Eastward Ho – Outsourcing Jobs from India to China
Siliconeer , News Report, Siddharth Srivastava, Posted: Dec 10, 2004
The outsourcing saga so far has proceeded along the following lines: Jobs in the U.S., mostly related to information technology, software and English-speaking customer support are being performed at lower cost and similar quality in India, which has garnered the bulk of the business. China is considered to be a potential threat with its big pool of cheaper engineers, but the main disadvantage has been the lack of an English speaking population, unlike India, which has a 300-year history of being a British colony, with English the first language of millions after the country’s independence in 1947. With the first mover advantage, Indian IT firms have established themselves in the global arena and are sought to deliver on crucial projects.
However, the dynamics of the way the outsourcing business is being conducted is changing. Faced with rising business from the West, spiraling salaries of high cost employees who constantly hop jobs as well as a predicted shortage of skilled workers, Indian IT firms are doing the next best thing — outsourcing outsourced work from the U.S. to China, with the added advantage to leverage more intra-Asian business from Korea, Japan, Hong Kong and Taiwan.
All the top Indian IT companies that vie for the outsourcing pool, such as Infosys, Tata Consultancy Services, Satyam Computer Services and Wipro have now established bases in China to meet the growing business demands from the West. TCS set up shop in China in 2002 with plans to employ more than 180 people; a year after making a foray into the country, Infosys (Shanghai) has a-staff strength of 200 to cater to clients in Europe, U.S. and Japan; Wipro set up its unit in August this year. Other multinational services firms such as Accenture, BearingPoint, IBM, and Hewlett-Packard have already running units in China. Intel employs some 3,000 people (majority of them engineers) at its R&D and assembly/test facilities in Shanghai while another assembly/test facility is under construction in Chengdu. In India, Intel has less than half the number compared to Shanghai at its R&D facility in Bangalore.
It may be recalled that India has the lion’s share of the outsourcing market. According to research firm Gartner Group, the global IT services market is worth $580 billion, of which only $19 billion is outsourced, but India has 80 percent of this offshore market. The figure for outsourced IT services is expected to grow at a very rapid pace. The IT services market is broadly divided into two sections — the IT/Tech services which requires skilled manpower that China possesses and the business and process outsourcing segment which requires a knowledge of English and thus cannot be further outsourced to China. India garners the bulk of the outsourced BPO business as well.
The one most important reason for IT business being driven to China is the cost advantage — China at the moment has an excess supply of well-trained engineers willing to work at wages lower than in India. Revenue from India’s IT exports was $12.5 billion in the year 2003-4 (March ended), up 30 percent from the previous year, which in turn has resulted in a 10-15 percent annual rise in wages in India’s software and back-office services industry. In turn, software export revenue for China in the year 2003 was just $700 million which leaves an over-eager and hungry-for-work, skilled workforce willing to work at a lower cost than India. This means that on an average an engineer with some experience in Shanghai can to be paid a monthly salary of less than $500 compared to over $700 in India and upwards of $5,000 in the Silicon Valley.
According to estimates, China has 200,000 IT workers — compared with India’s 850,000 — with over 50,000 Chinese software programmers added to this pool annually. Evidence suggests China’s universities churn out upward of 250,000 engineering graduates each year, compared to 150,000 or so in India. There is an Indian connection here, too, with NIIT, India’s top technology training company, set up by the founder of the software exporter HCL Technologies, that opened its first training center in Shanghai in 1998, now having 121 centers in 25 provinces and training 25,000 Chinese annually. A recent study by KPMG study has predicted an acute shortage of IT personnel to the tune of 250,000 by the year 2009 in India. Thus, the numbers and economics works very well for increased forays into China by Indian IT firms.
The impact of Indian IT firms moving to China is that it will still be a while before indigenous Chinese IT firms can really hope to compete with India on the global scale. With a head start of over 10 years Indian IT firms have reached scalability levels that will take a while for the Chinese firms to match. A second-rung Indian software firm employs over 15,000 employees compared to 3,000 employed by just a handful of IT firms in China.
Experts estimate a minimum 3-5 year lag period before China can hope to even provide any competition to India. With Indian IT firms, with deep pockets, setting up shop in China, it will be even more difficult for resident Chinese firms to compete. The main problem remains the lack of knowledge of English and managerial capabilities, which makes it difficult for the Chinese firms to communicate and relate to international clients and push for more business even as competition stiffens. Indeed, with business expanding, the impending shortage of skilled IT workers, spiraling salaries, Indian software companies need an alternative low-cost center with ample supply of engineers to grow further. China is an excellent back-end for India’s IT industry.
But the advantage may not last forever. As South Korea has shown to Japan in the automobile and consumer electronics industry, a nation can come from behind and overtake an advanced nation. With China aggressively promoting massive English literacy, the Indian outsourcing industry would do well to keep its eye on the ball.
Siddharth Srivastava is the India correspondent for Siliconeer. He is based in New Delhi.
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