China On The Move

John Buyers of Stephenson Harwood explores some of the key issues surrounding China's determination to be an offshore services giant.

The popular image of China is that of a low-cost, high volume manufacturing industry. According to a recent report commissioned by Microsoft, China's $14 billion IT industry will overtake the UK's in the next five years. So what are the factors that are coming into play which will make China an increasingly attractive destination for offshore services and which will, in the near future, transform the economic paradigm of the Middle Kingdom and reinvent it again?

China versus India

India may be the undisputed current leader as far as offshore outsourcing is concerned, but China has turned its attention to the lucrative offshore services market and is keen to close the gap between the two economies. The labour costs of China's IT industry compare favourably with India's which are increasing by 15 percent per annum. Although India has made great strides of late to improve its telecoms infrastructure and energy supply, China's transport, energy and communications infrastructure is some way in advance of India's, especially on its eastern coast. The Chinese government is also investing huge sums to try to erode India's other big advantage: its population's English language skills, and China now boasts more than 25 million English-speaking graduates.

Chinese outsourcing policy

The clearest indication of the Chinese Government's enthusiasm to grab market share in the world outsourcing market is the liberalised regime announced 2006 by the Chinese government's Ministry of Commerce (MOFCOM), the Ministry of Information Industry, and the Ministry of Science and Technology. This has permitted the establishment of new China Service Outsourcing Zones, in which outsourcing is encouraged and that provide subsidies and tax breaks for outsourcing suppliers to establish and expand their activities.

The aim of this initiative, known as the '1000-100-10 Project', is to build 10 'service outsource cities' (although there are actually 11 at present), attract 100 transnational companies to bring their outsourcing business to China, and foster 1,000 qualified Chinese home-grown outsourcing companies by the year 2010.

The initiative targets specific sectors including software; financial services; film and television; innovation and design; specialist services, such as accountancy and legal services; and commerce. The first...