China will be top destination for offshoring, says IDC

But other analysts disagree, saying India will remain a strong contender

Chinese cities are expected to unseat Bangalore, Mumbai and Delhi in India, and Manila in the Philippines as the most popular offshore delivery centers by 2011, according to IDC.

The market researcher has introduced a new Global Delivery Index (GDI), which compares 35 cities in the Asia-Pacific area as potential offshore delivery centers based on criteria such as cost of labor, cost of rent, language skills, government policies, infrastructure and staff turnover rates.

Bangalore currently tops the list, followed by Manila, Delhi and Mumbai. The Chinese cities that figure in the 2007 list include Dalian, Shanghai and Beijing, ranking five, six and seven.

Indian cities have inherent challenges such as cost of staff and pressure on infrastructure, Conrad Chang, a research manager at IDC's Asia-Pacific operations, said in a telephone interview. While India has focused on the U.S. and European markets, China has large opportunities in the Japanese and Korean markets, Chang added.

Chinese cities will overtake Indian cities by 2011 because of massive investments made in infrastructure, English language skills, Internet connections and technical skills, which are favorable toward offshoring, IDC said.

Forrester Research Inc., however, takes a less optimistic view about China as an offshore destination. Nearly two years ago, the country was widely viewed as a key challenger to India as an offshore services delivery location, but research shows that the market has not taken off as expected, Forrester said in a recent report.

China primarily attracts business from Korean and Japanese companies, but most of them have preferred to set up their own operations in China rather than outsource, because there are not many large service providers in China, said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International Inc. in Houston.

Many U.S. and European companies that set up offshore services operations in India may also have an operation in China, Pai said. "But the Indian operation will typically be the larger," he added.

China has still not overcome customers' concerns about English language skills, intellectual property protection and attrition in the country, Forrester said.

In contrast, India has a sophisticated and time-tested legal environment built around Western common law, Pai said. Even if China invests heavily in education, the population cannot become in four to five years as fluent in English as Indians, he said. "Indians have been speaking English for over a hundred years," Pai said.

India's demographics also favor its continuation as a key offshore services location. On account of China's one-child-per-family policy, the country's population is aging, with about half as many people under 30 as India, Pai said. The IT industry primarily employs younger staff.

The IDC GDI rates the potential of cities as offshore destinations, said Chang. The actual business decision by companies to offshore to these cities will depend on a host of other factors, he added. The GDI is a moving index, reviewed every six months.

"This is not about India versus China," Chang said, noting that IDC expects both countries' offshore business to grow.

Copyright © 2007 IDG Communications, Inc.

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