Global economic crisis and Chinese software outsourcing comapnies

Is the global economic downturn affecting Chinese outsourcing companies?

Dean Stevens recent blog post Uncertain Global Economy Hits Providers highlights specific examples of changes occurring within Chinese software outsourcing companies. Industry wide, smaller Chinese suppliers are running into cash flow problems, while larger Chinese software outsourcing companies are changing strategic plans and generally shifting focus away from servicing Western companies towards the local market.

However, China Daily and China Tech News both report continued growth in the industry and increased demand both at home and abroad. Also, the majority of demand for services outsourcing from China does come from America or Europe, the areas impacted most by the economic down turn. So, why are these Chinese outsourcing companies in trouble?

The Chinese outsourcing industry has grown substantially over the past ten years. Active support from central and municipal governments with capital from local and foreign investors speculating on industries growth has created a “China software outsourcing bubble”.

As happens with tech bubbles, many small Chinese software outsourcing companies have emerged that have not been able to reach the economies of scale required to compete with Indian and local rivals. Although, demand for outsourcing services has grown this year, the rate of growth has decreased. This combined with an increase in the RMB has caused challenges for many Chinese software outsourcing companies.

As the economic downturn continues worldwide these smaller Chinese outsourcing companies may be forced to shut down, while stronger companies continue to grow at double digit numbers. Although major changes will continue within many China software outsourcing companies in the upcoming year, the reasons around projected growth of the Chinese outsourcing industry are still sound

Large educated labor force
Strong government support
Steadily improving infrastructure

As the impact of global economic crisis trickles down we are sure to see more changes within the industry. However, as a whole, the Chinese software outsourcing industry will emerge from the crisis stronger and better able to service global and local clients once the current realignment has been completed.