China appeals as an IT outsourcer mainly to its neighbors

Language barriers and a lack of experienced project managers prevent the country from becoming a global player, say analysts

China's appeal as an outsourcing location is limited to a few neighboring countries like Japan and Korea, unlike India and the Philippines, which address global markets including the U.S. and the U.K., according to a report released Wednesday by Everest Research Institute.

The country has a shortage of experienced project managers with skills to interact with North American and European clients, according to the report. Although the talent pool appears large, with more than 4 million graduates from China's universities annually, the vast majority are not employable for offshore services delivery to North America and the U.K., it added.

As a result, more than three-fourths of China's offshore services exports are focused on Japan, Korea, and South-East Asia, it said.

A few years ago a number of analysts had forecast that China would become a significant competitor to India as an outsourcing destination. The country would overcome the English language handicap by aggressive education programs, analysts said.

These education programs are taking shape but the progress is slower than what one would expect, Anand Ramesh, research director at Everest, said on Wednesday. Educating and training helps solve part of the issue, but the lack of exposure to the language in a business context is a serious limitation that will take a few years at the very least to overcome, he added.

As a result of the one-child policy for couples in China, the country now has far fewer younger people than India, said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International. These demographic patterns could work against China building itself as an outsourcing giant, he added.

China still figures among the list of countries that customers consider when they decide to outsource offshore, but there aren't service providers in the country that can scale up operations like service providers in India or the Philippines, Pai said. Customers that decide on China have to usually consider setting up a services subsidiary in the country, he added.

A number of multinational companies, including service providers, have however set up delivery centers in China. Indian outsourcers like Tata Consultancy Services also have delivery centers in the country. It also has a small but growing crop of local suppliers, according to Everest.

China's offshore services however remain focused on Japan, Korea, and South-East Asia, according to Everest. A key advantage is common language. The northeastern parts of China have pockets of Japanese and Korean language skills, which help serve these two markets, Ramesh said. The Chinese can also service Hong Kong, he added.

China however has limitations when it comes to serving other parts of the Asian market such as the Philippines, Thailand and Vietnam, according to Ramesh. But these are low cost geographies, and companies from these countries do not have a strong incentive in any case to send work to China, he added.

Concerns around data security and protection of intellectual property are also significant deterrents for companies to operate in China, according to Everest. Services that require access to customer data, sensitive technology platforms, sensitive IT systems, or proprietary tools and knowledge are almost never sent offshore to China, it added.

China has also not been able to put together a countrywide focus on outsourcing, Pai said. The promotion of the business has been left to the provincial governments that compete with one another for business, and do not present a unified front to the market.

The country's low-cost staff however continues to provide an incentive for companies to try out new models for clients in North America, such as a two-tier model where some services are delivered out of China while others are delivered from another location, according to Everest.

Services that are more standardized, require limited interaction with the business in English, and benefit from scale can still be done from China for global markets, Ramesh said. Examples of such services are testing services as part of application development, and digitizing engineering designs, he added.

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