India is the undisputed offshoring centre of the world but a new challenger has appeared on the horizon. Corporations considering offshoring work to low-cost countries, long accustomed to turning to India without a second thought, are beginning to consider China as an option.
Does China have what it takes to be the new epicentre of offshoring, or is India’s pre-eminence unassailable?
India has good reason to celebrate its offshoring performance over the past 20 years. Covering activities ranging from IT and call centres to business process outsourcing (BPO), by many estimates India captures more than half the offshore market.
Its dominance can be exaggerated, however. News headlines question the quality and security of Indian offshoring. Recruiters complain of rampant wage inflation and attrition, and it is hard to ignore the infrastructural shortcomings on the streets of Mumbai or Chennai.
Eyes on China
While India tackles these growing pains, companies considering offshoring (both in house and outsourced) have started to explore China. Chinese government bodies and conference organisers have begun to bang the offshore drum. Executives are asking whether China can upgrade from being the workshop of the world to being the world’s back office.
At first glance, China appears to have the makings of an attractive offshore location. In terms of size, its massive population sets it apart from all other offshore locations (except India). It has low labour costs – the fundamental driver of global sourcing. Costs are often broadly comparable with India’s (particularly away from Beijing and Shanghai), with entry level employees’ wages at $200-$400 a month.
China has a well-developed university system, the vital finishing school for would-be IT and BPO recruits. It also has better transport and communications infrastructure than India. According to Sumeet Chander, general manager at knowledge process outsourcer Evalueserve China, these are the basic building blocks of the outsourcing industry. “If you have good universities, and good infrastructure, BPO will follow,” he says. “In terms of government support, in many ways China is ahead of India.”
Employability
On closer inspection though, China is a more complex proposition, above all in terms of the employability of its abundant human resources. Mr Chander’s observations on the matter are typical: “In China, employability is still a big concern. Out of every 100 graduates we interview, maybe only 10% are employable.”
Outsourcers cite two key issues: business skills and language abilities. In terms of skills, many complain of a dearth of management experience, and question a cultural emphasis on discipline that stifles creativity.
Clearly stereotyping should be avoided, but many recruiters would agree with one outsourcer’s conclusion: “In terms of talent, India will continue to score above China.”
The skills deficit is reflected in the fact that many offshore operations in China are lead-managed or trained by Indian expatriates.
Language skills
More importantly, there is the question of language. Unlike India, China has limited abilities in English and other foreign languages. In a market where 75% of deals are managed in English, this constitutes its greatest offshore challenge. Mitsuru Maekawa, CEO of Genpact China, an outsourcer of BPO services, says that although the quality of skills in China is growing, for most service providers “voice-based services in Chinese or Korean are okay, but are very limited in English”.
The picture is changing, however. The Chinese government is driving long-term improvements, recently announcing plans to spend more than $5bn on language training to target the BPO market. Mr Chander says: “Language will remain a big factor but China will catch up on this front very rapidly. India’s language advantage will not be a lasting factor.”
In the meantime, corporations ramping up in China need to bridge the language gap themselves. “Bridging the language gap requires initial investments in spoken and written English training, especially for junior and mid-level workers,” says Srikanth Iyengar of Infosys, one of the leading Indian outsourcers.
Law and politics
China’s offshore prospects are also tempered by the regulatory and political climate. Concerns about its political regime have generated heated debate, mostly in the US. More tangibly, question marks over the legal system loom large for a country that only recently legally recognised the concept of private property, and where contract enforcement and intellectual property rights are far removed from Western norms.
China’s legislators are moving fast to address these points but they provide risk management challenges for many offshorers.
China faces clear issues as it enters the global sourcing market. But, at the same time, it is far from an untested location for offshoring. In the past five years there has been a steady acceleration in back-office work delivered from China, and the key features of China’s offshore landscape are becoming clear.
Geographical spread
Different regions in China offer different labour costs, regulatory conditions and infrastructural assets. A picture is now emerging of a select group of cities where IT and BPO offshoring is already well established. Building on early investments in IT and research and development facilities over the past 10 years, these established locations – such as Beijing, Shanghai and Dalian – have access to good language and technical skills, and are home to multinational clients already operating in China.
