Nearshore Americas

China’s Economic Woes Will Do Little to Slow Outsourcing Dominance

China may be having a rough couple of months economically, but there is little to indicate the country is slipping from its positioning as a global outsourcing kingpin. China, at least for now, is certainly not the darling it once was as  first quarter results revealed that real GDP grew at 7.7% year on year, below the official estimate of 8%. Industrial output also waned relative to January-March 2012, and services, which account for more than 40% of GDP fell back, weakening business confidence and dampening real investment.

Government belt-tightening has also stifled growth, as the government is seeking to restore the country’s astronomic debt, which in 2012 reached around 40% of GDP. This has worried China analysts, prompting downward revisions to the growth projection of entities like the World Bank.

This coincided with a boom in credit growth that provoked a credit squeeze from the monetary authorities, triggering liquidity constraints and an ominous credit crunch. Amidst worries that this resembles the meltdown that followed the collapse of Lehmann Brothers in 2008 in the US, however, China analysts seem bullish.

Increasingly, higher wages and an appreciation of the Chinese currency have driven companies to seek other options in the larger Asia region – namely Vietnam and Malaysia. Across the Pacific, however, Latin America could represent an interesting alternative, especially for services like business process outsourcing (BPO).

Benefiting from its geographic proximity to the U.S. and possesses and rising number of English-speakers, could established outsourcing markets like Mexico and Brazil fill in a void if China sees a big stumble?

Credit Crunching 

“The demise of China is greatly exaggerated. The Chinese have the fortitude to hold-onto the property they own”, says Michael Puscar, CEO of China-based Yuxi Pacific and part of Grupo Internacional de Tecnologia de Punta, Lex Paradigm, Plum Analytics and Knowmor.

So will we start to see less of ‘Made in China’ and more ‘Made in Brazil’ or ‘Made in Mexico’?

Not necessarily, says Puscar, who thinks that China will continue to remain the authority on manufacturing for a few more years, since its resource pools, especially labor, are still quite competitive.

However, Puscar pointed out to Nearshore Americas, “For white collar jobs, you are going to see things shipped over to other countries, such as neighboring Vietnam, or Latin America”.

Middle-income countries like Colombia and Costa Rica which have up-and-coming outsourcing operations, could definitely contend for some contracts. These emerging markets have a population with strong English-language skills, and their governments have not been shy on offering incentives for foreign investment – especially related to BPO. For example, Colombia eliminated the value added tax for the BPO sector exporting companies in 2010, giving them the same incentives as other exporting companies. According to a poll published by ECLAC, the same number of responders indicated a willingness to consider Colombia as a possible international location for R&D labs than for Argentina, Israel, Austria, and South Africa.

Grammatically Unrelated

Stan Lepeak, Global Research Director, KPMG LLP Advisory does not view China’s present woes as an opportunity for Latin America. “We do not view Latin America and China in the same sentence”, commented Lepeak.

Lepeak continues to view China as an interesting and compelling market, especially for companies operating in that region. “There are huge resource pools in China – that will not change”. Factor such as the recent wage inflation, stated Lepeak, is a consideration, but one that is not primary for services, which also seek factors such as a strong skill set – one that China possesses.

Indeed, China’s capacity for productivity and prevalence of IT acumen is incomparable, says Puscar.

According to William Riley, Director of Marketing at Stefanini, the company has had an excellent experience in the year or so that it has been operating in China. “We are excited to pursue additional resources in china, given the talent level that we have seen in China compared to other parts of the word”, stated Riley.

This success, Riley notes, owes in great part to a very strong, obvious, and deliberate support from the Chinese government to support foreign companies. “Remarkable how easy the government makes it for foreign companies to set up shop”.

Susana Martinez

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