2005-08-29

China is Worthy of More Attention

A famous foreign company made an extensive visit in China in April to take a look at the IT services market and service provider capabilities. They met with 16 top suppliers in China: Shanghai, Beijing and Dalian. The report made us impressed with the facilities and capabilities of Chinese IT services, and made us evaluate the infrastructure in various parts of China.
We were also able to see the differences between perception and reality.
What are the characteristics of the IT services market in China?
What other foreign companies think of Chinese IT services industry?
What key trends can be assumed for the China IT services industry?

The offshore service delivery is not new but it is beginning to change. Things are changing because of economic conditions about low-cost options and the offshore locations' and service providers' growth.

Clients are carefully watching the global sourcing portfolio to decrease risk. The global sourcing portfolio shows India is the major deliverer, but with some small delivery, currency and geopolitical risks. Therefore, many US companies are looking for a better deliverer. China is usually the better choice than India because China has a strong and growing economy, a large talent pool and a government that is promoting free enterprise.

During this period, they spent weeks in China to understand the IT services industry and determine what myth was (not real) and what reality was (real).

The value of China's IT Services market is at about US$600 million in 2004 with a 50% projected growth rate in 2005. This shows that companies are considering China as an excellent choice for services globalization initiatives. The reason for the high growth is because of demand from US, Europe and Asia for skilled IT resources, support from the Chinese government and the low cost labor pool. The company estimates that the offshore IT services market in China will continue to grow over the next 5 years and grow more than $4 billion by 2010.

The IT & Telecom is expected to grow to represent the size of China's offshore outsourcing revenues. Japan is the primary beneficiary of China's offshoring exports, and Japanese customers contribute more than half of export revenues. However, Chinese companies want US and European customers. The following figures provide a breakdown of China's offshore outsourcing revenues by verticals and by geography.

A company would engage in offshoring because of the labor cost. For instance, India has a low-cost labor. China also has inexpensive labor that is lower than India by 10 to 15%. If companies were to look at the labor factor, China has an advantage over India.

The Chinese government has been supporting software exports. The Ministry of Science and Technology Torch Center launched "China offshore software exports to European and American markets program" in 2004. The program is to encourage software vendors to sell software products to overseas markets, not focused on either directly or via offshore software development models. The Ministry will provide financial and trade support to software vendors join in the program and the Ministry of Commerce of China will contribute RMB 60 million to the country's offshore software plan.

The government is planning to encourage the building of national offshore software development around China. Right now, there are six bases: 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 bases are expected to increase in the next few years; the Chinese government will continue to support suppliers and to export overseas.

China is located in a good place in the world for overseas clients to do business. China entered into the WTO and that will help to reduce barriers for trade for local and foreign businesses.

Chinese suppliers grew stronger by keeping the good relationship with Japanese customers for a long time. The relationships are based on high quality and timely project delivery. This experience will help Chinese suppliers to attract US and European customers.

Though verbal English is a major problem in China, the Chinese still make great efforts to improve their English-language capabilities, so more US and European companies will consider China as an important offshore place. China has increased on English training in schools and has more than 100,000 English teachers in IT colleges.

China is increasing college graduates, which provides a lot of professional talents. There are almost 500,000 professionals in the IT services industry. About 80,000 new IT professionals entered the industry in 2003, representing a 60% increase over 2002. In the summer of 2004, 2.8 million college graduates hit the job market, an increase of 680,000 in 2003. By 2005, the number of college graduates is expected to be 3.4 million. So, a huge pool of talent is waiting to be taken by offshore IT services providers. In recent years, the Chinese government has been focusing to create a first class high-tech labor through the creation of good education programs. Local service providers are also investing in employee training by universities. This helps to reduce on-the-job training time.

 

 

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