Finance, business

Outsourcing: China’s competitive edge over Russia

30 Jun '09
Philip H. de Leon, President of Trade Connections International, LLC (www.tradeconnectionsinternational.com) is a Washington, DC based international trade & business development consultant who assists companies work abroad and foreign companies work in the United States. Mr. de Leon elaborates business, marketing, project management and public relations strategies, seeks financing for projects, and gathers critical information for his clients. Mr. de Leon can be reached at: Philip@tradeconnectionsinternational.com.

Comparing Russia with China is a futile exercise, as both countries do not compete on the same scale. Having been recently to regional cities such as Wuhan in Central China and Tomsk in Siberia and having visited the Wuhan East Lake Hi-Tech Development Zone and the Tomsk Special Economic Zone of Technological Type, I would like to share a few thoughts to see how we can make sure Russia is not left behind by drawing lessons from China’s approach to become a global player in the outsourcing arena.

Directions Given by Five-Year Plans

China is becoming the country of the XXIst century just like the United States was for the XXth century. This is the result of a long-term vision clearly defined in Five-Year Plans by the central government and diligently supported and implemented by regional governments. This consistent approach over time has led the Chinese economy to become the third in the world after the U.S. and Japan. Major strides have been made in education and training and in infrastructure building (roads, airports, ports, industrial zones, etc.) consolidating China’s growing competitive edge. Lately, China has clearly marked its desire to diversify the economy and transition from a mostly manufacturing economy to one also incorporating high added value services, with energy savings and reducing pollution becoming goals of their own.

The Thousand–Hundred–Ten Project

As a follow up, the Ministry of Commerce decided to implement the “Thousand-Hundred-Ten Project of Service Outsourcing” with outsourcing encompassing information technology outsourcing (ITO) and business process outsourcing (BPO) services.

The main objectives are:

- To establish 10 cities as outsourcing bases;
- To promote the transfer of service outsourcing business of 100 world-famous multinational companies to China; and
- To establish 1000 large/middle scale service-outsourcing enterprises able to compete in the international arena.

According to KPMG which published a report entitled A New Dawn: China Emerging role in Global Outsourcing this project in addition to initiatives such as tax breaks, financial support, subsidies and intellectual property rights protection from the government are some of the many schemes to expand the outsourcing industry and to ensure economic growth, industry restructuring and creation of job opportunities, especially for university graduates. The ''Thousand-Hundred-Ten Project'' is the largest official government outsourcing initiative aimed at promoting the development of the service outsourcing industry, expediting the coordinated development of the regional economy, and improving the international competitiveness of the Chinese economy.

The initially approved 10 cities – that number has since grown to 20 - were Dalian, Shanghai, Xi'an, Chengdu, Shenzhen, Beijing, Tianjin, Jinan, Wuhan, Nanjing, and Hangzhou. In July 2006 The Wuhan Optical Valley Software Park Co. Ltd was set up to develop software and the information technology outsourcing industry in Wuhan and has shown great dynamism in raising its profile and building all needed infrastructure.

This is not to advocate that Russia should come back to five-year plans but simply to underline that consistent long-term vision is needed to promote a predictable and safe business environment. This has enabled China -- both at the central and regional levels -- to allocate the billions of dollars needed to build a strong economic basis and to attract foreign investors and foster international collaboration enabling companies to thrive.

Lessons Learned

The lessons I was left with following my visit to Wuhan and Tomsk, after delving into the documentation I collected in both cities, and from my observations and conversations with local officials, companies and foreign companies in my delegation, are multiple:

1. No need to be the biggest city to achieve success: A regional city, unknown to most foreigners and requiring several connecting flights to be reached, can still become a blip on the radar screen if it works on conveying a clear message as to what it wants to achieve in selected fields. During my stay in Wuhan I attended the 3rd China Service Outsourcing Industry Development and Cooperation International Forum hosted by the local government, which was a showcase of what local companies had to offer coupled with multiple on-site visits to these companies all located on the grounds of the Wuhan Optical Valley Software Park. A similar visit at the Tomsk SEZ during the time of the Tomsk XI Innovation Forum in October 2008 and the contacts made during networking opportunities were equally inspiring though the Chinese were more pro-active in initiating direct personal contacts.

Wuhan’s central geographical location and desire to become a world player is becoming a reality: by the end of 2007 the number of American companies having invested in Wuhan had reached 469, including Budweiser, Coca-Cola, Pepsi, Intel, and GE. As a result, a U.S. Consulate opened in 2008 and the American Chamber of Commerce also opened a Chapter. Tomsk, may be overshadowed by Novosibirsk and not be able to tap into the domestic market like China to fuel growth but it has a potential it needs to market aggressively.

