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

Truth be told, researchers can use statistics to argue just about any point of view. Case in point: A recent study by McKinsey concluded that China's IT outsourcing industry, often mentioned in the same breath as India's these days, won't pose a threat to its continental rival for many years. According to the study, "The Chinese must consolidate their highly fragmented industry to gain the size and expertise needed to capture large international projects."

We could not disagree more about the prediction. On the contrary, China is in a remarkable position to become an IT outsourcing superpower in less than five years' time. Recent fundamental changes and trends also will accelerate the growth of the China IT services industry.

Let's take a look at the statistics. According to Gartner Dataquest, a U.S.-based research firm, IT services revenue in China is projected to reach $8.9 billion in 2006, a compound annual growth rate of 19.6 percent. Another report from IDC, also a U.S.-based researcher, states that China's IT services market has grown nearly 42 percent a year since 1997.

According to a January 2005 report from Yu Guangzhou, Vice Minister of the Ministry of Commerce in China, the Chinese software industry has developed rapidly, with an average annual growth rate of 30 percent for the past five years. Software exports have grown a whopping sevenfold during the past five years. In addition, sales revenue of China's software industry increased from USD 7.16B in the year 2000 to USD 19.3B in 2003, while software exports increased from USD 0.25B to USD 2B in the same period.

The McKinsey report also stated that 90 percent of China's IT services work is done locally, and that it accounted for $6 billion (nearly half of India's total revenues) in 2003; in comparison, only 30 percent of India's IT services are done locally. China's IT services growth in the domestic market should be seen as a sign of strength, not weakness. The drivers of the growth, including China's membership in the World Trade Organization more than three years ago and the upcoming 2008 Olympics in Beijing, are great indicators of the long-term success of China's IT software industry. Without a strong local market, India's IT services are far more vulnerable.

There are five key drivers for China's IT outsourcing market growth. Many of the research companies ignore these drivers, but all are critical to the success of China's IT software and services sectors:

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