Opportunities for Outsourcing in Rural China




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Opportunities for Outsourcing in Rural China

ENTR 573


Author: Jeff Jackson

May 11, 2005


Introduction

Experts agree that China’s increasing awareness of the global economy will have a positive effect for the global population as a whole; however, one major issue that is being put on the backburner and not being dealt with head-on is the situation within China’s borders: the economic health and welfare of Chinas rural population. This population of over 845 million people that primarily rests in Western China are the firsthand witnesses to an increasing disparity between the standard of living between the inhabitants of the urban populace of Shanghai, Beijing and Guangzhou and the vast amount of the populace of rural villages who have seen no benefits from the last 25 years of Chinese growth (1, 5).

Much of this large populace in rural China is surviving on less than one dollar (5). According to the World Bank, Chinas middle-lower class citizen’s daily income starts at $19 a day, or $7,250 a year (10). This research paper will discuss the various factors associated with the obstacles and opportunities facing rural China’s ability to grow with its urban counterpart. It is my belief that the many leaders of Corporate America in the United States have the necessary compassion for human rights, the financial and influential resources, along with the understanding of rural China’s market potential, all of which must provide the synergy to assist in the development of poverty stricken regions in China, across the world, and into our own borders and communities.


Obstacles

In order to understand the opportunities for outsourcing, we must take a look at the obstacles facing the villages in China. Rural Chinese workers major obstacle to conventional outsourcing is in their language proficiency and their ability to relate culturally with U.S. customers. India gained this advantage when Britain colonized the country and brought much American-like influences of culture and the language; China, just emerging from over 4,000 years of national protectionism, will continue to struggle training Chinese workers with language and culture skills of the West. Times are changing however; with mandatory English education in the school systems, China has acknowledged that it must remedy these obstacles. As the first generations of English speaking graduates march off into the workforce, outsourcing opportunities will continue to become more and more available to U.S. firms.

Brain drain is also a major factor affecting growth of professional outsourcing from U.S. firms, predominantly within the Information Technology (IT) Professionals who leave abroad after gaining a couple years of work experience (13). These experienced project managers with a few years of work experience and good language skills in large demand to international firms and take higher paying jobs abroad. China will continue to have a short supply of experienced workers until comparative wages can increase high enough to eliminate those who unwillingly leave their homeland for higher wages.

The most hidden obstacle that outsiders don’t realize is the fact that China’s outsourcing companies currently tends to their own domestic economy. With over 100,000 large companies and 10 million medium to smaller sized firms, outsourcing firms are currently running to capacity and find it difficult to engage in the much of the outside market with exception only the largest firms willing to bid on the larger contracts. In order to remedy this, U.S. firms must rethink current outsourcing models (this topic is extensively covered under section: “Rethinking Outsourcing”).

The telecommunication and broadband infrastructure has also been seen as a major barrier in Chinas ability to grow its outsourcing industry. This infrastructure is important in unlocking the billions of rural villagers who could cost less to hire than the urban, educated workers, while providing a similar standard of living to the urban populace. This rural Chinese workforce, if educated in the western culture and language could mean even a greater ability for U.S. firms in call center facilities. However, as will be outlined in the following pages, current technology and innovative computer applications could allow Chinese workers with basic mathematical and with minimal to no English skills, avenues for the next great wave of offshore outsourcing to U.S. firms.


Hukou System

According to researchers Kam Wing Chan and Li Zhang from the Department of Geography at the University of Washington, the Hukou System was established in 1951 to better control the migration of labor between rural and urban areas (2). This was required because of such a great labor surplus in both sectors of China and to this day, to artificial price setting by the government in hopes of stimulating industrial growth (2). Due to pressures from the World Trade Organization, China’s Government has taken steps to minimize the effects of the Hukou Classification System; however, there are still barriers to rural people to move to the urban areas in order to find better work (2). To this day, approximately 32,000,000 or roughly 2% of China’s population leave their townships annually in order to find temporary or permanent places of work (2). By employing rural workers in their native lands, companies could bring wealth to these poor regions while enhancing the health of the nation as a whole; and in the long-term, ridding the affects of this caste system and the barrier to the most of the population in the worlds most populated country.


The Need

With the worlds largest dam, the Three Gorges Dam, set to be completed by the end of is decade; Chinas Government appears to be continuing the current path of catch up to the rest of the modern world powers for what really may just be the inevitable path to modernization and final degradation of much of their ancient history within their borders. In Ghost City, a major tourist attraction for visitors who are interested in seeing ancient temples, souvenir markets, and antique shops that have existed for thousands of years, the rising waters envelope these attractions once the dam is locked. This will further displace 75,000 residents due to the inevitable modernization of China (1).

