China IT Development Has Currency

A stronger Yuan may impact global software development.

As China continues to revalue its currency, the Yuan, against the dollar, some experts are looking at its potential impact on the global IT industry.

The Yuan has been gradually appreciating against the dollar since 2005, when it increased 2 percent in value, followed by a 4 percent increase in 2006 and a 6 percent strengthening so far this year. Some experts expect the Yuan to ultimately appreciate by up to 10 percent versus the dollar.

This relative appreciation may bring more changes to some areas of the IT industry than others.

One area where the impact may be sharpest is in IT offshore outsourcing and BPO (business process outsourcing). Michael Raisinghani, associate professor of the executive MBA program at Texas Womans University School of Management, in Denton, Texas, said that "the strengthening of [the Yuan] will have a negative impact" in those markets.

He cautioned U.S. companies outsourcing their IT/BPO programs to China that they need to "establish good reporting systems within the firm to monitor exposure positions and produce regular foreign exchange exposure reports that can be used as a basis for action."

Stuart Williams, an analyst with Technology Business Research, said that while China remains behind India as a source of software development talent, "the country is investing heavily into supporting the growth of software development capacity."

And despite a revaluation of the currency, Williams said, its labor supply is likely to remain relatively inexpensive.

"The country remains a relative bargain that international software firms will increasingly tap as the cost and availability of qualified software engineers continues to rise in India and Eastern Europe," Williams said.

In fact, the strength of the Yuan relative to Indias Rupee may have a greater impact on IT offshore outsourcing than its position versus the dollar, at least in the short term.

Arthur Kroeber, managing director of Dragonomics Advisory Services, based in Beijing, said the Rupee has risen by 10 percent against the dollar—triple the rate of appreciation of the Yuan. This may have an impact "on the plans of Indian outsourcing firms to add capacity in China," Kroeber said.

Between the appreciation of the Rupee and a growing scarcity of Indian labor, those companies may begin staffing more in China, despite the appreciation of the Yuan.

Gartner analyst Jamie Popkin, who watches the China and India markets and is co-author of "IT and the East: How China and India are Altering the Future of Technology," said low labor costs are only one reason that multinational technology companies are setting up shop in China.

Other factors include a talented labor pool and "a large domestic market that multinationals want to participate in," he said.

But some experts say that the time isnt right yet for Chinas impact to be felt in global IT labor markets.

"China has the resource pool and capabilities to make a dent in the software development market, but not in the near future," said Alex Adamopoulos, general manager and senior vice president at Boston-based Exigen Services, an application outsourcing service provider that taps talent pools in Central and Eastern Europe.

Adamopoulos said most of the work done in China is data processing work, "not the really rich software development you tend to see in India or Eastern Europe. They dont have a focus on becoming process-oriented. Your not going to find many CMMI [Capability Maturity Model Integration] shops there. Chinas not the process-oriented destination, and I dont see any real change in the near term. I think people have the general sense that made in China has the [same] connotation in software as it does in cheap goods."

While Indian companies have turned themselves into global services players, China has not reached that level of maturity, he said. "Theyre more concerned about quantity than quality."

Adamopoulos said China is a good location for services providers who are looking to grow, "but theyre going to have to make an investment to do more to assimilate the Chinese into their work culture."

Peter Harrison, CEO of GlobalLogic, a Vienna, Va., global software development company that augments companies research-and-development staffs, said China is far behind India in terms of the size of its outsourcing IT.

Kroeber of Dragonomics also said that most of Chinas offshore outsourcing business is aimed internally and at another Asian market—Japan. He said the Yuan "has actually been going down against the yen recently, so this business is in fine shape. Even if [the Yuan] started to move up against the yen, labor costs are so much lower in China than in Japan that there is no way a currency movement could have much impact."

Garnters Popkin said the revaluation of the Yuan may hurt some smaller companies, but that there will be no long-term negative impact on multinational investment in China.

To the extent that China does see increases in wage pressure, "Vietnam is a growing popular location," Popkin said, noting that many Japanese companies have been quietly looking at how to diversify their IT outsourcing away from China and into Vietnam, the Philippines and Brazil.

Meanwhile, Popkin said that, exchange rates aside, the real challenge for most Chinese software and services companies is to build scale.

"The extent that the appreciation of the Yuan makes things more expensive for China, it could have an effect on making things somewhat harder for the small companies," he said.

Anna Toncheva, a staff economist with IDC, predicted that the impact of any revaluation of the Yuan will be minimal on the world market, "because the prices of the software market are in dollars, so China is a price taker."

A price taker is a producer that isnt big enough to exert power on the market and dictate price and must therefore "take" the price or the going rate on the world market.

Toncheva also noted that China imports a lot of R&D because "they are still not able to do it all independently."

Yet, "software is a sophisticated product and these kinds of goods are more likely to be sensitive to the income of the buyer," Toncheva said.

But while fluctuations in the value of the Yuan wont impact the market, China itself is likely to experience lower margins, she said.


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