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Business News/ Industry / IT sector booming, but China has a lot of catching up to do
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IT sector booming, but China has a lot of catching up to do

IT sector booming, but China has a lot of catching up to do

Thinking innovation: A file photograph of computer engineers at work at Neusoft Groups headquarters in Shenyang, China.Premium

Thinking innovation: A file photograph of computer engineers at work at Neusoft Groups headquarters in Shenyang, China.

Hong Kong/Bangalore: China’s software sector is booming as it taps global firms looking to cut costs, but its small size and lack of experience mean it will be years before it threatens Indian rivals such as Infosys Technologies Ltd.

For now, Chinese firms are attracting venture funding and expanding staff in an industry Beijing views as strategic for the country’s future growth.

Analysts are bullish on the sector and say that scale, client lists, and quality of management are the key factors that distinguish the players.

Thinking innovation: A file photograph of computer engineers at work at Neusoft Groups headquarters in Shenyang, China.

But the value of software and services exported from China is forecast to grow at a compound annual growth rate of nearly 38% through 2011, while India’s is expected to jump to $60 billion by March 2010, according to industry estimates.

Chinese IT outsourcing firms, unlike their export-orientated Indian rivals, mainly serve the local arms of domestic and foreign companies and this could shield them from the worst impact of a US recession. Most of the software work is, however, less sophisticated than that done by Indian firms such as Tata Consultancy Services Ltd and Infosys, which are fast chasing consulting revenue.

“The Chinese firms have still not moved up to the top of the IT outsourcing value chain and are still doing ‘lights on’ types of work such as application maintenance, patches, or upgrades for software," said Timothy Bush, an analyst at Merrill Lynch and Co.

“They’re not upgrading IT infrastructures for major financial institutions."

Top players among China’s crowded field of up to 3,000 firms include VanceInfo Technologies Inc., Chinasoft International Ltd, SinoCom Software Group Ltd and Shenyang Neusoft Co. Ltd.

VanceInfo, which derived a combined 40% of net revenue from Microsoft Corp. and International Business Machines Corp., or IBM, at end-2006, has averaged 80% annual revenue growth over the past three years. The firm, which had some 3,700 staff earlier this year, aims to nearly triple its workforce in three years.

Chinasoft International, valued at around $167 million, expects its revenue from providing outsourcing to Europe and the US to triple to about $100 million this year and is eyeing overseas acquisitions.

“At this stage, we still have to be a little humble," said VanceInfo’s CFO, Sidney Huang, referring to his firm’s small size. “It will take years, if not decades, to catch up."

Merrill Lynch initiated coverage on VanceInfo with a buy in January, citing convincing management and strong growth from its top five clients, which include Microsoft, IBM and Citigroup Inc. Neusoft, valued at around $2.7 billion, has already attracted the attention of investors such as Intel Corp., Toshiba Corp. and SAP AG.

“They’re going to put pressure on the IT outsourcing value chain because their expectations for margins are lower," said Merrill’s Bush, referring to Chinese software firms.

DBS Vickers has a buy rating on Chinasoft, citing growth in hardware sales and economies of scale due to an aggressive acquisition strategy. CIMB has an outperform call on Sinocom, citing strong revenue growth from Japanese customers, but warned that administrative costs were rising.

But Morgan Stanley has an equal-weight rating on Neusoft—the largest of the group with roughly 10,000 employees as of end-January—citing declining margins on higher personnel costs and the appreciation of China’s yuan.

India’s export-driven software services industry is struggling to keep up its scorching pace of growth as its mostly-US based clients delay projects in an uncertain business environment in the world’s biggest economy. Intense competition to hire and retain staff and a strong Indian rupee are also hitting the sector in India.

The industry is shifting its focus to markets such as West Asia, Asia and India to reduce its dependence on the US, which accounts for more than three quarters of exports.

Infosys, Tata Consultancy, Wipro Ltd and Satyam Computer Services Ltd have all opened shops in China over the last three years as they target deals from local Chinese companies and large foreign firms.

Last year, Tata said it won a multi-million dollar contract to modernize the China Foreign Exchange Trade System’s trading platform—a top of the value chain deal out of reach for most Chinese firms.

Still, Indian players are worried that their advantages, mainly access to an army of English-speaking workers, may not translate in China. With native language skills, Chinese firms are serving local research and development centres for global giants as they continue to expand aggressively in China.

And Indian firms are scrambling for scale in China, hurt by intellectual property issues and difficulties in recruiting local staff.

Reuters

Kirby Chien in Beijing contributed to this story.

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Published: 12 May 2008, 11:54 PM IST
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