It is still early days for China as the destination of choice for business process outsourcing (BPO) but, taking a page from the success of the sector in India and the need to rebalance its own GDP, Beijing wants to see growth and is prepared to invest to get it.
What China has done in terms of building its infrastructure – and thereby expanding its manufacturing capabilities – in the last decade is nothing short of miraculous. The next challenge is one of diversification: China wants to develop platforms that are not just about foreign investment, manufacturing and exports.
Bulking out the service sector with software outsourcing, IT development and business processing is a potentially lucrative means of doing this.
And India knows how. In fact, India has managed to channel its IT and engineering excellence into new sectors that have redefined global business.
“Over the past decade, India has become a global hub for IT and IT-enabled service outsourcing,” said Tay Eng Kiat, CEO of Ascendas China. “We see India continuing to maintain an important position in the BPO market, supported by strong economic fundamentals and a growing IT sector.”
Ascendas is a leading developer of high tech business parks and has maintained a presence in Asia for the last 14 years. It has developments in India and is stepping up its presence in China.
In 2005, Ascendas began developing an IT park in Dalian as a joint venture with Dalian Software Park. The 100,000 square-meter first phase opened on September 5, with almost a quarter of the space pre-booked. A second phase, covering a further 84,000 sq m, will launch next April. Within eight years the park should the largest of its kind in China with operations mirroring Ascendas’ other IT parks in India and Singapore.
The targets are ambitious but not unrealistic. According to IDC, offshore BPO in China should grow to almost US$7 billion by 2011, an annual growth rate of 37.9%.
“China is emerging as a strong contender for the BPO business, moving up in popularity with MNCs seeking offshore outsourcing,” said Kiat. “China and India are both excellent locations for BPO. Both countries have unique offerings and will need to balance costs and expertise to attract global customers.”
Time for school
India is a natural place for Western companies to outsource. It has a large English-speaking population and large base of low-cost engineers.
China lacks the English language skills for some outsourcing activities Western multinationals (MNCs) seek but it’s a natural spot to develop business from other Asian markets. With this in mind, a dozen cities, including Dalian, Hangzhou and Xi’an, have been identified as BPO cities.
A number of ambitious firms are already making moves into these markets, including Vinculun, a startup focusing on software development and consulting as well as warehousing solutions.
Venkat Nott, the company’s founder, was formerly head of sales at Indian MNC software developer HCL and sits on the IT committee of the Indian Chamber of Commerce in Hong Kong. He’s had his eye on the China BPO market for quite some time and is in the process of setting up a development unit in Dalian, a port city in the country’s northeast. “Dalian is a good place because people speak Chinese, Japanese and Korean, so we can access all three markets,” Nott said.
This geographical importance, coupled with a string of government initiatives aimed at attracting high-tech and service sector companies to the city, has been hugely beneficial to Dalian. Its economy has grown steadily from US$14 billion in 2000 to US$34 billion last year, an annual growth rate of about 15%.
Other cities have also done well from the sector and much of their success is down to investment from India’s BPO heavyweights. Tata Consulting Services, perhaps India’s most successful IT outsourcer, has a fairly large operation in Hangzhou which focuses on developing business in Asia. Operating a joint venture with Microsoft and three state-owned firms, it employs more than 1,000 workers. Infosys, Bangalore’s famous success story, has bases in Hangzhou and Shanghai, with 700 people on the payroll.
Both companies have, in the past, outlined bold plans for further expansion in China. However, in recent weeks they have admitted that growth is not taking place as quickly as they had expected.
The hot zones
According to Prakash Manon, president of National Institute of Information Technology (NIIT), the world’s largest IT education provider, India and China are the only two countries in the world with the potential to become IT superpowers. But to realize this potential, people and infrastructure are required.
India has trained people and, increasingly, infrastructure. China has infrastructure and, increasingly, trained people.
“The raw material for the IT industry is a trained human mind,” said Manon. “Countries that can become big in IT are countries that have big populations. China and India hold 33% of the world’s population so they are the two countries that have potential to be superpowers in IT. India is well on its way because it started 10 years before China.”
He stresses that, while the IT industry is growing at 34% a year in China, this figure doesn’t include growth in software exports, which are doubling annually.
In the last five years, Beijing may have started placing more emphasis on its service sector but it will need to bring more people online. To keep on doubling thenumber of software exports, you have to double the number of IT professionals at your disposal. But China’s universities don’t have the resources to pump out that many students. The answer may be found in private education and, perhaps unsurprisingly, the largest provider of IT education is India.
“They have people at universities who are very bright, so why is there this huge gap between academia and the world of work? It is a mind-boggling,” said Manon. “The universities have not kept pace with change.”
He claims that NIIT’s entrepreneurial model has attracted interest in China. As a private sector solution, it doesn’t cost the government any money and it generates globally competent staff.
It is on this fundamental level of education that China’s bid to rebalance its growth model must begin. With more IT professionals in the workforce, software giants from India and beyond will look to take advantage of opportunities in one of the world’s fastest-growing regions. As has been its strategy in other industries, China would want this foreign expertise to migrate to domestic operations and raise the BPO bar nationwide.
The question on everybody’s lips is will China and India succeed in working together or just end up treading on one another’s toes.
“At the end of the day, there is going to be competition and there is going to be collaboration,” said Manon. “I would tend to feel that these two countries are waking up to the fact that collaboration seems to be better than competition. I think that is the way it is going to go.”