Insights into China’s Bid to Compete with India in Outsourcing and Offshoring: Critical Success Factors, Major Areas of Competition, and Barriers
Two decades ago, one may not have imagined that India and China would become stiff competitors in the outsourcing and offshoring sector. For many years, India has maintained its position as the dominant nation in the outsourcing sector, with a remarkable reputation in the service industry. With its deep connections in Europe and other Asian countries, India has managed to attract a larger market for its services, thus gaining a competitive advantage against new market entrants. However, in recent times, China has been making significant steps in the sector, intending to overtake India’s position in the market. While China has a developed infrastructure, large pool of talent, large geographical scale, outstanding manufacturing processes, government support, and diverse language skills among its population, which it can capitalize on, the nation may need to thrive through the major areas of competition and overcome barriers linked to its demographic policies, language capabilities, and global relationships to compete with India in the outsourcing and offshoring industry successfully.
India’s Outsourcing Sector
India ranks among the leading outsourcing countries in the world, after some Western nations. By 2008, the nation had six of the world’s top outsourcing destinations (Mehta et al. 140). This made it an attractive region for global investors and multinational companies. The country’s outsourcing sector has its roots in information technology (IT), which has been its main source of competitiveness. Findings from the research reveal that India has been a superpower in the field of IT, sourcing its services to multinational companies such as Microsoft, Oracle, General Motors, and United Airlines (Mehta et al. 139). Undoubtedly, information technology has become a key component in most organizations, and with the numerous changes that occur in the field of IT, majority of the corporations opt to source services from leading global outsourcing hubs such as India.
In terms of value, India has also managed to maintain consistency in the market, thus experiencing a steady growth in its outsourcing industry. By 2008, the country’s outsourcing sector was valued at approximately $52 billion, a higher value than its competitors (Menta et al. 141). Despite multiple external factors, such as the introduction of abrasive legislations in some European countries, India has made remarkable progress in enhancing its outsourcing sector. For instance, the country’s IT service exports grew from US$5.9 billion in 2001 to US$495.2 billion in 2013 (Chen et al. 72). In addition, in financial year 2017-2018, the country’s outsourcing sector accounted for approximately 55% of the market share of the US$185-190 billion global services sourcing business (“IT & ITeS”). Through its skilled workforce and several outsourcing destinations located within the country, India has managed to serve a significant fraction of the global sourcing market, contributing to a steady growth in its outsourcing industry.
China’s Outsourcing Sector
Unlike India, which relies heavily on the service industry, China’s interest in outsourcing has been in both the manufacturing and service industries. Research shows that by 2007, $15.2 billion of services were outsourced to China (Mehta et al. 141). Some services are often sought by nations neighbor China, while others are utilized in European countries. In addition, studies show that during the same period, information technology services accounted for approximately 60% of the country’s outsourcing business (Mehta et al. 142). In recent years, the worth of outsourced IT services has increased, with the country experiencing a steady growth from US$0.46 billion in 2001 to US$15.4 billion in 2013 (Chen et al. 72). Current reports by the country’s ministry of commerce also show that total service-outsourcing executive contract value increased by 9.7% to US$40.8 billion at the beginning of 2015 (Yi et al. 393). The above statistics show that China is increasingly capitalizing on its IT sector in order to maintain a better position in the service outsourcing sector.
Based on the above statistics, it is clear that China is making significant steps to compete with India in the outsourcing and offshoring sector. Just like India, the country’s outsourced IT services are increasing becoming steady over the years, posing a potential threat to the former’s position in the outsourcing space. Notably, how the country’s value of outsourced services and manufactured goods have grown relative to India’s services is promising, considering that the latter’s suppliers have been in the market for a longer time. To understand the remarkable steps China has made in the industry, it is important to analyze some of the critical success factors at the country’s disposal.
