China Aims to Gain from Satyam Mess

For Western companies looking to outsource to Asia, there's long been a clear division of labor. Manufacturing jobs go to China and services work heads to India. That belief has helped Indian IT companies such as Infosys (INFY) and Wipro (WIT) become global powers in the services industry. Meanwhile, the preference for India has stymied the growth of China's IT-services outsourcing providers. No Chinese company has established itself as a global player and most have struggled just to crack the 1,000-employee barrier.

Now some executives from China services companies are hoping the scandal surrounding India's Satyam Computer Services (SAY) will finally convince clients to consider China when looking to outsource tech and research-and-development support. The turmoil affecting India's fourth-largest IT services company, in which the longtime chairman admitted to fraud that artificially inflated profits, will lead U.S. and other Western clients to think twice about relying too much on Indian companies, says Brian Keane, chief executive of Dextrys, a Wakefield (Mass.) company that has 1,100 of its 1,400 employees in China. "There is a very strong sentiment in the marketplace about mitigating risk relative to being overexposed to India," he says. The Satyam scandal, following the November terrorist attacks in Mumbai, is prompting companies to ask "What is our risk-mitigation strategy," adds Keane.

Even before the latest setbacks, China outsourcing execs argue, sentiment was starting to turn in their favor. For several years, Indian IT firms have had to contend with challenges such as rising wages, employee turnover, and an appreciating Indian currency. The global financial crisis has slowed or reversed those trends, but they did prompt businesses outsourcing to India to think more about China, says Jean Cholka, chief executive of Freeborders, a San Francisco company whose 650 employees are mostly in China. "That presented a challenge to companies that had a lot of people in India and made them curious enough to look elsewhere," she says.

Increasing Revenues

Others agree there is potential for China to become more of a force in services outsourcing. Although it's much smaller than India's, the Chinese services sector has been growing impressively, says Enrico Benni, head of the Greater China business technology practice at McKinsey & Co. China accounted for about 10%, or $6 billion, of the industry's total spending worldwide in 2007, he says, and revenues in the mainland have been increasing by about 20% annually for several years (though India's services sector has expanded by about 30%). A growing number of Chinese companies have more than 1,000 employees, says Benni, and many have achieved the high-level certification that potential customers require.

The Chinese government also has been successful in fostering the development of IT services clusters in tech parks in cities such as Dalian, Tianjin, and Chengdu. "The government has been very active," says Benni. "There are positive messages in terms of what is happening."

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