China is the most prominent emerging location for IT offshoring. Though Chinese IT exports are far behind India’s IT exports, the IT industry in China is well established as 90 percent of China’s IT services work is done locally. According to the Ministry of Commerce in China, revenues of the Chinese software industry increased from USD 7.16 billion in 2000 to USD 19.3 billion in 2003, growing at a Cumulative Annual Growth Rate (CAGR) of 39 percent. During the same period, the exports from the Chinese IT industry increased from USD 0.25 billion to USD 2 billion at a CAGR of 100 percent.

According to research firm Gartner, China is yet to make a significant mark in the IT outsourcing domain due to lack of infrastructure, English language skills and cultural compatibility. However, the Chinese government is now taking active steps to increase the infrastructure by establishing software parks throughout the country and to increase the proficiency of the Chinese youth in English by making English a compulsory language in schools. These steps are expected to make China’s value proposition as a suitable IT offshoring destination stronger.

The opportunity posed by China in the IT domain is now well recognized by corporations all over the world. While US based IT companies such as Microsoft and IBM have already opened operations in China, Indian IT companies are also joining them. Indian IT outsourcing players such as Wipro, TCS, Satyam and Infosys have already made the move and are setting up their back end offices in China. The well established electronics and communications hardware industry in China has a huge market for software services. Indian companies, with their new centers, can cater to the global IT outsourcing demand as well as the Chinese local market.

What are the reasons for China’s emergence in the IT outsourcing industry? According to the Outsourcing Institute, there are five key drivers for the growth in Chinese IT outsourcing market. These reasons are:

• Zero duty: Services and products of the IT industry were exempt from any duty in 2005 in China. While this forces the local players to remain competitive as Indian companies can easily capture the market, US based IT companies will be encouraged to venture into the China.
• Standards development on core IT technologies: Development of the standards will place the local IT players on the global map of IT outsourcing.
• Intellectual Property Rights (IPR) protection: The Chinese judiciary has announced tougher penalties for IPR infringement and piracy of software over the Internet has also been forbidden.
• Outbound M&A activities: Unlike India where the growth in the IT outsourcing industry occurred due to an organic growth of large players such as Infosys and Satyam, the Chinese government is setting up numerous state owned enterprises which will have both government support and business agility. These enterprises, after establishment, will be then open for mergers and acquisitions by private players.
• IT talent pool: The Chinese government is taking active steps to increase the number of IT professionals in China to meet the growing demands of the industry.