Research on the Development of Software Outsourcing Industry of Dalian City of. China

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International Journal of Business and Behavioral Sciences Vol. 3, No.9; September 2013

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Research on the Development of Software Outsourcing Industry of Dalian City of China

Liu Xin, *Cai Li

International Business School, Dalian Nationalities University, Dalian, China

*caili@dlnu.edu.cn Abstract

Since 2006 Dalian has gained much attention globally as the first city of China which won the title of

"China's Service Outsourcing Base City". By virtue of the unique geographical advantages, rich amount of software talents, strong local government support, software outsourcing in Dalian has become its advantageous industries. This paper analyses many problems have been exposed in the process of software outsourcing development in the face of increasingly fierce competition in the industry and research the current situation of Dalian's software industry by using SWOT analysis method and points out some future development proposals for Dalian software outsourcing.

Key Words: Software Outsourcing; Service; Dalian; China

1. Introduction

Dalian is the first open port city in northern China and also is the one of fourteen coastal open cities of China. Dalian is window of the northeast China's opening up to the outside world. And it is also international shipping center and an international logistics center of northeast Asia. It also serves as regional financial center in accordance with the back hinterland of northeast China with pleasant weather.

It is known as "Pearl of the North of China," "The City full of Romance of China" "Window of the Northeast China” and so on. In 2001, Dalian became the first city in China which awarded "Global 500" of United Nations Environment Programme. Dalian was named the best tourist cities in China together with Hangzhou and Chengdu in 2006. Dalian won the first place in the competition of "International Garden City" in 2009. Dalian is the host city of the Summer Davos World Economic Forum of 2010. In 2012 Dalian ranked No. 10 in " China Urban Competitiveness Blue Paper” released by Chinese Academy of Social Sciences.

2. SWOT Analysis of Software Outsourcing Industry of Dalian 2.1 Strengths of Software Outsourcing Industry of Dalian 2.1.1 Industrial Base Advantage

Dalian City was identified as "China's Service Outsourcing Base City" by the Ministry of Commerce of China and the Ministry of Information Industry of China jointly, and was awarded the first and only

"Software Industry International Demonstration City". The software industry has gradually become a pillar industry of Dalian's economic growth. By the end of 2010, there were more than 500 enterprises established in the Dalian Software Park, including HP, Accenture, Genpact, IBM, Panasonic, Sony, Hitachi, NTT, Oracle, NEC, Fidelity, BT, Softbank, Pfizer, Lenovo and other Fortune 500 companies. The proportion of foreign-funded enterprises accounts for 40% of all software enterprises, 24% of which are

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International Journal of Business and Behavioral Sciences Vol. 3, No.9; September 2013 Japanese-funded enterprises. In 2010 Dalian software industry’s sales revenue was 535 billion yuan, the export value was $ 1.8 billion. In 2010 Dalian Software Park ‘s sales revenue was 280 billion yuan, the export value was $ 1,080,000,000. In 2011, the Dalian High-tech Zone was awarded “National Innovation-oriented Software Industry Cluster" and has become China's only innovative software industry cluster zone. In 2012, Dalian has won “New Industrialization Demonstration Base”. By the end of 2012, the Dalian High-tech Zone as the leading software and service outsourcing industries of China is expected to realize an annual sales income of 115.4 billion yuan with an increase of 51.8% and a total of more than 1,500 enterprises. Dalian will be China's first software outsourcing billion industry cluster area.

Table 1 The Sales and Exports of Software Service Outsourcing of Dalian, 2004-2011.

2004 2005 2006 2007 2008 2010 2011 Sales (RMB 100 million) 70 100 145 215 306 535 759 Exports (USD 100 million) 3.75 5 4.5 7.2 10 18 25

Source: Xu Xiaodong, Fenghai Zhang (2012). Development Strategy of Dalian Software Service Outsourcing from the Perspective of International Division of Labor. Journal of Shandong Institute of Business and Technology, No 6, Vol 26, 35-37.

2.1.2 Geographical Advantage

Dalian is located in the Bohai Bay economic circle of China and in the northeast old industrial district of China with rich resources and large market demands. Dalian is situated in the Northeast Asian economic zone center and adjacent to Japan, Korea, Russia, the three countries with major electronic information industry bases. Therefore Dalian is also called the back office of the three bases. In addition Dalian's software outsourcing contracting countries includes Japan and South Korea, followed by Europe and the United States. Japan and South Korea as international service contract countries, in terms of cultural origins, geographical location and personal connections, Dalian has the inherent advantages to undertake the software service outsourcing. Dalian is located in the southernmost tip of the Liaodong Peninsula and is the largest city which is engaged in the BPO business to Japan. From 1980 the Japanese enterprises began to enter Dalian, from the point of view of political stability and business convention of Dalian.

