August 15, 2007 -- Last month, a personnel training agreement on IT outsourcing was signed at TIFO Software Park in the Chengdu High-tech Zone by TIFO Soft, Sofmit Group and Sichuan Business College.

"Taking IT outsourcing as a strategic sector, the Chengdu city government has been attaching high value to the software industry," Shu Song, spokesman of TIFO Software Park, Chengdu, told Emerging China.

He said the city's IT outsourcing volume is expected to reach 8 billion yuan (US$1058 million) including 3.78 billion yuan (US$500 million) in service outsourcing by 2010. To achieve this target, a special fund of 50 million yuan (US$6.5 million) has been set up to lend support to the sector, and preferential policies have been formulated to attract high-profile IT professionals.

"The local government supports our software park, TIFO Soft, both in policy and in finance. In fact, TIFO Soft is a platform for local IT enterprises and talented people and overseas IT companies." said Song. "We offer the necessary infrastructure and information about outsourcing projects to IT enterprises."

Sofmit Group was established in 2002, and has been recording impressive growth particularly in the last two years as the offshore outsourcing industry has expanded.

"The offshore outsourcing market has been a constant force as our company has moved into TIFO Software Park since 2006. The number of employees has increased twofold, and budgets have grown exponentially," Li Chai vice President of Sofmit Group told Emerging China. "We're at our best when our backs are against the wall, I'm told by our employees that we have everything we need to succeed, and that is what we will endeavor to do," he said.

This boom in the IT outsourcing sector is not restricted to Chengdu alone.

According to IDC's latest report called the China-Based Offshore Software Development Market 2007-2011 Forecast and Analysis, the Chinese offshore software development market grew rapidly in 2006 with revenues reaching 10.43 billion yuan (US$1.38 billion), representing an increase of 48.4 percent from 2005.

"Chinese cities are on the rise and nipping at India's heels," states a recent report by IDC. IDC forecasts that Chinese cities will overtake Indian cities by 2011 due to massive investments made in infrastructure, Internet connections, the promotion of the English language and technical skills which which will contribute to success in the IT market.

Unlike India, China has a large domestic market for software outsourcing. For European and North American multinationals with Chinese operations in particular, the demand for software outsourcing services in China and overseas has contributed to the rapid growth of the market. In 2006, over 40 percent of offshore software development revenue came from multinationals operating in China, Karen Zhang, IDC China marketing manager, told Emerging China.

IDC predicts that the domestic market will continue to grow rapidly in the next three to five years, creating a healthy environment for local service providers to expand without direct competition from Indian rivals for European and North American clients. Competition in the domestic market will intensify eventually becoming saturated within three to five years, similar to what is happening now in the software localization service market.

"China's potential is real and gaining momentum. The country is very technology oriented, and this benefits it greatly in the IT outsourcing space," says a June report by Dallas-based Alsbridge Research.

According to this report, the outsourcing hotspots in China include Chengdu, Shenyang, Guangzhou, Hangzhou, Jinan, Nanjing, Shenzhen, Tianjin, Wuhan and Xian.

"Chengdu was laureled thanks to its booming economy, brilliant human culture, perfect environment for human inhabitation, ample resources of talented people, and great support from the local government," said Chai. "On the other hand, the lower cost in these cities inland of China is also a benefit to the IT outsourcing industry, especially in the two tier cities like Xi'an, Chengdu and Wuhan," Chai added.

"There is one common advantage for these cities. That is the university,"says the Alsbridge report.

According to a Report on digital entertainment industry in Chengdu by the Chengdu Software Industry Association, there are 40 universities catering to 514,355 college and junior college students with 36 state key laboratories, 278 doctoral posts, 734 master posts, 28 post-doctoral scientific research centers and 54 centers for post-doctoral studies in the Chengdu and peripheral areas. Close to 104,000 graduates poured out of these institutions in 2006 alone.

But IDC's Zhang warns that, although Chinese service providers currently enjoy a pricing edge over their Indian peers in relation to European and North American clients, this advantage will trail off eventually. Global prices for offshore software development are falling, and for Japanese clients, the price has fallen by as much as 30 percent in the past decade.

IDC believes that Chinese service providers need to look at improving development efficiency to reduce costs, enhancing the quality of new products, and providing value-added services in order to increase customer loyalty, while maintaining competitiveness and healthy margins.