Thanks to the visionary leadership of its legendary CEO Jack Welch, GE was at the forefront of multinational companies that turned to outsourcing in low-wage nations for everything from developing software to processing insurance claims. While GE’s trend-setting move in the mid- 1990s to establish an offshore base in India seems like ancient history now, the company continues to be at the leading edge of strategic outsourcing. At a time when budget-cutting is fueling the shift of more work to emerging markets and decision making in this critical area is becoming more complex, GE is one of a growing number of multinational corporations now looking beyond India for their off shoring needs.
The company’s financial services business, GE Capital, for instance, is using multiple locations to serve its growing outsourcing needs. India still attracts the bulk of the Fairfield, Conn.-based division’s offshore work, contracts for such jobs as administering mortgage refinance documents, but today, China handles 20 percent of GE Capital’s outsourced contracts, up from five percent just three years ago.
“For a big global company like ours, it is risky to rely on one country. We need to have back-up plans and China is one of the best options for us,” says Zhu YeQing, director of information technology vendor management at GE Capital. And multiple vendors, too. In China, it relies on eight vendors, requiring that each undergo a rigorous review of standards.
Using multiple locations for outsourcing work is a risk-management trend among astute multinationals like GE. While India’s market share of globally outsourced services towers at 70 percent, its growing pains with infrastructure and inflation have led executives to look elsewhere.
China is narrowing the gap with India on multiple fronts: cost, talent, improving telecommunications and business infrastructure, according to a survey by Gartner. But tensions over trade imbalances and float of the Chinese currency, coupled with policy differences over the Dalai Lama, have made CEOs feel unwelcome in China, according to a survey by the American Chamber of Commerce in China. A Chinese government dispute with Google over Internet censorship in China hasn’t helped, with the search giant opting in late March to exit the market. Intellectual property protection and bribery issues add to the concerns.
Still, an index compiled by A.T. Kearney on global service locations ranks China as a popular alternative to India, and points to the Philippines and Malaysia as increasingly attractive as well. China’s growing stature in the outsourcing market could reach a tipping point as English-language proficiency improves and China’s vast number of well-trained engineer’s measure up to India’s world-class talent pool. “China is well-positioned to ride the next wave of off shoring,” notes John Wharton, a technology equity analyst with Oppenheimer & Co.
Under continued pressures to cut costs, CEOs are mindful that smart outsourcing can not only stretch budgets but provide an edge with quality work and technological expertise. Despite growing protectionism in the U.S. over job loss, the outsourcing trend is unstoppable. India’s industry association NASSCOM pegged the country’s total outsourcing market at $60 billion in 2009, and forecasts a growth rate of 16 to 17 percent.
CEOs, although initially relying on partners overseas for business processing, have increasingly turned to them for more sophisticated work, including R&D and IT. Today, corporate managers are tapping vendors that can do it all, from processing paperwork to more complex pharmaceutical R&D assignments, engineering and IT development. Just eight years ago, only 10 percent of multinational companies had software development and other IT work performed abroad. By 2008, 70 percent of multinationals had joined the outsourcing parade, according to Gartner.
The export-driven manufacturing base of China’s economy has hardly been known for outsourcing services. But while in its infancy compared to India, the Chinese market is evolving quickly as leaders shift the economy to a strong services base and become a player in high technology as part of the government’s eleventh five-year plan. Nearly two-thirds of China’s outsourcing contracts are for IT, according to Chinese government statistics, while the remainder is for business processes – the traditional stronghold of India.
“There is tremendous opportunity for China to engage in outsourcing,” asserts Ronald Schramm, a professor at Columbia University and CEO of China Macro Finance. “This falls in line with China’s transition from being an export-driven economy to one based more on consumption, services and higher-end production.”
Developing prominence in outsourcing is stage one of China’s master plan to spend $110 billion on R&D by 2020 and become a world leader in science and technology. China claims a small fraction of innovations globally today, but no country in the world has seen a faster climb up the ladder. In just four years, China has risen to fifth in the world for new patent applications, up from tenth, according to the World Intellectual Property Organization.
China claims a small fraction of innovations globally today, but no country in the world has seen a faster climb up the ladder.
R&D by 2020 and become a world leader in science and technology. China claims a small fraction of innovations globally today, but no country in the world has seen a faster climb up the ladder. In just four years, China has risen to fifth in the world for new patent applications, up from tenth, according to the World Intellectual Property Organization.
David Chao, co-founder and general partner at venture investment firm DCM, predicts that China’s growing status as an innovator will slice into America’s 90 percent share of technological advance in the Internet, mobile communications and software. In only about a decade or so, “China will see the likes of Steve Jobs or Bill Gates,” he says.
Indeed, as China rises and the 2008 economic stimulus incentives kick in, its government and business leaders are pushing to become the outsourcing hub for the world – and, importantly, a source of non-polluting jobs in urban areas. The model is India and its outsourcing market that took root in the mid-1980s and flourished with the growing maturity of Bangalore’s Infosys Technologies and Wipro, and their public listing on U.S. exchanges.
