Conclusions regarding the potential of Chinaas an IT and business BPO destination have been mixed. China backers would have us believe that the country will present a formidable challenge to India’s dominance within the space of a few short years. Others point to China’s disadvantages and believe that the gap is too large for China to bridge, even within a decade. Regardless, the outsourcing industry in China is now experiencing a shakeup as leading global providers such as HP, BearingPoint, and IBM set up IT and BPO centers in China.

Most of the top Indian providers have set up centers in China, and several are planning transformative growth strategies. According to Vineet Toshniwal, head of sales and marketing, Greater China, Infosys says, “China will be a strategic base for us, as we view that the next-generation global delivery model will have integrated capabilities of India and China.” Satyam’s China head expressed similar views, while Chandra Sekaran, MD, Cognizant stated that they view China as a “potential global delivery center to provide offshore services to US, Europe, and Japan.”

Of India’s top five providers, Satyam and TCS have been operating in China for a couple of years, while Infosys set up earlier this year. Wipro recently announced its entry into the market, and HCL is anticipated to make a similar announcement soon. Medium-sized Indian companies Mphasis, Zensar, and iGate also entered the market sometime ago. The latest entrant is Cognizant, with a host of others expected to follow.

As V Rajanna, General Manager, TCS China commented, “Sooner or later most of the Indian outsourcing firms will set up operations in China.”

While wholly owned subsidiaries have been the most popular entry mode, joint ventures or acquisitions of local Chinese firms have also served as entry vehicles for Indian firms in the past, and may also be used to expand in future. Sudip Nandy, chief strategy officer, Wipro stated, “Wipro sees opportunities to potentially leverage the capabilities of leading local providers through acquisition and integration, in order to offer a truly compelling and localized China capability for its global customers.”

While each provider has somewhat differing rationales for entering China, the key to a successful expansion into the country rests on a deep understanding of the market and a sound business strategy.

China Market Landscape

Having transformed much of its economy into a basic-manufacturing powerhouse over the last couple of decades, the proactive Chinese government is now focused on developing higher value-added manufacturing and service industries. Outsourcing has been identified as one of the key ‘knowledge economy’ focus areas, and therefore a lot of the government attention has been devoted to developing the industry.

Software Cities In 2000 the Chinese government decided to set up 10 software bases to promote outsourcing and attract investment. Each city contains a software park, and ofers attractive tax policies and incentives to promote development of an export-focused software industry. However the cities differ in terms of tax holidays and government incentives, availability of technical resources, business infrastructure, and proximity to customers.

China’s major cities may be roughly classified as tier one, tier two, or tier three in terms of their levels of economic development. Importantly, there are vast differences in operating costs between cities and provinces in the three tiers. However, the level of public physical infrastructure throughout China far exceeds that within India. Prakash Menon, CEO, NIIT China, which operates more than 120 franchised IT training centers, with over 20,000 students, opined, “The country will now need to closely focus and build its human infrastructure, especially in IT. The key question really is how fast can this be done.”

According to Rajanna, “We chose Hangzhou based on an evaluation of critical parameters such as the talent pool, cost, availability of infrastructure, and government support.”

Talent According to government statistics, in 2001 there were almost 2,000 universities and colleges in China, boasting of 11.75 million enrolled students, and producing 1.97 million graduates annually.

The government claims there are currently around 500,000 workers with IT skills in China, 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. Impressive though these figures are, the availability of experienced professionals remains a key concern. Shortage of such professionals exists there and they can command high salaries.

As Raghavendra Tripathi, regional manager (China), Satyam explained, “Employee retention will be a key issue for sustainable growth. It may be a good strategy to look at establishing development centers in second-tier cities in order to recruit local talent from universities around the city, and provide training. This may foster loyalty, which would curtail the high employee turnover.”

Mainly among the skills easily available in 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 technologies. Such talent is primarily available, in small numbers, in tier one cities, and only at relatively high compensation levels. According to Rao Talasila, general manager, iGate China, “The biggest challenge is finding the right human talent to power our growth needs. We have often had to turn away projects because we couldn’t find the proper talent. The recruitment supply chain for IT professionals in China is still in its infancy.”

While experienced talent may be scarce, nevertheless “IT worker skills here are at a par with their Indian counterparts,” stated Rajanna. However, while the majority of current university graduates can read and write in English, only a small percentage can speak it fluently. The language issue is more pronounced in tier two and tier three cities.