IT Outsourcing in China: How China's Five Emerging Drivers Are Changing the Technology Landscape and IT Industry

By Savio S. Chan, Senior Advisor to The Outsourcing Institute

1. Zero Duty –In 2005, all 251 tax items related to IT products adopted zero duty. This presents both challenges and opportunities for the domestic IT industry. It will allow providers to be more competitive in terms of pricing, but also may invite foreign competition from India. It also means more opportunities for U.S.-based IT services providers and multinational companies, since they can increase both their business and their profits.

2. Standards Development on Core IT Technologies - From operating systems to 3G, China has already made an impact on standards, and, with major events such as the Olympics in 2008 and World's Fair in Shanghai in 2010, its influence will continue to grow over the next five years. Standards development has already become an important influencing factor in China's IT industry development. On one hand, technological standards are the lifeline that determines the prosperity of an IT enterprise and function as a key information industry development index for the nation. On the other hand, disputes on domestic IT industry-related standards are becoming more and more intense. The domestic IT industry is eagerly awaiting the launch of the standards, and China is emerging as a key player in shaping the standards that will define the nature of global competition in the technology arena.

3. Tougher Penalties for Intellectual Property Rights (IPR) – To boost enforcement in the face of growing international pressure, on Dec. 23, 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 USD 6,000 from USD 12,000-24,000 and has increased prison sentences from three to seven years. And for the first time, dissemination of pirated goods or software over the Internet is explicitly forbidden.

4. Outbound M&A activities – China will take a very different path than India to becoming an IT outsourcing superpower. Unlike India's leading IT outsourcing firms such as Infosys and Satyam, which fundamentally grew their businesses organically and became powerhouses in the IT outsourcing world, the Chinese are willing to acquire well-known brands to grow and expand. Many state-owned enterprises (SOEs) operate like “super-capitalists,” combining entrepreneurial agility and government support, both in a financial and regulatory sense. The recent purchase of IBM PC division from Lenovo is a good example. China-based TCL, the largest TV manufacturer in the world, obtained majority control of Thomson's television business, which also owns the RCA trademark. It won't be surprising at all for a major Chinese IT services provider to conduct a joint venture or outright acquisition to become one of the well-known names in the IT outsourcing world.

5. The Growing IT Talent and “Sea Turtle” – China has a reverse brain-drain situation and a fast-growing IT talent pool. According to research, there are about 2 million software developers in China, with a CAGR of 22 percent over the last five years; in addition, there are currently 5.86 million engineering graduates, with a CAGR of 13 percent. Moreover, many China-born, U.S.-educated businesspeople and IT executives, known as “Sea Turtles” or “Hai-Gui,” are going back to China to start their “China Dream.” These savvy executives are importing the knowledge and experiences they gleaned from the best universities and companies in America and reaping the rewards in their homeland. One of the best-known Sea Turtles is Charles Zhang, Ph.D., founder of Chinese Internet Portal Sohu.com (market cap: $540 million). Zhang, a 1994 physics graduate from the Massachusetts Institute of Technology, got in on the ground floor of the Internet market in China. He started the company in 1996 as a copycat of Yahoo with personal savings and a loan of USD 225,000.

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