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Technology is playing a big role in Chinas rise as a world economic superpower, but that nation still lags in one area: software.
As a provider of outsourced software services --- developing software programs for U.S. or other firms seeking low-cost, high-quality work --- China has a ways to go. Outsourcing will be key for it to emerge as a global force in high tech.
China has its role model. Chinese outsourced software firms such as Beyondsoft and Freeborders are taking lessons from India. Both have big dreams of building a vibrant software outsourcing industry in China.
India presents a clear model for success, says Bin Wang, founder and chief executive of Beijing-based Beyondsoft. "The Indians are now really climbing up the industry value chain," Wang said. "Theres no way we can touch them yet."
Wipro, Infosys Offer Examples
Over the past decade, Indian companies such as Wipro (WIT) and Infosys Technologies (INFY) have built a global empire for outsourced software.
The Indian firms started by writing basic code and testing programs. Their low-cost, high-quality labor attracted clients from elsewhere.
Over time, the Indians improved their software quality and delivery methods. Lately, theyve moved upstream to sell more complex, and lucrative, software products. Theyve also added consulting services.
Now its Chinas turn to climb that ladder of progress, says Wang. He cites the countrys explosion of new highways, ports, buildings and the rest of the infrastructure needed to build a strong tech industry.
Also, the government is investing heavily to promote high tech. It helps that China churns out more than 300,000 graduates with tech degrees each year. "Competition is growing fast in China," Wang said. "The Chinese government wants to move the national economy from low-end manufacturing to more high-end tech services."
Still, the software field in China remains highly fragmented. The country is home to thousands of software makers, but few employ as many as 50 people, says McKinsey & Co. No clear leaders have emerged.
The largest Chinese software outsourcers are hardly household names. The top five, ranked by 2004 revenue, are Dalian Hi-Think, Neusoft, SinoCom, Venus Software and Changxiang. Others include HiSoft, China National, BroadenGate Systems, CVIC SE and Worksoft.
There are so many firms in the worlds most populous nation that Chinas software outsourcing market already has some heft.
That fields sales should reach $1 billion this year, says International Data Corp. The market tracker forecasts average annual growth of 51%, reaching sales of $4.7 billion in 09.
China is already the largest offshore outsourcing base for Japan, which will account for $225 million of that $1 billion this year.
To grow more, China must take cues from India, agrees Philip Lew, chief operating officer of Beyondsoft. Just as India has built a strong reputation for serving the financial sector, China should pursue clients in manufacturing and retail.
"Those are key markets for us," he said. "To expand our footprint, we plan to follow the Indians by making small strategic acquisitions."
Freeborders, meanwhile, is based in San Francisco. But all 400 of its programmers work in Shenzhen, China. That city was the site of an outsourcing summit this month hosted by the Chinese government and U.S. tech research firm Gartner.
Freeborders Chief Executive John Cestar said his company is "very methodically and quietly building the Wipro of China."
Piracy Remains One Hurdle
Likewise, Beyondsofts mission statement begins with its aim "to become the Infosys of China."
"India pioneered the model," Cestar said. "We can learn a lot from what India did."
The Chinese market faces steep hurdles. For one, its software piracy rates hover near 90%. And there are language and cultural barriers.
Freeborders has worked with CyberQ, an Indian consulting firm, to improve its software quality. As a result, Freeborders expects this month to attain the highest ranking from the entity that provides global certification for software quality. That rating is a five; most of Chinas software firms are a two.
Cestar downplays language concerns. He cites a surplus of English-speaking grads in China. Freeborders received 20,000 job resumes last year, but hired only 220 people.
"I can assure you," he said, "they all speak near-perfect English."
The biggest obstacle to Chinas software growth involves a dearth of seasoned managers, says Cestar. He says thats due to the nations long history of state-run companies.
"There are a lot of bureaucrats in state industries, and often they dont deliver Western-style quality," he said.
Many Western firms are eyeing China. Beyondsoft says its providing outsourcing for some U.S. tech leaders, including IBM (IBM) and Hewlett-Packard. (HPQ) It says its biggest client is Microsoft. (MSFT)
Beyondsoft says its sales will be $12 million this year. Its Chinas No. 3 software outsourcer to North America, says CCID Consulting.
Beyondsofts staff has doubled in each of the last two years, to 800 employees. Revenue growth has averaged more than 50% a year since the firm opened in 1995, says Chief Operating Officer Lew.
"There are," he said, "a lot of reasons to go to China."
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