Large Chinese companies accelerate contracting out their IT work
July 28, 2009 – 3:26 pmWhile there is a decline in certain other sectors during a recession, offshore outsourcing is still in the low-double-digit growth rates, for most companies turn to outsourcing as a source of cost savings.
But for Chinese outsourcing companies, there are more robust growth opportunities ahead.
Take an example of VanceInfo Technologies, the first Chinese IT outsourcing firm listed in NYSE. The vendor got started by helping multinational tech providers develop local versions of their products for the Chinese market. But that’s the low end of the stack, whose contributions have been shrunk steadily to only about 4% of their revenue.
Most of the remainder comes now from higher end of IT service areas, such as research and development services. That business has prospered thanks to two huge customers: Microsoft (MSFT) and IBM (IBM). Together they provide more than 20% of total company revenue.
The shape of the future can be seen in VanceInfo’s No. 3 customer, Huawei. It’s a Chinese telecom gear maker that employs VanceInfo to customize and maintain its software. Some other local clients VanceInfo has taken on include China Construction Bank, China Merchants Bank and computer maker Lenovo.
Such Chinese companies originated outsourcing is heating up, as large Chinese companies are just starting to adopt IT vendors as part of their business practices.
Chinese companies aren’t necessarily searching for cheaper labor like U.S. firms outsourcing to Asia. But they have their own reasons for contracting out their IT work.
Many companies are changing out their old mainframes and desktop computers for newer technologies, which require techies with up-to-date knowledge. Skilled Chinese engineers are in high demand and can be time-consuming to train. Many firms would just as soon avoid hiring their own.
The Chinese clientele has become especially important for VanceInfo since recession is forcing Western customers to reduce spending. The firm’s guidance for the second quarter suggested revenue from the U.S. and Europe would be sequentially flat. But it sees overall sales rising 15% to 20%, thanks to domestic business.
Even with the cautious guidance, analysts are expecting accelerating profit growth over the next few years. Those polled by Thomson Reuters see earnings increasing 20% this year to 48 cents a share. Next year they expect 27% growth, rising to 34% in 2011.
By contrast, India’s Infosys (INFY) took in almost $4.6 billion, but forecasting a flat growth in earning and revenue.
One Response to “Large Chinese companies accelerate contracting out their IT work”
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By Crasty on Aug 5, 2009