Interview with a Beijing Official on Outsourcing

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By Dian Schaffhauser
The People’s Republic of China, if you have ever noticed, is mind-bogglingly big. A behemoth of a country, just the Great Wall alone stretches longer than the distance between New York and Los Angeles. So, it would not be too shameful a thing to confess that,[link widoczny dla zalogowanych], beyond the economic jugular cities of Beijing and Shanghai, beyond the well-known fact that China is the largest consumer market in the world and the source of industrious and dirt-cheap workers, you have no idea where to begin to make sense of the country in terms of IT outsourcing and -- most importantly -- how and where best to find an outsourcing partner that will serve your needs and/or help you to establish an offshore development center.
Can you qualify how important outsourcing is to Beijing government and what it adds to the economic progress of the area?
First of all, I think it is necessary to make sure you know some of the background of Beijing. The population of Beijing is quite large -- 17 million. Among the 17 million, 14 million are permanent residents. Three million are temporary. For the last 10 years, the [gross domestic product] growth is almost 10% per year. As for the capital of our country, the government in Beijing promotes policies for the comfortable living of Beijing.
In this way, we put stress on the Third Industry (services), not the Second Industry (manufacturing and construction). The third Industry that means the light industry: software development, outsourcing, and also some of the high tech technologies.
I would like to give you another figure. We have direct foreign investment in Beijing of $24.5 billion dollars.
You can imagine the situation.
The volume of export and the import last year for Beijing was $94.6 billion. The export should be $20.5 billion. The rest is import. Import is much larger compared to the other provinces. Import is very important to Beijing.
Also, investors in Beijing -- they also make investment outside China -- in the US, Japan, Hong Kong.
At the end of last year, the total volume for these outside China investments by Chinese Beijing local people was $700 million US dollars.
I also like you to know that we in Beijing are lacking in the heavy industries because we lack natural resources. Electricity, we depend on the provinces?supply. Natural gas, we import it from some other provinces nearby our city.
That is why the government encourages entrepreneurs and personnel to be engaged in the Third Industry.
We have 156 universities. Last year,[link widoczny dla zalogowanych], there were 130,000 graduates from the universities. So among these resources, I feel we are very strong compared to other provinces. This is our strength. Of the 156 universities, we have seven universities that specialize in computer science. Among the 130,000 graduates, 30,000 specialize in IT fields. Up until now, Beijing had 150,000 personnel engaged in IT fields. This is a very large number. For most of these personnel, they are engaged in software inside of China.
At the same time we also have some transnational companies that set up their own research institutes in Beijing. The figure for that is 120.
Outsourcing in Beijing itself started several years ago. And last year we started emphasizing IT for $230 million US dollars. But this outsourcing IT is mostly for Japan and other parts of Asia -- just around 15-20% to the United States and Europe. About 10% or $23 million was for US companies and 5-10% or $12.5 million to $23 million for European companies. -- Ed.
Does your group focus specifically on outsourcing initiatives for Beijing?
We have several bureaus that are focused on these fields. At our bureau, my position is the only one in charge of this work. But other bureaus are also focused on IT outsourcing. For example, in Beijing, we have a committee called High-Tech and Science Committee.They are also focused on the High-Tech outsourcing.
How big is your bureau?
120 people. We have several functions in our bureau. The first function is the foreign direct investment. Second, foreign export and import. The third is just as I told you -- with the entrepreneurs inside of China to make investment outside of China. The fourth is to have very close relations with the United Nations and foreign relations with other countries.
Besides these four functions, we are also in charge with what we call domestic trading -- for example, the supermarkets, whether they have regulations or not. I think we are also in charge of food and the beverage and restaurant regulations.
How many companies are there in Beijing right now offering IT services?
For the IT companies, 3,500 companies in Beijing.[These are called IT companies. They focus on the domestic work -- maybe finance for banking, for mobiles. For outsourcing, only about 200 companies.
Why would a company go to Beijing other than, say, another region, like Dalian? How do you position yourselves?
We have priorities the other provinces don’t have.
All the transportation facilities are the best in our country. And I think this is very important. Because you will have one stop to come to China, to Beijing. But you will take another plane or change another plane for Dalian.
The second is higher education. The ratio is the highest compared to other provinces.
And the third one is that for the -- how do you say? -- the independent research organizations in Beijing. The number of that is about 500. Some belong to the state department, some belong to the ministries... So this also helps us to understand -- to catch up with international information.
On this basis, our priority I think, is much better compared with other provinces.
The last one I should mention is the city itself. Also the mayor -- my boss -- [has made] the priority to software development,[link widoczny dla zalogowanych], because in this way they can employ more people and also to cut off natural expenses.
How do you take on India? How do you compete with India?
Last month, we held an India-China conference in Beijing. We invited several very big software companies from India to Beijing. And also Gartner in Beijing. We were all together to have a seminar. We just exchanged views on how to develop the software, especially outsourcing.
I think this is only the beginning for us to learn something, to know each other. And maybe also in this way India will find ways in which they can do some outsourcing from India to China. I think this is only the beginning. For some of the Indian companies, they start out with companies in Beijing and they set up a back office there in Shanghai and in Beijing. The figures are really very small. Just several companies.
I can just imagine the challenges of an American or European client dealing with an Indian software development company who has also got a Chinese office doing a lot of the work itself. Compared with India, we have similar cultural background. We have differences, because our native language compared with India is different. Our native language is Chinese. In India, it is English. So thinking and doing things is completely different.
