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Foreign outsourcing vendors to benefit from rise of China

Patrick OBrien | Nov. 24, 2009
Chinas importance as an outsourcing location is rising fast, but a fragmented local vendor landscape and a domestic market dominated by Wholly Foreign-Owned Enterprise customers means that it will be the major Western and Indian outsourcing vendors that will reap the rewards, according to a new report from analyst and consulting firm Ovum.

Chinas importance as an outsourcing location is rising fast, but a fragmented local vendor landscape and a domestic market dominated by Wholly Foreign-Owned Enterprise customers means that it will be the major Western and Indian outsourcing vendors that will reap the rewards, according to a new report from analyst and consulting firm Ovum.

The Chinese government is anticipating the need to migrate its economy from manufacturing to a services base in the long term, and has put in place a strategy to ensure that China will eventually rise to challenge India in the outsourcing sector. The Chinese government has designated 20 cities for outsourcing business and the investment in infrastructure, education, training and tax incentives at these locations is extremely impressive. Software parks are being built rapidly and on a large scale with transportation links to match and the university education system has ballooned to create 6.1 million graduates this year. It is clear that the Chinese government is intent on providing first-class infrastructure in which IT services and BPO vendors can flourish.

Low costs and access to a superpower economy is enticing outsourcing customers, and Chinas huge labour pool and expanded education system means that salaries for graduates are lower than in India. China is the fastest growing major economy in the world and Western companies, many of which have fully embraced the concept of global sourcing, are setting up Chinese subsidiaries to target a relatively untapped market. These subsidiaries will be an entry point for vendors to use China for delivery, and will lead to multinationals to consider Chinese delivery for its businesses in other locations.

No sign of domestic giants emerging

Chinese companies are mainly state owned, and are not as yet, major users of outsourcing services. Unless the government encourages this to change, the domestic market will be mainly made up of Wholly Foreign-Owned Enterprise (WFOE) customers. These firms are more likely to choose to be served by the international vendors with which they have already built up relationships rather than sign with domestic vendors. The domestic vendor market is highly fragmented and while there has been some consolidation, the market needs this to be much more rapid for some strong leaders to emerge. In the meantime, Western providers have invested in Chinese delivery centers having learned their lesson from the procrastination many showed when India emerged, which effectively allowed Indias domestic vendors to build themselves into global players.

There are no signs of a Chinese equivalent of a Tata Consultancy Services or an Infosys emerging, capable of challenging the Western major vendors for the foreseeable future.  

China needs to deliver promotional punch

Possibly the biggest barrier to China achieving its full potential is its lack of marketing skills. This is amplified by the lack of an industry organization such as NASSCOM to promote Chinas impressive abilities to the international market. Currently there are two government ministries working on the outsourcing industry the Ministry of Commerce and the Ministry of Industry and Information Technology which have, confusingly, both begun separate attempts to develop a China Sourcing brand. Vendors with a presence in China agree that a NASSCOM style organization would be beneficial, but as yet there seems to be no push to make it happen. Any such organization would have to work in tandem with the government rather than as a lobbying group.

Patrick OBrien is Senior Analyst, Ovum.

 

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