It's taking steps to nurture talent and woo clients in bid to overtake India
By Grace Ng, The Straits Times, 3 Dec 2012
BEIJING - The way ambitious Chinese officials see it, the growth of the country's IT outsourcing industry is all about ones and zeros - strings of them.
Take a new project - dubbed Shi Bai Qian Wan - launched last month in western Chongqing city.
The name refers to the initiative's goal to grow 10 (shi) outsourcing zones, nurture one million (bai wan) IT graduates and attract 1,000 (qian) global customers.
It is one up from the national Qian Bai Shi project ("1,000-100-10") launched six years ago, which later led consultancies like IDC and Ovum to predict that China could replace India as the world's favoured outsourcing destination in a few years' time.
At that time, China was hardly a blip on the outsourcing radar. India held the lion's share with well over 80 per cent of the world's business by some estimates.
But the national initiative poured more than US$1 billion (S$1.2 billion) to nurture 1,000 major vendors, attract 100 top multinational corporations to outsource here, and establish 10 cities as outsourcing powerbases, over five years.
Since then, China has zoomed up to No. 2, with a 23 per cent market share. India's is 47 per cent.
Even bigger growth may be coming, as Beijing prepares to unveil new policies this month to boost the outsourcing sector.
Its Commerce Ministry has already hinted at the scale of its ambitions. China's outsourcing sector could grow at an average of 40 per cent to US$90 billion over the next three years, it forecast in June. This is up from US$32.39 billion last year. What's more, it may grab half of the global market by 2015.
"The gap is too wide to be bridged easily in just a few years," said Forrester principal analyst Fred Giron. "Even if China grows at three times the pace of India's growth, it would take more than 13 years for China to reach the size of India."
Meanwhile, other markets like the Philippines, Singapore and Latin America, which are investing more in English-speaking, tech-savvy workers and better infrastructure, are also rising up the global ranks as attractive outsourcing destinations.
Still, that does not mean China is not becoming a serious rival in key markets - especially in fast-growing Asia.
"Competition (between the two countries) for the European and US outsourcing market is increasingly intense," said Ms Sha Qi, deputy director of outsourcing consultancy Devott in Tianjin.
"China also has an advantage in the domestic, Japan and South Korean markets that India lacks."
China's incoming Premier Li Keqiang and the new leadership team have added impetus to crank up the IT outsourcing industry growth machine. They are under pressure to restructure China's economy and boost high-tech services by 4 percentage points to 47 per cent of its gross domestic product in five years.
Also, China's 350,000-plus fresh IT graduates every year, whose English skills are catching up with those of their Indian counterparts, need jobs. The outsourcing industry, if it can scale up to be like India's, offers an answer.
But for now, it is hardly a silver bullet, given its fractured state.
By global standards, China's IT services sector is still lacking in areas like technical capability and service processes, said Ms Sha.
India, by contrast, has had more than 20 years to hone such skills. And its top five players are huge, contributing about 80 per cent of revenues.
"The largest Indian provider is more than 10 times larger than the largest Chinese firm today," pointed out Mr Giron.
In recent years, top outsourcing cities such as Bangalore have fought back against foreign rivals with more skills training and better infrastructure.
Still, the battle may be only just starting, as the China market comes of age.
One sign of this is its recent consolidation to create giants that can take on the likes of Infosys and Wipro. Take the recent flurry of mergers and acquisitions: leading player Neusoft has picked up assets including a Finnish software firm; smaller fry like Beyondsoft announced in August that it would buy six Chinese and Japanese units of a United States player.
And the most eye-catching of all - Pactera, a merger of two former Chinese outsourcing rivals HiSoft and VanceInfo. The newly merged group with about 24,000 employees, whose corporate clients include IBM and Hewlett-Packard, has become one of China's biggest alongside Neusoft.
Dubbed by Chinese financial writer Chang Qing as an "aircraft carrier" for the young industry, Pactera has provided guidance that its full-year revenues could be about US$675 million.
"The merger has made us a world-class IT services provider with an extensive global reach," Pactera chief executive Loh Tiak Koon told The Straits Times.
In the coming years, mergers will become "a major trend and feature of (China's) industry", predicts Ms Sha.
China's huge domestic multibillion-dollar market is also giving its vendors a leg-up over their Indian rivals. And it is likely to burgeon as multinational corporations pile in while richer Chinese firms flock abroad.
So while Pactera may be still about six times smaller than giants like Infosys, it is less concerned about surpassing them in size than offering "a serious alternative to India" for global companies, said Mr Loh, a Singaporean.
Meanwhile, China is investing more in cutting-edge areas such as cloud computing to host the world's burgeoning Internet data, while training more IT experts. Outsourcing hubs like Chongqing are going as far as dangling 100,000 yuan (S$19,600) housing rebates to attract top talent.
So while there may still be a thousand li (miles) to go on the journey to competing neck and neck with India, China has taken the first Shi Bai Qian Wan steps.
Ms Sha is optimistic it can cover the distance. "We can say that the potential and future momentum of China's outsourcing industry far surpasses that of India's."
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