Critical Success Factors
One of the essential factors of success for China’s outsourcing industry is the state of its infrastructure, which differs from the one in India. As noted by Zarella, infrastructure, in the form of telecommunications and transportation, is a critical element of attracting investors and multinationals. Arguably, countries with well-developed infrastructure have a higher chance of being target destinations for outsourcing because contractors value convenience in service delivery. Fortunately, China has an outstanding infrastructure. As noted by Kanungo, the country’s telecommunication industry is currently the fastest growing sectors across the globe, allowing China to remain connected with the rest of the world (65). Zarella adds that China’s government is investing heavily in modernizing the telecommunication network with broadband connections across different cities. Through its improved system of communication, China’s vendors can maintain constant connections with global companies, thus building stronger and longer-lasting business relationships. Furthermore, the country’s transport network has been a center of attraction for multinational firms that wish to relocate their business processes in the country, making it a critical success factor for the country.
Contrarily, India has a less developed infrastructure compared to China. Studies show that while China chose to follow the path of the fast-growing economies of building an impressive infrastructure, India opted to focus on the redistribution of wealth (Kim and Nangia 98). Therefore, up to date, the country’s transport and telecommunication network lag behind the system of nations that chose growth. The varying nature of India’s and China’s infrastructure acts as a critical success factor to the latter since corporations may be more willing to outsource from a country with a well-developed infrastructure for convenience in accessing products and maintaining a secure supply chain connection through telecommunication.
China’s large size is also a critical success factor for its outsourcing industry. Zarella observes that today, a significant fraction of organizations prefers to outsource in centers located in different parts of the country as a strategy of mitigation against social, economic, and political risks. For instance, if services from one supplier are constrained by social risks such as labor strikes, an organization with a diverse portfolio of contractors can source from an alternative supplier whose activities are not affected by similar risks. As a country, China is large in geographical area and population. Based on its geographic scale, the country has had the capacity to establish multiple outsourcing centers to meet the growing demand for IT services and manufactured products from neighboring countries. For instance, by 2007, the country had four major outsourcing destinations; Shanghai, Beijing, Shenzhen, and Dalian (Menta et al. 141). This may have been relatively lower compared to its rival country, India, which had six of the largest outsourcing destinations across the world (Menta et al. 139). However, due to its large scale, China has been in a position to increase its outsourcing destinations, aggregating to 24 cities and over 9000 service providers in 2010 (Zarella). In light of its large scale and growing capacity of outsourcing destinations, China is seemingly becoming a point of attraction for multinational companies that prefer a diverse portfolio of outsourcing centers, which is a crucial success factor in its bid to compete with India in outsourcing and offshoring.
A Growing Pool of Talent
Among the key drivers of outsourcing is gaining access to a wide range of skilled and competent workforce. Studies show that in the face of globalization, most companies prefer working with vendors to obtain the required skill sets rather than spending time and money on training employees to acquire new knowledge and occupational capabilities (Patil and Y.S Patil 407). With the current changes in technology, it is essential for organizations that wish to remain competitive to retain a competent workforce that is conversant with new technologies. Hence, countries that outsource talent are becoming popular among multinational companies.
Undeniably, China’s growing talent pool is a critical success factor in its bid to compete with India in outsourcing and offshoring because the nation is better positioned to meet the growing demand for outsourced labor among multinational companies. Zurella notes that over the years, China has recorded a large population of graduates who provide workforce in the industries. Notably, it is observed that the proportion of China’s population in possession of college education increased from 6.1% in 1980 to 28.8% in 2015 (Li 27). One of the factors that have facilitated growth in the pool of talent in the country is the government’s initiative to restore its education system since 1976, a process that is said to have raised the average years of schooling for adult labor force to 9.6 years; thus, providing adequate time for students to be prepared for the job market (Li 27). The above trend is an arsenal of the country since most graduates are a competent source of workforce for IT companies and other manufacturing companies that source services and goods in other countries.
