Predictions for 2008
I know that this is sort of a cliché topic, but I haven’t seen much interesting news during the past week. In the absence of anything really noteworthy to comment on, I’ll take the easy way out. Several of my clients have asked me to comment on where the China software outsourcing industry is heading, so I thought that I’d go out on a limb and make some predictions. In no particular order:
- We’ll see a true leader emerge with the scale and the management sophistication to set the tone for the industry. Some of the possible contenders include: VanceInfo (VIT), NeuSoft, iSoftStone, FreeBorders, hiSoft and Longtop. FreeBorders has brought in some smart new executive management and is definitely moving in the right direction. VanceInfo (VIT) and Longtop Financial (LFT) were able to raise capital from the public markets and clearly have the clout to step up. NeuSoft certainly has the scale, and they’ve done a great job of working with Japan. If they ever start to focus on the west, they will be a serious competitor.
- A small group of the companies will become very serious about winning western business and will make the investment necessary to have a credible sales team and world class delivery capability for mainstream western clients. Longtop Financial (LFT), though their affiliated company Longtop International is already making inroads, as are some of the early leaders like hiSoft, FreeBorders and Augmentum. iSoftStone is also rumored to be adding skilled senior management and staff in the U.S. for a major push into this market.
- Consolidation will accelerate with combinations that include some of the early leaders. It seems inappropriate to name names, right now, but there are rumors that a couple of the pioneers will not be independent by the end of the year. Of course, I’ll be happy to speculate off the record with anyone who wants to contact me.
- The industry will see a number of serious new players emerge as more ventures are established by Indian and western companies. At least a couple of these will finally get it right and very quickly become leaders. This prediction includes my guess that we’ll see western companies entering the market based on their strength in complementary industries. I’ve spoken with some of these folks and they are really sharp. If they make the commitment, they will be able to build businesses quickly (most likely though acquisitions, which ties into the prediction above).
- A couple more Chinese software outsourcing companies will tap the public markets in the U.S. for capital. My bet is on hiSoft and DarwinSuzsoft.
- At least one of the Chinese companies listing in the U.S. will prove to be a big disappointment. Again, I probably shouldn’t spout off about this in public, but I’d be happy to trade rumors privately.
- The yuan will continue to appreciate relative to the U.S. dollar, but it won’t move by enough to significantly impact any of the stronger software outsourcing companies. The move could start causing problems for companies that are only competing on low hourly rates, or that haven’t managed their businesses well enough to achieve healthy margins.
- The recent concerns regarding the safety of products imported from China will have no negative impact on the software / IT outsourcing business in China.
I’ll try to remember to review these predictions a couple of times during 2008 to see how well I did.
Is anyone planning to attend the Olympics in Beijing? I intend to avoid the whole country during the time around the events.
Technorati Tags: China, China Outsourcing
I saw something in the Economist a few months ago that talked about future concerns for outsourcing to India and China. They seem to suggest that at current rates of growth in the outsourcing market, both China and India won’t have enough of a skilled labour pool to support this growth and that it may raise costs dramatically for outsourced IT companies. In their opinion this will happen very quickly, because they suggest that neither country can train workers fast enough. You may have addressed it else where, but is there a skilled enough workforce and education system in China to actually pull off the rates of growth that some people are suggesting? Or will they find themselves in a crunch for skilled IT professionals in a tightening market? Normally India and China are represented as having vast pools of skilled IT people and I haven’t seen anything saying that the pool may be considerably smaller than has been represented and that they may have the same challenges in training more people that the US faces. Curious to get your opinion, because it doesn’t seem to get addressed much in the debate about IT outsourcing. Thanks.
Comment by The Beer Guy — 2008.1.02 @ 16:49
The Chinese government recognized that this could be an issue several years ago. As a result, they made a concerted effort to produce trained software people. Some of their specific programs include encouraging software engineering and IT programs at universities as well as establishing a national system of “Software Institutes” that retrain graduates from other fields to become programmers. It’s hard to get accurate numbers, but my best guess is that the country is currently producing more than 500K new programmers/software engineers every year.
The big gotcha is that most of these recent graduates aren’t really suitable for being deployed on outsourcing projects for western clients. While the newly educated engineers often have a good theoretical foundation, they generally require a substantial training period to develop practical skills and to learn how to work with clients. Most of the good Chinese outsourcing companies will spend at least 3-6 months training new graduates before they are actually billed to clients.
Right now, China does not have a shortage of software engineers / programmers (in fact, I’ve heard that some recent graduates from less prestigious schools actually have a hard time finding work), but it does have limits on the number of experienced / highly skilled software people.
To directly address your question: I believe that the government’s effort to build up the software workforce though educational programs has been very effective. The real challenge is in gaining practical skills and developing a client service perspective. China does have some constraints with regards to more experienced engineers and project managers, but clients can mitigate these issues by being selective in the types of assignments given to the offshore teams as well as by working with outsourcing companies that have mixed-shore capabilities.
One other thing worth noting is that there are pretty stark regional differences in the software labor pool within China. Both Beijing and Shanghai are experiencing high demand and some resource shortages, while some of the secondary cities, like Chengdu, Xi’an and Wuhan have excess resources. Clients should evaluate their vendor’s capabilities for tapping into the resource pools outside of Beijing/Shanghai.
Did I mention that I really like Chengdu, although it is rapidly becoming a preferred destination for a lot of leading MNC’s?
How’s the stove?
Comment by deans — 2008.1.05 @ 16:55