I visited Vanceinfo about a month ago, one of a growing pool of IT outsourcing companies in China, and the only one that is listed on a foreign stock market (NYSE). All-in-all the company is quite impressive. They've been near doubling their workforce every year since the company was founded, which, with about 15% of their employees leaving the company every year, implies hiring about 20 people a day. According to some reports which they eagerly gave me (from a Stanford study) they've been growing faster than their competitors, and are now the third largest such company in China. That said, I left clueless as to what their competitive advantage was, and struck by how China's internet policies are holding the industry back.
The way it was laid out to me was that most China-based IT outsourcing companies serve Japanese and Korean clients where knowledge of English is less important and Indians are linguistically unable to compete, but Vanceinfo, with its fancy US listing, has primarily targeted the Western market, and claim to be the top in the field there (though a few other companies are showing similar revenue numbers from Europe/US). So they dominate the market for China-based companies serving Western IT clients.
What I couldn't understand though was why a Western client would care if the company was based in China or India. It seems the biggest factor is that a lot more foreign multinationals are based in China than India, but that doesn't seem to me like it would provide enough of a competitive advantage. That said, the company is tiny compared to Infosys, so speedy growth for the next 5-10 years is quite likely for that reason alone.
Moving information
What really struck me though is how much the Chinese government's internet policies are an inherent risk to the company. A lot of what the company does involves accessing content that is banned on the Chinese internet (testing hardware, a small part of the company, requires accessing Facebook with each device). This is a fairly small problem as they run everything through a Virtual Proxy Network (VPN) for security reasons, but still, it means that their fundamental business plan requires breaking Chinese law.
Of more concern is that they eventually want to get into cloud computing. This is a big thing in the Chinese internet space, because with the blatant disregard of copyright running things over the internet is the only reasonable way to make money off of software, but could computing services have the annoying tendency of occasionally being blocked. Google Docs isn't properly working in China, and even game companies - currently the major cloud service - occasionally get shut down. I find it hard to believe a company would trust their operation to the cloud when there are such built in risks.
Short-term
So over the long term I think this company might have some problems, though over the short term this is still a solid stock, and one that I don't think has performed up to its capacity. It'll probably continue dropping for a while as the stock market goes into its second dip, after which one could easily pick up a few dollars on it.
