CHANGSHA, CHINA — In the foothills of Yuelu Mountain here, a young Mao Tse-tung found inspiration in nature for his political aspirations. Today, Communist Party officials have a different vision for this area: a valley of global outsourcing firms.
One of them, Beijing-based Chinasoft International Ltd., is recruiting hundreds of workers to process medical bills and health insurance claims. Its target customers: U.S. doctors.
Chinasoft is launching the venture with a Tennessee firm, Premier BPO Inc., which has similar operations in India and Pakistan. Chen Yuhong, Chinasoft's managing director, thinks it's only a matter of time before China makes big gains against India -- which now leads the world in information technology outsourcing.
"They're seriously concerned about our challenge," said Chen, 44, who has a doctorate in engineering from Beijing Institute of Technology and speaks fluent English.
Most analysts reckon it'll be perhaps a decade before China catches up. India's IT outsourcing revenue, estimated at $18 billion in 2007, is about six times the size of China's. The gap figures to be even bigger for business-process outsourcing, such as medical billing and back-office work. With its history as a British colony, India has workers with strong English skills and familiarity with Western culture. That gives companies there a big edge when bidding for jobs that require reading reports and talking to Americans.
But China's sales of IT outsourcing work are growing at roughly twice the rate of India's. Consulting firm Analysys International says they jumped 45% in the fourth quarter of 2007, to about $600 million. Although much of that was for clients in Japan and other Asian countries, China is making a push to extend its reach.
In 2006, the central government launched the "Thousand, Hundred, Ten" project, aimed at cultivating 1,000 Chinese outsourcing companies that would cater to 100 international clients. Beijing wants to situate them in at least 10 cities. Some are familiar locales -- Shanghai, Beijing and Shenzhen. But success or failure may come down to smaller cities largely unknown abroad.
Wages, plus land and housing prices, have soared in China's top-tier cities, prompting many foreign manufacturers to relocate. Officials hope that places such as Wuhan, Jinan and Changsha will be lower-cost alternatives for the service industry as well.
Junior software engineers in those cities can be hired for $170 to $250 a month -- a third of the going rates in Beijing or Shanghai, said Tian Yuqi, human resources manager at VanceInfo Technologies Inc., a Beijing-based IT outsourcing firm listed on the New York Stock Exchange. Those wages also are a lot lower than in India's outsourcing hubs such as Bangalore and New Delhi, where salaries are spiraling up.
"China enjoys the cost advantage, but India enjoys the market advantage," Tian said.
China's government wants both -- and is helping with incentives. Firms setting up in designated outsourcing zones can enjoy a two-year waiver of taxes. They can get a subsidy of about $700 per employee for training and hiring. Local governments are chipping in with sweet deals for rent and land, as well as cash for certain sectors. Hunan province, for example, has set aside about $56 million to bolster the local animation industry, which is particularly strong in Changsha.
"They're going after it with determination," said Gaurav Gupta, country head in India for Everest Group, a consulting and research firm based in Britain. Gupta and others at Everest track 125 outsourcing cities in the world, including 10 in China and more than 30 in India. Yet for all their potential, he says, Chinese outsourcing companies are generally serving domestic businesses -- not offshore customers, as India's firms tend to do.
Chinasoft's Chen, though, sees a way to leverage China's large domestic market into offshore contracts. As more Chinese businesses and public agencies contract out their IT, back-office and call-center operations, the firms that provide those services could offer connections to Western firms to help them break into the Chinese market.
"We tell them, 'You give us business in [your country], and we'll give you the market here,' " Chen said. Chinasoft also is considering buying a stake in companies such as Premier BPO to help drive more American customers to its fledgling outsourcing operations in China. Though Chinasoft has branch offices around the world, including San Francisco and Seattle, its IT outsourcing revenue was only about $9 million in last year's third quarter, the latest period for which results are available.
