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
2 11/22/11 NYU Stern China Luncheon. Copyright © 2011, Ning Su and Natalia Levina
Agenda
• Overview Chinese IT services industry • Comparison with other BRIC countries • Capability development path • Strategic crossroads for Western clients
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Offshoring of Services
Duke, Offshore Network, Survey
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Cost Arbitrage in IT Labor
Gartner Report, June 2005
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Move away from India only
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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
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Consultant’s View of India vs. China
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Other BRIC - Comparison
A.T. Kearney, Global Services Location Index, 2011
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11 National Software Export Innovation Bases
These zones account for 70% of China software industry exports
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Chinese IT Industry Salaries (2010)
11 11/22/11 NYU Stern China Luncheon. Copyright © 2011, Ning Su and Natalia Levina
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
12 11/22/11 NYU Stern China Luncheon. Copyright © 2011, Ning Su and Natalia Levina
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
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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
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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)
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Vendor Capability Development
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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
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… 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
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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