China as a Rising Global Outsourcing Hub

SmithStreetSolutions
January 25, 2008
Copyright 2009 SmithStreetSolutions. All rights reserved.
Table of Contents

1. A General Glance at Outsourcing

2. China’s Advantages
a. Terms
Below are some basic and frequently-used terms in the outsourcing profession:

Outsourcing refers to the contracting out of a business functions or processes to a third party over a
Outsourcing
Outsourcing substantial period of time

Offshoring
Offshoring Offshoring refers to outsourcing in which the vendor and buyer are not in the same country

BPO
BPO Business Process Outsourcing (BPO) refers to outsourcing in the business service market

ITO
ITO ITO, or IT Outsourcing, is defined as outsourcing in the IT services market

KPO or Knowledge Process Outsourcing refers to a sub-category of BPO in which knowledge &
KPO
KPO analytical skills and decisive management are outsourced, rather than process expertise
b. Key Factors for Successful Outsourcing

Customer
Customer
Communication
Communication

Meritocracy
Meritocracy Confidentiality
Confidentiality

All the factors depend on

GOOD GOVERNANCE

Quality
Quality Management
Management On
On Time
Time Delivery
Delivery

Talent
Talent
Recruitment
Recruitment &
&
Training
Training
c. Predictions on Outsourcing
In the coming years, the world will see the development of outsourcing increase in momentum.

Global Outsourcing In 2011 China Outsourcing In 2011

CAGR (2005-2011) CAGR (2006-2011)

Market Size Market Size

$319B
$6.9B

$235B A
A growing
growing part
part
of
of this
this story
story
37.9%

25.9% $2.7B
10.2%
7.4%

BPO ITO BPO ITO

Source: Gartner., IDC.

Table of Contents

1. A General Glance at Outsourcing

2. China’s Advantages
a. Government Support
To help Chinese firms capture a larger share of the global outsourcing market, the Chinese government
initiated a bold strategy in Sep. 2006, the “Ten-Hundred-Thousand Program(千百十工程)”.

•• As
As China’s
China’s economy
economy continues
continues toto surge
surge ahead,
ahead, China
China has
has yet
yet to
to establish
establish aa major
major presence
presence in
in the
the BPO
BPO and
and ITO
ITO
Background
Background markets,
markets, key
key segments
segments of
of international
international trade
trade

•• Establish
Establish 10
10 Service
Service Outsourcing
Outsourcing Base
Base Cities
Cities
Goals
Goals –– Resources,
Resources, suppliers,
suppliers, and
and potential
potential customers
customers will
will be
be directed
directed to
to designated
designated centers
centers
–– The
The centers
centers will
will receive
receive direct
direct support
support from
from both
both local
local and
and central
central governments
governments
•• Attract
Attract 100
100 multinationals
multinationals to
to place
place // build
build significant
significant contracts
contracts with
with Chinese
Chinese Outsource
Outsource providers
providers
–– This
This will
will build
build aa critical
critical mass
mass of
of demonstrable
demonstrable international
international capability,
capability, provide
provide for
for knowledge
knowledge sharing,
sharing,
and
and to
to encourage
encourage MNC’s
MNC’s toto work
work with
with local
local partners
partners
–– The
The primary
primary requirement
requirement for
for the
the contracts
contracts being
being sought
sought is
is sustainability
sustainability
•• Establish
Establish 1000
1000 mid
mid and
and large
large scale
scale service
service outsourcing
outsourcing enterprises
enterprises
–– These
These 1000
1000 outsourcing
outsourcing providers
providers are
are to
to have
have offshore
offshore delivery
delivery capabilities
capabilities which
which can
can satisfy
satisfy sophisticated
sophisticated
Western markets
Western markets

Ultimate
Ultimate •• The
The ultimate
ultimate goal
goal of
of the
the Ten-Hundred-Thousand
Ten-Hundred-Thousand Program
Program isis to
to put
put China
China on
on the
the world’s
world’s outsourcing
outsourcing map
map as
as aa
viable, successful, and competitive outsourcing destination
viable, successful, and competitive outsourcing destination
Target
Target

