Bangalore: Chinese cities of Beijing, Shanghai and Dalian will overtake Indian outsourcing hubs Bangalore and Mumbai by 2011 as destinations of outsourced services, thanks to the massive investments China is making in improving English language skills of its technical workers, and as customers are forced to look at alternatives to India because of its infrastructure problems and soaring wages, says tech researcher IDC.
This is the first time an international research house has clearly laid out the future for Asian cities—in India and China, in particular—to host delivery centres for offshoring of back office and tech services. IDC analyzed 35 locations in Asia Pacific, including Adelaide, Bangalore, Dalian, Hanoi and Kuala Lumpur on the parameters such as cost of labour, rentals, language skills and attrition.
“Chinese cities are on the rise and nipping at India’s heels,” IDC said in a report by Conrad Chang, research manager for IDC’s Asia-Pacific research. “IDC forecasts that Chinese cities will overtake Indian cities by 2011 due to massive investments made (eg infrastructure, English language, Internet connections, technical skills etc.) which are favourable towards offshoring.”
Other researchers supported IDC views but stopped short of a clear prediction as to when Chinese cities could count themselves on par with Indian peers as homes for outsourced services.
According to the Gurgaon offices of Everest Research Institute, China’s revenues from exporting software services stood at $2 billion (Rs8,200 crore) in 2006, and will grow at a rate of 38% to reach $7 billion by 2010. India is currently far ahead; it closed fiscal 2007 at over $39 billion software revenues and is predicted to top $60 billion in such sales by 2010. In revenue terms, China is far behind India now, “but with cities such as Mumbai struggling to cope even with issues of rain, many customers are looking at China, which offers much better infrastructure,” said Vikash Jain, engagement director with Everest Research. He added that China is looking to focus on the segments of financial services and telecom—two industries in which customers outsource the most—rather than trying to ape India and position as an end-to-end destination for application development and maintenance of all kinds.
The tech-savviness of the Chinese population will help the Asian powerhouse to catch up with Indian programmers (about 1.6 million at last count). “China’s potential is real and gaining momentum. The country is very technology oriented, and this benefits it greatly in the IT outsourcing space,” wrote Ben Trowbridge, chief executive of Dallas-based Alsbridge Research in a June report.
Outsourcing hotspots in China include Chengdu, Shenyang, Guangzhou, Hangzhou, Jinan, Nanjing, Shenzhen, Tianjin, Wuhan and Xian. With more than 1.3 billion people in China, “these cities offer a substantial population of skilled IT professionals,” wrote Trowbridge.
The rush by companies such as General Electric Corp., HSBC Plc., Pfizer Inc. and Citigroup to have projects serviced in India to take advantage of lower costs has resulted in salary levels at leading Indian vendors rising by around 15% in 2006, impacting margins of many software exporters. Rising salaries in cities such as Bangalore have become a cause of concern for many Indian software companies. According to a Dun & Bradstreet survey, salaries of software workers will rise by 15-20% in 2007, making it one of the biggest challenges for many software exporters.
Cost, however, is not the only driver for companies looking at Chinese cities. Many Indian companies are planning to hire more workers in China, as their clients demand location redundancy.
Raja V., senior vice-president for talent engagement at Wipro Ltd said in a March interview with Mint that the company will increase its workforce in China from 110 currently to anywhere between 300 and 500 by year end.
India’s largest software firm Tata Consultancy Services Ltd also said in March that it would have around 5,000 software programmers in China by 2010. Satyam Computer Services Ltd, which is working out of four locations in China, has 500 people there.
The company is now building a campus for over 2,500 associates in Nanjing, a tier-two Chinese city.
Indian companies do not see China as a threat “but more of an opportunity to establish a global presence,” said Virender Aggarwal, director and senior vice-president at Satyam.
Salaries for engineers are as expensive in Shanghai and Beijing as in Indian cities such as Bangalore or Mumbai, particularly for those who have skills in business software such as packages that handle ‘enterprise resource planning’, but are much lower in tier two cities of China.
Chinese cities also score over the ease of setting operations compared to setting shop in India, but there are inherent weaknesses like lack of English speaking talent, difficulty in obtaining visas for Chinese engineers to work onsite at customer locations and a perception of weak protection for intellectual property rights there.
Also, not only does China produce less than half the 450,000 engineers India graduates from its colleges annually “the percentage of English speaking graduates is miniscule compared to India,” says Sabyasachi Satyaprasad, senior director at neoIT, a consulting firm that helps customers to outsource their IT work to different locations.
He said though there is competition between Chinese cities, there is still a lack of collective will to promote ‘Brand China’ as an investment destination for IT companies. “It will be years away to provide full fledged competition,” said Satyaprasad.