India pulls China into outsourcing game
By Siddharth Srivastava
NEW DELHI – The outsourcing saga so far has proceeded along the following lines: jobs in the United States, mostly related to information technology (IT), software and customer support, are being performed at a lower cost and of similar quality in India, which has garnered the bulk of the business. China is considered to be a potential threat with its large pool of cheaper engineers, but its main disadvantage has been a lack of English-language skills among the Chinese population, unlike India, which has a 300-year history of being a British colony, with English now the first language of millions. With its “first mover advantage”, Indian IT firms have established themselves in the global arena and are eagerly sought after to deliver on crucial projects.
However, the dynamics of the way the outsourcing business is being conducted are changing. Faced with increasing business from the West, skyrocketing salaries as well as a predicted shortage of skilled workers, Indian IT firms are doing the next best thing – outsourcing outsourced work from the US to China, with the added advantage of leveraging more intra-Asian business from Korea, Japan, Hong Kong and Taiwan. All the top Indian IT companies that vie for the outsourcing pool, such as Infosys, Tata Consultancy Services (TCS), Satyam Computer Services and Wipro have now established bases in China to meet growing business demands from the West.
TCS set up shop in China in 2002 with plans to employ more than 180 people; a year after making a foray into the country, Infosys (Shanghai) has a staff strength of 200 to cater to clients in Europe, the US and Japan; Wipro set up its Chinese unit in August this year. Other multinational services firms such as Accenture, BearingPoint, IBM and Hewlett-Packard are already running units in China. Intel employs some 3,000 people (the majority of them engineers) at its research and development (R&D) and assembly/test facilities in Shanghai while another assembly/test facility is under construction in Chengdu. In India, Intel has less than half the number of employees at its R&D facility in Bangalore that it has in Shanghai.
Regardless, India possesses the lion’s share of the outsourcing market. According to research firm Gartner Group, the global IT services market is worth US$580 billion, of which only $19 billion is outsourced, but India has 80% of this offshore market. The figure for outsourced IT services is expected to grow at a very rapid pace. The IT services market is broadly divided into two sections – the IT/tech services sector, which requires skilled manpower – which China possesses – and the business and process outsourcing (BPO) segment which requires the ability to speak and understand English and thus cannot be further outsourced to China. India garners the bulk of the outsourced BPO business as well.
The main reason IT business is being driven to China is the cost advantage – China at the moment has an excess supply of well-trained engineers willing to work at wages lower than their Indian counterparts. Revenue from India’s IT exports was $12.5 billion in the year 2003-04 (March ended), up 30% from the previous year, which in turn has resulted in a 10-15% annual rise in wages in India’s software and back-office services industry. In turn, software export revenue for China in the year 2003 was just $700 million, which leaves an over-eager skilled workforce ready and willing to work for a low cost. On average, an engineer with some experience in Shanghai is paid a monthly salary of less than $500, compared with more than $700 in India and upwards of $5,000 in the United States’ Silicon Valley.
According to estimates, China has 200,000 IT workers – compared with India’s 850,000 – with over 50,000 Chinese software programmers added to this pool annually. Evidence suggests China’s universities churn out over 250,000 engineering graduates each year, compared to 150,000 or so in India. There is an Indian connection here too, with NIIT, India’s top technology training company, set up by the founder of software exporter HCL Technologies, that opened its first training center in Shanghai in 1998, now having 121 centers in 25 Chinese provinces and training 25,000 Chinese annually. A recent study by KPMG for the National Association of Software and Services Companies, or Nasscom, an industry trade group in India, has predicted an acute shortage of IT personnel to the tune of 250,000 by the year 2009 in India. Thus the numbers work very well for increased forays into China by Indian IT firms. _(www.hkitos.com)
The impact of Indian IT firms moving to China is that it will still be a while before indigenous Chinese IT firms can really hope to compete with India on a global scale. With a head start of over 10 years, Indian IT firms have reached scalability levels that will take a while for Chinese firms to match. A second-rung Indian software firm employs over 15,000 employees, compared to the 3,000 employed by just a handful of IT firms in China. In terms of job skills, it is the lower-end jobs in the value chain that are being outsourced from India to China. Experts estimate a minimum three to five-year lag period before China can hope to provide any competition for India. Now that Indian IT firms, with their deep pockets, are setting up shop in China it will be even more difficult for resident Chinese firms to compete. _(www.hkitos.com)
Observers, however, say the main problem holding China back remains the lack of knowledge of English and managerial capabilities, which makes it difficult for the Chinese firms to communicate and relate to international clients and push for more business, even as competition stiffens. This is unlike low-cost manufacturing, where China remains the champion, by inundating countries with cheap goods, such as electronics, toys and consumer appliances. Indeed, the opinion here is that with business expanding, the impending shortage of skilled IT workers and spiraling salaries, Indian software companies need an alternative low-cost center with an ample supply of engineers to grow further. And there’s no better country than China to be a potential back-end for India’s IT industry._(www.hkitos.com) |
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