Catchig Up The Outsourcing China
According to some reports, China is just a few years away from catching up with India as the destination of choice for companies looking to outsource all or parts of their operations. Others say, no way! Too many barriers sit between it and success. The important question right now is what recent developments in China mean to your organization and its outsourcing strategies.
Taken at face value, China’s presence in the service provider world is good news, since much of the impetus to
outsourcing is cost management, particularly in the area of labor. China’s cost advantage — which can translate into as much as a 70% savings over US salaries — sounds compelling.
But, of course, there’s more to consider than simply hourly labor cost. Quality of work, reliability, efficiency, flexibility, ease of communication and cultural issues are just as relevant in laying out an outsourcing strategy, as are macro factors such as geopolitical risks. Accordingly, this multi-part report begins with an overview of the current IT outsourcing landscape in China. We follow this with a quick discussion on the issues every decision maker and manager should think about before sending work to China.
Shortly, we’ll publish interviews with people on the ground in China who offer their practical advice for working with
China-based service providers.
Low Labor Costs as Pull Factor
The most outstanding virtue of China as an outsourcing destination is the cost. In fact, China is often mentioned
breathlessly as “cheaper than India.”
According to Bryan Huang, president of BearingPoint Great China, an engineer costing ,000 a month in the U.S would cost only 0 in China. And that’s for an engineer in Shanghai. According to ChinaHr.com, the salary level of an engineer in places like Xian or Dalian is closer to 0 a month. In short, the cost can be said to be between a sixth to an eighth of what it would be in the U.S., the variances being accounted for by regional differences.
Though there are analysts who argue that China is, on average, on par with India in terms of cost — Ian Marriott,
Research Vice President of Gartner being one of them — the fact is, in monetary terms, China’s pull will increase as
salary inflation drives cost up in India, the current dominant offshoring destination. India’s IT industry, blessed by high demands but beset by lagging human resources, experienced a 14% salary inflation in 2003. The trend is set to continue, which means that, based on a 13% compound annual growth rate, Indian programmers’ pay will nearly double by 2010. Already, according to JP Morgan, some Indian companies have put in place offshore floor rates of to an hour.
This labor cost advantage will be sustainable for a time to come. China has a large, expanding and sustainable pool of IT workers. Chinese universities, which matriculated 140,000 students in 2003, are predicted to churn out IT workers at an annual rate of between 150,000 and 200,000. The 2,000 Chinese universities (with current enrollment of just about 10 million students) can easily increase the numbers when the government decides there’s a need.
The ultimate testament to the importance of this virtue comes from India, whose firms, looking to continue their
dominance and growth, have decided to make China part of the solution. Nandan Nilekani, CEO of Infosys Technologies, declared that the company needs “a deep reservoir of talent as well as an alternative low-cost center like India as we continue to grow — and only China can match up.”
A Background and History of China’s IT Outsourcing Industry
The software outsourcing business in China is still in its infancy. Most of the growth and attention is recent.
Cyrill Eltschinger, who started I.T. UNITED in 1998, before China was on anyone’s map as an IT destination, attests to it: “I can tell you for a fact that pitching China-based high-end engineering services was — up to the 2003 timeframe – a hard sell and a long shot.”
The numbers show it. China’s software exports, which include software outsourcing, was a miniscule 0 million in 1999. It grew to billion in 2003 and is estimated to be .2 billion in 2004, according to International Finance Corp. Since China didn’t open up until 1979, there was little industry to speak of before that. In the 1980s and until the mid -1990s, much of the limited pool of engineers’ talents and energies were spent on reverse-engineering key hardware technologies. “It was driven by the government and focused on things such as circuit design and technologies with mixed civilian-military importance,” explained Thomas Brizendine, a senior partner at market consultant GCiS China Services in an article published in China Business Review.
In the ’90s, as China developed and IT needs expanded, the industry diversified and shifted in focus. It developed a large number of relatively basic information systems involving, typically, simple manipulation of databases. These systems were developed independently with little thought on integration or overall design issues.
In the late ’90s, thinking about software integration began to emerge in some quarters. But the Internet bubble became a major distraction. When that floated into the sunset, it left in its wake an industry that is still — on the whole – new to systems thinking, component-based design, true objected oriented design, and development capabilities and best practices.
The recent flurry of activity that helped put China on the outsourcing map came about partly as a result of government support and promotion, partly because of Japan’s push to move much of its software development work to China, and partly because a number of large foreign companies — GE, Microsoft, Dell, SAP and HP, for example — started up R&D centers in China.
Nevertheless, presently, non-domestic outsourcing business accounts for just 10% of the industry’s total revenue (compared with around 70% for India). Of this, according to McKinsey & Company, about 65% is contributed by Japanese companies demanding low-value application development work.
Growth in the outsourcing business presently is still driven by domestic demand, where customers are primarily small and midsized Chinese enterprises that want their software customized to their needs. The reality of the domestic market is that many projects are below optimal scale and that suppliers often compete on price (and not necessarily quality).
(We should point out that the sophistication of the domestic software companies is also directly related to fact that
Chinese enterprises do not, in general, rely on IT for competitive advantage. The game is about price, distribution and relationships, even though there are a few companies with fully integrated ERP programs.)
This is changing. China’s industries and institutions are starting to spend more on IT and are going beyond basic
systems. “The longstanding habit of burying software costs inside the hardware costs, while still common, seems to be coming to an end as clients become more sophisticated and system demands increase beyond what is available from simplistic software solutions,” according to Mr. Brizendine.
The Vendor Landscape
This backdrop explains the fragmented vendor landscape. The Chinese software industry is awash with small companies. Of some 8,000 IT services companies in China, about three-quarters are small operations with fewer than 50 employees. Only five companies have more than 2,000 employees, according to McKinsey. Although the data is a bit dated, in 2002 the China Software Industry reported that the average revenue of its members was a modest 0,000.
McKinsey also noted darkly in its publication, The McKinsey Quarterly, that “The top 10 IT-services companies have only about a 20% share of the market, compared with the 45% commanded by India’s top 10.” Currently, there is no company in China with a status and recognition in the global market synonymous with that garnered by India’s Tata Consultancy Services, Infosys or Wipro Technologies.
This fragmentation feeds into and explains why many of the Chinese software companies haven’t been able to amass the kind of higher level skills needed to handle projects larger than one-off contracting work.
Though there’s a rush towards capability maturity model (CMM) certification, as of the beginning of 2005, only six of China’s 30 largest software companies are certified at levels four or five.
The implication for any company looking to outsource to China is that, though the landscape is crowded, finding the right partner can be difficult.
The challenge in working with smaller companies is that they make for riskier partners in terms of reliability and on-going viability. They have difficulty retaining the best people or gaining experience in large, complex projects. Scalability may be an issue. Also, because projects and resources are limited, so is training. In fact, though the universities are graduating thousands of engineers a year, competition for the most talented and experienced people is high. Bigger shops such as IBM and Nortel Networks, which are establishing their own development centers in China, are gobbling up the top talent.
Of course, large size isn’t a stamp of validation either. The major Chinese software firms often started out as or are engaged in hardware distribution, corporate network system integration, software/hardware systems integration and software development. These companies expanded into the
Related posts:
- Minimize The Cost And Maximize Offshore IT
- The Concepts Of Outsource Outsourcing
- Home Remedies Of Medical Outsourcing
- Outsourcing Bookkeeping Businesses Benefits
- Fitting Outsourcing Prevalent Tradition
Pages: 1 2