Perspective on Outsourcing to China and India

Though not a new phenomenon, it is now possible to analyze and qualify the processes that have made overseas outsourcing successful and profitable, write the analysts at Capgemini. The report, Outsourcing to China and India: A North American Perspective, notes that, in fact, some North American companies have been outsourcing to China for as much as 40 years. However, experience in India is much more recent.

With India, much of the outsourcing has been in the area of information technology. Supply chain processes related to manufacturing are a challenge and an obstacle for North American companies.

Chinese infrastructure has proven to be a challenge as operations move away from the economic hubs along the coasts and into the less developed areas of China's interior. The rapidly developing economic hubs are already exhibiting problems with overcrowding, traffic congestion, air pollution and rising costs. Skilled labor and raw materials are particularly affected. Companies with substantial size in China are extending their reach into the interior by forming partnerships to lessen some of the impacts of these problems.

Though China has shown a willingness to address issues of quality and safety concerns, companies are putting greater significance to the need for risk mitigation. Other positive signs of China's response to business needs include major investments over the last 10 years and changes in laws that encourage a business culture that fosters growth. Today, only about a third of the Chinese economy is state owned. These and other reforms have allowed China to double its share of global manufacturing output as most wealthy Western countries see manufacturing output decline.

Since 2003, two years after it joined the World Trade Organization (WTO), China's gross domestic product (GDP) exhibited 10% growth each year. While that growth is expected to continue, it will be at a somewhat slower pace.

As China's economy grows, so does its consuming population. One major consumer products company reports it no longer uses China merely as low-cost production, instead, it has shifted production of products bound for North America and other markets to other low-cost locations. Its China-based production serves the Chinese consuming market.

Wage inflation in the urban hubs, mostly located along the eastern coastal regions, has led to China manufacturing wages outstripping the Philippines and Indonesia in terms of average manufacturing wage. Though costs are lower in the interior of China, the infrastructure limits the opportunity for North American companies to take advantage of those lower costs.

Another factor affecting the growing use of China as a manufacturing source is the rise of protectionism in the US and Europe. The substantial trade surplus China enjoys with the US is a growing concern for many as it drives pressure on the Chinese government to revalue its currency.

Of North American companies surveyed, many of those with operations in China said they shared planning responsibilities, with final execution of weekly and daily planning taking place in China.

Added to the need for logistics skills is the matter of cultural issues. Many companies attribute their success in China to efforts to understand and respect local culture. The sooner their staff became localized, particularly when Chinese nationals were bilingual and educated in American business practices, the sooner performance improved.

For outbound flows from China, most North American companies surveyed used ocean freight and moved through the ports of Hong Kong, Tianjin, Shenzhen and Shanghai. Among the challenges on outbound shipments, companies cited lack of standards on pallet loading, dock heights, and truck size. In addition, the need for greater visibility along the supply chain was also mentioned.

While many companies operating in China see potential for increased investments there, they are also looking to countries like Vietnam, Thailand and in Latin America as ways to mitigate some of their risks and shorten the supply chain cycle time.

Meanwhile in India, the services industry has become the country's largest sector. It's more modest [than China] GDP growth rate of 8% per year should remain reasonably constant.

Foreign direct investment levels are low compared with China, however, analysts expect the Indian government to continue to seek ways to increase investment.

As in China, the fast-growing consumer market is changing companies' views of India as just a low-cost manufacturing site. But economic and political factors could hinder this. Poor infrastructure may delay foreign manufacturing investments. Despite the government's more favorable views on foreign investment, there are still restrictions in some of the fastest growing industries.

Taxes are a major issue in India. Corporate tax rates are high, with a basic rate around 35%. There are also taxes by state and for interstate commerce.

Because logistics and outsourcing within India can be a challenge, some of the companies responding to the survey indicated they handled their own manufacturing and did production planning in the US and communicated the resulting plans to operations centers in India.

Success in India requires developing a good knowledge of state-level taxes as well as the infrastructure limits.

Capgemini provides consulting, technology and outsourcing services. Global revenues for 2007 were €8.7 billion. It employs 83,000 people worldwide.

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