IT Outsourcing (ITO) - China versus India
IT Outsourcing has become one of the most preferred means of achieving operational excellence across industries and the preferred destinations for outsourcing have been China and India. While China has been conventionally considered the hub for manufacturing, India has traditionally attracted most of the services outsourcing projects. The information technology (IT) industry has been one of the foremost industries to adopt outsourcing as a means of cutting costs and optimizing resources.
China, India, and the Unites States have also been the main destinations of global foreign direct investment (FDI) in Information and Communication Technologies (ICT), accounting for more than 50 percent of the overall investment. However, the profile of these investments varies across these countries. While India is preferred for Research and Development (R&D) and IT-enabled services, IT services projects are concentrated in the United States and China is considered the hub for ICT manufacturing.
Whereas India and the United States are yet to succeed in attracting ICT manufacturing investments, China has been successfully garnering investments in the IT services projects as well as for R&D. This is mainly due to the well-educated and cheap labor force in China. The high influx of foreign investors into China has ensured the high demand for ICT products and services in the country.
Global IT outsourcing was estimated to be around $39.6 billion in 2004 India’s share amounting to nearly $17.2 billion while China garnered nearly $1.9 billion of the outsourcing revenues.
The Chinese Government and the IT service providers are working at various levels to compete with the dominant Indian participants in the global IT outsourcing market. India with its 44 percent share of IT outsourcing projects is considerably ahead of China in the global outsourcing market but this gap in revenues is estimated to reduce soon as China leverages on its advantages.
Some of the key success factors of an IT outsourcing destination have been:
• Technical labor force
• Low cost
• Quality
• Regulation
• Infrastructure
• Knowledge of English
• Time zone attractiveness
India has had tremendous advantage in most of these factors with around 813,000 knowledge professionals being employed in the ITO sectors. More than 165 IT companies achieved SEI CMM Level 5 assessment at the end of 2006 and many more companies are expected to follow.
China shares many of India's advantages in the outsourcing market such as cheap labor costs and favorable government policies. However, the Chinese lack of English language skills and the expertise in western business practices. The Indian Government has gained from years of investment in IT education and from lenient policies toward the IT industry.
While the Chinese IT companies are increasingly bidding for international outsourcing projects, they are also leveraging on their proximity to markets such as Japan and South Korea, where they have an advantage both due to the geography and language. Nevertheless, China has to still gain expertise in project management as well as achieve economies of scale before it can compete with countries such as India in the global outsourcing market.
Indian firms are setting up operations in China in order to capitalize on the future prospects that the country might offer in IT outsourcing. As of 2007, nearly 98 Indian companies had operations in China with investments estimated to be nearly $950 million.
Indian companies are expected to expand their Chinese operations as well as double their employee base in China in the next 2 years.
Some of the trends in favor of Chinese expansion in the outsourcing market are the liberalization of government regulations, the growing middle class, large-scale investments in technical education, a vibrant economy, and the availability of cheap labor force. However, China needs to build its workforce capabilities in terms of English language proficiency and project management skills in order to emerge as a viable alternative to India in the global outsourcing market. Moreover, both China and India will also have to deal with the mounting competition from other low cost countries such as Russia, Philippines, Ireland, and Israel.
