September 2006

China an Offshore Outsourcing Rising Power?

Over the last month or so we have read a few articles in the National Press about China as a rival to India for outsourcing powerhouse.

The outsourcing of IT and back office functions has been largely associated with India the last 3-4 years. Some interesting trends and developments have been coming to our attention over the last few years and our trip to South East Asia/China in August 2006 confirmed what we had suspected for the last 2 years.

The fact is that multinational companies (MNCs) have substantial operations in Southeast Asia and East Asia and have operated in this area for quite sometime. While Indian companies usually follow the strategy of marketing directly to North American companies or setting up offices in North America, Chinese companies and Southeast Asian companies have been quietly marketing to the MNCs in their own back yard.

The value proposition is much more clear with this marketing strategy as the "service provider" and the "buyer" are in close proximity and there is a need to access "expertise". A case in point is our experience in China in 2002-2003. We saw companies such as Manulife Financial (Canada) and Chinese banks both setting up captive and 3rd party outsourcing agreements in anticipation of deregulation of the Financial Services sector in China (Inbound & Outbound agreements). We also saw this with HP Asia that set up service desks in Southeast Asia in 2004-2005 to support technical teams in the region.

The media tends to sensationalize outsourcing and China and India as rivals, but the reality is all we are seeing is the further development of the outsourcing market in China and India to the next level- specialization and regionalization. It is unlikely China would service US firms for Inbound and Outbound call center support, but they would service US firms based in China. The domestic economy is big enough to see the kind of double digit growth as with Indian outsourcing from the US directly a few years ago.

China has the B2B business opportunities to make this happen especially with the amount of US/European MNCs based in the country.

How does this translate in China becoming a rising outsourcing power?

1. China has the domestic economy to support wide scale outsourcing and there is a need to access expertise. The number of Foreign/Domestic MNCs in the China market dwarfs that of India. Inter-Asia trade has surpassed the amount of goods and services exported to North America.

2. Analysts and other organizations often site the cost advantage of India over China on salary basis, but the fact is Chinese outsourcing companies are undercutting their Indian competitors in IT outsourcing by as much as 10-20%.

It looks more like marketing strategy to capture business in the short-term, but the fact is many of these chinese firms have deep pockets as they are backed by larger organizations, banks, investors or are subsidiaries of a larger parent organization--meaning they could sustain this pricing strategy for a few years. Indian companies on the other hand are usually standalone entities especially in the small to mid market.

3. The Chinese government tightly controls foreign ownership in key sectors to the advantage of the local firms.