China's software industry faces tectonic shift

Updated: 2011-06-20 17:30
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DALIAN -- The golden age for the software and outsourcing industry is over, and Chinese companies must overcome a number of hurdles as they face a major shift as the industry goes from selling software products to selling services.

IT heavyweights made this call during a just concluded international software conference in the northeast port city of Dalian, Liaoning Province.

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Liu Jiren, chairman and CEO of Neusoft Corp, said costs in the IT sector have been growing at least 10 percent annually for the past couple of years, and such increases are difficult for overseas customers to bear.

But Michael Ye, vice president of Dalian Software Park Ltd (DLSP), believes the sector's primary challenge isn't rising costs but overcapacity from too many local governments competing with each other to establish software and outsourcing industries.

"All the governments flock to these multinationals to try to win investment," he said, as they think setting up IT services and a software industry is a good way to attract international investment.

And Ye anticipates this competition will become more severe due to local governments' perception that their "political performance" is based on them attracting foreign investment.

Chongqing is one of a number of cities in China rushing to turn itself into an IT hub. Construction of the largest cloud-computing zone in China started in April with investments totaling around 50 billion yuan ($7.73 billion), according to the municipality's government.

Yet the game of outsourcing, shared services and offshoring is not about today, it's long term, said Egidio Zarrella, KPMG partner and IT advisor, last month in Beijing. "China's focus on education, infrastructure and high quality means it's well placed for the future," said Zarrella in his speech at a shared services and outsourcing conference.

But Ye sees market forces rather than government investment as the key.

"The market will decide who will survive the competition, gradually the market will decide which areas, or which cities, are suitable for developing that industry," he said.

Ye said that quite a few municipal governments nationwide have approached DLSP in an attempt to copy its model, which is government supported but privately invested.

By the end of 2009, DLSP had realized an annual sales income of 20.2 billion yuan and had attracted Fortune 500 companies such as IBM, HP Accenture, Panasonic, Sony, Oracle and NEC, according to the company.

"They all expect us to help them attract Fortune 500 companies, but we can't make this promise," Ye said.

He said it's one thing to establish a software park, but quite another to make it a success, which must be based on a number of factors, such as whether the city has a sufficient number of quality universities, and whether the government applies a market-oriented management approach.

"I don't think our story can simply be replicated in other cities, and I suggest the local governments give it a second thought before deciding to build such parks," he said.