Many outsourcers are building up scale and capabilities in a next generation of emerging locations, such as Hangzhou, Chengdu and Xi’an (where a 35-square-kilometre ‘Chinese Silicon Valley’ is being built by the government). Many of these cities may be distant from established locations on the coast but they are also significantly cheaper, with substantial room for growth. Their emergence mirrors the range of ‘tier two’ cities in India.
China’s players
China’s offshoring expansion is driven by a range of participants. The first major offshore players were the in-house research centres for global brands such as Motorola and Oracle, from the mid-1990s onwards.
Then came the global consultancies such as Accenture, IBM, BearingPoint and EDS. These organisations are continuing to accelerate their investments. For example, EDS China is planning to double its presence to two locations with about 2000 staff by the end of 2007.
The major Indian outsourcing providers, such as Infosys, Genpact and TCS, have been investing in Chinese capabilities for the past few years. Infosys, for example, has more than 750 employees in China today, and plans to hire an additional 4000 people in Shanghai and Hangzhou.
The final entrants are the indigenous Chinese service providers. Unlike in India, they have been slow to emerge in China, and there are as yet only a small number of home-grown offshore providers, such as Shanghai-based Bleum. This is likely to change in the coming years, organically or through acquisition, mirroring the emergence of Chinese brands in manufacturing.
Offshored activities
China has been a global centre of manufacturing for decades, contributing to an early focus on hardware and software R&D facilities for the likes of Oracle, IBM and Motorola; the number of foreign R&D centres in China increased from 200 to 600 between 2002 and 2004.
In the core offshoring activities of IT and BPO, developments to date have been less spectacular. IT activities such as applications development and testing make up most of the non-R&D back-office work done in China today.
BPO activity has lagged further behind but that is set to change. Mr Iyengar says: “Infosys started delivering BPO services from China three years after IT, but we see both services growing rapidly in the future.” Research group IDC forecasts that the Chinese BPO market will grow substantially over the next five years at a rate of nearly 40% a year.
Many analysts suggest that, due to language issues, China will remain best suited to lower-end, transactional processing rather than more creative or analytical IT or BPO tasks. This will be a key test for China’s offshore development.
Customer base
China’s offshore customer base is both regional and global. Up to 80% of China’s current offshore activity is for Japanese clients via centres like Dalian. Of the remainder, many are Cantonese-based services via Guangzhou and Shenzhen for Hong Kong clients. As a result, only a small part of China’s offshoring activity is targeting more global markets such as the US or Europe.
This regional focus is shifting, as outsourcers win business with English-speaking multinationals operating in China. Evalueserve, for example, has a number of global banking clients to which it provides analytical support. Infosys, too, expects offshoring in China to become more globally orientated as capabilities mature.
China versus India
This snapshot conveys a sense of momentum behind offshoring in China, underpinned by regional demand and driven by the country’s growing importance as a multinational market. As a result, some analysts are predicting that China will win a 20%-30% share of the offshore market within 10 years.
China’s progress to date is significant and its future looks promising, but it is also clear that predictions of India’s demise are premature. India has a massive head-start in terms of quantity and quality of work. But, despite the gap, the question remains: will China’s growth be India’s loss?
The answer is no. India will continue to grow as an offshoring location despite China’s acceleration. China’s own internal issues regarding language and employability will act as a brake on its growth, as will the need for companies to avoid dependence on any single location. Mr Iyengar says: “For Infosys, China is an integral component of a strategy to build up diverse, globally distributed talent pools.”
In addition, Chinese offshoring activities are becoming integrated into the wider architecture of global sourcing. Supply chains, process flows and development cycles are already interwoven geographically with facilities in India, Europe and America – and China is becoming part of this collaborative, distributed system.
Endorsement of this ‘complementary future’ is illustrated by NASSCOM, the Indian software industry association, which has been instrumental in promoting Indian corporate investment in Chinese offshoring – and the new wave of Indian facilities opening across China bears out this engagement.
Offshore niches
As a result of this integration, specialisation can be expected and China will start to assert global leadership in specific offshore market niches. As is happening in other locations, clusters of offshore expertise will form in the Chinese cities with the right blend and critical mass of skills in specific areas, such as pharmaceutical R&D or security systems.
How China nurtures these areas of specialisation, while addressing its structural shortcomings, will be the primary challenge of the next few years. In so doing, China will find its place in the offshoring market alongside, not instead of, India.
Paul Morrison is a senior manager at specialist sourcing advisers Alsbridge.