China is taking steps to set up their rural population with opportunities for future growth however. The government is providing hundreds of millions of dollars to the rural infrastructure and is breaking investment records of close to 50% of their total GDP, a mount that is likely to surpass that of any other Asian country in history. In places such as Ghost City, the Government is placing its residents in newly built cities with modern attractions and hundreds of hotels in hopes or maintaining the tourism revenues and livelihoods for its rural citizens.


Rethinking Outsourcing

Corporations must rethink their business implementation plans in order to be enticed in spending millions in working with communities in rural China for outsourcing. According to C.K. Prahalad, a Professor at the University of Michigan, a best selling author, and the leader in the research of how societies and businesses handle poverty issues says that “If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up” (5); the issue of outsourcing in these communities should be seen in the same light.

These corporations must understand that setting up offices in areas where 4 billion of the world’s population resides (non-city centers) will improve profits both the short term with cost savings while expanding them greatly in the long term with extra revenues. As workers salaries increase, their buying powers will also increase allowing for economic theory to take its course and improving other industries in the regions as a whole. Eventually, these new economic regions will flourish and established companies within the borders will have a major advantage to companies who strictly import their goods and who have refused to outsource their services in these countries.

It is no secret that the economic projections for China detail no less than an economic powerhouse of the world. By 2020, according to the Report of the National Intelligence Council by the Central Intelligence Agency, China, with its sheer population will be able to compete with the Western countries as “important economic powers” without even raising its standard of living to a level comparable to that of its global economic rivals (3). The rise of China is not the question, who will benefit most from it is however.

Companies such as U.S. shoe giants Nike and Reebok Company along with the Ford Motor Company who has just established themselves with new manufacturing plants are already running outsourcing plants in China. Work must be done however to allow for the C.K. Prahalad's type model to make reality. With debate about Nike’s low wages to their Asian manufacturing employees hitting the mainstream in 1997, work is being done to improve the major disparity that omits most of these employees from being able to buy the very products they produce and these companies are moving ahead in these efforts. However, to this day, it would still take the savings of two months to buy a pair of Nike shoes; there is progress to be made.

There are many other industries that have the ability outsource services other than the manufacturing industry. Attention should be paid more to the U.S. services industry. Accounting, financial, and insurance businesses where profit margins could be drastically increased with new strategies and the right communities of rural China can provide a great earnings potential for both, U.S. companies and Chinese workers.


Community Liberation and Training

Outsourcing firms would be able to create campuses that would be able to train the rural workers on the exact processes in which their workers would need in order to complete their part of the job which makes up some piece of the core outsourcing assignment. Working with the Chinese Government, outsourcing companies would also benefit their communities by enhancing communities of rural China by improving on the current infrastructure for their employees that would benefit everyone as a whole, including the community who feeds off of this new stream of revenues.

This model of full-service outsourcing is already being employed by outsourcing firms in city centers of India. By moving their outsourcing jobs to rural communities and building all inclusive campuses that take care of every aspect of their workers needs, previous research has been shown that this models reduces turnover as the outsourcing companies would provide the highest paying jobs available along with the best livelihoods possible in their areas; this would allow for a continual enhancement of productivity as workers become more and more familiar with more work experience for their jobs.

The combination of the government’s system of Hukou which immobilizes its citizens along with the lack of local universities and colleges in rural China, hundreds of millions of citizens have been historically unable to obtain the proper education and the credentials in order to attract foreign investments of companies in which want to implement or expand outsourcing jobs. These barriers are having less of an impact however.

Since the beginning of the educational reformation with of three nationwide laws in China, the Compulsory Education Law of 1985, the Teacher’s Law of 1993, and the Education Law of 1995, attention to rural education has been improved drastically from what once was an annoyance that Chinese leaders avoided greatly (6). The Teacher’s Law of 1993 focuses on governmental appropriations for Primary and Junior Secondary education institutes (6). With an emphasis on allowing rural townships and villages to collect money for running schools, allowing students to go to school free from tuition charges, establishing special stipends for impoverished regions, and setting up stipends for helping poor students stay in school, these three reformations were a big first step for China to during the late 20th Century (6).

The Teachers Law of 1993 established a fair working wage for Chinese teachers and guaranteed them a standard of living equal to the government’s civil servants while including some benefits such as a Medicare system (6). The Education Law established two years later strengthened the Compulsory Educational Laws of 1995 by expanding the bill to preschool, higher education, vocational education, and adult education (6). It also expanded rural township and villages’ ability to maintain standards to their school houses by providing federal funding for construction and maintenance for these buildings (6).