In addition to its infrastructure, scale, and pool of talent, availability of diverse language skills is also a critical success factor in China’s attempt to develop prominence in the outsourcing industry. As mentioned earlier, China’s government has made significant steps to establish reforms in the education system to ensure that the country benefits economically from the skilled workforce. In particular, the current administration has been energetically renewing investment in promoting learning languages other than English (LOTEs) (Gao and Zheng 556). This implies that in addition to English, schools are encouraged to adopt a curriculum incorporating other linguistics, such as French, German and Spanish. Thus, this measure has been implemented across all levels of education to promote multilingualism among students.
Evidently, the above efforts by the government act as a success factor for China’s outsourcing industry, as communication is a key factor in outsourcing. As observed by Kalinzi, communication between logistics users and providers is important in outsourcing, especially where firms need to specify their role and responsibilities in the contract (12). Besides, the outsourcing sector is characterized by diverse stakeholders, some of whom are non-English speakers. Therefore, vendors wishing to remain competitive in the outsourcing industry should have outstanding communication skills. The effort by China’s government to promote multilingualism in the country is of significance as it equips its workforce with the essential language skills required to interact with multinational companies in the industry. By capitalizing on diverse language skills among its population, China has a better chance of gaining a competitive advantage against India and becoming a dominant outsourcing country in Asia.
China’s geographical position in Asia is also a critical success factor for its participation in the outsourcing industry. An analysis of the Southeast Asia region shows that China neighbors Korea while it shares a maritime border with Japan. One of the common characteristics between Korea and Japan is the nature of their demography. Studies show that Japan has a declining rate of fertility and an increasing rate of the aging population with 2010 reports indicating that the older adults account for approximately 22.8% of the total population (Usman and Tomimoto 1). These statistics may significantly affect the country’s economy as a younger and energetic population is required to provide labor in the manufacturing and service industries. A similar trend is prevalent in Korea, a nation where the rate of aging population is expected to accelerate rapidly in the next few decades (Kwak 1270). Just like Japan, Korea’s demographic structure is likely to limit the capacity of the country’s workforce.
While the above data may concern policymakers in Korea and Japan, it is a source of competitive advantage in China. Evidently, some of the companies in the two countries may experience a shortage in human resources, given the nature of their demography and opt to outsource workforce. With its close proximity, China may be the most attractive destination for outsourcing such resources. In fact, Zurella states that for the past few years, Korea and Japan have been tapping into the workforce of other countries, including India, the Philippines, and Malaysia. Fortunately, China may be more competitive in the above scenario given that it has a closer geographical border and stronger ties with Korea and Japan. Besides, the country has a well-developed infrastructure compared to India; thus, it would be more attractive to Korea’s and Japan’s companies. Therefore, China’s geographical location in Southeast Asia is a critical source of success, which can be used as a resource in its bid to compete with India in the outsourcing and offshoring industry.
Prominent Manufacturing Processes
China’s manufacturing process is also a vital source of success in its bid to compete with India in outsourcing and offshoring. Compared to India, China’s manufacturing processes are more advanced and capable of meeting the demand for goods from other countries. In fact, studies show that in the past few decades, China “has moved up the ladder of manufacturing industries from low-tech to high-tech” (Wei and Balasubramanyam 2). The country appears to be investing heavily on improved processes of production in order to meet the growing demand in its domestic market and exports. On the other hand, India’s manufacturing sector is mostly occupied my several smaller firms that are less labour-intensive (Wei and Balasubramanyam 2). Although India has invested in its IT sector, the rest of the manufacturing industry is low on capital-intensive technologies. Therefore, it is evident that China has a comparative advantage over India in manufacturing processes, an area that it ought to capitalize on whist competing with the country in outsourcing.
Low-wage labor in China is also a source of competitive advantage for the country in the outsourcing industry. Studies show that one of the key drivers for outsourcing is maintaining a competitive edge in the market by gaining access to low-cost countries (Patil and Patil Y.S 408). Most organizations today focus on reducing operating costs and maximizing revenue and profit generation. Hence, to achieve this, managements opt to source for relatively cheaper labor from other countries. While India was initially a low-cost nation, it has slowly been overtaken by China due to its escalating rate of salaries (Patil and Patil Y.S 408). Wei and Balasubramanyam observe that China has a steady supply of cheap labor for domestic and foreign employers to hire (2). As such, China is seemingly becoming an attractive destination for outsourcing cheap labor among multinational companies compared to India, which is slowly losing the competitive edge in this area. Low-wage labor is a critical factor of success that may boost China’s position in the outsourcing industry and potentially aid its competitiveness against India in the next few years.
