India will likely hang on to its reputation as the world's biggest outsourcer, but China should not be underestimated in the long run
India is likely to retain its tag as the backoffice of the world for the time being, but the country is expected to face competition from its neighbour China in the long run, a latest report says.
India at present is in a comfortable position as the share of IT and IT-based services in China's export revenues comes to only just above three per cent, compared to over 26 per cent in India, but China should not be underestimated in this sphere.
"China has an advantage as the country can boast of a qualified labour force which is one of the most important prerequisites for successful offshore locations. Besides, the country has government support and a dynamic home market which the suppliers of IT services use as a stepping stone," Deutsche Bank Research said in its latest report.
China has however two major, structural disadvantages the command of the English language and the protection of intellectual property.
The report further highlighted that "languages can be learnt, software piracy (and other violations of intellectual property) can be combated. This requires political resolve and the ability to act, which the Chinese government has proved in other respects already."
China which already ranks in the second position of the Global Services Location Index, mainly because of the large supply of skilled staff and the quality improvements of Chinese providers.
Besides, some Chinese cities could also benefit from the fact that Indian locations are reaching their capacity limits. According to forecasts published by market researcher IDC, Shanghai could by 2011 become a more attractive location than Bangalore, and Dalian more attractive than New Delhi.
The major drivers for offshoring are—education, language, respect of intellectual property and low wages. But with growing wealth, the advantages with regard to factor costs disappear as wages and other costs rise, and is likely to make offshoring less attractive over time.
Meanwhile, at the same time, the typical location advantages offered by more advanced economies will arise, such as highly qualified staff, excellent infrastructure and good institutions, the report added.
Chinese back-office and IT services are also attractive for international companies which produce or sell products in China.
Here, linguistic and cultural barriers disappear if the services are geared to Chinese customers and employees. The home market thus allows Chinese IT suppliers to move up the learning curve and makes it easier for them to head towards the international arena.
Last year, India generated close to $40 billion in proceeds from IT and IT-based services. Almost 80 per cent of these revenues were generated by exports. Global offshoring has a market volume of roughly $70 billion, with India share in the global market totalling 45 per cent.
"However, China is unlikely to catch up with India in the medium term," the report added.