China’s Unstoppable Rise to an IT Superpower
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Next Level Outsourcing - R&D China
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ITO & BPO Opportunities to China – A SWOT Analysis
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China’s Unstoppable Rise to an IT Superpower
The mercurial rise of China as an economic superpower has earned for itself remarkable distinction from the global business community. China’s booming economy, which annually grew at an average of 9.7% since it instituted economic reforms in 1979, has caught the world attention, particularly foreign investors who aspire to carve out a significant market share in the world’s fastest growing economy.
After emerging as the world’s manufacturing hub, China is joining English-speaking countries like India and the Philippines as one of the most sought-after destinations for information technology (IT) and business process outsourcing (BPO) services. China’s progress over the past few years has been so phenomenal that it is now posing a major threat to India’s supremacy.
In 2003, China’s IT outsourcing market was just US$0.4 billion, with almost all activities centered on lower-end IT services involving modular programming and testing. Its inherent competitive advantages however, make Gartner Research confident that its market will grow at 44 percent annually, potentially becoming a whooping US$2.5 billion industry by 2008.
Similarly in 2003, China’s BPO market was mere US$0.2 billion. Yet the unique charm of China to BPO players doing back-office processes such as call centers, finance and accounting, payables, and some research and development (R&D) have boosted China’s BPO market by 20 to 30 percent annually thereafter.
Recent flurry of activities that have put China on the outsourcing map were the influx of East Asian companies that moved much of their Research and Development programs to China, Indian vendors that tapped China to eliminate geo-political risks for their clients, and multinational companies that aimed to serve China’s gigantic domestic market. Also, local IT and BPO providers have been working assiduously to improve their capabilities and expand their service offerings. Moreover, the Chinese government has been providing stanch support for the industry by accelerating infrastructure programs and promoting the country to global business community.
China’s presence in the IT and BPO arena is good news for many organizations since much of the impetus to outsourcing is cost management. China’s labor cost advantage – as much as 70% savings over US salaries is simply overwhelming. China even appear much cheaper than India now, and this competitive advantage will be more highlighted as wage inflation drives costs up in India.
But of course, there is more to China than simply low labor cost. Another pull factor is the vast and expanding pool of available skilled workers in China. Its more than 2,000 universities graduate an annual average rate of roughly five million. Of these, 600,000 are technical engineers. Needless to say, this is a huge pool of talent that companies can tap into. In comparison, India graduates some 400,000 engineers, United States turns out 70,000 engineers, and all of Europe only produces 100,000 engineers every year.
Chinese officials aim to give this burgeoning industry a push by putting in multi-billion dollar investments to fast track avant-garde infrastructure projects; and build highly-sophisticated Science and Technology Industrial parks that provide ultra-modern locations for companies complemented with auxiliary capital, research, manpower, infrastructure and managerial support. Also, these high-tech corridors guarantee uninterrupted power supply; and provide a single point of contact, which largely cuts down on red tape.
China’s telecommunication infrastructure has also undergone dramatic improvements. China now has 175 million phone lines compared to India’s 34.5 million. Bandwidth in China is now 7.5 gigabits per second. This is 120 times faster than what it was four years ago. In comparison, India has connectivity of 1 gigabit per second.
All these efforts have made China much more attractive not only to East Asian companies but to U.S. and European companies as well. Yet, there are still some barriers to fully realize what China could potentially become. Thus, Chinese officials and local service providers are working together to clear the path towards China becoming the world’s most enthralling IT and BPO services locale. These initiatives include:
1. Protecting Intellectual Property
IP piracy has become quite an issue for most outsourcing companies on China. Yet, it has been shown in the past that IP piracy has been managed quite successfully. The key is just for vendors to implement internal systems to ensure IP protection like building high-tech firewalls; using a captive business model for IP sensitive activities; and performing regular IP audits.
The promising news for companies wanting to enter China is that, the country has made significant improvements in IP protection since joining the World Trade Organization (WTO) in 2001. With huge sales lost from counterfeiting, the government is moving quickly to ensure that property rights are respected.
2. Improving language proficiency and education
Local professionals may not be fluent English speakers but most employers are often amazed at how they possess value-added functional skills, a track record of achievement, and an exceptional ability to execute the job successfully. Top outsourcing firms even acclaim their raw intelligence and outstanding work ethic.
To fast track China’s linguistic learning curve, the country is increasing its emphasis on English training in schools, and has hired more than 100,000 English teachers at its IT colleges.
Congruently, the government has moved aggressively to improve technical education in order to create a first-class high-tech labor force. China is likewise providing coding training to workers, and cities and local firms share the costs of acquiring Carnegie Mellon Capability Maturity Model (CMM) certification for local providers.
Moreover, many successful IT houses have collaborated with leading universities and technology institutes in order to effectively shorten the training time of fresh graduates to become efficient programmers from about one year to six months.
