China
When China opened itself up to the world twenty years ago, many realized how its huge market of almost 1.3 billion consumers could impact the biggest manufacturers and retailers in the world. Few anticipated however, that China's large population base would also provide competitive advantages against the most dominant players in the outsourcing industry. China's current outsourcing market is growing an estimated 30 percent annually, and many countries have relocated their headquarters to China to establish businesses.
China and India are key players among the global sourcing industry. While it remains unlikely that it will overtake India's proven dominance completely, China is on track to usurp a significant segment of India’s outsourcing revenue in the future.
China has five major cities that provide the bulk of its sourcing services: Beijing; Chengdu; Shanghai, popularly known for providing product development, research and testing, and business analytics; Shenzhen, specializing in software, application maintenance and development; and Guangzhou, known for its engineering services. Its software outsourcing park is located in Dalian, with around 400 businesses that are expected to increase sales to 20 billion Yuan annually. Dalian is often compared with Bangalore in India. Presently, it is a part of the country’s eleven "National Software Industry Bases" and "National Software Export Bases."
China’s primary specializations include manufacturing, finance, services, health care, and government/education. China is mostly involved in the KPO, ITO, and BPO sectors, with investors like Convergys, Accenture, IBM, HP, and AT&T establishing their niches in different locations. There are also local providers that have become global players in the industry, such as Neusoft, Dextrys, Bleum, and Agumentum.
The recession has boosted China’s service industry, including its sourcing market. The Chinese government has made significant policy changes to extend this advantage, such as offering businesses financial support, subsidies, tax breaks, and intellectual property protection rights in twenty pilot cities; Hangzhou, Suzhou, Xian, Shanghai, and Beijing being among them.
Country overview
China, with the largest population in the world, once was home to the most advanced society, economy and sciences. It declined however during the 19th and 20th century due to famines, foreign invasion, civil discord, and military failures. China's economy was revived during Deng Xiaoping's reign in China; he focused on a free, market-oriented economic development that dramatically changed the living standards of its citizens. This also led to its rapid industrialization which made China one of the most important economies in the world and a "returning superpower."
China's economic growth is primarily concentrated on the public sector, non-government, and overseas investment. Its most dominant industries include the automobile industry, real estate, and IT. High growth is concentrated on the Bohai Sea rim, the Yangtze River Delta, and Zhujiang River Delta. Economic development in the coastal provinces were more rapid compared to the interior provinces, and more than 200 million rural laborers and their dependents have transferred to urban places to look for work. China's GDP has increased tenfold since 1978, and in 2009, China became the second biggest economy in the world after the US. However, the country's status still belongs in the low middle-income per capita when measured on a purchasing power parity. In 2009, the global crisis has lessened the demand for Chinese exports, making the country's economy vulnerable for the first time in many years. This has prompted the government to reform its economic policies and increase its domestic consumption to lessen the country's dependence on foreign exports.
Despite the economic success, China is facing major challenges including: environmental damage due to the rapid economic change of the country; high domestic savings rated and low domestic demand; corruption and legal economic violations and lack of adequate job growth for its migrants and new entrants to the workforce.
Source: CIA Factbook, 2009
Source: World Bank, 2009
Source: World Bank, 2009
Source: World Bank, 2009
Source: World Bank, 2009
Cost competitiveness
Employee compensation
Companies who want to hire software engineers can save up to 40% more can if they hire from Dalian, which is considered the software outsourcing center of China. Companies can also go to Jinan, with a few hours by train from Beijing. Junior software engineers or web developers with one to four years experience earn 23.46 percent to comparable resources to the US. Their average salary is 91,017 CYN or $13,8970 USD. Cities with the highest paying salaries include Beijing, Shanghai, and Shenzhen.
IT managers with 10-20 years of experience have salaries that are 49.6 percent of US resources, at USD $51,000. This figure is nearly double to the salaries in India.
Salaries in the Junior voice and non-voice resources under the BPO sector are typically 27 percent of their US counterparts. Highly-skilled BPO employees and those in the senior levels earn 52 percent of their US counterparts.
Customer service representatives in China earn on average 45%, or USD $10,468, comparatively to US rates. While the savings are sizeable, they are nearly impossible to compete with those in India, where representatives’ salaries are just seventeen percent of their US counterparts.
Real estate
Compared to the US, office occupancy costs in China are relatively high, especially the Grade A office markets situated in the country's key cities. For the first time since the recession, office rentals in Shanghai and Beijing have rebounded during the first quarter of 2010. A typical office rent per year costs around $47.50 USD per square foot, while it costs $31.80 USD to rent an office space in the suburbs.
Taxes
Corporate tax rates in the country are around 25 percent, with indirect tax rates amounting to 17 percent. In 2009, China implemented subsidies and tax rates to help the service outsourcing industry grow nationwide. Hangzhou, Suzhou, Xi'an, Shanghai, and Beijing are just some of the twenty cities that are eligible for these breaks, along with intellectual property rights protection and financial support.
