Why China's north-east is home to a booming IT industry

Youhao Square in Dalian commemorates the friendship of China and the former Soviet Union.
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Dalian makes a great leap forward.

A far-flung peninsula in China’s north-east is home to a booming IT industry that is targeting Silicon Valley-style growth.

For years the city of Dalian was a virtual unknown to the majority of Western business professionals, even those based in Asia.

Strategically located at the tip of north-east China’s Liaodong Peninsula, this bustling seaport of six million inhabitants was more renowned for its pleasant climate than its fertile commercial environment.

Today, however, this liveable metropolis is making waves for a very different reason.

Designated as one of China’s “outsourcing base cities” by Beijing eight years ago, Dalian’s revenue from software and service outsourcing is now displaying spectacular growth.

As the Chinese economy attempts to move up the value chain, government officials and business leaders are pushing hard to establish China’s very own Bangalore cum Silicon Valley beside the Bohai Sea.

“Dalian has grown into one of China’s strongest IT outsourcing (ITO) hubs,” says Walter Fang, former vice president of Neusoft, China’s largest offshore software and services outsourcing provider, headquartered in nearby Shenyang.

“Starting in the early 2000s the government decided to focus on promoting growth in its so-called ‘double D’ – digital and DNA (biotech) – industries. Service outsourcing is now a pillar of the local economy. Just look at the figures.”

According to the Dalian Economic and Information Technology Commit­tee, Dalian’s software and service outsourcing industry realised revenues of 135 billion renminbi (US$21.7 billion) last year, up from US$8.65 billion in 2010.

By the end of 2012, the city was home to nearly 1000 service-outsourcing enterprises, employing nearly 120,000 people.

Today, many of the cool tools that Chinese consumers increasingly demand, such as apps and smartphones, are still conceived overseas. China has long been the factory that mass produces popular gadgetry for global companies, but until now the country’s home-grown technology was seldom viewed as cutting edge. If tech hotspots such as Dalian continue to thrive, this may be about to change.

“More and more Chinese companies are start­ing to understand that in today’s competitive market, they really have to innovate in order to survive and grow,” says Chris Devonshire-Ellis, founder of China-based specialist foreign direct investment practice Dezan Shira & Associates.

“Places such as Dalian, which is becoming much more than just a call centre hub, are going to be increasingly vital to this evolution.” 

Much of Dalian’s growth is focused on three main areas: integrating ITO and busi­ness process outsourcing (BPO) services, developing embedded software, and attracting overseas data and back-up centres, especially in the fields of finance, insurance, social welfare and public service.

Until now, China's technology was seldom viewed as cutting edge. If tech hotspots such as Dalian continue to thrive, this may be about to change.

As such, the city has worked hard to establish an enticing environment for multinationals.

Today, overseas companies are drawn to Dalian by its multilingual workforce, robust infra­structure, assistance in hiring, generous tax breaks for high-tech investment, and low rents in the city’s software parks. Global tech and tech service heavyweights, such as SAP, IBM, Intel, Cisco, Genpact, NTT, Oracle, Hewlett-Packard and Accenture, have all set up shop here, not to mention Neusoft, which posted revenues of over US$1 billion in 2012.

“Dalian’s well-developed communications infrastructure, stable commercial environment and highly skilled technology workforce have allowed us to deliver a wide array of services to our clients,” says Paul Richardson, technology delivery lead for China at global outsourcing giant Accenture, which set up its first delivery centre in Dalian in 2002.

“One particular capability Dalian provides is the excellent Japanese language skills found in the area. This is key to our provision of services to the Japanese market.”

While servicing China’s domestic market provides Dalian’s main revenue stream, the importance of offshore markets is growing. The city occupies a niche position as it supplies high-value ITO services to the nearby Japanese and Korean markets.

According to international auditor KPMG, in 2012 the signed contract value and actual conducted value of offshore outsourcing services in Dalian were US$1.79 billion and US$1.53 billion respectively, a year-on-year increase of 41 per cent.

