SHANGHAI — Global software makers are looking to China as a new center for research efforts, seeking to take advantage of cheap programming talent despite nagging intellectual property concerns.
"Labour cost is probably the lowest in the world and the talent quality is probably the highest," Javen Tang, a technology fund analyst with a Chinese joint venture backed by JP Morgan Fleming, said at the Reuters Asia Technology Summit on Tuesday.

As much as 95% of the export market for software from China is controlled by global software players such as SAP, Oracle, Sybase and the hundreds of international industrial companies that use Chinese operations for their in-house software development.

"China is a playground for a technologist like me," said Kevin Walsh, head of Internet technologies for Oracle's Asia-Pacific unit.

With a population of 1.3 billion and numerous companies serving hundreds of millions of customers in energy, telecommunications and banking, China's market is attracting special attention from software makers.

"We bring technologies here and figure out how to make them scale," Walsh said.

Oracle and rival SAP have almost doubled their employee numbers in China over the past year. Many are focused on research.

IBM Research operates one of its eight global labs out of Beijing. The facility is known for its work in Chinese character recognition and voice recognition software.

Dodging pirates
J.P. Morgan China chief economist Frank Gong said China's biggest obstacle to developing a competitive software industry was not global competition or low sales.

"The most important thing is for China to get down to earth on intellectual property rights," he said.

"Even before you announce your product, you have copies of your product being sold in the market," he complained.

This partially explains why the absolute amount of money spent by customers in China remains small, judging from the size of individual contracts.

SAP, the world's leader in business planning software and a standout in terms of sales inside China, counts the recent $20 million to $30 million deal from the country's biggest oil company as it's largest Chinese contract so far, SAP China chief Klaus Zimmer said.

Zimmer told of how one Chinese company had paid SAP for 250 software licences but was later discovered to be using 3,000 copies. The German company employs two staff full-time just to audit such abuses.

Hiding secrets
One response by global software players is to break up research and development projects into component parts, while keeping overall control out of the hands of anyone who might try to copy or steal trade secrets.

"Product life-cycle management (PLM) software allows multinationals to port research projects into China and port them out again so that not every detail is revealed," said Tom Manning, Asia-Pacific head of the technology practice of consulting firm Bain & Co.

Given the cost advantages, however, many executives believe it is worth moving into China despite the effort — and risk — of trying to keep technology out of the hands of software pirates and thieves.

"China offers a structural cost advantage," Jon Cestar, the chief executive of Chinese contract software services firm Freeborders, said in an interview last week.

He estimated that the average Chinese software engineer is paid about US$6,500 a year compared with $10,000 for India and $100,000 in the United States.

Freeborders builds software for a variety of big-name U.S. retailers including Target, J. Crew, Saks Fifth Avenue and Dillards, and some major investment banks it declines to name.

"We build what the customer wants, so they own the code. We're the general contractor. They're the owner. We represent that we'll deliver (that) to them in a leak-free way," he said of the company's approach to dispelling intellectual property concerns. (Additional reporting by Wei Gu and Doug Young)