Source of Competitive advantage

Overseas players

With such a huge market in the offing and favorable development environment, there will be more windows of opportunity for Western companies and multinationals.

Big names such as Accenture and Capgemini have already been in China for several years and are busy adding more staff for their outsourcing operations.

"China is going to be an important emerging market for Indian outsourcing companies in the long run," Sangeeta Gupta, senior vice-president of the National Association of Software and Services Companies, an industry association in India, said at the recent China International Software and Information Service Fair held in Dalian, Liaoning province.

Other major Indian IT companies like Infosys and TCS already have presence in Chinese cities such as Shanghai and Beijing.

HCL Technologies, the fourth-largest ITO service provider in India in terms of outsourcing revenue, set up a unit in China in 2008. The company has a workforce of more than 90,000 employees spread across 31 countries. In China, it employs about 200, and "the number is expected to reach 2,000 by 2015", says Yu Zhongmin, regional head of HCL Technologies (Shanghai).

Yu says that despite the huge potential, there are several challenges for companies.

"For many Indian outsourcing service providers, performance in the US or Europe is what matters really for the overall business. However, it is not the same story in China's domestic outsourcing market.

"Rising labor costs and currency fluctuations are a drag on our profit margins in China," Yu says.

"The cost advantages are slowly eroding here, and the real competition now is about business model, talent and technology. Only those companies which can provide high-end services can stand out in the process of further consolidation of the market here," says Yu, who has been working in the outsourcing industry for more than 20 years.

He says HCL is considering developing new high-end services to catch up with the innovation boom in China, such as cloud-based services, as cloud computing is one of the key strategic investments for the Chinese government.

Genpact, a global business process and technology management company that was spun off from the industrial conglomerate General Electric, is stepping up its efforts to tap the fast-growing BPO service market in China.

Since its entrance to China in 2000, Genpact now has a workforce of about 5,000 in China. "Currently, the revenue from China's outsourcing market constitutes about 20 percent of our business, and it is expected that revenue from China's market will double by 2015," says Sophia Wang, vice-president of marketing, growth and special initiatives at Genpact Asia.

"We are considering opening some business delivery centers in less developed areas, for instance in the western part of China, not only for the sake of saving costs, but also to be in touch with the fast-growing market there," Wang says.

French IT services company Capgemini is also aggressively expanding its BPO services in China. Kenneth Poon, general manager of the Capgemini BPO center in China, says that China is a major market in the company's development plans.

Last year, Capgemini gained revenue of 9.69 billion euros, with 37.5 percent of it coming from its outsourcing sectors, including BPO and ITO. The revenue from China's BPO market constituted about 10 percent of the company's global BPO business in 2011, and it is expected to maintain the same proportion this year, Poon says.

"Although the proportion is the same as last year, Capgemini plans to realize revenue of 500 million euros from its global BPO services this year, compared with 400 million euros in 2011," Poon says.