CHINA WATCH: Local Software Cos Seek To Boost Intl Image

Wednesday March 2, 3:52 PM CHINA WATCH: Local Software Cos Seek To Boost Intl Image

By Jeff Meyer A Dow Jones Newswires Column

SHANGHAI (Dow Jones)--While China is emerging as a rich source of software talent, its homegrown software firms face a number of hurdles - including compebreastion from India - to win international customers and boost their profile abroad.

A good place to glimpse China's future software engineering prowess is at one of the 125 training centers across the country of NIIT Ltd. (500304.BY) - an Indian company which its China operations chief touts as "the McDonalds of training," since most of these centers are franchised.

"Very quickly we will find China becoming a resource pool for good programmers," Prakash Menon, general manager of NIIT China (Shanghai) Ltd.

Menon adds China "will be a very good alternative source of programming power for Indian companies." NIIT already trains about 25,000 software engineers a year in China, a number it hopes to double in the next 18 months.

With a growing pool of talent, the challenges facing China's software firms as they look abroad reflect the disparity between the might of the country's hardware and software production. Local hardware companies, including Lenovo Group Ltd. (0992.HK), TCL Corp. (000100.SZ), and Huawei Technologies Co. (HWI.YY) are becoming global powerhouses by acquisitions, joint ventures, and organic growth. But China's software industry remains fragmented and inward-looking, analysts and executives say.

Furthermore, as Indian information-technology firms such as Tata Consultancy Services Ltd. (532540.BY) and Wipro Ltd. (WIT) expand their operations in China, they are likely to compete more with local Chinese software companies for talent and business.

The small size of Chinese software-services firms limits them from attracting top international clients since smaller companies are generally riskier and less reliable partners, according to a recent article about China's software-outsourcing industry by consulting firm McKinsey & Co. (MCK.XX)

China has about 8,000 software-service providers, while India has fewer than 3,000 of these firms. At least 15 of the Indian firms have more than 2,000 employees, but only five of the Chinese companies do, according to McKinsey.

"It wouldn't be a great idea for Chinese companies to go head-to-head with India in customized software development," Giuseppe De Filippo, an buttociate principal at McKinsey in Shanghai and one of the article's authors, says.

Instead, De Filippo advises Chinese software firms to seek narrower markets including developing embedded software that is used to run appliances such as televisions and mobile phones - products increasingly designed and made in China.

Looking Abroad In Asia

Industry executives say, and De Filippo agrees, that pitching for projects from East Asian neighbors, Japan and South Korea may be a good first step abroad for Chinese software firms partly because of the geographic proximity.

Shanghai-based eBaoTech Corp. is carving out a niche abroad by selling insurance software. The company derived 70% of its revenue from clients outside China in 2004 and counts insurers including Singapore's Great Eastern Holdings Ltd. (G07.SG) and Swiss Life Holdings (SLHN.VX) as clients, says chief executive Woody Mo.

eBaoTech is targeting $20 million in revenue in 2005 and double that in 2006, as it aims to begin signing clients in Japan this year and North America next year, he says. Mo co-founded the Cayman Islands-registered company in 2000, and says eBaoTech is aiming for an initial public offering in two years, probably on the Nasdaq.

Mo says it's sometimes challenging to convince potential foreign customers to give eBaoTech their business since the China-based company is smaller and less-experienced than many foreign compebreastors.

Creating an international culture is another challenge for eBaoTech. "We should be building a global software (company) with a lot of operations in China," he says.

Across the Huangpu River from eBaoTech, Shanghai Baosight Software Co. (600845.SH), a subsidiary of China's largest steelmaking conglomerate Shanghai Baosteel Group Corp., is taking a more measured approach to growing its international business.

Baosight, which specializes in developing production management software for metallurgical companies, is dipping its toes into overseas markets to learn the demands of global clients and improve its brand recognition, says its chief technical officer, Liqun Cong.

"If we want to grow bigger and make our brand more famous, then we have to take the next step and capitalize on opportunities overseas," says Cong.

Baosight had overseas revenue of $4 million in 2004, which it received primarily from developing software for Japanese companies. The company aims to double overseas revenue to $8 million in 2005, Cong says.

Yet Cong recognizes this figure is small compared with Baosight's total revenue forecast in 2005 of CNY1.5 billion. And for at least the next five years he says Baosight is content focusing on China - a market it's familiar with and one that's growing quickly.