Software vendors set to go abroad
By Zhu Boru (China Business Weekly)
Updated: 2004-04-20 08:49

The Chinese Government is helping domestic software vendors as they march towards outsourcing markets in Europe and the United States, markets traditionally dominated by Indian firms.

The move is expected to enhance domestic vendors' competitive edge in the global software market.

At the same time, experts suggest domestic vendors themselves join hands to make more substantial efforts.

More than 50 domestic software vendors were recently selected by the Ministry of Science and Technology as major forces to enter the outsourcing markets in Europe and the United States, reported 21st Century Economic Herald.

"We will be offered more opportunities to work with US and European clients through the government," said Zhao Chunchi, market supervisor of UFSoft Outsourcing Co Ltd.

Beijing-based UFSoft Group, a leading domestic management software vendor, was on the list.Set up last July, UFSoft Outsourcing is a subsidiary of UFSoft Group.

Moreover, the government will provide favourable treatment including financial support and a higher-than-average export tax rebate rate to these companies, said Zhao.

But the government has not suggested any form of co-operation among these vendors, he said.

 "The government has made timely efforts in helping domestic vendors sharpen their competitive edge in the global software outsourcing market," Chen Chong, chairman of board of directors of the China Software Industry Association, told China Business Weekly in a telephone interview last week.

Chen is also inspector of the Electronics and Information Products Management Department of the Ministry of Information Industry.

The software outsourcing deals on the global market are transforming from simple work to more comprehensive projects, including system planning and advanced consulting, Chen said.

Although the Chinese vendors have a monopoly over Japan's software outsourcing market, the simple requirements of their deals with Japanese companies -- mostly coding, testing and data copying -- don't do much to help improve technology and management, said Chen.

Now Chinese vendors, mostly small in scale and short in comprehensive project experience, are almost locked out of the more demanding European and US markets, while in contrast, Indian firms are well established there thanks to their rich experience and excellent performance, according to Chen.

India had a total contracted outsourcing sales revenue of more than US$10 billion last year, and China's software outsourcing, however, has just started.

According to insiders, most Chinese vendors have 30 to 100 employees, with average annual sales revenue of less than 10 million yuan (US$1.20 million).

While an average Indian software company usually recruits between 30,000 and 50,000 employees, and an outsourcing deal of US$100 million is not rare for them.

 "It is not only a matter of more foreign exchanges, but the development of China's software industry in the long run, as the competition of software vendors takes place on a global arena," said Chen.

He cautioned that Chinese software vendors may even lose their existing shares on the domestic outsourcing market if they are content with their presence in Japan.

Chinese software vendors are facing tough challenges from Indian firms.

Many Indian software vendors, including the country's top three, namely Tata Consulting Service, Infosys, and Wipro, have already set up offices in China.

They either provide outsourcing service to Chinese companies or are getting ready to start outsourcing business in East Asia from China.

Moreover, at least half of India's software companies are looking to arrive in China, a senior official of the Indian Embassy in China was quoted as saying.

According to the official, about 50 Indian software vendors are expected to do outsourcing business in China in four to five years.

Still, painful and arduous as it might be to set the foot in European and US markets, both experts and industry insiders hold that Chinese vendors are more competitive than their Indian counterparts.

 "Surely it is difficult to convince European and US clients to drop the Indian products and turn to the little-known Chinese companies without any credit record," said Gao Lingyan, manager of public relations of UFSoft.

But that's only part of the story.

Larger and stronger as Indian vendors seem, the development of India's export-oriented software industry relies heavily on outsourcing deals, and thus the vendors have not grasped core technologies of their own, said Gao.

About 90 per cent of the software made in India is for outsourcing, indicate statistics.

But Chinese players, with clear aims to develop core technologies with China's own IPRs (intellectual property rights) and government support, may prove more competitive in the long run, Gao said.

Chen, sharing Gao's opinion, said apart from language and cultural factors, domestic vendors' lack of experience and scale, rather than capability, has hindered their market exploration in Europe and the United States.

Meanwhile, Chen called for joint efforts among domestic software vendors, as any single Chinese player is not large enough to win over their Indian rivals.

But he pointed out that it's not merely a capital operations problem, but one that requires systematic, complementary co-operation among vendors with different strengths.

Otherwise, the "one plus one" model produces little result, he said.

Leading players, in particular, should promote the industry rather than only minding their own business, suggested Chen.

According to Gao, UFSoft, fully aware of its role as an industrial leader, is considering setting up a strategic alliance or industrial association for outsourcing with domestic counterparts.

Many other domestic companies, including Digital China, Kingdee Software and SinoCom Software, have also turned to invest heavily into software outsourcing, reported 21st Century Economic Herald.

The size of global software outsourcing market, was valued at US$50 trillion last year and is expected to reach US$200 trillion in 2010.