The Rational Outsourcing Blog

Wednesday, May 16, 2007

The secret weapon of the Chinese BPO industry

I have an ongoing bet with my COO Benny who happens to be Chinese. He believes that the Chinese Business Process Outsourcing (BPO) industry will eat India’s lunch in the next few years. I on the other hand have always been confident that Indian entrepreneurship and innovation will help Indian BPOs beat all competitors including the Chinese. Till recently, I never worried that I may actually lose the bet. A recent conversation with Mr. Roc Yang (CEO of China Data Group, a leading Chinese BPO) forced me to acknowledge for the first time that perhaps Benny could win the bet after all.

Mr. Yang raised several reasons why China might beat India on the BPO arena. Some of these reasons I had heard before: lower employee churn rates, lower effective salary, and better infrastructure. While China may have these advantages today, either India will be able to address them over time (as in the case of better infrastructure) or China will face the same problems as its own BPO industry develops further (as in the case of employee churn).

Some of the competitive factors Mr. Yang raised (such as an ability to provide end-to-end services or more sophisticated operational procedures) are quite possibly valid for his specific company but I can’t imagine that they are true for all Chinese BPOs. Moreover, I can imagine conversations with CEOs of Indian BPOs who would raise the exact same factors as competitive advantages that the Indians enjoy. An analysis of who is right is beyond the scope of this blog. Most probably, only time will tell who is right on this issue.

One point that Mr. Yang highlighted however may turn out to be the secret weapon of the Chinese BPO industry. Contrary to popular perception, the Chinese BPO industry has existed for many years and quite possibly is as old as the Indian BPO industry. The reason that the Chinese have stayed under the radar is that they primarily serve the Chinese market. As Mr. Yang pointed out, because their customers are also Chinese they could never count on labor cost differentials as a critical factor in their business. Thus, out of necessity, they have had to be incredibly cost conscious. He believes that because the Indians have enjoyed a large labor cost differential relative to their customers, they have been much less labor efficient than the Chinese BPOs.

I must admit that many Indian BPOs often have an attitude that labor is cheap so we can always throw a lot of bodies at any problem. This has in many cases led to inefficient use of labor. If Chinese BPOs have truly figured out a way to be profitable in the absence of a labor cost advantage and are now shifting their attention to the US market then Indian BPOs may have cause for concern. An industry that is used to running lean and mean in their own country would have a huge advantage once they gain the additional advantage of the labor cost differential between China and the US. Look out India!

In reality, if the Chinese BPOs can truly bring labor-efficient solutions to the market, that would only spur Indian vendors to respond similarly. Due to the high employee churn rates and salary increases, Indian BPOs have already started to become more labor efficient. The entry of labor-efficient competitors from China would only accelerate the trend. I would expect to see even faster efficiency and accuracy improvements primarily via the adoption of new technologies and consistent processes across customers. This competition from China may just help spur the Indian vendors to the next stage in their evolution.

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  • I was very fortunate to contribute recently a chapter in a book to be published soon by Springer. Other contributors include Shiv Nadar, HCL’s Chairman, Nandan Nilekani, Infosys’ CEO and Dr. Liu Jiren, Neusoft’s CEO.

    The author of each of the 12 chapters had a free rein to describe the next decade of service-sector globalization, the future vision of offshoring, and the role that his/her country would play.

    My observation is that, since Indian leaders (TCS, Infosys, etc.) were so much ahead than their Chinese counterparts, China had to take a very smart road to catch up with India; the country itself, as a whole, has embarked into challenging India. Political decisions, like allowing Wholly Owned Foreign Entities, creating over 500 science parks, offering tax breaks, etc. have already caused industry leaders like Google, Microsoft or Apple to shift their outsourcing focus from India to China.

    The major strength of China in this race to leadership is that the focus of China is not on becoming the world leader, but in creating the conditions that make the country the privileged destination for IT outsourcing. Leadership will inevitably follow. In other words China has in fact created its own path to leadership.

    In addition, China has a better country infrastructure, more reserves, the biggest pool of graduate students, the highest attractiveness, an unbelievable momentum, better media coverage, etc.

    In the next 7-10 years, the top 5 leaders of IT outsourcing are likely to still be Indian, but China will have become overall the world’s number one destination for IT outsourcing, as it has become today the center for goods manufacturing.

    Remember this quote from Thomas Friedman’s book “The World is Flat”: “If Americans and Europeans want to benefit from (…) the interconnecting of all the markets and knowledge centers, they will all have to run at least as fast as the fastest lion – and I suspect this lion will be China, and I suspect it will be darn fast.”

    And to conclude this comment, I should add that I am neither Chinese nor Indian. I was born in Europe and live in San Francisco.

    By Anonymous Remi, at 3:39 PM  

  • Very nice articles in this blog. Even the responses are of high quality. Regards

    By Anonymous BPO.Asia, at 7:21 PM  

  • Hi Apu,

    A thought-provoking post. Do you think that language will play a role in the development of the BPO industry in China? Specifically, I guess, does India's large number of English speakers give it a competitive advantage over China?


    By Blogger Greg_Cruey, at 9:42 AM  

  • @Greg --

    That was the question I always asked, but everyone in the know tells me that language is much less of a big deal than people make it out to be. In fact, some of them have told me that it is India that has the language problem because the people there speak "only" English, whereas in China, there is Chinese, English, Japanese, and Korean.

    By Anonymous China Law Blog, at 5:32 PM  

  • Hi Arijit, I have mentioned your blog entry in my blog. I was not aware about this blog first and while reading the article on DNA was wondering who this guy is, neevr heard of him before.

    Khub bhalo lagey jokhon dekhi people are doing so well bairey.....shubhechha....I now have become a loyal reader to yur blog.


    By Anonymous Anonymous, at 9:46 PM  

  • I think beyond comparison, it is better for us to put in consideration the outcome of their production. If they are both competitive in different aspects... i think we should praise them for each difference... language barrier would not be a problem as it is, people are not animals that would take a century to understand communication. people can easy learn to speak and learn a different language whenever they have the will especially if it is for the betterment of their country. So i really don't think that china is far left behind but a copmpetitive market in the global sector, only different in their product focus compared to india.

    By Blogger Geoffx, at 3:06 PM  

  • Yes, China has the good chance to catch up India in the following years.

    By Anonymous Anonymous, at 3:01 PM  

  • While people may have different views still good things should always be appreciated. Still China will have to a lots of work for beating India. Communication skill is the one of the most important factor. India also has a very big own market.

    By Anonymous Monty, at 3:23 AM  

  • I got infomative and updated review, I appreciate the author for all effort sharing and it will open up our mind to prepare more with all relevant knowledge. Thank a lot.

    By Anonymous solikhin kasum, at 12:44 AM  

  • The most versatile weapon is cheap labor hand. I know because I work as a virtual sales person for a company that outsources to China.

    By Anonymous Anonymous, at 11:39 AM  

  • I run a small web development company and am interested in expanding our services to help Chinese BPO, HRO, and other companies that provide corporate level services reach the US market through a website tailored to their US consumers. I believe their is an emerging opportunity here.

    Does anyone have any comments on this matter? Do you feel there is a need and opening in the market for this type of service for Chinese companies looking to reach the US market?

    Best Regards,

    Silas Pepple

    By Blogger silas, at 6:04 AM  

  • Very nice articles in this blog,i was appreciated.

    By Anonymous Khitij, at 3:48 AM  

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