Chinese ITO companies focus more on solutions than cheap labor to gain clients and profits
Source: Devott Service View: 2901 Date: 2011-09-05

VanceInfo, which with more than 11,000 employees is one of Chinese largest ITO companies. VanceInfo utilizes Chinese low-cost work force to develop enterprise software and products for many of its clients including the long term customers Microsoft, IBM and other multinational companies.

However, Ken Schulz, vice president of global marketing for the company said “But continuing to rely on low-cost labor to attract business is becoming outdated.”

Chinese ITO companies like VanceInfo intend to supply more than just cost savings for their customers when they facing increasing labor wages and enhancive competition.

Schulz also said “In order to tap the market, we can’t just focus on staffing. We don’t want to get paid for the people, but get paid for the solutions we can provide.”

Even if the world’s largest outsourcing firms is in India, however, not only owing to China’s equally low-cost labor forces, but also with the purpose of opening China’s vast market, multinational companies also have looked to outsourcing firms in China.

In 2011, VanceInfo’s revenues are forecasted to reach 275 million USD, a year-on-year increase of 30%. Staff also has enhanced from 3,700 in 2007 to 11,600 in 2010. As a result, companies like VanceInfo, which was founded in 1995, have seen demand for their services surge.

VanceInfo’s past work has included localizing products for the Chinese market. While because foreign companies have relied on outsourcing firms like VanceInfo, therefore, have China’s own domestic IT companies, which have also exploded in rise. Only 5% of VanceInfo’s customer base came from China in 2006, Schulz said. Now that number has reached 45%, with VanceInfo’s U.S. customers at 34%.

Schulz said “Chinese companies have their own IT departments, but they want to build up their IT capabilities. They are facing competition and they want to go global.”

Another major Chinese ITO company HiSoft, has faced the same kind of rise. Nevertheless, most of the company’s customers come from the U.S. and Japan, currently 17% of HiSoft’s client base is from China, which including Internet companies, banks and telecommunication companies. Two years ago, that percentage was zero, said Tiak Koon Loh, HiSoft’s CEO.

Tiak Koon Loh said “We have served international clients like Microsoft and GE (General Electric) (GE). They have been outsourcing to vendors for a long time. So we took the best practices and what we learned from them and leveraged that to build capabilities to serve our Chinese customers”.

According to outsourcing firms in China, China’s market growth, Chinese government tax incentives and China’s huge talent bank have all helped drive the industry. However, to stay competitive, outsourcing companies have had to cut costs as they deal with increasing wages because of the appreciation of Chinese Yuan.

In the two cases of VanceInfo and HiSoft, both companies have moved parts of their business further inland to smaller cities, where wages are lower compared with Beijing and Shanghai.

Chen Ximin, COO of Neusoft, another major Chinese outsourcing company with more than 18,000 employees, he said “But in the future, China’s cost-saving advantage will grow weaker. Furthermore, multinational companies want more than just low-cost labor, but complete product solutions. We have to leave behind this thinking of just offering a simple cost-saving advantage, the advantage won’t last, and it’s something we have all been aware of”.

Chinese ITO companies have shifted toward being vendors of customized enterprise software in order to meet the challenge. Products can involve building online banking programs or creating software used to support telecommunication networks. At the same time, the companies have been more active in investing in research and development projects.

Yet when Chinese ITO companies try to hold their own advantages, they still fall behind their Indian competitors in terms of scale. Infosys, one of India’s largest IT outsourcing firms, employs 130,000 people, ten times more than the largest IT outsourcing companies in China. This allows the Indian firm to take on bigger projects.

Tina Tang, an analyst with research firm Gartner (IT) said “In spite of the challenges, the market for China’s IT outsourcing firms is only expected to grow. China will obviously become a bigger player. Even as it will have to compete with other countries, China can become a provider of high-level IT services”.
 

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