Counterpoint: Dalian not so hot, says Forrester

I would agree, almost

I would agree, almost wholeheartedly, with David Scott Lewis' comments.

As another industry insider working within the outsourcing industry in Dalian, I am surprised at some of John McCarthy's comments. I suspect he spoke to companies based in Beijing and Shanghai without taking into account the experiences of major companies in other locations across China.

As for costs, Shanghai & Beijing do not offer any savings (when compared to India). After this, John McCarthy's claim that 'the costs are about the same' do not hold much water.

Of the second tier cities, Dalian has clearly been the most successful location to date, attracting 32 global 500 companies to the Dalian Software Park (DLSP) alone. Cost savings of more than 20% over BJ & SH have helped, however it is its talent pool which has really attracted these companies. A strong technology graduate pool & substantial no.s of skilled language graduates & native speakers (Korean-Chinese ethnic minorities included) have helped to grow the Dalian base - but you must remember companies there service the Japanese, Korean & domestic markets.

Fluency in English speaking skills has never been Dalian's strong point but they are working on this very hard. And as David points out, you don't necessarily need fluency to work effectively with a tech team.

The competitive landscape among second and third tier cities is changing very quickly. Chengdu, Suzhou, Tianjin, and Wuhan are now all competing to attract BPO/ITO operations. DLSP have been smart enough to realise this and now own & manage software parks in all of these locations. (Ascendas, Neusoft, Tiandi, Shui On have also opened parks in other locations). These cities have various attractions e.g. Wuhan offers even more cost-efficiencies (than Dalian) and has more than 1,000,000 students currently on campus. Where it falls down is that it doesn't have rich pool of experienced technology workers. Training costs will be significantly more substantial.

John McCarthy states that the take up of offshore business from the US and Europe has been slow. Yes, there may be some truth in that, however China (and in particular in the Northeast) has always focused on providing BPO services to the above stated markets i.e. Japan, Korean & China. Thats where its strength lies. Take-up of ITO has been considerable, but certainly not disappointing. While it is certainly not on any kind of comparable size with India now, more and more companies are investing significantly in this area. The Chinese ITO market will grow significantly and it is in this area that China can rival India's capabilities - but not for some time. The big Indian comapnies have been quick to see this with Tata, Wipro and Infosys etc. all having a significant presence in the Chinese market.

David Scott Lewis' comments on awful attrition rates mirrors the opinions of various Indian companies that I have met when they were visiting Dalian. They are having big problems with attrition in India and have heard that the situation in China is the same. While I cannot speak for all the country, I know that SH & BJ is experiencing real problems in this area. In Dalian, only one of the big BPO operators has an attrition rate of circa 25% but this is not the norm. I would estimate the average attrition rate in Dalian to be around 12%-15%.

Moreover, whether you agree with the political system in China, or not, the stability of the central government plays it's part. In the near future, the government will release a special incentives package for BPO/ITO operations established on Chinese territory. This initiative follows the Chinese government’s decision to accelerate the development of the “green” industries in China. Presently, it is not possible to determine the nature of these incentives. However, from what we hear on the grapevine, the incentives will be very advantageous.

From the actions of the Chinese government, the big industry players (both foreign and domestic) and the foreign investment companies, I believe that industry growth will be a lot more upbeat that John McCarthy likes to suggest.

Meanwhile, McCarthy says,

Meanwhile, McCarthy says, other countries, such as the Philippines and Brazil, are gaining.

I agree, and like to point out Central and Easter Europe is also gaining: last example is BT's ramp-up plan in Hungary.

My knowledge of Chinese

My knowledge of Chinese sourcing is not first-hand. Personally, I am more familiar with Offshoring IT Services and sourcing from the west to India 




I would tend to agree with David Scott Lewis that unless one has spent some time on “the ground” one cannot speak authoritatively. During the past six months or so, there is lot more hype in the tech-press about Chinese offshoring and also ‘analysis about “India vs. China.” This is similar to the ‘buzz’ over sourcing to India a few years ago…. Making me wonder: are the analysts and ‘thought leaders’ just following the herd; and if so, who has the crystal glass to gaze at the future?

Forrester is 100% right

Forrester is 100% right about the facts and 100% wrong about the future. If you ask global outsourcing vendors and major US customers about China, you will receive a very pessimistic view. However, China has grown a significant service outsourcing industry that is primarily serving local customers and has thus remained under the radar. These vendors do not enjoy a labor cost advantage relative to their customers and thus have to be much more labor efficient than the Indian vendors. Once these Chinese firms figure out how to credibly serve US customers, they will become a credible threat to the Indian vendors unless India can get over its disease of throwing cheap labor at every problem. You can see more details at this recent article in a leading Indian newspaper which quotes me, or at my post on Chinese BPOs’ secret weapon at the Rational Outsourcing Blog.

Thanks for mentioning the

Thanks for mentioning the Tech China blog, Rob.

Actually, I also write the "Letter from China" columns for both the Sand Hill Group and AlwaysOn Network; the RSS feed is http://feeds.feedburner.com/sandhillgroup .

