The catastrophic events in Japan, which have damaged Japan's national economy and foreign trade, will also sequentially affect China's service outsourcing business, according to a new International Data Corporation (IDC) study. IDC believes that the volume of China's service outsourcing contracts from Japan, especially of low-end, peripheral outsourcing, will decrease in the short term. Meanwhile, the earthquake is expected to drive Chinese contractors to diversify their business sources, taking it as a chance to move focus from markets like Japan and South Korea to markets like Europe and North America.
"The earthquake has caused a direct impact on Japan's economy and foreign trade. Sequentially, it will affect the total volume of China's service contracts from Japan. This will drive domestic service contractors to gradually increase their market share from other areas, especially from Europe and North America," says Ting Yang, senior research manager, China Services Market.
Yang says Chinese companies are investing more resources, such as setting up overseas branches in order to better cater to their customers. On the other hand, the incentive measures released by the Ministry of Commerce, which encourages service companies to make merger and acquisitions overseas, will also help to increase the capability and efficiency of domestic companies in the pursuit of top-end outsourcing contracts.
Currently, Europe and North America have caught up to and even surpassed Japan and South Korea in China’s offshore service outsourcing markets. According to IDC, offshore software development business from Japan and South Korea accounts for 43.9 percent, while business from Europe and North America account for 47.9 percent and is expected to increase 24.5 percent annually in 2010, much higher than those from Japan and South Korea markets.
"The exploration of Europe and North American markets will help Chinese outsourcing companies to access to top-end businesses because outsourcing contracts from these areas require service providers to have all-around solution and service capabilities," adds Yan.
Joan Mao, senior analyst, Services and Telecommunication Research Group in IDC China, says that Japan's earthquake will have a different impact on different service outsourcing companies. The earthquake will not have much impact on enterprises that have maintained a long, stable relationship with Japanese customers and are already involved in the core business of customers.
However, for subcontractors who signed second-hand or third-hand contracts from general contractors like Hitachi, Fujitsu, and NEC, the earthquake will have a bigger impact on their outsourcing business, especially in low-end, peripheral outsourcing services.
"Since the earthquake has suspended the normal operations of many Japanese enterprises, it may delay the implementation of the ongoing service outsourcing projects for as much as three to six months. Many outsourcing companies could miss their revenue targets for 2011. But as Japan launches its reconstruction work, it will also provide opportunities for Chinese service outsourcing companies, especially in construction and transportation areas," Mao points out.
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