China outsourcing industry
Seven years ago, many industrial analysts had predicted that China will be the next IT outsourcing giant by 2010, ready to compete directly with India for the top position. However, today China's IT outsourcing is still limited to few neighboring countries like Japan and Korea instead of the entire global markets including the U.S and Europe. The fact is the global IT outsourcing markets in 2009 was valued at USD $180 billion but China only made approximately USD $8 billion and created only 30,000 new jobs when India made close to USD $97 billion and created several million new jobs. The fact that China is still a long way to catch up with India surprised me so last month, when I was in China, I asked several people for their opinions and recommendations.
A software company owner told me: “China's IT outsourcing industry has several weaknesses: Although the university system can produce large number of technical workers but only few technical managers. There is a shortage of experienced software project managers that can manage medium (50 to 100 people) and large size IT projects (100 – 500 people) in the industry. These kinds of project are very common in outsourced works since most companies do NOT outsource small projects (5 to 20 people). Among the IT training programs in university, the majority of courses are focusing on programming languages, web developments, and specific testing tools with little emphasis on the software lifecycle, system design or project management. Even in business schools including the Master of Business Administration (MBA) there are many courses on accounting, finance, marketing but very few on global management, foreign languages and soft skills. That is why China does NOT have enough managers with business and language skills to interact with other countries, especially customers in North America and Europe. If the education system do not change, we will not be able to reach our goal of being on the top. If we do NOT do anything about it soon, others such as Russia, Philippines could bypass us and be on top positions”.
A business analyst told me: “Traditional business such as family relationship in small business environment do NOT work in a globalized world where people negotiate deals based on global strategy, NOT on “who know whom” or “who is related to whom”. However, our training programs are still advocate the traditional ways because professors never learn about another way of doing business as they never leave China or work in the industry. That put our students in a disadvantage situation, if you do not know how the world is doing business than you cannot go further. China does NOT have enough requirements engineers to obtain customer's requirements for outsourced works as this type of training does not exist in most IT training programs. We only teach students to be workers NOT business leaders. That is why many IT companies have difficulty in bidding on contracts where requirements are NOT well defined. Even with several million students graduating each year, most of them can NOT work in the outsourcing business due to limited language skills. As a result, more than three-fourths of China's outsourcing works are focused on Japan and S. Korea where the works are limited to testing, programming because China has many people who can speak Japanese and Korean languages. If we do NOT advocate more language training, we cannot grow our industry”.
Another professor explained: “For many years, China's economy is focusing on “Product development” but IT outsourcing is about “Service delivery”. There is a fundamental difference between product and service. For product development, the key factors are cheaper labor and good manufacturing facilities. China has plenty of labor workers and government already spent billion in developing many good factories. However, in service industry, the key factors are knowledge and skills which means the focus must be shifted to investment in education and training. However, the current education system is NOT capable of meeting these needs. There is a tier system in our education system with top tier national schools, second tier state schools and third tier local schools. Top schools receive national attention and strong government supports so they can produce excellent students. Their graduates have no problem of finding jobs but the number of them is very limited, maybe a few thousand each year. Graduates from second-tier and third tier schools, which accounts for more than 80% of students population, do not have that advantages. They suffered from overcrowded classrooms, old textbooks, archaic laboratories, obsolete training programs, average skilled professors and that is why many are having difficult time to find jobs. Each year, we have several million unemployed graduates and there is a growing number of under-employment among graduates. They study one area then work at different area, mostly has nothing to do with their education. One can easily find graduates working in department stores, selling clothes, selling and buying old electronics devices, selling insurance, or even serve foods in restaurants. This issue raises significant anxiety among our young people about the value of our college education system and the chance of making a good living. Their hard work and investment in education is depending on the education system and how fast can it change to meet the demand. As of now, it is NOT changing much. For several years, there are plenty of debates about how to change and what to change but so far no one would do anything about it. There is no standard training program to focus on any particular IT skills, instead each school has their own program, depending on the available of professors because there is significant shortage of qualified IT professor. If we do NOT begin to create new training program that focus on what customers' needs, what industry's needs and having skilled workers than we will NOT be able to capture this golden opportunity”.
