S3Corp. Tech Blog

Vietnam Surpasses China as Second-Largest Software Outsourcing Partner for Japan

As of 2016, Vietnam overtook China to become Japan’s second-largest software outsourcing destination, trailing only India, which maintains its lead with a 31.5% market share. Vietnam software outsourcing now holds a 20.6% share, solidifying its position as a major IT outsourcing hub for Japan. This shift reflects broader trends in Japan’s IT industry, where escalating demand for skilled labor has outpaced domestic supply, prompting a significant rise in outsourcing.

Competitive Costs and Skilled Workforce Drive Vietnam’s Appeal

One of the primary reasons Japanese enterprises are increasingly choosing Vietnam over China for software outsourcing is cost efficiency. Vietnamese IT engineers are approximately 30-40% cheaper to hire than their Chinese counterparts, providing a substantial economic advantage. This cost-effectiveness, combined with the high technical competence and work ethic of Vietnamese professionals, has contributed to Vietnam’s rapid ascent in the Japanese outsourcing market.

Shigeki Maeda, Vice President of the Japan External Trade Organization (JETRO) in Tokyo, highlighted Japan’s vision of transforming into a global leader in IT adoption. The growing need for software engineers in Japan, coupled with a limited domestic labor pool, has fueled demand for international outsourcing partnerships, positioning Vietnam as an attractive option.

Japan’s Expanding Outsourcing Market

The Japanese outsourcing market has seen steady growth, expanding from 135 billion yen in 2012 to 145.5 billion yen (or roughly $1.4 billion USD) by 2015. Projections suggested this demand would reach 156 billion yen by 2017. Unlike the U.S. and European companies that typically allocate around 10% of IT budgets to outsourced software development, Japanese companies rely much more heavily on foreign partnerships, amplifying demand for outsourcing.

Vietnam’s IT Talent: Strengths and Challenges

According to Katsuro Nagai from the Japanese Embassy in Vietnam, Japanese companies value the intelligence and dedication of Vietnamese engineers. However, there is still a skills gap to bridge. Despite these challenges, the dedication and skill of Vietnam’s IT workforce have helped the country gain traction with Japanese firms, even sparking debate over the best direction for Vietnam software industry.

Some critics argue that Vietnam should prioritize developing its own software products rather than primarily focusing on outsourced services. Hoang Nam Tien, President of FPT Software, has countered this view by embracing FPT’s identity as an outsourcing provider. He categorizes the industry into two main branches: product development and service provision. While global companies such as IBM also lean toward services, Tien believes that service-oriented outsourcing is the right focus for FPT Software and similar Vietnamese firms.

In conclusion, Vietnam’s rise in Japan’s software outsourcing market highlights a pivotal shift fueled by competitive labor costs, a skilled workforce, and Japan’s urgent need for IT expertise. As the outsourcing sector continues to evolve, Vietnam’s role as a key partner for Japan seems set to strengthen, potentially reshaping both countries’ software industries.