Source: A US$ billion make over of China’s ITO and BPO Industry, www.chinaobserver.cn
b. Supportive Measures
The Ministry Of Commerce has announced a series of measures to achieve the targets of the “Ten-
Hundred-Thousand Program” :

1. Create a fund for providing specialized training to 300,000-400,000 university students over the
next 5 years. This training will include technical qualification and certification, international
standards, and IPR.
2. Provide incentives and financial support to encourage enterprises to obtain international
certification, with the target of 700 enterprises obtaining CMM /CMMI Level 3 certification and
300 enterprises obtaining CMM /CMMI Level 5 certification.
3. Work with the State Development Bank to provide credit and loans to qualified enterprises
engaged in outsourcing.
4. Collaborate with China Export Credit Corporation to provide credit insurance and guarantee
services.
5. Work with the Ministry of Information Industry (MII) and other relevant departments to
identify and support base cities under the Ten-Hundred-Thousand program, through guidance
in macroeconomic policy, program design, human resource training, attracting foreign
investment and creating a fund to support the infrastructure creation required in the base cities.
6. Build a website / portal to provide information to enterprises, universities, students, and
research institutions and provide a platform for business transactions.
7. Provide preferential treatment (such as discounted loans) for base cities in the Central and
Western regions.
8. Formulate a stronger IPR framework and establish IPR complaint centers in the base cities to
take prompt action against any kind of IPR violation.

》
Source: Tracing China’s IT Software and Services Industry , NASSCOM
c. Higher Education
In 2007 4,950,000 students graduated from college in China, compared to 1,300,000 in the US. Given the
current college enrollment in China, that number is expected to steadily increase.

Growth Of the Number Of Students In Higher

Education Institutions In China, 2000-2010

Thousand
40,000

30,000

20,000

10,000

0
2000 2005 2010

Total Enrollments
Graduate Students

Students Enrolled In Normal and Short-cycle Courses

Students Enrolled in Normal and Short-cycle Courses Provided By Adult HEIs

Source: Ministry of Eductation of China; chinasourcing.mofcom.gov.cn

d. English Language Concerns
Chinese students’ English language capabilities have been among the common concerns of overseas firms
considering outsourcing services to China. However, China has stressed English language education at all
levels of its education system to establish it as a lingua franca.

Primary School High School College

The
The Ministry
Ministry ofof Education
Education of of English
English has
has long
long been
been established
established Each
Each ofof China’s
China’s nearly
nearly five
five
China
China hashas required
required all
all students
students as
as aa major
major subject
subject in
in China’s
China’s million
million annual
annual college
college graduates
graduates
to
to start
start learning
learning English
English in
in grade
grade College
College Entrance
Entrance Examination,
Examination, from
from China’s
China’s 1792
1792 higher
higher
three.
three. Thus
Thus Chinese
Chinese students
students which
which isis the
the only
only criterion
criterion for
for educational
educational institutions
institutions has
has to
to
begin
begin learning
learning English
English as as early
early as
as colleges
colleges toto screen
screen high
high school
school pass
pass the
the College
College English
English Test
Test to
to
eight
eight years
years old.
old. graduates.
graduates. receive
receive their
their university
university degree.
degree.

“English
“English isis already
already compulsory
compulsory in in Chinese
Chinese schools,
schools, with
with 20
20 million
million
children a year starting lessons. In 20 years the number
children a year starting lessons. In 20 years the number of English of English
speakers
speakers in
in China
China is is likely
likely to
to exceed
exceed the the number
number ofof speakers
speakers of
of English
English
as a first language in the rest of the world.”
as a first language in the rest of the world.”
---- Gordon
Gordon Brown,
Brown, UKUK Prime
Prime Minister
Minister

Source: www.gov.cn; politics.guardian.co.uk; www.stats.edu.cn

e. Huge Talent Pool
China has a massive supply of talent suitable for outsourcing enterprises, and it is available at attractive
salary levels.

