One can’t really consider this to be a reliable source, but the People’s Daily Online has reported that a group of regional government entities in northeastern China intend to create a “China-North Korea animation game service outsourcing base” in Dandong.

‘Hangzhou national animation game public service platform of Zhejiang Province in east China, and the city governments of Dandong and Kuandian county in Liaoning Province, northeast China, signed a cooperation agreement concerning the China-North Korea animation game service outsourcing base. It was signed on April 27 at the 2008 China (Hangzhou) Summit of the cultural Creativity Industry and Investment and Financing Fair, according to Xinhua Net.

The main reason to select Dandong city as the China-North Korea animation game service outsourcing base is aimed to draw North Korea’s animation game talents to Dandong. Xu Aiqiao, chairwoman of the Hangzhou national animation game public service platform limited, said that North Korea has become the global animation industry processing “plant”.’

The article also asserts that:

“It is learnt that there are 23 national original animation bases around China but no professional services outsourcing industry processing bases.”

I’m not sure, but I suspect that my old friends at Symbio Digital Entertainment might disagree with this statement.  I haven’t been in touch with John Ma and Col Stone for several months, but the last time that I heard from them, they had a very healthy game animation outsourcing business in China.

Technorati Tags:  China, China Outsourcing, Animation, Games, North Korea

Fresh on the heels of the news from Tata Consultancy Services, Gartner has issued a press release, announcing one of their reports that makes a contradictory assertion.

According to today’s press release, aptly titled, “Gartner Says Economic Slowdown in the US to Accelerate Offshoring of IT Services“ (sorry, I’m not a Gartner client, so I can only comment on what they chose to include in their press release)

‘STAMFORD, Conn. –(Business Wire)– The current U.S. economic slowdown will lead buyers of IT services to consider increasing the percentage of their labor in offshore, lower-cost locations, according to Gartner, Inc. India will remain the dominant location for IT offshore services for North American and European buyers as a result of its scale, quality of resources and strong presence of local and traditional service providers.

With concerns that the US economic slowdown could extend to other geographies, organizations are refocusing on IT cost reduction and taking steps to accelerate the use of offshore labour. Buyers of IT services will shift from cost containment goals to a greater focus on cost reduction and productivity increases in their sourcing decisions. This will lead to a steady increase in the adoption and expansion of offshore services - primarily from India, but increasingly from other countries as well.

“Factors that will give India the edge over other offshore locations are scale and quality of labor. North American and European buyers of IT services have been the force behind a growing offshore services market and India is central to almost any discussion of offshore services delivery for these buyers”, said T J Singh, research director, Gartner. “Whether it is the indigenous India-centric service providers that have a wide-reaching impact on the IT services sector, or a vast and growing IT labour pool being trained to support a global client base, India will continue to be the most-sophisticated country option to source offshore IT services in the near term.”‘

The rest of the release quotes several other Gartner employees discussing their contention that a more severe downturn will lead to increased interest in outsourcing.

Intuitively, this makes sense, and it’s very consistent with what I’ve been telling all of my China based clients, so I’m glad to see that Gartner is in agreement.  One thing that bothers me, however, is the lack of discussion about China.  Gartner has historically underestimated, and missed the opportunity to provide insight into China’s software/IT outsourcing industry.  The good Chinese software/IT outsourcing companies will continue to grow rapidly based on both a very strong domestic market for their services, and, along with the Indian vendors, the need for Western companies to improve efficiency.  I’ve never understood the reasons behind the Gartner outsourcing analysts’ lack of willingness to cover China.  I’ve been so disappointed by this that I’ve stopped participating in the Gartner Outsourcing events.

Technorati Tags:  China, China Outsourcing, Gartner Outsourcing

This is either a brilliant move, or the beginning of the end.  According to an article in The Times, the Tata Group’s outsourcing arm, Tata Consultancy Services (TCS) will begin providing some services gratis.  It’s a moderately long article that details the current woes of the Indian outsourcing industry, but I’ll excerpt the key bits here.

‘Outsourcing, already regarded as a threat to Western jobs, is set to get cheaper: India’s largest IT outsourcing group is to give away services for free in an effort to lure large clients such as Wall Street’s beleaguered banks to sign off big contracts.

