India and China in the Offshoring Race

Inter­est­ing para­dox­i­cal news on this front today.

Around a month back, For­rester research came out with a report titled “China’s Dimin­ish­ing Off­shore Role”.

When For­rester first looked at China’s off­shore and glob­al deliv­ery mod­el (GDM) role near­ly two years ago, the coun­try was wide­ly viewed as the key chal­lenger to India for off­shore suprema­cy. How­ev­er, our lat­est research shows that to date the mar­ket has not tak­en off as expect­ed. While there con­tin­ues to be demand from Japan and multi­na­tion­als with oper­a­tions in Chi­na, the off­shore busi­ness from the US and Europe has been slow to mate­ri­al­ize.”

Sil­i­conIn­dia report­ed: “As lan­guage, attri­tion and intel­lec­tu­al prop­er­ty (IP) pro­tec­tion con­tin­ue to haunt the multi­na­tion­als, the myth asso­ci­at­ed with Chi­na as key chal­lenger to India for off­shore suprema­cy is dimin­ish­ing grad­u­al­ly.”

(Also see this blog post for an inter­est­ing take on the For­rester research.)

Cit­ing the above report, the Busi­ness Stan­dard today declared “Chi­na out­sourc­ing sec­tor no match for India”:

  • In 2006, Chi­nese IT ser­vices mar­ket reached $7.7 bil­lion, with a growth rate of 17.8 per cent
  • In FY 2006-07, IT exports from India reached $31.4 bil­lion, with a growth rate of 33 per cent
  • Demand for IT out­sourc­ing from India is around 4 times that of Chi­na
  • Chi­na does not have any sig­nif­i­cant cost advan­tage, note ana­lysts
  • China’s head­count with regard to out­sourc­ing was less than one-tenth that of Indi­an firms
  • US & Euro­pean mar­kets, which have high­est share (75%) of the world’s total mar­ket and the high­est growth rate (60%), account for a small­er pie (40%) of China’s mar­ket. Japan and Korea are China’s largest cus­tomers.

Prob­a­bly obliv­i­ous of these reports, IDC pre­dict­ed the exact oppo­site:

IDC’s Glob­al Deliv­ery Index (GDI) Pre­dicts Chi­na Over­tak­ing India by 2011

IDC has devel­oped a new Glob­al Deliv­ery Index (GDI), which com­pares 35 cities in the Asia/Pacific as poten­tial off­shore deliv­ery cen­ters, based on a com­pre­hen­sive set of cri­te­ria such as cost of labor, cost of rent, lan­guage skills and turnover rate. In its inau­gur­al find­ings, Indi­an cities are high­ly ranked, while Chi­nese cities are on the rise and close­ly nip­ping at India’s heels.

The IDC study also fore­casts how these top 10 cities rank­ings might change in 2011. The GDI reports take into con­sid­er­a­tion future plans of cities such as future infra­struc­ture plans and efforts tak­en to lay a firm foun­da­tion for attract­ing invest­ments. IDC fore­casts that Chi­nese cities will over­take Indi­an cities by 2011 due to mas­sive invest­ments made ( e.g. infra­struc­ture, Eng­lish lan­guage, Inter­net con­nec­tions, tech­ni­cal skills, etc) which are favor­able towards off­shoring.

And this is now all over the news after CNET picked it up.

The IDC method­ol­o­gy is still behind cur­tains. For e.g. we do not know:

  • Which cri­te­ria were used to select the 35 cities
  • Whether Tier II and III cities in India were con­sid­ered
  • Whether cur­rent export rev­enue fig­ures were con­sid­ered (not men­tioned in press release)

So, till we get a bet­ter under­stand­ing of the IDC approach, there’s no point in com­par­ing or con­trast­ing these two con­tra­dic­to­ry research reports. I per­son­al­ly believe the Chi­nese com­pe­ti­tion is good for India. It will keep our indus­try and our gov­ern­ment on their toes!

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  • Bang on Mahen­dra. I too noticed the con­trast, and was puz­zled after read­ing the IDC pre­dic­tion. I am guess­ing IDC knows what will sell to Indi­an out­sourcers — no body will buy anoth­er of those reg­u­lar rosy reports. They will snap up any­thing that says oth­er­wise 🙂

  • Pingback: India, China and offshoring « /India/Bangalore/things()

  • Thanks, silk­board — I’ve com­ment­ed on your post/spin to this!

  • Ramesh Natara­jan

    Dear Mahendra,I

    The off­shoring busi­ness, though India has a lead, it will be dif­fi­cult to sus­tain it just with a low cost advan­tage. Though Chi­na may not over­take India, a size­able vol­ume of busi­ness might be lost due to the growth of the BPO seg­ment in Chi­na, Malaysia, Phillip­ines, Viet­nam and oth­er emerg­ing mar­kets.

    How­ev­er, the growth of the BPO seg­ment in the Tier II and Tier III cities should keep us ahead in the com­pe­ti­tion.

    Best Regards,
    Ramesh Natara­jan, Dubai
    Views and Thoughts of a Glob­al Indi­an

  • Ramesh: yes, I ful­ly agree. We can­not rely sole­ly on low-cost advan­tage. We need to act on infra­struc­ture and reduc­ing bureau­cra­cy, improv­ing edu­ca­tion, among oth­er things.