Source: PayScale, SourcingLine, February 2010
Source: PayScale, Sourcingline, March 2010
Source: PayScale, Sourcingline, March 2010
Source: PayScale, Sourcingline, March 2010
Source: PayScale, Sourcingline, March 2010
Source: PayScale, Sourcingline, March 2010
Source: PayScale, Sourcingline, March 2010
Source: CB Richard Ellis, Colliers International, SourcingLine, March 2010
Source: Colliers International, SourcingLine, March 2010
Source: KPMG, October 2009
Source: KPMG, October 2009
Source: Doing Business (World Bank), 2010
Real Estate : Occupancy costs are averages across Beijing, Shanghai and Guangzhou.
Resources and skills
China's total workforce is an estimated 780 million, the largest in the world. Aside from its large labor supply, China has an edge on language skills, especially in Shanghai where most of the engineers can speak Japanese and Chinese.
Outsourcing sector
The volume of IT services exports indicates the size of a country's outsourcing sector. According to the IMF, China's exports of computer and information services are high, with approximately $6,252.1 million USD. It is fourth in line after India, the United States, and Israel. Similarly, China ranks very high in its exports of miscellaneous business services, earning $20,343.2 million USD and placing in second next to the US.
Basic education
Ever since the fall of the Cultural Revolution, China's education system has been focused towards economic modernization. It increased the number of undergraduates and doctoral degree holders, and improved the population's literacy. China's literacy rates, which start from the ages 15 years old and up is high. It averages around 93.3 percent of the population, which only has less than one point difference compared to Thailand and the Philippines. China has the most number of university graduates every year. The countries that follow it include: the US, India, and Russia. However, despite this accomplishment, it only spends 1.9 percent on its education, placing it at the bottom of the list after Vietnam.
Language
The main language of the people is Standard Chinese or Mandarin, Yu, and Wu. Only an estimated five percent of China's population speaks English.
Technological readiness
According to the International Telecommunications Union, there are around 22.2 internet users for every 100 inhabitants in China. This places it below average, although it has a higher ranking compared to India (7.0) and the Philippines (6.2).
Source: CIA Factbook, 2009
Source: IMF, 2008
Source: IMF, 2008
Source: UNESCO, 2009
Source: UNESCO, 2009
Source: OECD PISA, 2006
Source: OECD PISA, 2006
Source: OECD PISA, 2006
Source: UNESCO, NASSCOM, SourcingLine, 2009
Source: International Telecommunications Union, 2009
Source: International Telecommunications Union, 2009
Language : There are large variations in estimates on the number of English speakers/ users in China that range from ten million to several hundred million. For the purposes of this analysis we have estimated 5%.
Business and economic environment
A vital turning point for China's economy was the opening of its market to the world outside its borders, leading to massive changes in the business world including the outsourcing industry. The one advantage of China among other countries—and especially with India is its dependence on the outside environment. While India's outsourcing industry is mostly reliant on the international setting, China also delivers its services to both its manufacturing sector and large domestic market as well.
Economic competitiveness
Economic competitiveness is an important component for the long-term development prospects of an outsourcing location. According to the World Economic Forum's annual competitiveness report, China has one of the highest GCI score, averaging 4.7, followed by the US, Canada, Malaysia, and Israel. It also nears the top for macroeconomic stability.
Infrastructure
China has one the highest quality of roads, with the US, Chile, Canada, Malaysia, and Thailand taking the lead. It also has a reliable supply of electric power, with an index of 5 compared to the Philippines (3.9), South Africa (3.5), and India (3.2). However, China has a low per capita subscription rate despite having a large telecommunications market.
Overall ease of doing business
China ranks below average for ease of starting and running a business, which involves obtaining construction permits, paying taxes, registering property, enforcing, and closing contracts. It also ranks higher than the Philippines, India, and Russia. China is the least expensive country for acquiring a commercial case, as it only costs 11.1% of the claim value compared to India (39.6), the Philippines (26), and the US (14.4). One caveat is that it takes around 37 days to register a start-up, which is quite long when compared to other countries, such as Hungary, Canada, and the US where it takes less than six days to register a start-up.
Source: The Global Competitiveness Report, 2009
Source: The Global Competitiveness Report, 2009
Source: The Global Competitiveness Report, 2009
Source: The Global Competitiveness Report, 2009
Source: International Telecommunications Union, 2009
Source: Doing Business (World Bank), 2010
Source: Doing Business (World Bank), 2010
Source: Doing Business (World Bank), 2010
Source: Doing Business (World Bank), 2010
Source: Doing Business (World Bank), 2010
Source: Transparency International, 2009
Source: Doing Business (World Bank), 2010
Source: Doing Business (World Bank), 2010
Source: Doing Business (World Bank), 2010
Source: The Global Competitiveness Report, 2009
Source: BSE-IDC Global Software Piracy Study, 2009