Out of Bangalore and into China
China’s Service-Outsourcing Industry Receives a Boost from the Government
By William Dodson
Suzhou is a relatively small, picturesque city of about 1.5 million inhabitants, a 35-minute bullet train ride from Shanghai. The "Venice of China", as Chinese tour promoters like to call Suzhou, it is an ancient city designated as a world heritage site five years ago by UNESCO. Far from sinking, Suzhou is also one of 20 cities the Chinese central government has earmarked as international service outsourcing hubs angling for the fruits benefits India has reaped over the past decade in the IT-, Business Processing-, and Knowledge-Outsourcing industries.
The business research and consulting firm Frost & Sullivan estimated that the worldwide market for outsourced services was worth USD 930 billion in 2006. The company forecast that the IT Outsourcing (ITO), Business Process Outsourcing (BPO) and outsourced Research and Development (R&D) sectors would grow at a compound annual rate of 15 per cent to reach a market size of nearly USD 1.5 trillion by the end of 2009. By 2020, the global market for services outsourced to third parties could reach USD 6 trillion.
Outsourcers and Outsourcees
IT Outsourcing involves an outside engagement of software and hardware engineers and project managers that support the computer systems of a company onsite - typically, back office functions such as accounting, payroll and human resource systems management. Other ITO outfits write programmes for companies that make hardware, but eschew the more labour-intensive software development efforts. These programmes are called embedded systems, and can be found in everything from computer game sets to automobiles and manufacturing equipment.
Business Process Outsourcing transfers rote business functions to a third party to perform repetitive or scripted tasks. Such functions include call centre operation, payroll processing, medical recordation, and payment processing. In the instance of processing accounts payable, for example, a Chinese outsourcee can receive a scanned invoice to a vendor from an American outsourcer. Relevant information such as the invoice date, due date, purchase order number, delivery date, and product codes are manually entered into a computer system on the China side. The Chinese operation then posts the data to the client’s financial accounting software. Once the customer company has the order in its computer system, it can accurately track shipment progress and payment to the vendor.
The top sectors for outsourcing back office and IT processes are banking, financial services and insurance, followed by the high technology sector and healthcare industry, with its outsourcing expenditures primarily in R&D. The Chinese governments at national and local levels as well as foreign and domestic entrepreneurs are aware of the growth in the shared services sector and keen to have their slice of the pie. The entrepreneurs are seduced by high profit margins, while the government sees a stellar opportunity for job creation. Employment is high on the government agenda in China as “social harmony” and stability have top priority.
China’s Outsourcing Hubs
To that end the Chinese government designated 20 Chinese cities as hubs for the development of ITO, BPO and R&D sectors. The outsourcing centres are the means by which China hopes to gain access to knowledge-intensive industries valued at USD 100 billion by 2020. In late 2006 the national government identified Beijing, Shenzhen, Shanghai, Nanjing, Hangzhou, Chengdu, Dalian, Xi’an, Wuhan and Suzhou as keji bu – literally: Technology Divisions. In 2009, Tianjin, Chongqing, Guangzhou, Harbin, Jinan, Hefei, Nanchang, Changsha, Daqing, and Wuxi were added to the list. The plan is to persuade 100 multinational corporations to transfer some of their outsourcing business to China, and to create 1,000 large-scale international service-outsourcing enterprises by the year 2010.
The Chinese government is channelling hundreds of millions of Dollars over several years into the cities to provide tax benefits to trained IT professionals, subsidies, and support for their families. The Technology Divisions serve as the bedrock of China’s ITO Centres. The national approval means a subsidy from the national government of nearly USD 8 million a year to each city. The city parcels out the cash to its approved economic development zones to spend on infrastructure and incentives to woo investors and staff.
The China-Singapore Suzhou Industrial Park, or SIP, lies on the eastern border of Old Suzhou and is home to dozens of R&D centres and hundreds of IT companies. SIP and its cross-town cousin, the Suzhou New District, have made Suzhou one of the richest cities in China per capita, and a city in the vanguard of the new technology industries shaping the way we work an ocean away. The Suzhou Industrial Park International Science Park (SIPISP) is Suzhou Industrial Park’s magnet. It attracts IT, BPO and R&D companies to Suzhou in particular, and SIP specifically. “We know manufacturing is very important to China’s development, but it doesn’t generate a high enough level of employment. We have to develop the service industries, too,” says Daisy Gao, a SIP government administrator. Ms. Gao directs the promotional affairs of the Science Park.
