U.S. based communications services provider Avaya (NYSE: AV) recently established its intelligent communications center in the Dalian Software Park, contributing to the local municipal government’s efforts to make Dalian a global call center hub.
Other companies that have set up centers in China during the last few years include Dell (Nasdaq: DELL), Motorola (NYSE: MOT) and Hewlett-Packard (NYSE: HPQ). Government efforts to encourage the industry have translated into lower entry barriers, infrastructure facilities and tax sops. These, along with lower cost of operations and availability of cheap labor in China have driven increasing outsourcing to China lately. Many have identified China as India’s only serious competitor, but many others are still not endorsing this.
Over the years, global service providers such as IBM, EDS, Accenture, etc have set up their own centers or have partnered local players. The software parks that have come up across the country have various provinces vying to attract foreign companies. Indian companies such as Infosys, TCS, Wipro, Satyam, Cognizant and others have already set up centers in China to take advantage of the fast growing outsourcing industry.
Needs to consolidate effectively
China lags the Indian outsourcing sector by about 5–7 years. This can however be converted to an advantage by avoiding the mistakes that India made. While China is able to offer lower wages and lower attrition, a dearth of IT expertise, and lack of communication skills in English language are major impediments. On the other hand, India has developed a firm hold over the English call center market and the IT outsourcing markets and has produced global outsourcing vendors such as Infosys, TCS, Satyam and Wipro, among others.
As China works to overcome these drawbacks, it will be better off focusing on developing new markets and capabilities, rather than indulge in direct competition with India. Lower wages and lower attrition levels may not be the best bets to compete on, because as skill sets improve, these attributes may well disappear! In fact, China’s real strength lies in its infrastructure facilities, which can be used favorably if pitted against India’s. In the call center industry, China can also work on the foreign language domains, as there exists a huge demand for other languages even in the English speaking markets. Estimates show that language-based outsourcing is expected to be worth $13 billion by 2010.
China offers location advantage and is an important base for developing the Asia-Pacific market largely driven by Australia, Japan and India. Familiarity with language and cultural affinity has made China an ideal location for the Japanese market.
There is also immense scope in the Knowledge Process Outsourcing (KPO) space. Language issues do not inhibit some knowledge services. An impediment however, is the lack of a strong IPR regime in China. Foreign companies have been discouraged due to the lax regulations that may adversely affect the protection of sensitive data – especially in the areas of research, finance and key customer services. A transparent policy that can increase the confidence of the foreign companies will have a positive impact on the outsourcing sector.
Wake up India!
Leading Indian outsourcing companies have added value to their services by setting up operations in China and graduating towards becoming global players. Meanwhile, the Indian BPO sector is still awaiting a Chinese company to strike it big on the Indian outsourcing scene.
As the competition between India and China intensifies, Indians would do well to pull up their socks and deal with the internal issues of rising wages and attrition more effectively. In the meantime, China needs to concentrate on developing markets where India has not carved a niche already. The Indian outsourcing industry has been a leader too long, and all developments in China must be treated as a wake up call!!
ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.
No responsibility is accepted for errors of fact or opinion. Neither the analyst nor ValueNotes has a position in the stocks covered above, or has received any payment in any form for this report. ValueNotes does not own or trade in the stocks of companies under coverage. ValueNotes does not provide investment banking services or investor relations' services to preserve the independence of its research. Neither ValueNotes nor the analyst incurs any liability arising out of use of the above information/ report. Reproduction in whole or in part without written permission is prohibited.
ValueNotes Outsourcing Watch articles are distributed through FinancialWire, an independent, proprietary news service of Investrend Information, www.investrend.com
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