Will China Overtake India as Outsourcing Hub?

According to a new study by PricewaterhouseCoopers, outsourcing is back in vogue.

According to Charles Aird, managing director for shared services practices at PWC, "Cost is still the major factor…But people are also looking for greater efficiency, better quality and access to talent."

The global economic crisis has intensified China’s desire to match and overtake India as the world’s outsourcing destination.

Why? There are several key reasons:

1. Chinese outsourcing becomes cheaper as the dollar falls in value;

2. IT outsourcing alone was worth more than $250 billion in 2009;

3. The global recession has resulted in more small and medium sized businesses cutting costs by outsourcing their product manufacturing to China;

4. The current global recession has hit China’s manufacturing and export sectors hard…outsourcing looks like a promising new growth area;

5. The tragic terror attack in Mumbai has intensified the focus on India’s stability, safety and business environment

Again, China is competing with India in the outsourcing sector and seeks to take the number one position.

It won’t be an easy feat to achieve.

Can China accomplish this?

In 2008, India represented approximately 37 per cent of the global outsourcing market, while China represented less than 10 per cent.

This new competition between India and China should not necessarily be viewed as inherently bad. In fact, the increase in competition has led to significant M&A activity – with India buying Chinese outsourcing companies and China acquiring Indian companies. This, in and of itself is win-win.

Also, the relationship between India and China has taken on added importance with the onset of the global financial crisis.

India’s Foreign Minister S. M. Krishna recently conducted a state visit to China. In a speech entitled "India and China in the 21st Century" held at the China Institute of International Studies, Krisha said, "As India and China manage their domestic priorities well, it has huge implications for global prosperity (and India and China)….are raising the living standard of almost one-third of humanity.”

According to China’s Foreign Minister Yang Jiechi, "China attaches great importance to bilateral ties and is willing to work hard with India for new developments, taking the 60th anniversary of the establishment of diplomatic relations as a turning point.”

In fact, China and India agreed to set up a high level “hotline” for leaders to communicate directly on.

As we all know, companies look to outsourcing as a solution for a variety of reasons, including, cost cutting, access to new talent and also it permits companies to refocus on their core business.

These are just some of the many reasons.

Not everything can be outsourced and some companies have learned this the hard way. Dell had to bring most of its customer support to the US back from India after intense customer complaints. For the most part, however, there are upsides to outsourcing.

China has not traditionally been an outsourcing hub – a title which has gone to India. China has long been considered a manufacturing and export hub while India has traditionally been considered a hub for services outsourcing work. China and India are similar in some respects as an “ideal outsourcing hub:” both have an abundant supply of talented and low-cost labour and favorable government policies.

IT outsourcing has been a hot area of competition recently between India and China.

What are the key success factors of IT outsourcing?

They include: Technically skilled labour, low cost workforce, high quality of service, a favourable regulatory environment, dynamic infrastructure, English ability and an attractive time zone.

India has the advantage with most of the above.

India is the world’s IT outsourcing leader and is heavily dependent on business from the US. India’s flagship IT outsourcing companies are well-known and include Tata Consultancy Services, Genpact and Infosys.

China has been working hard – with the support of both central and local authorities – to develop its outsourcing industry. The Government has liberalised regulations, the middle class is booming, the economy is dynamic and robust, and there is an abundant supply of inexpensive and well-educated labour.

The questions remains: Can China compete with India on outsourcing?

Recently, there is an indication that China may be able to compete.

A tragic event in 2008 resulted in a major shift in the global outsourcing industry. The terror attack in Mumbai, which caused 172 deaths, put the spotlight on India’s ability to protect the safety of its citizens and tourists. India’s stability became an important issue and stability is a major factor in outsourcing.

Another factor has been the cost of labour in India. According to one recent report “the ratio of wages in India and the US used to be 1:6, but recently it has been closer to 1:3, and can even reach 1:1.5.

Indian labour is becoming a less efficient solution for the outsourcing businesses. The ratio of wages in China and the US is about 1:7 now, a ratio much more advantageous than that for India.”

China also has an abundance of skilled IT workers. China also provides a safe and stable business operating environment.

Are these advantages enough for China to be the number one force in global outsourcing? It’s doubtful.

Even with these seeming advantages, China’s IT workforce definitely lags behind India’s when it comes to English ability. It can be argues that India’s outsource workers are more “well-rounded” and not only have IT skills but English ability and skills in basic management and interpersonal communication.

Another concern is China’s ability to enforce and protect intellectual property – a major concern for outsourcing partners.

The tragic terror attacks in Mumbai, coupled with the financial crisis have shifted outsourcing towards China…I don’t predict this trend will last much longer and the lost business will return to India. An important note: the relationship between India and China is tremendously important and competition in outsourcing has produced some benefit to both sides.

Remember: The best thing ever to happen to Coca-Cola was Pepsi-Cola.

Email the writer: