Abstract: The appreciation of the RMB lasts for the past two years. In 2006, the monthly average exchange rate of RMB rose from 8.0688 to 7.8238; in 2007, according to the Bank for International Settlements announced that the RMB appreciation of real effective exchange rate reached 5.13 percent; in 2008, New Year new "high" let software and services outsourcing companies experience another winter.
As the typical industry valuing costs by RMB and income by US dollar, software outsourcing industry was suffering from the impact of the appreciation of the RMB in the front line. Raised costs, the profits are eaten up by the extrusion market... whether consciously or forced, software outsourcing providers may have had to consider now: how to do with the outsourcing market in the future?
RMB appreciation has a direct impact on the cost and profits of outsourcing business. Within the home, costs are valued by RMB, for overseas clients, the contract is valued in U.S. dollar. Appreciation of the RMB shrinks corporate profits seriously.
The evaporation of these profit is quite remarkable. Every 1% appreciation of the RMB will reduce the profits of 0.7 percentage points in software exports. From July 2005 to December 2007, the rate of appreciation of the RMV has already exceeded the 11 percent according to the China Foreign Exchange Trading Centre.
The impact of RMB appreciation to large enterprises has not reached to a serious extent, but large number of SMEs has been practically feeling the pressure. High-tech Zone in Dalian, Software AG, the Union of 20-30 software outsourcing businesses, said that the appreciation of the RMB has eaten these companies¡¯ 10% to 20% of the profits. Some companies have 100% of their orders from overseas, and contract has been signed, thus enterprises will lose as much as the appreciation of RMB.
If "earning less money" is the only problem, tension of the corporate is not enough to cause a shock. In fact, the deeper the panic comes from the fact of China¡¯s place in the global outsourcing market. With India as a forerunner and competitor, followed by a "Bengal tiger" to catch up with, China yet has no sufficient technology capital; shrinking price advantage brings the weakening attraction. Theoretically, the driving force of offshoring is to save 30% -50% of the cost for the contracting companies. If the appreciation of the RMB sustains, the driving force will be increasingly small. The Chinese outsourcing providers will either increase price which means that the survival advantage of the great majority of Chinese outsourcing enterprises will be reduced or even disappear and enterprises taking into account the integration costs will choose a more favorable market, so china's enterprises will face the outsourcing market extrusion; or accept the loss of profits. But in fact China's current labor costs of software enterprise are on the rise, while outsourcing prices are reduced. According to IDC, China outsourcing prices to Japan in the past 10 years has dropped by 30 percent. If this situation persists, how can the unprofitable software outsourcing industry develop?
Benefiting from the industrial transfer and domestic low labor cost as the long-term driving force of the development of software outsourcing business, China's software outsourcing business has been developing rapidly in recent years. However, the appreciation of the RMB reduces the profitability of the software outsourcing business space. If we take into consideration the enterprise psychological factors, the greater the anticipated appreciation of the RMB, as well as competitors take advantage of such factors, industry profit margins may decrease more than 8 percent.
RMB appreciation will have a significant impact on China's software export industry. At present domestic manufacturers generally are purely at the status of undertaker, and are also in a low-end part of business value chain, that is\ the lower part of the coding and testing business. Study on the software requirements, design and detailed design at the high-end of the business chain by Chinese enterprises are rare. Added value of China's software outsourcing industry are relatively low, industry profits are not high, and operating margins of some large-scale outsourcing enterprises are about 20 percent to 30 percent, profit margins of small and medium-sized manufacturers are less than 10%.
About 70 percent of the costs of software industry exports are for staff salaries. Every 1% appreciation of the RMB will reduce 0.7 percentage points of the profits bringing by software exports; if the RMB appreciates by 3 percent, software exports will directly reduce five percentage points. This will undoubtedly be a tremendous blow to the software enterprises with margin profits of less than 4 percent, and will have a more serious impact on the software outsourcing business which has just made a breakthrough. At the same time, BPO business in China has just started as a software outsourcing business, and more than 80 percent of the costs in BPO business are labor costs, which means the appreciation of the Chinese yuan will bring a fatal blow to the development of BPO.
On the outsourcer market, the Japanese market accounted for about 63 percent, but outsourcing cases from Japan are usually with low technology and low added-value. At the same time, Japan's economy improved slightly in the last two years, and the government attaches great importance to the exchange rate. The Bank of Japan also has the tradition to control the exchange rate. In order to maintain its economic development, the government of Japan will not allow the appreciation of the yen, and the trend of the falling of yen is relatively strong. So far the appreciation of RMB against yen may be higher than that against the US dollar. The low added-value and replaceable software export industry for Japan will face great difficulties.
1. Industry development strategy
For the software outsourcing companies, the establishment of the "Union" is actually a strategy to face the risks. The combined small and medium-sized software outsourcing enterprises have more far-reaching significance: strong negotiating capital when quoting, more powerful implementation capabilities after bidding. These resulted in more stable clients and better market order. This could make one think of the "termite tactics" in tropical rainforest: Group attack is one of the effective strategies for self-protection. Rapidly expanding is of vital importance to the software outsourcing industry. This can be seen from large enterprises¡¯ stronger ability to resist risks and strain the ability of the market. For international companies, they consider more of the integrity and R&D capabilities of the outsourcing companies, not just the price. It is for this reason that large-scale outsourcing companies can easily defuse the pressure of appreciation.
2. Bank credit strategy
The impact of RMB appreciation will be very big for SMEs in the software outsourcing industry. If the appreciation of the RMB exceeds 3 percent, a large number of small and medium software outsourcing enterprises is expected to close down. China's economy has entered the phase of interest rate increase, the increasing interest rates continued to increase the capital costs of software companies, and for those who rely heavily on bank credit funding, it will be a greater impact.
Bank should propose software enterprises to adopt certain measures when signing export contracts. They can take non-US dollar for earnings, and strive for using the euro as the currency of the income as far as possible. In the contracts signed with foreign partners, they should strive for more payment in advance, and take on the model of clearing payment during the progress. When a period of work is completed, the income matching the workload should be paid, so as to prevent exchange rate risk.
Software export enterprise will give all its export documentation to the bank or designated banks. The bank will deduct interests and related costs from the face value of the documentary bills from the date of negotiation to the date of receiving quotation, and thus pre-pay the net earning to the exporters as a mode of short-term financing. The bank then send bills according to letters of credit or export contract to require foreign currencies, and use the money remitted to pay back the financing, which can effectively avoid exchange rate risk while reducing the risk of bank loans.
3. Government supporting strategy
In this situation, the government should continue to provide a better business environment for the development of enterprises, so as to help enterprises improve their ability to resist exchange rate risks. We should appeal to the relevant government departments, trade associations to concern about the appreciation of the RMB on outsourcing, and recommend relevant departments to participate in international negotiations on behalf of the overall brand and image of outsourcing as a guarantee of the interests of outsourcing businesses. For the decline in the ability of China's software and services outsourcing will bring a global impact, which is not conducive to the global economic transfer and development in the final analysis.
Meanwhile, local governments should take effective measures for software enterprises to reduce costs and enhance core competitiveness. In addition to the implementation of the previous policies, they should introduce preferential policies especially for the services outsourcing enterprises and provide subsidies to them. In addition, there should be more acts in terms of personnel and inside park.
