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2 China, India vie for outsourcing
market By Daniel Allen
BEIJING - Asian heavyweights China and
India continue to battle it out for major slices
of the increasingly lucrative outsourcing pie.
While China has long been considered a hub for
manufacturing and research and development
(R&D), India has traditionally attracted the
lion's share of the services and
information-technology (IT) projects.
However, as China leverages its superior
infrastructure and cheaper labor, and expands its
pool of highly qualified, English-
speaking personnel, the
dynamics are set to change.
According to a
recent report by the market-intelligence firm IDC,
total revenue from China's offshore software
outsourcing market will grow fivefold over the
next five years, and the compound annual growth
rate of the market will reach nearly 38%. China's
offshore software outsourcing market continued to
grow rapidly in 2006, with reported total revenue
reaching nearly US$1.4 billion, up more than 48%
year on year.
In addition to cheap labor,
other drivers for the expansion of the Chinese IT
outsourcing market include market deregulation,
large-scale investment in technical education,
better intellectual-property protection, IT core
standards and infrastructure development, and the
flourishing Chinese economy. Despite promising
growth, however, China still needs to consolidate
its workforce capabilities in terms of
English-language proficiency, project-management
skills, and experience to step up its challenge to
India in the global market.
Kenneth Wong,
a managing partner at SmithWong Associates, a
China-focused US consulting firm, commented:
"Language issues are no longer the major handicap
to China-based outsourcing that they were before.
In the past, the big advantage of the Indian
market was that a lot of Indians spoke English.
However, many IT personnel in China today are
US-educated with undergraduate and graduate
degrees.
"Soon there will be more people
speaking English in China than in the US. The
Chinese government knows it has a way to go in
this area, but the signs are encouraging."
Tao Ye, president of Objectiva Software, a
leading provider of software outsourcing services
to China with offices in the US and Beijing,
commented: "More and more customers are confident
of doing business in China.
"Two years ago
potential clients would say to us, 'Why China?'
Now they say to us, 'Why you?' Since I founded
this company in 1999, we have employed two
full-time English teachers - language skills are
very important in China's outsourcing sector. To
say Chinese employees have no English is a myth."
While Chinese IT companies are
increasingly bidding for international outsourcing
projects, they are also leveraging their proximity
to markets such as Japan and South Korea, where
they have an advantage in both geography and
language. Last year the Korean electronics firm
Samsung outsourced about US$18.5 billion of
business to China in an attempt to lower
production costs.
To take advantage of
China's low wages and Asian-language skills, a
growing number of Indian outsourcing service
providers are hedging their bets by directly
investing in China. In a trend officially
supported by the Chinese and Indian governments,
many Indian firms - including Infosys, Satyam
Computer Services and Wipro Technologies - have
already established operations in China.
Learning from Indian companies, the best
Chinese outsourcers are gradually incorporating
more advanced applications, integration and
infrastructure services into their offerings. Some
are developing strong embedded software
capabilities to work with makers of mobile phones
and other hardware devices.
Edwin Ye is
engagements manager at Beijing-headquartered
MDCL-Frontline, the China-based subsidiary of
pan-Asian IT company Frontline. He commented:
"Compared to India, the Chinese IT outsourcing
market is still very young. I believe the future
is promising if we keep refining our products and
services, investing in personnel and
infrastructure, and exploring new markets and
opportunities."
MDCL Frontline has
recently registered strong license sales of its
China-developed software products, and won
strategic multimillion-dollar deals with Dalian
Techport Systems and Dalian Port Group for
software application development and management.
IDC analysis also showed that in contrast
to India, the Chinese market features considerable
domestic demand. In 2006, more than 40% of
offshore software outsourcing revenue came from
multinational companies that were actually located
in China. It is predicted that this demand will
continue to grow rapidly over the next three to
five years, providing an excellent opportunity for
service providers by allowing them to expand while
avoiding direct competition with Indian companies
in European and North American markets.
Shenyang-based Neusoft Group is China's
largest IT outsourcer, employing more than 10,000
staff, and providing software and IT services, as
well as medical technologies. Most of Neusoft's
revenue is derived from domestic software and
service sales.
"One of the top reasons for
outsourcing to China these days is that companies
in the US or Japan are trying to align their
target overseas markets with their outsourcing
destination," said Neusoft chief technology
officer Walter Fang.
This means such
companies as Microsoft, Motorola and Nokia, eager
to tap China's enormous consumer market, need
outsourced services to support their China-based
expansion strategies. Only last month Microsoft
announced outsourcing service orders worth $100
million to Chinese companies.
Though
Beijing, Shanghai, Guangzhou and a handful of
other seaboard hubs remain the destinations of
choice for most foreign companies, they may not be
the best locales for businesses on a
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