Daily Archives: August 8, 2012

India giving a wake-up call to China’s IT outsourcing industry

China’s expanding software outsourcing industry is rebooting to face competition on the domestic front from countries in Europe and India.   In spite of facing the twin challenges of increasing labour cost and stiff rivalry from foreign companies, industry insiders have said the industry is likely to grow hinging on robust domestic demand. But even in the domestic market, Chinese companies expect competition from India.

“Although Chinese-made software holds advantages in terms of price compared with overseas competitors such as Europe and India, local outsourcing providers are in urgent need of upgrading their services to protect the domestic market from incursion by overseas companies,” state-run China Daily said on Monday. It said India’s IT (information technology) outsourcing sector expanded as the number of talented “software writers boomed.”

"We should move fast to keep the business in the country because global players, such as India, are ready to compete against their Chinese counterparts in the Chinese market," the newspaper quoted Guo Xin, former president of IDC Greater China.

Entrepreneurs across the industry have to find out ways to improve the added value of their products in a bid to survive as overseas outsourcing providers start to enter the Chinese market, said Guo

Japan was the largest importer of China’s software products over the past four years, followed by the United States.

China’s capacity to digest overseas contracts remains weak compared with global players.

“Indian companies are able to absorb a transaction value 10 times larger than their Chinese counterparts, Shenzhen-based consulting firm askci.com Group reported,” the newspaper said.

Quoting data from the International Associated of Outsourcing Professionals, it said as many as 12 Indian companies were on the list of the top 100 outsourcing companies in the world this year and three Indian firms have found a place in the top 10; China’s top-ranked company, Neusoft Corp, barely made it into the top 30.

In fact, India’s Tata Consultancy Services’ China subsidiary was listed among the “2012 Top 10 Global Service Provider in China” in June. The award was presented by the China Council for International Investment Promotion.

On the positive side, the sector is expanding rapidly: In 2011, the output value of China’s software and information services hit a record high of more than 383 billion Yuan ($60 billion), up by nearly 40 percent year-on-year, according to an annual report issued by the electronic technology information research institute under the Ministry of Industry and Information Technology.

Chinese demand for software outsourcing hit 335 billion Yuan last year, taking more than 87 percent of the market share.

"Domestic demand will become the major driver for the industry. The turnover of the domestic market is on a trillion-Yuan scale," Li from the Dalian Software Industry Association, said, adding:  “The Chinese market will be one of the largest.” But it’s very likely that foreign companies, especially those from India, will be keeping a close track of that.

source: http://www.hindustantimes.com/News-Feed/Chunk-HT-UI-HomePage-Tab2-02/Chinese-software-outsourcing–ries-but-faces-competition-from-India/Article1-894196.aspx

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Outsourcing the future

Chinese service providers must enhance their skills further to make a mark in the global markets

Though the service outsourcing industry in China had a late start compared with India, it has developed in an orderly fashion and more or less adhered to the basic rules of development.

Despite the orderly evolution, high-end service capabilities like consulting services, business re-engineering and system solutions are often in short supply and not adequate for the offshore market requirements.

Lack of experience is often the most visible drawback for Chinese service outsourcing companies. Though Chinese companies have been making considerable progress, they are still far behind their Indian counterparts in terms of the services they can provide.

The fragmented nature of the service capabilities provided by Chinese service providers is another major issue. They often do not have solutions for systems integration, design development, testing, deliveries, operation, maintenance and system upgrade. Many of the Chinese companies are also not abreast with the latest technologies like cloud computing.

The service outsourcing industry in China also faces an acute shortage of high-end talent. Most of the employees in China’s service outsourcing companies have work experience of less than five years. The number of professionals with work experience of more than 10 years in Chinese service outsourcing companies is just about 1 percent.

Shortcomings in these areas are bound to be a drag on the industry as the success of the service outsourcing business depends largely on proprietary technology, service process maturity and industry experience.

Accumulated technologies and the experiences learned by the core personnel will certainly help Chinese outsourcing companies become much more competitive in the global market. Indian information technology company Infosys Technologies Ltd has often acknowledged that its core competitiveness is its more than 2,700 senior employees (aged between 45 and 60). This is something that Chinese companies must build up in the long run.

Information security is often cited as a major drawback for service outsourcing to China. The inefficiency of the information security laws and the weak enforcement of intellectual property rights in China are the two main factors that often hamper the transfer of the critical data and service businesses.

To some extent, it is also the reason why domestic clients like the government and State-owned enterprises often shy away from indicating their exact outsourcing requirements.

Language and cultural differences have also been constraints for the industry’s development. In recent years, the ability of Chinese students to understand English has improved considerably. But most of this education is oriented to train engineers to read and write English papers. As a result many of them still have difficulty in communicating in English, something that is essential in the outsourcing service industry.

In addition, the West’s historical and cultural influence in India has made India closer to offshore buyers than China.

Insufficient market research and industry development principles are other gray areas for Chinese companies. The National Association of Software and Service Companies, India’s largest and most important IT industry group, annually cooperates with top global consulting companies, and issues research reports on global service outsourcing market trends, service technologies, new services, model innovation, changing demands from buyers, and service bottlenecks. They also publish dozens of guidance reports every year. Compared with India, China’s research work still leaves a lot to be desired.

