Chinese outsource domination a mirage?
October 27, 2009
A new report out this week by global consultancy McKinsey & Co, Destination: China, A Perspective on the Offshoring and Outsourcing Industry maintains that while China has made tremendous leaps in terms of software development in recent years, it can’t realize its ambition of becoming the leading global offshore-outsourcing destination anytime soon, predict industry watchers. Out of a total of $80 billion worldwide revenues for providers of offshore services in business and technology, India leads by a wide margin, garnering $58 billion — a market share of over 70%.
In contrast, China currently accounts for less than 10% of the global $60bn market for offshore-outsourcing of IT services. And when you dig deeper you realize that four of the top ten Chinese IT service providers have grown only by 15% to 20% over the past five years, compared to the impressive 30% to 40% per annum logged by India’s top four offshore-outsourcers. The report says:
“According to more conservative estimates, the total global market for offshoring and outsourcing could exceed $160 billion by 2012. If China aspires to be a clear number two player by then, it will need about 20 per cent market share, or roughly $30 billion in industry revenues. Reaching this level would require growing the industry more than five-fold over the next four years.”
This indicates that instead of closing, the gap between India and China is widening.
McKinsey attributes this to the fragmented nature of the Chinese IT services industry; the lack of a single domestic player of any significant scale or market presence of the scale of one TCS, Infosys or Wipro; the perception that China is more a hardware hub than a software developer; continuing concerns about intellectual property protection under Chinese norms, and shortage of qualified local administrators to manage an offshore project.
McKinsey’s recommendation to Chinese companies is to gradually move up the IT services value chain, to increase their investment in R&D, and expand their global footprint through smart M&A activity.
The bottom line is that McKinsey is very bullish about offshore outsourcing in general and India in particular, but with a rider. Both India and China will have to meanwhile clean their act and improve on the quality parameter, as that’s where a lack of global benchmarking is seriously pinching them, says IT-watcher Rajan Chandras in his September 2, 2009 post.
For a detailed report on China’s future potential on ITO and BPO read the research report titled
“Enter the Dragon: China’s Potential as a Global IT Services and Outsourcing Leader”