Debate y Conocimiento

There was a popular saying several years ago: “China is the world’s factory, India is the office, Europe and the United States are the Board of Directors". However, it could be said that this arrangement is more than likely to change and evolve in the current global panorama.

Brief overview of the ICT Outsourcing and Software sector

The decade of the 90s saw spectacular growth in Software/IT Outsourcing. In recent years, countries like Ireland and Israel have also made significant advances in this area. China's case, in my opinion, is a new development that is still relatively unknown given that its upward surge in the sector began in 2003.

Now is a good time to ask:

• What is the current situation of China's emerging ICT sector (Information and Communications Technologies)?
• What is the country’s main competitive factor in its software industry and why has it developed so rapidly?
• Can certain aspects be extracted as examples for the western world?
• What will the central axis and path of the evolution of ICTs in China be in 2009?
• In the new era of “globalization”, do medium-sized and large western companies need to reflect on the impact that China’s emergence could have on the IT industry?
• What advantages could be obtained from this Chinese industry to increase the effectiveness of western businesses?
• What areas of ICT could be entry points for western companies into the Chinese market?

Despite the economic crisis that began in 2009 as a result of the financial catastrophe, China continued to show amazingly dynamic growth in the sector that we are discussing. According to estimates, there are currently 1.3 million people working in the software industry, which has generated 757.29 billion yuan (approximately 76 billion euros) in income, an increase of 29.8% over the same period the previous year. This also represents growth that was 8.3% higher than for the same period in 2007.

Of this big “pie”, the lion's share, 41.8%, corresponds to revenue generated by software products, which translates into 316.58 billion yuan (approximately 32 billion euros), with growth of 32%. Meanwhile, software services, which are rapidly expanding, have increased 39.9%, contributing revenue of 145.5 billion yuan (15 billion euros), which is equivalent to a growth rate of 10.1% for the sector as a whole. In the area of embedded software (internal software in machines), the figure has reached 111.82 billion yuan (12 billion euros), with an increase of 25.2%, which is 12.8 points higher than the growth of electronic information. System integration is an area that has generated 161.64 billion yuan (17 billion euros), with 25.2% growth. Finally, integrated circuit design (IC) has generated 21.74 billion yuan (2.3 billion euros), 16% higher than the previous year.

Source: Ministry of Industry and Information Technology of Chinese Government

We can also highlight outsourcing in the area of software services, which contributed 20.3 billion yuan (2.1 billion euros), which represents an increase of 100% with respect to 2007. The sub-contracting countries are mainly Japan, the US, and European countries. The subcontracted Chinese companies are concentrated mainly in cities such as Shanghai, Beijing, Guangzhou, Hangzhou, Dalian, Tianjin, Suzhou, Shenzhen, Chengdou, Wuxi, among others.

The ranking of the top 100 Chinese software companies published officially in 2008 was led by HUAWEI, ZTE, and HAIER, two telecom manufacturing giants and one household appliance manufacturer. None of these companies specializes exclusively in software. It is precisely their success in hardware production that has driven the growth of their software business, which is the same path observed in the past in countries like Japan and South Korea. This could also be a particular characteristic of the software industry in China.

The total income of the three companies mentioned represents 12% of the national software market, and 37.5% of the total from the 100 largest companies in the sector. According to the figures, there are 700 software companies with income of more than 100 million euros in China. Let’s take a look at a few of them (the top 20) and the sectors to which they belong:

