Challenges in China

Though the Chinese IT and BPO industry is developing rapidly, there remain challenges that Indian entrants must recognize and overcome.

Language Among the often-cited challenges China faces in outsourcing is the lack of English ability. However, Mithras’ work has shown that with new project management approaches, this can usually be overcome in the IT outsourcing arena. Nevertheless, language skills remain a major hurdle for voice-based BPO. “The lower levels of English skills, relative to other outsourcing centers such as India and the Philippines, makes voice-related processes such as call centers difficult to outsource to China,” said Lee Chen of Mphasis. “However the non-voice segment of BPO is set to expand significantly in China, with the market almost unexplored at present.”

IP Protection One of the most inhibitive hurdles is the lack of a rigorous Intellectual Property (IP) rights protection regime in China. This deters firms from outsourcing critical projects there, and is of concern to Western software companies wary of IP theft and reselling. They remain wary that protecting copyrights and IP through traditional contractual means may not be adequate or effective in China. Although the government is taking some steps towards more stringent enforcement of IP rights, the country still has a long way to go. This concern has led many multinationals to turn to outsourcing firms with strong global reputations, which are perceived as more likely to proactively protect their clients IP interests.

Large Project Experience Most of the IT outsourcing providers in China are small to medium-sized companies with limited experience in managing large-scale projects. Their background is often in localization or in the development of non mission-critical systems. There is also a lack of domain knowledge in fields such as the banking and finance sector, which account for a large chunk of outsourcing business. At present, China’s world-class capabilities are limited to lower-end tasks such as programming, testing and repetitive business processes. Convincing global clients to outsource critical projects to their development centers in China may initially be a challenge for Indian providers.

Cultural Differences To date, the majority of local Chinese providers have focused on customers in the domestic market and the Asian region. Chinese providers are currently not attuned to Western cultures and business nuances. This explains their relative success in Japan and Korea, but lack of progress in penetrating the Western markets.

“Indian companies find it difficult to deal with local companies,” noted Ashish Rahinj, CEO, Zensar China.

India’s educational system may also be an advantage in certain areas. While Indians are trained to find the source of problems and solutions through critical questioning and analysis, the Chinese are systematically taught to memorize the textbook answers. As a result, Chinese are superb in execution tasks such as software coding, testing, and repetitive business processes. However they may struggle when asked to design a software system or solve logic or business-process related issues with it.

Variable Quality and Service There are no clear outsourcing market leaders in China. And among those vying for attention, there are great disparities between the different providers’ capabilities to execute projects successfully. Few Chinese providers have CMM certification, making it difficult for clients to assess their process maturity. This has left the door open for global IT giants such as IBM, HP, and BearingPoint to clearly differentiate themselves. While Indian providers have been able to tout their CMM Level 5 certification and major-project track record, they have yet to really stake out a defined niche for themselves, a fact that may hamper their future growth and profitability prospects.

China’s Strategic Advantages

Although all major Indian providers have now established operations in China, their reasons for investing here and their strategies for growth are quite different. Their rationales for entering China include (claimed) lower costs, a complementary and larger skills pool, better servicing of MNCs in China, penetration of Japanese and Korean markets, access to China’s domestic market, and risk mitigation for global clients. However, China is less than ideal on all these parameters, so providers must look beyond the headlines in making key strategic decisions.

Lower Costs For ITES workers with limited experience, wages in second-tier cities are believed to be 15-20 percent lower than in India. Leading Indian firms such as Infosys and Satyam have already established operations in Shanghai and are now looking to expand into second-tier locations to benefit from this cost arbitrage.

“Shanghai does not offer us cost savings; rather it is more expensive than India to operate out of Shanghai,” commented Satyam’s Raghavendra Tripathi. However, most Indian providers initially set up centers close to customers, and are now beginning to explore the substantial cost savings achievable by setting up centers in less developed provinces.

Complementary and Larger Skills Pool Combined with lower costs, China also offers skills that may be complementary to those in India. Though not experienced, there is a large pool of IT programmers who are capable of carrying out coding and testing. In addition, BPO firms can utilize the large numbers of low-cost workers to execute back-office processing projects in China.

