China's Surprise Leap Into Outsourcing

by Cesar Bacani, 11 May 2010

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topics:
Outsourcing and Shared Services

tags:
BPO global outsourcing IT services KPO R&D shared services

Something unexpected is happening in the global outsourcing industry. While everyone’s attention has been fixed on India, which practically invented the concept of hiring someone offshore to carry out back-office functions at half the price but twice the quality, some other country has been quietly building up outsourcing capabilities and may be on course to eclipse the Indians.

The Philippines? Malaysia? Singapore? Vietnam? It’s actually China, according to accounting and consulting firm KPMG. “In the last three years, we have seen a dramatic change in the outsourcing scene within China,” says Egidio Zarrella, Global Partner, IT Advisory, at KPMG. “Our clients have been very surprised at the quality of infrastructure and even the English-language skills [in China].”

It’s a bold claim, but one that Zarrella backs up with evidence and analysis in a new report, Inside the Dragon: Outsourcing Destinations in China. If KPMG’s projections pan out, the trend has implications on multinationals and other large companies in Asia that are outsourcing IT services, business processes and even R&D and other knowledge processes. If your competitors are going to China instead of India, will you find yourself at a competitive disadvantage?

That’s a question that CFOs will increasingly be asking. According to Zarrella, the key reason behind outsourcing is no longer just cost arbitrage. Equally or even more important is the need to ensure access to a reliable supply of abundant and skilled talent, among them engineers and finance specialists. There is also the issue of establishing shared services in a location that many companies expect will become their biggest market. China has already surpassed the U.S. as the world’s largest car market.

Growth Spurt

In 2007, says KPMG, China’s onshore and offshore outsourcing market stood at only US$7.5 billion. That figure nearly tripled to US$20 billion last year, according to the country’s Ministry of Commerce. By 2014, KPMG predicts, China’s total outsourcing market will stand at US$43.9 billion.

India is still the leader, accounting for 13% of the global offshore outsourcing market last year. But China is fast catching up; it had 8% of the offshore outsourcing pie. The Ministry of Commerce reports that the contract value of China’s offshore outsourcing reached US$14.8 billion in 2009, an increase of 153.9% over 2008.

Zarrella credits the Ministry of Commerce’s “1,000-100-10 Project” launched in 2007 for the impressive results. The goal is to establish ten Chinese cities as outsourcing bases, attract 100 international customers to offshore in these cities, and assist in the development of 1,000 large and medium-size outsourcing vendors to meet the needs of these multinational clients. The chosen cities enjoy supportive macroeconomic and other policies from Beijing as well as special-purpose funds to construct public information platforms, develop human resources and improve the infrastructure and investment environment.

The project has been expanded to a total of 21 Chinese cities. The KPMG report examines these 21 and three other cities that the accounting firm believes can also excel as offshore outsourcing bases. (Hong Kong is not included.) “I have seen 18 of these cities first-hand,” says Zarrella. “People don’t realise the profound changes that are happening there.” A top executive at one of his clients, a major U.S. investment bank, recently visited Shanghai, Hangzhou, Beijing and Guangzhou. “He’s never been to China,” Zarrella recounts. “He said: ‘I thought Hong Kong was fast and dynamic, but those four cities are all moving with vibrancy. We’re looking at operations now in those four cities.’”

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