Outsourcing to China Pros and Cons
When discussing the pros and cons of doing business in China, it is important to first understand the outsourcing market. According to McKinsey & Co, the outsourcing market in China is still in its infancy, making up just a fraction of the $1 trillion-plus global outsourcing market – the market is evolving quickly, however. China’s outsourcing market weighed in at $15.2 billion in 2007, with business process and IT outsourcing exceeding $6 billion and $9 billion respectively. 2007 also saw a 40% increase in revenue from work outsourced to China, reaching 15% of total work outsourced – $2.3 billion. And the market is only growing.
Though outsourcing to China is attractive to many companies, it is not a good option for every business. There are pros and cons of doing business in China, and whether it is a good move depends entirely on the industry and business model. For instance, many companies who require affordable manufacturing can benefit from outsourcing to China.
Other industries that seem to benefit from outsourcing include business process services, customer service, back-office administrative work and, increasingly, high-end IT, and knowledge management activities. According to McKinsey & Co. survey of 75 software and IT services companies in China, the number of companies achieving Capability Maturing Model (CMM) level 4 or 5 certification – which details optimization and degree of formality in business processes – rose to 39% from 2004 to 2007. Five is the highest-level certification achievable.
Another of China’s outsourcing strengths, besides manufacturing, is their large pool of skilled engineers and technicians, with 1.5 million engineering majors graduating in China is 2006.
The Pros and Cons of Doing Business in China
A business chooses the platform based on a factual analysis of the market, labor skill, cost, compliance regulation, and many other factors. Following are the collation and categorization of various such factors.
Advantages of Outsourcing to China
- Lower CostsOne of the main benefits of outsourcing to China, with regards to manufacturing specifically, is the lower labor costs, which are much lower than in America and Europe, despite rising by about 12% each year. Overhead costs are also much lower.
- Closer Proximity to Resources In manufacturing especially, outsourcing to China can mean easier access to additional resources, which in turn leads to lower costs and lead times in production.
- Access to Expertise and Technologies Outsourcing manufacturing to China gives business instant access to increasingly sophisticated and competitive technology, research and science. While many large companies already have access to these, outsourcing to specialist vendors in China gives smaller companies access to these resources as well.
- Easy Access to the World’s Largest Economy The Chinese economy has been growing consistently for the last three decades, and more people live in China than anywhere else in the world. Though accessing the Chinese market can be challenging, having an outsourcing agreement in place can dramatically reduce this difficulty.
- Easier Access to Asian and European MarketsWith a base of operations in China, accessing the Asian and European markets becomes easier, and even expansion into these markets can be outsourced through China for even greater ease.
With a base of operations in China, accessing the Asian and European markets becomes easier, and even expansion into these markets can be outsourced through China for even greater ease.
Disadvantages of Outsourcing to China
- Final product quality may not be to the standardUnfortunately, the final quality of products manufactured in China may not always be up to international standard, especially without strong oversight. What might be considered safe in China doesn’t always align with what is considered safe in other markets.
- Language and cultural barriers The language barrier may make it difficult to get certain messages across. Cultural barriers, such as the legalities of child labor in China, may also be a problem for other markets.
- No copyright respects There is a general lack of respect for designs and international copyrights in China, which is something to think of before deciding to outsource.
- No control over additional outsourcing There is nothing stopping the agency you outsource to from outsourcing to another agency and acting as the middleman. This can have impacts on your final control over the project and can lead to a logistical and PR nightmare.
- Shipping and logistics After products are manufactured, proper warehousing and transportation to the final market can become a challenge and can increase costs dramatically if not handled correctly.
- Long lead times Starting up outsourcing processes in China can be a lengthy procedure, and long supply chains are involved. Locating the right outsourcing partner can also take a long time.
Other Popular Outsourcing Destinations in the Asian Continent and Their Benefits
Outsourcing to the Philippines
- The Philippines, with regards to the English-speaking population, is the third largest English-speaking country in the world, which translates to smooth working communication
- There are thousands of fresh administrative, technology, marketing and IT graduates every year, as well as seasoned workers with enough experience to manage teams or projects
- The culture is hospitable and, because the outsourcing of business process services contributes greatly to the gross domestic product of the country, they welcome foreign business investors.
Outsourcing to India
- According to the latest AT Kearney index, India is unrivaled in the availability of skills and scale, making it the best place for outsourcing
- Indian agencies are heavily focused on deploying the latest infrastructure and technologies, as well as training their workforce, conducting training programs regularly
- Labor costs are much lower in India, leading to lower costs in general and increasing ROI
Outsourcing to Vietnam
- Vietnam has a large and constantly growing talent pool, as well as experienced and well-established service providers
- They invest strongly in their IT and technology talent
- Vietnam ranks extremely high in studies on global outsourcing
Outsourcing to Malaysia
- Taxes are cheaper in Malaysia than in China, and Malaysia does not have a value-added tax, which can make manufacturing more cost-effective
- Malaysia has a much lower labor attrition rate than countries like China
Outsourcing Destination with a Balance of Quality, Cost, and Flexibility
The importance of outsourcing cannot be overstressed, and though there are pros and cons of doing business in China and other countries, the benefits can often outweigh the disadvantages. Outsourcing to India means better pricing flexibility, access to a pool of educated professionals with a wide range of skill sets and can enable you to delegate the non-core activities while freeing you up to manage important business functions.
Back Office Pro (BOP) offers reliable offshore outsourcing, with more than ten years of experience providing services to clients across the United States, Canada, Australia, and throughout Europe. As a trusted name for outsourcing business processes, BOP offers a comprehensive range of back-office services, allowing you to focus on the core aspects of your business.