsourcing to take hold. Below are some articles in the laws and regulations.

a. The registration of software copyrights is encouraged and key protection is given to registered software in accordance with the state laws.
b. No unit is allowed to use unauthorized software products in its computer system.
c. Crackdown on software smuggling and pirating shall be strengthened, and making, production and
selling of pirated software shall be punished severely.

Further, it embraces public/private partnerships and domestic/foreign partnerships.

Mr. Yao (www.shanghai-digital.com) says the general problem with IPR is not that laws are lacking but the enforcement is substandard. Nonetheless, the central government has introduced stricter enforcement around the major software parks with the creation of special agencies that deal with breaches.

The Ministry of Science and Technology Torch Center launched “China offshore software exports to European and American markets program” in 2004. The objective of this program is to encourage software vendors to sell software products to overseas markets not currently focused on either directly or via offshore software development models. The Ministry will provide financial and trade support to software vendors enrolled in the program. On the macro level, the Ministry of Commerce of China will contribute RMB 60 million to the country’s overall offshore software plan.

Secondly, English proficiency and quality of education see improved, but still need to improve dramatically. English language proficiency still remains a major hurdle for china, especially in verbal communication. already, the country is increasing its emphasis on English training in schools and has more than 100,000 English teachers in its IT colleges. In the summer of 2004, 2.8 million college graduates hit the job market. By 2005, the number of college graduates is expected to reach a record 3.4 million. In recent years, the Chinese government has been stepping up its efforts to create a first class high-tech labor force through the creation of reputable education programs. The offshore IT firms have invested in employee training provided by lateral institutes and universities, which greatly reduces on-the-job training time.

Thirdly, the worry of China lacking world-class infrastructure

The government has made significant investments in roads and rail systems with high ways and rail constructions being accelerated under the current five-year plan to adequately support the growing merchandise shipments. The following step is connecting inland second- and third-tier cities to coastal areas and ports. When NANDAN NILEKANI , Chairman and CEO of the India Infosys company, attended the Fortune global forum held in May of Beijing, he said that he was deeply impressed and enchanted by the appearance of Beijing, especially by the reasonable city organization, the well-equipped hard infrastracure, and its efficiency in city construction.

Despite the boom in outsourcing, firms still will face considerable challenges in successfully executing an offshore model. According to neoIT analysis, “More than 40% of the new offshore initiatives will fail to achieve the anticipated "savings, scale and risk diversification. The key reason for these disappointments will not be due to supplier capability but buyer preparation and management," the report says.

The Future Prospect

The IDC study reviews the IT services contracts signed in China in 1H04, and tracks major deals in three major engagement areas, systems integration, outsourcing, and technical product support.

"In 1H04, IDC witnessed more service contracts being signed, indicating the recovery of some major industries as well as the higher acceptance from clients of service products. More high-end services, such as consulting, storage structure planning, and complex system implementations, are being purchased independently, that is, apart from traditional hardware and software bundles," says Enid Du, IDC China service analyst.

The Opportunities

According to the <<Federal Computer Weekly>>,American software offshore outsourcing business has experienced an annual increase ,close to $50 billion in 2007 by estimate. This offers a golden opportinity for China and Southeast Asia countries seeking alternatives to India.

The due road for Chinese companies to development

1 Taking advantage of specialty of Chinese companies

Mr Yao from shanghai-digital information and technology Co., Ltd (www.shanghai-digital.com) analyses:

“The Chinese companies should optimize our production-making strength, especially our engineers’ advantage in arithmetic, science of computing, and develop products with special features, including built-in ones. We hold strong attraction to the American market in information security and finance management software products, the key point is how to better cooperate with American companies.”

2 Creating a better environment

To boost infrastructure, the government aims to encourage the building of national offshore software development bases around China. At present, a total of six bases have been built, including the Beijing Zhongguancun High-Tech Park, Shenzhen Software Park, Xi`an Software Park, Dalian Software Park, Shanghai Pudong Software Park, and Suzhou Software Park. The number of bases is expected to increase in the next few years, which implies the Chinese government will continue to support suppliers and their efforts to export overseas.

Besides the unremitting efforts on IP rights protection, Chinese government has provided strong policy support for the IT industry. On a national level, the policy includes a 30% annual growth target for software revenues and exports, investment in R&D to support the development of the IT industry, the creation of software parks and specific software regions, and provision of tax benefits. Currently, the western regions enjoy preferential tax treatments. The Chinese government will surely offer more policy support to drive this industry.

3 Getting in closer touch with the end-users.

To most of the Chinese companies, no matter the beyond soft or shanghai-digital, they often stay at the “sub-contracted” position, their projects are outsourced by TCS、Infosys、Wipro companies.

Mr. Yao from shanghai-digital information and technology Co., Ltd (www.shanghai-digital.com) analyses:“if we can’t meet the end-users, we will be at the not favorable position. For the Chinese companies, they should expand the marketing capability. While offshore development centers can offer the chance to keep in close contact with the end-users.”

4 Making the use of the advanced management experience and skills

This challenge should dissipate over time as more and more Chinese nationals return from overseas bringing with them the necessary management skills gained while working at US or European companies. Some of the Chinese IT services companies have also started to conduct management training programs that are focused on improving employees “softer” skills such as accountability, initiative, curiosity, business perspective, effective communications, team building and appropriate business conduct. In the future, more“homegrown” managers can be expected to

Effectively handle local employees while at the same time successfully dealing with Western customers.

5 Strengthening the ability of software engineers

Basically, the Chinese software engineers have strong theory knowledge, and quick-learning ability, the urgent thing for them is to improve their practice ability, from creating code conventions, estimating the workforce, to making a plan, launching quality system.

Mr. Yao (www.shanghai-digital.com)points out:“the Chinese engineers have strong coding or testing capability, But as far as requirement analysis and architecture design, there is still a long way for them to go.”

6 Mergers and Acquisitions

The growth of the outsourcing industry will force Chinese software and back-office companies to increasingly seek scale as a means to effectively compete. As a result, the consultancy expects a string of mergers and acquisitions in the coming year, as well as a number of stock-market listings by BPO firms.

7 Encouraging “go-out” policy

The Chinese government supports some companies to set up brand companies in US and look for partners, which is very useful for thoes companies to make a clear understanding of the end-user`s real needs and explore the outsourcing market.

Finally Mr. Yao says:“Although cost is very important, the most crucial factor to success is trust. Once you establish good reputation and trust-worthy image, you broaden your friends circle, and know their decision-making process.”


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