IN THE EYE

China has been touted for a while now as the ‘next big thing' in the global outsourcing arena. Many predicted that China would become a threat to India , the current favored offshoring destination. Gartner, for instance, has estimated that by the year 2007 the Chinese IT and ITeS industry could reach

$27 Billion. Going by the experience of IT majors operating in the mainland, however, it now appears that the Chinese IT potential has been vastly overestimated. Today, many IT companies, both Indian as well as MNCs, weighed down by the acute shortage of IT professionals in the mainland, are quietly moving back their operations into India or catering to their clients jointly from their development centers in India and China.

China admittedly enjoys significant potential for the growth and development of the IT and ITeS industries. Advantages like quality infrastructure, the Chinese predominance in hardware, a huge domestic IT market (estimated to be around $36.48 billion in the year 2002), geographic proximity and cultural synergies with the Japanese and Korean markets and the vast pool of technically skilled personnel churned out each year by the Chinese universities all make China a lucrative destination, at least on paper, for the IT majors. In fact, estimates have it that China produces a pool of 250,000 engineering graduates each year as opposed to around 150,000 by India , which is a win-win situation for the IT majors when average salaries in the sector have been spiraling off late.

In spite of these enormous advantages, China still has to overcome many hurdles in its bid to emerge as an IT powerhouse. Even though China has an advantage in terms of the absolute number of professionals it churns out each year, the ground reality remains that key high-end technology skill-sets are scarce and very expensive in China . While low end programming skills are inexpensive and relatively abundant, people with higher end skills and project-management skills are difficult to come by professionals with system integration skills, especially for large-scale integration, are not easily available. Similarly, high-end technology skill sets such as Oracle Apps, Data Warehousing and SAP Consulting and implementation skills are very expensive. China may be able to quickly educate large volumes of talented software developers, but higher skilled IS professionals (such as project managers and systems architects) take years to cultivate and mature. According to Gartner Research , China will need to increase its pool of skilled IT resources by 26 times by the year 2007. This is an uphill task by any standard and the chance of China measuring up to such demand is hard to contemplate. India , in comparison, is expected to have to increase its IT pool by only 2.5 times, which is eminently achievable.

The immaturity of the Chinese IT industry is another hurdle that they will find hard to overcome. There are over 6,000 software and application development (AD) service companies in China today, with the majority of these companies employing fewer than 50 professionals. These companies cannot bid or participate in large contracts because of their small size. India in comparison has around 3,000 software companies, just half that of China , but many of these companies are of significant size employing several thousand employees. There are three majors clocking revenues in excess of a billion dollars.

The commitment to quality is another telling indicator of the degree of maturity of the IT industry. Indian companies were early adherents to quality initiatives like ISO, SEI-CMM and Six Sigma. Three out of every four SEI-CMM Level5 companies worldwide are located in India . India has as many as 66 SEI-CMM Level5 companies as opposed to just two companies in China . The lack of solid IP and information security laws in China only adds to China's woes as many companies do not even contemplate offshore outsourcing to China given the scant protection accorded to IPR's and privacy issues in the mainland.

Adding to these hurdles is the linguistic and cultural incompatibility of the Chinese workforce which poses its own challenge in integrating into the global industry. This is possibly the biggest stumbling block as far as the Chinese IT and ITeS companies are concerned. The English-language capability of the Chinese leaves much to be desired and even the staunchest advocates of the Chinese IT potential will have to admit that China is a good five to seven years behind India in terms of its language skills. Given that outsourcing from English-speaking nations accounts for 85 percent of the total offshore market, this has grave implications for the Chinese IT industry. Since most Chinese aren't comfortable with the English language, they are constrained to use an interpreter while communicating and as a result the crux of the conversation is, more often than not, lost. It also adversely impacts the client's degree of comfort in dealing with the vendor and as a result many outsourcing contracts do not even go beyond the negotiation phase. India , on the other hand, by virtue of its 300 years history of association with the British and because of the status of English as a national language, has a labor pool well conversant with the Queen's language. Even though China has embarked on an ambitious prog ram to build language skills in that country, it has to be remembered that imparting language skills is a time consuming affair and it could take years before an acceptable measure of proficiency is acquired.

The English issue gains even more significance with respect to the ITeS space. The lack of language skills clearly puts China out of the fray when it comes to competing for voice services, which incidentally account for over 60% of the current global business process outsourcing market. Does that mean China can emerge a force in the transaction processing and non-voice space? The answer again is ‘no'. The shift to higher-end processing work is a transition process wherein the industry proves its credentials by engaging in low-end work and finally moves up the value chain. Even if the Chinese were to hone up their language capabilities over the next five to 10 years, they would still not enjoy the same cost advantages as they enjoy today. Being a signatory to the WTO, they would be required to open up various sectors of their economy to foreign competition and in the process wages are bound to rise. One possible area where China can emerge a strong force would be in outsourcing to the South East Asian markets, particularly the Japanese market, since the linguistic synergies could work to its advantage. Here again, it would be a tough call for the Chinese companies as gaining an entry into the Japanese market would require them to crack the monopoly of the Japanese Keiretsos - no mean task.

To conclude, the Chinese outsourcing industry holds much promise and potential; to pit it against the Indian outsourcing industry and to conclude that the threat from the Chinese is imminent is perhaps a bit premature. The Indian outsourcing industry has transformed to the stage where it is today through a process that has spanned the best part of three decades and China will take at least a third of that time before it can claim to have an outsourcing industry which is a worthy competitor to India.