Source: www.offshoringtimes.com
Communist China is vying to become the favored global offshore outsourcing destination. With many a government initiative in this direction, it is indeed making calculated moves to achieve offshore outsourcing supremacy.
Strong government initiatives, an education system creating a larger skilled work force, and unique economic conditions has positioned the country to challenge even India for dominance in offshoring.
Long the favorite outsourcing destination for manufacturers thanks to its low wages, China is striving to move up the value chain and capture a major share of the global IT and back-office services market, as well. However, China has substantial challenges to overcome, as do companies looking to set up operations there.
Atul Vashistha, CEO of the offshoring consulting firm neoIT in San Ramon and co-author of the book “The Offshore Nation: Strategies for Success in Global Outsourcing and Offshoring”, says “China is definitely becoming a more attractive destination.”
He further says that the nation’s IT industry had until recently been focused on the country’s own developing market and on business from Japan, but in the last couple of years that has changed. The Chinese government is attempting to unify efforts of various organizations to promote the country’s IT parks and special economic zones for outsourcing from the United States and other Western countries. It is also studying outsourcing industries in India and the United States.
While those efforts are much more fragmented than similar moves in India, they are starting to come together, Vashistha said.
China is an attractive candidate, especially for IT outsourcing. It offers many of the same characteristics that have made India the top offshoring destination for IT and other services. Despite moves to open its economy over the past two decades, China remains economically aloof from the rest of the world, with wages that are far lower than in most places and a cost of living that makes those wages possible. At the same time, central control over the education system has created a widely distributed skilled labor supply.
A number of outsourcing centers have developed - best known among them, Beijing, Shanghai, Shenzhen and Dalian, where 40 years of Japanese occupation (1905 to 1945) left Japanese language skills and a cultural orientation that has helped that region in northeastern China develop business relationships with Japan. Although the country still lags behind India, large American IT companies such as IBM Corp. have opened up operations in China, as have prominent Indian outsourcing firms, including Bangalore-based Infosys Technologies Ltd., which has its U.S. headquarters in Fremont.
Still, China faces sizable challenges. Cynthia Kroll, a senior economist at UC-Berkeley’s Haas School of Business who has researched global outsourcing, cited institutional differences as one difficulty. India is much closer to the United States in an institutional sense, making it easier for U.S. companies to set up operations there, she said.
In larger Chinese cities or areas where the national government has taken an interest, the government will address infrastructure and other problems, Kroll said. But in smaller and more remote cities, companies may encounter less-accommodating local governments and practices, and those areas also will be less Westernized.
Another challenge is a lack of mid-level managers with global experience, Vashistha said. With China’s huge market, businesses have focused on domestic - not global - operations.
A major challenge is language, but the Chinese government has been working to overcome that obstacle with several campaigns launched since July 2001, when Beijing was awarded the 2008 Olympics.
Vivi Wang, Chinese editor in chief of the Taipei-based educational publisher LiveABC, which publishes English-learning materials for Asian markets, said local government organizations around Beijing have made learning English a priority. The goal is to have more people speak English - taxi drivers, shopkeepers and people on the street. The government wants to use the Olympics to showcase Beijing as an international city and believes English proficiency will help.
NeoIT’s Vashistha predicts China will become a serious contender for IT and back-office outsourcing after the Olympics.
While China’s main attractions include lower wages and a large skilled labor force, labor markets in major Indian cities such as Bangalore have been getting tighter, driving up both wages and turnover.
Responding to that contrast, San Ramon-based Achievo Corp., which offers software and IT outsourcing services, has focused on China. Achievo’s chairman and CEO, Robert P. Lee, said China’s pervasive education system is an advantage, as it spreads skilled labor into smaller cities.
Achievo has set up operations in several Chinese cities and plans to open more, on the premise that as wages rise in larger metropolitan areas, the company will still be able to maintain savings for clients.
Going beyond the major cities could have additional advantages, Lee said. A high proportion of workers in larger cities have migrated from other parts of the country. In China, where family is highly valued, working closer to home is a substantial perk, even if the pay is lower.
As American companies have learned in India, recruiting and retaining skilled workers are among the most difficult challenges. Lee stressed the importance of overcoming high turnover, since it affects efficiency as well as cost.
Lee said his company also maintains a larger front-end staff in different countries - with a ratio of two IT staff in the client’s country to every seven in China - to help project efficiency.
These factors leave much for companies to consider. Lee says that companies need to look at the strategic role of their outsourcing and see if there are advantages in a particular country.
NeoIT’s Vashistha, who has consulted on outsourcing in several countries, offered three main points to consider: strategy, source and governance. He said a company should begin by looking at its processes and its ability to outsource them.
Next, a company must look at the skill sets available in a particular country. If English is needed, China is probably not the answer, at least not yet; but for certain IT tasks - for example, software embedded on chips - then China has the experience and skills. Companies need to match their long- and short-term plans with abilities and trends in a country.
Finally, Vashistha said, companies must commit to investment in ongoing management of the operation and the outsourcing supplier.
Another strategic aspect for larger companies is presence. UC-Berkeley’s Kroll said that for many multinationals, the cost advantage is only a part of the decision. “If they want to sell in China, they have to have a presence in China,” she said, and outsourcing is one way to establish that presence.
And China’s massive market is a huge draw, giving it another advantage in the competition for offshoring business.
“China is more than up and coming; it is here in many ways,” said Kroll. And its role in IT outsourcing is definitely going to grow.