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» China-Business-Articles » Reading: "Outsourcing in China"
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| Outsourcing in China |
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Chinasourcing website |
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Of the many near-shore and offshore alternatives, China has, arguably, the greatest potential. This was recognized by the Chinese Government two years ago – “Facing the fast growing outsourcing market, China is no longer satisfied being “ the center of world manufacturing,” it also wants to a big share of the outsourcing pie. We should pay emphasis on the trend of multinational companies outsourcing its internal services, actively create the situations, discuss the new methods and expand new ways to attract the foreign investment.” The vice Premier Wu Yi stressed in the Forum of Multinational Companies Investment in China on July 15, 2003.
Since that announcement much has taken place and it is now estimated that the IT outsourcing and BPO market in China is worth almost US$2.0 billion. With the market growing at a CAGR of 23 per cent, the market will reach over US$3.1 billion by 2007.
While AT Kearney placed China in number 2 position after India in their Global Attractiveness Index, there are issues to be addressed to gain the “number one’position.
To accelerate the China’s offshore market – where overseas customers are increasingly willing to outsource Application Development, Managed Service requirements and Business Process Outsourcing to China – China’s Central Government, Regional Governments, and Outsource Suppliers to pursue the goal of being a top outsourcing destination for international Technology and Business Process Outsourcing (including the high value added elements of outsourcing – for example, customer interaction centers, research and development, etc)
The Rise of China
As a result of over a decade of liberalization of trade and innovation and entrepreneurship on a grand scale, China has achieved a significant commercial presence on the world stage which has been heightened by accession to the WTO. Today China has positioned itself as the world’s manufacturing center. Across countless industries and sectors it is dominating supply chains. It is now poised to become a world player the IT and BPO sectors, and the term “China Price” may be as common in the technology and business process outsourcing arena as it is for commodity, automotive, engineering and other goods sought by procurement managers each and every day.
China’s growing role in global business process transformation and how this worldwide trend will influence the development and implementation of business processing strategies in the country.
● The role of multinational BPO providers: Foreign BPO companies, are pushing to involve China in global business process strategies. the world’s largest BPO providers are diving in. BPO providers from around the world are establishing a presence in the country in order to take advantage of low wages and reliable IT networks, as well as to spread their risks. Companies based in India, in particular, are major players in this trend.
● China’s significance is set to increase rapidly: Business process strategies will increasingly. Once companies establish the means to carry out business processing for these local operations, they may consolidate their business processing in China in order to benefit from the huge economies of scale available in the country.
● International competition drives business process transformation in China: The development of China’s market for BPO has been driven largely by multinational providers. These companies have set up facilities in China in order to combine international operating standards with local advantages—including reliable IT infrastructure and low wages. China’s proximity and cultural similarities to nearby Asian markets have also been significant attractions.
● China offers huge growth potential: Business process transformation strategies in China will be driven primarily by the need to respond to rapid market growth. The need to reduce the unit cost of business process that drives BPO in more developed markets. Instead, the need for faster services and capacity will lead many of them to outsource.
Just a few years ago BPO offshoring services were nonexistent in China According to the results of the Economist Intelligence Unit’s global survey of 300 senior executives of financial services companies.
How does China presently & Future rank in the world outsourcing market?
A study which was co-sponsored by American software giant Oracle Corp, and Dimension Data, ranks 60 of the world’s key economies on their attractiveness as off-shoring locations in nine categories, including political and security risk, regulatory environment, tax regime, labor laws, costs ,skills, and nfrastructure.
In overall ranking, China also came in Second behind India.
However, China has also been reported as having a higher attractiveness level as a “potential” outsourcing destination. And in the “Future opportunity Rank -2015”, China had to be the first rank above India. While this is good news, much remains to be done to make China a “must go to” destination for buyers and businesses seeking to outsource IT services and BPO.
China had been India’s major challenger.
China so far, has been mainly focusing on hardware development and manufacturing. But, this trend is changing. The government, clients and suppliers are currently discovering and developing China as next outsourcing heaven.