Lewis, an SVP at China

Lewis, an SVP at China outsourcing firm Startech Global, writes the Tech China blog at the Startech Web site.

--Rob

I have a lot of respect for

I have a lot of respect for John McCarthy; he's one of Forrester's best analysts. Even when I was an analyst with META, I used to read John's research.

But John isn't on the ground, isn't based here in China. This is a problem with Jamie Popkin at Gartner, as well. It appears that John is too pessimistic whereas Jamie, especially with Gartner's ties to various Chinese government entities, is too optimistic. Regardless, neither are based here, really understand what it's like in a major outsourcing company. In a country where show is everything (and it's like a Hollywood soundstage here), you have to be an insider to get it. It's easy for Westerners to be fooled in China.

I'm a former analyst; I was VP, E-Business Strategies at META. But I was also VP, Business Development at the two largest U.S.-focused, China-based ITO firms (Worksoft and Beyondsoft), and am currently SVP with Startech Global, the outsourcing hub for Tsinghua University (China's MIT, Hu Jintao's alma mater).

It could be argued that I'm biased, too pro-China. But if you've read my "Letter from China" columns for the Sand Hill Group or AlwaysOn Network, or read my "David on IT Outsourcing in China" blog, you know that my positions are balanced, based on hard knocks and experience as an insider.

BTW, you also quote Wen Xiao from BT -- and I was a key guy in the loop with Wen when I was still at Worksoft. For the record, the key reason I left Worksoft was due to their ineptness in handling the BT account; it's an industry-shaping program and the winner of the account will likely win the horse race in China. It also cost me upwards of $1.5 million in commissions, something not easy to come by in the China outsourcing biz.

All of this being said, it's important to note that BT already has significant operations in India. If it were an India vs. China decision with a clean slate, India would likely win. But since they've already had a phenomenal success in India, China was a logical option for expansion. Also, I sense that Wen really, truly wants to make this work in China. This might also bias his judgment. Maybe, maybe not. Regardless, I believe Wen will make it work, will make it a success. But it won't be a success because of China. It will be a success because of Wen. Wen personally. Personally driving their China development ops.

The idea that costs are about the same or even higher in China is both true and false. If one does all their work in BJ, SH or SZ (Shenzhen, not Suzhou), then the costs might be the same as in India. (BTW, we all know that costs are not the same throughout India; Hyderabad is hardly as expensive as Bangalore.) But other options exist, like Dalian, Xi'an, Chengdu, Xiamen, Jinan, Nanjing, Hangzhou (although HZ is a bit expensive), Qingdao, and list goes on and on and on. And in these Tier 2, 3 and 4 cities, costs are much, much lower than in BJ, SH or SZ. (English-language skills are the key problem in these cities.) So don't buy the cost argument. I know that TCS is complaining of high costs in China, but they don't get it. I have a column slated for next month that will address this issue and why the Indian globals will fail in China.

So the Forrester report cites attrition rates, English skills and inadequate IP. Well, a lot of this might be more perception than reality. Attrition rates are awful, but no worse than the publicly stated rates of the leading Indian globals. English skills: Forget fluency, but English-language adequacy can be found. And adequacy is all that matters; no need to get into a deep philosophical discussion with the China-based tech team. IP. IP doesn't matter as much as one may think, especially given that most of the work done in China is either language localization/globalization (L10N/G18N) or software testing. And there are ways to handle IP issues. We have ways. So does Augmentum. One suggestion: Go with a U.S.-headquartered firm doing most of their development in China. So also consider Achievo and Freeborders.

I recently wrote a couple of columns on IPR issues in China for the Sand Hill Group. I suspect that many U.S. execs will be surprised by numerous findings and facts, both good and bad, noted in my columns. Bottom line: IPR problems tend to be exaggerated. However, like I said, work with a U.S.-headquartered firm like Startech, Augmentum, Achievo or Freeborders. Have a throat to choke in the States.

Currency issues. This hasn't been a significant factor, but the Rupee is also gaining against the dollar. Matter of fact, just about every significant currency is. So in a global selection process, China is a bit worse, but not much worse when it comes to currency fluctuation and revaluation.

One unknown (at least to me) is whether the tariffs that might be imposed next month will apply to the China-based ITO firms. Since we're U.S.-based, but doing virtually all of our development work out of the Tsinghua Science Park (in Beijing), with satellite ops in SH and XA, I'm not too concerned. Matter of fact, it might benefit us and hurt the China-headquartered firms. Time will tell.

Overall, I think the pessimism (if you can call it that) expressed by John McCarthy is more on target than the optimism (again, if you can call it that) expressed by the Gartner gang. Gartner reflects what the government (from the central government to the SZ Software Park) would like to see happen, but Gartner doesn't really get it in China. Tourist analysts giving advice: A truly dangerous thing. But John is also a tourist analyst, and this shows in his writings about China.

Both Jamie and John are superb analysts. Hey, analysts are not right about everything. But in both cases, they should stick to topics that they know. China is a topic that they don't know, don't understand. Their knowledge is way too superficial, idealistic, biased.