Why does IT outsourcing to China continue to increase despite higher costs than competitors?
China exports billions of dollars worth of IT services per year. However, in my experience, cost for Chinese IT outsourcing is significantly higher than for Indian or the Philippines, the other two main outsourcing players, and the average grasp of English is much worse among Chinese compared to Indians and Filipinos. Frankly, I don't see the draw. What am I missing?
Answers
Hi ncharles,
While you might be aware of the higher costs, I suspect that those outsourcing to China might not be. Some companies are quite myopic in that sense and don't do their homework. They know that vaguely "china is supposed to be cheaper" and thus they proceed from a false assumption.
They'll learn though once they've wasted a lot of money, time and effort in outsourcing. It would make more sense to do their research ahead of time, but that's asking a lot from some companies. Heh, heh.
Here's an interesting article about general outsourcing to China:
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/07/AR200809...
"Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the "China price"-- the 40 to 50 percent cost advantage once offered by Chinese producers.
The export model that has powered China and other Asian countries for three decades will be compromised if fuel prices continue to rise, said Stephen Jen, a managing director for Morgan Stanley.
"Globalization has gone a little bit too far. It has overshot," Jen said. "We're not saying Asia is going to crumble, but we are saying Asia enjoyed extraordinary conditions in the past. Now the conditions are changing very quickly because of the energy shock, and Asia is coming under pressure.""
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As you noted, if you are seeking the greatest cost savings, you outsource to India or the Philippines, without a penalty in expertise. I suppose if you are one of those few companies that have multiple delivery centers, you could outsource to more than one country to reduce risk through diversification, but I can't imagine many companies making a decision based on that.
I think a large part of it is companies that have operations in China, or very close in places like South Korea and Hong Kong do it to support those markets. Sure the Chinese have comparably poor English skills, but they have skills in another language that is pretty important for international businesses in Asia - Chinese. There are also many Japanese and Korean speakers in China (or pretty close nearby). Also, the Chinese government has made a greater commitment to infrastructure than the US, and ensure that outsourcing locations have access to high-speed broadband networks. The Chinese are spending resources to create a high quality operating environment, which I am afraid will make them more competitive in the medium and long term, while in the US any attempts to improve infrastructure causes outrage and cries about infrastructure investment being socialism and a danger to democracy. I personally think we are being extraordinary stupid and shortsighted in this area, and it is going to make it easier to justify outsourcing in the future.