Other efforts include the adoption of customer operation performance standards (COPC) as gauge for contact center performance.
3. Improving management skills
While China produces substantial talent pool, additional training and experience are still required in order to obtain specialized skills and improve their management capabilities. Rising competition however, is prompting China-based IT and BPO providers to increase their management training programs in order to improve the business management skills of key employees and increase the pool of high-caliber project managers
Another trend is hiring returnees to China with international training and exposure, for executive positions. They in turn were expected to share their management skills and experience with their Chinese colleagues. Also, some firms have mentoring programs wherein young workers were matched with expatriates or former employees of multinational firms to help them move up the executive ranks.
All these initiatives are fueling the growth of IT and BPO industry in China. Major cities or tier-one cities are fast becoming home to various IT and BPO activities. Aside from strong government support, these cities boast of ample supply of young college graduates who speak a variety of languages, which are advantageous to companies establishing a presence in China. Also, these cities have rock-solid infrastructures which can very well support the IT and BPO industry.
In summary, China is gaining massive ground in the IT and BPO service industry. If China just used to be the manufacturing hub of the world, now, it’s building its new reputation as the best alternative to India for IT and BPO services. Because of China’s unique capabilities and the strong support provided by its officials, China is in the best position not only to serve the IT and BPO needs of corporations around the world, but more importantly to achieve their corporate goals and improve their competitiveness in the global market.
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Next Level Outsourcing - R&D China
Innovation empowers all businesses to improve their products, services, and processes to anticipate and respond to the rapidly-changing needs of customers. This means investing time and money into research and development (R&D) to establish customer needs and develop products and services accordingly. Thus, research and development forms an essential part not only of making the business more profitable and productive, but also of ensuring business survival in the future.
The extreme importance of R&D to a company necessitates it to be carefully planned and managed to succeed. However, various challenges in the R&D cycle, coupled with heightened competition in the world market have greatly impacted the way by which companies develop or revitalize their products and services, and ultimately bring them to market.
Rising R&D operational and labor costs, longer time to market, and shortage of available talent pool to accomplish R&D objectives are hampering companies nowadays. R&D initiatives also carry an element of risk because they involve trying out new, untested ideas, which may or may not be commercially successful.
Consequently, companies are turning to reliable and experienced outsourcing partners in lower-cost country destinations like India and China for their R&D programs. In the short term, outsourcing can give companies the opportunity to cut on cost and scale their resources accordingly, while in the long run, it gives them far more revenues from gaining access to and tapping worldwide skills and capabilities, which can tremendously improve existing products and services, and accelerate new R&D undertakings.
Medical device OEMs and pharmaceutical giants set the trend for moving their R&D facilities and product development offshore. Over time, outsourcing of R&D evolved from writing software codes and doing design works, including transfer of proprietary knowledge to chip’s micro-architecture and physical design.
As markets mature, there is now an increased and higher value-creation opportunities for involved players in outsourced R&D. Because of this, there is an upsurge of R&D programs and facilities going offshore. Majority of industry analysts expect this trend to continue specially that a large number of outsourcing deals are currently under negotiation. At the same time, local services providers are in a rush to increase their capabilities and expand their service offerings.
Outsourcing of non-core R&D components to offshore providers with solid experience and expertise in product development, testing and sustenance, complemented with clear understanding of emerging markets and new geographies also enables most companies to focus on their core competencies in the R&D value chain – product strategy and product architecture and design.
By locating their R&D facility or project abroad, companies are able to tap the developing nations’ vast pool of college-educated workforce at a fraction of U.S. salaries. China’s labor cost advantage, for instance – which can translate into as much as 70% over U.S. salaries, is simply overwhelming.
Another pull factor to outsourced R&D initiatives is the market trend suggesting that the domestic talent pool is shrinking in the U.S. while growing exponentially in Asian countries. In fact, the 600,000 technical engineers in China far outnumber those 70,000 in the U.S. and 100,000 in all of Europe.
The outsourcing of R&D activities likewise guarantees 24 hours a day and seven days a week development process. This 24/7 development would definitely enable companies to shorten their R&D cycle, accelerate their time to market, and enhance their chances at winning in innovation.
Although improved time to market was achieved by most companies engaged in outsourcing, many of them claim this benefit is not automatically achieved. To facilitate higher odds of improving time to market, some companies now offer financial incentives to providers not only to compensate for the risks they have to take, but also for the significant investments in resources they have to put in just to meet the client’s demands. As a result of this arrangement, both parties share the savings achieved by the development cycle.
Outsourcing their R&D is a definite advantage to U.S. and European companies because it enables them to support co-located manufacturing activities, which can reduce cost; and improve product quality, performance and availability. Moreover, it enables them to influence foreign research initiatives.
