China marches into outsourcing

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By Don Lee

It's mustering a serious challenge to India, but language and culture could hold it back.

CHANGSHA, CHINA — In the foothills of Yuelu Mountain here, a young Mao Tse-tung found inspiration in nature for his political aspirations. Today, Communist Party officials have a different vision for this area: a valley of global outsourcing firms.

One of them, Beijing-based Chinasoft International Ltd., is recruiting hundreds of workers to process medical bills and health insurance claims. Its target customers: U.S. doctors.

Chinasoft is launching the venture with a Tennessee firm, Premier BPO Inc., which has similar operations in India and Pakistan. Chen Yuhong, Chinasoft's managing director, thinks it's only a matter of time before China makes big gains against India -- which now leads the world in information technology outsourcing.

"They're seriously concerned about our challenge," said Chen, 44, who has a doctorate in engineering from Beijing Institute of Technology and speaks fluent English.

Most analysts reckon it'll be perhaps a decade before China catches up. India's IT outsourcing revenue, estimated at $18 billion in 2007, is about six times the size of China's. The gap figures to be even bigger for business-process outsourcing, such as medical billing and back-office work. With its history as a British colony, India has workers with strong English skills and familiarity with Western culture. That gives companies there a big edge when bidding for jobs that require reading reports and talking to Americans.

But China's sales of IT outsourcing work are growing at roughly twice the rate of India's. Consulting firm Analysys International says they jumped 45% in the fourth quarter of 2007, to about $600 million. Although much of that was for clients in Japan and other Asian countries, China is making a push to extend its reach.

In 2006, the central government launched the "Thousand, Hundred, Ten" project, aimed at cultivating 1,000 Chinese outsourcing companies that would cater to 100 international clients. Beijing wants to situate them in at least 10 cities. Some are familiar locales -- Shanghai, Beijing and Shenzhen. But success or failure may come down to smaller cities largely unknown abroad.

Wages, plus land and housing prices, have soared in China's top-tier cities, prompting many foreign manufacturers to relocate. Officials hope that places such as Wuhan, Jinan and Changsha will be lower-cost alternatives for the service industry as well.

Junior software engineers in those cities can be hired for $170 to $250 a month -- a third of the going rates in Beijing or Shanghai, said Tian Yuqi, human resources manager at VanceInfo Technologies Inc., a Beijing-based IT outsourcing firm listed on the New York Stock Exchange. Those wages also are a lot lower than in India's outsourcing hubs such as Bangalore and New Delhi, where salaries are spiraling up.

"China enjoys the cost advantage, but India enjoys the market advantage," Tian said.

China's government wants both -- and is helping with incentives. Firms setting up in designated outsourcing zones can enjoy a two-year waiver of taxes. They can get a subsidy of about $700 per employee for training and hiring. Local governments are chipping in with sweet deals for rent and land, as well as cash for certain sectors. Hunan province, for example, has set aside about $56 million to bolster the local animation industry, which is particularly strong in Changsha.

"They're going after it with determination," said Gaurav Gupta, country head in India for Everest Group, a consulting and research firm based in Britain. Gupta and others at Everest track 125 outsourcing cities in the world, including 10 in China and more than 30 in India. Yet for all their potential, he says, Chinese outsourcing companies are generally serving domestic businesses -- not offshore customers, as India's firms tend to do.

Chinasoft's Chen, though, sees a way to leverage China's large domestic market into offshore contracts. As more Chinese businesses and public agencies contract out their IT, back-office and call-center operations, the firms that provide those services could offer connections to Western firms to help them break into the Chinese market.

"We tell them, 'You give us business in [your country], and we'll give you the market here,' " Chen said. Chinasoft also is considering buying a stake in companies such as Premier BPO to help drive more American customers to its fledgling outsourcing operations in China. Though Chinasoft has branch offices around the world, including San Francisco and Seattle, its IT outsourcing revenue was only about $9 million in last year's third quarter, the latest period for which results are available.

Mark Briggs, chairman of privately held Premier BPO, declined to comment on the specifics of the deal with Chinasoft. He agreed that familiarity with English was a major plus for India; something as simple as commas and semicolons can be stumbling blocks for Chinese workers coding data into computers, he said. But training can overcome such language and cultural gaps, and Briggs predicted that the same assets that propelled China's manufacturing industry -- great infrastructure and labor power -- would help it become tops in outsourcing.

"I personally believe China will overtake the rest of the world in BPO," or business-process outsourcing, he said.

Changsha may be well suited to play a key role. Many Chinese regard Hunan as a center of culture and creative talent. The wildly popular television show "Super Girl," akin to "American Idol," was produced here. Changsha accounts for much of the nation's cartoon design and TV programming.

Changsha natives claim an outsize share of placements at top IT companies, managers say. The city boasts three universities rated highly for industrial design and software engineering. China's first supercomputer was developed at Changsha's National University of Defense Technology.

"They have a lot of talented people," said Xuedong Huang, a general manager at Microsoft Corp.'s communications innovation center in Redmond, Wash. Like most major technology companies, Microsoft's investment and work in China have been focused in Beijing and Shanghai. For four years, it has run a small software outsourcing project in Changsha.

"I've been very impressed with the quality, even by Microsoft standards," said Huang, himself a product of Hunan University in Changsha. What's unclear, he says, is whether an inland city as "small" as Changsha, population 6 million, can become a major player in outsourcing.

Changsha has yet to cultivate a star company in IT or business-process outsourcing. One reason is that Changsha's homegrown talent is lured by glitzier, cosmopolitan cities on the coast. Seventy percent of engineering graduates leave Hunan, said Lin Yaping, vice dean of Hunan University's software school. To keep them, "what we need is a dragon head," he said, referring to an internationally famous firm.

About 300 firms have set up in Changsha's software and outsourcing zone at the foot of Yuelu Mountain. Some have partnerships with big names including IBM Corp. and Google Inc., but most are tiny operations. One of the most promising locally bred IT companies, Powerise International Software Co., faltered and was bought by Chinasoft in 2006.

Today, Chinasoft's 160 staff members in Changsha do IT outsourcing for mainly Japanese companies, but most of it is coding work and software testing, not the high-end engineering and designing that Changsha craves.

VanceInfo Technologies' experience in Changsha isn't encouraging.

The Beijing firm opened a branch here in 2003. Tian said it took him nine months to recruit 60 engineers. They had little trouble doing the work, including developing, testing and localizing software and handling electronic transfers of loans for major banks.

But Tian said his staff in Changsha, lacking strong English skills, struggled in conference calls with customers. Nor were VanceInfo's clients entirely comfortable dealing in a small city unfamiliar to them, he said, and the firm shut the office in 2005.

"Compared to the Japanese, major clients in Europe and North America emphasized much more the city's characteristics," Tian said. "They preferred Shanghai. Our clients weren't supporting our establishing centers in cities like Changsha."