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Chengdu, China: a growing software and outsourcing hub
Apr. 20, 2009 (China Knowledge) - China is undergoing a process of industrial upgrading, in which the focus is turned from manufacturing to the service sector. Meanwhile, because the export-oriented economy has been hit by the global recession, China has recognized the need for a new direction for development. Software and service outsourcing has turned out to be a good choice.
In 2008, China's software industry saw rapid growth, with the industry revenue increasing 29.8% to RMB 757.3 billion. The growth is 8.3 percentage points higher than it was in the previous year. Meanwhile, software exports grew by 39.0% to hit US$14.2 billion. Service outsourcing grew at an even faster speed of 54.3% to US$1.6 billion.
Although China has a long way to go before it can compete with India, the giant in the world's outsourcing industry, some changes have taken place in recent times. The Mumbai attacks called the future of outsourcing in India into question, and India's labor costs continue to rise. In contrast, China has abundant IT human resources available at low cost. China also provides a safe and stable environment to overseas investors.
The software and outsourcing industry is now one of the most important industries encouraged by China's central government. More and more Chinese cities are focusing on the development of the software and service outsourcing industry. At the beginning of February 2009, 20 cities, including Beijing, Tianjin, Shanghai, and Chengdu, were approved by the State Council to become demonstration cities for service outsourcing. Preferential policies such as tax rebates were granted to these cities for the promotion of the software and outsourcing industry.
As distinct from the manufacturing industry, the software and outsourcing industry is not limited by geography or transportation costs. The vast hinterland of West China has low barriers to entry, and therefore is favored by software and outsourcing companies facing the global recession. Among such cities, Chengdu could be an ideal choice due to its unique advantages of talents and environment.
In recent years, Chengdu has shown stable growth in the software and outsourcing industry. In 2008, revenue from Chengdu's software industry rose 37.7% year on year to reach RMB 42.7 billion, accounting for 5.6% of the nation's total, and the growth rate was 7.9 percentage points higher than the national level. Meanwhile, software exports reached US$300 million in 2008, almost doubling from the previous year.
Though the rankings of all Chinese cities is yet to be released, according to the 2007 statistics, the revenue of the software industry in Chengdu ranked sixth and the growth rate of the software industry in Chengdu ranked second among the 20 demonstration cities in China. Notably, Chengdu's revenue surpassed that of some strong competitors such as Dalian, Shenzhen, Suzhou and Xi'an, and was ranked first in the central and western China.
Figure: Revenue and Growth Rate of Chengdu's Software Industry
Source: Chengdu Municipal Bureau of Commerce
The fast development of Chengdu's software and outsourcing industry has been boosted by several factors. In addition to support from government, Chengdu also enjoys several advantages, such as an abundant reserve of talent, low costs and a well-established infrastructure.
Chengdu is an important education and R&D center in China that has abundant human resources. Currently, Chengdu has around 100,000 employees and technicians working in the software industry. As of the end of 2008, there were over 500,000 university and college students in Chengdu, including some 100,000 majoring in software-related disciplines.
The investment cost in Chengdu is also low. Among the 20 demonstration cities, Chengdu's labor costs are below the average level. The average wage in Chengdu's IT and IT-related industries was less than half of that in Beijing and Shanghai. Furthermore, Chengdu also has low land, energy and water costs. For example, the average rent for Grade A office space in Chengdu is about 27%, 33% and 63% of that in Shanghai, Beijing and Shenzhen, respectively.
Attracted by these advantages, many overseas software and outsourcing companies, such as Microsoft, Symantec, IBM, Wipro, Ubisoft, Gameloft and GGL, have established their presence in Chengdu. Accenture is the most recent investor in Chengdu. It declared the launch of its global service outsourcing center in this city on Feb 18.
Microsoft set up its first China video game R&D center in Chengdu in 2006. "Chengdu has top-class game developing talents, and a mature customer market," said Chen Yongzheng, Microsoft's vice president and Greater China CEO. "The local government also supports the development of the game industry. These are the reasons why we chose Chengdu."
Symantec established its largest R&D center in Chengdu in 2008 with an investment of US$50 million. It later set up a joint venture with Huawei in Chengdu with an investment of US$150 million. "The market in China is obviously the best one in the world and has the fastest growth," said Guo Zunhua, Symantec's vice president and Pacific-Asia CEO. "Despite the global crisis, we will enlarge our investment in Chengdu."
In April 2009, IBM, which invested in Chengdu thirteen years ago, upgraded its branch in Chengdu to be the headquarters in Southwest and Northwest China, an area that includes nine provinces and one municipality. Zhou Weikun, chairman of IBM's Greater China Region, said IBM will continue to invest in Chengdu to strengthen the influence of this headquarters in West China.
Due to Chengdu's important position in China's software industry, several state-level summits for the software industry have chosen Chengdu to hold the events. The China International Software Summit has been held each year in Chengdu since 2003. On April 16, 2009, the 7th Summit was held in this city. It is organized by the Ministry of Industry and Information Technology, (MIIT) the China Council for the Promotion of International Trade (CCPIT), the State Intellectual Property Office (SIPO) and the Sichuan Provincial Government, and undertaken by Chengdu Municipal Government and Sichuan Information Industry Department.
This year, the summit was attended by about 1,500 people, including government officials and delegates from organizations and associations, as well as representatives of 650 enterprises such as Microsoft, Oracle, AMD, Fujitsu, Dawning, Huawei, Sina, Neusoft and Ufida.
The themes of this summit are internationalism and professionalism. The summit hopes to boost communication and cooperation in the international software industry and will promote integration, innovation and development. It consists of ten professional meetings and forums, including the EU-China Information Society Summit, the Conference of Sino-Japan Software Outsourcing Industry, the Sino-US Food Safety Information Based Supervision Summit, the International Disaster Recovery and Outsourcing Summit & the Fourth China Disaster Recovery Industry Forum, the 3G International Communication Summit, the Singapore Digital Community Seminar, etc.
According to a report which was released in October 2008 by India's Global Services, Chengdu ranks 37th among the top 50 emerging outsourcing cities in the world, after Shanghai, Beijing, Dalian and Guangzhou in mainland China. Compared to the aforementioned four cities, in the global economic downturn, Chengdu, because of its low cost and abundant talents, seems to be more attractive. Together with strong government support and a well-established infrastructure, Chengdu will see fast growth in the software and outsourcing industry in the near future.
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