The influx of Indian outsourcing service providers that have set up camp in China has validated the latter's rising status as a key outsourcing market. But are local players feeling the heat? According to industry observers, however, the pie is set to grow even bigger.
These companies would be looking to serve the needs of multinational corporations that have expanded to China, said Eugene Wee, IDC's Asia-Pacific senior analyst for services. As such, their emergence could be perceived as a threat particularly to China-based outsourcing service providers that currently cater to the MNC market, he noted.
"The great majority of systems integrators (SIs) in China have their energies focused on servicing the domestic market, and will not feel the heat as much from foreign competitors such as those from India, the United States and Europe," he explained. "It is the larger SIs which are servicing MNCs in China that may feel the heat."
MNCs with long-standing relationships with a foreign service provider may choose to continue the affiliation when the latter establishes operations in China, Wee said.
However, John Cestar, CEO and co-founder of Freeborders, said the pie has just gotten bigger. The U.S.-based IT and applications developer set up operations in China in 2001.
Currently, "only a few companies" are capable of serving the "lucrative North American and European" markets--which India already serves--where MNCs require service providers with "English capabilities, strong management and experience", Cestar said.
"With India’s move into China, China's outsourcing industry has finally gained recognition and credibility," he said. "More knowledge will be passed on to the Chinese companies [which] will get better, and which will in turn bring in more business [for them]."
IDC's Wee agreed, noting that the trend presents an opportunity for Chinese service providers to "up their stakes and ramp up outsourcing capabilities as well as to get a better grasp of offshore delivery".
Local companies that are currently "doing well servicing local demand for application development" can also benefit from "spillover Indian business", given their lower-cost models, added Wee.
Players such as NCS, a Singapore-based systems integrator, are also unfazed by the competition from Indian outsourcing companies. NCS has offices and operations in various Chinese cities including business hubs Shanghai and Suzhou, Beijing and Chengdu.
NCS CEO Chong Yoke Sin told ZDNet Asia that as user demand grows, the service provider is increasingly looking at "more inland" cities such as Fuzhou, Chongqing and
those within the Guangzhou province.
Chong added that NCS also leverages on its relationships with MNCs in Singapore, bringing the trust it has built with these customers in the island-state over to China.
Investments that the Chinese government have poured into infrastructure and education are also paying off and helped attract foreign outsourcers, according to the industry players. In addition, laws concerning data protection and intellectual property have been tightened.
"The Chinese government is wholeheartedly supporting the growth of this industry--their education system is structured to deliver high-level engineers annually," said Freeborders' Cestar. For example, he said, the Chinese government recently sponsored 1,000 Chinese project engineers for a training stint in India.
"We are well aware that the Chinese government has made tougher data protection a priority," added Cestar. "They know a huge opportunity is at stake. They've raised the bar on punishments and punishable offenses."
NCS's Chong said: "People think that the Chinese don't speak good English, but that's not the case anymore… increasingly you will find that this gap is closing. China's [local] universities [are capable of teaching] very good standards of English."
According to Cestar, as more and more foreign outsourcers such as those from India enter the Chinese market, local companies would increasingly adhere to international standards in project management such as the Capability Maturity Model Integration (CMMI). The model is a set of best practices that addresses areas in a product's lifecycle, including product development and maintenance.
That adherence, he noted, would lessen a company's "initial apprehension of using [services from] China".
There will also be "some degree of consolidation" among local companies, he noted. "China already has thousands of local players in this segment of the IT industry," he explained. "What we’re seeing now is a number of local players trying to consolidate and acquire smaller companies to appear bigger."
Rising wages will not be a problem for China as it currently is for India, even as the demand for outsourcing work increases, Chong said.
She cited reasons such as China's large number of universities, its supply of skilled labor as well as the ready pool of foreign talent eager to enter the Chinese market.
"In India, people have propensity to travel out of the market and relocate elsewhere…[while] people want to be in China," she said, adding that NCS has no qualms hiring local people in China.
While the Chinese market offers foreign outsourcers cost advantages, Chong cautioned that there is a "need to bring value" to survive in the long term.
She noted that local companies may already be competent in areas such as application development, but foreign outsourcing service providers have expertise in business process outsourcing (BPO) services and corporate transformation. This would give them an edge over their Chinese counterparts.
"Chinese companies traditionally will not pay for such services," Chong said. "But you have to have these services first, as part of your DNA, in order to survive.