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Offshore outsourcing: Can China steal India's thunder?

Stephanie Overby | Nov. 19, 2010
China is touted as the only threat to India's dominance in the IT services industry. But can China really overtake India's current position?

FRAMINGHAM, 19 NOVEMBER 2010 - 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 (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.


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