• Sat
  • Dec 20, 2014
  • Updated: 11:02pm

Outsourcing lead eludes China

PUBLISHED : Wednesday, 12 December, 2007, 12:00am
UPDATED : Wednesday, 12 December, 2007, 12:00am

Today, Beijing-based VanceInfo Technologies lists on the New York Stock Exchange, becoming the first Chinese outsourcing company to float in the United States.

Sophia Wong, head of marketing at VanceInfo competitor Beyondsoft, said her company had entered the 'quiet period' that bans it from promoting itself before filing for a US listing. A third Beijing firm called hiSoft also plans to go public some time next year.

Five years after consultancies such as Gartner started hyping China as the next big thing in outsourcing, it is tempting to conclude the industry will soon rival India as a purveyor of IT services to the developed world. In reality, it may be some time before that happens.

China has a niche writing software for Japan and other East Asian nations, and strong growth can be expected at home, yet it is in no position to go head-to-head with India in the big markets of the US and Europe.

According to figures from the Indian National Association of Software Companies and the mainland's Ministry of Foreign Commerce, the turnover of China's IT outsourcing industry was US$2 billion in the year to March, a fraction of India's US$18 billion.

Zhu Ziqi of the Beijing Association of Sourcing Services said that less than 20 per cent of the country's outsourcing goes to the US or Europe.

Wage inflation in India's IT sector was always supposed to be China's opportunity. Nevertheless, basic salaries in 'tier one' mainland cities are still the same or even higher than in Bangalore, although 'tier two' cities such as Xian and Hangzhou may be 20 per cent cheaper.

Tata Consultancy Services regional director Giriga Pande said that obligatory non-wage costs such as social security add 45 per cent to pay in China, twice as much as in India. 'Cost advantage was not one of the reasons we came to China,' he said.

When Indian and Chinese outsourcers cater to the US, India dominates in high-end services such as consulting and systems architecture, while Chinese companies generally stick to less skilled tasks such as coding and program testing.

At industry consultants Temasys, managing director Bill Lewis pointed to a dearth of experienced project managers in China. He also said China's universities tended to give computing undergraduates a lot of theory but little practical knowledge of problems.

Then there is language. 'In a team of 100 professionals you'll only get five to 10 who can do business in English,' he said. 'In India that's never a problem.'

Mr Lewis has spent five years advising western buyers of IT services who have heard about the potential of China. After making the trip and looking around, he said, the majority deferred entry to the indefinite future.

'China doesn't have India's service culture,' he said. 'The Indians have been doing this for 15 years and the entry routes are very well established.' As a result, Mr Lewis said the one-off cost of establishing an outsourcing connection to China was typically three times the cost of doing the same in India.

Still, China's huge kpool of computing graduates makes it the only country with the 'skill and scale' to rival India. It is therefore the No1 choice for large multinationals that already outsource to India, and want to spread risk by sourcing software from a second country.

Given India's advantages and a probable US recession, most Chinese outsourcers should see their biggest opportunities coming from the home market.

At Infosys, which employs some 750 professionals at centres in Shanghai and Hangzhou, China chief executive James Lin confirms the trend. 'We're targeting the home market,' he said. 'Our primary focus is on multinationals.'

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