It is a known fact that the offshoring services business in China constitutes a very small portion of the global outsourcing business. According to Amneet Singh, VP, Global Sourcing, Everest Group, "China accounts for 3% of the global offshore business. The global offshoring market size is estimated to be $90 Billion, 60% of which is driven by IT and 40% by business process outsourcing (BPO)." He further adds, "The overall growth rate has been 30% between 2004- '08, whereas BPO has grown faster at the rate of 35%. While India is clearly a leader in this space and holds 35% share in the offshore BPO market, China is growing fast."
In 2005, China had been identified in a number of studies as the second most popular place for UK organizations to outsource to with Poland being closer to home coming in third place. China continues to develop rapidly with IDC (China Services Market Report) stating that ‘…2008 was a fruitful year…’ for China ‘…despite the global financial crisis’ and that the Chinese IT Services market grew by over 24% over 2007 and will grow at a Compound Annual Growth (CAGR) of 13.8% through to 2012.
Although China currently accounts for less than 5% of the existing global market for offshoring and outsourcing of services, recent government and industry developments could see China capture offshore revenues worth US$56billion a year by 2015 as reported in China’s Opportunity in offshore services, McKinsey Quarterly, 2008.
According to Frost & Sullivan's whitepaper 'Outsourcing to China 2010' (commissioned by Bleum Inc.), "Currently India is generally acknowledged as the premier offshore location; however the sheer imbalance between global demands and India’s supply of IT Services has lead to creeping costs and strain on India as an offshoring destination." The whitepaper further quotes, "...service providers... are also fast establishing a presence in China to increase their competitiveness in the market. For example, WIPRO established a development centre in Shanghai as early as 2003". In the past, MGI (The McKinsey Global Institute) also published a series of papers comparing offshoring locations and rated China’s market potential as the highest among 28 low-wage countries and 8 moderate to-high wage ones. These included Brazil, Chile, China, Czech Republic, Hungary, India, Malaysia, the Philippines, Poland, and Russia.
The last decade saw an increase in the number of IT services providers in China, with a few Indian service providers also setting-up production units. Almost 90 percent of China’s own domestic IT services market is provided by local providers. This is a sign of a strong and developing capability for the delivery of IT Services. According to Amneet, "Indian IT companies such as TCS, Wipro and Infosys have moved to China primarily with an objective of addressing the needs of the domestic market, service Chinese subsidiaries of global customers and tap into the Japanese market. If one were to look at IT companies there, we see 70-80% of the work being delivered for the Chinese and regional markets."
Drivers of outsourcing to China
- Zero Duty – allows providers to be more competitive in terms of pricing
- Tougher Penalties for IP Rights (IPR) Abuse – China continues to enforce its 2004 dictate to the highest courts for prosecution, fines and longer prison sentences. This includes more thorough enforcement of explicitly forbidden distribution of pirated goods or software over the internet
- Growing IT Talent – China has a reverse brain-drain with many overseas educated Chinese returning home to set up businesses focused on export markets and bringing with them the business experience and contacts gained overseas
- Access to large talent pool
- Lower attrition rates
- China has over 2 million Japanese and Korean speakers, making it an excellent place for the development of IT applications and provision of services targeted at these huge markets, especially in the area of BPO services such as ‘near-shore’ call centers and transactional processing services such as payroll processing
Many companies also offshore to China as part of developing a ‘footprint’ in the Chinese market itself. Some treat this as a route to build local business contacts to subsequently sell their products/ services to the domestic market while other wish to use the local talent to meet the needs of the Japanese and Korean markets. No matter what the risks of being in China are, it is next to impossible for a global organization to ignore it. Service providers are evolving, and soon collectively will make China a preferred destination for offshore services business.