For all its rapid developments in other aspects of business, China has never really been perceived as one of the most attractive locations to which core business operations could be outsourced. This could be about to change according to sourcing industry commentators, KPMG.

In launching their report entitled A new dawn: China’s emerging role in global outsourcing, KPMG’s Advisory practice suggests that China is no longer the 'quiet man' of the outsourcing industry.

Over recent years, China has made major strides in laying the groundwork for a diverse and successful outsourcing market. Central and local authorities alike have demonstrated a quiet determination to promote IT and other business services industries in locations across the country, the report says. The quiet progress which has marked the early development of the Chinese outsourcing industry is about to catapult it to the forefront of the global outsourcing market according to the consultancy firm.

Edge Zarrella, Global Head of IT Advisory and a partner in the Hong Kong firm, explained: “China has been quietly asserting its position in the global outsourcing industry, attracting little in the way of fanfare. Having conceded a significant head start to the now established outsourcing centres like India, it suffered somewhat from the trend for multinationals to place all of their outsourcing work in one location.

“Two things have changed recently. Firstly, the plan enacted by the Chinese government in 2006 to develop 10 internationally competitive outsourcing cities is bearing fruit. Secondly, there has been a realization amongst many major corporates that they can combine the complementary strengths of different outsourcing markets to meet the increasingly complex challenges which they face. This is a major — and timely — boost for the Chinese outsourcing industry as it means companies are no longer thinking of, say, China or India. Now they’re thinking about China and India.

“It’s for these two reasons that I believe that China is not one to keep an eye on in the future; it’s the one to keep an eye on now. China’s days as the quiet man of the industry, gently ambling along with the pack, are over.”

The report suggests that strategic decisions based on a choice of one or more outsourcing destinations require a complex series of evaluations and, ultimately, trade-offs. No single destination can offer everything on the checklist. Therefore, companies are now combining the complementary strengths of several markets. The result is more robust and flexible than relying on a single supplier.

However, while many companies are showing greater appetite for outsourcing diversification, they still want the reassurance of dealing with companies with global perspective and experience. This is where the Chinese government’s 1000–100–10 plan comes into play.

Launched in 2006 with funding in excess of US$1bn, the plan aimed to establish 10 Chinese cities as global outsourcing bases (subsequently increased to 20 cities in January 2009), to attract 100 international corporates to outsource to these locations and to develop 1000 Chinese outsourcing vendors to service this new client base. It was a breathtakingly ambitious plan but the results can be seen with Dalian, Shanghai and Beijing already ranked in the top ten most attractive cities for outsourcing It is reckoned that Shanghai could even challenge Bangalore for the top spot within two years, with Dalian and Beijing thought likely to make it into the top five.

Ning Wright, KPMG’s China Sourcing Advisory Leader and a partner in the Chinese firm, commented: “On current reckoning, China may have only around ten percent of the global outsourcing market. It also still faces the inevitable concerns around intellectual property protection — although huge strides forward have been made in this area — and how it can ride out the impact of the economic crisis. In addition, there is a growing clamour for a professional trade body to be formed to articulate the industry’s needs — just as NASSCOM does for India. However, you cannot fail to be impressed by the vision which China is demonstrating in building a potentially world-class outsourcing industry and the incredible pace at which it is turning that vision into reality.”