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The Quest for Asia's Outsourcing Crown

By Bruce Einhorn For most industries, the rivalry between China and India hasn't been much of a contest. China is tops in manufacturing, with multinationals pouring billions of dollars of direct investment into the country. Chinese-made TVs, air conditioners, and cell phones are appearing in stores worldwide.

With far less foreign direct investment and a vastly inferior infrastructure, India is an also-ran to China in manufacturing achievements. But the service industry? That's a different story. India boasts world-class software service companies like Wipro (WIT) and Infosys (INFY), and multinationals have made India the top choice for outsourced software development, call centers, and other business operations.

OVERCONFIDENT? Indians, once fearful of losing out to China as Asia's economic powerhouse, are confident that they have little reason to worry. With so many companies expanding their existing Indian operations or opening new ones, the threat from China now seems far off. As Vivek Kulkarni, information-technology secretary for the southern state of Karnataka, whose capital of Bangalore is India's Silicon Valley, told me when I was in the country in June, "China, of course, has engineers, but...they're not good at software. They're not really competing" (see BW Online, 7/1/03, "For India, a Shrinking Chinese IT Monster").

Here in China, though, many people who follow the industry aren't so sure. One analyst based in Hong Kong says the Indians are way too confident. In China, "costs are lower, productivity is higher, and language skills are better," says this analyst, who prefers to remain anonymous lest India-based colleagues at the bank get angry at his candor (see BW, 8/4/03, "Outsourcing: Make Way for China").

While India has an advantage in its big English-speaking base, this analyst argues that English speakers are also plentiful in China. Moreover, the country has language skills that India lacks, says Tom Reilly, who runs the back-office center that Cap Gemini Ernst & Young is expanding in the southern city of Guangzhou: "There's a nice, steady stream of graduates who are English-literate -- and they're also good at Asian languages like Japanese, Korean, and Thai," says Reilly. "That's an advantage over India."

ONE-STOP SHOPS. Then there's the question of costs. "India's getting too pricey," says this analyst. "Everyone is complaining about how hard it is to get staff. China is not even close to that." So can China overtake India as the premier place for white-collar outsourcing? "It not only can happen," this analyst predicts. "It will happen."

Dion Wiggins, the Hong Kong-based head of research for Gartner, estimates that China's IT output will match India's within a few years. Since so many multinationals investing in Chinese manufacturing want to do more of their white-collar work there, too, Wiggins thinks Indian companies must get into China as well -- and quickly. "One of the top questions being asked of Indian software companies is: What's your China strategy?" says Wiggins. "Companies need to offer China support. If they don't, customers will move to one that does."

John McGregor, the chief information officer at privately held Sweetheart Cup Co. in Owings Mills, Md., had to choose between India and China recently. He was looking to outsource the development of a new system that would help track production at Sweetheart's factories, which produce $1 billion worth of disposable plates and utensils for companies like Wendy's and Ben & Jerry's.

He says the choice was easy. "Our focus is on cost. Whether it's India, China, or Russia doesn't matter," says McGregor. "China [costs] 40% less." Sweetheart is now having the work done from a center in Shenzhen run by E5 Systems in Waltham, Mass., and its Chinese joint-venture partner.

"WE'RE CONVINCED." Some China boosters now argue that the Middle Kingdom beats India on political stability. That might seem a bit odd, to put it mildly, given that China is the last surviving communist power, while India is the world's largest democracy. China has a state-controlled media and unelected officials who tried to cover up the SARS outbreak until it became a global menace, while India has a free press and an open society where it's easy to get information.

But Bryan Huang, president for Greater China at Bearing Point (formerly KPMG Consulting) says China offers the sort of quiet stability that India -- with open hostility toward Pakistan sparking nuclear-war threats every few years -- doesn't. "This is a business for the next 10 years, 20 years. We need a very politically stable environment," says Huang, who runs a newly opened software-development center in Shanghai's Pudong district. "We're convinced that China provides that."

That's why Bearing Point is putting its eggs in the China basket, Huang says. "The focus is definitely on China," he says. The firm has 150 people in Shanghai and will double that by yearend. Next June, the headcount will reach 600, Huang predicts, and should top 5,000 within five years.

Yes, businesses are employing thousands of new workers in India, too. And China has no home-grown high-tech power that can match Wipro, Infosys, or the privately held Tata Consultancy Services, which now has $1 billion in sales. China's companies are tiny in comparison. But a growing number of people in China think it can be done. And sometimes just seeing a goal can help achieve it. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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