China: Yesterday, Today and Tomorrow

As China welcomes in the New Year (Year of the Horse), columnist Professor Ilan Oshri reports on a Phoenix rising.

For the second day, a Chinese man witnesses a Westerner standing at the corner of a main street in Shanghai, stopping locals to ask them questions, and taking notes. As his curiosity grows, the Chinese man decides to ask the Westerner about his affairs:

"What are you doing?"

"I am doing research about China."

"Whatâs the research for?"

"I plan to write a book about China."

"When did you arrive and when will you be leaving?"

"I arrived yesterday, and will be leaving tomorrow."

"Oh â and what is the title of your upcoming book??

"China: Yesterday, Today and Tomorrow."

I spent 3 days in Zhengzhou, recently, attending the inauguration of Henan Outsourcing Park. Let me first just say that I have no intention of writing a book about China following this trip; however, the insights I gained from the numerous discussions and presentations during this outsourcing summit were so interesting that I want to share them. I will develop my thoughts through a series of questions that formed the basis of the discussions, as they will also be on top of the list for any multinational considering investing in China.

What are Chinaâs strong selling points?

Itâs very clear that the supply of talent in China is impressive. With about 7 million graduates every year, 66% in engineering and sciences and 16% in business studies, China is now ahead of any country in supplying talent.

A major weakness is the command of English language but the Chinese government is paying attention to this and has invested 30 billion RMB (about USD4.5 billion) in improving the language skills of university graduates.

China is also an R&D powerhouse. With an investment of USD154 billion in R&D second only to the USA, multinationals are setting up R&D centres that are bigger â both in numbers and scale â than in any other location. And yet, Chinaâs corporate tax environment is not as attractive as that of Ireland or Israel, and is certainty far more complex than that of many developed countries. Multinationals invest in China because they want to benefit from the availability of local talent and access to one of the worldâs largest economies. The Chinese government does not believe in "invisible hands", and therefore actively creates the conditions to attract multinationals. One of the better-known government initiatives for the outsourcing industry is the "1000-100-10" project. The idea is to set up 10 outsourcing hubs, attract 100 multinationals to its shores, and develop 1000 local vendors. Some of this has already been achieved, such as the new Outsourcing Park in Zhengzhou that has attracted 39 Fortune 500 companies â very impressive result for a non-prime location.

Firms that made an investment in Zhengzhou have realized that, with its abundant supply of talent in engineering and business greater than Shanghai or Beijing, and with office rental costs 30%-40% below that of prime locations in China, Zhengzhou is an attractive city for service outsourcing.

So that covers Yesterday. Now what about Today?

Letâs consider India for a moment. Over the last 40 years, India has developed strong captive and vendor landscapes, a remarkable achievement, which, to my knowledge, has not been replicated anywhere else.

The Chinese government would like China to copy Indiaâs successful outsourcing industry. So, how is the Chinese outsourcing industry replicating the Indian experience?

While China has achieved a comparative position regarding costs, supply of talent, and good infrastructure, the country still struggles with its vendorsâ ability to develop global footprints, establishing a smooth offshore delivery model, and leveraging cutting edge business acumen and relationship management skills.

Its vendor landscape is certainly maturing, with firms such as Pactera landing deals with Fortune 500 firms; however, it is still lacking the business acumen, ability to lead global deals, and sophisticated delivery models that deliver both service and innovation.

On the other hand, China has developed an impressive captive landscape, with many of them focusing on R&D. China is by far the land of captives. There are also many virtual captives, run by Chinese vendors for multinationals, and specializing in IT and BPO services. So, with the promise for the Chinese outsourcing industry lying in its captive sector, Chinese vendors should not lose hope. They can yet become true contenders to leading global outsourcing vendors such as Infosys or TCS. In fact, if anything, the Chinese captive sector may become the growth engine for outsourcing vendors in China.

[inlinead]

How will this happen?

First, Chinese vendors and parent firms should allow their captives to evolve and become profit centers. I have visited numerous offshore development centers in China over the last three years and, when asked about their evolutionary path, heard again and again that the vast majority of captives in China provide services only to their parent firm. This is a missed opportunity. A captive center needs to grow and take on external clientele, in particular where talent is available at low cost. But such an approach requires top management commitment to invest in the captive, something the Chinese outsourcing industry still needs to embrace and follow. Outsourcing leaders in China need to take an example from the many Indian captives that grew to become successful BPO providers, and seek out opportunities to replicate their experience of growth and success.

The implication of this for the Chinese government is that it might need to revise its outsourcing project from "1000-100-10" to "500-500-10," simply because a successful vendor landscape may, in fact, emerge out of the evolution of the Chinese captive landscape.

Before heading back to Europe, I visited Henan Outsourcing Park to see it with my own eyes. I was impressed with the smart and efficient design of the buildings and surroundings (an investment of about USD500 million), the use of Feng Shui elements (waterfalls) and the impressive logo featuring the Phoenix, a bird emerging from the ashes. All these elements reflect the deep cultural and historic roots of Zhengzhou, once the capital of the Shang Dynasty (16th-11th century BC). But as I thought about deeply these old Chinese traditions and symbols are embedded in contemporary business, I was led back to the 21st century: a Chinese lady was flipping between current images and future plans of the park on a huge plasma screen, as if we were inside the movie "Minority Report."