China's push into service
outsourcing By Brian Schwarz
SHANGHAI - After becoming the world's
workshop for mostly labor-intensive products,
China has unveiled a plan to enter an area long
associated with its Asian rival India: it is
poised to prioritize service outsourcing in the
coming years, in a bid to boost the services
industry. Experts predict that the global
service-outsourcing market will hit US$1 trillion
by 2008, with China lagging behind India in the
sector.
China's Ministry of Commerce will
launch a project with an annual
budget of at least 100
million yuan ($12.5 million) to set up 10 bases
for service outsourcing over the coming three to
five years, according to an earlier report by the
state-run China Daily. The hope is to persuade 100
multinational corporations to transfer some of
their outsourcing businesses to China, as well as
to create 1,000 large-scale international
service-outsourcing enterprises. Implementing the
central government's blueprint, the Shanghai
municipal government announced in late August its
plans to foster the development of 100 such firms
over the next three to five years.
On top
of its impressive manufacturing capabilities, if
China succeeds in its efforts to attract more
service-outsourcing dollars, the implications
could be enormous. With greater innovation in
digital technology, many experts say we are on the
verge of a new outsourcing wave. In the so-called
flat world of globalization, any work that can be
digitized can be transferred around the globe via
e-mail in a matter of seconds.
In the
West, many people just associate service
outsourcing (such as the offshoring of
manufacturing ) with job losses, depressed wages,
and economic decline. During his re-election
campaign in 2004, US President George W Bush was
often put on the defensive by his political rivals
over slow job growth coming out of the recession
in 2001.
While millions of working people
are at risk, the cumulative economic effect is
positive for outsourcing, assuming of course that
it can make the difficult climb up the value
chain. A 2003 study by the McKinsey Global
Institute showed that offshoring creates wealth
for Americans as well as for China or India, the
countries receiving the jobs. According to their
research, for every dollar of corporate spending
outsourced to India, the US economy captures more
than three-quarters of the benefit and gains as
much as $1.14 in return.
India vs
China Looking into the future, how does
China compare with India in its quest to attract
more service outsourcing investment from Western
multinationals? On the plus side, China enjoys
superior infrastructure, while India has native
English speakers.
However, both countries
are struggling to give their younger generations
the skills they need for a high-tech workplace.
And in this regard, both need to improve their
education systems.
Another McKinsey study
claimed that developing countries produce far
fewer graduates suitable for employment by
multinational companies than the raw numbers might
suggest - only 13% of the graduates from the 28
low-wage nations are suitable for jobs in these
firms.
Although China's top schools, such
as Beijing-based Peking University and Tsinghua
University or Shanghai's Fudan University, are
world-class institutions, McKinsey research says
the country spends only 4.3% of its gross domestic
product on education, less than other
lower-middle-income Asian countries such as
Thailand. Years of under-investment in the
classroom are starting to take their toll.
Because many Chinese professors favor a
lecture-based teaching style that puts great
emphasis on theory, many students lose the
motivation to learn. Problems start at the very
top of the educational hierarchy.
Last
September, Wang Yin, a PhD candidate at Tsinghua
University, wrote a 15-page open letter, titled
"The Smashing of the Tsinghua Dream", explaining
his reasons for dropping out of its
computer-science program. Publishing the letter on
his weblog, he attacked the school's obsession
with producing "meaningless research papers,
rather than focusing on practical training".
With China's university enrollment growing
dramatically in recent years, most campuses are
burdened with too many students and larger class
sizes. The number of enrolled university students
has exploded from 3.4 million in 1998 to nearly 16
million today. Ministry of Education figures show
the proportion of 18-to-22-year-olds at
universities in 2004 was 15%, compared with only
7% in 1995. And the ministry has set the ambitious
goal of 40% by 2020.
Chinese graduates
usually face a difficult transition from the
classroom to the workplace. An American director
of education at one of Shanghai's leading
joint-venture schools says China's traditional
rote learning style and strict top-down
educational system make it difficult for recent
graduates to adapt to an innovation-focused
environment. While requesting anonymity, given the
topic's sensitivity, he noted that most Chinese
"university students" actually attend full-time
classes for only three years, not the standard
four years common in the West.
At lower
levels, even in the most developed parts of the
country, similar problems are emerging. The South
China Morning Post reported that Beijing's
elementary and junior-high-school students are
poor readers and struggle to solve practical
mathematics problems, according to a survey of
7,000 fifth- and eighth-grade students in the
nation's capital. It found they did well in
writing and recognizing characters, but reading
was their weakest area. More worrisome, education
researchers who study rural junior high schools
have observed dropout rates approaching 40%.
Evidence is mounting that other developing
countries face similar problems.
While
India has built up an international reputation for
its dynamic information-technology sector and call
centers, The Times of India published a story in
July about the country's scientific adviser,
Calyampudi Radhakrishna Rao, warning that science
in the country is on its "deathbed". In a letter
to Prime Minister Manmohan Singh, Rao highlighted
the threat faced by the fragile structure of
science in India. It concluded with the claim,
"Indian science will be finished in the next five
years. Our universities have dried up."
With an effort to help millions of the
so-called "untouchable" poor children, India's
quota (for student enrollment) law has many
private universities worried that they will lose
their financial viability and academic integrity.
Similar to the debate over affirmative action
raging at many US universities, this sensitive
issue involves questions over fairness, academic
standards, and helping students from less
privileged backgrounds. Critics claim that the
controversial law will damage the very academic
institutions that provide the most skilled
employees that the Asian giant desperately needs
to move up the economic ladder.
India
has demographic advantage Compared with
Vietnam and India, China's soaring labor costs and
talent crunch will also make it increasingly
difficult to reap the benefits of increased
outsourcing dollars. A July report from the
Economist Intelligence Unit, for instance, showed
that 48% of Chinese companies said a lack of
"suitable management candidates" when searching
for executives is a major problem for their
business, with 7% of companies surveyed losing
15-20% of their senior managers every year.
India is one of the few major countries
without a graying crisis on the horizon. This
demographic pattern gives it a huge advantage over
China, and this edge will last over the next few
decades. And by 2050, Goldman Sachs says, every 10
Chinese workers in the age group of 15 to 64 will
support a total of seven younger and older people
- a dependency ratio of 70%.
Industry
insiders estimate China's share of the business
process outsourcing (BPO) business at about $2
billion, a fraction of India's. China, say most
observers, is five to 10 years behind India in
BPO. In the next few years, government officials
hope to close that gap. Nevertheless, given the
rapid changes taking place in the Middle Kingdom,
the Chinese may just be successful despite the
difficulties they are now facing.
Brian Schwarz
is an American freelance writer and
corporate trainer based in Shanghai.
(Copyright
2006 Asia Times Online Ltd. All rights reserved.
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