An industrial analysts told me: “Our key weakness is there is NO central government policy to support outsourcing business. India had a National IT strategy plan since 1992 and it is very effective. Our government have NOT been able to put together a strong nationwide focus on IT outsourcing. Even they designated 20 cities to be IT outsourcing centers but leave it up to local governments to implement it. That is why there is high competition for outsourcing business among cities and provincial governments. As local government learned from their success in investment for product development, they immediately build large IT centers, large technology parks with strong infrastructures and hope that IT business will come. They do NOT differentiate between product and service because no one invest in education and training. Today China has large technology parks with many empty buildings because without the skilled workers which are the key factor in deliver IT services, they cannot obtain foreign outsourcing business. When you travel in India, you only saw three to four IT technology centers in Bangalore, Chennai, Hyderabad, and Mumbai because India government know how to focus on a few centers of excellence where they have a good concentration of workers. This contradict with China where in almost every major cities, you can find large technology parks. Because of this scatter effort, no one is doing well as they keep competing with each other. The only exception is Dalian, Beijing and Suzhou because they received works from Japan, and S. Korea. If we do NOT focus on few areas and put in the necessity efforts to develop skilled workers, we will NOT be able to prosper from IT outsourcing”.
A government officer explained: “Although China is still being considered for IT outsourcing works as we are still ranked as number two behind India but in reality, most companies in China can NOT scale up operations to meet the global demand. Most outsourcing companies are small compare with India or the Philippines. The largest company has about 10,000 software workers when the top five India companies have 80,000 to 120,000 workers. Actually, most Chinese companies, on the average, have about 100 to 500 people, basically too small to get outsourced works. Last year, one western company told us that their outsourced project was approximately about 300 to 500 people and they want to outsource about ten to twenty projects per year. We had only two companies that meet the requirement even that means the entire company must work on those projects. In the end, the contract went to India instead of China. If we continue the traditional small business attitude by continue to stay small and not growing than we cannot compete in global business”
A software company owner told me: “There is a competition for skilled workers among local companies. The turnover rate among IT workers is getting worst each year with average workers change jobs every sixteen months. Many companies hire IT graduates, train them for several months, invest a lot on them but after acquire the skills, most would left to another companies for better wages. That is why many companies stop hiring IT graduates. This issue is getting more difficult because recently, many Indian IT companies have set up operating centers in China to compete with local companies. Indian companies like TCS, Wipro, Infosys have offered much higher wages and better benefits than Chinese companies. In past few years, these Indian giants have also acquired many smaller IT companies in China and began to play a major roles in control the outsourcing business there. As far as Indian companies' concern, most of the profitable works will go to India but the less profitable but require more labor intensive such as coding, testing will be moved to China. Everyone know that outsourcing business is large and keep getting larger as the need to reduce cost and finding skilled workers continue throughout the world. The problem is we are competing with each others for workers and not pay attention to these Indian giants and it is possible that we cannot compete with India if they can dominate our local market”.
Another government officer explained: “We still have a lot to learn about globalization, we still have a lot to learn about global business as we need to market our brand to the world. Today everybody knows about Indian companies such as TCS, Wipro, Infosys but no one even heard of Chinese IT companies. For years, we have market ourselves as cheaper than India and this is absolutely wrong. We never mention about quality, we never mention about skills, we never mention about our modern infrastructure which are much better than many countries. Basically we do NOT know about marketing and since there is no evidence of outsourcing projects successfully delivered by Chinese companies we cannot build a good reputation. If we do not have good reputation than cheaper does not mean anything. Today we have no strong “brand” for China's outsourcing capabilities because we do not have any large projects to prove our skills. We only do small programming and testing for others which is no different from other countries such as Vietnam, Bangladesh, and African countries. We are still compete among our cities for foreign business where everybody claimed that they are the best without any evidences. This hurt our international image because it fragment our national effort. As the importance of reputation is critical in global business, there is still a lot of things that we must do to improve our image but first we must abandon the “Cheaper image and low skills” that we have advertised for many years. We must learn from past mistakes and grow in this area because in the 21st century this is the fastest area to grow our economy. We cannot rely on manufacturing anymore, we must rely on our strength which is a billion people with highly skills, ready to do business anywhere”.
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
