IT Outsourcing: China Grasps for the Lead

China presents a major threat to India in the global IT outsourcing industry.

2009 Volume 12 Issue 3

Rough economic times make the outsourcing of information technology (IT) an even more critical area of discussion for businesses. Recently, there has been a great deal of debate on whether a shift in the global outsourcing of IT is occurring. India has long been known for its dominance in the field; however, China, which plays a leading role in the outsourcing of manufacturing, is making strong headway in the industry and may soon pose a major threat to India’s supremacy.

New management models and business strategies have evolved since the onset of globalization. One such corporate strategy is global outsourcing, which is receiving more attention than ever due to its effectiveness in cutting costs.[1] Global outsourcing can be defined as a strategy that allows corporations to redesign, redefine, and reshape organizations by transferring the management and/or day-to-day execution of a business function to an external service provider.[2] Used responsibly, it can generate enormous benefits.[3] There are two countries that stand at the forefront of the global outsourcing movement: India, which is considered the mecca for outsourcing IT services, and China, which has a strong reputation in the outsourcing of manufacturing work.

India made the decision to focus on IT expertise early on; it also made developing competency in the English language a nationwide priority, thus increasing its competitive advantage in the global marketplace. India’s economy has developed through the promotion of internal consumption rather than on exports.

India’s top 10 IT companies make up approximately 45 percent of the entire global market.[4] Companies like Tata, Infosys, and Satyam enjoy worldwide reputations and attract and land multinational deals every year. In addition to English language competency and IT expertise, trust in those companies, and in India as the go-to-country for IT outsourcing, has grown because the nation successfully combines low labor costs with Western management skills.[5]

China has long been known for its low cost of labor and its evolving infrastructure, and the country has attempted to develop its economy by focusing on exports as opposed to growth through internal consumption. China is a classic example of an emergent economic power. Since opening its doors to globalization, China has efficiently utilized its resources, which mainly focused on cost advantages. Conscious of its deficit in technological expertise, China concentrated on a practical business—manufacturing.

The government, aware of the value of diversification, has continuously sought other strategies to ensure growth and has undertaken efforts to support other economic sectors, particularly its IT industry. In 2008, it handled approximately $1.6 billion in IT outsourcing services and about $14.2 billion in software exports.[6] Japan, for one, outsources many of its IT needs to China.

China versus India

China’s international deals focus mainly on product development, but it has conducted a great deal of testing for IT projects as well. China has mostly handled low-end, relatively uncomplicated IT applications,[7] but it can and does manage mid-sized applications, primarily orders from Japan and Korea. The country desperately hopes to land multinational deals in order to prove itself as a leader in IT outsourcing. As such, the Chinese government is making a significant effort to heighten the IT industry’s appeal to foreign companies and investors.[8]

Currently, standardized IT services are outsourced to China and the more complex IT services are entrusted to India. This pattern will likely continue until China develops its IT industry and addresses its major weaknesses. The issues cited most often in the literature are the level of IT expertise of Chinese workers and concerns about intellectual property rights.

While many people claim that conditions for IT outsourcing in China are not as ideal as those in India, this statement was far truer in the past than it is today. India itself is aware of the rising Chinese competition and the country’s business experts expect that it will not be long before the Chinese improve their deficiencies in order to attract more customers.

Infrastructure

China: The government has built entire cities and towns dedicated to the IT industry, presenting almost perfect conditions for companies. The most prominent example is Shenzhen, one of the fastest-growing cities in China and a preferred location for foreign investors. Moreover, the government offers tax deductions, financial support, and subsidies for new establishments.[9] Large companies, such as TCL, China’s largest electronics manufacturer, have established themselves in Shenzhen.

India: India is considered to have a fairly weak infrastructure and many external companies claim that it is insufficient and inferior to China’s. In addition, the public interest sometimes prevents changes. In China, however, once a decision is made by the government, it is implemented quickly, as with IT infrastructure expansions.







Photo: Vikram Raghuvansh







Market Structure

China: Unlike India, China does not have many large IT companies.[10] Market experts often note that the highly fragmented nature of the IT industry in China needs to change as small companies are riskier and less reliable partners than major players.[11] Many people argue that China’s IT market needs to consolidate in order to become more competitive.[12]

In today’s economy, companies must also be very cautious about political instability in foreign countries. Political instability and slow progress in providing data security in China have been causes of concern. As the industry matures, however, it is thought that fragmentation will decrease due to international interests, and laws will improve to guarantee safety.

