China and BPO? Don’t bet your mortgage on it

There has been a considerable amount of hype around the China’s potential as a BPO power-house, typified by this recent article by Sridhar Vedala and Vibhash Ranjan of sourcing advisor Equaterra, which claims the China BPO market reached $1.3 billion last year.  The definition of BPO is somewhat vague, so I will refrain from commenting on this figure, but am sure the economic climate out there is capable of commanding this level of BPO work.  The article has some excellent points regarding the advantages and potential of China as a BPO destination, namely:

  • China’s BPO market will be driven by (1) companies from Japan, Korea and Hong Kong outsourcing low-end services; (2) foreign investors that have thousands of employees in China (i.e. Danone and Fuji);  and (3) domestic companies that outsourcing within China.  American and European firms are “rarely sourcing” BPO services from China.
  • Global BPO firms, such as IBM and Genpact, are developing a presence in China (even thought IBM is the only firm that has surpassed 1000 employees for BPO services);
  • New BPO locations, such as Chengdu and Tianjin, are 30% cheaper that the mainstays of Beijing and Shanghai, and their attrition is only running at 5%, as opposed to 30% in the big cities (this really fills me with confidence);
  • “China offers multi-region support to the surrounding customer markets, which sets it apart”.  I am assuming these are for regions that require Chinese dialects, such as Jin, Wu, Hui and Pinghua, in addition to Taiwanese, Japanese and other Asian languages.
  • Multinationals are shifting their Asia/Pacific regional HQs to China and establishing shared services centers or outsourcing local firms.
  • De-regulation of the Chinese banking sector.  It is now much easier for foreign investors to offer retail banking services in China – a real drive for BPO.

Look beyond the hype….here’s my take on China and BPO:

The Asia/Pacific region has been crying out for more comprehensive shared services and outsourcing structures for years.  Singapore and Hong Kong have traditionally assumed the role of “regional hubs” for most multi-nationals over the last 20+ years, but are now far too costly for running shared services, or outsourced operations.  China is offering potential, not too dissimilar to India 5 years’ ago, for multi-nationals to invest in servicing their Asia/Pacific regional businesses.  Many Pan-Asian businesses, or regional hubs of global multi-nationals, have shied away from shared services or outsourced models as they didn’t really have low-cost options available, and the Asian business culture has traditionally centered on inhouse models for its administrative support functions like HR, finance and procurement.

So while there is an obvious opportunity for a BPO industry to develop in China, I have several reservations that it will develop into anything more than a local hub for supporting Chinese-speaking business and a handful of multinationals:

1) China is in a time-crunch.  China is already touting it’s Tier 2 cities, such as Xi’an and Chengdu, as it’s mainstays of Beijing and Shanghai are already suffering from chronic job attrition (30%) and wage inflation.  At least in India, and other offshore locales such as Philippines and Eastern Europe, they enjoyed a stable period of a few years to develop their BPO infrastructures before these issues crept in. With China, it is moving into BPO with little breathing space to establish its infrastructure and build critical mass.  It is easier for BPO firms to combat attrition and wage inflation once there is critical mass of staff and infrastructure available (see this post from earlier last year that contrasts the typical approach being taken by the leading Indian outsourcing providers).

2) Wages are already high. Wages in China are not much lower than in India, which has more experience in BPO and much better English language skills.  As a side note, you can actually get cheaper accounts payable done cheaper in Mexico that China…

3) The India experience all over again.  With all the initial teething problems firms had sending out BPO services to India, why would they want to go through all this again with China?

4) China’s core competency is engineering. China is more of a manufacturing / industrial powerhouse… I cannot see it being so adept at doing back office work, with the exception of Dalian, which can service Japanese and Korean-speaking businesses.  Engineering services are in the Chinese DNA, rather than BPO services… this is the direction I see China taking, for example industrial design work, contract manufacturing, biotech services etc.

