Outsourcing in China: The Beijing Region

The People's Republic of China, if you haven't noticed, is mind-bogglingly big. A behemoth of a country, just the Great Wall alone stretches longer than the distance between New York and Los Angeles. So, it would not be too shameful a thing to confess that, beyond the economic jugular cities of Beijing and Shanghai, beyond the well known fact that China is the largest consumer market in the world and the source of industrious and dirt-cheap workers, you have no idea where to begin to make sense of the country in terms of IT outsourcing and — most importantly — how and where best to find an outsourcing partner that will serve your needs and/or help you establish an offshore development center.

The State Council of the Chinese government has created 19 software parks under its "Torch Programme." According to The Ministry of Science and Technology, the purposes of the plan are to "Promote the development of the country with science and education, carry out the general policy of reform and opening to the outside world, bring into full play the advantages and potential of China’s scientific and technological forces, take market for orientation [sic], promote the commercialization of new/high tech achievements, industrialization of new/high tech good and internationalization of new/high tech industries."

The 2,100 companies within these parks account for over 80% of China's total software sales).

The 10 regions where these parks are located are:

1. Beijing
2. Shanghai
3. Tianjin
4. Dalian (Liaoning Province)
5. Nanjing (Jiangzu Province)
6. Hangzhou (Zhejiang Province)
7. Guanzhou (Guangdong province)
8. Chengdu (Sichuan province)
9. Xian (Shanxi province)
10. Jinan or Changsha

Where to begin in your bid to work with China? Unless you're with a manufacturing or retail or other concern that has expertise in maneuvering through working with Chinese service providers, you'll probably choose the number one city from the list, Beijing, as a likely starting point for your outsourced work.

Why Beijing

Beijing is the capital of China and — politically and economically speaking — is the most important city in the middle kingdom. It is, with Shanghai, the most developed and advanced in terms of infrastructure — though most of China has a robust and reliable (telecommunications and power) infrastructure. (Note that Shanghai has a larger population and, in one survey among software developers is considered a more attractive work location than Beijing by about 10%.)

This is why the city is a major hub of China's IT industry and is considered a Tier 1 city for outsourcing. The city accounted for a third of China's IT industry volume and 40% of software exports in 2004, according to Qu Lingnian, deputy chief of Beijing Software Industry Promotion Center. Microsoft, IBM, Sun, BEA and Oracle have R&D centers in the city. Others like Infosys, Wipro, Satyam, Bearingpoint and CapGemini have established operations in Beijing.

Finding a software vendor is easy in this city. By 2002, Beijing already had 2,372 software companies. That's grown to about 3,500 companies in 2005. Of course, most of them are boutiques — tiny operations that may have little expertise in speaking English and no experience in delivering services to an American or European client. According to Beijing Municipal Science and Technology Commission, only three companies have annual income of more than 1 billion Yuan. (At the time of this writing, that equated to about US$124 million.)

One company has an income of about 100 million Yuan (US$12 million) and 403 have income between 10 million (US$1.2 million) and 100 million Yuan. Of course, sheer size of staff is not a definite stamp of reliability, fitness, and suitability of partnership. I.T. UNITED, an outsourcing firm that has successfully provided services to companies like Boeing and ACS, has about 120 employees presently.

The city also has the advantage of a government that is a keen champion of high technology and has singled the software industry out for support. The growth of Zhongguancun Software Park (zPark), Changping Software Park, and Beijing Industry University Software Park reflects this support. zPark, housing some 130 companies, is one of the largest national software industry bases in China.

The pros and cons with regards to the labor situation in Beijing is a wash.

On supply, anecdotes speak of difficulty of finding and retaining good engineers. But it isn't quite a red hot labor market yet. Second, sourced statistics bear either way. According to the Beijing Municipal Science and Technology Commission, "Beijing has 0.93 million software personnel." One report states the number of developers as 49,000. Supply is ample and will continue to be so now that the Chinese government is ratcheting up IT education.

On that front, Beijing has some 18 universities with engineering courses and 10 with specific courses on programming. Importantly, it's home to Peking University (also known as Beijing University) and Tsinghua University (the Harvard and MIT of China, respectively). Both universities have engineering departments and produces outstanding university graduates. In short, Beijing is literally the cradle of current and future software engineers. That's the pro.

The con is that labor cost in Beijing is more than any other cities on the list, Shanghai included. The average software worker earns $6,011 in Beijing, compared to Shanghai or Guangdong, whose workers earns $5,773 and $5,675, respectively. In fact, the average wage cost of an engineer in Beijing is nearly double of that an engineer in Xi'an.

Courts in Beijing are experienced in handling intellectual property rights matters and are less likely to be influenced by local economic concerns. In Beijing, the special IPR division of China's high and intermediate courts was established in 1993. Since then, the People's courts in Beijing have accepted more than 4,700 cases involving IPR disputes and have resolved more than 95% of these cases. Some consultants go to the extent of advising companies to establish jurisdiction in Beijing (or Shanghai), either by setting up business in one of these locales or by including in written agreements a clause stating that all parties consenting to jurisdiction in Beijing.

Regarding tax incentives, Beijing has a couple of local initiatives to help promote the software industry (separate from those offered on a national basis):

  • Exemption from individual income tax on government funded awards given to senior software talent.
  • Tax refunds on one-time investments for the purchase of cars or accommodations when hiring senior software management or senior technical personnel.

Resources on the Ground

The China Software Industry Association (CSIA) is the "official" representative of China's software industry. The organization, with offices throughout China, claims its goals to be "the promotion of the software industry through market analysis, information exchange, certification and policy studies." Its corporate members, mainly software enterprises, exceed 3,000, according to CSIA. It holds annual outsourcing conferences (International Soft China, which attracted 45,000 visitors to 2004's event) and is a possible reference when looking for companies to outsource to.

That said, the organization is nothing like India's National Association of Software and Service Companies (NASSCOM), which is well known as a most useful resource for understanding India's software development industry and for finding companies. CSIA's two main publications — one of which is a directory of China's software firms — are in Chinese.

The same can be said of Beijing Software Industry Association. The fact that BSIA's Web site is entirely in Chinese is an indication of its target audience and how useful a resource it would be for introducing its members to foreign companies.

Perhaps recognizing this gap, Beijing's Zhongguancun Software Park Development Co. Ltd. (zPark), which is a government sponsored enterprise, is in the midst of setting up a business association called the China-International Business Collaborative (CBC) to introduce Chinese vendors to foreign companies and to facilitate meetings and networking.

Beijing

Facts

Population: 14 million
Number of Engineers: 49,000
Universities with courses on programming/software: 10
Universities (Science and Engineering): 18
GDP per capita: US$2,695

Useful Links:

(Many organizations with official-sounding names in China don't have current Web sites, at least not in English. That's why the list is so short. Our suggestion is to make contact with the two groups referenced below and obtain phone numbers and email addresses from them for anybody you want to contact specifically.)

Beijing Municipal Science and Technology Commission
http://www.bjkw.gov.cn/English/

China Software Industry Association
http://www.csia.org.cn/chinese_en/index/index.htm

International Soft China (conference)
http://www.csia.org.cn/chinese_en/intl2005/contact.html

ChinaHR.com
http://www.chinahr.com/english/ (Note that job search results are shown in Chinese.)

SPECIAL REPORT: Outsourcing to China, Part 1
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SPECIAL REPORT: Outsourcing to China, Part 2
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Interview with a Beijing Official on Outsourcing
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