New Delhi: The growing size of China’s pool of engineering graduates and the government’s initiatives notwithstanding, the country is nowhere close to toppling India as the premier offshore destination, a study released on 24 May 2007 says.
The report by global consulting firm Forrester, entitled ‘China’s Diminishing Offshore Role’, says the threat China posed to India two years ago seems to have petered out.
When Forrester analyzed the GDM resources for Accenture, EDS and IMB on the multinational side, and Infosys, Tata Consultancy Services and Wipro on the Indian side, it found that the numbers across the board indicated that the market in the communist nation has not taken off as expected (See bar graph).
In fact, the communist nation’s percentage of overall offshore resources has dropped over the past two years, with its share of multinationals’ global delivery model (GDM) falling by 15% — this, despite the huge government support and overall visibility in the global scenario that China enjoys. What’s more, despite the fact that China is growing off a larger base, a smaller country like the Philippines grew at two-and-a-half times the rate of China, primarily on the strength of its base of English skills and large investments led by Accenture. The report adds that Brazil’s numbers increased thrice as much as those of China.
Why the decline?
The report says that while Chinese services firms are supporting a vibrant local IT market, the country has not been able to achieve the expected levels of growth primarily due to three reasons:
First, while Japan remains the dominant location for China’s offshore clients, the lack of offshoring and IT services sophistication of Japanese firms has limited growth in Chinese offshore services. The report sys the work that trickles in from the US and Europe is mostly project related, as China hasn’t been able to address concerns about limited English skills, high attrition and weak intellectual property protection.
Second, the evolution of services by provider firms has also been limited and most of the work outsourced is still project application development work, with some additional work implementing packages like SAP. The report on average, firms had only 20 to 30 accounts, of which 50% were still doing only project work.
Third, although China has been billed as an alternative location to India, it has to deal with the same issues affecting its competitor: attrition, captive centres bidding up wages, and lack of experienced managers and technical leads. The appreciation of the yuan vis-à-vis the dollar has been another impediment to growth.
Instead of trying to compete in areas like application development and management, where India dominates, China should encourage local firms to focus on other areas like testing, data management and product development services.
For other countries vying for the lucrative offshoring pie, Forrester suggested economic development agencies in Thailand, Malaysia, Egypt and Morocco that they need to do more than just re-labelling the pool of engineering graduates as being ready to export their services.
Forrester had interviewed a mix of 10 multinational, Indian, Chinese and Japanese IT services firms, as well as government minister to compile its report.