For Western companies looking to outsource to Asia, there's long been a clear division of labor. Manufacturing jobs go to China and services work heads to India. That belief has helped Indian IT companies such as Infosys [Get Quote] and Wipro [Get Quote] become global powers in the services industry.

Meanwhile, the preference for India has stymied the growth of China's IT-services outsourcing providers. No Chinese company has established itself as a global player and most have struggled just to crack the 1,000-employee barrier.

Now some executives from China services companies are hoping the scandal surrounding India's Satyam Computer Services [Get Quote] will finally convince clients to consider China when looking to outsource tech and research-and-development support.

The turmoil affecting India's fourth-largest IT services company, in which the longtime chairman admitted to fraud that artificially inflated profits, will lead US and other Western clients to think twice about relying too much on Indian companies, says Brian Keane, chief executive of Dextrys, a Wakefield company that has 1,100 of its 1,400 employees in China.

"There is a very strong sentiment in the marketplace about mitigating risk relative to being overexposed to India," he says. The Satyam scandal, following the November terrorist attacks in Mumbai, is prompting companies to ask "What is our risk-mitigation strategy," adds Keane.

Even before the latest setbacks, China outsourcing execs argue, sentiment was starting to turn in their favor. For several years, Indian IT firms have had to contend with challenges such as rising wages, employee turnover, and an appreciating Indian currency.

The global financial crisis has slowed or reversed those trends, but they did prompt businesses outsourcing to India to think more about China, says Jean Cholka, chief executive of Freeborders, a San Francisco company whose 650 employees are mostly in China. "That presented a challenge to companies that had a lot of people in India and made them curious enough to look elsewhere," she says.

Increasing revenues

Others agree there is potential for China to become more of a force in services outsourcing. Although it's much smaller than India's, the Chinese services sector has been growing impressively, says Enrico Benni, head of the Greater China business technology practice at McKinsey & Co.

China accounted for about 10 per cent, or $6 billion, of the industry's total spending worldwide in 2007, he says, and revenues in the mainland have been increasing by about 20 per cent annually for several years (though India's services sector has expanded by about 30 per cent). A growing number of Chinese companies have more than 1,000 employees, says Benni, and many have achieved the high-level certification that potential customers require.

The Chinese government also has been successful in fostering the development of IT services clusters in tech parks in cities such as Dalian, Tianjin, and Chengdu. "The government has been very active," says Benni. "There are positive messages in terms of what is happening."

To be sure, the Indian companies have been responding by setting up operations of their own in China. Satyam, for instance, was aggressive in expanding in the country. So, too, were Infosys and Tata Consultancy Services [Get Quote]. But executives from small, China-focused companies argue they still have an advantage over their Indian rivals.

"We will live or die on our capabilities to deliver in China," says Keane of Dextrys. Indian companies "are not as motivated to make (doing business in China) work."

Acquisition opportunities?

Regardless of which company is doing the work, China still has a long way to go before it can begin to match India's performance in services outsourcing. China's services companies can't come close to the size or expertise of the Indians, says Benni.

"We don't yet have any player in China that has at least $1 billion in outsourcing revenues," he says. And the Chinese don't have the global reputation yet to win big jobs. "Multinationals that would look at larger deals are looking for partners with the capabilities and size to support them," Benni says.

While the Satyam scandal is prompting some companies to think twice about their current outsourcing arrangements in India, getting them to make the change to a new, unfamiliar environment won't be easy. "If we don't have a player of a decent size, trust will be difficult to build," says Benni. But the global economic downturn could present acquisition opportunities for some China-focused outsourcing specialists looking to gain the critical mass they need to compete.

"The crisis could actually be a catalyst for China," he says. "There are clearly companies (worldwide) with depressed valuations that could make exciting targets for Chinese companies to access global markets and increase talent."