KPMG on Outsourcing to China

KPMG recently produced a report on the growth of outsourcing to China, including information on the benefits of outsourcing to China and the formation of outsourcing businesses in China, A New Dawn: China's Emerging Role in Global Outsourcing. The focus is on IT outsourcing in software development. The report is solid and neither sugarcoats the advantages of outsourcing nor shies away from the disadvantages to outsourcing to China. There are also a handful of in depth case studies on Chinese outsourcing companies serving the domestic market, other Asian markets, and the Western market.

The two greatest advantages that China has as an outsourcing destination are high number of college graduates with the necessary technical skills, and a relatively low salary for those graduates. China graduates 600,000 college students per year with engineering degrees, compared to 400,000 in India and 70,000 in the US. This provides industry with a "massive pool of engineers at the entry level." China still lacks the necessary amount of senior-level program managers, though. The salaries for entry level engineering graduates is much lower than in India, at $250-$350 per month compared to $750-1000 per month.

The greatest disadvantages to outsourcing to China include limited English language skills compared with India, highly fragmented market, high variation in local strengths and weaknesses, and ye olde IPR protection problems. China does lack the English language skills of India, but China is improving, and China does have the advantage of relatively high numbers of Korean and Japanese speakers. The report notes that though market fragmentation creates huge opportunity for consolidation, it is hard currently hard for foreign companies to make an informed choice for outsourcing service provider. Of the 20 cities identified on page 20 of the report as strategic sourcing locations, there is wide variance in education and infrastructure, which is just not the case in the relatively more "monolithic" levels of education and infrastructure development in India.

This is a really good report, and it's worth the read even if you just stick to the excellent case studies.