Whenever anyone writes about China, there is a certain tendency to fall back on stereotypes and clichés about this booming colossus. We are no different (note “booming” and “colossus”). Here are some thoughts after meetings with PRC business process outsourcers (BPO), application development firms (ADM), language service providers (LSP), and the multinational companies that employ their services:

• China’s role in the world economy. As we spoke with them, we noted the huge ambition of Chinese outsourcing companies (and their sponsors and investors) to become world players. This was manifested in the build-up of software and IT parks, the massive investment in the country by foreign high-tech and financial services firms, and a stated move to a greener society with less manufacturing and more emphasis on services and the growing knowledge economy.
• Company size and location. Many of the firms we interviewed don’t want to be seen as Chinese companies, but would rather benchmark against Indian companies now, western firms later. All feel they can compete with the best of the west on technical grounds. We heard a recurring theme comparing China to India — that’s no big surprise given the can-do, high-growth mentality underlying discussions with any company in Brazil, Russia, India, or China (BRIC). However, many Chinese ODC firms are small — less than US$25 million in revenue, yet they want mindshare parity with Indian outsourcing companies that earn a billion-plus in revenue.
• Staffing. Finding enough people to meet the IT demands of a growing economy and the expectations of companies seeking offshore help is a problem — remember, even with 1.3 billion people, not everyone can code or translate. Labor rates max out at US$20-25 on average versus twice that or more in the States. One executive joked that her firm, located in a Beijing office park, should offer prospective employees a walk-in interview. That would let them interview during lunch and start a new job after lunch.
• Competencies. One obstacle to outsourcing growth in China compared to India will be the lower level of English competency. This was a major problem at some firms we interviewed, but not an issue at others. On other fronts, the Chinese claim better access to intellectual assets than Indians due to its higher rate of university graduates.

China’s growth is white-hot, with Q2-2007 growth coming in at an annualized 11.9% — faster than any time in the last decade. At this level of expansion, the Chinese government is under constant pressure to deal with trade, currency, environmental, and now product quality issues. China’s software industry has paralleled the country’s growth over the last 10 years, so none of the companies has had to deal with an economic downturn.

At the risk of sounding like Cassandra or Chicken Little, we advise companies engaging with the country’s outsourcers to question what will happen when the inevitable slowdown does occur. At the very least, that means building contingencies and remedies into every contract. We have lots more advice on how to engage with Chinese outsourcers. In the final analysis, most companies looking to offshore application development and language services to China will find themselves echoing Churchill’s comment about Russia being “a riddle wrapped in a mystery inside an enigma.”

Will manufacturing disasters and product recalls such as Mattel’s affect the IT and language services sector? They may raise some red flags, but we suspect that six months from now, most problems will be fixed and forgotten. And we agree with James Fallows who argued in a recent Atlantic Monthly article that we’re too far down the offshoring path to change our economic behavior.