2. A little investment can go a long way: Exploring new market opportunities is costly and time-consuming; therefore a little incentive is needed to convince busy businessmen to take a week off to travel to remote cities. In our case, lodging, food and transportation (except the plane ticket to China) were covered by the regional administrations of Wuhan, Xiaoshan and Hangzhou. Also, the Chinese authorities did not discriminate and welcomed representatives from companies of all sizes. In business meetings, small entrepreneurs were sitting next to representatives of Google and Oracle and were seen as able to bring something to the table too. The eagerness to learn from its guests, the attention paid to everything we had to say, and the efforts made to facilitate interaction and discussions with local companies was quite striking.

3. Need to market niche-specialties: Russia has the intellectual potential to establish itself at an outsourcing destination but it will have to find some very specific niche markets such as R&D where the Russian engineers’ abilities are recognized worldwide. Russia cannot compete on costs (China is in fact already cheaper than India) or on endless manpower, which it does not have. However, as the trend for multinational corporations is to diversify the countries they outsource from, Russia could put itself on the map as long as it makes clear what it has to offer. Expecting that potential partners, investors and clients will come simply because “we are the best” is erroneous. Service and brainpower, just like goods, need intense marketing and the success of some average consumer goods is a reminder of this fact.

4. Paying attention to living conditions: One critical feature that Wuhan captured is that it is not enough for a city to be an attractive business destination, it also needs to be an attractive living destination, not only to the employee sought after but to his family as well. The cold weather is not so much the obstacle in Tomsk but the lack of amenities that would draw or retain a talented workforce. Wuhan - like many other regional cities I visited in China such a Hangzhou - also offers on-site housing and close-by malls, entertainment and sporting facilities, hospitals and world-class airports and highways facilitating business commutes and curtailing the sense of isolation. These amenities are an existing reality and not drawing board projects. Just like Bangalore’s impeccable campuses, the Wuhan Software Park offers visually attractive landscaping and a metro station is scheduled to open in 2012 (we ever were shown where its entrance would be).

5. Will to make it happen: While China was mostly non-existent in the outsourcing arena just ten years ago, an IDC market report predicts that among the top 10 cities in 2011, three of the top five will be Chinese with Shanghai overtaking Bangalore’s first place. The top ranking will be: #1: Shanghai; #2: Bangalore; #3: Dalian; #4: New Delhi; #5: Beijing. This growth will be fueled by the domestic market: according to KPMG local demand for IT and BPO services in China is projected to nearly double to $20.6 billion in 2010 from $10.5 in 2006. Growth will also come from consolidation efforts and the building of local brands that will enable Chinese companies to have a global reach beyond its traditional markets such as Japan and South Korea. KPMG forecasts that by 2010, 50% of China’s offshore software market will come from Western markets. This shows that if Russia would devote the same energy and financial commitment it is allocating towards promoting nanotechnology, Russia could become a more visible player, but more in the sophisticated and research & development niches of outsourcing.

6. Coordination of Efforts: The trickling down effect that starts from the Five-Year Plans needs to be noted. It is not a miracle solution per se but it has the beneficial effect in some instances to give a sense of direction and has justified and facilitated a coordinated approach from all players in achieving the same goal. For China, goals set in the Plans are implemented by the central and local governments. Legislation is passed to create the necessary legal framework. Infrastructures are built by the authorities to ensure guaranteed power supply and high-speed broadband. Financing and incentives are also made available to the private sector in support of these goals.

Does Russia have a will to be a global player?

Of course, the Chinese miracle and bulldozer approach to meet set targets is not without some drawbacks such as pollution and the environmental impact of accelerated industrialization but to conclude, the point is that when there is a will, there is way. In the outsourcing sector, China makes no secret of its desire to build domestic giants with recognizable brand names like India has done with Infosys, Tata and Wipro in order to compete on a global scale. Consolidation efforts are under way to regroup many small and medium companies for capacity building.

With such an unfaltering determination to achieve success, seeing Chinese jetliners and cars competing internationally and gaining noticeable market shares within a few years will undoubtedly become a reality and seeing a Chinese on the Moon is just a question of time. The fact that Russia has a famed air & space industry with mesmerizing achievements and a domestic automotive sector but has not really gained sizeable shares on international markets is maybe a wake-up call to avoid a new string of missed opportunities. Allocating proper resources, possibly through public-private partnerships, and creating a legal and business environment conducive to the development of outsourcing with foreign participation – and this without changing the rules of the games and forcing foreign investors out - will be key. The fact that China is being able to build industries from scratches is an example not to miss and a wake up call that the memories of past achievements does not guarantee a place on the podium in a what is becoming a highly competitive world.


The opinions and sentiments expressed herein are those of the author only and not necessarily those of Marchmont Capital Partners or any other person. This article is published for the first time by permission of the author.
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