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.
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.
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.
Siddharth Srivastava is a New
Delhi-based journalist.
(Copyright 2004 Asia
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