Winners of the China/India outsourcing war

Investors could easily double their money in 2010 as this global battle for customers and profits takes shape.

By InvestorPlace Feb 8, 2010 2:22PM

InvestorPlaceBy Robert Hsu, InvestorPlace.com

 

Because the yuan is pegged to the dollar, Chinese outsourcing becomes cheaper as the U.S. dollar falls. It's this dollar-based competitive advantage that has provoked Indian companies to slash costs and profit margins to remain competitive, especially in the tech sector. And Chinese companies now have responded by ramping up efforts to steal more business from Indian companies.

 

If you look closely, you can actually see the battle brewing with your own eyes simply by skimming the back pages of the financial section. There you'll see Indian companies rushing to buy stakes in Chinese companies, while Chinese companies are countering the move by spending nearly $35 billion in M&A activity -- all in hopes of grabbing a bigger piece of the outsourcing pie.

 

This virtual outsourcing arms race will put powerful upward pressure on the stock prices of companies that give U.S. and European companies what they want faster, better and cheaper than the competition. 

 

Here are three companies poised to prevail in this epic battle of emerging market titans.

 

VanceInfo Technologies (VIT)

 

The Chinese have an even greater competitive advantage than its southern neighbor in the technology industry due to lower IT wages, a larger supply of engineers and a very large domestic IT market from which to tap resources. VanceInfo Technologies (VIT) occupies a unique position in the outsourcing sector, with significant and superior advantages that no other Chinese or Indian company can match.

 

The company was originally formed in 1994 to help Microsoft and IBM localize their software into the Chinese, Japanese and Korean languages. As a result, the company -- with more than 5,000 IT professionals -- already provides world-class services to corporations in the U.S., Europe, Japan and China. This is how the company has been able to steal customers and profits from Indian IT firms for the past five years -- growing from 98 customers in 2005 to 241 customers in 2008, including Microsoft, IBM, Hewlett-Packard, EMC Corp., NEC Corp., 3M, Huawei and Lenovo. This is why the company's annual growth rate is 88% and why its net revenues jumped 45% in the third quarter of 2009 -- and this is just the beginning of a new profit run headed its way as the dollar falls and the competition heats up.

 

WuXi PharmaTech (WX)

 

For most global pharmaceutical companies, bringing a new drug to market can cost more than $1 billion and take more than 10 years. To reduce these costs, most pharmaceutical and biotech players are taking a page out of IT companies' playbooks and are now outsourcing nearly 80% of their R&D projects.

 

Helping the pharmaceutical industry with their R&D needs is China's WuXi PharmaTech (WX). The company has grown into one of the largest and most successful pharma outsourcing powerhouses in China thanks to the company's Western-trained Ph.D.s and MBAs with experience in drug R&D procedures and Western-style business practices. This training and knowledge allows the company to better serve its U.S.- and Western Europe-based multinational pharmaceutical companies. This is how the company lured the world's top 10 pharmaceutical companies away from its competitors and why it has 100% repeat business from each of them, including Pfizer and Merck. This is also why the company doubled investors' money in 2009 and will likely double investors' money again this year -- as U.S. companies get lean and mean in the face of health reform.

 

Mindray Medical (MR)

 

Most investors don't know this, but health care is one of India's largest sectors, not only in terms of revenue but in terms of employment, too. The country's 1.1 billion population is increasing at an annual rate of 2%, and by 2030, India is expected to become the world's most populous country -- surpassing even China. As a result, the demand for high-quality health services is shooting through the roof -- especially with India becoming a prime destination for "medical tourism." The biggest area for expansion is medical devices, including X-ray machines and CT scanners.

 

That's why Chinese medical device company Mindray Medical (MR) has expanded operations into India to steal customers and profits from India's homegrown companies -- just like it's been doing from companies in Europe and around the world for years. Its ability to compete globally is the reason why the company's revenues jumped 55% in the last quarter and the company rewarded investors with 89% returns in 2009. And now that Mindray is expanding into India, even these great gains could look like a drop in the bucket.

 

Get two more winners of the China/India outsourcing war here.

 

At the time of this writing, the author owned shares of VIT, WX and MR in personal and client portfolios.

 

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