Nation to support large service outsourcing firms

China will further support key companies and sectors in the service outsourcing industry with targeted policies, a senior official with the China Council for International Investment Promotion said.

"Previous support policies will not be downsized. And in the new policies, we will increase support for key companies and sectors," Zhou Ming, executive vice-president of the council, told China Daily.

The council is a non-profit organization set up by the State Council, the cabinet, to support policymaking decisions in the service outsourcing area.

China's service outsourcing industry is growing rapidly after the government selected 20 cities as "model cities" and offered fiscal and human resource stimulus policies to "advanced service outsourcing companies" in those cities.

As the policies are set to expire in 2013, concerns arose among industry players on whether the scale and scope of the policies would be cut back.

Zhou said the package launched in 2009 aimed to encourage the development of the sector as a whole. As a result, universal coverage - rather than pertinence - was the policymakers' priority.

China's service outsourcing sector has seen an annual average growth of more than 40 percent since 2009.

In 2011, the industry's contracts value hit $32.39 billion, up 63.4 percent compared with 2010.

Using the potential of its huge domestic market, China has become the world's second-largest outsourcing services provider after India, accounting for 28.7 percent of the global market.

And more big companies are emerging in the booming sector. In 2008, only one company in the field had annual sales of more than $200 million. In 2011, the annual sales volume of nine companies surpassed $200 million, according to a report released by Zhou's organization.

As companies developed, their policy support demands also evolved.

For example, previous policies required companies to export at least half of their services to be eligible for favorable taxation policies.

Chen Qian, a manager with hiSoft Technology International Ltd, said that even though her company sold half of its services abroad, some of its branches could not meet the criteria and were not eligible for the favorable policies.

Zhou said the new policy would pay attention to similar cases, and would also encourage the formation of bigger companies to secure a better position in the market.

"The trend is that most of the major offshore outsourcing orders go to a few big companies. Competent service providers could integrate their global orders and achieve multi-location delivery," Zhou said.

"To become competitive, China must have a few competent players who can take up half of the market", Zhou added.

A number of companies in the industry have already started to merge.

In August, IT services provider Vinceinfo Creative Software Technology Ltd and hiSoft Technology International Ltd agreed to merge, in the largest M&A deal in China's domestic service outsourcing industry.

Zhou said that as China's companies get bigger, more overseas M&A deals are expected.

However, China's current foreign exchange management system does not allow timely payments.

Zhou said that the upcoming "targeted policies" should allow special payment operations for domestic service providers.

She also proposed more credit-related policies for service outsourcing companies.

"Outsourcing companies usually don't have enough fixed-assets to provide as guarantee in order to get access to bank loans. The government should study more flexible methods, such as using orders or contracts as guarantees," Zhou said.

While emphasizing the role of big companies, Zhou also said that the previous beneficiaries will continue to enjoy favorable policies, and that small and medium-sized enterprises will be supported as well.

Frances Karamouzis, a senior IT services analyst at IT research and advisory firm Gartner Group, said, "What's interesting in the Chinese market is that there is room for both big companies, who rely on scale, and SMEs who focus on niches."