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China: The Next Big Wave in Offshore Outsourcing

Deloitte Study Discovers 75 Percent of Global Financial Institutions Plan to Outsource Offshore

Deciding What to Keep and What to Outsource in an HR Transaction

Launching the World's Largest Employee Portal

IDC Report Finds Canadian Executives Desire to Team With Providers for Shared Outcomes

Doing Cross-Border Outsourcing Deals: A Quick and Dirty Checklist

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Up to My Knees in Alligators: What Executives Need to Know About Supporting a Remote and Mobile Workforce

Impact of Best Practices in Outsourcing Arrangements

Currently, India is becoming the back office of the world. Everest estimates companies all over the globe are sending as much as $5 billion in work to Indian outsourcing service providers. (I know from both my research and from my periodic travels to India periodically to meet with service providers.)

But all the headlines about the Indian success story are obscuring a development that can have just as much impact. I predict China will be the next big wave in offshore outsourcing.

I believe the changes currently altering the economic fabric of China will create a vibrant outsourcing environment. Here are the elements creating the perfect economic storm:

1. Liberalization of laws and government policies.

China desperately wanted a membership card in the World Trade Organization (WT0). Prior to and after its acceptance, Chinese leaders have accelerated the liberalization of its economy. They realize the membership they coveted now makes China subject to WTO oversight. The country is now passing laws that protect private ownership and intellectual property, a crucial step for outsourcing to take hold. Further, it embraces public/private partnerships and domestic/foreign partnerships.

2. An emerging middle class.

Liberalization of the economy is stimulating growth, including rapid development of a new, thriving middle class. Increasing numbers of young and old alike are moving from rural areas to jobs located in urban centers. Job creation reflective of GDP growth is tremendous, producing increasing numbers of wealthier middle class urbanites.

This exploding urban wealth will provide the underpinnings for an economy ripe for a thriving outsourcing environment by demanding more and higher quality goods and services. Joan Zheng, an economist with JP Morgan Chase, which does investment banking in China, reports car sales rose 54 percent in 2002 and home sales have risen at an average annual rate of 37.2 percent since 1992.

3. Investment in technical education.

One of the principal attractions of India is the large number of well educated and highly skilled employees. The emerging Chinese middle class demanded more education, thanks to the prestige attached and opportunities to that education. At the same time, Chinese leaders noticed the importance of technical education in India and have begun to make a serious investment in higher learning academies to train the kind of people outsourcing service providers employ.

To speed the educational process in other areas, the Chinese have created "radio and television" universities in addition to the traditional schools to meet the huge demand.

4. Large supply of low cost labor.

China has over a billion people, including many in densely populated megapolises, willing to work for comparatively low wages; in other words, low cost labor provides a pure labor arbitrage opportunity for many advanced economies. Thus, China has one of the key ingredients to compete with India as an offshore provider.

5. China's enviable economic growth.

Zheng estimates the Chinese economy grew at a 9.9 percent rate during the first quarter of 2003. However, some cities are doing even better. Zheng says Shanghai's real GDP grew 12 percent this April over last. The Beijing Investment Guide says China's capital city has enjoyed an 11 percent annual GDP since 1990. This means that growth is happening in ways that can give rise to outsourcing within China. In other words, China is developing a domestic market too. This blazing growth will give rise to domestic outsourcing buyers and sellers sooner rather than later.

6. Offshore manufacturing already there.

China is the manufacturing plant of the world; the "made in China" label seems ubiquitous. China slowly has been developing ancillary services to support its large manufacturing base. From an ex-pat viewpoint, the support services are already there to support outsourcing.

7. Physical proximity to major markets.

Doing business with your neighbors is easier than working with companies across the globe. China is just across the water from Japan, the second largest economy in the world, and sits next to South Korea, the world's 13th largest economy. Japan has been moving operations from Japan to China for many years. So, there is an increasing familiarity and economic integration between those two economies.

8. Cultural similarities.

China, Japan and South Korea share an Asian outlook and are much closer in language and history to each other than to India or the West. For example, South Koreans can read a Chinese newspaper when they graduate from their version of high school. This makes China a logical candidate for offshore outsourcing to these two key markets.

Of course, there are negatives. They include:

1. Family traditions.

The Chinese family structure sends down deep roots. Every New Year's Eve (Tet) people return to their family villages to honor their ancestors. Western outsourcing service providers report they lose some of their workforce every Tet when employees choose not to return to the cities.

2. Language.

The Indians speak English, even though it's not the American version. Chinese, a language that uses hundreds of symbols instead of an alphabet, presents a far greater challenge in basic communication. Westerners learning Chinese and the Chinese mastering English can be a serious stumbling block to outsourcing growth.

Until recently, even the computers in both countries had trouble communicating. Since most Western languages are based on a 26 letter alphabet, Western computers use a single byte language capable of 256 different combinations (2 to the 8^th power.) However, that number is not large enough to accommodate Asian languages. So Asian computers double byte language, which use 65,535 combinations (2 to the 16^th power).

Single byte computers had difficulty communicating with Asian double byte systems. This created problems with information technology-enabled services and systems integration, limiting near-term offshore outsourcing to Far Eastern countries with big economies like Japan and South Korea.

But the times they are a'changing. Microsoft built its Windows XP architecture around Unicode, which can easily communicate with both singe and double byte systems. And the Internet has had a tremendous impact. These developments make it possible for Westerners to send their IT work to China, which was near impossible before. But it's still not easy.

I'll be watching closely to see how this wave develops. How might it unfold? How about using the creation of an offshore capability designed to support North America as an entry strategy for a go-to-market capability in China? Job creation in China, market insight for U.S. or Canadian companies in China, lower cost structures for North American buyers and improved performance for all...seems like everyone wins!

Lessons from the Outsourcing Journal:

• China will become a major supplier of offshore outsourcing services.
• Changes in the country are creating a perfect economic storm for outsourcing. They include the liberalization of laws and policies, a burgeoning middle class and a new emphasis on education.
• The offshore manufacturing already in China has created the support services infrastructure necessary for outsourcing.
• China's proximity to Japan and South Korea, as well as its common culture and similar language, make it a natural for offshore outsourcing to those two large economies.

Publish Date: June 2003

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Copyright © 2003 - Everest Partners, L.P.

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