China Surge in Offshore Outsourcing Projected

IDC report sees China taking lead from India in offshore outsourcing market by 2011.

Chinese cities are expected to unseat Bangalore, Mumbai, and Delhi in India, and Manila in the Philippines, as the most popular offshore delivery centers by 2011, according to IDC.

The market researcher has introduced a new Global Delivery Index (GDI), which compares 35 cities in the Asia-Pacific as potential offshore delivery centers, based on criteria such as cost of labor, cost of rent, language skills, government policies, infrastructure, and staff turnover rates.

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Bangalore currently tops the list, followed by Manila, Delhi, and Mumbai. The Chinese cities that figure in the 2007 list include Dalian, Shanghai, and Beijing, at number five, six, and seven.

Indian cities have inherent challenges such as cost of staff and pressure on infrastructure, said Conrad Chang, a research manager at IDC’s Asia Pacific operations, in a telephone interview on Thursday. While India has focused on the US and European markets, China has large opportunities in the Japanese and Korean markets, Chang added.

Chinese cities will overtake Indian cities by 2011 because of massive investments made in infrastructure, English language, Internet connections, and technical skills, which are favorable towards offshoring, IDC said in a July 3 report.

Not every researcher shares IDC's view. Forrester Research Inc. said in a recent report that in 2005, China was widely viewed as a key challenger to India as an offshore services delivery location, but the Chinese market has not taken off as expected, the research firm said in a recent report.

China primarily attracts business from Korean and Japanese companies, but most of them have preferred to set up their own operations in China rather than outsource, because there are not many large service providers in China, said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International Inc (TPI) in Houston, on July 5.

Many US and European companies, that set up offshore services operations in India, may also have an operation in China, Pai said. “But the Indian operation will typically be the larger,” he added.

China has still not overcome customers’ concerns about English language skills, intellectual property (IP) protection, and attrition in the country, Forrester said.

In contrast, India has a sophisticated and time-tested legal environment built around Western common law, Pai said. Even if China invests heavily in education, the population cannot get in four to five years as fluent in English as Indians, he said. “Indians have been speaking English for over a hundred years,” he added.

India’s demographics also favor its continuation as a key offshore services location. On account of China’s one-child-per-family policy, the country’s population is aging. The country has about half as many people under 30 than India, Pai said. The IT industry primarily employs younger staff, he added.

The IDC GDI rates the potential of cities as offshore destinations, said Chang. The actual business decision by companies to offshore to these cities will depend on a host of other factors, he added. The GDI is a moving index, reviewed every six months.

“This is not about India versus China,” Chang said. IDC expects both countries’ offshore business to grow, he added.

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Copyright © 2007 IDG Communications, Inc.

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