Dalian’s advantage in servicing near-shore locations stems not only from cost considerations, but more importantly from the city’s geographical proximity to both Japan and Korea. Japanese is one of the key foreign languages taught in local universities and, according to China’s Ministry of Commerce, 80 per cent of Dalian’s revenue from exported ITO services was based on Japanese business in 2012.

But Dalian is also looking beyond nearby Asian markets. Today the city’s rising profile and global focus is such that many companies have now expanded their operational charters and business goals to include servicing North America and Europe.

“This trend is gathering momentum as many companies realise that the competitive edge which English language skills gave ITO and BPO centres in India and the Philippines is diminishing,” says Raphael Pui, commercial director of the Dalian Tiandi software hub and mixed use development.

“The quality of English language talent in Dalian has already improved greatly compared to five years ago.”

“We originally established our delivery centres in Dalian to service regional clients in Japan, China and Korea,” adds Accenture’s Richardson.

“The fact that we now service clientele across the globe reflects Dalian’s ability to provide cost competitive multilingual technical and business skills across the board.”

Much of Dalian’s tech-focused activity takes place in the city’s software parks. The first of these to be established, the Dalian Software Park (DLSP), opened on 3sq km of prime urban land in 1999.

The sprawling site mixes academic pursuits with private business investments, and boasts office buildings, research facilities, apartments, bilingual grade schools, restaurants and recreation facilities.

“Since it was established, DLSP has undergone rapid development,” explains Craig Wong, project manager at DLSP’s Business Solution Center.

“Our goal is to bring together international and Chinese students, academics and engineers so that they can share ideas in a concentrated area. I guess you could say we’re following in the footsteps of California’s Stanford University, the institution behind Silicon Valley.”

The DLSP is now home to nearly 650 software companies from China and overseas, with some 80,000 employees. Of these, nearly half are foreign-owned, including Global 500 enterprises such as Accenture, IBM, Oracle and SAP. In 2010, the DLSP generated sales revenues of US$4.5 billion and export revenues of US$1.08 billion, a year-on-year increase of 38.6 per cent and 25.6 per cent, respectively.

Dalian now trains more than 70,000 students each year in software skills programs across 22 universities, offering more than US$40 million in annual subsidies to encourage college graduates to enrol.

Many of these programs involve language training. According to government figures, by the end of last year, Dalian’s higher education system was supplying the market with an extra 10,000 young professionals annually.

“Human minds are China’s biggest resource when it comes to growing the country’s IT and technology industry,” says Prakash Menon, head of Chinese operations for NIIT, one of India’s top IT learning solutions providers.

NIIT now has a presence in 66 Chinese cities and set up a training centre in Dalian in 2008, with a current intake of around 1000 students a year.

“Nearly all our graduates take up employment in a software-related industry,” Menon explains.

“Bangalore retains the edge on Dalian because Indians still have a more Western mindset. While Chinese students are naturally disciplined, we focus on higher order skills, developing their ability to handle large-scale projects and teaching them to think outside the box. The gap with India is closing.”

At Neusoft’s Institute of Information in Dalian, which now boasts more than 12,000 students, the focus is also on practical, creative and entrepreneurial skill sets.

"Forecast of Demand for Dalian SoftwareIndustry and Training of Highly Skilled SoftwareTalents" by Zhang Yi, Contemporary Economy, No 22, Vol 310

Forecast of Demand for Dalian SoftwareIndustry and Training of

Highly Skilled SoftwareTalents" by Zhang Yi, Contemporary

Economy, No 22, Vol 310

“The Institute was set up here in 2000 because we felt Chinese higher education curricula weren’t being modernised quickly enough,” explains Walter Fang.

“Today no more than 10 per cent of Institute graduates are directly employed by Neusoft, but way over 90 per cent find themselves in IT-related jobs,” he says.

“We like to look on this as ‘cross-pollination’ for the IT services industry. Companies can feed off each other, just as we see the ‘cluster effect’ driving tech-focused business in Dalian.”

