IT Outsourcing in China | Vancouver Consultants

IT Outsourcing in China: The new global challenge in
Information Technology outsourcing

CIOs are beginning to see China as a cheaper alternative to India for outsourcing business IT requirements. This article explores the reasons and examines China’s challenge to the world economy.

China is positioning itself to become an IT outsourcing superpower in less than five years time. Recent changes and trends in both economic and political structures pave the way for phenomenal growth in the Chinese IT services industry. According to the US based research firm Gartner Dataquest, China’s IT services market has grown by 42% per year since 1997, and it is projected to reach $8.9 billion in 2006. Gartner predicts that China could rival India as the leading offshore services provider by as early as 2007. Chinese Universities turn out around 400,000 technology graduates a year, and these highly technical and skilled workers are creating a resource base that will rival India in terms of both quality and service. Clearly western business will need to understand how best to penetrate and exploit this almost untapped resource

In early 2004 an average of 8% of CIOs polled by DiamondCluster International stated that they were considering some degree of outsourcing to China in the next three years. By the middle of 2005, this figure had increased to over 40%. China is very different from India, which is dominated by a very limited number of large firms like Tata, Infosys, and Satyam. The model in China avoids the danger of monopolies inherent in the Indian model because the Chinese IT sector is spread amongst a mix of much smaller firms. China has also concentrated on building up its IT infrastructure. This infrastructure growth is accelerating at a much faster rate than in India. It is also important to note that building an IT infrastructure from scratch, as is the case in China, avoids the complex issues involved in grandfathering legacy systems. While China does have problems it will need to address to overcome the ad hoc way in which its IT sector has evolved in the past, the government is working hard to pull order out of chaos.

The Key Drivers for China’s Outsourcing Growth

• Zero Duty – Prior to 2005, China taxed 251 IT-related products. They all now attract zero duty. Chinese service providers can be more competitive if service taxes do not create barriers to international trade. US-based and multinational IT service providers can make a better business case if the tax climate is fair.

• Tougher Penalties for Intellectual Property Rights - China has lowered the threshold for punishable offences. Its highest courts have announced stricter interpretation of the intellectual property rights laws, so for the first time dissemination of pirated goods or software over the internet is forbidden. Western business may become more confident that US patent law can provide better protection to companies using proprietary technology in China.

• Improvement of standards on core IT Technologies - China is hosting the 2008 Olympics in Beijing and the Worlds Fair is in Shanghai in 2010. Greater exposure to the world wide marketplace means that Chinese IT standards will develop in a way that is consistent with international standards and subsequently that Chinese IT infrastructure will be compatible with legacy systems. China is rapidly emerging as a key player in establishing the international standards that will influence global competition

• Outbound Merger and Acquisition Activities - There is no doubt that China has a different agenda than India in its quest for superpower status in IT outsourcing. India has concentrated on growing its domestic brands, while China has been more proactive in its acquisition and development of well known international brands. The recent acquisition of IBM PC division from Lenovo, and the TCL acquisition of Thomson TV business (RCA trademark) both show merger and acquisition activities which argue that Chinese IT standards and brands will be universal.

• Growing Domestic Talent and “Sea Turtles.” Many Chinese-born US and European IT executives, Sea Turtles, are returning to China. They bring with them valuable expertise to establish new businesses. In addition the growth of technology graduates from Chinese universities continually fuels the IT talent pool. There are about 2 million software developers in China and 5.8 million engineering graduates. China is poised to enter the technology marketplace with the infrastructure and the technical personnel to provide reliable and competitive services.

The Improved international outlook

China will emerge as a new leader in the global economy and this will foster an improved international outlook in the way it conducts business. IBM has signed deals to train 100,000 software specialists over the next three years. Microsoft is spending in excess of $750 million in the development of a new technology centre expressly designed to expose Chinese engineers to Microsoft hardware and software technology. In addition, Microsoft has agreed to donate $25 million over the next three years for education, with a further $10 million earmarked for elementary schools. UPS is spending $500 million to expand operations in China with the addition of 20 new warehouses. In addition China had 3.8 million private enterprises by late 2004, an increase of more than 26% on the previous year. External investment and internal business entrepreneurship are both booming in China.

5 Key Rules of doing business in China

• Flexibility and Diversity. Be aware that manufacturers do go bust in China. Flexibility and diversity are key when it comes to sourcing consumer products

• It’s not all about lowest costs. Look beyond the concept of lowest costs when considering outsourcing in China. Government incentives, reliability assurances, infrastructure support and timeliness of delivery are all factors to consider.

• Teaming with local enterprises. Use local talent and connections; they will speed delivery into the marketplace and leverage the skills that you bring over.

• Understand the cultural differences. The Chinese are both astute and progressive, but they lack the international business experience of Japan and Singapore. Business who wish to outsource in China need to understand and respect local cultures. This should be viewed as a challenge and an opportunity rather than a barrier. The right attitude is all important if business is to develop relationships with central and local governments, and with local business contacts.

Are India and China really in competition ?

The global economy will foster many international business collaborations, teaming and working together towards common goals. Now consider:
Tata Consultancy Services, from India, which has been operating in China since 2002, is forming a joint venture that will provide IT outsourcing services. It has partnered with Microsoft Corp. and three Chinese firms. The company, which will begin operation in 2006, will be one of the largest IT joint ventures in China. TCS will be the majority shareholder and its CEO, S. Ramadorai, has said:
“This venture is ample demonstration of the credibility that TCS has established in a market like China within a short span of time. TCS is committed to this initiative and this venture will be integrated into our pioneering global delivery model.”
While no specific investment amounts were announced, the joint venture will be located in Beijing's Zhongguancun Software Park. Clearly the international business community has identified the tremendous opportunity that IT outsourcing represents in China and we would be wise to follow the leads of companies like TCS and Microsoft.