Report: China's outsourcing industry lags India's

The Chinese tech economy has been racing forward, but neighbor India has a comfortable lead in the field of software outsourcing.

That's the conclusion of a recent study from consulting firm McKinsey, which said the fragmentation of China's software-outsourcing industry is a limitation. Of China's 8,000-some software services providers, only five have more than 2,000 employees, the firm said in its first 2005 McKinsey Quarterly report.

India, by contrast, has fewer than 3,000 software services companies, McKinsey said. At least 15 of these have more than 2,000 workers, and some--including Infosys Technologies, Tata Consultancy Services and Wipro Technologies--have "garnered international recognition and a global clientele," McKinsey said.

Although revenue from information technology services is rising in China, it is barely half of India's $12.7 billion a year, McKinsey said.

"It will be many years before (China) poses a threat to its continental rival in this arena," the report said.

China and India have been pushing to take on technology tasks from more developed countries, such as the United States. The practice, sometimes called offshore outsourcing, has been blasted by critics as hurting U.S. workers and threatening America's technology leadership. Defenders say it helps the U.S. economy overall.

Sending services work to lower-wage nations is in some ways an evolution of the overseas flow of manufacturing work. While China has been a manufacturing leader, India has emerged as the services king, with a number of U.S. companies locating operations there as well.

Citing estimates from research firm IDC, McKinsey said China's annual revenue in software and IT services rose by 42 percent a year, on average, from 1997 to 2003, to $6.8 billion. In addition, McKinsey said, the number of engineering graduates and software applications professionals in China has grown considerably in recent years, and the number of English-speaking graduates in the work force has doubled since 2000 to more than 24 million in 2004.

But the country's less prominent IT services providers aren't likely to attract top international clients, McKinsey argued. "In general, smaller companies are riskier and less reliable partners," McKinsey said. "They are more vulnerable to the loss of key personnel, may not have the financial muscle to survive for the duration of a project and often don't have the capacity or breadth to absorb large projects easily."

There is little movement among Chinese businesses to consolidate, McKinsey said. But, it said, "several Indian companies are considering acquisitions of Chinese firms to expand their operations."

McKinsey suggested that other challenges face Chinese IT services companies, including better talent management. "Organizational and operational changes are also needed to protect the intellectual property of clients," McKinsey said.

Where ITO leads, BPO beats

An interesting report from McKinsey and this may well be the case for technology services, but I comfortably predict that the offshoring of business processes to China will outstrip technology within 24 months.