Services globalisation and investment advisory firm Tholons now ranks Dalian as the world’s 14th largest outsourcing destination, up from 15th in 2013. Most of the top 10 positions are occupied by Indian and Filipino cities, and Dalian’s relatively late entry into the outsourcing market means the city is still playing catch-up.

Dalian’s strengths are also its weak­nesses. While it continues to boast the best talent pool for servicing nearby East Asian markets, the shortfall in personnel with sophisticated skill sets will become increasingly acute as a growing number of multinationals set up shop and look to service Western clients.

Domestic Dalian-based companies must prioritise the development of industry leaders who can grow their organisations on a global scale and keep pace with the region’s rapid economic progress.

More than just simple education and training, this means creating a favourable environment for the retention of experienced, highly creative professionals who can lead the local economy to the next level.

In addition, most of the software outsourcing work that comes to Dalian from Japan and Korea is of relatively low value, which leads to low profit margins and little economic progress. As always, innovation is the key to moving up the value chain.

“Over the last 10 years, Dalian has focused on building its service out­sourcing industry,” says Xia Deren, secretary of the Dalian Municipality Party Committee.

“Over the next decade, we need to ramp up this city’s core competitiveness in the software sector by developing more innovative software and technology.”

Chinese tech giant Neusoft is showing the way forward. The company recently acquired part of Sesca, a Finnish mobile solutions provider engaged in high-end smartphone software development. Neusoft’s European business has increased five-fold since the deal.

A growing emphasis on technological innovation is also leading to an increase in patenting in Dalian, and the strengthening of local intellectual property (IP) protection. Recently listed as a “National Innovation Pilot City”, Dalian is also rated as Liaoning Province’s only “National Model City of Intellectual Property”, and the only “Patent Insurance Pilot City” in north-east China.

According to the Dalian Bureau of Science and Technology (Intellectual Property Office), 5280 invention patents were applied for in Dalian between January and October 2012, with 1205 granted, representing a year-on-year increase of 36 per cent. The 40 “incubators” of the city’s science and technology companies are now apparently generating more than 800 new “industrialisation projects” annually.

Last year, Dalian’s high-tech industry generated one quarter of the city’s GDP. The creation of a true Silicon Valley here is undoubtedly still years away, but if the city’s brightest minds can combine capital and creativity in new ways, then China’s Silicon Peninsula surely has a promising future.

Silicon Valley: a state of mind

Hugging San Francisco Bay in California, Silicon Valley is the world’s most high-profile entrepreneurial hotbed. Many places have attempted to follow in Silicon Valley’s footsteps – London’s “Silicon Roundabout” and Berlin’s “Silicon Allee” spring to mind – but the original Silicon Valley still enjoys unparalleled success. But why?

“Silicon Valley essentially works because of the local ecosystem,” explains Victor Hwang, CEO and co-founder of T2 Venture Creation, a Silicon Valley firm that builds start-up companies.

“This ecosystem is powered by the culture. As people here are fond of saying, Silicon Valley is not a place, it’s a state of mind. That mindset is an outgrowth of the American frontier, where people learned to build spontaneous teams and communities together. What matters here is how quickly you can organise and maintain great teams to solve huge problems. That means open-mindedness, big vision, willingness to experiment, comfort with uncertainty, a spirit of generosity, and high levels of trust.”

Most cities looking to replicate California-style tech heaven in their own backyard have tended to focus on the so-called hardware. Universities, research and development, infrastructure, capital investment, legal structures and skilled labor are important. However, on their own they are not enough to guarantee spectacular, Silicon Valley-style growth.

“What makes Silicon Valley work is the software,” says Hwang.

“The social networks, connectivity, diversity, trust, and invisible patterns of human behaviour for collaboration and experimentation. Creating a Silicon Valley means designing environments that cause such things to happen. Other cities should concentrate more on growing these environments – the ‘ecosystems’ – and less on mandating the economic results.”

December 2021
December 2021

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