Inside the dragon: Outsourcing destinations in China

China has become an emerging location amid the development of the global outsourcing sector, and establishing a physical presence in China is now a necessary strategy for outsourcing enterprises. A wide range of enterprises have set up service outsourcing operation bases in various Chinese cities, including global outsourcing enterprises and relatively new domestic Chinese enterprises.

According to the Ministry of Commerce of China, 60,247 service outsourcing contracts were signed in 2009, a year-on-year increase of 142.6 percent. The contract reached USD 20 billion, an increase of 185.6 percent, and the contract value of offshore outsourcing reached USD 14.8 billion, an increase of 153.9 percent.

Since February 2009, China's State Council has approved the setting up of 21 cities as models of service outsourcing, which will receive special preferential policies in tax and subsidiary. These cities have also leveraged the opportunity to issue local policies in support of the development of the outsourcing industry. They have invested heavily in public infrastructure, industrial parks, education and training. Other cities around China are also stepping up their efforts to gain a foothold in the service outsourcing industry.

Edge Zarrella, Global Head, IT Advisory, KPMG China said, "With the service outsourcing industry in China growing at a rapid pace, establishing a physical presence in China is imperative for outsourcing enterprises. While these cities may have similar advantages in terms of industrial policies and infrastructure, focus and potential may vary from one city to another. As such, companies need to weigh their own development requirements and strategies to determine which cities best suit their needs."

However, identifying and selecting the right strategic location for outsourcing in China can be challenging, as every city has its own unique offerings.

Last year, KPMG China issued their first China outsourcing report entitled A New Dawn: China's Emerging Role in Global Outsourcing. This second report titled Inside the dragon: Outsourcing destinations in China examines 24 key outsourcing cities in China (three additional potential cities have been included in this report), highlighting the breadth of locations available for outsourcing service buyers and providers. The objective of this report is to provide reference materials to companies interested in China's outsourcing industry.

When selecting an appropriate city to establish a business base, each enterprise has its own established methods and procedures. Common evaluation criteria used to select a city include costs, supply of labour, infrastructure development, techniques and skills available in a city. Enterprises will typically strike a balance between these criteria. As such, how a company best acquires and analyses the most up-to-date economic, social and cultural data in these major service outsourcing cities is the key for enterprises to successfully select a city for its outsourcing base.

As Ning Wright, Partner in Charge, China Sourcing Advisory, KPMG China explained, "The service outsourcing industry is a fairly new business model concept in China and it's very pleasing to see that the Chinese government has given its full support to the industry. However, companies need to note that choosing an appropriate destination is only the first challenge. A comprehensive plan needs to be established to ensure that all opportunities and advantages offered by the location are optimally leveraged; they also need to implement any strategies, which mitigate risk."

Download: Outsourcing-destinations-201003.pdf