India: Recent headlines about the Indian IT industry have been a source of alarm. At the beginning of 2009, it was revealed that the Satyam company had accounting discrepancies and the resulting negative publicity has affected the entire industry and raised the question of whether such problems could have occurred in China. Many foreign companies and investors see their businesses as endangered due to these revelations as it showed that regulations and laws in India were not as developed as expected.

To deal with the impending threat of China, Indian companies are also starting to acquire Chinese IT companies, opening the door for India’s involvement in the burgeoning market. In 2005, India invested nearly $50 million in the Chinese IT industry,[13] mainly comprised of stakes in Tata and Infosys.[14]

Quality/Track Record

China: One of the major concerns for foreign companies interested in investing in China is the country’s lack of protection for intellectual property in the form of trademarks, copyrights, or patent laws.[15] However, the government has already made dealing with piracy and other investor concerns a priority. Since China’s inclusion in the World Trade Organization in 2001, the nation has updated its laws to fulfill international demands[16] and in 2004, China announced stricter laws on intellectual property rights. Penalties for defiance of these laws have been raised significantly since then.[17]

India: India has more Capability Maturity Model (CMM)-certified companies than China. CMM is a program that determines the quality of software processes in organizations. While all of India’s top 30 companies are CMM certified, only 6 of the 30 top companies in China are certified, clearly showing the gap that the country will have to fill within the next few years.[18]

Labor Availability

China: Two serious issues linger in China—English language and IT skills. English is obligatory in interacting with foreign businesses, and while the Chinese educational system tries to emphasize the advancement of English, the population still seems to be lacking in this area. [19] In 2005, about 0.77 percent of China spoke English, compared to 10.66 percent of the population in India. [20], [21]

In addition, the country’s IT expertise is not yet at a desirable level. Although many students graduate with IT degrees from universities every year, the majority of China’s IT professionals still have less than five years’ experience.[22] Employees will require more training in order for China to become a competitive global force.

India: India has the disadvantage of higher labor costs than China. Although India has been known for its large pool of talented, low-cost workers, its wages have jumped by 25 percent since the onslaught of globalization.

Conclusion

As China continues to develop, there will be fewer reasons for an external company to avoid establishing itself there. In fact, it may be that in order to stay competitive and decrease additional costs, companies will be obliged to outsource their IT needs to China. The country’s potential has already been recognized by companies like IBM and Hewlett-Packard, both of which have established major presences there.[23] If the IT industry develops as expected, China could capture opportunities worth $56 billion by 2015.[24]

India’s acquisition of Chinese companies is a direct indicator of China’s growing IT outsourcing power. The country is trying to entrench itself in the Chinese IT industry because it anticipates China’s future capabilities. Many authors argue that China and India should consider working together in the field of IT—China would gain access to important IT expertise, while India would benefit from cheaper labor costs and a better infrastructure.

Today, India still has the lead over China in IT outsourcing and its advantages over China are still distinct. While China will almost definitely become an important force in the IT industry, the country still needs more time to develop its competencies. Many think that the Chinese IT industry will have to consider acquiring or partnering with foreign IT companies in order to grow and compete. Lenovo’s acquisition of IBM is an example of how Chinese companies can expand and “go global.” China’s leading software company Huawei Technologies has also established joint ventures with Western companies such as IBM, Siemens, 3Com, and Symantec.

Conversely, as China closes the gap between itself and India, India will have to make adjustments in its laws to prevent further scandals and companies will have to reconsider their strategies to make their offerings more attractive and maintain their customer bases. If India wants to sustain its reputation as the leader in IT outsourcing, it must also focus on both innovating and furthering its talents.[25]


[1] D. Elmuti and Y. Kathawala, “The Effects of Global Outsourcing Strategies on Participants’ Attitudes and Organizational Effectiveness,” International Journal of Manpower, 21, no. 2, (2000): 112-128.

[2] F. J. Casale, Introduction to Outsourcing, (The Outsourcing Institute, 1996).

[3] Ibid; D. Crane, “Renewed Focus on Financial Performance,” Outsourcing Center, http://www.outsourcing-bpo.com/sct.html.

[4] G. Filippo and J. Hou, “Can China Compete in IT services?” McKinsey Quarterly, 1 (2005): 10-11.

[5] J. Kotlarsky and I. Oshri, “Country Attractiveness for Offshoring and Offshore Outsourcing: Additional Considerations,” Journal of Information Technology, 23, no. 4, (2008): 228-231.

[6] T. Wang and G. Tian, “IT Outsourcing: China vs. India,Bangkok Post, March 21, 2009. (hyperlink no longer accessible).