5) Movement away from mere labor arbitrage.  BPO is moving away from the “body shopping” game, and more towards value-services and innovative offerings. Moving more work to China seems like a regressive step for many multi-nationals.  Having said that, experienced BPO firms can claim to have learned from past mistakes and seek to rectify then in a Chinese delivery model.

6) China’s English-competency is a major minus for BPO.  Whereby Singapore and Hong Kong adopted English as their mother tongue many years’ ago, China is still a good decade away from being able to boast good English-speaking competency.   Beyond the Chinese-speaking languages, and some surrounding Asian languages such as Japanese and Taiwanese, it is difficult to see China becoming more than a local hub for it’s domestic economy and some of the Asian-speaking countries.   To run truly pan Asia/pacific services, not having a strong English-speaking competency is a major issue with BPO.  When running the vast majority of BPO services, there needs to be elements of close interaction between the outsourcer, or offshore worker, and the mother company outsourcing the services. 

So all-in-all, China has potential to develop a compelling BPO industry, but there are many obstacles the country needs to combat, in order to develop this beyond an industry that is merely serving a sub-region.  Moreover, it is tempting for people to get over-excited at anything “China-related” these days… it is important to look beneath the surface to get a dose of reality.

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18 Comments

  1. Vaibhav Tyagi, ASQ CSSBB
    Posted January 11, 2008 at 3:13 pm | Permalink

    Well, China has potential to take giant steps in BPO game, however it will be restricted to specific domains like back office operations. They have proved themselves in manufacturing quiet well and very cheap too in terms of cost. Chinese government has taken some steps in making China global and more accessible, still a lot to be done for their education system. India was never in the race before and now it is the front runner with great success. I don’t find any competitive advantage for China in next 5 years.

  2. Raymond Demeo
    Posted January 11, 2008 at 3:15 pm | Permalink

    Wages are not much lower than in India, which has more experience in BPO and much better English language skills.

    >>True, a plus for India. Still many companies are already outsourcing services (mostly in support of other Asian countries at present) that include technical support and localization from China.

    With all the teething problems of sending out BPO services to India, why would firms want to go through all this again with China?

    >> China is less bureaucratic, and far more streamlined than India. Getting things done is just easier. China infrastructure grows at a rate orders of magnitude ahead of India and this will contiue to faclilitate business diversificaion.

    China is more of a manufacturing / industrial powerhouse… I cannot see it being so adept at doing back office work, with the exception of Dalian, which can service Japanese and Korean-speaking businesses.

    >> True, there is a lot to be learned about business practice and quality of service required by the West. Keep in mind though that more semi-skilled labor, already trained in the manufacturing sector, is coming available and looking for new opportunity as China drives further into its remote regions to tap new lower labor costs. The government is very motivated to keep the employment rate up and a lot of training in support of western culture is on going. Not aware that India has undertaken the same initative.

    BPO is moving away from the “body’shopping” game.

    >> The Chinese understand speed, efficiency and most of all opportunity. It is a mistake to underestimate how fast they are coming up the learning curve. The larger question is whether we in the West can maintain the moivation, focus and drive to stay ahead of them.

  3. Posted January 11, 2008 at 3:18 pm | Permalink

    Phil

    This article is absolutely spot on – the level of education and language skills today in India are light-years ahaed of China. It’s common knowledge that China is heavily inferior in management skills and heavily lacking funds to invest in latest technology and machienery, making it unlikely that leading edge technology will be at your disposal, again something more likely to happen when using Indian service providers. BPO is a lot about making decicions in order to provide quick, first class customer service, and this is simply yet not part of overall Chinese business culture,

    Eugene

  4. Posted January 11, 2008 at 3:22 pm | Permalink

    Eugene has already brought out interesting points about “Why China wont succeed as Outsourcing / BPO hub?”

