China's outsourcing industry has maintained a strong business growth in the first five months of this year although the financial crisis has reduced demand from foreign companies such as big banks and insurance companies.

Wang Chao, assistant minister of commerce, said in an industry forum yesterday that the contract value of China's outsourcing industry reached $2.59 billion from January to March, an increase of 25.9 percent compared with the same period last year.

"Although overseas demand for outsourcing services shrank in the first half of this year, China's software exports and outsourcing industry still maintained a rapid growth," Wang said at the China International Software & Information Service Fair in Dalian.

But he said Chinese outsourcing companies still have to face great challenges, as the global economy cannot recover in the short term. He warned that some small and medium sized outsourcing companies might have to wind up due as banks have become cautious in their lending due to the economic crisis.

Impacted by the financial crisis, many of the big companies, especially the financial institutions, have reduced their outsourcing orders due to shrinking business.

But Chinese outsourcing companies, whose major customers are Japanese companies rather than US and European firms, still maintained a strong growth due to the country's relatively lower labor cost, the government's strong support and the abundant pool of college graduates.

"Our software outsourcing business increased 94 percent year on year in the first five months of this year," said Zheng Shiyu, CEO of Dalian Yidatec Co Ltd, one of China's largest outsourcing firms.

The company acquired two Japanese counterparts during the past ten months and plans to attract more high-end customers.

In order to help it transform from a manufacturing base to a service hub, China aims to double in five years the export value of the outsourcing industry by 2010. By achieving that, the government announced earlier that it plans to woo some 100 multinationals to transfer part of their service outsourcing industry to China by building 10 cities with international standards.

It also plans to help 1,000 Chinese outsourcing companies grow into medium to large size enterprises within the five-year period ending 2010.

But experts said Chinese outsourcing companies still have a smaller scale and lack the experience and capacity to deliver complicated outsourcing services, when compared with their Indian counterparts like Infosys and TCS.

Liu Jiren, chairman of Neusoft, China's largest outsourcing company, said Chinese outsourcing companies need to grow bigger to have the advantage of scale. He said Neusoft, which failed in its effort in March to acquire Dalian Hi-Think Computer Technology Corp, China's second largest outsourcing company, is still in acquisition talks with many domestic and foreign companies.

He said as more US and European companies are starting to outsource their business to Chinese firms, China is expected outpace India in outsourcing in the next five to ten years.

(China Daily June 19, 2009)