What we all want to know about China

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Shared Services & Outsourcing Network â€“ Editorial Team
01/06/2012

With China seen as a rising star for many corporations looking for the leading edge in their sourcing strategy, Dr. Philip Hadcroft, a veteran of the Chinese economy, contributes to the debate.

When SSON approached Dr. Hadcroft to do an interview on China’s impact on the outsourcing market, he rebuked us on our initial approach, which focused on how China would play into the GBS "wave"; China’s unique selling proposition; its value-add compared to other locations; and what kind of due diligence should be done.

Dr. Hadcroft’s response was: "You’re asking the same old questions that are always asked about any outsourcing destination – how can we trust it? What are its strengths and weaknesses? What makes it any different from the others?

"What’s coming through here is that you’re thinking of China as a sourcing destination, competing against India and the Philippines. While that’s factually correct - it’s not the main game. In fact, that is more representative of what’s been happening over the last 5 years, rather than what will happen in the next 5 years.

"You’re looking in the rear-view mirror and thinking it’s the windscreen. It’s not."

We were intrigued and followed up. Dr. Hadcroft shatters the conventional "sourcing mold".

Dr. Philip Hadcroft on China

China is not just a strong source of supply – it’s a massive market for outsourced services.

The Chinese government is about to become the most active buyer of outsourced services in the world – and they are using their massive buying power to purposefully drive up the scale of their domestic services outsourcing industry.

China’s BPO and ITO service providers will grow quite dramatically in scale over the next five years – and they won’t need to rely on offshore clients to drive that growth. The Chinese government will be force-feeding them as they mandate the outsourcing of service contracts in banking, finance, utilities, telecommunications, insurance – most of which are majority-owned by the state.

Five years from now, the Chinese vendor community will comprise many hundreds of very large companies with high-tech locations and all the cost benefits of massive scale.

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To get your head around this, you have to put aside normal inter-company market forces. This is not about individual corporations seeking individual contracts from individual vendors. If you keep those blinkers on, you’ll miss the main game.

This is a story about how the single-party government of the largest country on earth intends to transform the fundamental economic underpinnings of the nation. To do that, it has to make certain things happen on a mega scale. Building China’s services outsourcing industry is a core part of that strategy. In order to meet China’s requirements, the industry will be made to grow very big, very quickly. There’s nothing sudden in this. China announces its plans in 5-year increments. This is the start of stage 3 of a four-stage plan over 20 years – it’s just that this is a very dramatic growth stage.

One consequence (by default, rather than by design) is that China’s vendor community, in 5 years, will be able to offer services on a scale and at a cost that most of the existing service providing nations will be hard-pressed to match.

So, the questions again:

Q1 Global Business Services is already becoming the next wave of value sweeping shared services & outsourcing. How will China play into this proposition?

A. Income from offshore services continues to be vitally important to Chinese companies. Foreign Direct Investment is a key part of China’s economic funding model. International standards accreditation, the accepted legitimacy of Chinese companies’ policies and practices, the equivalency of China’s tertiary education and consistency with international data privacy and IP protection laws will continue to place the globalization of China’s services industry at the forefront of its drive for full WTO acceptance by 2020. However, right now, China is on an upward spiral while the rest of the world is not. Iceland, Portugal, Ireland, Greece and Spain are teetering on the edge of bankruptcy. The UK and USA are reeling under the GFC and have not recovered since the hits of 2007-8.

Australia’s relatively healthy economy is still under 1% growth in GDP. In contrast – China has experienced GDP growth in real terms of 10% p.a. consistently for over 30 years!

They consumed 60% of the world’s iron ore in 2009.
There are more cranes in China than in all the rest of the world.
By next year there will be more dedicated high-speed passenger rail infrastructure in China than all the rest of the world combined – and there was none until just before the Beijing Olympics!

The question (above) asks: How will China be relevant to the rest of the world. I think you’re looking through the wrong end of the binoculars!

Q2. What is China’s USP when it comes to outsourcing – wage arbitrage? Educated talent? Innovative technology?

A. Chinese companies understand Chinese natively, both linguistically and culturally. As this will be the fastest growing market in the world – they don’t need a stronger USP – except when competing against domestic rivals

Q3. As there were with India, the Philippines and other outsourcing/offshoring destinations, there are of course concerns as to whether the Chinese market can provide solutions that fit with Australasian demands. Do you think this is founded?

A. By 2020 China will have six provinces with trillion-dollar economies – each larger than Russia, Spain or Canada. Chinese companies won’t need to concern themselves with the needs of Australians – the problem is one for Australia – not China. The question would be better phrased as – How can Australian companies stay relevant, in the face of China’s burgeoning growth in services outsourcing?

The answer is that China’s services outsourcing industry is now being forced to grow much faster than it has the managerial resources to cope with. It has plenty of young, talented labour, well-educated and with English language skills that are getting stronger year by year. It has a layer of middle management that is largely entrepreneurial but has little experience working in global corporations, and its senior management ranks are dotted with a handful of notable luminaries – but too thin to meet the demands for rapid growth

China understands this. China is happy to attract international talent and expertise from Europe, UK, USA – and of course Australia. There are plentiful opportunities for Australia to participate in this Chinese growth phenomenon, if we understand it and look where the opportunities really lie. And don’t be fooled. This is a window of opportunity that will close in 10 years, as China will have no intention of being reliant upon foreign management indefinitely.

Q4. When thinking about doing business with a Chinese firm, where should executives start when it comes to due diligence?

Ah. But who’ll be doing due diligence on whom??

One Chinese firm I know of will triple in size in just 2 years as a result of a single contract with a single Chinese bank. There are many more contracts being let. If Australian companies want to enjoy this kind of growth – it won’t be because they have a Chinese supplier – it will be because they have a Chinese customer.

Australian companies need to understand where the opportunities are, who to partner with, which cities to base themselves in, which provincial governments are outperforming the nation’s capitals. If we want to be allowed to participate, we need to be seen as competent rather than ignorant; constructive rather than arrogant; supportive rather than competitive.

For more information on China please visit: www.practicallogic.com.au/home-page/what-we-do/research-data-on-china/

Dr. Philip Hadcroft
Managing Director
Practical Logic Pty Ltd
p: +61 (0)297050500
m: +61 (0)417242807
www.practicallogic.com.au
Skype: practical.logic

Dr. Hadcroft is a leading authority in the field of Business Process Outsourcing (BPO). He attained the world’s first PhD in that discipline in 2002, has worked extensively in that field for over 20 years and was appointed as the official BPO Strategy Advisor to the Heilongjiang (China) Government in 2006.

Post-graduate studies in qualitative and quantitative research and statistics. Over 10 years’ experience in hands on design and research in:Customer satisfaction (CSAT), Customer value perception (CVAL), Employee satisfaction (ESAT), Market scoping and market structure modelling, Product-market propensity assessment

Note: If you want more detailed information about China, SSON readers can buy Philip Hadcroft’s Big Red Book of Outsourcing at a 20% discount (A$2,240 instead of A$2,800).This two-volume directory brings together: