kpmg.jpgChina is quietly asserting itself in the global outsourcing market and while this emergence is often painted as a threat to India, the two giant powers seem condemned to get along.

That is because global organisations increasingly opt for mix-and-match approach to outsourcing, which draws on the complementary skills and comparative advantages of providers in various countries.

That is one of the key findings of a recent KPMG report on China's outsourcing industry entitled New Dawn: China's Emerging Role in Global Outsourcing.

“We see that more companies want global sourcing not simply from India or China, but from both” says Seth Pinegar, head of corporate development at Chinese vendor iSoftStone Information Services, one of several industry players interviewed in the report. “They want diversification but also support from companies with global perspective and experience.”

India has long been at the forefront in outsourcing, but the market saturation has partly eroded the cost advantages of outsourcing to India and allowed other contenders to appear. Providers of IT outsourcing and business process outsourcing have taken root in countries as diverse as Philipines, Ireland, Romania, Malaysia and, increasingly, China.

One big outsourcing customer, GE Capital, has reduced the volume of work going to India over the past three years while increasing the share that goes to China from less than 5% previously to approximately 20% of its total outsourcing workload. Latin America gets 20% while the remaining 10% is divided among other smaller countries.

To reduce risk, GE Capital further divides its workload in China between eight vendors, splitting the projects among well-qualified and screened global and local providers.

KPMG says a number of rankings reveal that China is gaining ground in outsourcing on criteria such as financial attractiveness, people and skills, and business environment.

In 2007, China's outsourcing market was worth $15bn with IT outsourcing accounting for around $9bn and BPO taking the remaining $6bn. Revenues from offshore outsourcing – supplying foreign entities rather than China-based companies — grew more than 40% to almost $2.3bn or 15% of the total.

KPMG says the growth in China's offshore outsourcing business, which is mostly IT outsourcing, far outpaced the global market and is forecast to grow at around 30% a year over the next four years.

The Chinese outsourcing industry is nevertheless highly fragmented with more than 3,000 players, although the market's rapid growth has create some mid-sized players with revenues over $50m.

Indian outsourcing giants like Infosys, Wipro and TCS have little to fear for the time being. And I don't think US giants like Accenture or EDS are losing too much sleep over the Chinese upstarts. But will the threat be so easy to dismiss in a few years time?