Forrester recently published a report entitled China's Diminishing Offshore Role which has been widely quoted by the likes of Computerworld, Times of India, the Hindu Business Line, and China Economic Review. The Computerworld article says:

Forrester Research came out with a report with a rather downbeat assessment of offshoring successes there to date. According to analyst John McCarthy, the market "has not taken off as expected. While there continues to be demand from Japan and multinationals with operations in China, the offshore business from the US and Europe has been slow to materialize. In fact, China’s percentage of GDM resources for the top services firms like Accenture has dropped, while India and the Philippines have seen far greater investment."
The findings in the report , China's Diminishing Offshore Role, were based on interviews with executives at 10 large IT services firms. Reasons cited for disappointing growth included high attrition rates, a lack of English speaking workers, and inadequate intellectual property laws. According to one executive interviewed for the report, offshoring to China "would have to be 20% cheaper than India to be viable." Currently, McCarthy says, the costs are about he same.

Forrester’s facts are 100% right, but their conclusions are almost certainly 100% wrong. The original Forrester report states: “What we found is that while Chinese services firms are supporting a vibrant local IT market, China has not achieved the offshore growth that people expected.” I care much less about the absence of a significant offshore market, but the vibrant local market is certainly of interest to me. These Chinese vendors serving local customers do not enjoy a labor cost advantage relative to their customers and thus have to be much more labor efficient than the Indian vendors. Once these Chinese firms figure out how to credibly serve US customers, they will become a credible threat to the Indian vendors unless India can get a lot more labor-efficient. You can see more details on China’s threat to India at this recent article in a leading Indian newspaper [disclaimer: the article quotes me but that is not why I think its good] or at my post on theChinese BPOs’ secret weapon at the Rational Outsourcing Blog.

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