China outsourcing sector no match for India

China is promoting its information technology (IT) outsourcing sector as a rival to that of market leader, India. A look at the figures, however, paints an altogether different story.

Consider this. In 2006, the Chinese IT services market reached a size of $7.7 billion, with a growth rate of 17.8 per cent over the previous year. On the other hand, software and services exports from India for the financial year 2006-07 grew by 33 per cent to register revenue of $31.4 billion, whereas the domestic segment grew by 23 per cent to register revenue of $8.2 billion, according to Nasscom's latest figures. Moreover, analysts note that the demand for IT outsourcing from India is around four times that from China.

"China has the potential but India has the edge" says Nasscom Vice-President, Ameet Nivsarkar. He adds: "Clients of Indian outsourcing vendors simply expect more out of the services. This has led Indian vendors to set up base in places like China."

The myth associated with China as a key challenger to India for offshore supremacy is diminishing gradually with issues like language, attrition and intellectual property (IP) protection continuing to haunt multinationals, according to a recent Forrester report. The other global delivery model (GDM) locations like the Philippines "� which grew at two and half times the rate of China, on the strength of its English-speaking skills and large investments led by Accenture "� and Brazil are growing at a faster pace.

China does not have any significant cost advantage, note analysts. The average IT salaries in China are around $10,000 per annum and the average BPO salary is around $7,634 per annum, according to a KPMG-Nasscom study. The salaries are close to the Indian average salary of $9,867 and $7,779 per annum in IT and BPO sector, respectively. A relatively small supply of IT professionals with English language proficiency allows these employees to command higher salaries. Besides, as of Decemeber 2006, China's headcount with regard to outsourcing was less than one-tenth that of Indian firms, according to Vikash Jain, Engagement Director, Everest Group (a research firm).

The Chinese IT consulting market benefits from various IT consulting projects of the telecommunication industry. The Beijing 2008 Olympics project has further helped the system integration market to garner a high-speed growth. However, due to the historical interdependencies, cultural and linguistic similarities and physical proximity, China has been able to establish itself as a key near shore destination for Japan and Korea. They contribute around 60 per cent of IT services exports revenues and also a significant chunk of BPO revenues. The US and UK markets account for the rest.

However, according to IDC, North American and European markets accounted for 75 per cent of the world's $320 billion IT service and outsourcing market. And these two markets are expected to expand more than 60 per cent annually in the coming years -- almost twice the speed of the Japanese market. Everest Group Research Director, Sheetal Bahl, opines: "China is unlikely to substitute for India or other mature offshore destinations in the short or medium-term -- it will work best as a supplement that matures over the years".

Meanwhile, Indian IT service providers like Satyam, Wipro, TCS and Genpact are setting up base in China and tapping the market. "With the presence of Indian vendors in the Chinese market, the Chinese firms might face difficulty on the global front. The Chinese outsourcing firms are more focused on the domestic market as compared to the Indian companies which have made their mark on the export front," says Anish Zaveri, Associate Director, KPMG Advisory.

He adds, though, China provides India with a healthy competition. "It not only helps the Indian outsourcing majors to evaluate themselves better but will also encourage the Indian government to keep on their toes, looking at the initiatives taken by the Chinese government."