The Economic Times (India Times) had an interesting article that discussed the big Indian vendors’ pursuit of outsourcing business in China.  I was especially struck by the inroads that they appear to be making into China’s financial services industry.

‘“We are looking at opportunities with the big four Chinese banks,” said TCS Asia business head Girija Pande. “The core banking software deals at tier-I banks could be around $100 million each,” he added. TCS, which won a $100-million contract from Bank of China last year, has a core banking software product BaNCS, which competes with Infosys’ Finacle and Oracle Financial’

The Economic Times article does acknowledge the competition from Longtop International and VanceInfo (NYSE: VIT), but I’m surprised that there isn’t more “pressure” for the big financial institutions in China to source projects with domestic suppliers.  Curiously, the story didn’t even mention Chinasoft.

I can’t help but wonder whether China’s financial services industry will, at some point, start feeling a bit nationalistic and lean more towards Chinese vendors.  I guess that we’ll see.

Technorati Tags:  China, China Outsourcing

We all hear news that suggests the current direction of the global economy.  Today the U.S. DJIA closed down 444.99 points at 7552.29.  The S&P 500 closed down 54.14 at 752.44.  With the grim feel in the U.S., I keep getting questions about the impact on outsourcing in China.  Rather than just relying on my anecdotes for this post, however, I wanted to try to present a slightly broader view.

There’s an old saying, “People lie, markets don’t.”  With that in mind, I took a look at VanceInfo’s (NYSE: VIT) recent market performance.  For those that weren’t paying attention, they released their Q3 results this week.  (Source: WSJ, subscription required)

VanceInfo (VIT) Third Quarter 2008 Financial and Operating Highlights (unaudited)

• Net revenues for the third quarter increased to $27.7 million, up 53.3% from the third quarter of 2007.
• Gross profit rose to $10.9 million, up 55.0% from the third quarter of 2007.  Gross margin improved to 39.3%, up from 38.9% in the same period last year.
• Operating margin was 15.5%, compared to 14.4% in the third quarter 2007.
• Net income was $4.3 million, compared to $2.9 million in the third quarter of 2007. Non-GAAP net income, which excludes share-based compensation expense, was $4.7 million, compared to $3.2 million a year ago.
• Diluted earnings per share (”EPS”) were $0.11, and adjusted diluted EPS (non-GAAP), which excludes share-based compensation expense, was $0.12 in the third quarter.
• Employees totaled 4,975, including 4,351 billable professionals, as of September 30, 2008.

The company also revised its guidance, upward:

• 2008 net revenues to be between $100 million and $101 million, representing a 59% to 61% increase from 2007.
• 2008 diluted EPS to be between $0.37 and $0.39 on a GAAP basis, and non-GAAP diluted EPS excluding share-based compensation to be between $0.4 and $0.43, based on 40.6 million total ADS-equivalent average shares outstanding.
• Fourth quarter diluted EPS to be between $0.10 and $0.12 on a GAAP basis, and non-GAAP diluted EPS excluding share-based compensation to be between $0.11 and $0.13, based on 40.9 million total ADS-equivalent average shares outstanding.
• Total headcount by the end of 2008 to be approximately 5,300.

Not bad, right?  Clearly they’re the leader among U.S. focused Chinese software outsourcing companies.  Now, remember that VanceInfo’s IPO price was US$8.50.  Today the stock closed at US$5.72, after trading as low as $5.52 intraday.  Since their IPO late last year, their stock has traded as high as US$13.98 on May 16.  I’m glad that I didn’t buy any at those levels.

I guess that the wisdom of the market is not currently in VanceInfo’s favor.  While it might be misleading to infer too much from one company’s performance, I submit that they are one of the best proxies that we have for the expected impact of the global economic turmoil on Chinese software outsourcing companies.

Technorati Tags:  China, China Outsourcing

iSuppli predicts that nearly 20% of China’s fabless semi companies will fold up within the next two years.  As I have contacts with some of these groups, I’m mostly surprised that the number isn’t a bit higher.  The combination of tight financing and shrinking global markets for the end products has pushed a number of my friends right to the brink.  According to the story,

“‘The majority of China’s IC firms are short of capital and face cash flow problems,’  iSuppli said. The launch of another stock market in Shenzen has been postponed because of the global economic financial crisis, it added, and venture capitalists generally lack interest in China’s IC industry. But iSuppli expects at least five companies will seek initial public offerings on the Nasdaq stock exchange and at least 10 companies will be involved in mergers next year.”

