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Friday, July 21, 2006

Chinese Service Players :Just A Pipedream?

I had been covering about the limitations about the chinese service players and the market and why china may not be a significant force in global consulting & services segment. Gartner’s Rolf Jester writes after attending the second china international software and information service outsourcing summit (CSIO) in Dalian, on china’s potential to operate in a major way in outsourcing services market and he thinks that chinese providers have a long way to go for being called a success in the global services arena. Highlighting the lopsidedness in the industry’s thrust in china, he says, providers should focus on reaching potential overseas customers and spend less time on internal conferences. He is on the dot when he observes that wWhile most of the firms are just focusing on cost savings, the hard reality is that enterprises need develop their own unique value proposition beyond cost saving to service it for the long term in the global market. Cost advantage is sustainable only till the extent of time even-less-expensive country gets "discovered" by buyers.
The overwhelming majority of IT services companies in China have a long way to go to become successful exporters of services to the wider global market. Chinese firms predominantly serving customers in Japan are doing ok and are mostly working on embedded software for high-tech vendors – a high proportion of IT services exported from China is accounted for by testing, localization and maintenance of products, especially embedded software for high-tech vendors in Japan and the U.S. There are also quite a few captive offshore centers in China that are owned and managed by high-tech companies from other countries, including the U.S., Japan and India, doing product development and maintenance . The Chinese government statistics show, 65 percent of Chinese IT services exports go to Japan. Japanese complain about communication issues and there is fierce price competition in the Japanese market for the lower-value phases of application development, such as simple coding and unit testing. The main target customers, Japanese systems integration (SI) firms, are facing lower profitability themselves, thus putting additional price pressure on their Chinese suppliers. The possibility of an appreciating chinese currency exacerbates that risk. At best, other global vendors including offshore majors can consider chinese services firms as suppliers of services, as part of a value chain or as potential acquisition targets. Most Chinese companies do need a large global partner to help them adequately address the global market. There is a real case for assessing predictions that most of the Chinese providers would wind up their export business in the next 3 or 4years as a massive consolidation/re-alignment happens in the industry.

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