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 IT talent. By trying to prize 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 the UK and the US.
In 2006, China's software outsourcing companies raked in $1.4 billion in
revenues, up more than 40 percent compared with a year earlier. And 60 percent
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 percent of the world's $320 billion IT service and outsourcing
market.And these two markets are expected to expand more than 60 percent
annually in the coming years, almost twice the speed of the Japanese market.
"The market size and profit margin in the US market is more attractive," says
Wang Tao, of Analysys International, a local IT researcher. "You can't afford to
miss it if you want to become a global player."
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.
"Envisage saves us a lot of work in engaging new clients in the US," says Loh
Tiak Koon, CEO of hiSoft. "And their ability to provide higher-value consulting
services allows us to get bigger contracts with higher profit margins."
Even as late as 2003, more than 80 percent of hiSoft's revenue used to come
from Japan. Now the company, established in 1993 in Dalian, expects the US
market to account for 60 percent of its business in two years. Such has been its
success that hiSoft is lining up a NASDAQ listing this year, trying to become
the first Chinese software exporter to chart those waters.
Learning the ropes
But a local sales network is not the only thing Chinese outsourcing firms are
after, says Ben Wang, CEO of Beyondsoft. "For certain technologies and domain
knowledge, you just can't learn by yourself."
Trying to move into a more sophisticated high-end market, Beyondsoft has
adopted a "silver hair" strategy - inviting veteran software experts to train
its young engineers.
Michael Lee, a founding engineer of Siebel Systems, has been giving lectures
and coaching Beyondsoft's engineers since last year. Lee co-developed the early
application for Siebel, a leading customer relation management (CRM) software
developer acquired by Oracle Corp in 2005.
The company also went on a recruitment drive in New York, trying to hire
experienced engineers to expand into pharmaceutical and financial sectors. It
says it has managed to rope in senior IT consultants who have "worked on Wall
Street for more than 10 years".
To keep pace with their rapid growth, local outsourcers are also trying to
improve their management ability, including hiring senior executives from
Earlier this year, ChinaSoft International appointed Fanny Chan, former
Marketing Director of AMD China, as its senior vice president. Chan started her
career as a software developer in IBM Canada in 1985 and oversaw HP's
outsourcing services in China in the early 2000s.
Shortly after taking over as the chief of China's fifth-largest outsourcer,
Chan established two departments for process management and quality control to
make sure "every project is done according to international standards."
Dalian-based Neusoft, now China's largest software exporter, established a
"Leadership Institute" earlier this year to train its middle- and high-level
management team. The company also got Jack Welch, former CEO of General
Electric, and Kenichi Ohmae, a Japanese management guru, to give online training
to its managers.
"Jack really taught us a lot about how to manage a fast-growing company,"
said Liu Jiren, chairman and CEO of Neusoft. "Such experiences are invaluable
for us to become a global player."
Elephants at the gate
Despite their ambition to go global, Chinese outsourcing companies are facing
increasing competition in the neighborhood. 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
"The labor cost in China could be 15 to 20 percent lower than India's,"
Satyam's CEO Rama Raju said during the opening ceremony of the Nanjing center.
"Besides organic growth, we are also studying the possibility of acquiring local
companies to speed up our expansion." Local companies such as BeyondSoft are
already feeling the pinch of this competition. "Some of our employees have
already moved to these Indian companies," says a senior manager who preferred to
remain unnamed. "The battle for local IT talent may grow even fiercer once the
Indian companies shift into high gear in China."
"Now, it's all about how fast we will grow," says Ben Wang. "If we can't
become a world-class player soon, Chinese outsourcing simply will have to be
done under other brands."
But though the world's leading IT giants are pushing into China, industry
insiders say the country's domestic IT outsourcing market could be a great
advantage for local players.
"Multinationals, eager to tap China's enormous consumer market, are more
willing to outsource services to local partners here," says Liu Jiren.
Liu's company started to develop software programs for Japanese car audio
manufacturer Alpine Electronics in 1991 and has become the Japanese company's
largest vendor besides its subsidies. Seeing China's rise to the world's
second-largest auto market, Alpine decided to set up a joint venture research
and development center with Neusoft in 2004.
The center, in Northeast China's Liaoning Province, now employs 700 engineers
to develop audio and video software used in cars, a number of which will be sold
to the Chinese themselves.
"We understand the demand of local consumers much better," says Liu, adding
Neusoft now also operates similar centers with other companies such as Toshiba
and Philips. "It's easier to hit a home run at home, right?"
(China Daily 06/16/2007 page1)