India and China as Options in Global Delivery Centers

India and China as Options in Global Delivery Centers

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Introduction:

What China is to the world for manufacturing, India is for services. The accelerated economic growth of both India and China in recent years has been a focus of significant policy discussion and analysis. On one hand, this growth is led by the IT Industry in India, and on the other, it is the manufacturing industry based in China.  This article details how we have come to this conclusion following 2 years of extensive research by the experts of Vantage Agora Inc.,

A comparison of the economic structure in China and India demonstrates that the role of the service sector (or the tertiary sector as it is known in China) in the two economies is very different. Referring to Figure 1,on the one hand, the service sector has become the dominant contributor to the Indian economy, accounting for 54.2 per cent of GDP (Gross Domestic Product) in 2004.The success in this sector is regarded as “India’s services revolution” (Gordon and Gupta 2004). On the other hand, China’s service sector has lagged well behind the manufacturing sector (or the secondary sector according to Chinese terminology), and its role in the economy improved slightly in the last fifteen years when the Chinese economy achieved its best performance in recent history.

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Figure1: Comparison of Various Indian & Chinese Industry Sectors through the decades. (Sources: National Bureau of Statistics (various issues) and Reserve Bank of India (2005). Chinese data from 1993 onwards are revised according to China’s recently released economic survey results (www.stats.gov.cn, Zhu 2005)

The Indian Services Sector

The service sector is playing an increasingly important role in the Indian economy.  Services, which made up only 29% of GDP in 1951-52, grew to 57% of GDP by 2009-10. A variety of factors have contributed to this growth namely economic and financial reforms, privatization, trade, reform, Information Technology Enabled Services (ITES), and an overall opening up of Indian society and economy to the world. The export of ITES services, which includes software and Business Process Outsourcing (BPO) from India, has also helped to ensure consistent economic growth as the demand for these services as a cost saving measure in the west remains high. The service industry in India is well diversified due to which overall growth in the sector has been resilient even through economic troughs.  From tourism, airlines and hotels, to finance, insurance and banking, the sector has shown very strong growth for decades so that it now occupies a dominant position in the Indian economy.

The outlook for services in 2011 is good to the extent that the Indian financial system is nowhere nearly as exposed to the risks facing many western financial institutions.  The Information Technology Enabled Services (ITES) industry is arguably one of the most visible of all Indian service Industries.  It is also the one most influenced by overseas economic events.  ITES exports declined slightly in the immediate aftermath of the financial crisis. Inspite of the major external shocks like a financial crisis in Europe and United States, the Indian service sector has grown by about 6-8% in 2011.

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Figure 2: Growth of Indian Service Sector (Source: Calculated from Reserve Bank of India Data)

The Chinese Services Sector

China committed to a dramatic opening of its services sector when it acceded to the World Trade Organization in 2001.  The sector has grown strongly, but even after last year’s recalculation of the services sector’s share of GDP, the services sector in China is still smaller than it should be for an economy at China’s stage of economic development. Unlocking the enormous potential of the services sector is needed to strengthen the business sector in terms of soft skills which will take a longer time to establish. One of the drawbacks of the Chinese service sector growth is the constant threat of intellectual property rights violation. There is rampant piracy which is constantly contributing to the smaller and weaker size of China’s software firms.  Despite the differences in the Indian and Chinese service sectors, most of India’s lessons can be applied to ensure the success of the Chinese service sector. Both India and China have earmarked two different development paths. Each has leveraged its strengths to develop its own industries. While India has been hugely successful in its service sector, it has fallen short of the manufacturing sector. As a result, China looks towards India for lessons learned and vice versa.  To develop its services sector, China would need to improve their working skills, continue development of human capital and provide some preferential treatment to increase FDI and foster specific industry development.

