China still safe for IT outsourcing, despite US security concerns, says vendor

Pactera is one of China's largest IT outsourcing vendors

China's reputation for security may have been marred by recent U.S. accusations of state-sponsored hacking but the nation is still a safe place as a tech subcontractor for foreign businesses, according to one of China's largest IT outsourcing vendors.

"We take security as a 'live or die' thing," said Jun Su, corporate executive vice president for Pactera Technology in an interview. "We are a public company. If we ever got exposed for leaking IP, we are dead."

Keeping a company's intellectual property secure in China has long been a challenge facing foreign businesses operating in a country known for piracy. But the concerns around security have heightened in recent months, as the U.S. has grown increasingly vocal about alleged Chinese cyber-espionage that has sought to steal sensitive data from the U.S. military and corporations.

Certain Chinese tech companies, most notably, Huawei Technologies and ZTE, two major providers of telecommunication gear, have been caught in the crossfire. Last October, a U.S. congressional committee accused the two companies of having links to the Chinese government, and advised that U.S. businesses looks elsewhere for their networking equipment purchases.

But the mounting security concerns also represent a potential threat to Pactera and other China-based technology outsourcing vendors, which take the bulk of their clients from overseas. In Pactera's case, about 43 percent of its 2012 revenue came from U.S.-based customers, with another 23 percent from Europe and Japan-based clients.

Both the U.S. and Australian press have circulated stories about China's alleged links to cyber-espionage, and the country's reputation for security has never been its strong suit, Su said. But the accusations shouldn't spill over into China's outsourcing industry, where strict standards on security are maintained, he said. For example, China's former premier Wen Jiabao made a visit to a company facility in 2011 as part of local government tour. But the premier was later barred from entering a lab because he lacked the security clearance.

"Security is the number one thing we definitely have to do," he said. Pactera has never lost a client because of security problems, according to Su, and the company has offices across the world, including in the U.S. and Europe, to accommodate its customers. "We have to protect the IP," he said.

Pactera formed out of the merger last year of two Chinese outsourcing vendors, HiSoft and VanceInfo, which have histories stretching back almost 20 years ago. Pactera declined to name its key clients, but before the merger HiSoft and VanceInfo were known to count Microsoft, IBM and General Electric as some of their customers.

"These Chinese outsourcing companies have been around for 10, 15 years or more," said Tina Tang, an analyst with research firm Gartner. "They've been following the Western companies' standards, so I don't think security would be a problem."

China's outsourcing vendors, however, still lag behind their Indian counterparts in terms of scale. One of India's largest vendors, Infosys, has over 150,000 employees, with an annual revenue at US$7.4 billion. Pactera, in comparison, has only over 23,000 workers, and an annual revenue at US$360 million. In addition, the country's outsourcing vendors are facing China's rising labor costs, along with a depreciating U.S. currency.

It's why the Chinese companies such as Pactera want to wean themselves from low-cost outsourcing, and move toward developing their own more profitable enterprise services and products for customers. Currently, it receives about 70 percent of its revenue from outsourcing, with the rest coming from consulting and products.

"If we can become successful, I think we can definitely become a leading service provider in China," Su said. "That will be the challenge for the next two or three years."

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