    I would like to add another small point here. Indian BPO industry has started to mature. Five years ago, BPO meant an easy job for fresh graduates with loads of fun, parties and goodies. But today, BPO industry means business. In job adverts BPO companies are promising career and not fun. the attitude inside the campus gates is also changing. People are focusing on re-engineering processes and getting more focused on delivering quality to their customer’s customer!!!!

    Indian BPO industry has realised the need to present a professional face and with this maturity setting into the Indian BPO industry, it will get an edge over a Chinese company which is just a start-up.

    While China has a competitive advantage in Manufacturing, India enjoys a similar stature in Services industry.

    Regards,
    Anil Piplani

  5. Posted January 11, 2008 at 4:38 pm | Permalink

    Phil

    Good post.

    China has the potential to scale up it’s BPO revenues primarily being driven by demand from ‘near shore’ regions in APAC and companies with domestic operations within China. The scope of BPO (depends how you define it!) growth is although limited as the largest users of BPO services aka the Western firms are still reluctant to have a purely ‘China’ back office strategy. Primarily because of the number of reasons cited above in the post.

    A number of Indian vendors, the likes of Genpact, Wipro, Infosys have all talked last couple of years about growing their global footprint outside India and expanding in China. In reality this growth has been very muted. For example, Infosys in their earning call today continues to see China for the next three quarters to be in the ‘investment phase’ (I don’t make any money phase) after 6 quarters. Infosys has 700 people in China and might add 200 people by end of this year. Compare this with the 18,000 campus hire offers Infosys has made for 2008 in India.

    Another potential challenge for growth of the BPO is the stringent regulatory environment in certain APAC countries (Singapore, Korea, Japan) which make it tougher to move shared services hub outside of these countries despite the rising cost.

    On the other hand China has build an enviable lead in the manufacturing global delivery model BPO or not!

    Best

    http://offshoreindianews.blogspot.com

  6. Posted January 11, 2008 at 6:47 pm | Permalink

    You may very well be right, but I submit that you’re overlooking some key points. First, at least as I understand it (and I certainly don’t claim to be a “guru” like you) many aspects of BPO may not require English language skills, – specifically services that are to be provided within China, or perhaps to Japan / Korea. I have some BPO clients that are using extensive resources in China specifically for local support. Second, for many relatively low skilled repetitive BPO services, like digitization, data entry, forms processing…etc. we find that many China based BPO operations can do outstanding work at very reasonable rates (often these services involve reading English, but not necessarily speaking fluently). Basically, this is viewed much like factory work, only with a dramatically better working environment. Third, the available workforce in China continues to expand rapidly. While you’re correct about conditions in Beijing/Shanghai, and even Chengdu, other western & northern cities have massive populations of young potential workers, reasonable Internet connectivity and an improving infrastructure to support business process outsourcing operations.

    I generally agree with your conclusion when the discussion is specifically limited to BPO that requires strong English speaking skills, but for other areas, including domestic services and processes that only require reading English, I believe China can still be considered an excellent destination.

  7. Posted January 11, 2008 at 6:55 pm | Permalink

    Dean,

    Thanks for the excellent input. I think you have pretty much summed up a lot of what I have been saying… that China has some excellent potential for BPO work, and you have provided some excellent examples of BPO administration work that can be done, where a command of spoken English is not essential. As I was stating in my post, China has some excellent potential to run BPO work, particularly for domestic businesses, but is unlikely to set the world alight beyond this as a BPO industry. I would like to hear more about these “reasonable” prices you mention you have been working with, as the Chinese-based services with which I have been involved have generally not been lower-priced than anything I have seen coming out of India for the same work. But I am open to persuasion here…

    PF.

  8. Posted January 12, 2008 at 2:27 pm | Permalink

    China or India, that maybe a big topic in recent global outsourcing market. India still the No.one destination for offshore outsourcing, but china more and more show his potential advantage.

    1. Skilled talent. China’s universities, colleges and software institutes are producing well over 500,000 trained technology professionals each year. and the English level of graduates are more and more better than before.

    2.Government support. In 2006, the ministry of commerce of the country had published “1000-100-10 project” to promote outsourcing industry. Till now, there are 11 cities had be outsourcing base city in china, each year, central government and city government will totally pay more than 20 billion RMB Financial support for outsourcing industry.

    3. Domestic huge market. The main advantage of china comparise other destinations is the huge domestic market.As China’s economy booms, its businesses and consumers represent a huge potential market for global goods and services. Development, localization and support centers in China are becoming necessary components of every company’s approach to China. On the other hand, chinese local service providers can use domestic market to have more experiences in process.

    4. duplicate of India. From the perspective of risk diversification, when companies came to India, set up ODC, then they will try to find another destination to diverse risk and backup all the services.

    I am doing offshore outsourcing consulting in china, from my experiences, more and more MNC coming to china, set up ODC, outsource project, and also outsourcing would be a possible way for companies to enter into china market.

    Haitao

    Links:
    http://www.chnsourcing.com
    http://www.china-outsourcing.biz

  9. Posted January 12, 2008 at 2:40 pm | Permalink

    Haitao,

    Thanks for the good information here. A few points in relation to my post:

    1) 500,000 trained technology professionals a year… I see this as excellent potential for IT outsourcing work (as opposed to BPO). I see China a becoming very competitive with India in the IT outsourcing industry in the coming years, especially with the onset of remote infrastructure management services and the low-cost “white box” hardware we’re seeing being manufactured en masse in China.

    2) Government support: this is the key reason behind the success of China’s economic rise, and will help faciliate outsourcing services also. However, BPO requires more than tax breaks from the government…

    3) Huge domestic market: as I said before, the immediate economy within China and the surrounding Asian economies like Taiwan, Korea and Japan will be hotbeds for the Chinese BPO and ITO industries to grow from (not not the US and Europeam markets).

    4) Back up for India? Not quite sure I buy this, but I do see China as competing with Indian resources for ITO business – especially if the Indian prices spiral out of control.

    Hope this is helpful,

    Phil.

  10. Emilio Navarro
    Posted January 12, 2008 at 2:44 pm | Permalink

    Another talk about BPO is Latin America. Let’s keep in mind that Latin America is a very close destination for US firms. As a matter of fact, many firms have used resources from the region for years, many Latin American professionals have been trained in the US and have the know-how as well as the language skills.

    I believe that instead of looking towards China as the next BPO giant we should start looking towards Latin America as a whole region.

  11. Posted January 12, 2008 at 3:12 pm | Permalink

    Emilio,

    Regarding Latin America as a BPO hotbed, you are already preaching to the converted – check out these posts:

    http://fersht.typepad.com/the_outsourcing_bloghorse/2007/12/nearshoring-sof.html

    http://fersht.typepad.com/the_outsourcing_bloghorse/2007/11/enter-argentina.html

    PF.

  12. Joseph Wang
    Posted January 13, 2008 at 3:14 am | Permalink

    I think it is hype since China’s strengths are in manufacturing and doesn’t have the infrastructure that I can see for BPO.

    One other reason that I don’t think that China will turn into a major BPO site for US based companies is that it is going to be busy trying to be a local hub for Chinese-speaking businesses and multinationals. Developing a local infrastructure for business processes is going to be challenging and profitable enough that I don’t see the pressure to look for overseas markets.

  13. Graham Miller
    Posted January 15, 2008 at 7:37 am | Permalink

    Phil,

    I agree with most of your points but you are looking at the market and the workforce of today. The Chinese education system is improving in areas away from engineering, and opportunites in East Asia are opening up.

    BPO is not a short term decision, it needs to be part of a long term plan. In the medium term (next 3-5 years) an increasing percentage of the world’s GDP will be based in East Asia. More of the world’s workforce, more of the world’s major companies, more of the world’s credit card transactions. A location like Dalian has a highly trained work force with good universities churning out business graduates who can speak Chinese, Japanese, Korean, and some English. This makes is a great location to locate services for Japan, Korea, Mainland China, Hong Kong, Singapore, and even Australia.
    Expect cities like Dalian to develop BPO superstars of the future as local workers with MBAs depart IBM etc and set up domestic rivals.

  14. Kartik 'KT' Anand
    Posted January 15, 2008 at 7:39 am | Permalink

    I agree with you Phil – In my view, China needs to spend a lot of efforts entering into the mainstream voice BPO work – primarily because of their English speaking differences if you compare it to India or any better offshore location. Costs are not too far from what India offers but given the fact that India is improving on its voice-based services, China really needs to plan for the next phase, today.

    KT

  15. Nick Ayton
    Posted January 15, 2008 at 7:56 pm | Permalink

    I would add the Chinese central bank will lose control of inflation quite soon and price controls will bite… I moved into China in 2003/4 for BPO, mainly F&A but a subset of areas…not a great success other than to outsource Asia Pac companies…due to location and timezone… US companies hated the time difference and I agree the spoken English… Also limiting other languages…

    ‘Made in China’ still has issues with buyers of products and services…

    Currency the big issue, with problems hedging dollar based contracts with local labour… Command and control culture, poor human rights, politically stiffling culture, too many qualified staff coming onto the market…will make China a tough place to look to depend on the deliver your back, mid and front office… There are better places…

    Also you get eaten alive in summer!

  16. Posted January 17, 2008 at 4:37 pm | Permalink

    Hi Phil:

    Concurring to Graham and all others. HOWEVER, that ONLY speaks of the English speaking BPO. According to my knowledge, the growing drive of China BPO is from Korea and Japan. The government has recently adopting a strategy to encourage to be a big player of global outsource. Another thing to note is, China is growing to be a strong player in global economy; rather then saving cost, setting up captive centers may be a good step to help enter this market.

    Regards,

    Alan Young

    Service Manager, Global Business Development
    CIIO Technology – TRUST implemented

  17. Posted January 18, 2008 at 9:32 am | Permalink

    I help govern a substantial number of medium to large outsourced processes and have, as a result, traveled to many places to evaluate labor markets and vendors (both locally and internationally based).

    I can say with absolute objectivity, China is not a suitable location for any English-based outsourcing program. Period.

    If the legal issues alone were not a sufficient deterrent (the ability to get an injunction against a company for infringement, abandonment, or for breach – or the the ability to take legal action against individual agents who breach US-based confidentiality requirements), the utter lack of English proficiency, the inability to hire and retain quality middle and upper management with high quality operational knowledge, the cultural US-Chinese void (which is far, far greater than many understand), and the ability to hire and RETAIN agent-level resources should scare off potential outsourcers or outsourcing clients.

    Phil is dead on here and it’s about time someone clearly pointed out China’s problems.

    For those that compare early India outsourcing or Philippine outsourcing environments to China and call upon China’s uncanny ability to grow, learn, and adapt quickly, I insist that you consider that outsourcing is not about body-shopping and looking for the lowest price. At least it’s not that way among folks who understand quality, sustainability, and consistency. It’s for those reasons that taking a gambit on China over the next 2-4 years is not worth the enormous issues that could result.

    Tony
    http://www.360vendormanagement.com

  18. Posted January 24, 2008 at 12:04 pm | Permalink

    Hi Phil,

    Nice post…I think China’s future lies pretty much around engineering…they might do a decent job in the ESO segment (engineering services outsourcing), but even there I think they will face huge challenges…my guess is, in domains where the Chinese do not require extensive and continuous interactions with their client ( that is, in areas where things are rather well defined and are not subject to frequent changes), they will dominate…BPO obviously doesn’t quality,KPO most certainly does not…engineering services though, could!

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