Expert Cyrill Eltschinger says, “China’s rates can undercut India’s rates by 30% average, in many cases even higher. Most Asian-Pacific headquarters across industries are currently relocating to China from places like Singapore, Hong Kong and Australia.” This move will further spark the Chinese outsourcing industry. China has already started focusing on providing outsourcing services to markets in Asia and the Pacific, especially Japan.
Source: Global Outsourcing Report 2005
Chinese firms will be creating major new market opportunities in the next few years by strategically acquiring business outsourcing companies.
expert, Lionel Carrasco notes, “China will definitely be a great provider of low-cost labor. Chinese government system can and will mandate thousands of any skills and produce trained brains as cookies. The challenge for China’s growth will be business domain expertise and huge language and cultural barriers. India has the British heritage and China has the Great Wall of China that remains conceptually.”
In the next 10 to 20 years, China will continue to invest significantly in the development of world-class technology outsourcing centers with international satellite offices in Singapore, Russia and theU.S.
If political transition matches economic performance, then China’s economy is poised to become the world’s largest in purchasing power parity.
China has the business environment and location to drive business success
In the outsourcing field, China is the biggest challenge and the largest threat to India. With the largest population and fastest economic growth, China has at least three strengths in the global outsourcing market: manufacturing，IT and BPO.
The main advantages of China are as follows:
Lower Manpower costs:
The Chinese workers cost about 15 percent less than equally qualified Indians.
Japan Advantage:
China is likely to grow through the Japanese outsourcing route. The advantages that China has are Japan’s s porximity to China, similarity of the languages. India currently offers almost no BPO services in Japan.
Leveraging on the manufacturing image:
Western manufacturing companies have found that outsourcing their manufacturing function to China for their companies’ global operation can be profitable nd also of good quality.
Global Connectivity: Leverage on World-class Infrastructure Second to None
China is acknowledged as one of the new leading countries in the world in the deployment of technology — a key driver of BPO.
China is one of the best connected countries in the world, equipped with sea, air and telecommunication links required for business. Global connectivity gives you convenience, control and real-time communication advantages, enabling you to get your business ahead faster and ensuring you keep ahead.
Do Business in a Supportive Environment:With a Stable and Responsive Government, You re Well Backed Up
China’s Government is resilience, commitment and rapid response towards recovery achieved international recognition for its transparency, decisiveness and efficiency.
Get the Quality You Deserve:Choose From a Ready Pool of Skilled Manpower
Outsourcing requires you to trust someone or a group of people, and rely on them to do a good job of your business for you. That means you need more than a service provider — you need a business partner that can help you realise your vision. China s ready pool of skilled manpower are equipped with strong technical expertise in existing and emerging technologies, and many have extensive domain knowledge across high-end sectors including financial, biotechnology, logistics, healthcare and IT. By employing their services, you can rely on them to undertake ancillary but integral business processes for you, while you concentrate on enhancing the core processes that make your company unique.
Stretch Your Dollar:Benefit from Competitive Business Costs and Added Value
In an Outsourcing Environment, China has a highly competitive cost structure (arguably, with all other qualifiers being achieved, China’s cost advantage would be the “winning” criteria). China has Extremely low cost real estate and power, This can be a very attractive to the US companies, which are looking for cost cutting due to the downturn.In comparison with India for example, China’s costs are shown to be 11 percent lower:
We Can Speak Your Langauge: Leverage on china s Multi-ethnic Population and Language Skills
As services are increasingly globalised and transferred across the globe, the importance of localising services to meet local expectations is also on the rise. With a multi-ethnic population, China is well placed to serve as a hub to the world-wide region, providing multi-language support such as English, Japan.
There s Plenty of Choice:If you are looking to outsource your business processes to China, you will find that a wide range of BPO service providers are available here.
