Chinese outsourcing companies should focus on 'open innovation' to reap further rewards

China is slowly emerging as the world's No 1 outsourcing hub. This is indeed an impressive feat and has been made largely possible due to the progressive reforms and the benevolent conditions in the country. Both these factors have encouraged offshoring of activities to China (location of activities under ownership by foreign companies) as well as to international sourcing and outsourcing of activities.

China's current outsourcing market is growing at an estimated 30 percent every year, and many countries have relocated their headquarters to China to establish businesses. The market for outsourcing activities in China is expected to reach $44 billion (36 billion euros) by 2014, according to IDC, Datamonitor and KPMG analyses.

This development has affected positively on China's economic growth as well as its integration in the world economy.

But new challenges for Chinese outsourcing activities also arise. The general economic growth along with the surge in demand for local talent means that Chinese labor costs are also increasing and the comparative cost advantage is threatened by competitors in the Asian region.

Another threat for the outsourcing industry stems from the technological development of fully automated production facilities that are prompting companies to move back sourcing activities to Europe and the United States.

A number of extraordinary technologies have come together over these years: smart software, new types of materials, more dexterous robots, new processes (notably three-dimensional printing) and a wide selection of Web-based services. All of this will change the production landscape as we know it and with it the competitive parameters of China as an outsourcing market.

From a Chinese perspective, how should one adjust to this development? There are several critical moves. First, Chinese suppliers of outsourcing in manufacturing as well as in services need to move beyond price as the dominant attraction for foreign trade. The Chinese industry is increasingly embracing the open innovation paradigm of the so-called knowledge economy, where R&D is of the essence.

According to this way of thinking, suppliers must offer more than just reliable production of low-cost products. They must see themselves as co-creators of customer products and services and offer their insights to customers, helping them to source not only components but also ideas.

Second, suppliers of outsourcing can help their customers in other ways: as identifiers and developers of possibilities in the fast-growing Chinese market. Many US-based and European manufacturers are keen to gain not only a sourcing but also a market foothold in the Chinese market. Suppliers, with in-depth knowledge of market and business conditions, hold valuable insights that can form the basis of new ventures and partnerships - possibly also for developing the export basis of China further.

Finally, leading Chinese suppliers of outsourcing services may consider following their customers out to other emerging economies in Vietnam, Malaysia or Thailand in their search for new sourcing opportunities and providing outsourcing services.

No doubt, these suggested strategic moves to meet the development are demanding for Chinese suppliers of outsourcing services and call for considerable organizational transition in these supplier firms.

In some cases such aims are better reached in collaboration with other local providers of outsourcing services than alone. However, the future prospects are equally grand and suggest tomorrow's realities and winning strategies for the Chinese outsourcing market.

The author is a professor at the Aarhus School of Business and Social Sciences, Denmark.

(China Daily 07/27/2012 page7)