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Now there are 3000 software outsourcing enterprises in China. In the next five years, the number may reduce to 30. The industrial conformity of the software outsourcing has already begun in China.

The financial crisis starting from the USA has already exerted its influence upon the Chinese software outsourcing industry. Its former style of “from VC support to fast expansion to initial public offering (IPO)” is hard to maintain though it used to be very successful.

“It is not proper to talk about listing now,” said Wang Bin, CEO of Beyondsoft Corporation. After several years crazy increase of the software outsourcing industry in China, now the enterprises must review their status quo. They need to adjust their financing strategies, re-plan their strategies, improve their operation efficiency and management and control their cash flow.

According to the forecast of the Board Chairman of Hisoft Co., Ltd Sun Zhenyao, although there are 3000 software outsourcing enterprises in China, only 30 will survive in the coming 5 years. The industry conformity of the software outsourcing is unavoidable.

The Hazardous Time

Actually, Chinas software outsourcing industry has begun to suffer depression since 2007. The impact mainly came from the appreciation of Renminbi, issuance of new Labor Law and so on. The problems of increasing cost and decreasing profit have been haunting the software enterprises in China for nearly two years. The financial crisis, however, has made the situation worse.

An insider from Dalian Genpact Corporation said: “If Renminbi appreciates to 6.4 yuan against one US dollar, there is no profit for the Chinese software outsourcing enterprises. Though the appreciation of Renminbi has slowed down, it is not optimistic for the Chinese software outsourcing enterprises to have the ability to increase the prices of their products.

Sun Pishu, CEO of Langchao Group Corporation, said that his enterprise earned the profit of 30 million US dollars in the field of software outsourcing in 2007. The appreciation of Renminbi has really seriously influenced the enterprise. “All the clients of Langchao, except Microsoft, have rejected our requirement of increasing price.”

According to the experts in the software outsourcing industry, there used to be thousands or even millions of order forms for Chinas software outsourcing enterprises, but now the number is much smaller. All the practitioners of the software outsourcing industry in China believe that the financial crisis brought more influence upon the high-end enterprises, while the one on medium- and low-end enterprises is less. However, the outlook for the medium- and low-end enterprises is not optimistic.

Microsoft is the company based in America or Europe giving the largest number of order forms to the Chinese enterprises. The value of the order forms it gave to Chinas enterprises in 2007 reached 100 million US dollars. But the senior vice president of Microsoft (global) Zhang Yaqin warned those CEOs not to be too optimistic. “The winter may have come. The software outsourcing enterprises must change their product structure, get rid of the businesses which cant bring cash flow in a short time and improve their management and operation efficiency,” said Zhang.

The Wreckage of IPO

According to Sun Pishu, the development pattern of Chinas software outsourcing industry changed a lot after several years fast development. It is known that the former pattern is the fast expansion based on VC support at first and then IPO. Now there are problems in the financing channel, and the development pattern mentioned above was quite hard to maintain.

In the past one or two years, some Chinese software outsourcing enterprises proposed the plan of listing. Some of them possess the conditions of listing. However, there are also lots of bubbles in the software outsourcing industry.

In Wang Bins opinion, the software outsourcing enterprises had explosive development in the past two or three years. “30% of the former clients might be bubbles. The growth rate of each year is not less than 80%, which is exaggerated.” Many Chinese software outsourcing enterprises signed the contract regardless of whether their clients have decided to do or not and they have to persuade their clients which increase their costs a lot. The profit ratio for them is very small.

“Previously, our salesmen even took the order forms of 200 thousand US dollars. The sales cost took 25% of the total. There cant be profits,” said Wang Bin. Formally the enterprises had VC support. They took all the order forms for their development, without regard of the cost. Now they never dare to do this.

Liu Erhai, Investment Managing Director of Lenovo, said that till the first half of 2009 it is impossible to realize the IPO due to the financial crisis. The financial cost is also very huge. Generally the software outsourcing enterprises in China are holding a waiting and watching attitude towards the IPO.

Start All Over Again

Though greatly influenced by the financial crisis, the Chinese software outsourcing industry cant be said to suffer decline. The Chinese enterprises usually get the third-second or even fourth-hand order forms and most of the order forms belong to the medium- and low-end ones. So the influence may be less.

“We still have opportunities,” said Liu Tianwen, President of Softstone Corporation. The software outsourcing in India may be more seriously affected. Its scale is large: most of their order forms are worth over one hundred million US dollars. The Chinese enterprises receive the order forms with the value of several million US dollars. So the Chinese enterprises have better flexibility.

It seems good, but it shows that the Chinese enterprises have not enough capacities to receive the high-value order forms. The financial crisis gives the Chinese software outsourcing enterprises to review themselves and change their pattern of development.

According to the forecast of Wang Bin, the adjustment of the market will cause the adjustment of the enterprises. Some of them will be eliminated; some of them will be merged or acquired.

In Sun Pishus opinion, the enterprises with acquisition platform, like Langchao, will have great advantages in the future. Langchao has already listed the mergers and acquisitions in their future strategy.