China offshore software market to reach $13.8b
China-based offshore software development market will reach $13.8 billion in 2017 at a compound annual growth rate of 22.3%.
According to International Data Corporation (IDC), a provider of IT market research services, the market reached $5.05 billion in 2012 at a 22.5 percent growth rate over 2011.
In recent years, global customers have been under pressure to cut operating costs. Offshore outsourcing services which could optimize cost structures and compel the business transformation have been widely adopted. 2012 witnessed a year of rapid development and sharp transformation for the China outsourcing market. In that year, China outsourcing market experienced a dynamic merger of equals, buyouts of core business.
In comparison, the European and North American markets decelerated in terms of growth, accounting for a 57.3% market share with $2.89 billion in revenue, but they are still the foremost markets for Chinese SPs (service providers).
In 2012, the Japan and Korea offshore software development markets reached $1.81 billion, accounting for a 35.9% market share. This growth rate can be attributed to the following factors: Firstly, Japan's population is aging and declining in recent years, due to low fertility rates and longer life spans. The decreasing working-age population cannot meet the current demand for IT services. The outsourcing model is expected to play an increasingly important role in Japan, where it is seen as a complementary stream of talent.
Secondly, taxation reform has led to intense financial system demands. In recent years, the Japanese government had passed bills to reform financial system and tax legislation, paving the way for a series of IT system changes. Related government sectors need to complete the deployment of IT system in advance, increasing opportunities for application outsourcing services and system upgrading.
Firstly, with the constant changes of international economic environment in recent years, currency fluctuations have lead to high exchange loss. For example, since November 2012, the yen depreciated significantly relative to the yuan. The long-term settlement of the foreign exchange market is still unable to cover that negative influence which directly has compressed Chinese SPs' net profit space. Plus the continuous RMB appreciation has given rise to the higher commercial costs, lowering the cost advantage of outsourcing service exports. On the other hand, the SPs who have abundant capital, could take advantage of the depreciated yen to carry out cross-border M&A toward Japanese service providers, aiming to realize scale expansion and revenue-boosting effectively.
Secondly, SPs are focusing on large scale development and innovation framework. Continuous expansion due to solid market demand and government support in recent years has prompted China-based IT services providers to actively engage in merger and acquisition activities, as they seek to achieve even greater scale. While in the midst of transformation to offer high-end services, China-based outsourcing firms need to plan continuous investment in innovative R&D. It is important to construct long-term innovation mechanisms that stem from customer requirements and are fueled by R&D, knowledge, and innovation that provide greater value to the clients.
Thirdly, more flexible and efficient HR strategies have been adopted. In a fiercely competitive environment, highly skilled professionals are important for service providers. Facing the rising pressure of domestic labor costs, SPs have redesigned and implemented some career development plans.
On the one hand, vendors who tend to establish more ODCs (Offshore delivery centers) in the lesser developed areas in China at a lower cost benefit from attractive subsidy policies and a moderate rate of staff turnover. On the other hand, with a high demand for talent integration induced by M&A or internal organization adjustments, vendors need to build new promotion channels dedicated to talent consulting, parallel to existing HR channels for technical engineers.
Fourthly, privatization plans are the next transformation. With the United States placing increasing pressures on vendors to be more competitive and better regulatory oversight, several China vendors listed in overseas markets plan to privatize. By privatizing, vendors can avoid exposure to the capital market and choose flexible innovation strategies for moving up the value chain from low-end to high-end services. But if privatization fails, originators will have to bear high fees. In addition to this, other China vendors might try to acquire US-listed vendors in the process of privatization, in order to take advantage of a lower share price, thus increasing the complexity of privatizing.
"The complex international political and economic environment bring lots of challenges to the growth of China's service outsourcing enterprises. The highly rising domestic labor costs, currency fluctuations significantly, as well as the capital market performance pressure have become the bottlenecks of SPs' further development," says Shanshan Li, Senior Analyst of Services Research, IDC China.