Shares in Tata Consultancy Services (TCS) fell by 9 per cent in morning deals in Bombay this morning – a record intraday fall for the stock.

The slump came after India’s largest private-sector employer missed earnings targets yesterday by a sizeable margin and posted its first quarter-on-quarter fall in earnings in three years.

TCS said today that it would shoulder the cost of “transition work” on selected large outsourcing contracts, a move designed to buttress future earnings.

The charges, which previously would have been paid for by customers, cover the preparatory work carried out before a function – such as the running of a piece of back-office work for a bank – is outsourced from the West to India.

“This is an investment that will be recouped as contracts proceed,” a TCS spokesman said.

Outsourcers are looking for a way to clear the heads of Western banking executives left shell-shocked by the meltdown on Wall Street and in the City.

Indian executives have complained for several months that clients in the banking sector have delayed spending decisions, often after the departure of senior executives in the wake of the sub-prime debacle.’

The discussion in The Times goes into some details about just how bad it is for TCS, and also mentions that the all of the major Indian outsourcing companies are experiencing

“…a slump in demand from the financial sector in the West.”

It seems that the recent troubles with sub-prime mortgages and other bad debt are finally having an impact the outsourcing industry.  Those of us who hoped that the efficiencies gained from outsourcing would outweigh the poor economic conditions may turn out to be disappointed.  As the piece continues…

“The slump on Wall Street has come at a bad time for India’s IT industry, which was already battling the effects of the rupee’s sharp appreciation against the dollar and annual wage inflation running at between 12 per cent and 15 per cent.”

We might want to take a couple of lessons from this news.  First, basing your outsourcing business on serving banks & financial institutions may not be a great idea, right now.  Second, the weak dollar and increased costs are finally starting to impact the Indian outsourcing industry.  Unfortunately, the same factors could begin to hurt China’s software/IT outsourcing industry.  I suspect that concerns about this are behind some of the strong motivations for many of the vendors to pull back on approaching the West and to focus, instead, on growing their domestic business.

Technorati Tags:  China, China Outsourcing

While a number of western companies appreciate China’s critical role in their supply chain, the leading global organizations understand that the country is also strategic for all other aspects of their business.  I’ve heard from some of the outsourcing companies that Cisco is starting to make significant investments in developing China based engineering resources.  I also noticed this article in Information Week that describes some of the other investments that Cisco is making in China.  According to the article, Cisco has appointed a new SVP of Global Operations/Chairman of Cisco China and charged the individual with:

“…implementing the company’s China strategy, which includes research and development, education, procurement, investment, and training.”

Cisco also announced a number of key agreements that will help to ensure that their strategy is based on partnership with China’s government and that it spans both business and advanced education.  CEO/Chairman John Chambers shared several developments, including:

“…a memorandum of understanding with China’s National Development and Reform Commission. The agreement is for collaboration on Internet and environmental research and development, leadership training, best practice sharing, and business development investments, Cisco said.

In addition, Cisco has signed a memorandum of understanding with the communist nation’s Ministry of Commerce. The pact furthers Cisco’s commitment to providing assistance to Chinese businesses in the development of IT and business-process outsourcing within the country.”

This bit suggests that some of the rumors I’ve heard might have some substance.  It’s interesting to see that Cisco will be helping to foster the development of the ITO and BPO industries in China.  If the word that reaches me is accurate, they are already starting to spread some money around with key players.

The article continues…

“Cisco also has agreed to work with Peking University to create the Guanghua Cisco Leadership Institute for leadership training. Cisco plans to invest $20 million over the next three to five years in the institute.”

This one is especially important in that the shortage of local managers with global leadership skills has presented a challenge for both multi-nationals and domestic businesses that are building China operations.

It’s interesting to see one of the great tech companies take such a multi-faceted and comprehensive approach to securing their business in China.  Cisco’s efforts follow similar moves by IBM and Microsoft to demonstrate how important China has become to global businesses.

According to Mr. Chambers,

“The next stage of our strategy for China reflects the country’s importance to Cisco’s global growth strategy and to our long-term business model.”

