HANGZHOU plans to develop an outsourcing industry with high added value as the city's traditional business has started to shrink. Industry officials described the strategy during an outsourcing forum that closed last Thursday in the city.

China's national policy also calls for promoting the service-outsourcing industry to head off the decrease in commodity trading and to create jobs.

During the three-day forum, topics discussed included Hangzhou's position, its talent cultivation, and developing trends in the outsourcing industry.

Around 350 people represented the Ministry of Commerce, the China Council for International Investment Promotion, the Hangzhou government, international buyers and Chinese service providers.

Service outsourcing is a crucial field for transforming China's image as the "world's factory," according to Li Ling, head of the Hangzhou Foreign Trade and Economic Cooperation Bureau.

"Hangzhou, with its leading economic development, excellent ecologic environment and convenient location, is an ideal place to develop such service industry," she said during the 2nd China International Service Outsourcing Trade Fair and China Sourcing Summit 2010.

Hangzhou hub

The revenue by commodity trading in Hangzhou shrank 12 percent in 2009 from a year earlier, but the service-outsourcing sector jumped by 350 percent in the same period, according to Li.

"The development of service outsourcing in China has three advantages: boosting a high added-value economy, creating more jobs, and protecting the environment," she said.

Statistics show that Hangzhou represented 10 percent of China's off-shore outsourcing contract value in 2009. From January to April this year, Hangzhou's executed outsourcing contracts reached almost US$400 million, of which off-shore contracts amounted to US$319 million, expanding 153 percent from a year earlier.

"To make the best of Hangzhou's resources, we should focus on the financial sector," Li said, noting that the city is the fifth-largest financial market in China. "Its outstanding deposits is second only to Shanghai in the Yangtze River Delta."

"The relationship between Shanghai and Hangzhou is like that between New York and Boston," said Tong Guili, vice mayor of Hangzhou. "New York is the financial center while Boston is the financial backstage service center. It's important to diversify each city's role when developing our outsourcing industry."

Communications

In 2009, the staple of Hangzhou's outsourcing industry was the service outsourcing of communications network development. Its value was US$330 million, 36 percent of the total executed contracts. Financial service comes second with US$210 million in delivery, almost twice that of the previous year.

Yu Haifeng, chairman of Strategic System Solutions Holdings Co, a Liverpool-based software provider and data processor with branches in Hangzhou, was more positive about their financial services.

"Our business has drastically recovered since the beginning of the year, especially in system-support services that requires less capital input," he said.

Statistics show that software-outsourcing contract value dropped in 2009 because of the financial crisis. This year from January to April, the value of software outsourcing contracts executed in Hangzhou reached 770 million yuan (US$113 million), 350 percent higher than the previous year.

According to Yu, with more and more international financial institutions establishing their branches in Shanghai, companies in Hangzhou would benefit in the long run.

National outsourcing

Hangzhou is the latest major example of China's development of its outsourcing industry, which aims to decrease dependence on manufacturing and improve the economy's development structure, analysts said.

Since the 1980s, multinationals have increased contracting out those functions not specifically related to their core business across or within national boundaries for lower cost and better services. Such functions usually involve IT services, data processing, accounting, human resources, customer services, and other areas.

After India's domination in outsourcing for some 20 years, other developing countries such as China and the Philippines have tapped into the market as an alternative to their traditional low added-value labor-intensive manufacturing industries.

Since 2009, China's central government has pledged to promote service outsourcing to hedge off the decrease in commodity trading and to create more jobs.

It selected 21 service-outsourcing demonstration cities, including Shanghai, Beijing, Guangzhou (Guangdong Province), Hangzhou and Dalian (Liaoning Province), were chosen for their leading positions in economic development and convenient locations.

From 2010 to 2012, an annual investment of 5 million yuan from the central government will be allocated to each city to sponsor local service providers and cultivate talents.

China's executed off-shore service-outsourcing contract value hit US$10 billion in 2009, and the service-outsourcing industry is expected to expand 26 percent each year in the near future, according to a KPMG report.

Rich resources

Statistics from the Ministry of Commerce show that the number of people engaged in the service-outsourcing industry has reached almost 100,000 in Hangzhou so far.

The industry recruits 10 percent of the total fresh graduates this year, according to Wang Jianguo, head of the student's department of the Ministry of Education.

The 400,000 full-time students studying in 38 universities and colleges in Hangzhou provide sufficient engineering, design and language talent for the city's software and service outsourcing.

"The most serious problem of university graduates is their lack of practical knowledge and skills," said Cai Jun, head of the brand strategy section of the institute and chief editor of the Hangzhou Outsourcing Journal. "The government has offered us sufficient support to recruit teaching staff directly from enterprises such as IBM, Microsoft, Cisco, among others."

In addition, Hangzhou is aggressively promoting practical training institutes. Currently, 28 service-outsourcing training schools have registered in the city, with an annual capacity of 200,000 students.

"Hangzhou is the only city in China that grants employment subsidies directly to students," said Wang Jiangyou, general manager for south China of Tarena Technology, a leading outsourcing training school that has branches countrywide. "Every student here receives 4,500 yuan once she/he is enrolled in an outsourcing related school, and another 4,500 yuan will be granted if she/he is successfully employed after graduation."

According to Scott Furlong, global partner of TPI, a world-leading advisory firm in outsourcing, the quality and stability of human resources are crucial factors influencing international buyers' selection of contractors.

"Cost saving and service upgrading are overseas companies' main concerns," he said.

"Second-tier cities provide a more stable labor force," said Li Zhaoyang, vice president of Hangzhou Totyu Tech Co, a software developer invested by Japanese companies. "We've spent five years to form our own talents training and client management system in Hangzhou, and we are now trying to expand to more similar cities countrywide."

According to him, language proficiency and intercultural communication skills are the most important qualities of any potential employees in the outsourcing industry.

Challenges

During the summit, experts praised the China's government efforts to attract foreign investment; its intervention in and regulation of money supply, inflation and currency fluctuation, as well as a stable preferential policy toward service outsourcing.

Meanwhile, the industry faces challenges. Issues of intellectual property rights and data security are considered the most serious problems hindering international buyers from entering the market, according to a TPI survey.

"The negative responses were largely due to misrepresentation of China's image by foreign media," commented Roger Berry, former senior vice president of Walt Disney World in Florida. "But honestly, one cannot neglect pirating music and software stalls along the streets."

Hangzhou is believed to be the first city among 21 outsourcing demonstration cities to issue laws to reinforce protection of intellectual property rights and data security.

"The most essential task for the Chinese government is to market its intellectual property protection policies and to seriously address the pirating and security issues so as to build the government's reputation," said David Thompson, chief information officer from Symantec.

"Data security has been a global problem," said Michael Rehkopf, partner and chairman of TPI China. "If this issue is solved, then cloud computing may facilitate data transfer and make software more customizable. That's certainly the biggest opportunity and threat since the Internet."