Outsourcing Q&A

Q:China is considered as a manufacturing hub. However, China’s services sector is now booming with a 41% share in the country’s economy. What according to you will be the short and long term impacts of this on China?

A: I’m not sure this is entirely accurate. The recent readjustment in the statistics marking the Chinese economy comes from change in perspective rather than a shift in the reality on the ground. Previously the statistics on China’s economy did not count the small private businesses in the service sector like small restaurants and hairdressers – the readjustment is just a sign that the government is starting to count what was already there. If China is indeed moving to a more service sector economy the long term impact will likely be more liberalization – especially political liberalization since this is what is generally demanded from a large middle class.

Q: What do you think are the various reasons for the boom in China’s services sector? What will be the impact of this boom on other countries?

A: The move towards the services sector is probably just an inevitable effect of economic growth and social development.

Q: How do you view the liberalization scenario in the Chinese services sector? What are the service areas that the country needs to open up?

A: The most obvious area is banking – one this sector opens completely the continued rise of China will be much more assured. The other crucial area is the media sector (television, newspapers, magazines etc). The censorship and closure causes it to lag far behind countries like India. Connected to this is the arts in general – for example China still heavily restricts the number of foreign films it allows into the country.      

Q: With China’s services sector on the rise, does it pose a threat to India’s services sector? What are the service areas (eg. BPO etc.) that
China poses a significant threat to India and what impact will it have on India as a whole?

A: I tend to think that China’s role as a competitive threat to India serves as a positive motivational force ensuring that India doesn’t become complacent and pushing the economy towards reform. India has a lot of advantages in BPO and other areas of the service sector especially its connections to the Western market, knowledge of Western ways of doing business and English language skills and also it’s free media. China may threaten India in the area of software programmers but there is probably enough of this work to go around. Underdeveloped areas like medical outsourcing may be an area that China could do quite well and is a zone that India and China will likely compete heavily for market share.  
Q: China’s services sector is growing substantially driven by manufacturing. Do you think India can do this the other way round i.e. improve its manufacturing capability led by its efficient services sector?

A: For India to improve its manufacturing sector it will have to learn from China  - primarily by opening its economy to foreign direct investment and massively deregulating it’s labor market.  

Q: What according to you are the impediments to the growth of China’s services sector?

A: An education system and culture that is too focused on memorization and rote learning and doesn’t encourage flexible thinking and problem solving skills. In addition a lack of English (though here China is learning fast) Also residual ideological and cultural controls that arise from the one party state. Finally there is a lack of trust when it comes to China especially in America.   

Q: What steps should India take to sustain its leadership in services sector and to beat the threat from China?

A: I think this question is misconceived. China will not be a threat in this sense – as I said above the China example has generally served as a positive example to India pushing it towards greater economic liberalization and reform. Indian companies are better off finding ways to cooperate and trade with China (a process that is already occurring) rather than viewing China as a hostile threat.