Chinese and Indian technicians often meet to exchange information.	Chinese software exports accelerate.	A group of talented Chinese software company employees.

WHEN ever the future of China's software industry is raised among Chinese IT workers, India predominates the ongoing discussion. The subcontinent has led the global software outsourcing industry for some years. But Chinese technicians hope soon to catch up with -- or even surpass -- their Indian counterparts.

The Emergence of China’s Second-Tier Cities

Software zones have mushroomed across China in the last few years. The major cities of Beijing and Shanghai began attracting software companies early in the decade, and software zones in the second-tier cities such as Xi’an, Wuhan and Chengdu soon followed. Today, there are software parks in the smaller cities of remote central and western China. The Ministry of Information Industry has now designated 11 cities, including Beijing, Shanghai, Dalian, Chengdu, Xi'an, Jinan, Hangzhou, Guangzhou, Changsha, Nanjing and Zhuhai as China's national-level software industry bases, and Beijing, Shanghai, Dalian, Shenzhen, Tianjin and Xi'an as China's software industry exporting bases.

“Second-tier cities such as Jinan have a labor cost advantage over major centers like Beijing and Shanghai,” notes Xu Qun, director of Jinan’s Qilu Software Park. Lower housing prices in smaller cities mean lower salaries, the average monthly salary of Jinan software employees being RMB 1,000 lower than in Beijing. “That means the company saves as much as RMB 10 million per year on labor costs by employing 1,000 people in Jinan rather than in Beijing.”

Jinan is the capital of Shandong Province in eastern China, and far lesser known to the outside world than the major cities of Beijing and Shanghai. “Many foreigners know about Confucius, Taishan Mountain, and Tsingtao Beer, but they don’t know Shangdong -- where all of they all originated from -- nor Jinan -- the capital city of Shandong,” says Xu. Nevertheless, Jinan has become the base for many domestic and international software companies, with 563 operations employing more than 30,000 workers. Thirty-three of the world’s top 500 companies can be found in the city, including Japan’s NEC and America’s E5 Systems, the latter, one of the leading outsourcing companies, having moved to Jinan from its original Chinese base in Shanghai. “I knew little about Jinan before I came here. Later I found it has a great reserve of talents. Labor costs are low and the local government gives us a lot of support,” says a representative of the E5 Systems (Jinan).

The 50 plus software companies in Jinan that provide outsourcing services achieved a total export volume in excess of US $31 million in 2006. Compared to China’s total software outsourcing service of US $1.43 billion, Jinan’s share remains small. “But our annual growth rate has hit 86 percent, much higher than the national average of 50 percent.” Xu says proudly. Jinan’s software boom started later than in China’s bigger cities, but Xu believes the gap between major centers and second-tier cities will narrow considerably in two to three years.

Closing the Gap with India

Despite the prosperity of China’s software outsourcing industry, it is India’s software capital, Bangalore, that is always on the lips of Chinese officials --­ they want a Chinese Bangalore. Xu admits that, compared to India, China is lagging. “They have a better management mode and are much closer to Western clients in terms of language and customs, as the country has a British colonial history and English is one of its official languages.”

Steven Chen, well-known expert on the science of success, traveled to Bangalore specifically to learn about its management skills. “Everyone thinks highly of India’s software industry and its management, so I wanted to learn their secret.” He concluded that Indian employees, as well having a language advantage, "are ideally suited to the outsourcing industry, as they can admirably meet their customer’s demands.” Moreover, “they seem to be more insistent on professional ethics. The Chinese government needs to promote further our technological and industrial strength if we are to make our presence felt in the overseas market.”

V Murali, senior vice-president of Satyam Computer Services Ltd., echoes Steven Chen’s assessment of India’s relative strengths. “China can learn from us. India excels in service standards and development modes, while the China excels in project management, utilising cost advantages and concentrating resources.” Elsewhere, Murali has been quoted as saying, “Chinese technicians have wisdom and are eager to learn, but the industry’s prospects depend on improving techniques, standardizing the development and service process, and getting familiar with foreign modes of practical application.”

Restricted by the language barrier, China mainly serves the East Asian market, especially Japan and Korea. Zhang Mingxi is vice director of the Electronic Information Industry Department of Jinan High Technology Zone (HTZ). He has been to Japan, Korea and the US many times to promote Qilu Software Park, which lies within the HTZ. As many as 80 percent of the orders received in Qilu come from Japan and Korea. Nationally, 60 percent of China’s orders come from Japan, compared to 15 percent from the US and 10 percent from Europe. Yet 70 percent of orders in the global software market are made by Western enterprises, making the cracking of this market China’s biggest challenge in the software arena.

“Thus far, our clients are mainly from Japan and Korea,” admits Zhang Mingxi, “but we are targeting the US market, and we have found several clients through American professional associations. Meanwhile, we are encouraging enterprises in the zone to familiarize themselves with American company culture and business customs, and we are preparing training courses with this in mind.”

Everyone agrees that developing talent is crucial to developing the outsourcing industry. “All large software bases are located in cities that have a number of colleges,” Zhang Mingxi explains. “No one can afford to depend on importing talent from other places. We need to develop the local talent reserve.” Jinan has 59 colleges and universities turning out 20,000 information technology students annually. There are 459 college students for every 10,000 people in the city, four times the national average. “But Qilu Software Park still faces a shortage of talent, because not every graduate can meet the standards of the local enterprises.”

Steven Chen believes Chinese IT technicians to be as good as, or even better than, their Indian counterparts. “The level of Indian engineers is equal to Chinese undergraduates. Generally speaking, an Indian technician with two years experience is at a professional standard achieved by Chinese technicians within six months.” But the average salary of Indian technicians ranges from US $1,000 to 3,000 per month, much higher than the US $400 to 1,330 paid in China.

Although India and China are key competitors in the software realm, there has also been some cooperation between the two countries. India’s top three software exporters -- Satyam, Tata and Infosys -- invested in subsidiary companies in Shanghai during 2002-03. Satyam is now expanding into medium-sized cities like Nanjing.

Within China, different software zones compete to make themselves attractive to clients. Qilu Software Park, for example, has stringent rules protecting intellectual property rights, and has established an IPR infringement fund. If an IPR encroachment occurs, the park pays the compensation default owed by0 the guilty party from the fund before the default party is brought to law. Furthermore, the park also presses criminal charges against IPR violations, and aggrieved companies can report directly to the security authorities. A delegation representing ten other national-level software bases recently came to Qilu to learn about its IPR protection practices, with a view to promoting these measures elsewhere.

So despite the advantages held by India, Zhang Mingxi believes that China’s expanding, well managed economy and superior educational system will allow it to “catch up with India in a few years, and then surpass it.” The enthusiastic support of local governments in China will also play a decisive role on the development of China’s booming software industry.