On the other hand, local economies of countries housing R&D centers of multinational companies also leverage these R&D initiatives by positioning investments to maximize their benefits and in the process, stimulating their own economies.
Undoubtedly, outsourcing of R&D provides mutual benefits to outsourcing countries as well as country destinations. Despite the migration of R&D facilities to lower-cost countries, this does not necessarily derail the ability of developing countries to reinvigorate their domestic centers of excellence and maintain their capabilities for critical technologies. In fact, they have the unrivaled capacity to innovate technologies of critical importance to their countries, such as in defense, biotechnology, genomics or other areas.
In summary, outsourcing of R&D programs enables companies to reduce their operating and labor costs and scale their resources. It also gives them the chance to tap global resources and allows faster time to market in order to increase their profits and improve their competitiveness in the global market.
In a global scale, outsourcing of R&D initiatives is the perfect opportunity to enhance both domestic and foreign research and development capabilities. It can definitely open doors toward innovation partnerships between countries, foreign corporations, governments and academia. After all, outsourcing has one ultimate goal – to bring the world closer together, so that the gains of one country become the gains of others.
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ITO & BPO Opportunities to China – A SWOT Analysis
From being the world’s manufacturing powerhouse, China is now poised to increase its share in the global information technology (IT) and business process outsourcing (BPO) market.
China’s nascent IT and BPO sector is becoming a new highlight in the global IT and BPO arena as there is substantial influx of virtually all the major international players in offshore outsourcing. While India remains the premier IT and BPO hub, China’s extraordinary progress in the past few years has made industry analysts optimistic about its unique capability to emerge as one of the most attractive IT and BPO locations.
In 2003, China’s IT outsourcing market was just US$0.4 billion, and much of it involved lower-end IT services such as modular programming and testing. The upsurge of companies capitalizing on China for their IT needs as well as the local providers that grew both in number and capabilities make Gartner Research confident that its market will grow at 44 percent annually, potentially becoming a whooping US$2.5 billion industry by 2008.
Similarly in 2003, China’s BPO market was mere US$0.2 billion. Yet the unique charm of China to BPO players doing back-office processes such as call centers, finance and accounting, payables, and some research and development (R&D) have boosted China’s BPO market by 20 to 30 percent annually thereafter.
Unlike India, China emphasizes niches, such as contact centers and back-office processing, which cater to fast-growing East Asian markets like Japan and Korea; and R&D, which supports its huge manufacturing base. Moreover, many Indian vendors are now establishing centers in China to tap into its complementary skill-base. Although China remains primarily a regional hub, new capabilities are quickly transforming the country into a global service provider.
Strengths
Several factors point to China as an emerging IT and BPO services locale. These are:
1. Availability of large, expanding pool of skilled workforce
China has the world’s largest number of science and engineering graduates. Its more than 2,000 universities graduate an annual average of roughly five million. The 600,000 technical engineers in China far outnumber the 400,000 engineers in India, the 70,000 in the U.S. and the 100,000 engineers in all of Europe. Needless to say, China offers an enormous pool of talent that companies can tap into. This vast supply of technology talents helps keep wage inflation and turnover rates at minimum level.
2. Low Costs
China’s labor cost advantage which translates to as much as 70% savings over US salaries simply overwhelming for most companies wanting to enter China. It is even appearing much cheaper than India now. This gap is even expected to widen as wage inflation drives costs up in India. Although India remains a powerhouse in high-end IT services, latecomers these days must pay higher wages for experienced engineers.
3. Ultramodern infrastructures
China’s infrastructure is rock-solid and highly-sophisticated. Multi-billion investments were put in to fast track avant-garde infrastructure projects; and build 29 highly-sophisticated Science and Technology Industrial Parks that do not only provide ultra-modern locations, but also auxiliary support in capital, research, manpower, infrastructure and managerial. These high-tech corridors also guarantee uninterrupted power supply; provide a single point of contact, which largely cuts down on red tape; and encourage industrial cluster effect.
China’s telecommunication infrastructure has improved dramatically as well. China now has 175 million phone lines compared to India’s 34.5 million. Bandwidth in China is now 7.5 gigabits per second. This is 120x faster than what it was four years ago. In comparison, India has connectivity of 1 gigabit per second.
4. Solid Government Support
The rock-solid and highly sophisticated infrastructures built by Chinese officials proved their strong commitment to give this burgeoning industry a push. This determination also extended to forging partnership with multinationals to train information technology engineers to accelerate the creation of a first-class high tech labor force. The government is also offering subsidized world class infrastructure, tax incentives for purchases, zero corporate tax status and even a 30% personal income tax rebate to employees working in units in special parks. Some cities are even helping local providers cover the cost of acquiring Carnegie Mellon Capability Maturity Model (CMM) for their various processes.
