Outsourcing guide: China

China's potential in the outsourcing game causes India, the Philippines and other outsourcing strongholds to tremble in their boots, experts say. And for good reason: The nation boasts a massive population, a strong university system and a central government that's determined to create a global technology powerhouse.

But for now, China is best suited to low-level IT work such as maintenance and porting, most analysts say. The country's IT workers are also happy to do work on older systems, such as the AS/400, that may no longer interest Indian firms.

Despite this assessment, Bain Capital is entrusting application development work to China, according to Dave Hamilton, CIO at the Boston investment firm. "This is a full-fledged Web-based (trading) application," he says. In a project managed by E5 Systems , a Waltham, Massachusetts, offshore outsourcing vendor, Chinese programmers will develop and then maintain the software. The application development began just months ago, so Hamilton says it's far too early to say whether the project will succeed. He advises peers to "work very, very closely with (an) outsourcer when the country is an unknown."

"Cost was the only factor" in Bain Capital's decision to outsource to China, Hamilton says. "We don't care where the resources come from — E5 is responsible, and they assure us the appropriate resources" can be found at the bargain rate, he says.

Cost was also the big draw at Sweetheart Cup , which is in the early stages of a shift from proprietary production software to an open-source platform encompassing Java, Linux and Apache servers, says John McGregor, CIO of the Owings Mills, Md., manufacturer. Sweetheart is sending the work to China after determining it will cost 40 % less there than it would have in India.

"We're a penny business anyway," says McGregor, referring to the low-cost paper cups Sweetheart manufactures. "These days, it's all about cost containment, so that 40 % is attractive."

Like Bain Capital, Sweetheart Cup is using E5 as its outsourcer, and the project is in its infancy. The companies' CIOs concede that there are increased risks but say that signing on with a leading outsourcer such as E5 or Lionbridge Technologies , also based in Waltham, mitigates those risks.

Wireless work is also viewed as a Chinese strength. The nation "got to skip a whole generation of technology," says Gordon Brooks, E5 Systems' CEO, and thus enjoys a wireless infrastructure that belies its overall immaturity. In addition, China is embracing open-source software, especially Linux — at least in part because the nation is one of the worst offenders where software piracy is concerned. (According to a 2002 International Intellectual Property Alliance special report, there's a 93 % revenue loss for business software in China.) Brooks says the company pays its Chinese programmers more than the national average, which analysts say is about US$5,850 per year, though English-speaking programmers can make about $9,000.

However, China is relatively inexperienced compared with India, Ireland and other nations, according to Gartner But its major weakness is a lack of familiarity with everyday use of the English language. English is taught in Chinese schools, and in fact, for the past eight years, college students have had to pass an exam testing their proficiency in order to graduate. "So Chinese (IT professionals) all read and write English well," says Brooks. "But that doesn't mean they speak it well."

Overall, China lacks the maturity of more established countries. Skilled project managers are hard to come by, and certification even more so, according to Gartner.

Moreover, while the Communist Party of China has pushed to make China an outsourcing player, government involvement in the traditionally wide-open world of software development is a double-edged sword, says Stephen Lane, an analyst at Aberdeen Group in Boston. "This is a government that shuts down Web sites, remember."

The political climate in China will give some IT organisations pause. "When people think China, they think Tiananmen Square," Brooks says. He adds that judging a vast nation this way is like "judging the US by watching tapes of the Rodney King beating."

"The Chinese government is taking a tremendous gamble," Lane says. "They are saying, 'We can continue to be authoritarian and maintain the Communist Party if we open up our economy and (thus) offer people better lives.' If they fail for any reason, the risks of internal political strife are tremendous."

For this reason, companies using Chinese outsourcers must be vigilant on risk-mitigation basics, such as off-site backup and employee screening.

Sheer numbers are key to China's rise as an IT player. As home to 1.28 billion people in 2002, according to the Population Reference Bureau — about one-fifth of the total world population — the nation boasts about 400,000 IT professionals, according to analyst and vendor estimates. That number rises by 50,000 each year, Gartner says. And according to Marty McCaffrey, executive director of Software Outsourcing Research in Salinas, California, China's universities could soon churn out a staggering 200,000 computer science graduates annually.

The anticipated massive increase is a product of the communist government's decision to become a world technology leader, according to several analysts. To that end, China has pulled out all the stops as only an authoritarian government can. In the past half-decade, the country's strong university system has ratcheted up programs in both computer science and English, says Atul Vashistha, CEO of NeoIT , an offshore outsourcing advisory firm in San Ramon, California. And McCaffrey says China is building no fewer than 10 universities right now to increase its supply of IT professionals.

As China produces such a prodigious quantity of IT pros, and as their project management skills and English proficiency mature, it's no wonder competitors are nervous.

Ulfelder is a freelance writer in Southboro, Massachusetts Contact him at sulfelder@charter.net.

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