So, has outsourcing moved to China?

The rising salaries of graduate engineers and MBAs might yet prove to be the nemesis for the Indian BPO growth story. You would seem to think so if you were to believe this article from 'The Economist' (Watch Out, India - May 4th 2006 Print Edition). Though in terms of actual numbers, it currently lags way behind India, experts believe that China is catching up and catching up fast. Xian, the capital of China's Shaanxi province, is slowly but steadily evolving into one of China's most modern cities. The birthplace of China's space programme, Xian houses one of China's largest technology parks that is home to more than 7,500 companies supported by about 100 universities, and churns out 120,000 graduates every year. More than half of these are in the computer sciences field alone.

Apparently, this is just the beginning though. The sheer magnitude of this undertaking speaks volumes about China's ambition and commitment to become a global powerhouse in software and services (to go with its pre-eminence in manufacturing). The market for BPO, which encompasses processing bills and credit-card applications to managing entire human-resources operations, should be worth another $24 billion by next year, and is expanding even faster. India has captured the bulk of this work. While China is the world's top location for contracting out manufacturing, it has just $2 billion of the outsourced-services market.

Well, India may have the lead right now but China has the potential as well as the resources to surpass India as the biggest outsourcing destination. Factors that push China into the consideration set include millions of low-cost workers who are well-educated in basic computing and mathematics. But then, from the strategic literature angle, this is not a differentiating factor, is it? Differentiators, though, emerge in the form of more long-term factors such as infrastructure, generous tax laws and a very strong lobby of support from the state.

If these outline the opportunities for corporates to send business over to China, the motive is not too far behind either. Companies want to spread risk away from India; and China offers just the right kind of sops that these multinationals are looking for. The latest companies to discover China are a revelation though (revelation to me at least). TCS, Infosys and Wipro lead a pack of Indian IT companies, the very companies that have been at the forefront of the BPO growth story in India. And if these Indian IT companies sense an opportunity, can their multinational clients be far behind?

What does all this mean for India? Fortunately, India seems to have a bit of time on its hands. China is still about five to ten years away from seriously challenging India for the pole position in the BPO industry. One factor that goes against China is that the Chinese are poor in speaking or writing in English. Language is a huge barrier when it comes to services that demand frequent communication with overseas clients and customers. Another factor is the intellectual property rights (or the lack of it, to be more precise). The perception that sensitive business information faces a security threat is likely to constrain development, at least in the short term.

So, shall we get working on our infrastructure now?