Why China

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Post time:2009-09-10Source:iSoftStone Author:Seth PinegarEditor:wanghualing,[link widoczny dla zalogowanych]
During the last ten years, CIOs of global Fortune 500 Multi-National Corporations (“MNCs”) have made big bets using a single-country Indian offshore outsourcing solution, by outsourcing to leading Indian vendors such as Infosys, Wipro and Genpact. A desire to leverage the Indian cost advantage has caused many of those MNCs to develop a significant concentration and increasingly uncomfortable dependence on India for offshore outsourcing solutions. At the same time, labor rates and other costs in India have increased over time, narrowing the cost “arbitrage” that MNCs have been able to take advantage of in using offshore resources to help reduce costs to remain competitive in the global marketplace.

In 2008, India as an outsourcing destination has lost “glow”, with the 2008 Mumbai terrorist attacks reminding us all of the geo-political risks present in India and its neighbors. Additionally, the $1bn(+) Satyam fraud reminds the world that while India has had a strong track record for reliability in serving global clients, that its companies are not immune to fraud and corruption that happens everywhere at the expense of us all. Lingering corporate governance concerns have raised questions about the integrity of a number of India-based providers’ tightly-controlled Boards.

With the above factors, many global MNC clients are looking toward alternate geographies to supplement India as offshore/nearshore outsourcing destinations – these include Latin America, Eastern Europe, the Middle East and Asia Pacific (including mainland China). Of the alternate locations available, China is increasingly developing the most favorable combination of the following criteria: Abundance of skilled labor (e.g. college graduates and vocational diploma candidates), highly geared toward hard sciences and technology (as is typical in many Asian countries), and ability to serve English-speaking clients.

Additionally, in contrast to what many global MNC clients have experienced in India, China has a refreshingly favorable business environment. Many MNCs are attracted to the ‘total package’ China has developed for nurturing its service-based economy, including:

There is a strong desire by government and population to continue the rapid “opening” of China that has taken place in the last 20 years, which has resulted in generally business-friendly attitudes adopted in dealing with the West. Furthermore, there is strong government desire to promote new growth industries to replace manufacturing.
The underlying stable political environment, as demonstrated during the 2008 Olympics, provides further confidence in China’s long-term stability. Strong government support (tax incentives, land grants, training subsidies, software parks to help companies be near peers and talent pools, government-backed loans, client-facing government support, among others).

Outsourcing is an industry China can leverage – it is people-intensive, requires education, and is a “green” industry –all of which help China to achieve its long-term objectives for continued self-reliance and sustainable economic growth. This is supported by strong public Infrastructure in tier-1/tier-2 cities which is more easily utilized than that in India, including roads, educational facilities, telecom infrastructure and public utilities.

Demonstrable progress in IP and copyright protection. Contrary to Western perceptions of old, China has adopted strict laws for enforcement of Intellectual Property (IP) infringement. At present China has two major agencies dealing with IP protection – the National Copyright Administration of the PRC (NCAC) and the State Intellectual Property Office of the PRC (SIPO). China has also implemented a large body of legislation protecting IP, including "The Trademark Law of the People‘s Republic of China," the Paris Convention treaty, the "Copyright Protection Law", and the "Anti-Unfair Competition Law".

Lastly,[link widoczny dla zalogowanych], China has distinct advantages in serving domestic market outsourcing needs of other Asian countries (especially Japan, which remains the world’s 2nd largest economy), with shared history and cultural ties. Asian markets such as Japan are under-penetrated in terms of offshore outsourcing, and China is well-positioned to continue as a primary provider to them.

Important to consider for MNCs is also China’s domestic market. Because China is also a huge target market of the same MNCs who are clients of the global outsourcing industry, these MNCs can use their business dealings with China-based outsourcing providers to illustrate to the Chinese government that there exists a two-way relationship, rather than their simply wanting to sell goods and services China’s domestic market without buying from Chinese companies in return. In 2008 the government announced a massive domestic stimulus, on top of “healthy” 7%+ GDP growth rate this year (and higher expected for 2010) – this is expected to benefit infrastructure investments and result in a “trickle down” effect on to technology/services providers. This stimulus directly benefiting transportation & logistics industries. Furthermore, there are rapid reforms taking place in technology intensive industries (telecom, banking, energy and travel, among others). Chinese providers are at the forefront of helping to develop this new technology,[link widoczny dla zalogowanych], which can be leveraged in the same industries globally outside China, to help link China’s systems with those of the rest of world.

All of the above has helped to create a backdrop whereby Chinese outsourcing providers are attracting world-class talent, which is helping to better equip them for serving global MNC clients. This in turn is expected to further establish China as the #1 alternative to India for global offshore outsourcing, and a leading outsourcing destination for years to come. This trend has already taken hold, as evidenced by the numerous MNCs who have chosen to become the “anchor clients” of China’s emerging global offshore outsourcing industry.

About iSoftStone

iSoftStone Holdings Limited (iSoftStone) is a global provider of business consulting, IT outsourcing,[link widoczny dla zalogowanych], and business process outsourcing services to clients in the United States, Europe, Japan, Korea, and Greater China. Headquartered in Beijing with offices in key client geographies, iSoftStone provides a comprehensive end-to-end service offering including on-shore client-facing business consulting, and off-shore delivery of IT outsourcing and software product engineering services. iSoftStone focuses on key client industries including financial services, telecommunications, high technology, energy & utilities,[link widoczny dla zalogowanych], and healthcare, etc.
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