Software firms flex muscle

China's increasing demand for software outsourcing services will spur the country's industrial transition, analysts said on Tuesday.

China is the world's top software outsourcing provider, and the nation's capacity will be big enough to challenge India - the market leader - in the years ahead, said Qu Lingnian, president of the Beijing Association of Sourcing Service.

Chinese software outsourcing companies received orders worth more than $46.5 billion in 2012, a jump of 43.8 percent year-on-year, according to the Ministry of Commerce.

Orders from overseas customers came to more than $33.6 billion last year, compared with $23.9 billion in 2011, the ministry said.

China's advance in the sector reflects steady demand growth in the global service outsourcing industry, according to Qu.

International spending in information technology and service outsourcing sectors hit $2.16 trillion last year, up 3.2 percent year-on-year despite the global economic downturn.

Companies in the financial industry are among the biggest customers for global outsourcing companies.

"Outsourcing the service business is good for financial institutions' long-term development because the move will subsequently reduce costs for them," said Liu Yanxin, deputy general manger of the IT management department of China Construction Bank Corp. The bank is the world's second-largest lender by market value.

"Banks quickly found out outsourcing software and services will bring efficiency and quality to their services," he said.

The IT industry will play an important role in the Chinese economy as the nation is mulling its transition from the world's factory into a technology and innovation base.

China's 12th Five-Year Plan (2011-15) includes provisions to support the development of the IT industry.

With the number of industry players increasing over the past two years, revenue from China's software industry hit 2.5 trillion yuan ($407 billion) last year, a jump of 28.5 percent from the previous year, said a report released by the Beijing Association of Sourcing Service.

By the end of 2012, there were more than 21,000 software service providers in China, employing 4.3 million people, it said. The sector had created 1.1 million jobs last year.

Data processing and operating services were among the fastest-growing areas for the industry, generating 428.5 billion yuan in revenue.

In addition, Qu said, China is on the track to build its first national industry association.

The association will help local providers grab more offshore orders while helping overseas players tap into the Chinese market, said Qu, but he did not disclose when the organization will be established.

China is not only the world's top service provider, it also has great local demand for software outsourcing and services.

"Turnover from local demand surpassed $260 billion in 2012, but most overseas providers failed to see this gold mine," Qu said.

China started to focus on the development of outsourcing services in 2006, but the businesses suffered from the global economic slump in 2008.

"Stronger competition for overseas orders has underlined the importance of nursing local demand," Qu said.

Although local service providers hold advantages in price compared with international players in Europe and India, Chinese outsourcing companies urgently need to upgrade their services to remain competitive, industry insiders said.

Indian outsourcing companies dominated contracts from the United States because of their language advantage and service quality. Qu estimated the scale of Chinese outsourcing companies is about the size of their Indian counterparts about four years ago.