Perspective on India vs. China – BPO War

“It doesn’t matter if the cat is black or white, as long as it catches mice,” was the statement of one of China’s most powerful men in the last century, Deng Xiaoping. During the last decade and a half, the world has undergone a radical transformation in the global marketplace. The transition from socialism to capitalism has ushered 3 billion people into the global market, in fact a huge boost to the international economy. Today, it matters whether the cat is black or white and which mice it catches.

India vs. China: can be described as the Second Cold War not because of military hegemony but because of economic supremacy.

India in the last decade has capitalized on its pool of qualified human resources and has become the Czar of Information Technology. Since the early 1990s, Business Process Outsourcing has supported the next step of the IT wave in India. Today, India is the center of process outsourcing, especially the US and UK. China, on the other hand, is rapidly gaining popularity. A recent report indicates that within two years, 200,000 IT professionals in China will graduate annually from universities, while India will produce around 3,00,000 engineers and 100,000 IT professionals each year. In the next ten years, China will overtake India, some experts say. The Government of India, recognizing this fact, is increasing capacity by opening new colleges and universities. They cannot afford to dilute their strong competitive human capital strength. India has seen institutes multiply in metropolitan areas and cities producing quality workforce in BPO. These institutes provide training for two to three months in voice and accent, social skills, and other training necessary to work effectively in a BPO organization.

India has a linguistic advantage over China, with about a third of its population, or more than 300 million people, possessing the English language ability. India has more English speaking people than the US and UK combined.

The second aspect is related to the experience with the scale and the deliverability of the projects. Indian companies in the IT and ITeS space have experienced tremendous learning in executing global projects. The risk of outsourcing to China is perhaps higher for American and Western European companies due to a lack of experience executing large and complicated projects.

China, on the other hand, has its competitive strengths over India in cost advantage. The wage rate in China is 40% -50% lower than in India. Large multinationals are opening their development and back office facilities in China to capitalize on a huge low-cost workforce, but most offshoring projects are at the lower end of the value chain. These processes are labor intensive rather than knowledge intensive. Today, China is at the same junction where India was in the early 1990s. China is certainly moving fast. It experienced a 34% growth rate in IT outsourcing in 2004, but the process offshoring numbers were comparatively low. On the other hand, India has witnessed a sharp rise in the wage rate which will act as a deterrent in the long run.

India vs. China – True success will depend on the BPO business model. Will it go from being a tool to cost advantage? If so, the BPO business could simply be replicated by China, eroding India’s market share. One of Gartner’s research reports says that the Indian market share in offshore business process outsourcing is likely to evaporate, from 80% today to about 55% in 2007. China will consume a larger share. But this erosion will depend mainly on how China will keep its labor cost low in the long term and simultaneously move rapidly up the value chain. The next five years will conclude the debate on the supremacy of offshoring.