Last week Welocalize announced that it had acquired Transco, a PRC-based language service provider founded in 1998. What does Transco bring to Welocalize?

• Asian production and sales. As we advised when Welocalize acquired Irish LSP Connect Global last December, “The natural next step for the enlarged Welocalize will be to expand its presence in Asia beyond the Tokyo sales office with some production capacity in China or India.”
• “Best in its market.” As nearly every vendor does, Transco claims to be the world’s “leading” player in its market. That means Asian language services, where it offers “a complete range of localization solutions for Asian languages including Chinese, Korean, and Japanese.”
• Certification. More objectively, Transco does distinguish itself on two fronts — ISO9000 certification and CMM Level 3 — both features that Welocalize heretofore could not claim on its own.
• Scale. As we noted back in December, size matters to large buyers of language services who “don’t want their projects to constitute 10-20% of an LSP’s business, so that means the bigger deals go elsewhere.” This deal doubles Welocalize’s headcount and gives the company more credibility as a business process outsourcer.

The numbers demonstrate the cost advantages of Chinese labor. With the acquisition of M2 earlier this summer, Welocalize claimed to exceed US$25 million in revenue. While Transco doubles Welocalize’s headcount, it adds just US$5 million in revenue to the bigger company’s total. However, recent news reports indicate that the PRC’s cost advantage is evaporating — labor costs are rising, some sectors are experiencing labor shortages, and the yuan is under pressure to revalue as the booming Chinese economy sucks natural and human resources into its orbit. Sooner or later, US$5 million with 125 employees won’t be a sustainable ratio, so Welocalize will be under pressure — as will all companies in the region — to improve productivity and profitability as wages rise. Manufacturers are already looking for safe havens in less boiling economies. Service companies will follow. Finally, as with any company growing rapidly by acquisition, Yewell faces the inevitable integration and management issues compounded by differences in culture, legal system, business practices, and time zones.

Overall, what can we expect in the region? Earlier this year we commented on 2 major Asian economies vis-Ã -vis language services.

• Expect more language investment in China, both from within and from foreigners. We noted that the PRC government supports its information technology industry with tax breaks, subsidized office parks, and other incentives. We expect the Chinese to get more involved in building an indigenous localization industry to support its export agenda and to create more information-age jobs. Last year the PRC’s State Commission for Administration of Standardization approved China’s first set of standards on the quality of translation, thus setting a precedent for state involvement in the language industry.
• For all its complexity for westerners (see A Quick Take on Japan), Japan may continue to be a gateway to Asia for American and European companies. While Japan is not a low-wage country, it is more financially and legally transparent than China but still on the doorstep of rapid market development in China and Korea. Japan-centric LSPs such as Honyaku Center, Intergroup, and Sunflare book revenue of more than US$20 million per year, but they do business only in Asia.

The acquisition path of Welocalize puts it on track for an eventual initial public offering. With the strength of the IPO market in China, this M&A example raises the question of when we might see a publicly traded LSP in Asia. With Yewell remaining in the driver’s seat and Welocalize being the surviving brand, we won’t look for this company to list in Shanghai — but perhaps it won’t be long before the acquiring party will be based in Asia and buying into the U.S. market in the runup to its IPO.