Emerging Market Region

Central and East Asia

Software Outsourcing Industry:
All positive signs for the young
industry, but not up for global
challenges.
Despite not regarded in the same
prestige as the big names like
Microsoft, Oracle and IBM, the
Chinese software industry is
nevertheless growing fast and
steady primarily by providing
lower-end software and programtesting services. Such downstream
services
characterise
the
outsourcing industry and has for
the past 30 years consistently
brought it enviable revenue. The
2014 official report just announced
yet another double-digit growth
(23.8%) in revenue from July last
year. Notwithstanding the rosy
present, China is beginning to lose
its comparative advantages in face
of its own labour supply problems
as well as the changing global
demands. The way to dissolving
this crisis may be to turn inwards to
its expanding domestic market.
More expensive but
unimpressive workers
The
production
of
software
primarily relies on labour. Once
boasting low-cost labour supply,
China now sees its IT labour cost
shot up by 23.6% July this year,
just slightly below the collective
revenue growth of the industry.
Expensive labour forces some
software firms to settle for 3 rd- or
4th-tiered cities so that profit margin
can be maintained. The rising
labour cost is only but a single
concern to the industry that desires
to move up the supply chain. The
quality of labour also causes
worries. According to the Chinese

Household Finance Survey in

2011, an unofficial estimate of
college graduates aged 25 or
younger who were unemployed
reached a worrying 16.4%. The
inadequate job trainings, much
less serious IT skills, among young
people may partially explain the
difficulty many China software
firms face in moving beyond basic
services such as providing generic
embedded software to something
with higher profit margin like
custom application development,
IT management services, and
system integration and deployment
which India, its long-time
competitor, is doing. In the long
term, given its costly and
inadequate labour supply, China
software industry risks losing its
competitiveness as a major
outsourcing provider.
Potential falling demand due to
structural mismatch and
unpredictable factors
Against the background of rising
middle-class
in
emerging
economies, consumer values have
changed. At the core, consumers
are no longer satisfied with a
generally functional machine; they
expect a customisable machine.
For this reason the biggest
customer of China software
outsourcing firms, Japan, may
substitute China for countries that
can provide higher-end software
like India and Vietnam. Moreover,
the recent depreciation of the
Japanese Yen and the worsening
Sino-Japanese relationships over
the South China Sea Row
represent the unpredictable factors
may unexpectedly pull down
demand.
Opportunities
growth

for

sustainable

The first opportunity may

come when the China Housing
Department starts building
smart cities in more than 50
provinces.
The
plan,
announced in 2013, may spur
huge demand for software that
connects and monitors urban
infrastructure. This plan, if
successfully
enacted,
may
make up for any shortfalls in
global demands for Chinamade software.
The second opportunity may
be
when
the
Chinese
government
manages
to
protect this nascent industry
with
strong
protectionist
policies. The recent fierce
targeting
of
big
foreign
companies like Microsoft by
Chinas anti-monopoly agency
may allow local software
industry a better chance at
securing
domestic
market
shares.

In both cases, nevertheless,

progress will not
be made without the China
software
industry
quickly
value-adding its services.

Growth Rates in software outsourcing 2014 substantial

30

2014

20

2013

percentage 10
0
JAN-FEB'14

Growth Rates In Software Revenue 2014

2014
Percentage

30
25
20
15
10
5
0

2013
Figure 1: Ministry of Industry and
Information Technology of the People's
Republic of China