Economy

China's outsourcing sector faces challenges

(Xinhua)
Updated: 2011-06-19 18:07

Overall planning to curb overcapacity

As China is transforming its economy from being based on low wages to value-added products, many Chinese cities are considering whether to make the software sector their leading economic driving force, business leaders told Xinhua.

Inspired by what was achieved in Dalian, a city reliant on heavy industry before the turn of the century but now accounts for more than a 10th of China's total software and outsourcing sector output, many cities are attempting to reduplicate its success story.

This would leave China's software sector fragmented and give rise to overcapacity, said Michael Ye, vice president of Dalian Software Park (DLSP), home to more than 500 Chinese and foreign companies, including IBM, HP and Cisco, and about 70 percent of Dalian's total software and outsourcing sector output.

More than 20 cities in China are aiming to copy the success model of Dalian, which really poses risks, as not all of them are well equipped to become IT hubs, Ye told Xinhua in an interview.

This is in sharp contrast with India, by far the largest outsourcing service provider which accounts for more than 40 percent of the world's total sector. India has only four cities that are strongly focused on software development and outsourcing.

Just in China's coastal Jiangsu Province, there are five or six cities struggling to become centers for software development and outsourcing, Ye said.

The central government should make an overall plan which selects those cities with the most and the highest quality universities, Ye said.

He suggested the establishment of one software and outsourcing hub in each of the country's five main regions, namely southwest, north, south, central, and northeast China.

Culture and language

Another problem facing China's outsourcing companies is their lack of competitiveness in exploring the US and European markets.

While the United States and Europe make up about 80 percent of the world's outsourcing market, and Japan accounts for about 10 percent, more than 60 percent of China's outsourcing business comes from Japan, according to the Beijing-based Essence Securities.

Apart from being an English-speaking country, India's biggest advantage over China is that it has a culture, both economic and political, which is much more closer and compatible to that of Western countries, said Ye.

This can be reflected by the fact that China's software companies lag far behind the Indian in providing outsourcing services to U.S. and European financial institutions, Ye explained with an example.

"This is mainly because India has almost the same financial system as the United States and Europe, which China does not," Ye said.

However, as China becomes more and more globalized, the English language skills of college graduates will improve and its culture will evolve, but it will take a long time before China can seriously challenge India's dominance in serving Western countries outsourcing needs, he said.