If weapons manufacturing is illegal in China, don't tell Xin Chung. The American opened his first "munitions factory" in Shanghai last October and plans to open many more.
His company, Vykarian, is an outsourcing studio that builds labor-intensive artwork for game publishers in the US, supplying the ammunition for a global war in the video games industry.
"We provide the bullets" for the wars over market share for video game consoles, online-games and in-game advertising, he said.
Vykarian is one of many studios cropping up across China as rising costs push the industry to outsource.
"I used to have to sell outsourcing," Chung said. "Now it's like catching rain."
The global games outsourcing market was worth US$1.1 billion last year, according to London research firm Screen Digest. It may grow to US$2.5 billion by 2010 with 90% of game developers outsourcing work next year.
The boom is fueled by rival platforms PlayStation 3 and Xbox 360, introduced by Sony and Microsoft, which can handle huge amounts of data, photo-realistic graphics and animations.
"[At the start of] every platform cycle, we see a 30% to 50% increase in product development costs," said Shiraz Akmal, who runs the outsourcing division for game publisher THQ.
Increased capacity requires more manpower and higher production costs – US$20 million can easily be spent developing a game. According to Allison Luong of Pearl Research, companies can save up to 40% on production costs by outsourcing.
In 2006, China had more than 100 outsourcing studios capable of handling international-quality work, twice as many as in 2005, according to research firm Niko Partners.
One of the largest is Winking Entertainment, from Taiwan, which now employs 274 artists and programmers in four studios on the mainland and is looking to add another 100 people. Its revenues jumped 96% in a year, although product marketing director Guo Jingyu would not say what those revenues were.
Other studios report similar growth. Monte Singman, who started Radiance Digital Entertainment in Shanghai in 2005, said outsourcing revenues jumped from US$100,000 last year to US$600,000 this year.
"I believe foreign companies are gaining enough confidence to outsource works to China," he said.
Most of the work outsourced is art asset production: Building 3-D models of characters, objects, or environmental features for games, and creating the polygon sheeting they are wrapped in to give the appearance of texture. Art assets are labor-intensive and have an easily broken down work-flow.
Clients pay a flat fee or a rate per man-month, said Niko's Lisa Cosmas Hanson. Most studios in China charge US$3,000-4,000 per man-month and a standard project is worth anything from US$25,900 to US$77,600. Large projects can go up to US$650,000.
But Chinese outsourcing studios are having trouble keeping up with demand since video game development is only a few years old and the labor pool is small. Local graduates are not yet good enough and most studios must train people from scratch. Vykarian has a training center and plans to graduate 50 developers every quarter.
The anemic labor supply means companies cannot scale up quickly enough and wage inflation threatens to derail the industry. Game developers start out earning less than US$400 a month but after three years employees are demanding more than US$1,000.
"Salaries are already outrageous," Singman explained. "Salaries are going to go up and [China] will lose its competitive edge."
Indeed, China's outsourcing studios are no cheaper than those of chief rival India, but China has another advantage -its game-crazy population.
Pearl Research found that China's gaming market was worth US$760 million last year, with 25 million gamers. India, by contrast, has a small online gaming population.
As Chung asked: "Would you rather have a developer who speaks English or someone who speaks video games?"
China's large domestic game market draws foreign game publishers here. Akmal said THQ also uses outsourcing to scout new markets.
"It isn't about outsourcing entirely; more importantly, we look at new regions in the world where we want to do business in," he said.
Working with development teams in China can be difficult, though. Language problems stretch out contracts and there has been talk of source-code leaks.
Jessica Mulligan, a veteran game producer, recalled the first time she outsourced artwork to China.
"The problem was making ourselves understood through e-mail. Instead of doing three to four iterations for a piece of art, we would be doing seven or eight," she said. "All of a sudden it wasn't very cost-effective."
China's video game studios have more work than they can handle but not everyone is optimistic.
"I would say in the next five years, you will see nothing but boom," Singman said. "And then some of these dreams will break."