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China the Next Outsourcing Hub?
Summary:

From News, page 6, issue no. 408, March 2, 2009
Translated by Tang Tang
Original article:
[Chinese]


China has been mounting a vigorous challenge to India's prided software outsourcing industry.

More and more software and IT service outsourcing orders have been coming directly from the US and Europe into China, rather than via a third-party contract from India like before, according to industry players.

Meanwhile, the Chinese government has introduced a pilot project to develop 20 cities as bases for outsourcing.

The EO learned that a group of six US-based companies had visited Beijing recently and held discussions with Ministry of Commerce officials to explore ways to transfer outsourcing orders to China, and two sets of formulas were discussed.

“One formula was being discussed with the Ministry, while the other with local governments. We are all very excited about this,” said Qu Lingnian, the director of Beijing Outsourcing Services Association.

Qu believed this was only the beginning, as more companies had been in talks with Chinese firms before and after the landmark visit. She added: "We have not seen orders being transferred over to China in large quantities, and it will not happen overnight. But I believe the breakthrough will come in a few years."

Why Now?
Li Dan (pseudonym), an owner of a 3D animation company in Beijing, recently obtained an order from a US firm.

“In the past, we usually got our orders forwarded by Indian companies. Honestly, that was not an ideal situation, as we have the capacity here to carry out original software research and development," said Li, adding the recent trend of orders coming directly from the US and Europe to Chinese firms stemmed from recognition of this.

Li also attributed the favorable change to the global financial crisis. “Because of the crisis, many IT professionals have returned to China, bringing home new standards and skills. This too has boosted international recognition,” he said.

Echoing the crisis-turned-opportunity theory was an official from the Ministry of Commerce.

“As the financial crisis deepened, many US companies started to close down departments involved in non-core businesses, and began outsourcing such businesses to other countries such as China. This is an opportune moment that we must seize by enhancing our communication and promotional efforts,” said the official who requested anonymity.

The potential of China emerging as the next outsourcing hub was acknowledged by Pramod Bhasin, CEO of India's largest business process outsourcing giant Genpact. Bhasin recently told the Financial Times that: "China is a huge threat [to Indian IT groups]. Long-term that is the only real threat we [Indians] have.”

Why China?
India has long been crowned "the world's office", and it has successfully swept up some 65% of the world's software and IT outsourcing businesses. Why would the Americans shift their gaze on China now instead?

A combination of cost and credibility were likely the major motivating factors.

Earlier this year, it was exposed that Satyam, India’s fourth largest IT company, had illegally inflated its financial report with non-existent cash flows amounting to 1.1 billion US dollars.

And a week later, Wipro, India’s third largest software company, was barred from doing business with the World Bank for violating fraud and corruption provisions under the Bank's procurement guidelines.

"These scandals might have dented the reputation of Indian companies. Representatives from the six visiting US companies had told us that they used to think Indians were more reliable than Chinese," recalled Qu.

Another industry player believed India had been taking more orders than it could handle in recent years. "For instance, an Indian company gets 100 orders, but it only has the manpower and resources to complete 10 on time, and the rest of the orders are sub-contracted out to Chinese companies. This has been happening for a few years," claimed Li.

When clients from the US and Europe realized they could cut out India as the middle-man and cut costs, they came to China instead, reasoned Li.

China's Bottleneck
The Chinese government has selected 20 cities - including Beijing, Tianjin, and Shanghai - to carry out a pilot project to build model cities of outsourcing. The project, which included incentives under government policies, was outlined in an official circular issued by the State Council on Jan 19.

The above-mentioned official from the Commerce Ministry said developing the outsourcing business would help China to partly solve employment problem for fresh graduates, especially when the job market was becoming tight due to the on-going economic slowdown.

"The government has issued a series of supporting policies, including tax cuts, human resource training, and qualification reviews," said the official.

He said the southern city of Shenzhen would be a crucial platform for developing outsourcing business, adding discussions held with foreign companies mainly concerned human resources capacity and government measures for supporting the industry.

He reasoned that China was still relatively inexperience in outsourcing, adding its foreign business contacts were mainly service providers, thus China had been mostly dealing with downstream orders, namely to provide technical support rather than creating IT solutions.

Another main concern of foreign companies fell squarely on China's infamous record of intellectual property protection. This remained the biggest obstacle for China to win the trust of foreign companies, said one Chinese industry player.

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