Will China be the next outsourcing hotspot

Doug Young

GUANGZHOU: Sharon is at her desk when an order arrives by e-mail from a client of Norwegian shipping firm Torvald Klaveness Group (TKG).

She opens a file in her computer, types the order into a form, then submits it and sits back to await the next order.

The scene could be taking place in an office in Norway, but Sharon's last name is Fung and her office is in downtown Guangzhou, the capital of south China's Guangdong province.

"Sometimes it can be a little tedious," admits Fung, who has worked on the account for 2 years. "But there's no big difference between (doing the work in) China and Norway."

Fung works exclusively for TKG, but her actual employer is Capgemini SA, Europe's largest IT services group. Its office in Guangzhou also handles work for the likes of LG, Philips Displays, the world's biggest TV tube maker, and Dairy Farm International Holdings Ltd., the Hong Kong franchisee for 7-11 and Starbucks.

Capgemini is among an initial wave of firms that have set up China outsourcing centres for everything from back office work like accounting and data input, to call centres and information technology services like software design and system integration.

INFLECTION POINT

"Outsourcing in China is a very substantial phenomenon at this point," said Tom Manning, a director at consultant Bain & Co.

"I think 2005 will reflect an inflection point in the sense of both acceptance of China as a source of outsourced services and a maturing of China as a provider of such services," he said.

Capgemini opened its Guangzhou centre in 2001. Tom Reilly, chief executive of the firm's Asia business services unit, said the company would nearly quadruple its staff to 1,000 by the end of next year.

China has lured outsourcing firms eyeing alternative centres such as India with its recently built infrastructure, which includes advanced telecoms systems, roads, and state-of-the-art airports with direct links to the West.

Major drawbacks still exist, with language and a shortage of qualified workers often cited as the biggest problems. Despite those issues, however, many predict that China could soon become the world's next big outsourcing hotspot.

China was listed as the third-best country for growth opportunities by both outsourcing buyers and suppliers, behind only the United States and India, according to a recent survey on IT outsourcing by DiamondCluster International.

Despite that bullish outlook, less than 10 percent of providers in the survey and none of the buyers were actually involved in China outsourcing yet.

"We believe that buyers and providers alike are taking a wait-and-see attitude with respect to China," the study's authors wrote. "There is a widespread agreement on the inherent potential of such a large and growing economy."

Communication is one of the biggest lingering concerns, in a country where many often study English in school but have little or no proficiency in the spoken language.

TRADE OFF

"Language is more of an issue in China than in India, but it's not impacting our ability to do work there," said Craig Franklin, executive vice president of global technology services at outsourcing firm BearingPoint.

"The flip side is the infrastructure in China is better than that in India, so there is a trade-off between these two."

BearingPoint has opened centres in Shanghai and the northeastern city of Dalian in the last 18 months and plans to expand its staff to as much as 2,000 from 550 in the near term.

Such demand for staff means retaining employees is becoming a problem, a complaint often heard in India, said Fang Liang, Asia president for software development outsourcing firm Freeborders.

Two-year-old Freeborders, in the city of Shenzhen next to Hong Kong, planned to nearly triple its staff to as high as 500 next year.

Its clients include retailers such as Target Corp., J. Crew and Dillards. A recently won contract with NextJump, a provider of services to retailers, is expected to bring in up to $3 million over 18 months, Liang said.

But the staffing problem is a threat.

"We have been feeling pressure since August," Liang said. "Good people are getting harder to find, salaries are getting higher."

(Additional reporting by Wei Gu in New York)