IT Outsourcing: China Grasps for the Lead
China presents a major threat to India in the global IT outsourcing industry.
|Yunus Kathawala, PhD, and Christoph Heeren
Reprinted by permission from the Graziadio Business Report, Volume 12, Issue 3, 2009
|Rough economic times make the outsourcing of information technology (IT) an even more critical area
of discussion for businesses. Recently, there has been a great deal of debate on whether a shift in the
global outsourcing of IT is occurring. India has long been known for its dominance in the field; however,
China, which plays a leading role in the outsourcing of manufacturing, is making strong headway in the
industry and may soon pose a major threat to India's supremacy.
|New management models and business strategies have evolved since the onset of globalization. One
such corporate strategy is global outsourcing, which is receiving more attention than ever due to its
effectiveness in cutting costs. Global outsourcing can be defined as a strategy that allows corporations
to redesign, redefine, and reshape organizations by transferring the management and/or day-to-day
execution of a business function to an external service provider. Used responsibly, it can generate
enormous benefits. There are two countries that stand at the forefront of the global outsourcing
movement: India, which is considered the mecca for outsourcing IT services, and China, which has a
strong reputation in the outsourcing of manufacturing work.
India made the decision to focus on IT expertise early on; it also made developing competency in the
English language a nationwide priority, thus increasing its competitive advantage in the global
marketplace. India's economy has developed through the promotion of internal consumption rather
than on exports.
India's top 10 IT companies make up approximately 45 percent of the entire global market. Companies
like Tata, Infosys, and Satyam enjoy worldwide reputations and attract and land multinational deals
every year. In addition to English language competency and IT expertise, trust in those companies, and
in India as the go-to-country for IT outsourcing, has grown because the nation successfully combines
low labor costs with Western management skills.
China has long been known for its low cost of labor and its evolving infrastructure, and the country has
attempted to develop its economy by focusing on exports as opposed to growth through internal
consumption. China is a classic example of an emergent economic power. Since opening its doors to
globalization, China has efficiently utilized its resources, which mainly focused on cost advantages.
Conscious of its deficit in technological expertise, China concentrated on a practical business-manufacturing.
The government, aware of the value of diversification, has continuously sought other strategies to
ensure growth and has undertaken efforts to support other economic sectors, particularly its IT industry.
In 2008, it handled approximately $1.6 billion in IT outsourcing services and about $14.2 billion in
software exports. Japan, for one, outsources many of its IT needs to China.
China versus India
China's international deals focus mainly on product development, but it has conducted a great deal of
testing for IT projects as well. China has mostly handled low-end, relatively uncomplicated IT
applications, but it can and does manage mid-sized applications, primarily orders from Japan and
Korea. The country desperately hopes to land multinational deals in order to prove itself as a leader in
IT outsourcing. As such, the Chinese government is making a significant effort to heighten the IT
industry's appeal to foreign companies and investors.
Currently, standardized IT services are outsourced to China and the more complex IT services are
entrusted to India. This pattern will likely continue until China develops its IT industry and addresses its
major weaknesses. The issues cited most often in the literature are the level of IT expertise of Chinese
workers and concerns about intellectual property rights.
While many people claim that conditions for IT outsourcing in China are not as ideal as those in India,
this statement was far truer in the past than it is today. India itself is aware of the rising Chinese
competition and the country's business experts expect that it will not be long before the Chinese
improve their deficiencies in order to attract more customers.
China: The government has built entire cities and towns dedicated to the IT industry, presenting almost
perfect conditions for companies. The most prominent example is Shenzhen, one of the fastestgrowing
cities in China and a preferred location for foreign investors. Moreover, the government offers
tax deductions, financial support, and subsidies for new establishments. Large companies, such as
TCL, China's largest electronics manufacturer, have established themselves in Shenzhen.
India: India is considered to have a fairly weak infrastructure and many external companies claim that
it is insufficient and inferior to China's. In addition, the public interest sometimes prevents changes. In
China, however, once a decision is made by the government, it is implemented quickly, as with IT
China: Unlike India, China does not have many large IT companies. Market experts often note that the
highly fragmented nature of the IT industry in China needs to change as small companies are riskier
and less reliable partners than major players. Many people argue that China's IT market needs to
consolidate in order to become more competitive.
In today's economy, companies must also be very cautious about political instability in foreign
countries. Political instability and slow progress in providing data security in China have been causes of
concern. As the industry matures, however, it is thought that fragmentation will decrease due to
international interests, and laws will improve to guarantee safety.
India: Recent headlines about the Indian IT industry have been a source of alarm. At the beginning of
2009, it was revealed that the Satyam company had accounting discrepancies and the resulting
negative publicity has affected the entire industry and raised the question of whether such problems
could have occurred in China. Many foreign companies and investors see their businesses as
endangered due to these revelations as it showed that regulations and laws in India were not as
developed as expected.
To deal with the impending threat of China, Indian companies are also starting to acquire Chinese IT
companies, opening the door for India's involvement in the burgeoning market. In 2005, India invested
nearly $50 million in the Chinese IT industry, mainly comprised of stakes in Tata and Infosys.
China: One of the major concerns for foreign companies interested in investing in China is the
country's lack of protection for intellectual property in the form of trademarks, copyrights, or patent
laws. However, the government has already made dealing with piracy and other investor concerns a
priority. Since China's inclusion in the World Trade Organization in 2001, the nation has updated its
laws to fulfill international demands and in 2004, China announced stricter laws on intellectual property
rights. Penalties for defiance of these laws have been raised significantly since then.
India: India has more Capability Maturity Model (CMM)-certified companies than China. CMM is a
program that determines the quality of software processes in organizations. While all of India's top 30
companies are CMM certified, only 6 of the 30 top companies in China are certified, clearly showing
the gap that the country will have to fill within the next few years.
China: Two serious issues linger in China-English language and IT skills. English is obligatory in
interacting with foreign businesses, and while the Chinese educational system tries to emphasize the
advancement of English, the population still seems to be lacking in this area. In 2005, about 0.77
percent of China spoke English, compared to 10.66 percent of the population in India.
In addition, the country's IT expertise is not yet at a desirable level. Although many students graduate
with IT degrees from universities every year, the majority of China's IT professionals still have less than
five years' experience. Employees will require more training in order for China to become a competitive
India: India has the disadvantage of higher labor costs than China. Although India has been known for
its large pool of talented, low-cost workers, its wages have jumped by 25 percent since the onslaught
As China continues to develop, there will be fewer reasons for an external company to avoid
establishing itself there. In fact, it may be that in order to stay competitive and decrease additional
costs, companies will be obliged to outsource their IT needs to China. The country's potential has
already been recognized by companies like IBM and Hewlett-Packard, both of which have established
major presences there. If the IT industry develops as expected, China could capture opportunities
worth $56 billion by 2015.
India's acquisition of Chinese companies is a direct indicator of China's growing IT outsourcing power.
The country is trying to entrench itself in the Chinese IT industry because it anticipates China's future
capabilities. Many authors argue that China and India should consider working together in the field of
IT-China would gain access to important IT expertise, while India would benefit from cheaper labor
costs and a better infrastructure.
Today, India still has the lead over China in IT outsourcing and its advantages over China are still
distinct. While China will almost definitely become an important force in the IT industry, the country still
needs more time to develop its competencies. Many think that the Chinese IT industry will have to
consider acquiring or partnering with foreign IT companies in order to grow and compete. Lenovo's
acquisition of IBM is an example of how Chinese companies can expand and "go global." China's
leading software company Huawei Technologies has also established joint ventures with Western
companies such as IBM, Siemens, 3Com, and Symantec.
|About the Authors:
|Yunus Kathawala, PhD is a professor of management at the School of Business at Eastern Illinois
University in Charleston, Illinois. He holds a doctorate from the University of Georgia. His research
interests are in the areas of supply chain, small businesses, international business applications,
and web-based and distance education, and he has been published in the European Business
Review, the International Journal of Service Operations Management, and the International Journal
of Business and Globalization.
Christoph Heeren will graduate as a German transfer student from Eastern Illinois University
Lumpkin School of Business in August 2009. He worked as a research assistant for Dr. Kathawala
in the field of operations management. Born in Luxembourg and raised in Tokyo, Singapore, and
Hong Kong, he will be completing his MBA degree at the University of Cologne in Germany with
majors in business policy and logistics.