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"The industry has matured and so have expectations. The entry barrier is higher than ever"

Vassilis Serafeimidis, PA expert in shared services and outsourcing


Crouching tiger, eager dragon: China’s role in the future of offshore IT

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Over the last two decades, as the balance of world power has shifted from West to East, India has established itself as the preferred destination for offshore IT services. In recent years, however, questions have been raised about India's offshore IT industry and its ability to continue to dominate the offshore market, especially as inflationary pressures in India are forcing some companies to look elsewhere for outsourcing providers.

China – already the undisputed world leader in offshore manufacturing – has been suggested as a likely challenger. Correspondingly, its government has embarked on an investment strategy to help it grow its share of the offshore IT market. As yet, however, Chinese companies are not beating Indian companies to the largest IT outsourcing contracts. It appears that something is holding them back.

During a recent research visit to China, during which we met representatives from over 70 companies, we found that Chinese companies need to develop their strengths in language, experience, transparency and brand before they can successfully compete with their counterparts in India.

The communication barrier

While it is possible to provide offshore manufacturing capabilities without strong language skills, the same cannot be said for IT services, which rely on clear and regular communication between the provider and the customer. There may be significant uptake of English in Chinese universities but, from our research, it appears that much of the Chinese IT industry is still a long way from conducting business in English.  The communication skills of the Indian workforce are often cited as a potential area for improvement, despite English being widely spoken in the country. Given that, China will need to focus on language as a priority in order to compete with India on IT services delivery.

Expectations in the offshoring market

Offshoring has come a long way since the ‘body shopping’ era of the 1990s and early 2000. Back then, Indian companies met demand for IT services by exporting technical resources. Over the last decade, Indian providers have gained valuable experience and now regularly undertake complex assignments that require mature project management and business skills.

China is producing some 23 million graduates every year and while many of them may have excellent technical skills, they do lack experience in delivering large-scale offshore IT projects.

The offshoring industry has matured and so have expectations. The entry barrier is higher than ever and it is no longer about just the technical skills, thereby making it difficult for China and Chinese companies to challenge the dominance of India.

Transparency and a strong industry body – or lack thereof

Customers are required to take a huge leap of faith when offshoring their IT. Trust and transparency are key to making the offshoring relationship work. Our observations suggest that Chinese companies struggle to provide this transparency to a level expected by a Western client base. This is made worse by a perceived lack of trust in Chinese companies’ handling of data security and intellectual property.

In India, many such concerns are addressed by Nasscom, the trade association that represents over 95% of the country’s hi-tech sector. A comparable body does not exist in China, which means its companies lack the credibility of many Indian firms.

Western trust in ‘brand India’

‘Brand India’ was built by Indian companies such as TCS, Infosys and Wipro, which worked hard to develop and maintain their presence among Western CIOs. During our visit to China, we met over 70 companies but few names stuck. These companies are doing some great work but must invest in developing their brands if they are to rival those in India.

While offshore software development in China is growing, much of the growth is coming from the near-shore Asia-Pacific market. Many Indian companies have set up bases in China to service Asia-Pac customers, but they still service many of their Western customers from India. This suggests to us that companies operating from China have yet to develop credible plans to serve the Western client base from this location.

While China remains a plausible contender to compete with India on offshore IT services, its companies must first meet these key challenges.

To find out how PA can help your business realise sustainable value by thinking differently about shared services and outsourcing, including offshoring, contact us now

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