Why American Technology Companies Choose China for

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For the past decade American technology companies have increasingly outsourced software development and support to India initially, and later Eastern Europe. The outsourcing approaches they adopted varied, including the use of models such as:
1. Staffing
2. Project
3. Partnership
4. Flex / Burst
5. PLM
6. BOT
7. Reverse-BOT
8. Captive
Setting aside the customer owned Captive and low-value staffing models for a later discussion, let’s focus on the other six. Software engineering outsourcing vendors that engaged with technology customers during the 2000 decade around these six models were either specialists or generalists. Specialists focused on offering a single capability: software engineering services. Generalists,[link widoczny dla zalogowanych], on the other hand, offer multiple services that typically fall in three categories: IT services, BPO and software engineering services. One difference between the two is generalists will often reassign their technologists between the three service categories, and different clients, as needed in order to manage their resourcing pool. The specialist model relies less on resource reassignment, following a dedicated, long-term client team approach.
A decade in, significant global economic and market realities are rapidly changing the traditional software product engineering outsourcing model. The effect of these realities, which we’ll review shortly, is that American technology companies are going to China for software engineering. Not inexorably, but rapidly. Let’s do the numbers:
1. While the total Indian services market (IT services, BPO, software engineering services) is 4X the size of China’s,[link widoczny dla zalogowanych], total software engineering revenue in India and China are very similar - $9.3 billion and $7.7 billion, respectively
2. The number of new software R&D centers opened in China from 2007-2008 was double that of India
3. While the total number of software R&D talent employed in China is 19% lower than India, the total annual number of science and engineering graduates from China’s universities - 2.3 million - is 4X greater than that of India
4. The total cost of operating a software R&D center in China is 65% less expensive than a US based center,[link widoczny dla zalogowanych], and 30% less than a center located in India
And, American technology companies are going to China in different ways and for different reasons. First, the “ways”:
1. Technology companies that set up India or Eastern Europe captive (customer owned) software development and support centers years ago are now entering into partnerships with China based software engineering outsourcing specialists. The two country strategy springs from a geographic risk management strategy that recognizes that annual talent attrition in India - typically 20%-40% - and escalating salaries - 7%-10% increase annually - can be balanced by much lower attrition and compensation numbers in China
2. Other American technology companies with long term software engineering outsourcing partnerships in India and Eastern Europe have begun to scale back proactively, not waiting for attrition, while in parallel increasing their presence in China through new partnerships
3. Still others, not yet invested in their own captive or sourcing partnership internationally, place their bet with a China based software engineering specialist for the first time due to the economic and quality values; and the opportunity to launch their software R&D center rapidly, with less risk through partnership
The reasons - beyond economic, stability and availability - include a key difference between China and the other geographic destinations for software R&D: a sales market.
It is well known that American technology companies are seeing their sales expand in Asia, in an economy that at times sees flat product sales in the US and Europe. These same companies see the Asia market as key to selling their products to support growth. India and Eastern Europe, not so much – those two markets are not nearly as robust for American technology companies to sell their products into. Combining a software R&D presence in China with growing product sales in the same region makes good business sense.
Another driver is that English language skills are increasing in China. Many software engineering services vendors, for example, have as much as 75% English speakers among their software engineers. China as a software R&D destination has arrived. As part of a multi-country outsourcing strategy for American technology companies already in India or Eastern Europe, China will only continue to grow in importance.