Interview: Pearl Research's Allison Luong On The Chinese Market

As part of a new study entitled “Games Market in China”, consulting firm Pearl Research predicted the China's games market would exceed $1.3 billion in 2008, and see an increase in numbers of Western developers relying on the country's studios both for outsourcing and development. The study warned, however, that despite the 20-40 percent savings a Western company could expect, additional costs such as travel, training and project management can erode costs savings overall, as Chinese companies continue their climb to long term best-practices. To find out more about the development market in China, oversight and support from the Chinese government, as well as advice on what to expect and avoid when considering Chinese outsourcing, Gamasutra spoke with Pearl Research analyst, Allison Luong. GS: Can you better explain the divide within the government between those that see games as a beneficial part of the new economy and those that are leery of it? We've seen some of the recent actions being taken, whether from the GAPP's online fatigue proposal or moves to police content for online games, SARFT banning game content in commercials -- is the reality quite so schizophrenic, or are the two sides converging? Allison Luong: Government agencies in China must balance two conflicting agendas for the games market. They must foster a fast-growing industry that is a source of tax revenues and job creation. Yet, they must also respond to growing social criticism over game violence and addiction. The divide is a result of various government agencies all with different agendas. The Ministry of Science and Technology’s mission is to promote technological innovation so it will be more supportive of games, whereas other agencies (GAPP, SARFT) are tasked with regulating content. Part of the reason for these regulations is that the majority of Chinese parents are vehemently opposed to their kids playing games. China’s one-child policy puts enormous pressure on children to succeed in school. There is the expectation that these only children in China will financially support their parents when they are older. Thus, parents view games as unproductive and a hindrance to their children excelling in school. Sensational press stories of game addiction and violence have made the games industry an easy target for government officials and politicians. Games are viewed as one of the fastest growing sectors of the economy and the government agency responsible for their regulation wields significant clout and power. GS: When a Western company considers Chinese outsourcing, what sorts of risks can it anticipate, and what can be done in advance to help minimize those risks? AL: It is important to distinguish work that is being outsourced to a third-party provider versus work that is created by a company’s internal studio in China. Much of the outsourcing work is art-related and consists of basic asset creation, specifically for items and objects that require less creative and interpretative work. By outsourcing to China, companies face issues such as uneven product quality, intellectual property protection, “bait and switch” tactics by certain outsourcing studios and high employee turnover. Part of the issue that contributes to uneven product quality is that many studios in China never refuse a project and will often bid for work, even if they are unable to complete it on time. Thus, the same studio that is capable of completing one project on time would have difficulty completing another project due to the lack of capacity and manpower. Looking at bait and switch tactics, one practice is the use of a highly qualified team to complete the “test” provided by the publisher. A publisher will often select an outsourcing vendor by having them complete sample work. The outsourcing studios will use their most talented employees to complete the test. Once the contract is signed, outsourcing companies will often use a cheaper and less experienced team to complete the project. The result is that the work completed is of a significantly lower quality than the publisher expects. To help minimize these risks and maximize the chances of having a successful relationship, a publisher must conduct thorough due diligence and validate references from trusted sources that have worked with the outsourcing studio. Testing the relationship through smaller projects before larger projects are initiated will also provide a publisher with a clear picture of the outsourcing studio’s capabilities and work style. For smooth interaction, a certain degree of ‘fit’ must exist between the two organizations in terms of corporate culture, communication styles and work ethic. It is also important to ascertain if the top management of the outsourcing studios, and not just the English-speaking representatives that a publisher deals with, share the same business ethics as you and your company. GS: What sorts of cultural differences have you seen crop up between Eastern and Western companies in trying to work together? AL: A “yes culture” still pervades in China, with many companies hesitate to say “no” to projects and deadlines even if they are unachievable. GS: You've talked about a high turnover rate being a problem for Chinese companies -- what can employers do to help retain employees, and are they moving in any appreciable direction on that? AL: Some outsourcing studios have tried to reduce employee turnover by emphasizing a more collegiate environment and by offering top employees an opportunity to advance into a management track. Others have created bonus pools for their employees based on years of service and contribution. While pay is important, employees also value the ability to grow within an organization, develop new skills and work on exciting projects. GS: What would you say the major players in the Chinese development market have done to contribute to their success? AL: In our “Games Market in China” report, we discuss the different types of studios in China, such as studios that are started by expatriate game developers, locally Chinese-owned studios that work exclusively on outsourcing, and international publishers with studios operations in China. Even Chinese game operators are developing an outsourcing business. Many of these Chinese game operators and developers have excess capacity and can divert members of their team to outsourcing projects. Outsourcing can be a buffer against unpredictable revenues from operating online games. Success factors include competent and culturally-attuned management, effective training programs, and having an efficient workflow process. Companies operating in China should also prioritize protecting intellectual property. This means setting up specific processes and procedures within the company to ensure ethical behavior. Many outsourcing studios have removed CD and USB drives from computers in addition to tracking their employees’ emails. The legal system in China is not as robust or transparent compared to the US, thus preventive measures are important. China will emerge as a leading game development destination due to its low cost structure, robust infrastructure, and most importantly, it has an avid gamer base that loves playing games. Employees who are gamers tend to be more passionate about their job than those who work solely for a paycheck. By outsourcing to China, companies can achieve cost savings of 20% to 40% in areas such as art creation. With rising next-gen development costs, the savings from outsourcing can help increase profit margins and make the difference between a profitable and unprofitable title. The game development industry is relatively young in China, thus there is an initial steep learning curve. This curve will flatten as developers build up experience and as companies invest in training programs. The accumulation of experience that leads to the development of best practices will not occur overnight, but is occurring rapidly as the game development industry in China matures.