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Offshore Outsourcing

New, Low-Cost Asian Tigers Take Bites Out of Offshoring

Finding the next big offshoring destination before everyone else is almost an obsession for some multinationals. The problem is that more often than not there’s no such thing as a “best kept secret” – by the time a location is mature enough to support your business the word is already out, prices begin to rise and the whole cycle moves on somewhere else. That said, Gartner has just released a study of nine “emerging” Asian destinations which has some useful information for those on the lookout.

At the more mature end of the scale it covers China, India, Malaysia and the Philippines, but the really interesting info focuses at the emerging end – Vietnam, Thailand, Sri Lanka, Bangladesh and Indonesia. On the demand side, European MNCs are increasingly looking at moving their operations from mid-cost countries like Malaysia and the Philippines to these low-cost locations in Asia, as well as others in Latin America and Eastern Europe, it said.

Report author Jim Longwood told me that Bangladesh and Vietnam in particular are seeing strong growth thanks to significant government support, while Indonesia is doing so thanks to more “ad hoc and local entrepreneurial means”.

“Part of the high growth will come from growing from a low base and some from investing in key IT service offerings and improving their local skills bases and experience whilst leveraging their low cost base,” he added. “In countries like Indonesia and China, with high-growth domestic markets, we also see the local and global providers establishing dual capabilities to target both domestic and offshore business.”

A sting in the tail

Cost isn’t everything of course, and the report warned that financial savings needed to be balanced with “low ratings for language, government support, the labour pool and infrastructure” as well as an “immature legal business environment”.  The report appraised each location in nine categories and found data/IP security and privacy to be particularly bad, with all five emerging destinations rated “poor”.

Longwood added that there are often “soft costs” associated with setting up shared services or “captive” centres in an emerging location. These could range from setting up a local joint-venture to investing in building a local brand or paying higher fees to ensure a stable power supply.

“Others include creating and building relationships with intermediaries and government officials,” he said. “These will help to expedite processes for obtaining permission to set up and register as a foreign businesses, as well as processes for optimising installation and day-to-day operations of local facilities.”

The report also warned that staff at offshore providers in emerging Asian countries like Indonesia and Vietnam usually average just one to two years’ experience, compared to two to three in mid-range locations like Malaysia and the Philippines and three to five years in India. That said, Vietnam for one is rapidly ramping up its expertise thanks to strong government support. In fact, the IT ministry is predicting that enterprise IT, of which outsourcing will be a major part, could soon be worth over $1bn annually to the Communist state. The programming skills being taught in schools there were even enough to impress a visiting Google engineer, who claimed half of the kids in an 11th-grade computer class could pass one of the web giant’s notoriously tricky interviews.

Myanmar (or Burma to use its unofficial name) isn’t mentioned in the report, but it’s also attracting serious attention as an emerging offshoring destination. IDC’s Myanmar ICT Market 2012–2016 Forecast and Analysis of two years ago predicted 15% year-on-year growth with the market reaching US$288m by 2016. Analyst Lam Nguyen told me its manufacturing offshoring credentials would improve thanks to a young, low-cost labour force.

An 800-pound panda

As for China, Gartner’s report noted an improving IP protection regime (although it still ranks only as “fair”) and that it’s increasingly being chosen as a near-shore back-office destination for APAC companies headquartered elsewhere. However, cost increases are threatening its competitiveness while Japanese firms are beginning to “perceive that there is an increased risk” in basing near-shore operations in the Middle Kingdom.

Chinese providers such as Gamutsoft, ChinaSoft and iSoftStone are increasingly targeting MNCs, recruiting heavily and expanding coverage across the country, according to a Forrester report from last year. However, despite describing it as India’s “most serious challenger by scale”, Gartner’s Longwood told me China would not be overtaking its rival anytime soon, despite leading the world when it comes to the offshoring of tech manufacturing.

“I think it’s fair to say that India has well and truly won the current ‘battle’ to be the leading global site for horizontal IT services for applications and business processes,” he added. “As an example, India’s more prominent offshore providers have 100,000 to 300,000 employees whereas in China it’s only 20,000 to 30,000 staff.”

Tholons’ annual Top 100 Outsourcing Destinations report seems to bear this out, with India accounting for six out of the top ten entries while China managed four out of the next ten, starting with Shanghai in 11th place.

Longwood’s Gartner colleague Arup Roy told me last year that China is at least six to seven years behind India as an offshore location and would stay that way as long as the latter could itself mature at around the same rate. Ironically enough, Indian IT services organisation NASSCOM recently hinted that it would be turning its attention eastwards to achieve this growth – to locations like Japan, South Korea … and China.

 

John Anderson has been writing about technology and all things Asia for over a decade, having started out on some of the UK's best known best-known IT trade titles. From his perch in the Far East he keeps a keen eye on the global significance of emerging trends in the region. 

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John Anderson

John Anderson has been writing about technology and all things Asia for over a decade, having started out on some of the UK's best known best-known IT trade titles. From his perch in the Far East he keeps a keen eye on the global significance of emerging trends in the region. 

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