China has improved its information technology infrastructure and taken a higher ranking worldwide in the use of IT, a report released in June by the World Economic Forum. China ranked in 46th position globally this year, from 57th a year earlier, based on the NRI - networked readiness index. It also replaced India to take the leading position among the BRICs - China, Brazil, Russia and India, according to the Global Information Technology Report 2008-2009.
This improved infrastructure has been a boon to the country's IT outsourcing industry. Over recent years, China has made major strides in laying the groundwork for a diverse and successful outsourcing market. Edge Zarrella, Global Head of IT Advisory at KPMG, explained in a new report entitled, A New Dawn: China's Emerging Role in Global Outsourcing: “China has been quietly asserting its position in the global outsourcing industry, attracting little in the way of fanfare. Having conceded a significant head start to the now established outsourcing centers like India, it suffered somewhat from the trend for multi-nationals to place all of their outsourcing work in one location.”
Back in 2006 China's central government announced plans to prioritize service outsourcing in the coming years. The Ministry of Commerce launched the project with an annual budget of at least 100 million yuan (US$12.5 million), to set up ten bases for service outsourcing before 2011. The aim is to persuade 100 multinational corporations to transfer their partial outsourcing businesses to China, as well as creating 1,000 large-scale international service-outsourcing enterprises. China's outsourcing companies will also benefit from 15 percent preferential corporate income tax.
India's IT outsourcing revenue, estimated at $18 billion in 2007, is about six times the size of China's. Springboard Research says that IT spending will grow at a slower rate in 2009 than in 2008, but Asian economies will fare better during the current economic crisis than those in the West. The crisis will help drive the ongoing transfer of wealth, power and innovation from the West to the East.
One company leading the industry forward is Long Circle, a US-registered company founded by Hayden Hong in 2005. The Pudong-based firm provides IT outsourcing services including GPS, mobile, VoIP, wireless, video surveillance, .NET and communication products to high-tech clients from around the world, including Motorola (MOT) and China Telecom (NYSE:CHA).
Inspired by Shanghai's iconic Jinmao Tower, Hong started working on his third entrepreneurial business and set out to create one of China’s leading IT outsourcing firms. “Starting up always take a lot of works, even with a long time planning before it - doing it is not the same as planning it,” says Hong, who has also built businesses in the US. “To get it up and running, there are so many things I needed to do.”
With a lot of hard work and a little luck, Hong today is the CEO of Long Circle, which has the mission to be the most efficient embedded technology outsource provider with an Engineering Center of Excellence in China. Contrary to the claims made by some in the West, outsourcing is not simply about cutting jobs and moving them to low-cost countries in Asia. Hong and his team of engineers in Shanghai provide mostly US-based high-tech clients, who benefit from a multiple increase in their return-on-investment.
Concerns over intellectual property, English skills and offshore capability remain for many western companies, but industry experts say outsourcing companies in China have made some improvements in all of these areas.
"There were incidents in the manufacturing industry that give bad names to China, but for outsourcing, where service reputation is a critical business asset, this concern, though common, have been well addressed," argues Hong.
Diversification around Asia
While remains the outsourcing king, there are opportunities for China to gain a larger slice of the pie. The KPMG report says there has been a realization among many major corporations that they can combine the complementary strengths of different outsourcing markets to meet the increasingly complex challenges which they face. "This is a major — and timely — boost for the Chinese outsourcing industry as it means companies are no longer thinking of, say, China or India. Now they're thinking about China and India," the report concludes.
Diversification lowers risk. Recent events in India are forcing many Western firms to rethink their outsourcing plans. First the tragic terrorist attacks in Mumbai caused chaos in India's financial capital. Then in December, a well-publicized accounting scandal at Satyam (SAY), India's fourth-largest IT services company in which the longtime chairman admitted to fraud that artificially inflated profits hit the entire industry.
The global downturn is helping the industry gain new clients. Jim Andrew, a senior partner and managing director at Boston Consulting Group says that in the current recession, companies need to ensure that they are getting full benefit from every dollar they spend -- including their investments in innovation. Andrew sees growing innovation in low-cost countries such as China and India as one way for companies to increase the cost-effectiveness of their innovation spending.
The economic downturn is making China's strengths more attractive. “We are finding a lot more interests in our service from global customers in these recent months,” says Hong. “Some of them have gone through downsizing. Our cost advantage is attractive in good time, and equally attractive in bad time.”
Last month the Shanghai city government drafted a four-year plan to develop high-tech industries such as information technology manufacturing to upgrade the city's industrial structure and enhance its global competitiveness. KPMG says Dalian, Shanghai and Beijing are already ranked in the top ten most attractive cities for outsourcing. It is believed that Shanghai could even challenge Bangalore for the top spot within two years, with Dalian and Beijing thought likely to make it into the top five.
Emerging Trends for 2009
Industry insiders say small and medium size businesses in China have started to outsource massively, creating a huge market opportunity for outsourcers. Smaller firms begin to recognize that they can achieve the same benefits that large organizations enjoy when they hand over non-core IT functions to outside service providers. According to a report by McKinsey published last year, China’s top four outsourcing firms have enjoyed 21% annual growth over the past three years. Last year, Xinhua reported that China's 3,300 outsourcing businesses had a combined contract volume of USD 4.69 billion.
Many Chinese outsourcers are trying to leverage the China's domestic market as a way to gain offshore contracts. Consider the story of Beijing-based Chinasoft International Ltd., which launched a new venture with US-based Premier BPO Inc., which has operations in India and Pakistan. Together they are targeting US doctors and recruiting hundreds of workers to process their medical bills and health insurance claims.
As more Chinese businesses and public agencies contract out their IT, back-office and call-center operations, the firms that provide those services could offer connections to Western firms to help them break into new foreign markets. Chen Yuhong, Chinasoft's managing director, was quoted telling a Los Angeles-based newspaper last year, “We tell them, "You give us business in [your country], and we'll give you the market here."
"We will look back on this time and say it was an inflection point with regard to the speed at which certain innovation activities were scaled up in China and India in particular," Andrew was quoted as saying in a recent newsletter from Wharton Business School. "There is really a step-function change in the rate at which some of these activities are growing."
When Hong started Long Circle in 2005, he firmly believed in the engineering talents in China and the outsourcing service business in China has a lot of room to grow. When he saw the Jinmao tower in Pudong, then the tallest building on the Chinese mainland, it represented China's talent and potential. States Hong, "I arrived at the Pudong Shangri-La Hotel and looked up at this humongous tower. I instantly decided that this city could compete in the world."
Disclosure: No positions