Governmental strategy will only help outside investments with a greater number of educated adults able to perform jobs that demand higher responsibility from rural workers. From 1982 to 2000, illiteracy rates of rural people over the age of 15 has declined from 37.74% to 11.55%; according to statistics from 2000, of the approximate 845,000,000 rural Chinese residing in rural china, the current number of students enrolled in a Senior Secondary Educational Institution is numbered at an astounding 44,954,000 (see Exhibit 1 for Calculation, 6).

While this rural population of students may not hold valued English skills for call centers or much programming knowledge for jobs in Information Technology, the two major trends in the current outsourcing models, China’s educational system does promote math skills which could open outsourcing models for every U.S. business firm to engage in.

With the reduction of China’s welfare system and controlled markets, along with transferred the responsibility of welfare and healthcare issues onto the individuals and families of its citizens, the insurance industry has taken off. In the late 1990’s, these factors led to the emergence of the insurance industry and a continuous 30% growth rate of total assets in the insurance sector. The insurance business itself is projected to be the second leading industry in Asia by 2010 and a top five market in the world just a few years after that. With millions of proficient workers within this area, there is no reason why converting this knowledge for U.S. counterparts could not be achieved with innovative offshore outsourcing models (8).

Through the internet, U.S. companies could use outsourcing posts in China to do everything from calculating risks of new clients and setting up their new accounts to providing approvals of claims and even transferring the cash that the claim entails to the client’s bank accounts 3,000 miles away. The internet would provide a buffer for any client who uses a user-interface client on the world-wide web. This business model would allow native, rural Chinese citizens to perform their pre-trained functions through applications that would allow for such operations. These yet to be created applications could take choices from the U.S. customers through pre-determined options on their screen and this information would be transferred in the proper Chinese dialect on the workers screen.

From there, the workers could cipher through the particular options and determine what rates and plans would best fit each particular client. This is the similar business model that companies such as Lending Tree and Geico Insurance provides through their website. Savings can be multiplied even while providing a stable standard of living to their non-English speaking workers in rural China.

This can also be done through similar processes of financial statement preparations and tax preparation for large corporations or in assistance to accounting agencies. Many U.S. accounting firms across the nation are currently performing such operations through offshore outsourcing agencies in India. By outsourcing less important jobs, employees and operations can become more efficient as they move their efforts onto their core business instead of spending their resources on the time-consuming less skilled tasks.

The economic boost from outsourcing firms would assist a poverty stricken economy in emerging into an economy with competent, value conscious consumers and small business entrepreneurs that feed off the outsource campuses and their workers. According to some of C.K. Prahalad’s research along with common economic theory, individuals would have opportunities to finding their niche in the rejuvenated economy. Even in the most poverty stricken regions, research has shown the resiliency of free markets will prevail with a small boost from outside developers. From shampoo singlet sales to charging friends and community members for cell-phone minutes, small businesses would grow all because American compassion was stretched outside its borders (5).


Exhibits





References

1) Browne, Andrew. “China Girds for Future Shock: Beijing Tackles Rural-Urban Divide,
A Feared Source of Social Unrest.” THE WALL STREET JOURNAL. April 4, 2005; Page A12.


2) Chan, Kam Wing and Zhang, Li. “The Hukou System and Rural-Urban Migration in China:Processes and Changes.” Department of Geography, University of Washington. 2004.


3) CIA Staff. “Report of the National Intelligence Council's 2020 Project.” CIA:Rising Powers: The Changing Geopolitical Landscape. 2004.

4) Lemon, Sumner. “Gartner: Look to China for outsourcing services.” Freeborders. 21 January 2002.


5) Prahalad, C.K. The Fortune at the Bottom of the Pyramid. Wharton School Publishing. 2005. Upper Saddle River, NJ 07458


6) Wang, Dewen. “China’s Rural Compulsory Education: Current Situation, Problems and Policy Alternatives.” Working Paper Series No.36. 2003


7) www.Nike.com


8) China Economic Review. “Insurance” China Economic Review. 2004


9) Business Weekly Staff. “China's IT Outsourcing Sector Rolling Along.”
Li Weitao, China. 09 March 2005.


10) “Country Analysis: China.” Computerworld. 15 September 2003.

11) Author Unknown. “China's caste system?” March 18, 2004.


12) Xinhua. ”China's middle class ushered in at 60,000 yuan?” January 1, 2004


13) Singh, Uday; Speaker Series. Partner, Outsourcing Practice at A. T. Kearney. March 21, 2005


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