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back to index backASIAtalk May,  2007

Asia: still on top

2007 Global Services Location Index: Regional Highlights.

India and China continue to dominate the Index.  India maintains a wide, albeit slightly shrinking, lead over China, confirming what industry surveys and visiting executives repeatedly find – for all the concern about overheating, wage inflation and service levels, India still offers an unbeatable mix of low costs, deep technical and language skills, mature vendors and supportive government policies.  In both countries, double-digit growth rates have fuelled wage inflation, with average compensation costs for sample functions rising by around 30% in China and around 20% in India.  But these cost escalations have been matched by corresponding increases in skill supply and quality indicators.  While India maintains a strong-lead in terms of language skills and vendor maturity, China has been catching up in several areas, growing university enrollment by more than 25%, and almost doubling the number of firms with CMMI and ISO quality certifications.

Southeast Asian nations continue to do well, with Malaysia, Thailand, The Philippines, Indonesia and Singapore occupying 5 of the top 12 spots and Vietnam entering the top 20.  Somewhat surprisingly, both Singapore and The Philippines dropped several places in this year’s rankings.  Singapore maintains its score from last year, but has been overtaken by larger, lower-cost countries now competing to establish themselves as service centers – in the same way that Singapore itself did 20 years ago.  In the Philippines’ case, growth in the sector and currency appreciation has driven up wages in US dollar terms by as much as 30%, reducing relative cost advantage.  Nevertheless, the Philippines remains one of the lowest wage locations in the Index and now offers the lowest telecom costs of any country in the Index.

Malaysia, Thailand, Indonesia and Vietnam have also seen significant declines in telecom costs, while slower growth rates have moderated wage inflation.  At the same time, all six ASEAN countries have significantly improved quality indicators, increasing the number of CMM-certified firms in the region from 100 in 2005 to over 150 in 2006 and the number of ISO 27001-certified firms from 0 in 2005 to 45 in 2006.  Despite their rise in this year’s Index, Thailand and Indonesia will likely remain challenged by lesser English language capabilities and concerns over their economic and political stability.

Sri Lanka and Pakistan enter the Index for the first time at 29 and 30 respectively.  Both countries offer many of the same advantages as India, with similar labor costs, widespread use of English, strong education systems and increasingly open and well-regulated business environments.  However, both countries have only recently woken up to the enormous opportunity of the offshore services sector and therefore lack India’s breadth and depth of experience.  Both countries are also disadvantaged by their relatively smaller population-base and obvious concerns over internal security.

Latin America and the Caribbean: bearing fruit

Latin American countries are collectively the biggest gainers in this year’s Index, with Brazil, Chile and Mexico rising to 5th, 7th and 10th spots in the Index.  Spurred on by India’s success, governments throughout the region have begun to recognize the potential of the export services sector, particularly in the context of providing near-shore support to North America and Iberia.

Despite currency appreciation, strong sector growth and corresponding wage inflation (aggravated by high non-wage labor costs imposed by the government), Brazil has begun to leverage the traditional strengths of its indigenous IT sector, rapidly expanding university enrollment and quality certifications.  While less spectacular than Brazil, Chile, Mexico and Argentina have also seen significant sector growth (and corresponding wage inflation) and some increases in graduation rates and company certifications.  Chile continues to benefit from the best business environment and tax structure in the region, while Mexico leverages its proximity to the US, and Argentina offers relatively lower costs.

Uruguay makes a strong first appearance in the Index at 22, benefiting from relatively competitive labor costs and a positive business environment, albeit disadvantaged by its small population size.  Like Singapore and the Czech Republic, Costa Rica is the traditional leader in the region and maintains its absolute score, but falls in the rankings as larger regional players enter the competition.  Weaker infrastructure and a decline in the perceived quality of the business environment remain problematic.  Jamaica holds more or less steady as the leading contender in the English-speaking Caribbean, while Panama is beginning to catch up with neighboring Costa Rica.

Central and Eastern Europe: new contenders climb the rankings

The trend from last year continues as the established service providers in the region, Czech Republic, Hungary, and Poland lose ground while emerging locations quickly move up the rankings. Bulgaria replaces the Czech Republic as the only country from the region in the top 10.  Both Bulgaria and Romania see big jumps in their business environment scores, as they complete preparations to join the European Union in 2007.   Despite a larger population base, Romania’s relatively higher costs put it among the middle of the pack at 33rd place.  Slovakia continues to do well, just edging out the neighboring Czech Republic at 12th place.  The Baltic States, Estonia, Latvia and Lithuania, jump into the Index at 15th, 17th and 28th place.  Albeit small in size, all three countries combine a business environment similar to that of most developed countries with a superior cost structure.   Estonia today is what Ireland used to be ten to 15 years ago, a relatively low-cost European location with top class, largely untapped, talent and a pro-business policy environment.

Continued improvement in the business environment in the Czech Republic and Hungary can not offset deterioration in cost competitiveness and they slip in the rankings, despite maintaining or improving their absolute scores.   Among the big three Central European countries, only Poland manages to maintain its position, thanks to lower wage inflation and infrastructure costs.   Despite competitive wages, large populations and strong technical skills, very weak business environment scores (only Pakistan, Senegal and Indonesia fare worse) leave Russia and newcomer Ukraine low in the rankings at 37th and 47th place.

Middle East and Africa: a growing cadre

Contrary to the perceived challenges in both regions, Middle Eastern and African countries are increasing their visibility as remote services locations.  Egypt, Jordan and the United Arab Emirates maintain roughly the same positions in the top 20, reflecting the increasing number of US, European and Asian companies choosing these locations as centers for regional or global support activities.  The rise of Mauritius, Tunisia, Morocco and Senegal reflects growing interest in locations with the ability to serve francophone markets.  Stronger business environments in Mauritius and Tunisia contend with lower costs and larger populations in Morocco and Senegal.  Ghana maintains its position as a low-cost English language location in Africa, while South Africa, Israel and Turkey all see their rankings improve, largely as a result of improvements in the policy environment and infrastructure quality.

Developed economies: slipping in the rankings

On-shore” and near-shore” locations in developed countries all slipped in this year’s rankings.  In the case of the US, UK, Germany, France, Iberia, New Zealand and Ireland, each country has maintained or improved their score, but has been overtaken by lower-cost emerging markets and new entrants.  Once again, the US scored significantly better than any of the European on-shore” options, thanks mainly to its larger population size and industry depth.  In the case of Canada and Australia, currency appreciation and hence wage inflation in US dollar terms eroded their cost advantage.

To download 13-page report, click here.

Source: AT Kearney - GAI

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