By Tom Reilly
(tom.reilly@nexthorizon.com)
The Outsourcing Opportunity in China
Plummeting technology costs and globalization of trade has made offshore outsourcing ubiquitous. Whether it’s a call with a customer service representative in the Philippines, the use of software developed in India, or the purchase of iPhone produced by a contract manufacturer in China, it’s all around us. It has become so common in corporate life we hardly notice it.
It’s easy to forget that as recently as 1990s this flattening of the world was unthinkable. For most corporations, the first taste of outsourcing came in response to the “Y2K” software crisis – when, in the rush to disarm the ticking time-bomb in the world's computer systems, we turned to an army of low-cost and highly skilled computer programmers in India.
I have had the pleasure of an insiders’ view of the growth of the most recent boom in offshore outsourcing. I started my career helping clients set-up onshore and offshore “shared service centers” for finance, information technology, customer service, and supply chain. In 1998 I moved to China and was among a small team of people who launched the first Business Process Outsourcing (BPO) company in the People’s Republic of China. In these early days, the key impediments to offshore outsourcing were primarily driven by the high cost of the technology needed to set up remote processing operations – and the fact that, despite a decade of ERP implementations, most corporate back-offices remained shockingly paper-based.
We started our China office with two people in a 500 square foot office in the Southern Chinese city of Shenzhen. Shenzhen was really our only option at the time, since it was one of China’s four “special economic zones”, and one of the only places a foreigner could own a business in China. The common saying in China in those days was that “everything is possible . . . and nothing is easy”. It took me almost a year to get approval for establishing a branch office in Guangzhou and nearly three years to get the proper business licensing for our outsourcing business. In contrast, when I launched a new Wholly-Owned Foreign Enterprise (WOFE) in Guangzhou in 2007 the license was hanging on my wall after about 45 days.
From those initial two staff we created China-based offshore service solutions for organizations in Australia, Brazil, Hong Kong, Japan, Korea, Singapore, Taiwan, Thailand, Malaysia, the Netherlands, New Zealand, the Philippines, the United Kingdom, and the United States. We had even “offshored” work from India, Bangladesh, Pakistan, and Vietnam . . . to China.
During the very short history of modern outsourcing several outsourcing destinations have risen and fallen at an amazing speed. Just 10 years ago, Ireland and Singapore where seen as the premier low-cost offshore destinations, but these soon lost their luster to the motivated masses of skilled workers in India, Eastern Europe, and the Philippines.
My company, Next Horizon, today provides a wide range services from highly-skilled accountants, statisticians, and logistics staff. Our work ranges from transitional accounting to high-end market research and we are now even venturing into some of the highest levels of financial research. From China, we support human resources processes in places as far-away as Australia and the United States.
People outside China often miss the massive changes are occurring in the PRC. In some ways most outsiders are used to a world that changes at a much slower pace that what is happening in China. We (westerners and frankly some easterners) see the world changing at rates we think are breathtaking . . . but in terms of modern China the rest of the business world moves in slow motion. The simple reason for all of this is that China is making up for lost time and the sheer breadth and depth and scope of the change obscures things. The next major shift in the Chinese Economy is focused squarely on the Service Sector, and there are three key drivers that push Chinese-based outsourcing to new levels: Driving Force 1 – Exploding Skilled Labor Force: Chinese nationals between the ages of 15 and 64 make up approximately 25% of the world’s work force. In recent years, we have all become familiar with the productivity of Chinese unskilled-labor as China churned out much of the world’s manufactured goods. What most of the world has not yet seen is China’s skilled white collar labor force – which for most of recent history has lagged behind the rest of the world. Mao’s cultural revolution virtually closed all of China’s university’s form 1968-1978 –– which meant until the time that Beijing University re-opened in 1976 there were hardly any university graduates at all in China. When the schools began opening their doors the demand was massive . . . and by 1998, when I launched my first company in China, the number of tertiary program graduates in China was approaching one-million people per year -- about half the 2.0 million that graduated in the USA or the 1.5 million that graduated in India. Impressive growth from 0 – 1 million in 20 years, but not really too mind-blowing, considering in a country of 1.3 billion people. College Students at a Recent Job Fair in Wuhan, China © 2009 South China Morning Post What has happened since 1998, is mind-blowing. China went from under a million graduates per year in 1998, to 2.0 million to an estimated with 7.5 million in 2010! At the same time the US continued to graduate about 2.0 million per year (nearly ¼ China’s) and India, with nearly the same population as China inched up to slightly under 2.0 million. The Philippines, with a population of 100 million, stayed relatively flat at about 0.6 million graduates per annum. Annual College and University Graduates in China © 2009 Next Horizon Another interesting phenomenon is the number of Chinese kids going abroad for an education and the staggeringly high rates at which they return to China to start their working lives. In Australia alone, an estimated 20,000 mainland Chinese nationals graduate from Aussie schools each year. If you think the average Chinese family is not well-off enough to send their kids to a good school, think again. Just imagine what happens in a society populated with education obsessed parents that has both 40% average savings rate and a one-child policy. Chinese parents send their ‘little emperors and emporesses” to the best schools they can afford and then put a lot of pressure on them to come back to the family in China to build their lives. Chinese parents are legendary for placing a high degree of importance on their children’s educations. Even knowing this, I am always amazed at just how far these parents will go to insure their children’s educational success. My friends back in New York think I am kidding when I tell them that my secretary takes her entire annual vacation every year to help her young son study for exams, and her behavior is not at all unusual. China and India Make Up 40% of the World’s Working Age Population © 2009 Next Horizon. The fact that China now produces more university graduates than any other country, has not been lost in the conclusions drawn by the executive search firm Heidrick & Struggles in their recent Global Talent Index – which put China work force as the 6th most promising. Mapping The World’s Talent Heidrick & Struggles © 2008 Heidrick & Struggles. Driving Force 2 – Infrastructure Leapfrogging the World: Unfortunately for the rest of the world, the growth of the white-collar labor pool in China is only a very small part of the equation that will push this country to dominate the world’s service economy. The infrastructure in China, especially the technology, telecoms, transportation, and commercial real estate is quickly leap-frogging the rest of the world. Sometimes this is hard to imagine when staring out at the pollution clogged skyline of the typical dingy industrial Chinese City, but all those construction cranes we’ve become used to seeing across China will one-day complete their projects. The pace of change is sometimes lost on the casual visitor to China, or even those who spend a year or two living out here . . . but there is hardly a Chinese City that is recognizable today from where it was 10 years ago. Levels of Infrastructure Investment in China and India © 2009 Next Horizon For a dramatization of the infrastructure investment in China, you need only compare the level of China’s investments with its close neighbor India, which is the only country that has a relatively comparable population. From the late 1990’s to the early 2002’s China spent nearly an average of USD 200 Billion per annum creating new capacity in electricity, construction, transportation, and telecommunications – or about 10 times that of India. When analyzing this I specifically focused on the years leading up to 2002, since many of these capital projects are now coming on line in China and this was a period before China had been selected to host the 2008 Olympic games (which has been estimated to involve USD 40 billion in capital spending just for the Olympic venues). While China and India are often grouped in the same “Emerging Economies” bucket, one ride the Shanghai Maglev train or any type of transportation in India will tell you that the development in these countries is not the same. Also consider that China is now the world’s third largest economy behind Japan. Of course, with China the big story is always about the pace of change. One of my favorite analogies describing the rapid re-emergence of China’s economy was given at the turn of the millennium by Lee Kuan Yew, the architect of modern Singapore. In his speech, the then Prime Minister Lee described the world economies as automobiles on an “economic super-highway” moving at approximately the same speed. PM Lee put the American’s out front in a bloated Cadillac, followed closely by Japan in a well built but slower Toyota, then the Germans, the British and so on. Mr. Lee then added that somewhere far in the back of the pack, barely visible in the rearview mirror of the leaders, was China . . . traveling at 350 mph. His message was simply that China was moving at an incredible pace, and by the time the rest of the world noticed, it would be too late to avoid being overtaken. World Economic Forum's Technology Readiness Index I am reminded of Prime Minister Lee’s analogy, each year when the World Economic Forum (“WEF”) publishes its annual ranking of world’s technology infrastructures. Essentially, the key measure is what the WEF calls the “Technology Readiness Index” – which is simply a measure of how easy it is for a business to get a data connection in a given country. Usually, Singapore, Finland, and the United States are in the top three of the Index. Pretty much all of Western Europe fill the ranks of the top 10 to 20 nations. In each year since about 2001, China has steadily moved up the rankings from its dismal pre-2000 position near the very bottom of the 200 countries surveyed. Between 2005 and 2007 China Inched up from 59th to 57th place on the list over taking Poland , Jordon, and Mexico – not impressive in itself – but astounding when you consider this is a single ranking for a country with 1.3 billion people with a land mass slightly larger than the USA, and covering roughly the latitudes as all of North America. I usually say that giving one rating to China is sort of like giving a single ranking to all of Europe – lumping Latvia, Romania, Ukraine, Russia, and Greece along with Germany, France, Britain and Finland. My message is simply that the measure hides the enormous disparity between the development levels of Chinese Cities (more about this later). From experience I can tell you it is as easy to get a data connection in Shanghai or Beijing or Guangzhou, as it is in Washington, New York, or Dallas. During the same period India has steadily, sometimes suddenly, fallen behind in the technology ranking. In 2001 India was in the top 30 but has now slipped to 50th closing the gap with advancing China. Part of this is simply that the “boom” in India’s service exports, growing from USD 0 to USD 46 billion in 20 years simply overwhelmed the country’s infrastructure. I can tell you that procuring any kind of data communication in Mumbai ranks up among the most exasperating experiences a modern human being can endure. Driving Force 3 – China’s Government Turning Its Focus to The Service Economy: China is now entering the “Forth Phase” of development of the modern Chinese economy. The first phase in the 1980’s focused on the move away from the collective agriculture and manufacturing economy which was the hallmark of Mao’s cultural revolution. The early 1990’s saw the beginning of China’s dismantling of the behemoth State-Owned Enterprises and the slow devolving of management to fledgling private enterprise. The third wave in the late 1990’s was focused on China’s opening to the world, and reached its zenith with China’s accession to the WTO on the 10th of October 2001. The second and third waves of China’s economic turned China's closed economy into “the workshop of the world”. China’s rapid and continuing integration into world trade and capital markets which has propelled the Chinese economy from the world’s 16thth largest in terms of GDP to the 3rd largest by 2008. China is now entering the fourth wave of Chinese Government has now squarely set its sights on the country’s thriving service sector in a way very similar to its focus on the manufacturing world nearly two decades ago – and of course, in those two decades the Chinese GDP doubled, twice. Recently the Chinese government announced the first details of its specific plans for the service outsourcing market – unveiling its “1000-100-10” slogan for outsourcing. The plan envisions China creating “1000” world class professional services and outsourcing firms; capturing “100” blue-chip corporate clients who outsource to China; and creating “10” outsourcing focused cities. Along with the 1000-100-10 program local governments across the country have started rolling-out ambition tax incentives, training grants, land grants, and development programs. The public relations around outsourcing has been impressive as well, with president Hu Jin Tao announcing that the government is targeting BPO as a strategic growth industry. Experts suggest that the real aim is of the government is to create 100 million service sector jobs over the next 10 years, employing approximately 1/3 of the countries estimated 300 million middle class. **** ------------------------------------------------------------------------------------------------------------- Stay tuned to upcoming stories from Tom Reilly: ------------------------------------------------------------------------------------------------------------- Now Available: ------------------------------------------------------------------------------------------------------------- About Tom Reilly -Founder of Next Horizon (www.nexthorizon.com) Tom Reilly is one of the pioneers of shared services in Asia. He established the first offshore finance and accounting shared services firm in China in 1998. This multi-client center now provides real-time remote support to companies in Europe, Asia, Australia, and the Americas. Tom’s work has been profiled by Business Week, Wall Street Journal, Outsourcing News, The Economist, China Daily, CFO Asia, Times of India, Australian Financial Review, Reuters, as well as industry whitepapers and analyst reports. Tom joined Ernst & Young Consulting in New York in 1993, where he focused on implementing financial service centers for clients in the United States. He moved to Hong Kong in 1998, while helping to launch OneResource Group Ltd. a fast growing accounting services spin-off from Ernst & Young. Tom served as COO of OneResource Group from 1999 to 2003 and became the CEO of Capgemini Business Services Asia in July 2003, after leading the purchase of OneResource Group by Capgemini ASA. Tom also spent a year helping Microsoft Corporation with a global overhaul of its finance and procurement support structure. Today, Tom is the CEO of Next Horizon – a new concept in finance and accounting services. Tom is a frequent speaker and author in the international business community. He serves on Boards of Directors for both private and non-profit organizations. Clients Tom has worked with include:
ABN AMRO Adidas American Express BP China China Light and Power Citigroup Dade Behring Dairy Farm Deloitte Consulting Dow Corning Exxon Mobil Fed Ex Peninsula Hotels Philips Consumer Electronics Pizza Hut Syngenta Ferrari North America Goldman Sachs Hudson IKEA Jardine Matheson LG.Philips Displays Lian Hua Microsoft Corporation Mandarin Oriental Maxim’s Caterers McGraw Hill MetLife MGM Macau Morgan Stanley New York Life Insurance Optus Pacific Basin Synovate Texas Utilities TNT China Torvald Klaveness Group Wihl. Wilhelmsen ASA Wyeth PharmaceuticalsWhy China-Based Outsourcing Is Set for Growth – and Why Now ?
About Next Horizon
Next Horizon is a new concept in china-based offshore support services. The company helps clients operate support functions in ways which achieve new levels of clarity, focus, and performance.
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