Outsourcing firms on an expansion spree

By Wang Xing (China Daily)
Updated: 2009-09-11 13:52

In an economic slowdown companies tend to scale down their business in order to deal with reduced demand. But for outsourcing giants, this is not the case.

Executives of foreign outsourcing giants such as Cognizant and Hewlett-Packard said they plan to aggressively expand their business in China, where demand for outsourcing continues to grow, as companies are more willing to outsource their non-core business amid the financial crisis.

Henry Yang, the China head of Cognizant, said the company plans to increase its headcount in China from the current 800 to over 5,000 in the next three years.

"We plan to significantly boost our capability in China in the next three years as our customers grow rapidly here," Lin said. As Cognizant's global customers are starting to put more of their focus on China, where the economic growth is expected to maintain at 8 percent amid the economic crisis, Cognizant also needs to expand its presence in the country.

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The firm's revenue rose to $776.6 million in the second quarter of 2009, up 13 percent from $685.4 million in the second quarter of 2008. Francisco D'Souza, the company's president and CEO, said large corporations are seeking outsourcing companies out to streamline global delivery, rationalize costs and create new business capabilities.

Lin said the Cognizant currently only has one delivery center in Shanghai and is considering launching another in the next couple of years in a second- or third-tier Chinese city.

He said that booming outsourcing demand from China's financial and healthcare industries will sustain the company's rapid growth in the country.

In fact, Cognizant is not the only company seeking aggressive expansion in China. Hewlett-Packard is planning to ramp up the headcount at its outsourcing unit in the country.

The US technology giant could increase its payroll by as much as 25 percent "as the domestic outsourcing market in China is still robust", said Andrew Lai, general manager, HP Global Delivery China Center.

"We believe that China may be able to revive its economy in a short time," said Lai, adding the priority for HP is to recruit new university graduates and train talent.

HP's outsourcing unit in China currently employs about 3,600 people, based in Shanghai, Beijing, Dalian, Chongqing and Wuhan. The company last year acquired Electronic Data Systems (EDS), one of the world's largest outsourcing firms, for $13.9 billion. EDS has around 700 staff in China.

Lai said that the international business, which accounts for three-quarters of HP's outsourcing revenue in China, has been affected by the economic recession and the falling dollar. However, orders from domestic customers, such as China National Petroleum Corp and Bank of China, remained stable.

Lai said the government's strong backing for the outsourcing industry as well as its 4-trillion yuan stimulus package would ensure that the industry's prospects remain robust.

According to official figures, the contract value of China's outsourcing industry reached $2.59 billion in the first three months of this year, a year-on-year increase of 25.9 percent.

Although many big companies, especially financial institutions, have reduced their outsourcing orders amid the financial crisis, outsourcing demand from domestic companies and local branches of multinational firms in China continues to witness rapid growth.

Li Jun, executive president of research firm CCID Consulting, said that China currently gets most of its outsourcing orders from Japan but many US companies are expected to transfer more of their orders from India to China, which will encourage many outsourcing firms to boost their presence in the country.

During the past decades, multinationals have been transferring non-core business to countries such as India and China to cut costs. But as labor costs and the value of the renminbi continued to rise in China over the past few years, China's attractiveness as an outsourcing hub was somewhat reduced.

In 2005, China launched a five-year plan to double the export value of its outsourcing industry, and also sought to attract 100 multinationals to transfer part of their service outsourcing industry to China by building 10 cities with international standards. It also took steps to help 1,000 Chinese outsourcing companies grow into medium- to large-size enterprises within the five-year period.

Liu Jiren, chairman of Neusoft, China's largest outsourcing company, said competition between Chinese outsourcing firms and foreign firms will intensify as more foreign firms boost their presence in the country.

Neusoft failed in its effort in March to acquire Dalian Hi-Think Computer Technology Corp, China's second-largest outsourcing company, but Liu said Neusoft is still in acquisition talks with a number of domestic and foreign companies.

He said as more European and US companies outsource their business to Chinese firms, China is expected outpace India in outsourcing over the next five to 10 years.