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Figure 3: Growth of Chinese Service Sector

Comparing Services Industry in the two countries

India China
Communication English is the unofficial language of business in India with 232 million English speakers (226,449 list English as their first language) China has just 10 million regular English users with Chinese being the most accepted language of communication
Project and Program management Because of the fact that the India economy has opened up 20 years ago there is good supply and experience in the program and project management in the industry. The service industry is mature. Recently there is a trend of sending Indian management staff to train and manage Chinese service companies. There is also a trend for Chinese students to come and work in the India services organization to learn and grow at a fast rate in their careers. In the manufacturing space China is more progressive and is open to hiring foreigners to help in the growth of the company. Given the language barrier mentioned above these people have difficulty in translating their learning and implementing good practices in the Chinese services companies.
Cultural Affinity A former British colony, India retains a strong cultural affinity with Western nations.Higher power distance than US but lower power distance than the Far East. Very high power distance. This leads to miscommunication beyond that language.U.S. and European customers cite cross-cultural differences as a big barrier to success when outsourcing to China. Chinese workers can have difficulty adapting to collaborative or entrepreneurial environments.
Infrastructure The public infrastructure in India is not as good as in China in the cities. But for the services sector this is irrelevant. The important infrastructure like the Internet, Power, Water, A/C is very well developed. The Indian government is promoting tier two and tier three cities mini hubs for outsourcing and laying in fiber optic cable throughout the country China has a very high growth in the infrastructure because of the ability to react from being a communistic government.While the ability to scale manufacturing needs is unquestionable, the internet and the support people availability is less than that in India.
Supplier Base India has a robust and competitive provider environment led by a legion of Indian-owned, publicly held suppliers and large local operations of global providers, along with niche players. China’s market is fragmented and dominated by small to mid-size suppliers, including Chinese owned providers, Western-managed companies, and local operations of global suppliers.
Outsourcing Customer Base India’s most valuable customers are U.S. and European buyers of IT services. In China, domestic companies make up the majority of the customer base, followed by those from nearby Asian countries such as Japan.
Management Maturity India possesses strong project management skills and continues to invest in initiatives to strengthen middle management capabilities. China has a shortage of middle- and senior managers with experience managing client expectations, Western business acumen, leading large teams, and communicating with customers.
Service Delivery Model In India, traditional third-party outsourcing deals predominate as captive centers continue to be sold or folded. In China, captive centers account for more than half of all IT service delivery.
Process Maturity India’s outsourcers have put years of investment and training into software development and other process maturity programs. In China, process and functional skills necessary for requirements analysis, business process design, and use-case development are scarce
Transparency Leading outsourcers in India tend to promote transparency with customers, in as much as true openness is ever a part of an outsourcing deal. More than 85 percent of outsourcing customers cited “Chinese inscrutability” as a concern, according to Gartner, making relationship-building difficult.
Signing on the Dotted Line India has a strong tradition of private contracting and enforcement, similar to leading global providers. China only recently moved away from trading agreement forms to more mature contracting capabilities.
Intellectual Property India’s IP laws are comparable to those in western nations, but enforcement remains challenging. China recently enacted IP laws, but security remains a top concern for outsourcing customers.
Legal System For Western customers, India’s legal system is familiar-a British-based common law system with an independent judiciary. China’s civil law system derived from Soviet and continental legal principles; critics warn that it is opaque, complex, and inconsistently enforced.

Table 1: India vs. China in offshore outsourcing

This bird’s eye view of industrial capabilities in China and India lead us to the following observations. The service sector as part of the national economy in China and India has achieved substantial growth in recent decade. However, in international perspective, China and India are outliers, i.e., India’s service sector over-performed while China is a better fit for the manufacturing outsourcing. This has been proven by the sheer number of companies that have done their homework and have IT and BPO centers in India and not in China. Whereas a majority of the world’s manufacturing needs come from China. The fact that India has more number of IT and BPO than anywhere else in the world and China has more manufacturing revenue than any other country in the world is testimonial to this conclusion.

An added note on China and India is that there are many internal drifts and a movement in both countries. China is having trouble opening up to the rest of the world. India has its limitations in the fact that it is the world’s largest democracy and with it comes latency in the system to work.

In conclusion, India is still the first choice for IT and BPO service across the world while China remains the destination of choice of most manufacturing outsourcing work.

About Vantage Agora

Vantage Agora(VA) is a global provider of back-office solutions, custom IT services and consulting services for companies in the insurance, finance, and healthcare sectors. As a SAS70 Type II audited company, Vantage Agora utilizes advanced data processing and quality control systems on a secured network to ensure efficient, comprehensive management of back-office functions such as payroll, accounting, financial and administrative tasks. Founded in 2004, Vantage Agora has offices in Cleveland and Dallas.

For more information on Vantage Agora’s capabilities visit  vantageagora.com

Harsha

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