Will China's Outsourcers Soon Rival India's?

International Data Corp. analyst Conrad Chang thinks so, based mainly on the mainland's solid investment in skills and infrastructure

Some may doubt China's ability to match India as an outsourcing destination for services, but Conrad Chang is not one of them. The Sydney-based research manager in business process outsourcing for International Data Corp. recently finished a report comparing the top cities in Asia for outsourcing information technology services. His conclusions: While Indian cities are tops now, by 2011 they'll be matched or even bested by cities in China. Chang recently spoke with BusinessWeek's Bruce Einhorn about the IDC study and how it differs from that of John McCarthy, a vice-president at Forrester Research (FORR), who earlier this year wrote a report criticizing China's slow progress as an offshoring destination.

Why are you so much more optimistic about China's chances to match India?

Ours is a much broader comparison. We are not just comparing IT services—but also global delivery, business process outsourcing (BPO), procurement, logistics, anything to do with an outsourced service. We look at 30 different comparisons to see which city is better. The heaviest weighting is given to deal-clinching criteria—what essentially wins contracts— cost of labor, language skills, political risk, and government incentives. These factors weigh much more heavily. For service providers, end users, these are the things they find most critical. These are the things their clients regard as most important.

And how do Chinese cities measure up?

Currently Indian cities rank highly, but five years down the road Chinese cities are becoming a lot more important. Chinese cities are going to do really well [because of their] massive investment in infrastructure.

How does that compare to India?

If anyone has been to Bangalore, you will see that infrastructure is a big issue. Companies need their own generators, their own power supply. You don't get those kinds of issues in China. They have invested a lot in getting the hardware right—roads, airports, Internet connections—and they have also invested heavily in tax incentives.

But many more people in India speak English.

China is investing in building up skills in English. China [also] has a foothold in outsourcing markets in Japan and Korea, and India has not been successful in penetrating these two key markets.

Any other reasons you're bullish on China?

China has potential as a large, domestic outsourcing market. That's still in its infancy stage, but there's a lot of potential for transformation in a lot of Chinese companies in banking, manufacturing, and services. Companies like China Mobile, Bank of China, ICBC, Haier, Huawei. These are Chinese companies with a lot of potential for transformation. A lot of the work is now done internally, and there's a lot of potential for outsourcing with these companies.

A lot of people in India are going to dispute your conclusions.

It's not that India is losing out to China or losing its luster. Now the end users and service providers have a choice: There is a strong India and a strong China. It used to be only India. Now companies have an alternative to a strong India [and that is] a strong and rising China.

The big Indian companies are now expanding their operations in China, while there aren't any Chinese companies of a comparable scale. So even as China rises, are the Indians the ones bound to win out?

China doesn't have many large or big up-and-coming outsourcing providers like Wipro or Infosys, but a lot of these [Chinese] needs will be provided by the IBMs (IBM), HPs (HPQ), and Accentures (ACN) of the world. The Indian companies are making inroads, they realize the need to operate in China. The Indian companies are understanding that they need to be strong in China, but I think that the concentration will be more on the multinationals, the IBMs and HPs. They are pushing a mass volume outsourcing framework. They stand to benefit the most, since theirs is a volume-based, cost-effective type of model.

And where does that leave the Indians, then?

The Indian players are basically moving from a low-cost structure, trying to move up the value chain. The IBMs and HPs are already up the value chain.

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