[7] T. Leach, “Outsourcing to China,” Bleum, September 29, 2009, http://www.bleum.com/software-outsourcing-news-events/offshore-outsourcing/outsourcing-to-china.shtml.

[8] M. Karthikeyan, “Is China a Threat to Indian IT Outsourcing?” ITonion!, January 15, 2009, http://www.itonion.com/2009/01/is-china-threat-to-indian-it.html.

[9] Z. Qu and M. Brocklehurst, “What Will it Take for China to Become a Competitive Force in Offshore Outsourcing? An Analysis of the Role of Transaction Costs in Supplier Selection,” Journal of Information Technology, 18 (2003): 53-67.

[10] B. Einhorn, “China Aims to Gain from Satyam Mess,” Business Week, January 14, 2009.

[11] E. Frauenheim, “Report: China’s Outsourcing Industry Lags India’s,” CNET News, February 3, 2005, http://news.cnet.com/Report-Chinas-outsourcing-industry-lags-Indias/2100-1011_3-5562791.html.

[12] G. Filippo and J. Hou, “Can China Compete in IT services?” McKinsey Quarterly, 1 (2005): 10-11.

[13] V. Sarma, “IT Outsourcing: China versus India,” Frost & Sullivan Market Insight, June 8, 2005, http://www.frost.com/prod/servlet/cif-econ-insight.pag?docid=39745707.

[14] B. P. Watson, “Will China Change IT?” CIO Insight, August 27, 2008, http://www.cioinsight.com/c/a/Expert-Voices/Will-China-Change-IT.

[15] G. Filippo and J. Hou, “Can China Compete in IT services?” McKinsey Quarterly, 1 (2005): 10-11.

[16] K. Sepetys and A. Cox, “China: Intellectual Property Rights Protection in China: Trends in Litigation and Economic Damages,” NERA Economic Consulting, February 17, 2009.

[17] S. S. Chan, IT Outsourcing in China: How China’s Five Emerging Drivers Are Changing the Technology Landscape and IT Industry, (The Outsourcing Institute, 2005).

[18] G. Filippo and J. Hou, “Can China Compete in IT Services?” McKinsey Quarterly, 1 (2005):1-11.

[19] E. Benni and A. Peng, “China’s Opportunity in Offshore Services,” McKinsey Quarterly, 3, no. 17 (2008).

[20] J. Yang, “Learners and Users of English in China,” English Today, 22 (2006): 3-10.

[21] Census of India, Indian Census, 10 (2003): 8-10.

[22] Karthikeyan.

[23] Watson.

[24] E. Benni and A. Peng, “China’s Opportunity in Offshore Services,” McKinsey Quarterly, 3 (2008): 17.

[25] S. Prasad, “China is India’s ‘Only Possible Threat,’” ZDNet Asia, May 9, 2008, http://www.zdnetasia.com/insight/business/0,39051970,62041177,00.htm.

About the Author(s)

Yunus Kathawala, PhD, is a professor of management at the School of Business at Eastern Illinois University in Charleston, Illinois. He holds a doctorate from the University of Georgia. His research interests are in the areas of supply chain, small businesses, international business applications, and web-based and distance education, and he has been published in the European Business Review, the International Journal of Service Operations Management, and the International Journal of Business and Globalization.

Christoph Heeren, will graduate as a German transfer student from Eastern Illinois University Lumpkin School of Business in August 2009. He worked as a research assistant for Dr. Kathawala in the field of operations management. Born in Luxembourg and raised in Tokyo, Singapore, and Hong Kong, he will be completing his MBA degree at the University of Cologne in Germany with majors in business policy and logistics.

Comments

Anonymous

December 15, 2010 at 7:21 am

Wonderful article.

“In addition, the country’s IT expertise is not yet at a desirable level. Although many students graduate with IT degrees from universities every year, the majority of China’s IT professionals still have less than five years’ experience.[22] Employees will require more training in order for China to become a competitive global force.” — This is indeed very true. Although the students possess the intelligence, the IT training provided in the Chinese universities are not adequate to equip the graduates to obtain a job in competitive job market. We as a company (www.freeoutsourcing.net) are working in the training and placement to help the new graduates to gain more practical knowledge and better adapt to the real world.


Stan Smith

April 28, 2012 at 12:42 am

There is up-to-date information that compares China and India outsourcing at: http://www.outsourcingchinablog.com


Eric Li

May 13, 2012 at 10:09 pm

An article on one China-based outsourcer playing catch-up: http://www.vanceinfo.com/en/newsroom/VanceInfointheNews/20111026