China began developing its outsourcing business in the mid-1990s. By 2009, China’s Ministry of Information and Industry had pegged the country’s outsourcing market at $25 billion, up 25 percent from the year before. Research group IDC forecasts that China’s outsourcing will grow by 30 percent annually over the next three years. China already has its share of internationally recognized up-and comers, among them Beijing-based Vance Info Technologies, a 10-yearold company that listed on the NYSE in late 2007 and counts $103million in revenues, nearly 6,000 employees and multinational corporate customers that include IBM, Hewlett- Packard and Microsoft. CEO Chris Chen has proclaimed that he wants Vance Info to be “the biggest outsourcing company in the world.”
Reaching toward its long-term vision of moving up the value chain from manufacturing to services and high tech, the Chinese government has crafted an ambitious long-term plan. In 2006, officials unveiled a $1 billion program that earmarked 10 Chinese cities as outsourcing bases and provided incentives, tax breaks and subsidies to further develop capabilities of the country’s 1,000 outsourcing vendors to serve multinational customers. A key goal is to create 1.2 million jobs by 2013, according to China’s Ministry of Commerce. “It’s remarkable how fast the vision is becoming a reality,” says Egidio Zarella, head of KPMG China’s IT advisory in Hong Kong.
For Western CEOs, China can present a bewildering array of options. Not only do pricing and skills need to be evaluated, but they are confronted with a highly fragmented Chinese market with as many 3,000 specialized outsourcing players spread out nationwide – with consolidation underway.
Unlike India, where outsourcing is anchored in Bangalore and Delhi, China’s outsourcing hubs range from Dalian and Hangzhou to Chengdu and Nanjing, as well as Shanghai and Beijing. Municipalities in China compete hard for contracts from multinationals. With so many voices and factors to weigh, decision-making can be tough. An industry association that is forming in China thanks to spearheading efforts by KPMG and Roc Yang, chairman of outsourcing specialist firm China Data Group, could make the task easier.
China’s Offshore Pioneers
Some CEOs aren’t waiting. Chuck Zhu, CEO and founder of NJ PharmaTech, recently decided to use Nanjing as his company’s R&D base. Officials courted him by promising to make their city the San Diego-like biotech hub of China. Zhu recently moved there from New Jersey to set up a captive operation to handle contract research for drug development. His office in a sprawling modern software park is not far from Nanjing University’s School of Medicine and other campuses. He jokes that the “NJ” in his company’s name is meant to signify either Nanjing or New Jersey. Government officials welcomed the company in May 2009with a ceremony that included guests from Goldman Sachs and AIG in New York.
Meanwhile in Hangzhou, Deputy Mayor Tong Guili hosts welcoming dinners for foreign executives in a bid to attract more business to the city, known for its scenic West Lake and as home of China’s leading Internet player, Alibaba Group. The Boston based financial firm State Street has long called Hangzhou, a two-hour drive southeast from Shanghai, its China home. The company took a small R&D facility and turned it into a full-fledged technology center, under the direction of Boston-based vice president of IT, Albert Ma.
The Chinese center started out as a project for computer science graduate students at nearby Zhejiang University. But later, working with publicly listed Chinese software company Insigma, State Street formed a subsidiary called Universe Soft (purchased by State Street in 2006) that hired former students who had worked on its projects.
![]() |
China is narrowing the gap with India on multiple fronts: cost advantages, favorable government policies, qualified talent, rapidly improving telecommunications and business infrastructure.
The company has achieved 25 percent savings in labor costs and a strengthened position in the local marketplace from the operation, plus being able to re-engineer systems and applications at the center at less than 2 percent of the cost of replacing them. Today, the bank’s information technology workers in China make up 10 percent of its total IT staff. |
Likewise, Paris-based Publicis Groupe, the worldwide public relations and ad agency, has gained cost savings with a unit it set up in 2006 in Guangzhou to handle insurance, procurement, IT, real estate and legal services in China and Hong Kong. The result has been standardized and simplified administrative processes.
“We are happy with this model,” says Eric Cheung, managing director of Public is China. “Though our service center, we are able to reduce administrative costs for our brands, which will improve their financial results and competitive position.”
Keeping close tabs, the CFO of Publicis works with the service center, and the center’s processes are transparent to the business unit. As a further check, Publicis separates procedures for processing the transactions and approving them. Quarterly meetings are held to get feedback on improvements and each department focuses on a single process, such as accounts payable.
Not all Chinese outsourcing companies are going after business from the West – at least not initially. China’s largest outsourcing company, Neusoft, has ramped up to $540million in 2008 revenues and 15,000 employees since 1991 by focusing on China and Japan, including anchor client Alpine Electronics. Its 8,000 customers are in a broad range of fields, including telecom, healthcare and finance.
Led by former university professor Liu Jiren, the Shanghai-listed Neusoft is positioned to tap into China’s fast-emerging home grown market. Its sprawling headquarters in China’s northeastern city of Shenyang is a landmark for its mammoth scale, with landscaped acres filled with training institutes, design centers and R&D hubs that would look at home in Silicon Valley. Reflecting its aspiration to develop a higher profile globally, the Dalian regional headquarters stand castle-like high on a hill overlooking the sea.
“We think China will be our great opportunity for the next 20 years,” says CEO Jiren. “We hope to be five times bigger than today. But this is not just a dream. It is a reality. We are ready for this level of expansion.”
Rebecca Fannin is the author of Silicon Dragon – How China is Winning the Tech Race.