I guess that this is what happens when too much money chases too few good ideas and skilled managers.

Technorati Tags:  China, China Outsourcing

There’s been a fair bit of speculation regarding whether the current “challenging” economic environment would have an impact on the Chinese software outsourcing vendors.  We’ve already seen some operational changes at Dextrys (read the comments for some real insight).  Now, a very well informed source in China is telling me that both iSoftStone and BeyondSoft have shelved their IPO plans indefinitely.  As I’d previously suggested, iSoftStone was rumored to be moving towards tapping the public markets this year.  The same source also told me that a significant number of the smaller providers are on the verge of shutting down.

Unfortunately, the firms are facing an unhappy combination of declining demand from the West and rising costs in Beijing and Shanghai.  While the Chinese economy may be slowing, the demand for skilled programmers who can understand English and interact with customers is still quite strong, so their salaries continue to shoot up.

Technorati Tags:  China, China Outsourcing

Several sources have reported that Datang will invest nearly US$172M in the struggling Chinese foundry.  Trading in SMIC (SMI) was halted last week pending the release of “price-sensitive” news.

I guess that this sort of qualifies as a “bail out”, since Reuters reports that:

“Datang Telecom, an indirect unit of China’s State Development and Investment Corp, and China Academy of Telecommunications Technology…”

I’m glad that they have the extra rope, but they still have a lot of challenges ahead of them, and they’ve got a lot of catching up to do before they’re in TSMC’s league.

While Beijing and Shanghai are the most accessible, both in terms of international travel and accommodations for westerners, in some sense, they are yesterday’s news.  The real story now is in the aggressive “second tier” cities.  Many of these regions have populations in the 10M range, outstanding universities and eager local governments.  PCWorld recently presented a survey of some of the best.

Of course, I can’t let any post on this topic pass without plugging Chengdu (normally I wouldn’t post such a long excerpt, but I’m making an exception for Chengdu):

“Chengdu — This city in southwestern China’s Sichuan province was shaken badly but ultimately received minimal damage from the May 12 earthquake that killed 70,000 people in nearby Wenchuan. Although some operations were knocked offline by the quake, business in this pleasant and livable city have returned to normal.

Despite its inland location, Chengdu is one of southwest China’s largest cities and infrastructure hubs. It boasts international air connections throughout Asia and domestic and international train routes, and its Hi-Tech Zone is home to 28 Fortune 500 companies.

Intel is one of them. The company responded to the Chinese government’s “Go West” strategy, promulgated to attract investment to poorer, less-developed inland provinces, not just to coastal areas that have traditional received the most attention from overseas businesses. An Intel spokesperson said that the city met all its criteria: availability, pricing and reliability of utilities; availability of the right kind of talent, especially high-end technical talent; and a government that’s interested in working with Intel and offers the right incentives. Since the announcement of its testing and assembly plant in 2003, Intel has invested US$525 million [m] there and employs 2000 people, the company said.”

As we’ve suggested before, make sure that your vendor has a robust strategy to tap the resources in the second tier cities.

Technorati Tags:  China, China Outsourcing

Earthtimes seems like a strange place to find a report from CCID (I had a problem with CCID Consulting’s website, so I’m not including a link - I’m not sure what’s going on), nonetheless, that’s where I saw the release.  The embedded portion of the electronics value chain has exploded over the past decade.  I think that there are two primary explanations for this.  First, it’s partly the result of the availability of powerful standard building blocks.  Second, semiconductor companies are able to crank out performance/functionality fast.  In fact, faster than most organizations can deploy systems that take full advantage of the available power.  Increasingly, the value add comes, not at the silicon level, but at the embedded systems level.

Here’s what CCID had to say:

“In 2007, the market scale reached 408.16 billion US dollars, up 17.50% over 2006. The scale of China’s embedded system market also reached 221.81 billion Yuan in 2007, up 32.3% over 2006.”

Among the Chinese outsourcing companies, Long Circle is the only one that I’m familiar with (also here) that specializes in this area - good for them! I’m guessing that we’ll see other organizations following their lead.

The release ends with some sound advice to Chinese companies and a veiled warning to electronics firms in the rest of the world:

‘Strengthening R&D in embedded system would be the best strategy in the transition for China products from “Made in China” to “Created in China”.’

Technorati Tags:  China, China Outsourcing