The tremendous support that China’s outsourcing industry receives from the government is also a point of success in its attempt to compete with India. Studies show that compared to India, China’s growth is pillared against strong government-oriented development path (Chen et al. 75). The country’s political leadership is significantly involved in the growth and development of domestic industries. Putting it into perspective, China’s government has been making plans to enhance service outsourcing industry. As noted by Zurella, the government has been developing initiatives to train service outsourcing professionals to serve in the country’s outsourcing industry. The author also adds that direct financial support is offered to vendors involved in outsourcing through tax incentives (Zurella). With tax incentives and other forms of financial support offered by the administration, China’s suppliers can easily offer competitive prices in the market. Based on the above information, it is evident that government’s involvement in the industry is a success factor that differentiates China from India, which will boost its rising potential to compete against its counterpart.
Major Areas of Competition
Although China possesses the above mentioned critical factors that facilitate its potential to compete against India, the outsourcing industry of the two countries is shaped by some similar factors which act as major areas of competition. One such factor is the nature and size of their population. Studies show that both countries have a large population in Southeast Asia (Chen et al. 72). Therefore, one country cannot boast over possession of a larger workforce for its manufacturing and service outsourcing industry. The above similarity acts as a major area of competition; thus, each nation thrives to enhance the skill sets of its workforce in order to remain outstanding in the outsourcing industry.
The two countries’ geographical location also acts as a major area of competition. As mentioned earlier, China’s close proximity to South Korea and Japan is a source of competitive advantage because vendors have the opportunity to satisfy the growing demand for outsourced skilled labor from the country. However, one cannot overlook the fact that India is also a potential destination for outsourcing based on its geographical location in the region. Besides, as discussed earlier, the majority of the companies prefer to diversify their portfolio to mitigate operations against potential risks that may arise during outsourcing (Zurella). Therefore, organizations in the Asian region may outsource in countries that are easily accessible and close in location for convenience, including China and India. Furthermore, Zurella acknowledges that companies increasingly prefer global sourcing from India and China. Therefore, the fact that India and China are located in the same region is a major area of competition because both countries are potential outsourcing destinations for neighboring nations. As such, for one country to enhance its attractiveness in the market, it ought to capitalize on the resources that are lacking in its counterpart.
China and India’s decision to venture in the IT outsourcing industry is also a major area of competition between the two countries. As studies show, India has for years been recognized as the superpower in the development of IT, meeting the outsourcing demands of information technology among multiple European countries (Mehta et al. 139). Therefore, India has had the privilege of serving the IT outsourcing industry without stiff rivalry from new entrants. However, as noted by Zurella, the IT, business process, and knowledge process outsourcing functions have been emerging simultaneously in China. Mehta et al. also adds that in 2007, IT services accounted for nearly 60% of China’s outsourcing business (142). China has steadily been moving towards software development, an area that was initially occupied by Indians. The above statistics prove that China has the potential to penetrate the IT outsourcing industry viably; thus, posing a great threat to India’s position in the IT space. The fact that both countries have a common interest in the IT outsourcing sector is a major area of competition because both nations have an equal potential to satisfy the growing demand for upgraded IT functions among multinational companies operating within Asia and the rest of the world.
Apart from such similarities in geographical location and interest in the IT outsourcing industry, the two countries’ economic development is also a key area of competition. As noted by Chen et al., India has a highly developed service and agricultural industry, which boosts the country’s economy (73). Similarly, the author acknowledges that China’s industries are growing at a faster speed, thus being major facilitators of the country’s economy (Chen et al. 73). In the presence of a highly developed economy, India has the potential to satisfy the growing demand in the outsourcing industry, since it can easily finance its service sector. Similarly, China’s growing economy has the potential to support its outsourcing industry. The fact that the economy of the two nations is seemingly at per implies that they are both greatly competitive in the industry.