Technorati Tags:  China, China Outsourcing

The currency exchange rate is one of the well-known issues in outsourcing to China.  The Chinese government has traditionally kept the exchange rate for the yuan fairly constant relative to the U.S. dollar to facilitate the growth their economy.  We used to routinely estimate the price for engagements based on 8 RMB per dollar - a nice round number that allowed us to do quick arithmetic in our heads (and also gave us a bit of “cushion”).  This has been changing for some time (sorry, subscription required), but last week we reached a new benchmark.  The yuan traded below 7 RMB per U.S. dollar for the first time in nearly fifteen years.  According to the Wall Street Journal:

“SHANGHAI, China — China’s government allowed the country’s currency to rise to its highest level against the dollar in more than a decade, despite weakening global growth, an indication that Beijing views rising inflation as a bigger danger than the risk of an economic slowdown.

On Thursday [April 10, 2008], the U.S. dollar slid to less than seven yuan for the first time since the early 1990s, ending Shanghai trading at 6.9916 yuan, down from 7.0017 yuan in the previous session. The yuan has now gained more than 18% against the dollar in less than three years, although it has been flat or even depreciated against other major currencies, such as the euro.”

Both sides of outsourcing contracts in China need to be thinking about how much this will continue.  The WSJ article continues:

‘”It’s going to go a lot higher,” says Jim Rogers, a U.S. investor and self-described China bull. Mr. Rogers says the Chinese currency has the potential to strengthen to just two yuan to the U.S. dollar — a 2½-times rise from current levels — noting that the Japanese yen once made a similar rise from 500 to the dollar to 100 to the dollar, albeit over a number of years.’

I’m not sure that I can go as far as Mr. Rogers, although it would be a real challenge for China’s outsourcing industry if he turned out to be right.  The most well thought out guess that I’ve heard from colleagues in China is that the “fair” value is about 4 RMB/$, but that the government would likely stop a rise beyond 6 RMB/$, or thereabouts.

“Others aren’t quite as bullish. Another key measure of sentiment — a derivative product traded by banks around the world called the nondeliverable forward — values the dollar at 6.4 yuan one year from now, which would represent a further gain of 9.2% for China’s currency by this time in 2009. So far this year, the yuan has been rising faster than that, at a 15% annualized rate.”

Given the global nature of software outsourcing, U.S. focused Chinese vendors can’t simply crank their dollar denominated prices by 30% just to stay even.  Instead, they’ll need to learn to operate more efficiently, begin offering services that are worth more and aggressively expand their global delivery to include Europe, Latin America and, of course Asia.  This is exactly the same challenge faced by the Indian outsourcing vendors over the past several years.

Clients, especially those with long-term contracts, should evaluate the impact of the exchange rates on their vendors.  If they want to maintain productive partnerships with their vendors, they may need to renegotiate the contracted rates.  If clients force the vendors to take the entire exchange rate hit, they’ll quickly find that the vendors will adapt by quietly reducing costs and service levels will inevitably suffer.

Technorati Tags:  China, yuan, Currency, Exchange Rate, China Outsourcing

For the most part, I hate to shop.  There is one notable exception.  I love to shop at Trader Joe’s.  The store had pretty good stuff (sometimes great stuff) at generally fair prices.  I stop in at least once, sometimes twice, every week.  I’m ashamed to admit it, but I even kind of like their fake tropical motif, and I religiously read their cleverly written fliers.  I genuinely feel affection towards this company.

OK, so here’s the problem.  The other day, as I was eating my breakfast, I started wondering about the ingredients in one of their cereal products that I particularly like.  The ingredient list is (parentheses nesting as presented on the box):

• OAT CLUSTERS (ROLLED OATS, CRYSTALLIZED EVAPORATED CANE JUICE, CRISP RICE [MILLED RICE, CRYSTALLIZED EVAPORATED CANE JUICE, SALT, MALT], WATER, CANOLA OIL, HONEY, CORNSTARCH, NATURAL VANILLA FLAVOR, SALT, HERBS & SPICES),
• CORNFLAKES (MILLED CORN, CRYSTALLIZED EVAPORATED CANE JUICE, SALT, MALT),
• MULTI-GRAIN FLAKES (MILLED RICE, WHOLE WHEAT, CRYSTALLIZED EVAPORATED CANE JUICE, BARLEY MALT),
• ALMONDS.

