5/22/2007

india vs. China: The other side of the story

I was asked by a reader, “so why do you think you will win your bet with Benny?” Most of India’s strengths are self-evident and have been widely written up. Here are a couple of thoughts on why I still believe I will win the bet:
  • Be careful what you wish for, or in other words, how China may fall victim to its own success: The Chinese government tends to think big and right now it is trying to start 1000 BPOs by 2010. 1000 is a large enough number that it attracts attention (which by the way is what I think the government was trying to do) but it is too large a number of companies in too short a time for them to learn how to compete smart. If they can’t compete smart, they will compete hard which means they will undercut each other on price and overbid each other on paying workers. Pretty soon they will face the exact same problems India is facing: high employee churn rates, wage inflation and lower margins. The Chinese government has to help Chinese BPOs grow smart rather than just grow fast and that can’t be done by spending money alone.
  • When it comes to quality, perception is as important as reality: While the Chinese BPO industry has existed for years, they have very little experience serving US and European customers and dealing with their quality expectations. The newer Chinese BPOs also tend to have less extensive quality management experience and technologies. [There are exceptions to every rule: I have met some Chinese BPOs who are investing quite heavily on their quality, while others seem to have very few if any quality experts on staff.] Furthermore, often the definition of quality in BPO engagements is quite subjective. If US customers believe that China has a quality problem, they will perceive lower quality in the processes run by Chinese vendors. Indian vendors addressed this quality perception problem by aggressively adopting CMM and reaching CMMI certification levels that were often higher than their customers’. [Look out for an upcoming post on why CMMI is not sufficient for BPO as opposed to IT outsourcing. But the reality is that the market broadly perceives it as a quality certification.] Chinese BPO vendors can’t follow that exact same strategy. The leading Indian BPO vendors have already invested years in reaching the highest levels of CMM. Even after spending years, the Chinese BPOs can at best match the Indian vendors in CMMI certification, not beat them at it.

China labor prices are rising - What it means for outsourcing

By Charlie Barnhart

May 21, 2007

China's labor costs for electronics manufacturing are rising even faster than I thought they would. In my work for the Outsourcing Navigator Series, I see dozens of quotations for manufacturing projects each month, and nearly every one includes a

China estimate.

Based on this information, I've concluded the following:

Before November 2006, China's labor costs were rising 3 to 5 percent per year. Then in November that gradual slope in the cost curve took off like a rocket. The result: For all 2006, costs rose nearly 16 percent with the vast majority of that increase occurring in November and December. In the first three months of 2007, the rate of increase has flattened a bit but has not reversed course. My estimate for 2007: A 10 to 13 percent increase.

At this rate, China's labor costs either have or soon will reach parity with Malaysia and Thailand, thus making Vietnam the lowest labor cost location in Asia.

What does all this mean for your sourcing decisions?

More than ever, OEMs need to refrain from making decisions based on fanciful whim about where they think costs are lowest and start getting the facts - and the facts need to be accurate. Plus, they need to start doing their homework on Total Cost of Ownership (TCO) whenever thinking about China, Malaysia, Thailand, Vietnam or even Singapore because all of these geographies are becoming progressively intertwined from a regional economic perspective.

Here's the bottom-line:

Rising labor costs in China will inevitably relieve the competitive pressures that have been holding down prices throughout the region so it is reasonable to say that prices throughout Southeast Asia are going to start going up. When and how much - who knows? The best course of action may be for North American OEMs to take at look at Mexico, and Western European OEMs to look toward Eastern Europe.

What impact do you think this will have on global manufacturing? Please post a comment on my weblog.

If you need help with TCO or want to know more about what's going on in Asia and the rest of the world, check out my upcoming Outsourcing Navigator workshop next month in Chicago.

Note from TFI: Quarterly Forum members, have you registered for the June event in Chicago? Planned reports include TFI's annual EMS-ODM industy financial performance analysis, a new study on logistics, and a panel on environmental compliance