China facing challenges to catch India in outsourcing

On paper, China looks like as ideal of an outsourcing location as global leader India. With costs rising in India and other developing countries, you’d think China would be primed to take advantage, thanks to its seemingly endless labor pool.

While China’s outsourcing has seen some growth, there are many problems ahead if the country hopes to catch India in the global outsourcing market. China’s software and outsourcing sector grew 43 percent year-on-year in 2010 to reach $19.8 million, which accounted for 5.4 percent of the world’s total software and outsourcing market.

Thanks to such low labor costs and the support of the government, China’s software and outsourcing sector has grown roughly 40 percent each year for the past 10 years, but that could be coming to an end.

“It seems the golden age for the software and outsourcing industry is over,” Liu Jiren, chairman and CEO of Neusoft, China’s leading IT service provider, told ChinaDaily.com.

Operating costs have gone up at least 10 percent in each of the past two years, which is expected to slow outsourcing growth in China.

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Also hurting China’s attempts to narrow the gap with India in the global outsourcing arena is the fact that China is attempting to grow its outsourcing capabilities in over 20 cities nationwide. India, on the other hand, focuses its software development and outsourcing strength on just four major cities.

Michael Ye, vice president of Dalian Software Park, suggested an outsourcing system similar to India’s, with a software and outsourcing hub in each of the country’s five main regions.

China has tried to do everything bigger, playing on the country’s unparalleled population, and the outsourcing business is no different. But until China’s leaders realize that bigger isn’t always better in outsourcing, expect India to remain out in front in outsourcing for years to come.