China’s success in low-wage manufacturing, where it competes aggressively with neighboring India, has prompted many to speculate that it will soon challenge India in IT services. With a 20-year head-start, India currently is far ahead in export volumes, and, with the exception of China’s first-tier suppliers, in quality processes as well. Nevertheless, Western CIOs interviewed for this report indicate that China is for the first time appearing on their radar as a viable offshoring destination. Reasons for this vary, but they include recent increases in the quality of providers, the viability of the judicial system, the volume of China-specific IT work, and the need to diversify offshore operations concentrated in locations such as India and the Philippines.
Yet
these CIOs often view China superficially as an “emerging India.” This is
a mistake. China’s IT-services market is developing in a very different
environment from the one India’s industry emerged 20 years ago. Unlike
India, China has benefited from a large, robust domestic economy with
unmet IT needs, particularly emanating from China’s unusually large
foreign multinational business sector. China has also been able to exploit
close geographic, cultural, and historic ties with its rich neighbor,
Japan. However, China’s heavily provincial-based pattern of economic
development and undeveloped M&A market has resulted in a fragmented
industry, with providers lacking scale. Structural disincentives against
long-term investments stemming from government partiality and rapid policy
changes have resulted in a lack of sustained development in internal
software quality processes. These unique circumstances impact both the
strategies that providers should adopt to succeed and the issues of which
clients must be cognizant.
Impacted too will be the country’s
future development. While we believe that India’s future lies in higher
value-added services for Western markets, China must continue to play to
its strengths in:
While China is yet to reach
maturity as an offshore base, and provider selection remains critical due
to the wide disparities in capabilities and service levels between
providers, significant offshore work is already being done in China for a
range of client segments. At this stage for U..S clients, China generally
serves specific needs, such as regional IT support or risk-mitigation,
rather than offering a value proposition as overall cost or quality
leader. However, for many Japanese clients, China is already a compelling
near-shore destination for a wide range of needs from ERP to SCM and
embedded systems. For Japanese companies, China’s cultural and geographic
proximity add to its other attractions to offer absolute advantages over
India, the Philippines, and other destinations.
Current
Market Status
Current offshore
projects being carried out in China fall into several categories:
Outsourcing providers are also targeting
business in China’s domestic market. Here, a number of smaller projects
are being done for the China subsidiaries of MNCs. In addition, due to the
lack of experienced IT talent in China, there is strong demand for
temporary IT staff; a need for which the Indian firms in particular are
actively trying to fulfill with their staff contracting
services.
Talent Availability
The
Chinese government claims there are currently approximately 500,000
workers with IT skills in the country, with about 140,000 new
computer-science graduates in 2003 (up from 62,000 in 2001). The number of
graduates with accounting and other skills relevant to BPO is said to be
even higher. However, these figures, even if accurate, fail to communicate
the real situation of an overwhelming lack of experienced talent. Staff
with experience or specialized IT skills command relatively high salaries
in China, while the more plentiful entry-level staff require intense
training, decreasing competitiveness relative to more mature offshore
destinations.
“While experienced English-literate talent is
relatively expensive in China, we offer a combination of talented
programmers, experienced managers, and standardized processes to provide a
globally competitive service offering,” explains Mark Cavicchia,
managing director of Everse Corp. The firm includes a staff of more
than 80 individuals and serves MNC clients such as Credence Systems
and Baskin-Robbins from its Los Angeles headquarters and Shanghai
GDC.
Chief among the skills that are readily available within China
are the traditional programming languages. However, there remains a dearth
of talent with substantial project experience or with skills in areas like
ERP and the latest IBM, SAP, or Oracle technologies. Such talent is
primarily only available in small numbers in first-tier cities and even
then only at relatively high compensation levels. In fact, Indian
providers, who have for some time been looking to China as a potential
solution to the huge projected future talent gap in India, have found that
finding experienced talent at short notice is more difficult in China than
at home.
Thus, the type of projects that can be done most cost
effectively in China are those involving traditional programming languages
and not requiring deep domain or industry knowledge. Software-development
stages including coding, testing, and maintenance can be carried out most
effectively in China, while the requirements analysis and system-design
stages may be best done in other locations. A cultural aversion to
questioning, which is rooted in the rote-learning-based education system,
makes analysis, design, and other tasks requiring consideration of broader
issues difficult in China.
Due to great differences in cost
structures between the various regions and the highly developed public
infrastructure throughout China (in contrast to India, for example), for
lower-level programming projects, substantial cost savings may be achieved
by looking to second or third-tier cities.