While China has the potential to invest in its unique capabilities, such as infrastructure, diverse language skills, and government support, to gain a competitive edge against India in their major areas of competition, multiple barriers remain, which may hinder its journey to becoming the latter’s great rival. An example of such impediments is the country’s demographic policies. China’s government introduced the one-child policy, which governs the number of children each household should have, enforcing a penalty on individuals exceeding the birth quota (Zhang 141). Notably, the above policy of controlling births in the country encourages each family to have a maximum of one child. While policy makers view this as an effective way of controlling its growing population, it may eventually adversely affect the country’s workforce. Notably, China requires a large pool of talented individuals to serve in the service outsourcing industry and domestic companies that export goods to other countries. However, the above-mentioned demographic policy may limit the number of people available for hiring by domestic and foreign companies, thus hindering its bid to compete against India in the outsourcing industry.
Furthermore, although China’s government is developing initiatives to ensure that its population is equipped with diverse language skills, a large fraction of its residents still experience difficulties speaking English, which may hinder its success in the outsourcing industry. For instance, studies conducted in China revealed that multiple groups in the country experienced challenges in speaking English, including university students from mainland China and Hongkong (Gan 231). The fact that the majority of the population cannot speak English implies that English speakers are rare in the country. As such, the nation’s service outsourcing industry may be subject to several communication challenges that arise from a lack of diverse language skills. For instance, contracting companies may not have a well-equipped human resource that can interact with companies from European countries to establish contractual deals. As mentioned earlier, such communication is vital, as it facilitates success in deals and strengthens working relationships between logistic users and contracting companies (Kalinzi 12). Therefore, a vendor who lacks effective communication systems can easily lose supply deals. Besides, the available population of English speakers may develop multiple work-related demands, including increased wages, making China a less attractive outsourcing destination for companies that seek cheap labor.
China’s changing population pattern towards an ageing population may also be a barrier in its attempt to overtake India in the outsourcing industry. Studies conducted by the United Nations reveal that by 2050, the country’s population of people aged 65 and above will reach 40 million (Xiaolong and Say 313). This trend may significantly affect the country’s economy because few energetic people will be available to work in the manufacturing and service sector. In fact, with the growing popularity of the one-child policy, the situation may be worse as the country may record a higher age dependency ratio. Although the country is well-positioned to meet the growing demand for outsourcing services in Japan and Korea, this may not be achieved in the presence of an ageing population.
China’s negative relationship with some Western countries is also a potential barrier for its bid to compete with India in the outsourcing sector. Evidence points to the fact that India has been in the industry for long; thus, the country has deep connections with its partners from the United States and other European countries (Mehta et al. 140). On the other hand, China’s focus mainly lies in enhancing its domestic market and developing close ties with neighboring countries such as Japan and Korea. With the current trade wars between China and potential outsourcing nations such as the United States, it may be difficult for the country to compete effectively with India in the industry, as the latter has stronger ties in the global market.
Overall, China’s bid to compete with India in the outsourcing industry is facilitated by multiple success factors. As evidence shows, the country has a well-developed infrastructure, a growing pool of talent, sizeable geographical scale, outstanding manufacturing processes, government support, and diverse language skills among its population, which are critical success factors for its participation in the sector. However, research also shows that both countries have similarities in demography, geographical location, and economic growth, which act as significant areas of competition. In addition, it is clear that the attempt to challenge India’ position in the outsourcing space may be hindered by multiple factors, including the country’s demographic policies, its aging population, and negative relationship with potential outsourcing nations such as the United States. Therefore, for China to effectively compete with India, it ought to capitalize on its unique capabilities, thrive through the major areas of competition, and overcome all potential barriers.
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