Dalian can be described as the city of talents, low labor cost, and business environment fully integrated in China. By the end of 2012, the total investment of Japan, South Korea in Dalian has reached about 11 billion U.S. dollars, accounting for half of the Dalian’s foreign investment. Dalian is particularly prominent in opening up the software outsourcing market to Japan, and has initially formed the backbone of the enterprise groups concerning the development of software exports to Japan. Investment environment and business environment of Dalian software industry attract more and more foreign enterprises and software talent of all ages, so that Dalian will become a hot spot of software outsourcing destination.

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2.1.3 Government Support

Dalian service outsourcing industry development has benefited from the support of the Chinese Ministry of Commerce, Dalian has been granted as “State National Software Industry Base” "National Software Export Base" “Software Industry International Model City”, "Software Talent Training Base", “ National Software Copyright Protection Model City", "National Animation Industry Base” and “Revitalization of the National Animation Industry Base” and so on. The China International Software and Information Service Fair (soft ECF) which held in Dalian was granted by State Council of China as the only national level exhibition. Dalian government attaches great importance to the software industry and provides a lot of favorable treatment to the industry. In 2004, the Dalian government promulgated "the Implementation on Accelerating the Development of Software Industry", and proposed focus on the development of software and intelligent information service industry in order to build Dalian as a national level software industry export base. In 2008, Dalian introduced certain provisions of views on accelerating the development of software outsourcing industry to further promote the development of software outsourcing industry, such as “Preferential Policies to Accelerate the Development of Software Industry in Dalian" “Provisions to Attract Senior Software Talents " “Policies to Speed Up the Development of the Software Industry”.

“Dalian City Economic and Social Development 12th Five-Year Plan (2011 to 2015)” highlighted the importance of cultivating the eight industrial clusters of China, software outsourcing industry is one of them.

2.1.4 Advantages of Specialized Talents

In the costs of software development, human resources accounts for 70%. A large number of high-quality, low-cost professional talents will effectively reduce the cost of software development. There are 22 institutions of higher education in Dalian, the number of the university personnel in the coastal regions ranks the second in China. Dalian Neusoft Institute of Information Technology, School of Software at Dalian Jiaotong University, School of Software at Dalian University of Foreign Languages, School of Software at Dalian University of Technology, School of Software and IT Vocational Training Units at Dalian University have been established, it is expected that by 2013 Dalian will cultivate 10 000 professional software talents to meet the software corporation sustainable strong demand. What’s more, Dalian also actively promote foreign language professional education. While Dalian is in the construction of China's software outsourcing center, it is also becoming China's IT personnel education and training base.

Table 2 Workforce of Software Outsourcing Industry of Dalian, 2005 to 2010.

Year 2005 2006 2007 2008 2009 2010

Employees 6063 6822 8739 16677 15190 18226

Source: Zhang Yi (2012). Forecast of Demand for Dalian Software Industry and Training of Highly Skilled Software Talents. Contemporary Economy, No 22, Vol 310, 96-97.

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International Journal of Business and Behavioral Sciences Vol. 3, No.9; September 2013 2.2Weaknesses of Software Outsourcing Industry of Dalian

2.2.1 Lack of Innovation

From the entire software industry chain, Dalian's software outsourcing industry in the downstream industry chain with weak competitiveness. This industrial structure also determines the software outsourcing corporation profits of Dalian below the global average. Dalian mainly focuses on Japan and South Korea international software outsourcing services. These contracts between these countries and Dalian are low-tech processes of software, such as the program entry, single test. This business model restricts local businesses of Dalian very limited added value. This operation mode makes Dalian software companies enter the Japanese market is relatively easy, however it is difficult to break through the U.S.

market.

