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
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
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.
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)
“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
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
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
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.”