China s home-grown BPO companies have also developed a comprehensive range of unique technologies and solutions that have contributed to china s status as a trusted business hub. With deep domain knowledge and local market insight, local companies have played an integral role in the provision of BPO services to many MNCs who have chosen to locate their IT and business processes in China. They can help you improve the potential of your business. China is BPO ready. Whether you are looking for a BPO partner, a BPO service provider, or to use China as a location to establish your BPO services, China has the necessary infrastructure, expertise and environment to help your business achieve its goals.
What is china doing now?
English teaching and other skill sets:
Over $5.4 billion was invested in nine universities in China to promote English language and other skill sets.
Increasing telecom density and PC penetration:
China scores over India in these aspects and intends to further increase the gap.
Reduce the bureaucratic red tape:
effective actions to reduce the bureaucratic red tape. Admittedly, China has received marked results in improving the business environment after WTO entry. For example, the State Councillor, Wu Yi urged industry and comer authorities to make the necessary reforms of the registration system for foreign-funded enterprises in the line with the WTO rulesxiv. After WTO accession, the Chinese government cut 789 items off its administrative procedural list.
Create clarity and understanding:
in the view of the “outsider” the official rules are unclear and unknown and businesses are subjected to numerous layers of government approvals which means the people who hold the power to say YES are spread out among the local, provincial and national levels. Rules, Regulations, and Procedures are, understandably, written in Chinese. Authorities had understand that to be “user friendly” to the inbound investor and inbound “outsourcer” much more efforts need to be made to create multi-lingual (particularly English) transparency. The ability of foreign outsourcer, customer, and investor to know “what to do” and “where to go” will greatly enhance China’s attractiveness.
To continue improving IP protection:
Chinese government is ensure an enforcement of law to strengthen IP protection regime. Perhaps the greatest weakness for firms considering outsourcing to China is that China has a poor reputation when it comes to intellectual property security. The Chinese government is said to have taken a number of actions to solve the matter with respect to intellectual property infringement. One of the significant commitments made by China to the WTO is to protect intellectual property rights.
In depth Industry knowledge, awareness of industry dynamics and industry terminology
To undertake projects (IT outsourcing or BPO) for western clients – knowledge of western business environments and western practices is necessary. Movement is being made in this direction in China. As a result of inward Foreign Investment, MNCs and foreign Enterprises arrive in China and they in turn bring “western” business practice.
Process Management and Process Engineering Skills, Technical Skills, Recognized Quality Standards, and Rigorous Delivery Methodology.
China is producing outstanding engineers, and there is an abundance of technical skills. However, these skills must be harnessed and directed within rigorous delivery methodologies and against quality standards, and managed with consummate skill.
The Process Engineers must be brought up to standards of delivery and process articulation as western counterparts and must be equipped and be familiar with western business methods and quality standards.
Critical Mass - to provide assured delivery by stable work force
China currently has over 8000 significant IT service companies. The top ten companies contribute only 20% of domestic market share. By contrast, India has less than 3000 IT suppliers, the top ten of them account for 45% market share, and at least 15 IT suppliers have more than 2000 employees.To provide sustainable IT Outsourced Services and Business Process Outsourced services demands critical mass and stability of labor force. Authorities and companies must encourage consolidation of businesses and the development of highly effective employee retention policies.
Risk Dimensions
POLITICAL RISK:
tight political control.
Relatively stable government,
strong government support to develop outsourcing industry.
LEGAL RISK:
bad IPR protection, lack of enforcement, copy-cat mentality.
Taxes are relatively low, but tax grace periods for investors are expiring;
there are special economic zones; regulations, censorships;
decisionmaking is improving and becoming quicker;
state enforces the law (pushed by the WTO), continuing efforts are being made to improve civil, administrative, criminal and commercial law;
lack of transparency;
poor trademark protection.
CULTURAL RISK:
Chinese culture is relatively difficult for Westerners to understand;
management is based on guanxi (connections);
English language proficiency is still an issue;
young IT graduates, however, speak English well. Language skills/understanding of Western culture are good thanks to aggressive programs.
Other Asian nations with similar cultures (especially nearby Japan) are using China as a major outsourcing center.
