IT outsourcing in China
Many people think China's economic success in manufacturing will allow it to compete in Information Technology (IT) with India and other countries. However, according to a new global study on outsourcing trends, it may not happen because China has many weaknesses that prevent it from competing in this lucrative market. The study stated that in the past, most outsourced projects were small and simple. Many were architected and designed by customers and outsourced the coding and testing to offshore suppliers. Today many outsourced projects are relatively large; some can be in the million lines of code. Customers often outsourced the entire development project rather than just coding or testing. This approach requires a different approach, different skill levels, different trainings and different mind-set that China is not prepared.
China's Information Technology (IT) outsourcing is a highly fragmented industry with many small companies. According to Chinese government data, in 2010 there were over 8,000 IT outsourcing companies, but most (6,400 companies) have less than 50 employees. Few larger ones have 200 to 500 employees. Only five companies have more than 2,000 employees and two largest have reached over 10,000 employees. On the contrary, India has fewer than 2,600 outsourcing companies. Of these, 485 have more than 2,000 workers. The top companies such as Infosys Technologies, Tata Consultancy Services, Wipro Technologies, and Mahindra Satyam all have over 100,000 employees with offices all over the world.
Because of the small size, most Chinese IT companies are operating like a small “family business” rather than a global enterprise. This is a major weakness which keeps them from getting larger and more profitable projects from foreign countries. That is why a majority of them are still depending on domestic market rather international. The largest customer is Chinese government which provides over 73% of the business to these companies. Other customers are mostly local companies that want to customize software applications or set up infrastructure to their needs. Without adequate size and skilled management, these companies are unlikely to attract international customers because smaller companies are riskier and less reliable than large and professional managed companies. They are easier to lose employees, and do not have the financial strength to survive for long. Most small companies do not have the proper knowledge or capacity to handle international business. Their managers and workers have limited skills which are not sufficient in meeting global business requirements.
Even today, a majority of Chinese IT workers do not speak English or have good language skills. Without good command of the English-language, China will not become a destination for IT outsourcing for companies in the U.S or Europe. A western executive commented: “Until at least half of software workers in China speak English, they cannot compete with India.” Currently China's outsourcing industry has less than 16 percent share of the market, compared with the 52 percent of the market commanded by India. Another major issue is its poor protection of intellectual property (IP) rights. The study found a majority of Chinese companies are still using unauthorized or unlicensed software which also created significant problems with foreign customers. Without strong enforcement of intellectual right, western companies are afraid to outsource anything there for their intellectual assets can also be stolen.
The study found that quality of most Chinese IT companies was not adequate. There were very high defects rate among their products. Even today, only 6 companies in China are appraised at CMMI levels five when by contrast, about 85 Indian software companies have achieved these rankings. Although Chinese companies have tried to implement the CMMI standard for years, but most gave up as it is too difficult to follow and such efforts are not worthwhile for small companies less than few hundred employees. Without a strong commitment to following a standard process and not be able to improve the quality, it would be difficult to attract foreign contracts or investments.
Another major weakness of Chinese companies is the lack of employee's development. Most companies do not have training programs or incentives to encourage skills building. They rather “steal” each other's employees than train them. That is why annual employee turnover in China is about 22 percent. Most IT graduates are willing to work for small companies just to get the experience necessary for them to switch to larger companies with better salaries and more benefits. The study found on the average, 65% of IT graduates change employment five times in seven years.
A major weakness that has been identified is the state education system that is too slow to change. With the exception of few top universities, a majority of state university has not improved their curricula for years. Everyone knows that technology, especially information technology changes fast but college trainings have not been adjusted to accommodate these changes. The result is many graduates do not have the skills needed by the industry. Today, these universities are producing, on the average over 450,000 engineers and computer science graduates per year to meet government's goal. Over 75% of them could not find jobs due to their limited skills from inadequate trainings. The number of unemployed graduates is a major concern for government as each year, more and more students graduate without jobs.
Although China's IT outsourcing industry is growing with annual revenues reaching $22.8 billion dollars. It is still far much less than the $98 billion dollars that India's outsourcing industry made last year. China's main customers are Japanese and S. Korean companies, which provide low-value contracts, mostly coding and testing rather than large and more lucrative contracts for design, integration from western countries. Profit margins of these outsourced companies are very low, average about 7 percent, compared with 22 percent of similar companies in India. Because many companies are small and desperate for business, they often compete on price. The practice of lower price to win contracts and low profits make IT outsourcing less desirable for further investments and growth.
Currently, information technology outsourcing business is considered “High priority” by the government. There are many government investments in building technology parks and tax incentives to attract foreign investments but these attempts have not brought result. A Chinese official complain: “We have better infrastructures, we have better technology parks, we have better tax incentives and our cost is much lower than India but we are still not being able to get business as expected”. The fact is China has better technology parks and infrastructures than India. Its tax incentives and costs are also better than India. However, lacking leadership at the top and management “know how” at the middle, the IT industry will not be able to change. Currently, there is no strategy or plans to fix their weaknesses but only encouragement to get more foreign business. Unless these identified weaknesses are fixed; unless the industry has a clear direction and guidance; unless workers are properly trained, unless the education system is improved, China will be looking for many years before catching up with India or make IT a key driver for job creation.
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
