The Wall Street Journal presented a story discussing the challenges facing India’s first tier outsourcing providers (sorry, subscription might be required).

Apparently, the issues that we’re encountering in the U.S. and Europe are finally starting to have an impact on the rate of growth for the Indian companies:

“Now that growth is slowing sharply. The credit crunch and spending slowdown in the U.S. are hurting the companies’ biggest market, while a cheaper dollar shrinks their profits. Longer-term problems are surfacing. Competition is rising from other low-cost nations, ranging from Eastern Europe to the Philippines and Vietnam. And India’s own success has raised labor expenses, cutting into the companies’ low-cost advantage just as their revenue growth is slowing.”

The story continues with a set of statistics that suggest that growth is slowing and profitability is falling.  After some discussion about how the vendors are trying to move up on the service value chain, it gets back to the bad news:

“The industry’s biggest blow came last summer, when the meltdown in the U.S. subprime-mortgage industry and ensuing credit crisis froze new business from global banks and other financial institutions, which bring in close to half of the industry’s revenues.”

It seems that China outsourcing dodged a bullet here, as most of our companies were less dependent on big financial institutions (sorry Bleum).

Towards the end, the story loops back around to how the big Indian vendors are attempting to adjust their businesses.

“The tech companies also have been expanding into consulting, where they say revenue per employee is higher than in outsourcing. But they’ve struggled to break into the market, which is dominated by well-known names such as International Business Machines Corp. and Accenture Ltd., finding many of their own clients prefer to take advice from those companies rather than the Indian ones better known for their outsourcing. In the year ended March 30, TCS’s consulting business contributed 3.4% to the company’s total revenue — the same as in the previous fiscal year.”

It might be interesting to speculate on why the article makes no mention of China, although it does refer to

“other low-cost nations, ranging from Eastern Europe to the Philippines and Vietnam”

as potential competitors for India.  Perhaps the Wall Street Journal believes that the situation in China is similar.  If that’s their rationale, they are wrong.  While the slowdown is definitely having an impact on the Chinese firms that have weaker management, the strong companies continue to grow very fast, with many still seeing 50%+ growth (albeit from a smaller base).  I’m cautiously optimistic that these challenges will actually be good for China outsourcing as they will weed out the companies that can’t really compete.

Technorati Tags:  China, China Outsourcing