Surprise Winners of the China/India Outsourcing War

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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 five companies poised to prevail in this global battle for customers and profits.

Next — Chinese Stock #1

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Chinese Stock #1 —
VanceInfo Technologies (VIT[1])

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[1]) 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 also 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.

Next — Chinese Stock #2

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Top Chinese Stock #2 —
WuXi PharmaTech (WX[2])

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[2]). 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.

Next — Chinese Stock #3

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Chinese Stock #3 —
China National Offshore Oil Corporation (CEO[3])

A number of select oil companies will reap unprecedented profits as the battle heats up between India and China. Companies in both countries that can reduce their energy costs will have significant profit advantages over those that can’t, which is why both countries have been racing to secure new energy sources over the past five years. Oil services company China National Offshore Oil Corporation (CEO[3]), also known as CNOOC, could be the biggest profit-taker of all — thanks to the Chinese government’s investment in oil and gas development.

Most investors don’t know this, but a huge portion of China’s $586 billion stimulus package went to fund a major west-to-east gas pipeline project. As a result, the demand for top-notch drillers and transportation equipment is shooting through the roof. In addition, CNOOC is the only company permitted to conduct exploration and production activities off the coast of Mainland China in conjunction with foreign governments and companies thanks to a government mandate. With a competitive advantage like that, and the Chinese government’s ability to outsource its vast capital reserves, CNOOC could be a very big winner in the outsourcing wars.

Next — Chinese Stock #4

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Chinese Stock #4 —
China Life Insurance (LFC[5])

The battle between India and China for profits may very well extend to financial sector as well as capital always flows to the highest returns. China Life Insurance (LFC[5]) looks to be moving in on the Indian life insurance market, entering into behind-the-scenes negotiations with India’s top insurance provider that could put it in the catbird seat to dominate the Asian continent with more than 2 billion potential customers. Should that happen, I could see this company easily repeat its 670% gains by 2015, doubling every year for the next five years.

Going forward, China Life’s main growth will come from expansion in its fast-growing insurance sector, but changes in some recent regulations should add to the company’s bottom line. In addition to insurance premiums, China Life also grows its profits the same way we do — by investing. At the moment, fixed income securities and bank deposits are still the company’s main investments. But in 2006, the Chinese government allowed insurance companies to invest more of their assets in the stock market. And at that time, the local Chinese stock market was on fire, so that was a positive for China Life. Now, recently the Chinese government allowed insurers to double the share of assets directly invested in domestic equities to 10%, and to invest as much as 15% of their total assets overseas — up from the 5% previously permitted. I expect these policy changes to continue to drive China Life’s investment returns.

Next — Chinese Stock #5

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Chinese Stock #5 —
Mindray Medical (MR[6])

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[6]) 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.

Your Guide to Profiting From Asia’s Explosive GrowthFor access to the best-kept secrets about investing in China and the rest of Asia, plus the hottest stocks to buy and sell, sign up now for Robert Hsu’s FREE Investing Newsletter, Asia Insider[7]. It’s sent right to your email inbox every week — absolutely FREE!