Revenue from China's offshore software outsourcing market to grow five fold over next five years

Shanghai. May 11. INTERFAX-CHINA - Total revenue from China's offshore software outsourcing market will grow five fold over the next five years and the compound annual growth rate of the market will reach 37.9 percent, according to a recent report on the market by a market research firm.

The report found that China's offshore software outsourcing market continued to grow rapidly in 2006, with total revenue from the market reaching $1.38 billion, up 48.4 percent from 2005, according to the report by IDC China.

Japan and Korea remained the principal markets for China's offshore software outsourcing industry in 2006, with the two countries accounting for 56 percent of the industry's total revenue. European and American customers accounted for almost 36 percent of the industry's total revenue, up 8.4 percent from 2005.

The report predicted that in the future, demand from the Japanese and Korean markets will continue to grow steadily while demand from European and American markets will grow at a much more rapid pace. Over the next five years, it is expected that the European and American markets will have an annual compound growth rate of 48.6 percent. At this rate, revenue from European and American markets will surpass that from the Japanese and Korean markets by 2009.

According to Han Guohua, an official from IDC China's software and service research department, the industry was marked by acquisitions and integration in 2006. Five of the 10 leading companies in China's offshore software outsourcing industry completed large-scale acquisitions during the year, greatly enhancing their scale and revenue. As long as the acquisitions have been executed smoothly, it is believed that these companies will begin to reap great benefits from their acquisitions within the next two to three years.

According to IDC statistics, the market share of China's 10 leading companies in the industry rose by 6.5 percent during the year, illustrating a surprising level of growth. IDC believes that in the future, the market will be subject to a Matthew Effect, where larger outsourcing service providers will use their brands, sizes, services, local sales networks and supporting capabilities to continuously increase their market share while smaller companies will decline.

IDC also found, in contrast to India's market, China features considerable domestic demand. In 2006, over 40 percent of offshore software outsourcing revenue came from multinational companies that were located in China. IDC predicts that domestic demand will continue to grow rapidly over the next three to five years. This growth provides an excellent opportunity for service providers, allowing them to expand while avoiding direct competition with Indian companies in the European and American markets.

However, at the same time, competition within the domestic market will increase in ferocity, with the market only reaching a stable saturation point three to five years from now. For this reason, it is necessary for Chinese offshore outsourcing service providers to begin developing their sales and support abilities in European and American markets soon.

IDC suggested that in order to expand their businesses in Europe and America, Chinese offshore software service providers should choose medium and small-sized software businesses in Europe or America as customers. Through this approach, companies can begin to research and develop outsourcing services for their software products as well as application development, testing and other R & D services.

The outsourcing of software product R & D is seen as the high-end sector of the industry. The sector holds many potential rewards for the Chinese offshore software outsourcing industry and Chinese service providers through the added value of the services, competitive environment and improvements to human resources.

Medium or small software businesses in Europe and America are also unable to afford global service providers or services from the Indian software outsourcing giants for the most part, which provides Chinese service providers with a great many opportunities to enter into the market.

However, the price of global offshore software outsourcing is decreasing at the same time. The average price of China's outsourcing services utilized by Japanese entities has dropped by approximately 30 percent over the past ten years. While China currently has a price advantage over India through its cheaper services, this advantage will disappear in the future.

In order to maintain their competitive strengths a reasonable profit rate, Chinese service providers should consider lowering their costs by enhancing efficiency or by increasing their attractiveness to users through improved software quality and value-added services.