Internationalization of Chinese IT Services Industry: Capability ...pages.stern.nyu.edu/~jcarpen0/pdfs/China Luncheon, Levina...iSoftstone Early 2000s Beijing ~ 4000 Strong relationships

1 11/22/11 NYU Stern China Luncheon. Copyright © 2011, Ning Su and Natalia Levina

Internationalization of Chinese IT Services Industry: Capability Development Path and Current Dilemmas

Ning Su Ivey School of Business, U. of Western Ontario Natalia Levina Stern School of Business, New York University


Agenda

•  Overview Chinese IT services industry •  Comparison with other BRIC countries •  Capability development path •  Strategic crossroads for Western clients


Offshoring of Services

Duke, Offshore Network, Survey


Cost Arbitrage in IT Labor

Gartner Report, June 2005


Move away from India only


Overview

•  China: The new frontier of IT services offshoring –  Large size, long history + Japan’s biggest IT outsourcing base –  CAGR of about 40% in export services –  70% of software exports come from foreign enterprises (e.g., IBM) –  From ‘Made in China’ to ‘China Service’

•  Special Features –  Japan – 33% of China Software and IT Services Exports –  Domestic Market – 90% of Chinese Software Industry

•  Strategic shift to diversify from Japan to U.S. & E.U. –  Larger size and higher profit margin + More advanced technical requirements –  Strong government support

2010 China India

ITO & Software Rev. $185 billion $60 billion

Software export $10-20 billion $48 billion

Major clients Domestic & Japan U.S. & Europe

Real GDP $5.9 trillion $1.6 trillion


Consultant’s View of India vs. China


Other BRIC - Comparison

A.T. Kearney, Global Services Location Index, 2011


11 National Software Export Innovation Bases

These zones account for 70% of China software industry exports


Chinese IT Industry Salaries (2010)


Major Vendors Firm Founding HQ Size -‘08 Background

Neusoft Early 1990s Shenyang ~ 14000 Strong brand name in Japan; strong relationships with major clients from China, Japan, and the West

VanceInfo Mid 1990s Beijing ~ 6000 Focusing on the U.S. market; strong relationships with major clients from China, Japan, and the West

Insigma Mid 1990s Hangzhou ~ 5000 Strong relationships with major clients from China, Japan, and the West

iSoftstone Early 2000s Beijing ~ 4000 Strong relationships with major clients from China, Japan, and the West

hiSoft Mid 1990s Dalian ~ 3000 Strong relationships with, and balanced revenues from, both Japan and the West

Beyondsoft Mid 1990s Beijing ~ 3000 Focusing on the Western market; main business directly transferred from the U.S. or Europe

Longtop Mid 1990s Beijing ~ 3000 Focusing on the domestic market; strong market position in China; expanding rapidly into the U.S.

Achievo Early 2000s U.S. ~ 2000 Founded in the U.S.; strong relationships with major clients from China, Japan, and the West

Sofmit Early 2000s Chengdu ~ 1000 Solid relationships with clients from China, Japan, and the West

Newtouch Mid 1990s Shanghai ~ 500 Solid relationships with clients from China, Japan and the West

USTC EBT Mid 1990s Hefei ~ 500 Solid relationships with clients from China and Japan; some projects from the West

Bleum Early 2000s Shanghai ~ 500 Owned and managed by Americans; focusing on the Western markets; good international reputation


Research Study

•  Broad research question –  How do Chinese IT service firms (vendors) develop capabilities

to compete in multiple markets? •  Theory building from case studies (Strauss and Corbin, 1997)

–  Multiple breadth-focused case studies –  Supplemented with an in-depth case study –  2006 – 2009 and ongoing

•  Selected firms (IAOP 2008; Chinasourcing 2008) –  12 leading China-based IT service vendors –  ~100 interviewees, top and middle level managers –  ~60 interviewees + observational study at one of the largest

vendors


Vendor Capability Development

•  Chinese IT service vendors developed capabilities by learning from their clients

Clients’ outsourcing governance practices

China

Clients’ outsourcing governance practices

West

Vendors’ market-specific capabilities Vendors’ market-specific capabilities Vendors’ market-specific capabilities

Japan

Clients’ institutionalized vendor governance practices

Vendors’ cross-market capabilities


Clients’ Institutionalized Vendor Governance Practices

Institutionalized practices Japanese

Relational aspect

• Long-term, trust-based relationship

• Incremental, collaborative approach

Contractual aspect

• Fragmented work, detailed specifications

• Structured, rigorous process, quality-oriented

Prior literature

• Japanese firms build deep relationships with suppliers. (e.g. Liker & Choi 2004)

Western

• High relationship entry barrier

• Competition-based approach

• More holistic, higher-end work

• Requiring vendors to propose new solutions

• Western clients outsource open-ended work to Indian vendors. (e.g. Kaiser & Hawk 2004)

Chinese domestic

• Long-term, full-lifecycle outsourcing;

• Guanxi-moderated approach

• Holistic, high-end work based on new technology

• Ad hoc management, high vendor autonomy

• Chinese firms have less mature supplier management practices. (e.g. Pyke 2000)


Vendor Capability Development


Western Clients Are Very Attractive

•  Chinese IT services vendors are rather strategic in the kind of clients they are looking for

•  They are hungry for open-ended, innovation-focused projects …

•  … Japanese firms have been cautious and have given rather narrow, well-defined tasks to Chinese vendors

•  … Domestic clients have open-ended projects to give, but have no in-house IT capabilities to “learn from”

•  Western clients are very attractive to Chinese firms and they are generally used to teaching vendors how to work on more open-ended, innovation-focused projects


… But

•  Chinese vendors don’t yet have capabilities to execute on open-ended projects –  They are relatively inexperienced –  They are far –  Language skills are limited

•  There are still IP risks involved unless –  The client posses “all/most” complementary assets for deriving

value from the outsourced software –  The value of vendor’s reputation as IT service provider > The

value from “stolen” software IP

Changing


Conclusions

•  Chinese IT services vendors like their manufacturing counterparts have been able to build capabilities by learning from their clients in Japan, the West, and China

•  They have been cross-pollinating what they have learned in one market to the other, reshaping client’s behavior in each market

•  Japanese’s cautious approach has been working well thus far, but now Chinese vendors are hungry for more

•  Western firms are at crossroads: –  Either continue sourcing increasingly open-ended work (like they

have done in India and Russia) –  Or replicate Japanese client’s more cautions style

Internationalization of Chinese IT Services Industry: Capability ...pages.stern.nyu.edu/~jcarpen0/pdfs/China Luncheon, Levina...iSoftstone Early 2000s Beijing ~ 4000 Strong relationships

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