Why Outsource to China?

Language
Lack of English language skills is the most frequently cited challenge to China's offshore outsourcing industry. However, China is making substantial progress in bridging the English gap. In most major CHINESE cities, elementary school students are required to learn English. At the university level, undergraduates are required to pass the CHINESE English Testing Level (CETL) 4 and graduate students are required to pass CETL 5. It is very easy to find IT workers in China's major cities who have passed the even more rigorous CETL 6 exam. To prepare itself for the 2008 Olympics in Beijing, the government lead an intense effort to increase the population's proficiency in English, which yeilded positive results. Overtime, the language impediment will decline as more student move through the school systems and as China increases its business with English speaking countries.

Capability
While China's IT industry is growing quickly, it does not have a pool of resources with deep experience in software development standards. It is hard to find skilled project managers or developers with a minimum of ten years experience, and few companies have attained Capability Maturity Model (CMM) Level 5 certification. Once again the CHINESE government is playing a key role in closing this gap with India. Most major CHINESE cities see knowledge workers as a benefit to their societies and have programs subsidizing companies focused on achieving high levels of maturity such as CMM Level 5. As a result, there are now companies emerging in China that are every bit as good as the best software outsourcing companies worldwide.

There are numerous indicators of the rapidly improving capability of China's software companies. Between 2000 and 2004 the number of project managers who had achieved the Project Management Professional (PMP) certification in the city of Shanghai grew from 80 to over 5,000. By 2004, 150 CHINESE companies had achieved CMM certification of Level 2 or higher. To date, twelve outsourcing companies with operations in China have attained Capability Maturity Model Level 5, the highest ranking from Carnegie Mellon University's Software Engineering Institute. Among those, seven are local CHINESE companies.

Security
Another common concern with outsourcing to China is the country's negative image for protecting intellectual property. Although warranted based on historical business practices, China recognizes the importance of protecting intellectual property and is rapidly improving its enforcement of IP. As part of its entry into the World Trade Organization (WTO), China adopted laws and enforced practices conforming to the WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In Beijing and Shanghai, dedicated IP courts have been set up with judges trained in the US and Europe. These courts are active now and monetary judgments have been won in favor of IP holders, including foreign firms. For the first time there is finally a competent enforcement mechanism to provide the protection in practice that the earlier legislation provided in theory.

To boost enforcement in the face of growing international pressure, in Dec, 2004, China's highest courts announced stricter interpretation of China's existing IPR laws. According to the courts, China has lowered the threshold for punishable offenses to US$6,000 from US$12,000-$24,000 and has increased prison sentences from three to seven years. Now, for the first time, dissemination of pirated goods or software over the Internet is explicitly forbidden.

As McKinsey Company recently pointed out in their quarterly report on IP protection in China, litigation is no substitute for strategy. Firms are recommended to find professional partners with high ethical standards, focusing on suppliers with both physical and technological security measures. Some firms may want to choose vendors that are pure services companies, eliminating the risk of their IP being used in a competitive product.

Note: For detailed information about IP Protection, please refer to Bleum? Whitepaper on Protecting IP in China dated February 2006.

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