Analyst: Poor IP Protection Hinders IT Outsourcing To China

China's outsourcing rise over India doesn't apply to software development, a new IDC report predicts.
Several Chinese cities are on track to overtake popular Indian cities by 2011 in offshore outsourcing, according to a new IDC report. This prediction, however, does not include software development and trademarked business processes, according to report author and analyst Conrad Chang.

IDC has created a new Global Delivery Index that compares 35 cities in the Asia/Pacific region for offshore outsourcing, based on criteria such as the talent pool, costs, language skills, political risks, and infrastructure. Plans for huge investments in infrastructure and other factors are pushing the potential of the Chinese cities of Dalian, Shanghai and Beijing beyond what Bangalore and Mumbai can offer, according to the report.

Yet growth in outsourcing in China will mostly come from lower-level administrative duties, such as billing and data processing jobs, Chang said in a telephone interview from Singapore Friday.

"Software development is a more mature type of outsourcing," Chang said, highlighting that it's one area where India still has the edge. "China needs to grapple with regulations around IT and protection of it, especially in software, a major a potential area of copying and pirating."

So far, pirating in China has centered on consumer products such as music and videos. That's been an ongoing source of trade tensions between the U.S. and China, and the U.S. government in April filed a complaint against China in the World Trade Court, alleging its intellectual property laws fall short of global standards. On Tuesday, China's top intellectual property official, Tian Lipu, denied the allegations and urged the U.S. to drop the complaint, according to reports in China Daily and Shanghai Daily.

Meanwhile, reports of unsafe toothpaste, seafood, pet food, and toys exported to the U.S. are intensifying trade tensions and political posturing; Congressman Dick Durbin (D-Ill.), also a critic of offshore outsourcing, is calling for the government to negotiate a food safety agreement with China.

These things together are creating a public relations black eye for China that could affect other areas, including exported IT services and software development, and also raise what are perhaps legitimate concerns that companies should be cautious about their intellectual property when working with China.

The U.S. suit against China could prove a good thing, by encouraging Chinese officials to realize what's at stake as it faces huge potential to grow as an offshore outsourcing destination, Chang said. "China could lose its luster," he said.

For now, businesses outsourcing to China need to take precautions, Chang said. "The onus lies with companies engaging Chinese local officials, to make sure there is some sort of compliance to guarantee processes that are trademarked and protected don't get leaked out," Chang said.

Yet for many entry-level areas of outsourcing that don't involve IP, Chang said, China is well positioned to grow fast. The Chinese government has committed to investing billions of dollars in infrastructure improvements at a time when major Indian cities continue to struggle from such basics as stable power supplies and Internet connections. China is rapidly improving its English proficiency, particular in the area of data, but spoken English is improving, too. Meanwhile, India is struggling with rising labor costs and higher turnover rates in offshore service jobs at a time when China's talent pool is growing.

Even so, Chang is convinced both countries will be major powerhouses in offshore outsourcing for years to come.

"China is catching the first wave, and India is moving up the value chain," Chang said. "India went through the first wave and learned by trial and error. China has the hindsight of being able to observe what was learned, and move on."

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