What You Should Know About Outsourcing to China

A veteran watcher of India's outsourcing market, researcher Joseph Rottman says that China is worth evaluating for offshore work but he warns labor costs are rising.

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What Chinese IT services providers did you talk to?

Rottman: I talked to people at Neusoft, which has 12,000 employees; Dalian Hi-Think Computer Technology Company, which has 2,800 employees; NewLand, which has 40 employees; Crystal, a small computer graphics and CGI, which has 100 employees; and a small startup called Netai-Techno, which has 40 employees.

I also conducted interviews of people running the software parks. IBM was there, Dell, HP—multinationals wanting a Chinese or Asian face to serve those customers. While we were there, I visited Intel's $2.5 billion manufacturing center, which will employ 2,500 people (2,000 of them Chinese).

How did the software parks compare to those you saw in India?

Rottman: In some ways, you could have picked up the software centers in China and placed them in India. As general rule, the Dalian infrastructure was far more advanced and stable. But India’s BPO and IT infrastructure, once you get inside a software park or inside the campus of a Wipro, there’s a big difference. Dalian, as a city, is more advanced. But software parks within Bangalore are more advanced than Dalian.

The other really big difference between India and China is scale. It felt like, when you went to one of Dalian software parks that housed dozens of software development and BPO companies, that you could have fit it all within Wipro’s campus. A Dalian software park is like a campus for a single Indian firm. We gathered some data—if you took the 10 largest software development companies in China, the combined revenue is equal to just the fifth largest Indian supplier. And if you add up the head count for the top 10 in China, you’re at about the seventh largest Indian supplier. The Chinese market is very fragmented with a lot of smaller players.

Is that fragmentation simply a product of China’s maturity level as an outsourcing provider?

Rottman: Yes. India had an incredible start, going all the way back to the Y2K days. There was a national movement toward a service-based economy that predates that. They had national government efforts that help get the Infosyses of India off the ground. China just now started that movement.

Do you envision future Tatas or Wipros coming out of China?

Rottman: If you look at some of the market leaders, like Neusoft and DHC, they have goals to grow at the same speed as the Indians. But when you look at their base of growth, it’s going to be a long time. They can’t just grow to catch up. Today, Neusoft has 12,000 employees. Infosys has 85,000 employees. HP has 156,000 employees.

They want to go there. I got the sense that they have a good plan and some great year-over-year growth.

They’re doing things to try to improve the talent pipeline, like starting their own schools. Neusoft has its own system of private schools called the Neusoft Institutes of Information. It’s not a money-making proposition, only 5 percent of their revenue comes from the Institutes. It’s an effort to secure talent and secure quality. Approximately 15 to 20 percent of the graduates end up working for the company.

Next: The ambitions of Chinese outsourcers

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