2.2.2 Less Competitive Industry

Dalian's software outsourcing began with a late start, and employees of small enterprises of Dalian with less than 50 employees have accounted for a large part. And companies with more than 1,000 employees only accounts a few. At the same time, concerning the international competitiveness of software companies, there exists a big gap between Dalian and India. In 2012, Dalian Neusoft Group's software outsourcing business income reached USD 62.7 million and ranked the first place in China with market share of 6.8%. However the income of the company only was equal to 4.7% of outsourcing revenue of India Tata Consultancy Services in the same period. In addition, in term of quality management, there is still a gap between Dalian software enterprises and Indian companies. By the end of 2010, 40 enterprises in Dalian passed the CMM assessment. Compared with other domestic software outsourcing cities of China, only a small number of Dalian software companies passed CMM certification. By the end of 2007, there were more than 700 software enterprises in Dalian, while only 24 enterprises have passed CMM / CMMI certification.

2.2.3 Relatively Narrow Market

Europe and the United States are the largest two software outsourcing markets in the world. 80 percent of U.S. software companies vendors outsourcing to India, Ireland and Israel. Due to Geographical reasons, 85% of enterprises are Japanese-funded enterprises in Dalian Software Park, and the major export markets of Dalian are Japan, South Korea, and thus the market of Dalian software outsourcing is relatively narrow with high potential risks. What's the worse, the development of economy is not stable in Japan.

The 2010 earthquake in Japan caused a huge impact on related industries, there was a sharp fall in software outsourcing business. Secondly, the majority of software outsourcing enterprises of Japan and South Korea are at the low end of the industrial chain. Dalian can not improve its own competitiveness through the relatively narrow market.

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2.3 Opportunities of Software Outsourcing Industry of Dalian 2.3.1 Great Potential Global Market

Three types of outsourcing industries has been formed in Dalian, including Information Technology Outsourcing (ITO), Business Process outsourcing (BPO) and R & D Center (KPO), however there are also some new types of outsourcing which has not developed quickly in Dalian, such as Financial and Insurance Services Industry, the Digital Trade Industry, Animation Industry, Industrial Design Industry. At present, total of 40 software companies in Dalian passed CMM certification, accounting for one fourth of software companies in Dalian. Main markets of Dalian's software outsourcing are South Korea, Japan, Russia and other countries.

2.3.2 Further Expansion of Dalian Software Park

In 2006, Dalian was identified as "China's Service Outsourcing Base City” by Ministry of Information Industry of China. Dalian Software Park was awarded “China's Software Service Outsourcing Base City Demonstration Area” at the same time. Dalian Software Park is a specialized software zone which was built in 1998. Domestic and foreign software companies are provided with preferential policies, adequate personnel, multi-channel financial funds in the market and have formed specialized industrial chains including Software Development, Business Process Outsourcing, Network Communications, IT Education, Information Services, Software Technology Research and Development. Dalian Software Park has been successfully introduced 326 software companies of which 41% were foreign-funded enterprises. The construction of Dalian Software Park Phase II aims to build “Northeast Asia Software and Information Service Center" in accordance with "specialization, internationalization" development strategy with focus on building Software Development Zones, Technology Research and Development Area, Service Area, Education and Training Area and Enterprise Campus Industrial Area, Public Service Area, ICT Services Area, Business Conference and Exhibition, High-end Residential and Coastal Leisure Park Service Area. In recent years, Dalian Software Park ranked the top compared with other six national software export bases of China.

Table 3 Prediction of Total Output of the Software Industry in Dalian, 2013-2016. (RMB 10000)

Year 2013 2014 2015 2016

Prediction of total Output 3437238 4283063 5337025 660343

Source: Zhang Yi (2012). Forecast of Demand for Dalian Software Industry and Training of Highly Skilled Software Talents. Contemporary Economy, No 22, Vol 310, 96-97.

Table 4 Prediction of Dalian’s Demand for Software Professionals, 2013-2016.

Year 2013 2014 2015 2016

Estimated Demand for New Employees 9014 11505 14684 18742

Source: Zhang Yi (2012). Forecast of Demand for Dalian Software Industry and Training of Highly Skilled

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International Journal of Business and Behavioral Sciences Vol. 3, No.9; September 2013 Software Talents. Contemporary Economy, No 22, Vol 310, 96-97.

2.4 Threats to Software Outsourcing Industry of Dalian 2.4.1 Competition from Abroad

Software outsourcing recipient countries are mainly India, Ireland and other countries. Among them, the United States market is monopolized by India, 80% of Indian software industry income comes from software outsourcing business, India has become the leading software outsourcing destination. At present, India has been quite competitive in the global IT outsourcing services. And large outsourcing companies in India have a market capitalization of tens of billions of dollars. European markets are monopolized by Irish.

