China Seeks a Piece of the IT Pie Through Outsourcing

China has many of the same attributes that have lured U.S. businesses to India: low wages and a large pool of talented, eager workers. A report released last month by global consultant McKinsey & Co. concluded that China was the second-best place for U.S. companies to send their IT work, after India.

China's IT industry is here, growing and eager for American business.

That was the message from Chinese government officials and information technology businessmen last Thursday at the 2005 China IT Service Summit, a two-day event organized by the International Executive Association.

Taking a cue from their country's ascent as manufacturer to the world, Chinese officials said their IT industry could provide opportunities for American businessmen and investors.
Cut Costs, Boost Profits

Chinese companies can provide healthy returns for investors and quality services for businessmen looking to cut IT costs by sending work abroad, Chinese officials said.

"U.S. outsourcing Latest News about Outsourcing to China will become big business," said Wuqiang Li, science and technology counselor for the Chinese Consulate in New York City. "The coming years will be the best period for U.S. investment."

About 100 people attended the two-day conference in lower Manhattan, many of them U.S. businessmen and investors looking to evaluate the risks and opportunities of entering the Chinese market.

Included were representatives of Deloitte & Touche, Merrill Lynch (NYSE: MER) Latest News about Merrill Lynch, Lehman Bros. and Morgan Stanley, as well as smaller investment companies.
'The Place to Be'

"Clearly there are opportunities," said Bernard Hutman, a portfolio manager for Platinum Partners, a New York-based hedge fund, who attended the conference to better understand the Chinese investment environment.

"For our generation, this is the place to be," he said.

China lags well behind India in the global market for IT work done overseas. Analysts say India holds about 90 percent of the world's outsourcing business, worth around US$20 billion. Chinese officials said their IT outsourcing industry earned $600 million in 2004, according to Walter Fang, an executive with Chinese outsourcer Neusoft Group.

Still, China has many of the same attributes that have lured U.S. businesses to India: low wages and a large pool of talented, eager workers. A report released last month by global consultant McKinsey & Co. concluded that China was the second-best place for U.S. companies to send their IT work, after India.
Establishing a Presence

The list of U.S. companies that already do IT work in China includes IBM (NYSE: IBM) Latest News about IBM and Motorola (NYSE: MOT) Latest News about Motorola, Chinese officials said. Teaneck, N.J.-based outsourcer Cognizant Technology Solutions, which has 70 percent of its employees in India, last year opened an office in Shanghai.

Jamie Popkin, an analyst for Gartner Latest News about Gartner Research, said China clearly has grand designs for its computer industry: it wants to make its mark in a variety of areas, including computer software Get your FREE Oracle Database Software Kit today!, hardware, semiconductors Latest News about semiconductors and programming services.

"It's a very ambitious goal," he said, noting only the United States could claim strength in all of those areas.

"That is a statement that should create competitive concerns among others in the industry."

Indeed, Chinese officials offered a wealth of statistics to support their contention that the industry in China is on the rise. It is growing 30 percent a year, they said, with about 700,000 IT workers and another prospective 200,000 in college.
Industry on the Move

The industry has 10,000 software companies and adds 1,000 to 2,000 each year, Chinese officials said. Popkin, however, noted that most of those companies have fewer than five employees.

Among the larger ones seeking to drum up business from U.S. companies at the conference was UFIDA Software Engineering, a Beijing-based firm.

"Definitely, we have a large talented pool of software experts in China," said Long Fang, an executive for UFIDA. With 5,000 employees, UFIDA has a client list that includes HP and Microsoft (Nasdaq: MSFT) Latest News about Microsoft, he said.

China offers companies a cheap alternative to India, he said. UFIDA can cut American IT costs by two-thirds and even undercut Indian companies by 20 percent to 30 percent, he said.

That's in part because a typical Chinese IT worker earns $700 to $800 a month, less than one-fifth what a U.S. worker would earn.

In addition, China allows American companies to diversify their services, he said.

"They don't want to put all their eggs in one basket," he said.