New Study Reveals Large Gap Between India and China In Outsourcing

china-india-flag. Image source

It is a well-known fact that China is well ahead on the population graph in comparison to India. A study from a top rated US business school, however reveals that China catching up to the outsourcing volume in India is highly unlikely. This revelation maybe surprising as the Chinese central government has introduced several policies directed towards advancing the outsourcing market in the recent years.

The Fuqua School of Business, Duke University conducted a study titled, “Providers in China and USA: Preliminary Comparison”. The study was conducted by Professor Arie Y. Lewin. The study throws light on the plight of the Chinese firms struggling to make an impact on the global IT market amid tough competition from Indian and global firms at a time when the industry itself is reaching a saturation point.

Professor Lewin in a telephonic interview was quoted as saying, “It’s been very hard for Chinese outsourcing firms to break to the top; it’s partly not their fault because the timing was wrong. They’re not trying to take the share away from a growing market; they’re trying to take away share from existing players, which is much more difficult.”

China losing on the global outsourcing pie

Technology research firm Gartner was of the opinion that the global IT spending is expected to touch $3.7 trillion by the end of the year 2013. At a time when the global industry seems to be thriving, China is unfortunately not receiving any share in the pie.

Barriers to China’s outsourcing potential

One of the most important barrier to China realizing its full outsourcing potential is the fact that English is a heavily accented second language for a large part of the population. At a time when an increasing number of IT services are getting commoditized, China is unable to attract large outsourcing contracts owing to the language barrier. Professor Lewin believes that China has not realized the fact that the fluency in language is costing them important contracts.

A large number of global firms and Indian firms have been in business for a better part of three decades and in some cases even longer. In contrast a large majority, nearly 79% according to the survey, of Chinese firms have been in business for a decade or even lesser in numerous cases.

Professor Lewin jointly conducted the study with Professor Liu Yi from Shangai Jiao Tong University. The study includes a survey of over 250 Chinese firms. According to the study, another major issue was that the country’s engineering graduates did not consider the outsourcing or IT services as a major option for employment. Manufacturing firms received the most number of engineering graduates applying for jobs.
Kotak institutional Equities recently conducted a study according to which, China currently has 1.1 million engineers graduating annually. The Chinese government has tried to emphasize on expertize in software outsourcing since 2006. The government named 20 cities where software firms could be set up and developed.

Chinese initiatives to boost outsourcing

A national initiative was executed in 2009, to encourage the country’s outsourcing industry according to Professor Lewin. The industry size was estimated to be around $50 billion. The industry body Nasscom pins the Indian industry at an estimated $ 108 billion, more than double the estimated worth of the Chinese outsourcing industry.

Frederic Giron, a principal analyst at the research firm Forrester Research Inc., responded in an email and was quoted as saying, “Despite ambitious global growth plans, Chinese ITS (information technology services) providers have largely failed to articulate a compelling value proposition to US and European clients. By focusing mainly on low-end application development services, they have instead primarily competed with much bigger and much more experienced Indian providers- but without the ability to offer lower costs.”

Underestimating the competition

While most Indian firms registered average profitability in the 15-25% range, Chinese firms slid from an average profitability of 10-15% to less than 5% in the last two years alone. The numbers were crunched by Giron at Forrester research Inc.

The downslide in profitability led to the privatization of a large number of Chinese firms, notably Asia Info-Linkage, Camelot, Yucheng Technology and Pactera. The privatization was localized within the last year.

China’s inability to gain significant market in the growing economies of the world is also attributed to its unerring focus on the Japanese and domestic markets. Sid Pai, partner and president of the Asia-Pacific region, at the Information services group, an outsourcing advisory group believed that China lacked a global delivery capability that crippled the chances of success.

Professor Lewin was quoted as saying, “In Northern China, you had a very thriving (outsourcing industry), but they were serving Japanese or Korean companies- that was a model that could not expand to compete with Western competitors.”

Despite all the focus on the Chinese outsourcing industry, it was never considered to be a serious threat to the thriving Indian IT services industry. With large multinational companies and Indian outsourcing companies like International Business Machines Corporation (IBM), Tata Consultancy Services (TCS) and Accenture Plc., having such a strong grip on the global market, it is not surprising that the Chinese market is not a threat.

Latest Columns

Financial Services: Insourcing trends gain momentum in 2013

About a decade back, when the BPM industry was witnessing an upswing in outsourcing operations, nobody would have anticipated that the process would come full circle. But the inevitable is happening now. Many Western companies are increasingly looking at insourcing as part of their business strategy to improve profits. This idea has been gaining ground […]

9 top priorities for Cloud Service Providers

Cloud computing has been here for over decades, but with a different name- the Information Technology (IT) services. But the current rate of growth of cloud services is such that it has never been observed in the industry before. The increasing popularity of cloud service is contributed by advancement in technology, which has helped businesses […]

Speak Your Mind