Will China be an offshoring favourite?

Free enterprise is all about gravitating to where opportunity is, and in a fiercely competitive market opportunity resides in countries that offer cheap skilled labour.

Recent market studies forecast runaway growth for IT offshoring over the next few years. The question now is not whether IT will be offshored, but where to. It’s not at all clear that the offshoring havens of today will continue to be tomorrow’s preferred destinations.

Of current favoured offshoring destinations, India remains the most popular. Major software providers such as Microsoft and IBM are investing more in their Indian operations, and increasing the size and scope of their subsidiaries in that country. Yet not all big software firms are cock-a-hoop about their prospects in India. Enterprise software vendor SAP AG isn’t as enthusiastic.

“India is slowly getting expensive,” rued SAP CEO Henning Kagermann in an interview in the German edition of the Financial Times. “We have decided to hire a certain number there, and then start looking at other locations.”

The SAP chief cited China as one possible location. The number of employees SAP has working on development in China is in the low hundreds, he said, but it may easily rise to the thousands.

Will SAP set a precedent that other big software companies will follow? It’s too early to tell. But Kagermann’s statement has generated a lot of discussion on blog sites around the world.

A McKinsey study on China’s software industry published last year identified several issues with China’s software sector, including a fragmented industry that simply lacks the scale to attract top international clients, weak process controls and product management, and very inadequate talent management/employee retention programs. However, none of these seem insurmountable obstacles. Scale and consolidation would be appear to be the antidote to most of them.

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