The way leading to a breakthrough for China’s software outsourcing enterprises

According to prediction of some market research agencies, the U.S. software outsourcing market occupies 65% of market share, while Europe and Japan occupies 25% and 10%. But according to the statistics from the consulting company IDC, China's outsourcing services market gained a worth of four billion dollars in 2003, it is predicted to reach 2.5 billion US dollars by 2008, with a compound annual growth rate of 44.8%.

This fast developing market provides a new chance for China’s software companies which can exempt them from the fierce competitions at home. Datas show that the growth rate of China's software industry has been gradually declining in the past three years, dropping from the annual growth of 48.45% in 2003 to 37.78% in 2004. According to the forecasts of the Ministry of Information Technology, the sales volume of software industry will reach 290 billion Yuan in 2005, with a declined growth rate of 28.89%. At the same time, the number of software enterprises increased dramatically. The number added up from 1359 to 10300 from 2000 to 2004, with a compound rate of 150%. The explosion of software companies diluted the values made by the whole industry. In 2001, the profit margin fell by 4% and 5.89% in 2002. In 2003, the profit of the software enterprises declined sharply 57%, the operating profit only kept at 2%.

On the other hand, Chinese software companies realized a net profit of 46 million Yuan in 2004, the profit margin was 6.5%; according to relevant statistics, the enterprises’ net profit in software outsourcing business gained a profit rate of 20%. In 2005, the net profit of companies achieved 55 million Yuan, of which about 30 million Yuan was from software outsourcing business.

In fact, the high profit of software outsourcing is driving more and more domestic software companies to enter the rapid developing market. To name a few, Neusoft Group, Dalian Watson and Zhongxun are well-known domestic companies who have become software outsourcing providers.

The government provides supports

The other reason of growing attention of enterprises to software outsourcing is due to the supports from the government on encouraging enterprises to develop their outsourcing business and the government deems it to be the right way for further development. China is planning to scale up 6 times on the basis of the current 2.6 billion dollars in the next five years, equaling to that of India.

The analyst Chen Meifeng thinks that what China need is neither order nor capital, but it is technology, experienced engineers and educational mechanism. This is also what the Chinese government tends to learn during the corporation between Chinese software companies and Microsoft. He believes that, the possible reason for the Chinese government’s intention of cooperating with Microsoft is to foster a couple of achievements like Tata information. It is highly possible that software companies will be the first as for the support from government. In addition to software companies in China, Neusoft Group, Dalian Watson, Zhongxun and etc. software outsourcing business leaders will also get supports from the Chinese government. They will also become the targets for investing.

Chinese companies need to be self-renewal

However, there still exists gaps between China and India if to compete in the international market.

First of all is the gap in scale. Compared to India, our software outsourcing scale is still too small. India owns several software outsourcing companies with sales volumes of more than 10 billion Yuan. For example, Infosys which is listed in NASDAQ owns 30 thousand employees and 10 billion Yuan sales value, while the largest software outsourcing company in China, Neusoft group, has only 2000 employees and outsourcing business of 33 million dollars.

Gap also exists in quality management between the domestic companies and Indian companies. Only 6 out of 30 top software companies have obtained CMM4 or CMM5 certification, while all of the top 30 companies in India have obtained.