Error creating thumbnail: convert: unable to open image `/home/wikinvest/src_live_1/mediawiki/images/9/9f/Global_thinking.svg.png': No such file or directory @ blob.c/OpenBlob/2480. convert: unable to open file `/home/wikinvest/src_live_1/mediawiki/images/9/9f/Global_thinking.svg.png' @ png.c/ReadPNGImage/2889. convert: missing an image filename `/home/wikinvest/src_live_1/mediawiki/images/thumb/9/9f/Global_thinking.svg.png/30px-Global_thinking.svg.png' @ convert.c/ConvertImageCommand/2800.
|This article describes a concept which could impact a variety of companies, countries or industries. To see what companies and articles reference this concept page, click here.|
Investors betting on the growth of business process outsourcing (BPO) to China should focus on engineering and IT areas of investments, because these job functions are most easily bundled into a project format and moved offshore. On the other hand, industries that sell services to the U.S. government (e.g. aerospace and defense contractors), require significant U.S. government regulatory approval (e.g. pharmaceutical manufacturers), or rely heavily on proprietary intellectual property (e.g. high-end microchip design) may be a less appropriate bet for those hoping to profit from increase outsourcing to China.
Most of the plastic widgets at Wal-Mart Stores (WMT) seem to be made in China. Does this mean that the rest of our jobs will be moving to China soon as well? From an investment perspective, it is important to understand which service sector industries might be affected by competition from China and start to think about which companies may profit from that trend.
In high-wage countries like the United States and Western Europe, the services sector is the largest source of employment. For example, U.S. government statistics suggest that the service sector provides over 75% of all U.S. jobs. The WTO reported that service exports grew at a compound annual growth rate of 6.9% worldwide between 1980 and 2002 – a rate comparable to the growth rate in exported manufactured goods.
Both investors and workers are concerned about the possibility of service jobs moving offshore to locales like China. McKinsey & Co., however, believes this fear may be overstated. In its review of eight industry sectors (automobiles, healthcare, insurance, IT services, retail, consumer banking, packaged software, and pharmaceuticals), it calculates that only 18.3 million jobs worldwide could be effectively outsourced to another country. Projecting this outsourcing onto all sectors of the economy, only 160 million service jobs, out of nearly 1.5 billion service jobs worldwide, are suitable for outsourcing offshore.
Engineering, finance and accounting occupations, for example, do not require much interaction with others and can often be broken down into discrete, well-defined projects and problems to be solved. This translates into more outsourcing risk for this employed in industries heavily reliant on such talents, such as software development and document processing. According to a presentation by Holly Muscolino, the Director of InfoTrends/CAP Ventures, at a meeting of the International Association of Outsourcing Professionals, Document Process Outsourcing will grow at a 17.9 percent CAGR from 2003 through 2008 – reaching a market size of more than $1.5 billion dollars in the U.S. alone. Already, Microsoft, Dell, SAP, Nokia, General Electric, Alcatel-Lucent and Unilever offshore, except perhaps the reading of x-rays and other data that can be conveyed electronically. The testing of physical samples, such as by a pathologist, by comparison, may be too time-sensitive to ship offshore for testing.
Based on the aforementioned distinctions between occupations, it is not a surprise that outsourcing is most likely to impact information technology (IT) and routinized business processes, such as customer service. At present, China lags in these areas. In 2005, McKinsey reported that China accounted for $3.4 billion of the world’s total business process (BPO) and information technology (IT) outsourcing, a pittance compared to $8.6 billion in Ireland and $12.2 billion in India.
China and India both have a ready supply of skilled labor to take on outsourced tasks. A Duke University study by Gary Gereffi and Vivek Wadhwa shows that each year, the United States produces 137,000 engineers with full engineering degrees, while China produces 351,000 and India produces 112,000. By contrast, a Bain & Company report suggests that China produces 700,000 engineers per year, and Marty McCaffrey, executive director of Software Outsourcing Research in Salinas, Calif., says that China's universities could churn out 200,000 computer science graduates annually,
|Total Degrees Awarded||222,335||215,000||644,106|
|CS, Electrical, and IT||84,917||95,000|
|Sub Baccalaureate Degrees||84,898||103,000||292,569|
|CS, Electrical, and IT||45,246||46,000|
|Source: Duke University, Chinese Ministry of Education, National Center for Education Statistics|
According to Forbes magazine, one-quarter of all foreign PhD candidates in the United States are from China. Over 170,000 Chinese who have studied abroad have now returned home, with 30,000 of those returning in 2006. This may be affecting China's R&D capabilities positively. China reportedly surpassed Germany in the number of patents filed and spent more than Japan on R&D in 2006. Overall, China's expenditures on R&D have doubled as a percentage of China's Gross Domestic Product (GDP) - despite the fact that China's GDP is growing as well.
CNET reports that China has around 8,000 software services providers, yet only five have more than 2,000 employees. By comparison, India has fewer than 3,000 software services companies, yet at least 15 of these have more than 2,000 workers – and several, such as Infosys Technologies, Tata Consultancy Services, and Wipro Technologies, have a world class clientele.
In 2004, the China BPO services market was valued at $683.3 million, based on five key horizontal business functional segments: customer care, finance and accounting, human resources, training, and procurement. IDC predicts that, although India will remain the major hub of BPO activities over the next few years, China will increasingly attract large BPO investments, and it will move from just processing services contracts to higher level BPO activities. IDC expects that the China BPO market will increase at a 34.8% compound annual growth rate (CAGR) between 2004 and 2009.