But with a highly educated people -- especially with the university graduates -- before the class gives examination, first of all, their English should be up to the level of TEM4 to 6. Maybe in this way, they can not speak fluent English, but they can write and they can read. But for the outsourcing, it doesn’t need much fluent English. But if they can read and they can write, that would be OK. And for at least 20 years, more and more students go out to the get a master degree in some of the developed countries: UK, Finland,[link widoczny dla zalogowanych], Ireland.
And after that, maybe two years or more than that, they will come back to China to Beijing to start their own work. So in this way their English will be much improved.
Is it true that grade school students are getting English training?
Yes.
All through China?
I think all through China. But Beijing stresses it more on that level. So for the university students, if we put in a pass an English level 6, you will not get a graduation license without being able to work at that level.
Most of the university students, they choose the second language as English. They do have a small number in Japanese. At the most, I think 90% should be in English, 10% would be in Japanese. But we do have foreign language institutions. That is different. We have Spanish-speaking, French...
What role does your department play in this whole process? What exactly are you doing besides learning how to promote the IT businesses in Beijing?
...We government officials do things according to the regulations. Before that, take an example, for the software, we do not have regulations. So we study how to set up regulations for all these. So in this way the officials will do according to the WTO regulations. And also at the same time we should ask the software companies to do something.
Two years ago , we did some investigations on software companies to know what they need and what they would like to ask the government to help them.
So we just set up one regulation with certain departments concerned in the city government itself. Thatis to help the software companies to get bank loans through the -- how do you say? -- guarantee companies. In this way, if they borrow money from the bank, because they don’t have certain properties, a guarantee company could have certain ways to do that. Suppose that the guarantee companies, insurance companies -- how do you say? -- we will support this insurance company or guarantee company to help in this way to solve the problem.
That was two years ago.
Last year, -- for the city itself together with the departments concerned -- for the software outsourcing, we said, suppose you would like to set up any offices or branches or companies outside of China? We will give you a certain percentage -- a certain amount of money just to encourage... this is a very small number.
And now we are thinking -- because these software companies are quite small in size -- how to give them support and what kind of support they would like to get in order to promote all these companies from small to big.
So this is one thing we are considering now.
So maybe we have different ways. Do some promotion nationally. And maybe we will -- with vendors -- spend a certain time to promote them from outside.
So this is the only way we are thinking. But we have no solution.
Do you act as a matchmaker? Matching up companies with customers?
I think of the promotion center sometimes as the matchmaker. Certainly, suppose if you have the foreign direct investment,[link widoczny dla zalogowanych], you come to me. I can do that for you. Because I have been in charge of such kind of work for many years.
How big are the companies there -- the ones focused on IT outsourcing?
To my understanding, all these companies are not so big -- 200 to 300 people.
But... we have around five companies that have 1,000 people, something that comes up a lot in articles about doing business with China is intellectual property issues. What is the Chinese government doing to address those IP issues? And then what is the Beijing government doing?
...Our bureau is one of the bureaus that belongs to the city government. But the city government took almost two months on each bureau to say whether you have acquired some of the illegal software from the other resources. Each computer was examined by the IP company. We have an intellectual property bureau. That bureau looked at each computer -- to say whether they have a copyright or not.
At the same time for the city government, we do things, we also have a special bureau to do that -- a bureau of -- how do you say? -- industrial and commercial registration bureau. And they go to each company to look at whether they have copyrights.
We also do a lot of propaganda to say it is illegal to use unauthorized IP.
What if I'm a client considering doing business in Beijing. How can I be assured that what I bring to the country to have worked on will not suddenly be duplicated and distributed -- that my intellectual property will be protected? Are the regulations on the books and have you shut down rogue IT shops?
OK. Suppose you are a newcomer come to China, and you would like to produce something of your own. Then you can register your own product -- your own -- as the user. We have a special department. If it is registered, then it will protect it legally. So if you find somebody copying that, then no matter the judge or no matter through some of the authorized positions, you can go to the certain departments concerned and say that he copied my property, copied my patents, or my patents have been copied by some other... so he will be maybe punished or certain penalties because we have the law there.
So the government takes it very seriously?
Very seriously.
Are you aware of any cases that has happened?
Yes.
What is the biggest challenge China faces in competing with India for IT business?
Cyrill Eltschinger, CEO of I.T. United, a China-based service provider:
One of the biggest challenges... there is almost no marketing/promotional efforts -- indeed, most of the efforts are within China. And the efforts of Madame Cheng and her team in the US and to attend this conference shows an awareness that promoting the value-based proposition of China-based technologies and outsourcing for the software industry is now clear. But it is something India did very, very well 20 years ago. They brought India into the buyers and didn’t expect people to go to India.
Madame Cheng:
Since you are a journalist, I should be speaking frankly. Sometimes the US government gives some value to this development.
How so?
Mr. Eltschinger:
Double standards. Sometimes they just have different standards. Sometimes they just tell the US companies, you can do this in India but not in China.
Can you give me an example?
Madame Cheng:
Even Chinese companies, they would like to buy high-tech products. Then the US government says, oh, this high-tech product is not to be sold to China, but it can be sold to some other countries.
But anyway, since we would like to do it, to show it, we will do it regularly and ask the people to do in the perfect way, in the proper way.
I think we still have the challenges. We will show that we are fair to everyone.
What’s the biggest strength that China brings to the world as far as its IT? What’s the biggest strength Beijing brings?
We are coming here, unlike the other provinces.I hope you will come to China to see it for yourself. I hope to see you in Beijing.
About the Author:Dian Schaffhauser is the editor and managing director of Sourcingmag.com. Contact Dian Schaffhauser at dian (at) sourcingmag.com.

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