Look Out India, China is Gaining on You

By sheer numbers, China's ascent to the top of the IT outsourcing world seems inevitable, but plenty of challenges remain

BY ANTHONY BALDO

India may be the lightening rod for policy wonks and unions who blame offshore outsourcing for the loss of huge numbers of US jobs.

However, while India is still the most popular overseas haven for sending software development, call center and telemarketing functions, China is rapidly moving up in popularity.

For any US company considering outsourcing its information technology development work to China, the numbers can be alluringly mind-numbing.

An 82% literacy rate. Wage rates as much as 40% to 50% less than India’s. Some $50 billion in direct foreign investment in 2003. The prospect of graduating 200,000 IT professionals from colleges annually, starting two years from now.

Some outsourcing pundits feel that if China’s time hasn’t yet come, it inevitably will. “China and India are in a dead heat,” argues Howard A. Rubin, executive vice president of Meta Group, a Stamford, CT, technology research and consulting firm that evaluates outsourcing nations using several variables, such as political stability, government policy and available talent.

Other experts are a little more reserved. “India is a sneak preview of what China will be in five years,” insists Gordon Brooks, CEO of Waltham, MA-based E5 Systems Inc., which has two facilities in China and one in India to which US companies outsource.

Perhaps India should turn tail and run right now. But China still has plenty of outsourcing issues to work out, namely the language and cultural barriers. The betting is that China will figure it out. It’s actually starting to. Even so, for the high-end IT work-call centers, project management-India is still the place to be.

“India has been attractive for awhile,” says Savio S. Chan, the president and CEO of Melville, NY-based US China Partners Inc., which helps US and Chinese companies develop business in each other’s country. “But China is becoming more attractive. In about 10 years, it’ll pass India.”

Fair enough. But how is it that China, historically known as the place of choice for outsourcing for US manufacturers, seemed so suddenly to burst on the scene as an IT venue?

Actually, China has always had the natural resource necessary for low-cost outsourcing-masses of humanity. It has one billion literate people. And Brooks notes that 90% of E5 Systems’ customers want scale. They need more people for the buck to keep up with demand without adding huge labor costs. In China, that calculus is easy.

Just ask John McGregor, the CIO of Sweetheart Cup, a $2 billion-in-sales maker of plastic-ware for fast-food chains such as McDonald’s Corp. For the past eight months, E5 has been developing a system in China that Owings Mills, MD-based Sweetheart can use to track production processes at its 14 North American factories.

“We figure it saves 40% by sourcing in China rather than India,” McGregor says.

Cost, however, isn’t the only thing that has made China bloom. Oddly enough, the nation’s government has actually been a major factor. China became a member of the World Trade Organization in December 2001, meaning it had to comply with certain civil rights and other standards that once marred the communist government in the eyes of the US.

What also helped was that in January 2002, the US government issued regulations that made transferring technology easier and more transparent, so companies could more freely outsource IT elsewhere, Chan notes. And as it happens, protections for intellectual property are no worse in China than they are in India.

The Chinese government also came up large in another way: economic incentives. E5 has received tax abatements, free rent and financial assistance for worker certifications, enabling the company to pass on its cheaper costs to its American outsourcing clients. India used to provide such inducements, too, but no longer does.

As a result, China’s political situation has actually become a plus. Meta, which collects data from 10,000 companies in 100 countries to create a global index that ranks nations on their outsourcing potential, has India and China running neck-and-neck for the top spot. “But as far as political stability goes, we put China ahead,” says Rubin, citing India-Pakistan border problems as one reason.

Some of China’s momentum of late also stems from India’s maturity. “India is getting expensive,” says E5’s Brooks. “It’s pure demand. Office space is hard to find. The lemmings are heading to India, which has great people and great resources. But there’s more job-hopping now.”

India still has more experience with the scale and deliverability of projects than China does. “India has more talent and more management capability,” says Rubin.

A major reason for that is language. India is an English-speaking nation. China isn’t, though higher English proficiency standards are on the way. “China is not even a contender at this point in the English language outsourcing market,” says Partha Iyengar, a Gartner Group analyst specializing in outsourcing. “They have too many language challenges to overcome at this point, in addition to the process capability issues they are grappling with.”

Chinese companies are making better headway with attracting Japanese outsourcers, he explains, since some of their provinces have native Japanese-speaking populations, like the one in Dalian. That provides an advantage over Indian rivals.

US companies are really looking at an India-plus-China approach, Iyengar explains. “Companies that want to have a base in China are either asking their Indian providers to establish this base for them, such as General Electric Corp., or else setting up captive centers in China, in addition to either captive or outsourced centers in India.” he adds.

But the language barrier hasn’t daunted Sweetheart. In fact, several years ago, Sweetheart brought in contract consultants from India for an enterprise-resource-planning project. The project struggled because of communication problems related to cultural differences. “There was a lot of rework, and you’re still paying guys by the hour,” says the company’s McGregor. “It just manifested into a big problem. That was a big takeaway for us.”

Language hasn’t been problematic in China yet for the company. “We let all interaction flow through the E5 team, some of whom speak Chinese,” he explains. “We rely on E5. We’re not putting ourselves in the position of having to translate communications.”

Even Iyengar notes that the language issue isn’t intractable. He says Gartner estimates it’ll take Chinese companies two years to reach where India is today in addressing the English-speaking markets.

What does worry him, however, is that cultural differences between China and the US, which bleeding-edge companies tend to overcome because of the bigger technological goals involved, could hinder a second wave of outsourcers. In other words, companies such as GE will spend the money to make the arrangement work. But, now companies much smaller are considering outsourcing overseas.

“The breed of companies looking at offshore [outsourcing] now will not have this capability of high levels of investment to mitigate for some of these shortcomings,” Iyengar explains. “If the Indian or Chinese service providers are to have the same level of success with this ‘second batch’ of companies, they will have to start addressing some of these cultural differences.”

Certainly, the emphasis on education isn’t one of those cultural hurdles. Nor is the societal focus on infrastructure. China now has 175 million phone lines compared to India’s 34.5 million. Bandwidth in China is now 7.5 gigabits per second, according to Dataquest, a research firm. In India, it’s 1 gigabit per second.

And then there are the people. Some 50 million Chinese workers are added to the workforce every year. Already, China has 400,000 IT professionals, the same as India and just 100,000 short of what the US has, says US China Partner’s Chan.

The world has always waited for China to awaken to become a foremost economic power. It’s not there yet; Chan estimates that the nation’s software outsourcing revenue will more than double, to $5 billion by 2005. But by 2007, Gartner predicts that China will generate $27 billion for IT services, including call centers and back-office space.

Chan even predicts China will surpass India as the world’s foremost IT outsourcer by 2010. Far-fetched? Hardly.

Stranger things have happened. And with this being the year of the monkey on the Chinese calendar, we’re supposed to expect the unpredictable.