'That could be the type of aggressive investment strategy Chinese software and services companies need to do,' said John Cestar, co-chief executive at the San Francisco-based outsourcing firm Freeborders, which also has operations in Shenzhen.

He noted that China already provided a large supply of low-cost, high-quality software engineers, who currently number about 400,000. Up to 150,000 highly motivated and skilled engineers enter the workforce each year.

'What mainland companies lack is a first-rate services delivery model in the United States and Europe,' he said.

He predicted that it would take a few more years for Chinese software and services suppliers to build that expertise and the needed international resources if industry consolidation was not accelerated.

A recent report from business consultancy McKinsey & Co suggested that gaining adequate size and substance mattered if mainland software and services firms wanted to challenge the likes of Tata Consultancy Services, Infosys Technologies and Wipro Technologies.

Christopher Ip, a principal at consulting firm McKinsey & Co in Hong Kong and head of its business technology office for Greater China, noted that the mainland has about 8,000 software and services providers, but almost three-quarters of them have fewer than 50 employees.

'Compare that with, say, Tata Consultancy, which has about 40,000 staff worldwide,' Mr Ip said. 'Chinese firms must consolidate and build up their resources to attract international clients.'

The McKinsey study, however, found that only about 12 per cent of Chinese software and services providers saw mergers, acquisitions and alliances as a priority.

It also found several Indian firms are keen to make acquisitions of Chinese firms to expand their operations.

Many western enterprises and large Asian firms typically outsource enterprise applications development, desktop support and data centre activities to low-cost sites like India, China, the Philippines or Malaysia.

Also in huge demand is business process outsourcing, which includes customer relations management, call centres, accounting and human resources.

Recent analysis from consultancy Frost & Sullivan estimated that a total of 826,540 IT jobs were exported last year by France, Germany, Hong Kong, Japan, Britain and the US to lower-cost countries, amounting to a combined value of US$51.6 billion.

Exporting IT jobs to lower-cost countries is now regarded as critical to survival in industries where other competitors are doing so, according to Frost & Sullivan. It noted that hiring outsourcers provided a company the flexibility to adjust its personnel strength to business requirements at a lower cost and with a higher level of expertise.

Mr Cestar said more multinational companies, especially from the US financial services industry, were starting to outsource part of their application software development to IT outsourcing companies in the mainland to diversify and offset rising expenditure in India.

He cited as an example Freeborders' own mainland operations, which are set to increase staff to about 1,000 this year from 325 at the start of the year to meet a pickup in demand from US firms.

'We see this trend continuing as more customers look for a combination of lower cost and more highly skilled outsourcing services from China,' he said.

'Technology outsourcing to China is going the way of what happened in the US retail sector. Manufacturing went to China, but jobs and economic activity associated with design, marketing and selling exploded in the US because of higher demand for lower-cost goods.'

Research firm Gartner has forecast the worldwide IT outsourcing market to grow from US$180.5 billion in revenue in 2003 to US$253.1 billion in 2008.