FT : The Lengthening Shadow Of The New Outsourcing Dragon

Friday, September 10, 2010

India’s outsourcing groups may be keeping a wary eye on China but the world’s second-largest economy does not necessarily spell doom for the subcontinent.  Tata Consultancy Services, India’s largest outsourcing services group, last month said that it would double its headcount in China, a clear signal that the Indian sector is keeping a close eye on a market that could evolve into a serious competitor.  The threat appears clear enough.  China’s outsourcers are set to grow at a faster pace than India’s over the next few years, according to analysts.  “The Chinese outsourcing sector is bound to see the same curve the Indian industry had before – they are in for incredible growth,” says Egidio Zarrella, a partner at KPMG.  “There’s paranoia among the Indians because they remember what they did to us [in the west] – rolling up our markets in just a couple of years’ time,” the China head of an American outsourcing group says.  “They fear the Chinese are going to do the same to them now.”  The Chinese government has offered strong support to the industry, including incentive packages and tax breaks, in the hope of emulating India’s success and creating millions of jobs.  Beijing’s declared goal is to create 10 internationally competitive outsourcing hubs, encourage 100 multinational companies to outsource to China and develop 1,000 Chinese outsourcing services vendors that are qualified to serve the global market.  As a result, the Chinese are now increasingly picking up orders in the US and Europe, traditional strongholds for Indian companies.  Last year, all top 10 Chinese outsourcing services vendors saw revenues from US and European customers rise and in some cases outgrow the portion of business that is derived from Japan and South Korea, where they initially started offering services.  HiSoft, the third-largest Chinese offshore vendor, which went public on Nasdaq in June, serves a smattering of global clients including AIG, Microsoft, and Citigroup.

However, some say fears of a Chinese challenge to the Indian industry globally are mostly overblown; partly because the Chinese industry is still relatively small and fragmented; but also because China, unlike India, boasts a big potential domestic market. China’s IT services exports were worth just $9.6bn last year while India’s were $49.7bn, according to CLSA, the brokerage.  Neusoft, the largest Chinese player, reported Rmb4.2bn ($618m) in revenues last year, less than one-tenth of Tata Consultancy’s revenues of $6.5bn for the financial year ended March 31.  Not a single Chinese outsourcing group approaches even 10% of TCS’s headcount of 160,000.  In addition, Indian and Chinese outsourcing services vendors often still do not compete head-on, according to analysts.  “The pie is growing rapidly. It’s not a question of India versus China, there’s room for everyone,” says Sidney Huang, chief operating officer of VanceInfo, China’s second-largest IT services company.

The main reason is China’s potential domestic riches.  IT services account for only 13.8% of China’s total IT market compared with a 30.3% share for Asia-Pacific overall, according to IDC, the research firm.  That number will increase as government requirements for more efficiency push local groups to step up outsourcing, IDC analysts argue.  There are already signs that this is happening. At $8.1bn, China’s domestic IT services market was bigger than India’s with $5.8bn last year, according to CLSA, and many Chinese outsourcers are now increasingly looking to the local market for business.  “In the past four years, China has been the driver of our business,” says Mr Huang of VanceInfo.  In 2006, the domestic market accounted for just 5% of the company’s revenues, but in the second quarter of this year, that share had soared to 45%.  HiSoft says its domestic business has soared over the past six quarters.  “By the end of 2010, China will account for 10% of our revenues, but by 2012 it’s expected to be 40%,” says Ross Warner, vice-president.  Both Indian and Chinese outsourcing companies are preparing for the bigger, long-term opportunity of business from state-owned banks and telecommunications operators in China.  But that day is still distant, analysts and executives say. “IT services demand in this segment is still primitive,” says Mr Huang of VanceInfo.

Reference : The Financial Times Sep 8th 2010

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