China is expected to overtake India to become the world’s leading provider of offshore outsourcing services in five to eight years, experts said at a global outsourcing summit over the weekend.
The service outsourcing industry has large growth potential in China, boosted by the country’s growing domestic demand and advantages in the manufacturing sector, Zheng Xiongwei, executive chairman of the Asia-Pacific CEO Association, said at the summit in Kunming, Yunnan Province.
The global market for offshore outsourcing services was worth $102.6 billion in 2011, with China taking a 23.2 percent share, ranking just behind India, data from the Chinese Academy of International Trade and Economic Cooperation showed.
"Though the service outsourcing industry in China had a late start compared with India, it has developed at a faster pace in the past five years," said Qi Haitao, CEO of consultancy Devott Services, Sunday.
However, the sector is facing challenges such as increasing trade protectionism. The US, Japan and some European countries are major users of offshore outsourcing services. In the current US presidential race, moving jobs that have been outsourced overseas back to the US is a hot topic.
"The election will only have a short-term effect on the outsourcing industry. But in the long term, the appreciation of the yuan and increasing labor costs in China will continue to squeeze the profitability of domestic companies," Qi warned.
Labor costs in China’s software outsourcing sector are expected to rise by 5 to 7 percent in 2012, following a rise of 15 percent in 2011, according to China International Capital Corp.
A 5 percent rise in labor costs, which account for 60 to 70 percent of an outsourcing company’s total costs, would squeeze the companies’ profitability by 1.5 to 2 percent, the report said.
Experts said developing the service outsourcing industry could help China restructure its economy and shift its development model.
"Current preferential policies for the service outsourcing industry will expire in 2013, and future policies should shift from encouraging growth in business scale to improving quality," said Qian Fangli, director of China Outsourcing Institute.
China designated 21 cities including Beijing as trial grounds for the outsourcing sector in February 2009, offering each of them annual grants of 5 million yuan ($785,000) between 2010 and 2012 to develop their outsourcing service platforms.
"In developing the service outsourcing industry, China can’t repeat its development style in the manufacturing sector. Instead it should focus on developing more high value-added services," Qi said.