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China's emerging outsourcing industry isn't a fire-breathing dragon yet, but it's making strides to become a force, just as its role model India did a decade ago.
Chinese outsourcers still face steep challenges before they can dent the armor of such giants as Infosys in India, or IBM in the U.S. Chinese firms still must improve their software coding and English-speaking skills, better protect intellectual property and build their market awareness.
And they are.
One early success is Beijing-based VanceInfo Technologies. Its U.S. stock has soared 259% this year, and that's even after falling 11.9% Tuesday, after releasing big hikes in third-quarter sales and profit and an improved outlook. But some investors were hoping for an even better outlook from the highflier.
VanceInfo builds and tests software for companies worldwide. Nearly 40% of its sales come from IBM, Microsoft and Huawei, the big Chinese telecom gear maker.
In order to raise cash and its profile, VanceInfo went public on the New York Stock Exchange in late 2007. New customers looking at China put a premium on U.S.-listed companies, says Sidney Huang, VanceInfo's chief financial officer and head of operations.
'Taking Market Share'
"VanceInfo is the only U.S.-listed outsourcing company in China, so we have a distinct advantage from a perception point 15f view," Huang said. "As a public company with brand equity and financial stability, we are taking market share away from smaller players."
Despite the recession, VanceInfo's per-share, year-over-year profit has jumped at least 18% for the past 12 quarters. In that span, sales have soared by at least 38%.
For the third quarter, VanceInfo earnings rose 27% to 17 cents a share ex items. Revenue jumped 45% to $40.2 million. At least one analyst was expecting 17 cents per share on sales of $38.2 million.
The company raised its profit outlook for the year to 57 cents a share ex items. In August, it forecast profit of 53 cents to 55 cents. And it raised its revenue outlook to $145 million from $140 million. That would be a 41% hike.
But management's tone on the earnings conference call seemed conservative about growth prospects in the U.S. and Europe, says Karl Keirstead, a Kaufman Bros. analyst.
"The (earnings) beat-and-raise was not sufficient enough, and the tone on the call was not nearly bullish enough," Keirstead said. He rates the stock a hold, after its big run-up most of this year.
VanceInfo is roughly equal to the size of Infosys back in 1999, when the Indian vendor had $120 million in revenue. Infosys is expected to end this year with roughly $4.9 billion in sales.
Engineers Gravitate To China
But VanceInfo, in some ways, faces a possibly easier growth route than its Indian counterparts, due to the enormous economic growth in China today. As foreign companies set up new businesses in China, they need local outsourcers to help run their tech systems. At the same time, more talented foreign engineers are flocking to China in search of career options.
"Companies with sound financial status,[link widoczny dla zalogowanych], effective business strategies and continuous innovation will be taking this recession as an opportunity to stand out and establish a leading position in the increasingly competitive market," Vivian Yu, an analyst with research firm IDC, said via e-mail from Beijing.
IDC ranks the largest Chinese outsourcers, in order, as: Neusoft,[link widoczny dla zalogowanych], HiSoft, VanceInfo, SinoCom and ChinaSoft.
Chinese outsourcing revenue rose 22% last year to $2.4 billion, IDC says. It forecasts average annual growth of 23% through 2013, when global sales should reach $6.8 billion. While India's outsourcing industry is much larger, the local trade group Nasscom predicts that its sales will rise just 4% to 7% this year and next, after years of double-digit growth.
The Chinese government is investing heavily to nurture its outsourcing sector. And officials are cracking down on software piracy. The government wants to create hundreds of thousands of new skilled jobs in China by 2013.
In February, China's Vice Premier Wang Qishan announced a program to give business benefits to outsourcers in 20 pilot cities. Starting in January, the Ministry of Commerce will offer new tax breaks, financing and vocational training in those cities.
A big challenge for outsourcers in China involves training recent college grads in specific skills needed for software development and testing, says Eric Rongler, Bleum's CEO and founder. The U.S.-owned, privately held outsourcing firm is based in Shanghai.
Rongler says Bleum applies careful screening practices to find skilled workers with a knack for Western business practices. Bleum only accepts employees with an IQ of 130 or above. All new hires must pass behavioral interviews to demonstrate their personal confidence.
To improve communications with global clients, all Bleum employees are required to speak English full time, Rongler says. He boasts that Harvard accepts 11% of applicants, but Bleum only takes the top 1%.
"Our game in China is not to look at being the next, cheaper outsourcing spot,[link widoczny dla zalogowanych]," Rongler said. "We go to the top of the talent pool and cherry-pick the best people."
Rongler, who owns a majority stake in Bleum, hopes to take the company public in the U.S. by 2011 or 2012.
Other China outsourcing firms include BeyondSoft, Achievo and Hangzhou Sunyard.
Another player in China is U.S.-based Dextrys. The privately held company is led by Brian Keane, the former head of U.S.-based outsourcing firm Keane.
The business culture in China is evolving,[link widoczny dla zalogowanych], says David Etzler, CEO of OutsourceWorld, a firm that produces industry conferences and trade missions. Etzler recently visited China with executives from 14 large global companies looking for outsourcing partners.
Perhaps the biggest obstacle to building an outsourcing industry in China involves its corporate culture, Etzler says.
For instance, tradition dictates that one should not question authority in China. In addition, many business people there can be rather formal, making it hard for some to connect with their Western colleagues, Etzler says.
"If you can't strike up a conversation, you're not going to get a deal done," he said. "Translation of the language is easy,[link widoczny dla zalogowanych], but translation of personal communications is not an overnight thing to learn."
One big step for the China industry would be to form an outsourcing trade group, much like Nasscom in India. This would give Chinese firms a more unified voice in seeking investment dollars, says Cyrill Eltschinger, CEO of Softtek China, the Chinese unit of Mexico-based outsourcing firm Softtek.