• Telecommunications: HUAWEI, ZTE, ALCATEL-SBELL SHANGHAI
• Household appliances: HAIER, HISENSE, PANDA ELECTRONICS
• Electricity: NANJING NARI
• Banking: UNIONPAY
• Civil aviation: CHINA TRAVELSKY HOLDING COMPANY
• Other general sectors: DIGITAL CHINA, INSIGMA, FOUNDER, TSINGHUA TONGFANG, INSPUR, MCC Cisdi, NEUSOFT, LINKAGE TECH., CS&S, CIVIC SE.
  • Open source is on the verge of new growth. To address the financial crisis, companies have begun to cut costs and reorganize and integrate their technical platforms/infrastructure. Due to its low cost and high accessibility, open source has been one of the priorities in the business selection of ICT services. Organizations such as IDC have reported that worldwide, open source would increase the value created by Linux software and related services by 20% in 2008. Average growth until 2012 would exceed 10%.
  • There is an optimistic outlook in e-business of SMEs. In order to reduce costs, companies have chosen to sharply cut traditional sales and marketing spending and have turned to the Internet as the alternative for sales management. For example, both Alibaba and Amazon, two of the world’s largest B2B giants, were magnificently successful in 2008. Amazon's sales revenues increased 29% and net profits by 36%.
  In the first three quarters, Alibaba increased sales by 37%, profits by 49%, paid subscriptions by small and medium-sized companies as members by 40%, and the online storefront figures by 54%. In the last quarter of 2008, the company maintained its growth trajectory.
  • New opportunities appeared to restructure the sector. The poor economic outlook forced the start of a reorganization of the sector. Starting in 2008, software company acquisitions multiplied worldwide. In each of the following purchases, both HP acquiring EDS, Oracle acquiring BEA and Primavera, in addition to Sun’s acquisition of Sweden’s MySQL, the deals exceeded one billion dollars. In 2007, IBM acquired 12 software companies, and in 2008 continued with more than 10 acquisitions. More sophisticated Chinese companies in this sector have also begun the same adventure and consider it to be a strategic priority for 2009. From the start of the year to date, the company Ufida has acquired Beijing Founder Chunyuan and TurboCRM in succession. These large companies have completed acquisition operations in hard times with the clear goal of optimizing their advantage in resources and bolstering their competitiveness. As a result of these actions, today there are new changes in competitiveness in the sector.
  • The evolution of Internet computing service models based on Cloud Computing is accelerating. As this technology advances, the centre of gravity of the application and software service has moved from terminals to the Internet. This new model, which stands out due to its low cost and greater efficiency due to the shared use of re-structured resources, has adapted better, to a certain extent, to the needs of businesses to seek lower costs and higher productivity within the context of the economic crisis. Although Microsoft, IBM, and Google experienced different degrees of deceleration in their sales in 2008, earnings generated by network applications and related services maintained a growth rate higher than 20%. By 2012, IDC predicts that Cloud Computing products and applications will contribute an average annual increase of 25% in sales revenues.
  • 1. The announcement by the Chinese government of the increase in domestic demand and the application of the corresponding measures, are opening an enormous market to the software industry. In order to promote the integration of ICTs into the industrialization process, the Government has created the Ministry of Industry and Information Technology, which will encourage the creation of a more competitive environment for the development of the software sector. To combat the financial crisis, at the end of 2008, the Government implemented ten plans aimed at increasing domestic demand, investing 15 billion yuan (1.6 billion euros) of public funds for the technological transformation of industrial sectors. In response to the immense market opportunities, the software sector will benefit from the computerization of rural areas, infrastructure “systematizing” projects, Internet maintenance and designs, as well as the upgrading of computers in traditional sectors. Also, after the Chinese government granted mobile 3G licences at the beginning of this year, the three operators that were “reborn” after their respective mergers, China Mobile, China Telecom, and China Unicom expect an increase in investment in 2009 for more than 200 billion yuan (21 billion euros) dedicated to the construction of the telecommunications network. This step can open an enormous market for the growth of embedded telecommunications software and network system solutions.
  • 2. In order to improve the sector with favourable policies to offer stronger political support to the software industry, China is studying the possibility of drafting new policies and measures to promote better compliance with controls. The restructuring and stimulus plan for the electronic information sector has been announced and will come into effect soon. As a key component in the sector, the software area will be a priority target of the subsidies established in the Plan. In recent years, China has reinforced promotion of the services sector, with the approval of a series of tax and financial measures that have benefited the software industry as an important icon of the services sector today.
  • 3. Reorganization of the sector will encourage the optimization of existing resources. Starting in 2008, multinationals in the financial, manufacturing, and software sectors have continually strengthened their presence in the Chinese market. The continuous creation of global software service centres in the country not only strengthens local industry, but also increases market opportunities for companies in the sector that have a tendency to reorganize themselves as a whole. Larger and larger internationally competitive companies will appear as mergers and the concentration of small and dispersed companies increase. According to forecasts, until 2010, the number of outsourcing companies will drop by one third from the current number of 3000, with 20% becoming medium-sized companies. The Government stimulus is expected to help 1000 companies achieve CMMI 3/5 certification.
  • Education, healthcare, social security, and communication: main areas for sector computerization.
  • RFID, automotive, machinery, and healthcare service electronics, industrial control and inspection.
  • Processing software in Chinese, security software, basic and CPU software are the general areas that are receiving stimulus from the government.
  • Promotion of the integration of ICTs into traditional industries, with an emphasis on R&D, design, processing control, business administration, marketing, and sales.
  • Operation of new information services that will adjust to China’s socio-economic needs.
  • Guide independent organizations, public service institutions, and companies in their desire to attract subcontracting for data processing, ICT maintenance, and other businesses that are not strategic for them, as well as to create a service outsourcing system based on IT and the Internet.
  • Participate actively in the contracting of offshore global outsourcing businesses.