A number of providers believe this talent pool may one day dramatically alter their global delivery capabilities. Noting the potential, Ashish Rahinj of Zensar commented, “The model Zensar has adopted is robust, in order to cater to the US, Japanese, and Korean markets.”

Better Servicing MNCs As the world’s seventh-largest economy (India is twelfth-largest), and number one destination for foreign direct investment, China has attracted almost every major MNC to set up operations. India’s IT providers have proved adept at marketing to and serving these companies in their home market. By establishing operations in China now, Indian providers can grow the value of these client accounts without spending heavily on business development activities. At the same time, they can temporarily help keep the legions of small Chinese outsourcing companies, that hope to become the next Infosys, at bay.

According to Masaki Nagao, Wipro’s chief executive of China and Japan: “Our initial strategy is to support our global clients operating in China in projects that they need to execute locally; for example, localization of software to the China market, testing of locally developed software, and enterprise applications with substantial local requirements.” Indeed, the vast majority of work currently being carried out by Indian firms in China falls into these categories.

Penetration of Japanese and Korean Markets Currently around 70 percent of IT outsourcing, export dollars in China are earned from Japan. This is in stark contrast to India, where Japan represents somewhere around five percent of exports. However, by locating in China, Indian firms can leverage the same advantages of cultural and geographic proximity, along with the availability of Japanese-speaking workers. Thus, the easiest route to penetrate this hitherto difficult market may be through China.

Indeed, firms such as IBM, Dell, and GE have already established call centers in Dalian to provide customer service to their clients in Japan, Korea, and Greater China. Indeed Dalian, a city which has been famously successful in selling outsourcing to Japan and Korea, also recently attracted Satyam to set up its first branch office outside their China base in Shanghai. Other Indian providers are also leveraging China’s geo-cultural advantages in various ways: “Strategy of TCS is three pronged-China for global customers, China for APAC, and China for China,” commented Rajanna.

Access to China’s Domestic Market China’s domestic IT market has been hampered by lax IP protection policies, resulting in a lack of value being placed on software. Furthermore, state-owned enterprises in particular have been reluctant to implement software that may result in jobs being automated, given that their traditional role has been to provide employment. Most businesses in China-particularly state-owned ones-are overstaffed, and know it.

Despite these challenges, some have pointed to the substantial existing hardware infrastructure, emergence of Chinese multinationals, and increasing IP protection reforms as being potential catalysts for future growth. Some Indian providers hope that these trends will eventually open more market opportunities for obtaining outsourcing projects domestically.

Risk Mitigation In recent years religious and ethnic violence in India’s northwest and occasional nuclear tensions between India and Pakistan have made international headlines. Combined with the trend to outsource more mission-critical applications, and an increased focus on business continuity following September 11, companies have been looking to mitigate such risks. As Chandra Sekaran, Cognizant’s MD explained, “Multinationals are seeking credible alternate options to India, in order to diversify their sourcing base, and China is certainly being viewed as a country that holds promise.”

However China is not a risk-free destination. With popular dissatisfaction over endemic government corruption, a chasm-like gap between rich city-dwellers and rural peasants, a banking system saddled with billions in bad loans, and an estimated $43 billion in unpaid wages owed to low-wage migrant workers; the seeds for potential unrest are plentiful in China. However, so long as China’s growth continues apace and the economic fundamentals remain intact, it will continue to be an enticing destination to at least spread the risks.

India’s Future in China

In terms of entry rationale, Wipro has placed more weight on risk mitigation, TCS has focused more on servicing their MNC clients in China, while Satyam and particularly Infosys see the potential to leverage China’s talent pool to extend their global delivery model to China. These different emphases also directly influence their investment and growth strategies.

While some leading Chinese providers may pose serious competition to Indian firms in the future, the Indian’s are also well positioned to leverage China’s advantages themselves. With ambitious growth plans already underway, it seems certain that China will be the largest offshore development center for Indian firms, after India itself. And currently, in both the Chinese domestic market and the offshoring-to-China market, there are no clear leaders. This fact offers Indian providers the biggest opportunity (and the biggest potential threat to their incumbency) since the early 90’s upsurge in offshoring. Future success depends on how well Indian providers understand the market opportunities and position themselves for leadership now.