Ever since China embarked on the journey to bolster its services industry, the focus has been on providing IT services to the domestic and international outsourcing market. The Business Process Outsourcing (BPO) industry, on the other hand, was until recently largely neglected. But now the trend seems to be changing — the BPO market has grown from $900 million in 2005 to about $1.3 billion in 2007.
Moreover, the spread of Chinese locations providing BPO services, too, has increased dramatically in the recent past. Prior to 2005, the majority of BPO activity was restricted to the metro cities of Shanghai, Beijing and Guangzhou. More recently, however, new BPO hubs have emerged, Dalian being an important one. Because of the cultural and geographical proximity of this northern Chinese city to Korea and Japan, it has emerged as an important BPO center for servicing corporates from these Far Eastern countries.
In fact, because of language considerations, the BPO landscape in China is quite different from that in other Asian service-provider locations such as the Philippines and India. American and European customers rarely source BPO services from China, and the market is dominated by three types of customers. First, customer companies from Japan, Korea and Hong Kong are the key drivers of BPO business in China. However, most of these companies restrict outsourcing to only low-end services and are focused on cost savings.
Second, multinationals that have large manufacturing operations in China and the Asia-Pacific region, and have substantially grown over the years. These companies are driven to outsource mostly to harmonize and consolidate their processes, scale operations, seek locations with regional linguistic skills, and, of course, to save costs. Some large foreign investors that have thousands of employees in China are DSM (5,000 employees), Danone (15,000 employees), Fuji (5,000 employees) and Akzo Nobel (7,000 employees). For such corporations, it makes sense to outsource to Chinese providers.
Third, domestic Chinese companies that outsource within China. Potentially, the demand from such companies is expected to grow considerably. These companies include state-owned enterprises, government agencies, and private and public enterprises. Traditionally, these companies have never outsourced, but are now starting out. For instance, some Chinese banks have started outsourcing processes such as low-end data processing, information validation and reference checks.
Drivers for BPO Growth
While cost is the primary driver for any outsourcing to take place, China also offers a lot of other facilities, such as low land rentals and favourable banking regulations.
Emerging regional hubs: Following the commitment to the World Trade Organization, the Chinese economy has been experiencing tremendous growth. There is also a trend of many multinationals shifting their Asia-Pacific headquarters to China. Many multinationals are now looking to setting up their shared-services centers in China or outsourcing their processes to local companies. As such companies gain experience in outsourcing, they plan to make China a regional hub for outsourced services.
Domestic companies getting competitive: Many Chinese companies are aggressively expanding their presence globally, and are now seeking to streamline their business processes to offer best-in-class services. They are outsourcing their activities to some global and Chinese BPO service providers.
Consolidation of business units: The growth of many multinationals in China has typically been driven by business units. During the initial phase of market entry, these multinationals focused on growing the business, thus leading to business-unit driven growth. In the process, various business units set up their own processes in order to efficiently run their respective operations. As the volume of revenue generated and the size of operations increased substantially, the need for consolidation of business processes increased. Presently, many companies that have been in existence in China for years are now in the phase of evaluating the consolidation of services.
Banking regulations: More recently, due to the changes in banking regulations in the country, foreign banks are now allowed to offer retail-banking services in China. Many global banks have entered China through partnerships with Chinese banks and have started focusing on improved service levels and cost efficiency. This will spur growth in banking BPO services in the near future.