Average ITO Salaries in the APAC Region in 2005, by Level of Experience

US$
140,000 Entry Level
120,000 Team Lead
100,000 Project Manager
80,000
60,000
40,000
20,000
0
China India Malaysia Philippines S ingapore Thailand Vietnam United S tates

Average Non-voice BPO Salaries in the APAC Region in 2005, by Level of Experience
US$
120,000 Entry Level

100,000 Team Lead

80,000 Project Manager

60,000
40,000
20,000
0
China India Malaysia Philippines S ingapore Thailand Vietnam United S tates
f. Unique Language Advantage
China’s geographic proximity and cultural and linguistic similarities with Japan and Korea give it a
leading edge as an outsourcing destination for firms in these countries. No other country offers the same
depth of capability that China has in the Japanese and Korean languages.

Linguistic Similarity Contribution of International Service

Buyers to China’s Offshoring Market, 2007
There are 1945 Chinese
characters in modern Japanese.
Tokyo
Others

Today’s Korean language

contains 1800 Chinese characters.
Japan and
Korea
Korea
Europe
and US

Number of Learners

There are 870,000 Japanese learners in

China, making up 29.4% of all
overseas Japanese learners around Total = US$ 2,317.0 M
the world.

About 2 million ethnic Koreans live in

China. In addition, the popularity of Currently, Japan and Korea represent the
Korean pop culture attracts many bulk of China’s offshore outsourcing market.
Chinese to learn the Korean language.

Source: www.jpf.go.jp; China population census data; <2007 Report on China’s Outsourcing Development>
g. Superior Infrastructure
China’s infrastructure is reaching the quality of developed countries. Availability of suitable office space,
robust telecommunication networks, high-speed internet and broadband access, a stable power supply,
and a developed road network between key cities all enhance China’s attractiveness as an outsourcing
destination.

Development of International Web Bandwidth in Mainland China

Mbp/s
250,000 214,200
200,000
136,106
150,000
74,429 82,617
100,000 53,941
18,599 27216
50,000 241 351 1,234 2,799 3,257 7,598 10,577 9,380
0
06/1999 06/2000 06/2001 06/2002 06/2003 06/2004 06/2005 06/2006

Railways Roads Airports

As
As of
of 2007,
2007, 6003
6003 kmkm of of China’s
China’s A
A trunk
trunk road
road network
network extending
extending By
By 2007
2007 China
China hadhad around
around 500500
76,000
76,000 km
km total
total rail
rail track
track were
were 35,000
35,000 kilometers
kilometers connects
connects all
all of
of airports
airports of
of all
all types
types and
and sizes
sizes in
in
suitable
suitable and
and approved
approved for for high
high China’s
China’s cities
cities with
with aa population
population ofof operation,
operation, about
about 400
400 of
of which
which hadhad
speed
speed rail.
rail. 500,000
500,000 or
or more.
more. paved
paved runways
runways and and about
about 100
100 of
of
which
which had
had runways
runways of of 3,047
3,047 mm oror
longer.
longer.

Source: CNNIC.; Wikipedia

h. Domestic Demand
The large scale and growth momentum of China’s domestic economy have attracted many MNCs and
other forms of foreign investment. This results in the rapid adoption and proliferation of global best
practices and technologies, and drives up China’s domestic demand for on-site support services.

2006 Global GDP Ranking by IMF Real GDP Growth Rate (%)
Rank Country GDP (US$M)
11.5
1 United States 13,194,700 2007 8
7.2
5.1
2 Japan 4,366,459
10
2008 7.9
3 Germany 2,915,867 6.4
4.5

4 P.R. China 2,644,642 9.3

2009 7.4 China
5.5
5 United Kingdom 2,398,946 4.1 India
8.4 Russia
6 France 2,252,213 2010 7.4
4.8 Brazil
4.0
7 Italy 1,852,585
8.3
2011 7.5
8 Canada 1,275,273 4.5
3.9

9 Spain 1,225,750 8.3

2012 7.5
4.3
10 Brazil 1,067,706 3.9

Source: The Economist Forecast; Wikipedia.