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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Do these Chinese companies want to move beyond serving the regional market?

Rottman: Yes. Neusoft has a few multinational customers. They do some embedded software work for Alpine Electronics on their GPS systems and they have a number of large Fortune 100 customers. But the majority of revenue still comes from Asia. That’s their sweet spot right now. According to people we interviewed, salaries in Tokyo are three to five times as high as Dalian, so Japan has nice labor arbitrage situation going there.

How does China compare to India, in terms of IT salaries?

Rottman: Is it cheaper in China? I hear contradictory information.

The U.S. companies I talked to saw wage inflation and housing inflation eating away very quickly at their savings. The staff augmentation company saw 30 percent wage inflation in 18 months. I think increasing demand and competition for talent from multinationals setting up captive centers in Dalian are helping to fuel the increases. And Dalian is cheaper than Shanghai or Beijing.

When you compare the cost of a C++ programmer in Dalian and Bangalore, you can’t make the comparison based on the hourly rate. So much goes into that, and the transaction costs – everything that goes into creating the mechanisms for work to be done like infrastructure, travel costs, rework costs, training, knowledge transfer, IP protection – are different. It usually ends up being a wash.

The companies that I interviewed were not going to China for cost savings, but either for a Japanese “face” to customers or for risk diversification. They cited things like the nuclear tensions between India and Pakistan. If you have all your eggs in that geopolitical basket and something happens, you need Plan B. So the large companies we talked to are looking at other places, whether it’s Costa Rica or China. They’re not chasing the cheapest programmer. In the case of Dell, they’d like to sell computers to China. With Oracle, it’s the same thing. What better way to service and understand an area than to set up a captive IT center there?

If I had no interest in selling my goods to Asia or servicing my customers in Asia, I’d stick with India. With the gigantic hurdles of [intellectual property protection] and English, it doesn’t make sense. If you were outsourcing to China just to save money, you would lose your shirt.

Next: The English language challenge for Chinese outsourcing vendors

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