China’s software power
It’s a brave new world for China’s software firms as they come of age
WHY China? Even two years ago, Ben Wang had to answer the question every time he tried a sales pitch for software service contracts from overseas clients.
These days, instead of answering the question, Wang asks the questions as he meets executives from scores of companies every month, all keen to outsource software work to his company.
“China is becoming a top destination for software outsourcing,” says Wang, CEO of Beijing-based Beyondsoft Co Ltd. His company, started in 1995 with only four people, now has an army of 2,000 engineers, providing outsourcing services for tech giants such as Microsoft and IBM.
China’s fledgling outsourcing companies are now expanding rapidly, trying to woo multinationals scouting for low-cost information technology (IT) talent. By trying to pry open the US market, they now aim to become international players like their successful counterparts in India.
But they are not the only ones driving China’s IT outsourcing dreams. Leading IT services companies such as US-based EDS and India’s Satyam have mapped out aggressive expansion plans in the nation. Some are even looking at acquiring local players to speed up the process.
“It’s a critical time for Chinese outsourcing companies,” says Wang.
“We will either grow into giants or will be gobbled up by a giant.”
Unlike their Indian cousins, Chinese outsourcing companies usually made their first millions in Japan rather than Western countries like Britain and the US.
In 2006, China’s software outsourcing companies raked in US$1.4bil in revenues, up more than 40% compared with a year earlier.
And 60% of this revenue came from the Japanese market.
Yet, compared with the US and Europe, the Japanese market is still a small pie. According to IT consultancy IDC, North American and European markets accounted for 75% of the world’s US$320bil IT service and outsourcing market. And these two markets are expected to expand more than 60% annually in the coming years, almost twice the speed of the Japanese market.
With the US market firmly in their sights, Chinese outsourcing companies have kicked off an acquisition spree, trying to gain access to it.
In March this year, Beijing-headquartered hiSoft Technology International bought out Envisage Solutions, a California-based IT consulting firm that boasts a client base of biggies such as Novell and General Electric.
Despite their ambition to go global, Chinese outsourcing companies are facing increasing competition in the neighbourhood. As salaries for software engineers keep rising in India, the world’s leading outsourcing giants are now eyeing China’s universities as the new sources of low-cost software talent.
Tata Consultancy Services, one of India’s most powerful IT outfits, established a new outsourcing joint venture in Beijing with Microsoft and two Chinese partners this February.
The company expects the venture to increase its headcount in China tenfold to 5,000 by 2010, and help it become one of the biggest players in China.
Two months later, India’s fourth largest software exporter Satyam kicked off a global delivery campus in Nanjing, capital of East China’s Jiangsu Province as part of its efforts to increase its number of engineers to more than 3,000 by 2008.
“The labour cost in China could be 15% to 20% lower than India’s,” Satyam chief executive officer Rama Raju said during the opening ceremony of the Nanjing centre.
“Besides organic growth, we are also studying the possibility of acquiring local companies to speed up our expansion.”