These companies normally provide the following services to large foreign companies: Software distribution, integration, development, customization, technical service, etc. These companies also work in sector computerization and outsourcing development tasks. In recent years, companies like NEUSOFT, INSPUR, BEYONDSOFT, HISOFT, which have expanded through takeover operations, have joined the ranks of the “2008 Global Outsourcing 100" list prepared by the International Association of Outsourcing Professionals. A more in-depth analysis of the embedded software area and integrated circuit (IC) design reveals that the 100 largest Chinese companies in the sector are basically classified into three sector groupings: 1) for telecommunications equipment, 2) household appliance equipment, and 3) digital equipment.

On the other hand, there are two main areas in regard to software products. The first is ERP (Enterprise Resource Planning) software, which is led by well-known companies such as UFIDA, KINGDEE, and INSPUR. The second is software application to sectors, which concentrates the most powerful companies from a wide range of sectors: social security, healthcare, telecommunications, traffic, banking, finance, insurance, taxes, government, trade, petrochemical industries, education, tobacco companies, auditing, electricity, postal services, automotive industry, shipbuilding, iron and steel, railway sector, metro, aviation, customs and ports, chemical, metallurgy, paper manufacture, construction materials, public safety, statistics, legal areas, logistics, retail sales, aluminium, coal, and cement, among other sectors.

Software/IT Outsourcing exports

Let’s now look at the international scope, where Chinese exports in the area of software in 2008 totalled 14.2 billion dollars (approximately 11.5 billion euros), 39% higher than the same period in 2007. Exports of software outsourcing services at the end of the year showed a spectacular increase of 54.3%. In terms of subcontracting of Chinese software services, Japan remains the principal client, accounting for 60%, followed by the US, Hong Kong, and Europe. This business sector for both Asian countries (China and Japan) is strengthening their cooperation and is moving progressively from subcontracting to strategic collaboration. At this stage of the transition, they are moving from ITO (Information Technology Outsourcing) to BPO (Business Process Outsourcing) and KPO (Knowledge Process Outsourcing).

At the beginning of December 2008, the Dalian Software Park became the first to establish a branch outside of China, in Tokyo. This will undoubtedly lead to new opportunities to expand Software/IT Outsourcing services of the Chinese city in the neighbouring country.

Chinese software and IT Outsourcing exports were affected by the global financial crisis and slowed significantly in the second half of 2008. In addition to this, the revaluation of the RMB has generated a significant "increase" in prices, while the variation in the dollar/RMB exchange rate caused earnings from sales to drop.

The crisis has caused different impacts on different sectors. The impact has been greater in the hardware area than in the software area and has affected export-oriented countries more than countries driven by internal consumption. In terms of the impact on companies, it is more direct and faster in the case of small companies. However, it should be noted that the financial crisis has promoted changes and adjustments in the software sector, opening new development horizons:

ICT trends in China for 2009

In short, it is beginning to be noted that the Chinese government is prioritizing the following areas in the new economic recovery plans:

In short, despite the unprecedented challenges and the complicated situation of the Chinese software industry in 2009, the Chinese economy, which plays a very important role in the world economy, has managed to offset the drop in exports with its domestic demand. The enormous opportunities created following the global crisis, the stimulus plans and measures of the Chinese government, and their macroeconomic management will foreseeably cause acceleration in the growth of the ICT sector in the second half of the year, an annual increase of between 22% and 25%.

«Paper included in the bulletin eKISS nº125, a weekly internal publication of Telefonica»