Would You Trust Your Information to a Chinese Server?

Would you trust your information to a Chinese server?

That was basically the question raised by my conversation with the VP of Hisoft, a Chinese IT outsourcing company that has just listed in the US. Like many other conversations I’ve been having about intellectual property lately, he made the argument that the problem isn’t as bad as everyone thinks. The protections in place at Chinese IT outsourcing companies to prevent information leaks are as strong, or even stronger than in India, he claims, but that the industry is being held back because there aren’t enough marketing skills to counter China’s image as an IP badboy

The IT outsourcing sector is somewhat special though, as China’s image as an IP badboy here is less a matter of poorly regulated factories in Shenzhen, and more a matter of specific government policies.

I think this sector is actually one of the most concrete examples of how government controls put the country’s service sector at a disadvantage to regional rivals. The sector is in an extreme growth phase right now, so its obviously not an extreme risk, but I believe companies like Hisoft and Vanceinfo will hit a wall before they catch up to their Indian competitors. And something significant will have to change with China’s internet policy if they are to get past that wall.

Government Support

The sector has extensive government support. According to the VP of Hisoft any new IT outsourcing company in China has a 3-5 year tax holiday starting out. Regionally additional subsidies, tax breaks, and preferential treatments are added into the mix. These companies employ thousands of college graduates in second and third-tier where college graduates are traditionally underemployed, and so they are favorites of the local politicians (unemployment statistics are sketchy in China, but I have read that one inner province has an unemployment rate over 20% in the two years after college graduation).

My favorite part is that the universities actually liaise between students and employers to direct students to pick up certain skills. Something along the lines of “If you want a job with the local Sony campus after graduation, they will need 100 people a year to read and write Japanese, 70 of which need C++ programming skills. Currently we only have 67 signed up.” 

The sector also has certain cost benefits-first because there is a less developed (and thus cheaper) workforce, but primarily because they are protected in the local Chinese market by preferential government policies. They can grab international customers by providing their China services and segwaying from that into global services, but outside of China some of the cost argument breaks down.

The Google Problem 

Google’s spreadsheet program has been banned in China. It was blocked sometime in the second half of 2009, well before the controversy at the beginning of this year, so the reason for the sudden shut down remains one of the mysteries of the Chinese Internet. But if my office were running the software, I would want to know why I suddenly had to relocate all my documents. I have heard from countless places the argument that cloud computing (a mainstay of Indian outsourcing firms) is the future of the Chinese software industry, which, due to bootlegging, can’t make money off store bought software. But as of now I couldn’t imagine anyone trusting Chinese servers to be accessible anytime, anywhere.

And then there’s the issue of supposed government IP theft. Google’s accusation earlier this year that the Chinese government was hacking into its servers may or may not be true, but its quite obviously believable. Chinese laws regarding technology transfer, its intrusive information gathering apparatus, and some conspicuous attacks on computer security, have given the impression that it wouldn’t be safe to store your information within the jurisdiction of the Chinese government. Or as one research analyst I spoke to about the issue put it “we should at least make them work a little to spy on us.”

The concern is somewhat overwrought. The Chinese IT outsourcing companies usually go out of their way to show that they put the trust of their clients first and foremost (and that they’re rather dismissive of Chinese internet laws, as they regularly have to access blocked sites for particular projects), but the Google problem means trust is something that the Chinese companies have to earn, not something they have naturally.

The Wall Approaches

This industry will grow for a while, as long as they have a cost advantage over Indian companies (particularly on smaller projects), as well as a captive market within the fastest growing economy in the world. But as China delves into the services sector, a supportive government can be as much a hinderance as a helping hand.