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Report: China IT outsourcing has opportunity to grow

By : Agencies|Updated: 2009-01-16

China's IT outsourcing industry remains well behind India's but has made great strides in recent year, and the economic crisis presents an opportunity to close the gap, consultancy McKinsey & Co said on Wednesday.

"If you really want to jump start the growth, if you want to grow double or triple ... don't miss a huge opportunity here," Alex Peng, a McKinsey partner, told reporters.

Presenting a report on China's outsourcing, McKinsey said it figured the global outsourcing sector for financial services -- on which the sector relies heavily -- shrank 39 percent in the first nine months of 2008 to $11 billion in total contracts, but would benefit as companies around the world desperately look for ways to reduce costs.

However, Chinese companies are hindered by weak English-language skills and perhaps weaker intellectual property rights protection, areas where India excels.

"They are not keeping pace with the big players in India," said McKinsey partner Enrico Benni.

For China's IT outsourcing sector to thrive, McKinsey reckons it has to capitalize on its huge domestic manufacturing sector, the growing number of multinationals which have built research centers in the country and government policy which nurtures the industry.

China's outsourcing sector -- which includes companies such as Neusoft Corp and VanceInfo Technologies -- commands less than 10 percent global market share, but is growing at between 20 and 40 percent a year, analysts say.

Yet the industry is growing just as fast and the Indians even faster.

"Even in 2010, China will account for a fraction of the global market and will rank clearly behind India," said Deutsche Bank analyst Thomas Meyer in a report this week.

The Chinese government has financial resources and direct decision-making power over State agencies and State-run firms to unleash a wave of domestic IT services demand, McKinsey said.

But China's huge domestic manufacturing base has not escaped the attention of Indian rivals and Infosys, Tata Consultancy, Wipro Ltd and even Satyam have opened shop in China in recent years, adding pressure on Chinese firms which have global ambitions.