Indian outsourcing services cover more than 52 countries and regions worldwide, with more than 500 global delivery centers located outside India. By the end of 2010, the number of foreign employees in Indian services companies surpassed 6 million. Indian companies have also carried out more than 200 cases of overseas mergers and acquisitions.

The number of sharing centers set up in India by multinational companies has reached 750. India’s outsourcing industry revenue in 2010 was $88.1 billion (72.7 billion euros) with the business scope covering IT services, software products, engineering services and R&D.

Revenue from BPO services in India was about $76 billion, while $12.1 billion came from hardware services. Of this, onshore hardware revenues were $11.5 billion, accounting for 40 percent of the total onshore revenue. Out of India’s $88.1 billion service outsourcing revenue, $28.8 billion came from the onshore market, a year-on-year increase of 21 percent, while the offshore market income of $59.4 billion was an 18.7 percent increase over the previous year.

In comparison, China’s service outsourcing industry is still young.

In the next 20 years, China’s economic structure will have a qualitative change in exports, investment and consumption. The scale of trade will continue to grow, but its percentage in total economy will decline. With the completion of the large-scale infrastructure nationwide, infrastructure investment will be reduced. The contribution rate of exports and investment to GDP growth will drop from today’s 70 percent to less than 50 percent. Household consumption in GDP will increase from less than 30 percent to more than 50 percent.

Twenty years later, the ratio of China’s manufacturing and service industries will reverse from today’s 6:4 to 4:6. The total scale of China’s service sector is estimated to reach $14 trillion, a net increase of $12.5 trillion compared with that of 2010.

Pension, health insurance, healthcare, education, housing, employment and other issues will create potential for the vast emerging markets of China’s service economy, which will provide a huge market for the service outsourcing industry.

Based on these judgments, I believe that the service outsourcing industry in China and India has a completely different market environment. Contained by the Indian economy and onshore market size, India will continue to major in offshore business, keeping the ratio between the offshore and the onshore market at 7:3.

The nascent Chinese service outsourcing sector is looking to compete in the international offshore market, after learning from experienced international service buyers and improving the process management maturity, consulting and solution capabilities, staff training, and collective delivery experiences through offshore services. China’s service outsourcing will maintain rapid growth in the offshore market, but the focus will shift to the domestic market.

India had encountered bottlenecks constraining the outsourcing service industry, and it was not until 2000 that a sound industrial environment was formed. Despite the many problems, China’s speed to improve the industrial environment is much faster than India. I believe service outsourcing will become the main force of China’s service industry in the future.

The author is chairman of the Beijing Association of Sourcing Service and a senior consultant of China Council for International Investment Promotion.

source:http://europe.chinadaily.com.cn/epaper/2012-07/27/content_15623456.htm

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US tech investors hurt by offshore cash

American tech titans Apple and Microsoft racked up more billions in sales and profits in their latest quarterly filings — thus adding to their offshore treasure trove.

By conservative estimates, Apple has roughly $74 billion parked overseas, while software giant Microsoft has an estimated $50 billion outside the reach of US tax authorities. And eBay had $8 billion of cash on its balance sheet as of last month, with about $7 billion of it residing outside the US.

This money, while being used to fund international operations, is also out of the grasp of shareholders, who could use a larger dividend or stock buyback by the companies with that cash cache.

“Apple has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules,” the company said in a statement about the matter.

Apple and Microsoft are, of course, by no means alone. There are varying estimates of the total amount of the huge sums parked abroad by these and other US multinationals. What everyone agrees on is that the numbers are huge.

A stunning report by the Tax Justice Network estimates that unreported US offshore wealth in tax havens has climbed to as much as $32 trillion. That’s up from $11.5 trillion in 2005, the last year the left-leaning group released estimates.

Citizens for Tax Justice estimates that the US Treasury is losing an estimated $90 billion each year from corporate giants — and an additional $40 billion to $70 billion from wealthy individuals who squirrel funds in offshore tax havens.

Congressional analysts say Uncle Sam could rake in an extra $600 billion over the next decade simply by ending the corporate tax exemption that permits US companies to defer payments through complex overseas tax dodges.

To get the money home without paying full US taxes on it, some advocate a change in the tax law.

Apple is a member of Working to Invest Now in America, or WinAmerica. The business coalition is lobbying for two congressional bills that would temporarily reduce the tax rate on repatriated earnings to 5.25 percent. That would encourage the repatriation of much of the cash that US companies have sitting in overseas accounts, the group says.

As a precedent, the temporary tax amnesty enacted in 2004 resulted in hundreds of billions of dollars being brought home.

Google, Oracle, Microsoft and Cisco are also members of WinAmerica, but none of them stand to gain as much as Apple from a tax amnesty, because they have less cash overseas.

source: http://www.nypost.com/p/news/business/us_tech_investors_hurt_by_offshore_uO01HlnANHJvVd9l8XU6jN?utm_medium=rss&utm_content=%0a%20%20%20%20%20%20%20%20Business

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