"Therefore, Chinese outsourcing services providers need to take business transformation urgently, which would require them to possess deeper domain knowledge, reasonable talent strategies and stronger grasp of cutting-edge technologies in their efforts to meet customer requirements. 2013 will be a year of 'leapfrog' service offerings."
In recent years, global customers have been under pressure to cut operating costs. Offshore outsourcing services which could optimize cost structures and compel the business transformation have been widely adopted. 2012 witnessed a year of rapid development and sharp transformation for the China outsourcing market. In that year, China outsourcing market experienced a dynamic merger of equals, buyouts of core business.
In comparison, the European and North American markets decelerated in terms of growth, accounting for a 57.3% market share with $2.89 billion in revenue, but they are still the foremost markets for Chinese SPs (service providers).
In 2012, the Japan and Korea offshore software development markets reached $1.81 billion, accounting for a 35.9% market share. This growth rate can be attributed to the following factors: Firstly, Japan's population is aging and declining in recent years, due to low fertility rates and longer life spans. The decreasing working-age population cannot meet the current demand for IT services. The outsourcing model is expected to play an increasingly important role in Japan, where it is seen as a complementary stream of talent.
Secondly, taxation reform has led to intense financial system demands. In recent years, the Japanese government had passed bills to reform financial system and tax legislation, paving the way for a series of IT system changes. Related government sectors need to complete the deployment of IT system in advance, increasing opportunities for application outsourcing services and system upgrading.
Firstly, with the constant changes of international economic environment in recent years, currency fluctuations have lead to high exchange loss. For example, since November 2012, the yen depreciated significantly relative to the yuan. The long-term settlement of the foreign exchange market is still unable to cover that negative influence which directly has compressed Chinese SPs' net profit space. Plus the continuous RMB appreciation has given rise to the higher commercial costs, lowering the cost advantage of outsourcing service exports. On the other hand, the SPs who have abundant capital, could take advantage of the depreciated yen to carry out cross-border M&A toward Japanese service providers, aiming to realize scale expansion and revenue-boosting effectively.
Secondly, SPs are focusing on large scale development and innovation framework. Continuous expansion due to solid market demand and government support in recent years has prompted China-based IT services providers to actively engage in merger and acquisition activities, as they seek to achieve even greater scale. While in the midst of transformation to offer high-end services, China-based outsourcing firms need to plan continuous investment in innovative R&D. It is important to construct long-term innovation mechanisms that stem from customer requirements and are fueled by R&D, knowledge, and innovation that provide greater value to the clients.
Thirdly, more flexible and efficient HR strategies have been adopted. In a fiercely competitive environment, highly skilled professionals are important for service providers. Facing the rising pressure of domestic labor costs, SPs have redesigned and implemented some career development plans.
On the one hand, vendors who tend to establish more ODCs (Offshore delivery centers) in the lesser developed areas in China at a lower cost benefit from attractive subsidy policies and a moderate rate of staff turnover. On the other hand, with a high demand for talent integration induced by M&A or internal organization adjustments, vendors need to build new promotion channels dedicated to talent consulting, parallel to existing HR channels for technical engineers.
Fourthly, privatization plans are the next transformation. With the United States placing increasing pressures on vendors to be more competitive and better regulatory oversight, several China vendors listed in overseas markets plan to privatize. By privatizing, vendors can avoid exposure to the capital market and choose flexible innovation strategies for moving up the value chain from low-end to high-end services. But if privatization fails, originators will have to bear high fees. In addition to this, other China vendors might try to acquire US-listed vendors in the process of privatization, in order to take advantage of a lower share price, thus increasing the complexity of privatizing.
"The complex international political and economic environment bring lots of challenges to the growth of China's service outsourcing enterprises. The highly rising domestic labor costs, currency fluctuations significantly, as well as the capital market performance pressure have become the bottlenecks of SPs' further development," says Shanshan Li, Senior Analyst of Services Research, IDC China.
"Therefore, Chinese outsourcing services providers need to take business transformation urgently, which would require them to possess deeper domain knowledge, reasonable talent strategies and stronger grasp of cutting-edge technologies in their efforts to meet customer requirements. 2013 will be a year of 'leapfrog' service offerings."
