China’s software and service providers today are more heavily focused on serving regional markets, most notably Japan and South Korea. This is a function of geographic proximity as well as through the leveraging of existing and related business ties. Also, many multinational and India-based service providers, in particular, have been less active in pursuing the Japanese and South Korean markets, leaving more room for opportunities for Chinese players.

Western companies are getting more aggressive with efforts to penetrate the Chinese market. Many companies that have outsourced manufacturing to China are now investing to serve the domestic market from a services perspective as well. Both multinational and India-based service providers are opening Chinese operations both to sell services into that market as well as back to Western clients.

While there is much potential for China as a services source and destination, the market is more focused on packaged software than outsourcing services. Many large Western software companies have opened up operations in China. Multinational service providers operating in China today are still developing software applications rather than delivering other services back to the West.

China’s software industry is large in terms of number of firms. EquaTerra estimates that there are over 6,000 software companies and 30,000 professionals operating in China. China’s growth rate at a CAGR of 20% in this industry is second only to India in market size. However, the market is very fragmented, and only approximately 20 software enterprises, many with Western ties, have over 1,000 employees. Most firms employ less than 50 people. Two firms, UFSoft and Kingdee Software, control about 60% of China’s $150 million accounting-software market.  

Even in market segments where Chinese firms have been less dominant, the government hopes to strengthen domestic firms rather than allow Western firms to enter. Yet very few Chinese software firms have revenues above $100 million, and most have limited access to capital needed to fund growth in research and development. While Western firms could provide this capital, to date, these practices have been restricted. There are also some concerns that investors have about the market related to the control of their investments, portability and repatriation of gains and the potential impact of future currency fluctuations. In general, though, the appeal of accessing the market is outweighing those concerns from an investment perspective. It is reasonable to expect acquisitions of Western/Indian services companies by Chinese firms along the lines of Lenovo’s acquisition of IBM’s PC business. In the case of a service provider acquisition, though, the acquirer would likely come from an adjacent space, given the lack of large domestic Chinese service providers.

While the government actively supports the Chinese software and services market, there is not a Chinese equivalent to Nasscom, India’s leading software and services association. While the size, stature and influence of such an organization is in part of function of the size of its members and the market, the development and growth of a similar public/private sector association could benefit the Chinese market.

Target of the Global Services Delivery and Management Model: China

Outsourcing buyers need to tailor their global SDMs to account for the realities and conditions outlined above of the Chinese services market. The key areas to emphasize are what to outsource or what services to access from the Chinese market, and what the requirements are to successfully manage and govern the outsourcing process. Additionally, and more often distinct from Indian services, buyers may also need to coordinate outsourcing with their own efforts to market their own product and service offerings into the Chinese market.

Outsourcing services from the Chinese market are most viable for buyers with the following attributes: