China's grand outsourcing ambitions could be scuppered by its politics

* China wants your outsourcing dollars - is it worth going there?

China wants to be like India...a major destination for services outsourcing. A Shanghai paper recently ran a story on the 25th anniversary of Infosys, the first global outsourcing company in India. This sort of "legend" story telling is a clear sign of respect and flattery for what has been accomplished in the Indian economy. But could China's politics get in the way of its outsourcing aspirations?

The Chinese government is working hard to attract investment, foreign company partnerships, and training for resources into China to build a global outsourcing services industry. The Ministry of Commerce will launch a project with an annual budget of at least 100 million yuan ($12.5 million), to set up 10 bases for service outsourcing over the coming three to five years. The ministry hopes to persuade 100 multinational corporations to transfer their partial outsourcing businesses to China, as well as to create 1,000 large-scale international service outsourcing enterprises.

China's economic development efforts are paying off. Recently Microsoft and Tata joined forces to set up an outsourcing service company in China. And EDS, which was late to the party in India, is planning to double its presence in China. So is it only a matter of time before China is a major services outsourcing destination?

China certainly has a large potential workforce with low wage expectations compared to western economy standards. China will have bigger language and cultural issues to deal with in contrast to India. It also has to deal with copyright violation and privacy issues. However, I think the biggest roadblock to a fast growing services outsourcing industry in China could be its global politics, specifically related to the Middle East.

The raging war between Israel and Hezbollah in southern Lebanon has raised the possibility of a World War III scenario. Hezbollah's longest-range weapon is a Chinese-designed, Iranian-made missile. China has clear political and economic ties to Iran, based on China's need for Iranian oil. China has blocked or caused the watering down of a number of U.S. backed U.N. resolutions dealing with Middle East issues. This should cause concern for companies considering the outsourcing of mission critical work to China.

In the long run, it may be beneficial to increase the economic ties between China and the west. As outsourcing is a people-intensive business, a sizable outsourcing industry in China would be a major political factor affecting jobs and the broader Chinese economy. Clearly, privacy issues hindering outsourcing business growth in India were quickly addressed in the Indian parliament to keep the outsourcing economic steamroller advancing. China may find it has to balance its global political positions to achieve its outsourcing industry goals.

In the short term, if you want to take advantage of China-based outsourcing, it may be wiser to use a large established firm such as EDS or Tata. These firms have processes and experience in dealing with the cultural, time zone and language issues inherent in offshore outsourcing. These firms also have capacity in other geographies should conducting business become difficult in China for geo-political reasons. Let these outsourcing experts deal with the front line resources and related issues while China and the world adjust to the development of a major services outsourcing business in China.


Copyright © 2006 IDG Communications, Inc.

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