Chinese software makers have traditionally focused on its fast-growing domestic market and Japan and Korea. But as competition intensifies at home, they have started to look abroad, particularly at the United States, for new growth.

Increasing demand from the United States has helped drive China's software export revenue to grow sevenfold since 2000 to $2.8 billion, said Neusoft Group, China's largest outsourcer.

"U.S. firms are farming out jobs to China at a very high speed," Walter Fang, chief technology officer of Neusoft said at the 2005 China IT Services Summit held in New York.

"US companies are outsourcing to China to mitigate risks," Fang added. "They do not want to put all the eggs in one basket."

Neusoft's U.S. outsourcing segment rose more than 60 percent last year, higher than the 12 percent to 15 percent growth in its domestic market. However, Neusoft's U.S. segment accounts for less than 10 percent of its $34 million outsourcing revenue. Its sales totaled $290 million last year.

China has become a leading maker of computers and electronic devices but lags behind in software. At annual sales of $27 billion, China's software industry accounts for only 3.3 percent of the global software market. But several new companies have raised the competitive stakes abroad.

Software company UFIDA Corp.'s <600588.S> software outsourcing unit now develops software for Microsoft and Hewlett-Packard . It generated $4.5 million in outsourcing revenue last year and the business is expected to double this year. The company has plans to take its outsourcing unit UFIDA Software Engineering public on the Nasdaq exchange within the next three to four years.

CHINA'S ALLURE

China has the world's largest number of science and engineering graduates. The vast supply of technology talents helps to keep wage inflation and turnover rates at bay, while higher wage rates have cut into Indian companies' margins.

The country has also developed expertise in some niche areas such as software embedded in cell phones and digital cameras and open-source software which can be obtained for free and are easy to modify.

The reason that China lags behind India might be due to a lack of marketing acumen, said Jamie Poplin, who leads Gartner's Asia Pacific and Japan research. "The Indians have been really great at marketing themselves," Poplin said.

Indian software giants drive the majority of their revenues from the United States and Europe, although sales have started to slow after growing a few years by over 40 percent annually.

To be sure, Chinese companies still face formidable hurdles before posing a real threat to their Indian rivals. The English proficiency level is lower and the protection of intellectual properties remains a concern for foreign companies.

"China's IP laws are quite good, they are pretty much on par with India," Michael Mensik, a partner with law firm Baker & McKenzie said at the 2005 China IT Services Summit. "But China lags behind India in terms of enforcement."

Mensik advised foreign companies to take more control when they shift work to China and Chinese software providers to take pro-active measures to assuage these concerns.