Weaknesses
The following are some of the concerns most outsourcing companies have about China.
1. Lack of English language proficiency
China graduates numerous English-language proficient students each year, many have solid writing and reading skills but are not fluent English speakers.
Given the complexity of modern enterprise software and the business processes they automate, effective communication between the company and its service provider is very crucial. Project goals and objectives, along with regular project evaluation and feedback need to be articulated and understood well by the two parties. China's relatively lower level of English language proficiency provides an additional barrier to effective communication.
Moreover, majority of Chinese cannot use English without the help of an interpreter; and the crux of conversation is most often lost in translation.
To accelerate the linguistic learning curve of Chinese, its government hired more than 100,000 English teachers for its comprehensive English language program.
2. Market/Process Maturity
Despite China’s robust growth, the maturity level of processes at many Chinese providers do not yet meet international best practice. But the intense competition will eventually force local providers to invest in upgrading the quality of their processes to international standards.
3. Lack of global awareness of China’s competitiveness
Most outsourcing buyers are not well aware of the vast opportunities and competitive advantages they can get from outsourcing some of their IT/BPO services to the country. Realizing this, the government has committed to work closely with local vendors to ensure that China is well-promoted to the global business community as a viable outsourcing option; and its plethora of competitive advantages can work favorably to actualize business goals for outsourcing buyers.
4. Cultural Affinity to West
Majority of local Chinese providers have focused on customers in the domestic market and the Asian region. Although they have already started attracting multinationals, Chinese providers are currently not attuned to Western cultures and business nuances. Bridging this cultural gap is critical to aligning strategies and achieving business goals.
Opportunities
1. Quality certifications
The Carnegie Mellon Capability Maturity Model (CMM) quality standard is widely regarded as the best means to measure the quality and maturity of an organization's software development and maintenance processes. Due to heightened competition, local providers are now in a rush to focus on improving their processes and acquiring CMM certification to mark their competitive edge over other providers.
2. Increased global awareness
In an effort to accelerate the emergence of China as the world’s most enthralling destination for IT and BPO services, its government has been working assiduously to promote China to the international business community. Aggressive marketing campaigns have been launched recently so multinational companies would learn about the unique capabilities that they can take advantage of from China.
3. Overheating market in India
After years of exponential growth in its IT and BPO industry, India now faces challenges as signs of a potentially dangerous inflationary spiral are beginning to surface. There is an overheating of offshore outsourcing market due to attrition, escalating wages, talent scarcity and rising real estate prices.
All these factors are prompting companies to look elsewhere, and China is often on top of mind of companies because the country possesses unique capabilities which could make them successful in their outsourcing endeavors.
4. Multi-sourcing
Indian companies have been seeking entry into China's booming market. Further, being increasingly constrained by lack of talent and physical resources at home, they want a base in manpower- and infrastructure-rich China to expand their global operations more easily and minimize geo-political risks for their clients.
Threats
Despite increasing competition and spanning new services, companies seeking to outsource in China face numerous potential threats.
1. Intellectual Property Issue
One of the most inhibitive hurdles for most companies is the lack of a rigorous intellectual property rights protection regime in China. This is of particular concern to Western companies considering outsourcing some of their critical programs, such as R&D to China. Thus, the government has to more than double its efforts to impose stricter punishment to violators and ensure protection of intellectual property at all times.
2. Geo-political tension with Taiwan
Another potential threat to companies outsourcing to China is its growing political tension with Taiwan which could potentially result to military reaction should overt actions towards independence of Taiwan, or reunification with People’s Republic of China (PRC) be taken. However, the current status quo prevails –both are to refrain from performing actions or espousing statements that would “unilaterally” alter Taiwan’s status. Unless status quo is altered, China continues to entice foreign companies with its unique competitive advantages.
3. Overheating as seen in India ( in the long run)
China as the best alternative to India for IT and BPO services increases its tendency to eventually experience “overheating” as seen in India now. This may also be true as local providers increase both in numbers and capabilities. This scenario is still far-fetched, if not impossible at this time because China’s IT and BPO industry is still nascent and there is still plenty of room for improvement and expansion of these services.
Conclusion
Outsourcing to China would have once been considered a gamble. But today, with the presence of all leading global players, along with the growth of emerging local leading providers, companies now have a wide range of choices. Quite a number of providers are now capable of delivering world-class solutions in particular industries.
With remarkable cost advantage over other outsourcing destinations, and strategic benefits ranging from availability of large, expanding pool of skilled workforce to rock-solid infrastructures and strong government support, there are certainly powerful reasons for companies to outsource to China. Meanwhile, the pitfalls that some companies may experience are rapidly being addressed by the Chinese government. With this scenario, no doubt that China will soon emerge as the world’s most promising IT and BPO destination.
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