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Debunking the Myths Surrounding Sourcing Services in China

by ISG

By Scott Furlong, Partner, TPI

Sourcing manufacturing from China is very commonplace today and has been a solid sourcing alternative for a number of years. Sourcing services (IT, Finance & Accounting, etc.) from China is a much more recent trend that is picking up momentum very quickly. This summer, the Chinese central government hosted a sourcing summit in Hangzhou that attracted hundreds of interested clients and service providers. 

While participants learned a great deal over four days, we noted these TPI Top 5 myths about services sourcing from China that should be debunked:

1.  “China is an embryonic, less mature delivery location for services.” China is home to more than 9,000 service providers delivering services from Chinese delivery centers. Large multi-national service providers are also present there, and the vast majority of the China-based providers are small, rapidly growing companies.

2.  “Chinese service providers are simply trying to emulate their peer companies in India.” This couldn’t be further from the truth. Speaking with dozens of Chinese service providers made it evident that the choice for many is to serve the domestic market — not to provide services to global companies with business in Asia. Most of the providers do not want more than 40 percent of their business mix to derive from foreign clients.

3.  “Data privacy violations are rampant in China.” In private conversations most service providers acknowledged this perception. While they struggled to identify any instances that they were aware of in recent years with their own companies or their competitors, many acknowledge that data privacy laws still lack some “teeth” — notably in enforcement — so the industry sees a need to police the data privacy issue itself.

4.  “The Chinese government is a barrier to setting up delivery centers.” This is another myth where the truth is completely opposite. The Chinese central government and regional governments are actively setting up and promoting 20 model cities to attract service delivery centers. This includes building the infrastructure ahead of the curve and creating incentives for foreign academic institutions to set up campuses in China. The incentives can be extremely enticing.

5.  “Software and technology companies are the only major vertical industries engaged in sourcing in China.” The Offshoring Research Network at Duke University has reported that software and technology verticals make up only 38 percent of the current market and that Chinese service providers project the largest growth to come from Finance and Insurance, Healthcare, Education, and Automotive verticals during the next several years.

The enthusiasm and optimism in China at this time for sourcing services is contagious. Many more myths are waiting to be debunked in the coming years. Will you be a participant or a spectator?

TPI specialists can guide you through evaluating your China sourcing options, whether simple or complex. For more information e-mail Scott Furlong, Partner, TPI or phone him at +1 330 721 2940.