A typical Chinese IT [outsourcing information] is VanceInfo (VIT) , founded in 1995 in Beijing, and now boasting over 10,000 employees. Its clients include large firms like Expedia (EXPE) , Microsoft (MSFT) , and Citigroup (C) . In 2010 it received a Quality Excellence Award from Microsoft for playing a critical role in the Japan MSN Next Entertainment project, covering product design (both front and back end) for the Web services initiative.
VanceInfo is not without competitors. Foreign firms have already begun setting up bases in China and international companies won 90 percent of the $4.3 billion in contracts for computer services awarded in China in 2004, according to Gartner.
In August 2005, Infosys announced that it would spend $65 million over the next five years to build software development centers in Shanghai and Hangzhou, employing 6,000 engineers. Its Indian competitor Satyam plans to hire 5,000 workers in China within three years. Another Indian competitor, Wipro, runs development centers in Shanghai and Beijing. Meanwhile Indian market leader Tata Consultancy Services, agreed to become the controlling stakeholder in a venture with Microsoft, Uniware of China, and two state agencies, in addition to its existing development center with 250 engineers in Hangzhou.
Overall, Indian companies expect to increase their investment in China ten-fold to as much as $1 billion by 2009, according to the New Delhi-based National Association of Software and Service Companies (NASSCom).
The E-Commerce News reported that the China Development Bank (CDB) will issue 5 billion yuan ($632.7 million) worth of credit to foster service outsourcing in five cities; Chengdu, Xi'an, Shanghai, Shenzhen and Dalian. At the inauguration ceremony for the five cities, Chinese Minister of Commerce Bo Xilai said the ministry will take measures to promote the fast growth of service outsourcing in the next five years. Under the country's Sixth Five-Year Plan (for 2006 to 2010), the Chinese government aims to build service outsourcing bases in ten cities, encourage one hundred multinationals to outsource services from China, and foster one thousand medium and large-sized service outsourcing enterprises. Of course, the market may have its own thoughts about this plan…
IT Week reports that businesses in the Asia Pacific region outside Japan will spend more than $16 billion per year on IT outsourcing by 2010. China may be able to secure a larger share of this market than it does of Western outsourcing because Asian countries may have a greater affinity to China or at least less discomfort about China as a foreign culture. In 2004, Japan awarded only $257 million of IT contracts to Indian companies, while it awarded $828 million in contacts to Chinese IT outsourcing companies, according to Gartner Group.
From an investment perspective, many factors need to be considered in order to determine which businesses and industries will gain and which will lose from outsourcing to China.
Service businesses with low margins are more likely to benefit from offshore outsourcing than those still commanding a high margin. Thus, a move of customer service abroad for a high-touch, high-margin business may save a few dollars, but dramatically reduce a company’s market share among competitors. By comparison, a business in a oligopolistic industry, such as utilities and telecom, can provide lower-touch customer service without dashing as many customer expectations.
China’s poor intellectual property protection may limit its share of service outsourcing - To the extent that businesses rely on proprietary technology and processes to provide services to their customers, Western companies may shy away from locating those aspects of their business in China. While China has joined with the World Trade Organization and acceded to the related TRIPS treaty protecting intellectual property rights, in practice China’s record is still poor. Counterfeit merchandise in China abounds, reportedly accounting for 20% of all consumer products there, and the United States recently filed two intellectual property protection cases against China through the WTO dispute resolution organization.
For national security reasons, it is unlikely that defense contractors or even manufacturers of high-end dual use services will be able to move significant portions of their operations abroad. The May 2006 flap over the U.S. State Department’s purchase of $13 million of computers and related equipment from Chinese-owned Lenovo, despite the routing of the purchase through U.S. government contractor CDW Corp, highlights this issue. One can only guess how large of an uproar would be created by Lenovo also providing after-sales service and support…
Other arms of the U.S. government may not restrict overseas activities, but they still regulate them. For example, the FDA must approve all drug clinical trials before such drugs can be marketed in the U.S. Trial represent a huge expense for pharmaceutical manufacturers – and perfect opportunity to lower costs by shifting overseas. On average, drug companies spend about 37% of their overall R&D budgets on clinical affairs. USA Today reports that 21% of drug industry spending for human drug testing was outside of the United States in 2004, up from 18% in 2000; however the number of U.S.-based clinical trials is not declining as "much as foreign ones are increasing." According to GlaxoSmithKline’s head of development, companies can reduce human testing costs by 10% to 50% by conducting trials in Eastern Europe, Asia, and Central and South America because clinical and hospital costs are lower outside of the United States, and patient recruitment is less time consuming. Merck concurs, as it now conducts approximately 35% of all its clinical trials overseas.bwa bwa
One of China’s largest impediments to success in gathering outsourcing business is its low degree of English literacy compared to other developing countries, like India and the Philippines.
India has spent more than a decade developing its project management skills, as demonstrated by worldwide outsourcing players like Wipro and Infosys. By comparison, until recently, many Chinese worked for state-owned enterprises where management skills were either inessential or not well-honed. In order to scale an outsourcing business, China needs more trained managers whom foreign companies can trust from afar.
One company which is highly focussed on project management and customer satisfaction is Bamboo Technologies located in Guangzhou, China. They cater to both China and US market providing IT/Software application development and support services to their clients. They have heavy foreign investment and interests, helping their customers to gain confidence in their delivery capability by constantly thriving on customer requirements and providing valuable suggestions to customers on how to optimize their product and services.