As I’m reading this, I’m feeling pretty good with my “healthy choice” in breakfast products, until I start considering “Crystallized Evaporated Cane Juice.” About the time that I begin to wonder what this magical ingredient might be, I realize that it’s simply cane sugar.  Some marketing genius at Trader Joe’s has seen fit to re-position sugar (doesn’t sound healthy) as “Crystallized Evaporated Cane Juice” (somehow sounds healthier).  With nonsense like this, I can certainly understand why people don’t believe in marketing hype anymore.

Sigh…  I still like Trader Joe’s, but I’m a little more jaded about them.

eOn, which invested in The Symbio Group, will terminate its engineering operations in India and shift focus to growing its team in China.  According to their press release:

“After reviewing the effectiveness of multiple Engineering efforts, the Company has concluded that we need to reduce the multiple offshore facilities currently supported by eOn. Effective May 1, 2008, eOn will no longer maintain an engineering presence in India. Engineering emphasis will remain within the North American based teams in San Jose, California; Kennesaw, Georgia; Corinth, Mississippi; and Guelph, Canada with expanding engineering resources in China.

In addition to these changes, eOn’s Chief Operating Officer, Mitch Gilstrap, has resigned to pursue other opportunities and eOn’s Chief Technology Officer, Vijay Sharma, has departed eOn Communications focusing his efforts on new directions.”

I guess that the departures of Mr. Gilstrap and Mr. Sharma will reduce eOn’s burn rate, but it seems to leave them with a skeleton executive team (CEO, CFO, VP of Channel Sales).

eOn also announced recently that it was selling its interest in Spark Technologies, Inc.  I can’t help but wonder if eOn’s Board of Directors wishes that they could take back the money that they sunk into Symbio (which was considerably more than they had in Spark).

Technorati Tags:  China, China Outsourcing

We’ll include this item in the list of cultural differences that could lead to misunderstandings.  According to a piece in the Wall Street Journal (sorry, subscription required), the immediacy of a cell phone call, text message, IM, or face to face meeting make all of these preferable to e-mail for doing business in China.  Ms. Li Yuan, shares her prospective on the differences and takes a stab at explaining them:

“One reason: technological problems. Almost every Chinese I asked cited such difficulties, saying their corporate emailing systems aren’t as reliable as those of Yahoo or sina.com. They either get buried in spam, or find that many of their messages can’t get over the firewall.

But I think that’s only part of the reason. Another aspect is cultural. Many Chinese prefer traditional, face-to-face meetings, or at least one-to-one phone calls and text messages sent via cellphone. And in China’s go-go climate, instant responses are greatly valued. For many people I know, email is an afterthought — they’d rather chat via instant message.

Maybe that’s also the reason voice mail has never taken off in China. Who has the patience to wait to be called back instead of calling somebody’s cellphone immediately?”

This is the first time that I’ve seen a credible explanation for the nearly complete absence of voice mail in China.  Many of the most senior executives that we work with don’t have VM.  You have to just keep calling until they finally pick up, or else you send them a text message.  As Ms. Yuan suggests, e-mail is pretty much hit-or-miss.

In contrast, many of us (of a certain age) in U.S. business value the asynchronous nature of e-mail.  We can send it off without interrupting the recipient, and we can have some (perhaps diminishing) hope that they’ll respond when they can.  We like having an e-mail record of our interactions, and we appreciate being able to include multiple recipients in the “CC” list (of course, this leads to all sorts of anti-social behavior).  We also value the fact that we can hit “Send” and check one more thing off on our To-Do list (now it’s the other person’s problem).  Sadly, the sheer volume of e-mail is making it much less effective.  We often find that people are ignoring their inbox because it’s just overwhelming.

As we’re thinking about how to work with our colleagues in China, Ms. Yuan’s comments are well worth considering.  We need to agree on realistic communication protocols that reflect an acceptable compromise between the preferred styles.  On the U.S. side, we may be required to handle lots of phone calls in the evening, and we may learn to accept that e-mail isn’t appropriate for anything really important.  While, in China, our co-workers may need to pay more attention to proactively managing their e-mails.

In the end, it’s the sender’s responsibility to select the medium that will accomplish their objective most effectively and it’s important to recognize that our own preferences are not universal.

Technorati Tags:  China, email, cell phone, Text Message, IM, Voice Mail, China Outsourcing