India Vs. Other Outsourcing Destinations

 

Numerous studies have shown that India is the most attractive destination for offshore outsourcing. AT Kearney released a report on country attractiveness for outsourcing and offshoring in 2004.


The report placed India at the top of all the studied countries, followed by China and Malaysia. Various factors such as availability and education of human resources, cost considerations including wages, infrastructure cost and taxes, and the overall political stability and intellectual rights security were used to find an attractiveness index for each country.

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India ranked highest in the availability of talented, skilled and experienced work force. India also offers the best financial structure as it has a favorable tax and regulatory environment, labor costs and infrastructure costs. The research findings are summarized in Table 5.

Table 5: Attractiveness Index for Offshore Location

Rank

Country

Attractiveness Index

1

India

7.12

2

China

5.61

3

Malaysia

5.59

4

Czech Republic

5.58

5

Singapore

5.45

6

Philippines

5.45

7

Brazil

5.44

8

Poland

5.33

9

Hungary

5.29

10

Thailand

5.20

Source: AT Kearney

Though China is next to India as an attractive destination, it lags behind India in a number of parameters. Table 6 compares the two countries for their suitability for IT outsourcing based on factors such as talent pool, government support, education, etc. Clearly, India has a larger talent pool which is proficient in English and which produces better quality work using superior infrastructure. The Chinese government is, however, taking steps to improve China’s value proposition for an offshore hub in services. It is focusing on providing excellent higher education to its youth by starting about 100 technological institutions. The Chinese government has also made English compulsory in schools to increase the number of English speaking people.

 

Outsourcing has become one of the most preferred means of achieving operational excellence across industries and the preferred destinations for outsourcing have been China and India. While China has been conventionally considered the hub for manufacturing, India has traditionally attracted most of the services outsourcing projects. The information technology (IT) industry has been one of the foremost industries to adopt outsourcing as a means of cutting costs and optimizing resources.

 

China, India, and the Unites States have also been the main destinations of global foreign direct investment (FDI) in Information and Communication Technologies (ICT), accounting for more than 50 percent of the overall investment. However, the profile of these investments varies across these countries. While India is preferred for research and development (R&D) and IT-enabled services, IT services projects are concentrated in the United States and China is considered the hub for ICT manufacturing.


Whereas India and the United States are yet to succeed in attracting ICT manufacturing investments, China has been successfully garnering investments in the IT services projects as well as for R&D. This is mainly due to the well-educated and cheap labor force in China. The high influx of foreign investors into China has ensured the high demand for ICT products and services in the country.


Global IT outsourcing was estimated to be around $39.6 billion in 2004 India’s share amounting to nearly $17.2 billion while China garnered nearly $1.9 billion of the outsourcing revenues.


The Chinese Government and the IT service providers are working at various levels to compete with the dominant Indian participants in the global IT outsourcing market. India with its 44.0 percent share of IT outsourcing projects is considerably ahead of China in the global outsourcing market but this gap in revenues is estimated to reduce soon as China leverages on its advantages.


Towards this end, the Chinese Premier, Wen Jiabao, visited several Indian IT outsourcing hubs such as Bangalore and also visited the premier Indian Institutes of Technology (IITs) in 2004. The Chinese Vice Foreign Minister, Wu Dawei, was quoted as saying "The Premier Wen would like to know more about the experience of India in developing science and technology."

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Some of the key success factors of an IT outsourcing destination have been:

  1. Abundance of technically skillful labor force
  2. Low cost workforce
  3. Quality of service
  4. Regulatory environment
  5. Robustness of infrastructure
  6. Knowledge of English
  7. Time zone attractiveness

 


While the Chinese IT companies are increasingly bidding for international outsourcing projects, they are also leveraging on their proximity to markets such as Japan and South Korea, where they have an advantage both due to the geography and language. Nevertheless, China has to still gain expertise in project management as well as achieve economies of scale before it can compete with countries such as India in the global outsourcing market.


Indian firms are increasingly setting up operations in China in order to capitalize on the future prospects that the country might offer in IT outsourcing. As of June 2005, nearly 18 Indian companies had operations in China and had a workforce of nearly 2000, with investments estimated to be nearly $ 50 million. By the end of 2005, Indian companies are expected to expand their Chinese operations as well as double their employee base in China.

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Frost & Sullivan’s recent report on the ‘Chinese Information Technology Industry’ analyzes the trends affecting the industry in view of the political policy and cultural environment as prevalent in China.


Some of the trends in favor of Chinese expansion in the outsourcing market are the liberalization of government regulations, the growing middle class, large-scale investments in technical education, a vibrant economy, and the availability of cheap labor force. However, China needs to build its workforce capabilities in terms of English language proficiency and project management skills in order to emerge as a viable alternative to India in the global outsourcing market. Moreover, both China and India will also have to deal with the mounting competition from other low cost countries such as Russia, Philippines, Ireland, and Israel.

 

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