People skills are average;
bureaucracy levels; isolation;
ECONOMIC RISK:
GDP—purchasing power parity: $6.449 trillion
GDP growth: 9.1%
The world’s most dynamic (in terms of overall GDP growth) economy. About 6 trillion dollars—huge economy;
huge domestic base.
Economic prospects are good.
China will be the world’s new growth engine.
Chinese renminbi (RMB) is still pegged to the U.S. dollar;
Financial structures are solid and growing;
China entered the WTO;
services sector is growing.
The result has been a quadrupling of GDP since 1978. Measured on a purchasing power parity (PPP) basis, China stands as the second-largest economy in the world after the United States, although in per capita terms the country is still poor.
Economic influence of nonstate organizations and individual citizens has been rising steadily. Increase of the authority of local officials and plant managers in industry has permitted the start up of a variety of small-scale services and light manufacturing enterprises and opened the economy to more foreign trade and investment.
IT INFRASTRUCTURE RISK:
Telephones: 263 million
Internet users: 123 million
In major cities there’s good infrastructure and it’s improving;
national software and technology parks/incubators.
There are power ruptures in big cities due to China’s ever-rising energy demand; many R&D facilities set up by Western companies.
Domestic and international telephone services are increasingly available for private use;
unevenly distributed domestic system serves principal cities, industrial centers and many towns.
IT COMPETENCY RISK:
Quality project management lacking;
lack of technical and business management experience
Custom Code Writing (body shopping): Strong
BPO: average level but growth fast
System Writing Project R&D: Average
Core competencies: Basic functionality, applications development, application maintenance; embedded systems; data processing services; application maintenance
HUMAN CAPITAL RISK:
Universities graduate very competent people;
large pool of IT workers, 50,000 new IT graduates per year and more than 200,000 work in IT.
Labor force: 778 million
COST:
Low salaries, but higher in bigger cities,
outsourcing centers move westward to benefit from lower costs;
labor costs are low;
lowest real estate;
lowest power cost.
MARKET OPPORTUNITY
MARKET:
2005: 30%
2006: 29%
2007: 26%
Compounded growth 2005-2009: 25%
(source: Forrester Research)
—Population growth: 0.57%
—Market size: According to Mckinsey, the annual revenue in software and IT services have risen 42% on average since 1997, reaching $6.8 billion in 2003
GLOBAL COMPETITIVENESS: Average
OVERALL ASSESSMENT: China is still aligned to hardware manufacturing and development. Software/offshoring services still in their infancy. Indian companies (Infosys, Wipro) have started software development centers in China to gain a cost edge and take advantage of the local Chinese market.
China’s labor pool, government support and low cost puts it in second place. It currently lags behind India in experience, country risk, experience, project management. China offers incredible market opportunities.
Future
As pointed out by AMR: “Offshore Outsourcing Isn’t Just India” and their recommendation is categorical: Companies with offshore experience should mitigate offshore outsourcing risk by moving beyond India in 2005. This strategy mitigates an overheated labor market in India is driving costs up and increasing attrition; other markets may offer a better cultural fit; and provide an hedge against geo-political risk, and AMR believe now is the time to establish relationships with an emerging market.
Global sourcing is seen as necessary to be competitive or even survive. Against this background, a significant number of countries are vying to get a piece of the global pie. These countries, with varying skills and capabilities and populations are the fourth ingredient in the battle for global delivery model supremacy.
It is also against this back drop that China is beginning to satisfy part of the global demand. Already Global ESPs are establishing themselves in China and captive centers are also appearing. The application of major strategic initiatives underway to attract more offshore business will have an undoubted effect on the global balance of supply and demand in the outsourcing marketplace.
China will be:
Destination for Asian economies, such as Japan for offshoring;
will become attractive over the next 5 to 10 years in IT;
will become India’s major competitor for outsourcing services.
will spur new growth and investment future high-tech labor force.
Its market opportunities will continue to grow.
will continue to expand R&D and focus on high-end offshoring.
http://www.chnsourcing.com |
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