Since 2006, SIP and neighbouring economic development zones have been excluding highly polluting and low-value manufacturers from their investment zones. Instead, they’ve been courting hi-tech, R&D, and IT/BPO companies to gentrify Suzhou and increase tax revenues from companies that use as much, if not less, land than their manufacturing brothers, but have higher annual taxable incomes.
The 20-30 Problem
The Chinese government has several motivations for promoting the tertiary industries in China: job creation, wealth creation and environmental conservation. It knows that the light manufacturing sector – sneakers, toys, lighters and other commodity-driven manufacturing – will only be able to employ a proportion of the working age population. Issues such as land use, resource exploitation, technical training and experience constrain the degree to which China – or any country – can industrialise. In particular, over the last two years, land for building manufacturing facilities has become highly restricted, and economic development zones in China can no longer expand the size of the land available for investment in their locales. Outsized intakes of materials have put upward pressure on the cost of inputs as well, as Chinese factories have sucked in greater amounts of metals, plastics, wood and other resources to meet production quotas inside and outside of China. The havoc unregulated light manufacturing has wrought on the environment will take decades to reverse.
The Chinese government sees the tertiary industries as a social release valve of sorts. In particular, the Chinese government is looking to the commercial sector, the travel and leisure sector, the financial and banking sector, the logistics sector and to the cultural and entertainment sector to soak up the labour pool. Currently, Chinese universities are churning out hundreds of thousands of graduates who find themselves under- or unemployed. Further, with per capita GDP in the nominally poorer interior of China rising, more students are able to go beyond the compulsory nine years of education to complete 12 years of schooling. The Chinese government will have the additional responsibility of creating jobs for the millions that do not go on to university but who are better educated than previous generations. The tertiary industry provides an outlet for this labour pool that a diminishing light manufacturing sector cannot.
“Unemployment for people in their 20s and 30s is one of the problems China has to solve,” confirms Daisy Gao. “We call it the 20-30 problem.” Without employment in significant numbers – and we are talking in the hundreds of millions here – Chinese society could fall prey to the kind of unrest other countries suffer when high levels of unemployment among the youth prevail.
The Elephant in the Room
No discussion of China's development of its service-outsourcing sector can be complete without mentioning India. In 2007 India captured an estimated USD 34.1 billion in total revenue with just over 11 per cent of the share of the global market for ITO and BPO services. The Indian share of the market could increase to as much as 15 per cent of the global share by 2010. China, meanwhile, took USD 13.1 billion over the same period, representing a 4.4 per cent share of the global market. The Chinese are looking to break the Indian dominance in IT-based outsourcing services by 2020.
Of course, the Indian education system, with its emphasis on English language skills is a factor in the growth of its ITO business, and facilitated entry into the BPO space. Credit card processing, insurance claims processing, and call centres are natural extensions of the knowledge base and experience Indians are gaining through their business analyses and IT implementations.
The Chinese government has its sights set on conquering the international market for service outsourcing. Newly opened economic development zones throughout China are flush with cash and are already investing in platoons of engineers and hi-tech infrastructure. The Chinese are gaining success in form-processing and data entry, tasks that are repetitive and detailed. The most accessible areas for Chinese BPO operations right now are insurance claims processing, personnel records data entry, patient records entry, and invoice processing. Though gradually changing, the Chinese education system has for centuries favoured rote learning and the regurgitation of facts and figures. As a result, Chinese people tend to be more attentive to detail, but less innovative, than their Indian counterparts.
However, the Chinese seem on course to price themselves out of the market before they can present a formidable threat to Indian service-outsourcing hegemony. "Cost escalation is hurting competitiveness," says one industry source. "Language and communication remains a major challenge in serving clients. A shortage of project management and senior software engineering skills is also a significant problem." So although China's development of an international presence is being thwarted by the global economic downturn, its domestic market is gaining momentum. Relatively low cost service-outsourcing hubs like Nanjing and Hangzhou are well positioned in this respect. The high number of multinational corporations based in the proximity of these cities will serve as ready customers. Meanwhile, cities like Wuhan and Chengdu will continue to expand their service base for coastal cities, like Shanghai and Dalian, that become too expensive to continue to support rote operations.
China's service-outsourcing sector has near limitless possibilities for expansion. It may take some time for it to catch up to the size and the sophistication of its Indian counterparts but the message ringing out from Beijing is clear: China is at your service.