Nowadays, Philippines, Brazil, Russia, Australia and other countries also joined the world's software outsourcing competition. The decisive factor in undertaking international software outsourcing services is the significant reduction in costs. With the growing number of developing countries and regions continuing to join the fray of international outsourcing, software outsourcing market share of one country is getting smaller and smaller, the competition will be more intense. As the world's largest software contractor, India has an absolute advantage in terms of cost and quality, while Dalian is at a distinct vulnerable place.

2.4.2 Competition from Domestic Market

In order to promote the rapid development of service outsourcing industry and optimize the export structure of trade in service, Department of Commerce of China operates "Ten Thousands of Projects".

Since the project is launched, China has invested nearly 300 million yuan to support the development of 11 service outsourcing base cities (Xi'an, Chengdu, Dalian, Shanghai, Shenzhen, Hangzhou, Tianjin, Wuhan, Nanjing, Jinan, Beijing). In 2007, Department of Commerce of China also identified three new service outsourcing base cities (Guangzhou, Changsha, Hefei) and four national service outsourcing demonstration zones. In China, 11 national service outsourcing base cities have introduced their objectives and policies of the local development of service outsourcing industry, thus there is a fierce competition to attract foreign investors among these cities, resulting from a substantial increase in wages, the sharp appreciation of the land caused by rising rents, a shortage of human resources.

3. Countermeasures for Speeding up the Development of Software Outsourcing Industry of Dalian 3.1 Improving Software Talents Training Program

Inadequate supply of talents is still a bottleneck in the development of the software industry in Dalian. In addition to personnel training, companies need to create a favorable environment for the development of qualified personnel, so that they are happy to display their talents in the enterprise. Implementation of effective human resources policies, emphasis on staff development and the introduction of training programs and incentives for talent management will attract more talented people to join the enterprise in Dalian.

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3.2 Encouraging Research, Development and Innovation Activities

Dalian's software outsourcing are mainly engaged in low value-added services, which leads to low profit margins and is not good to the development of the industry as a whole. In order to get out of this situation as soon as possible, Dalian must increase the R & D and innovation efforts. As one of the software outsourcing leading countries, India already have their own businesses expended to IT consulting, systems integration and infrastructure management. This suggests that as soon as Dalian masters the development process of software technology and advanced management experience through software outsourcing, Dalian will improve the industry's competitiveness, enhance R & D and innovation capability.

In the context of the financial crisis, the software outsourcing industry will experience a brutal baptism, most of the software companies will face the reality of fierce competition, and Dalian software outsourcing should integrate competing advantages with accelerating industrial upgrading to cope with the severe situation.

3.3 Improving the Development of Software Industrial Chain

Dalian's software outsourcing industry has a good external conditions, the Government also supports the industry vigorously. Software enterprises in Dalian should expand both international and domestic software outsourcing markets. The domestic software market is an important component of the international software market, which can be confirmed from a large number of international software companies which entered into China. On the basis of the Japanese market, software industry in Dalian should strive to climb to the high end of the value chain, while at the same time attention should be paid to the European markets.

3.4 Expanding Business Scale

In the field of software outsourcing, the size of the business is the most important symbol of the strength of a company. Dalian's software companies are generally small, and major competitor in the U.S. Market is India which has obvious advantages with size of companies. The four leading software outsourcing companies in India have tens of thousands of employees. At present, software outsourcing enterprises in Dalian are about 900, however the companies with more than 100 employees are less than 100. Neusoft in Dalian, China's largest software outsourcing company, only has 16,000 employees. Overall, the size of the software and service outsourcing enterprises in Dalian is very limited. In August 2009, Neusoft bought 100% of the shares of three companies from the Sesca of Finland which engaged in high-end smart phone software development business, so that the Neusoft competitive strength has been greatly enhanced.

Dalian's software outsourcing industry also needs to maintain the leading place in the shipping and logistics, numerical control technology and software research and development with emphasis on system integration, embedded software, Internet business, high-end software services, to create an internationally competitive software outsourcing industry cluster. Accelerating Software Park Phase II project of Dalian will lead a role in the formation of interactive win-win outsourcing service industry development in the near future.

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International Journal of Business and Behavioral Sciences Vol. 3, No.9; September 2013 Acknowledgement

This research is supported by Sun Bird research project of students of Dalian Nationalities University.

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