Offshore outsourcing: Can China steal India's thunder?
Competitive costs, robust government support, the largest labor market in the world. It's no wonder that for the past decade China has been deemed the biggest--and only--threat to India's dominance in the IT offshore outsourcing industry. In recent years, all the big names in IT outsourcing--from IBM, HP and Accenture to Wipro, TCS, and Infosys--have set up shop there. (See "Inside HP's $1 Billion Outsourcing Plan".) Gartner research vice president Frances Karamouzis calls China "one of the most analyzed alternatives to India." Ovum principal analyst Jens Butler describes it as "a two horse race to the finish."
But what can get lost in breathless analysis is just how far China has to go to catch up to India in the export of IT services--and whether it even needs to pull ahead.
China vs. India: Two Side of the Offshoring Coin
Looking beyond the obvious similarities in size, China and India have little in common as it pertains to IT outsourcing. India's history as an outsourcing destination, dating back some 30 years, began with its successful business exporting IT services to the Western world. It was years later that India Inc. began serving its own country's businesses. In China, the two are happening simultaneously, with the domestic and regional market growing much faster than the export market, says Karamouzis.
The Indian government came late to its IT services party, which was led by the country's commercial sector. "In China, it's the opposite," Karamouzis says. In 2006, the Chinese government unveiled a five-year plan to create 1,000 large and medium-sized suppliers, 100 multi-national corporate clients, and 10 competitive cities for technology outsourcing. And while the government has not released a report card on those efforts, it recently broadened its scope t0 20 cities and introduced tax incentives for IT outsourcers through 2013.
"A lot of the early energy and effort has been focused on what China really likes--building things," says Geofrey Master, a Hong Kong-based partner in Mayer Brown JSM's business and technology sourcing practice. China erected the infrastructure necessary to support a growing IT outsourcing industry--software parks, training centers, a robust technology backbone--in "record time," says Karamouzis, "a lot faster than India."
But China faces challenges foreign to India. And its problems aren't easily or quickly solved by throwing money at them--serious security and intellectual property concerns, management immaturity, cultural conflicts with Western enterprise customers, and most importantly, lack of customer confidence. "The biggest hurdles are rooted in perception versus fact, and that's very hard to overcome," says Karamouzis. "You can't just convince someone with a PowerPoint slide." In addition, China lacks the strong process and quality maturity necessary for the large-scale delivery of IT services, says Atul Vashistha, CEO of outsourcing consultancy Neo Advisory.
India had much of what Master calls "the soft infrastructure" in place--English capabilities, a cultural and business affinity with its Western customers, rule of law--and struggled with the physical infrastructure required for a robust IT services industry. China faces the opposite conundrum. In addition to China's world-class technology parks, it boasts modern airports, new roads, even high-speed magnetic levitation trains. But the country has just 10 million English speakers versus India's 232 million. "Things happen in China when the government sets its sights on doing something," says Master, pointing to the development of its manufacturing sector which now rules the global market. "Stunning things." But the kind of advances necessary to overtake India in the outsourcing export market will take time.
China's Unique Value Proposition
There are areas where China has surpassed India, most notably in embedded systems engineering. Major hardware and software vendors are eyeing China--and Asia as a whole--as a future source of revenue and must localize their products. "It's China's number one area of exported outsourcing, but it doesn't get much press or fanfare because the customer is not an enterprise buyer like the CIO," says Karamouzis. "It's someone in product development or R&D."
In fact, it's that massive domestic market--boasting the highest growth rates in the world and 20% of the global population--that has drawn most IT service providers--and even some customers, to make early bets on Chinese outsourcing. The local economy makes China "independently attractive to virtually any company with any kind of international growth aspirations," says Master. "Accessing ITO capabilities can be part of an overall program of introduction to China."
An IBM or a Wipro sets up shop in China not just to provide additional low cost IT services to its existing customer base. They want to cement deals with Chinese companies. "They're eager to not miss out on the early phases in China as most did in India," Master says. "They're taking advantage of the attractive infrastructure and facilities and incentives China has established in its quest to develop the services market."
Whereas customers who offshored IT to India in the early days did so independently of any enterprise plans for Indian expansion, customers offshoring IT to China are doing so in conjunction with other business functions sourcing materials, establishing manufacturing operations there, or launching joint marketing ventures there "The dabbling they're doing in China is not just limited to the IT outsourcing deal," says Karamouzis. "It's often concurrent to other business activity in three or four different channels." (See "Outsourcing Is Cheaper in China".)
IT Customers Taking the Slow Boat to China
Still, we're not seeing U.S. or European CIOs signing billion0dollar outsourcing deals with Chinese providers--or even the Chinese divisions of multinational providers. And the Chinese IT services market has yet to produce any major names of its own. "The market continues to be fragmented with no really dominant firms," Master says.
IT outsourcing customers are today still experimenting in China. "The routes they're taking to learn about China are multifaceted," says Karamouzis. "They're not just signing up with one company in China." Some may send smaller projects to one or two Chinese vendors to supplement their larger deals with an Indian or U.S.-based provider. Others are mitigating some risk by signing up with a smaller Western IT services companies dedicated to China-based outsourcing. Still others set up captive shared services operations in the country.
Customers are exercising extreme caution around master data security, adequacy and enforceability of contract rights, operational transparency, and supplier due diligence, says Master. Vashistha of Neo Advisory suggests that clients to use China to only to support their Asian operations and, even then, to use U.S. educated Chinese managers to lead operations or handle relationship management.
It's difficult for industry watchers to say when--or if--China will catch up to India as an offshore outsourcing provider. If it is a horse race, it's one in which the finish line is always moving.
China has mature offerings in some areas--embedded software, basic application development--but its five years away from maturity in ERP support, for example. And it could be at least a decade before the country is able to offer anything near the end-to-end IT services necessary to encroach on India's $70 billion offshore outsourcing market. "China has made a lot of progress, but India continues to raise the bar," says Master. "China may never truly compete with India on the entirety of services offered by Indian providers."
If China is to make gains on India in offshore outsourcing, the biggest sign to look for, says Karamouzis, is "ink on deals. Clients signing outsourcing deals with China demonstrates a level of confidence." If customers begin to consider bids from Indian and Chinese providers on equal footing, says Master, that will be further evidence of China's maturation. And "when we start seeing Chinese suppliers set up operations in India," jokes Master, they will have won.
In the end, it may not be an either-or proposition. "Each market must be considered as a delivery location on an individual contractual basis," says Butler of Ovum, "as each has social, political and economic advantages." "One of the fascinating aspects of the whole India vs. China consideration," adds Master, "is the reality that India and China are not, and never will be truly fungible."