By CBRE Consulting, Hong Kong China Location Trends By CBRE Consulting, Hong Kong August 19, 2009

A Snapshot – China Economy 2008 GDP by Country (USD Billion) China’s economy demonstrated rapid growth over the last three decades, and now is the 2nd largest in Asia (after Japan). While the the country has become the manufacturing hub of the world, known as the “world’s factory”, the Chinese government’s preferential policies and initiatives are now focusing more on promoting more value-added economic activities, including the development of the high-value outsourcing sector. Data Source: International Monetary Fund China GDP & CPI Trends Data Source: National Bureau of Statistics, PRC

Key BPO Locations in China TAIWAN Source: CBRE First-tier Cities Second-tier Cities XIAN Foreign companies typically open their first operations in either Shanghai or Beijing. As their business in the region grows, they will then seek out the lower cost tier 2 and 3 markets.

Key BPO Locations in China Beijing, Shanghai, Guangzhou and Shenzhen currently account for the vast majority of the offshoring market. While traditionally the market is dominated by low-end, IT-based development, higher-value support services such as call centres and data processing centres are also gaining traction. The increased demand for these support functions is also a result of the stronger domestic BPO market, which is driven by the rapid development of the banking and insurance sectors. Cities in the central/north include Dalian, Xi’an, Shenyang are considered the ones to watch in the future, given the large pool of low cost human resources from some universities/colleagues in the areas and the prevalence of other foreign languages. 2nd tier markets are gaining traction with BPO operations as provincial governments create favorable economic incentive programs and policies. Competition and wage inflation in tier 1 markets is also pushing companies to look beyond. Dalian has focused on the IT sector and has successfully attracted IT software development and pharmaceutical software R&D operations.

Competitive Advantages China’s BPO Market Competitive Advantages Challenges Lower cost structure as compared with Western and some Asian countries. Proximity (both geographical and cultural) to other key Asia markets such as Japan and Korea. Longtime investment in education. China’s status as a global manufacturing center offers unique advantages when providing R&O services. Workforce skills and industry expertise with a high degree of comfort and familiarity with the BPO services. Intellectual property rights protection remains an issue. Development of China’s BPO Market The outsourcing sector in China remains in its early stages of development. Unlike India, the country is still an “exporter” rather than a “consumer”. BPO spending in China is expected to grow from USD273 million in 2007 to USD721 million by 2012, for a five-year CAGR(2) of 21.4%. The Chinese BPO market is primarily focused on IT software development. Non-native language skills are the prime limiting factor to call-based BPO operations in China. Those with the language skills are typically well-educated and in position to acquire better jobs than call center work. This has created a shortage of talent for BPO jobs requiring non-native language skills.

Second /Third Tier Cities China’s BPO Market The 20 Designated Cites: Recognizing China’s potential as a major BPO hotspot in the future, more attention has been paid to the outsourcing sector. 20 cities have been identified as China’s key BPO hubs. First Tier Cities Second /Third Tier Cities Beijing Shanghai Shenzhen Guangzhou Tianjin Chongqing Dalian Chengdu Nanjing Xian Jinan Hangzhou Hefei Nanchang Changsha Daqing Suzhu Wuxi Wuhan Harbin No longer need to pay premium to entice ex-pats to relocate to China, due to rapid improvement of entertainment, recreation and quality of life in the big cities. This has changed over the last 5-7 years.

Talent Supply for China’s BPO Industry Supply of Educated Talent Talent supply of university graduates is promising –approx. 6 million new university graduates entered into the labor market in 2008. However, as BPO jobs are generally perceived as low-end operationally orientated rather than strategic, people with excellent English skill may not be attracted to work in the BPO industry. Approximately 5% - 10% of population in major cities (Beijing) has college degree. Source : Projob51

Talent Supply for China’s BPO Industry High labor turnover in the BPO industry has become a growing concern. The rising turnover rate may be due to 1) competition for labor as a result of the increasing numbers of BPO employers and 2) job nature associated with the BPO industry. Source : Hewitt (July 2009) Employee’s Career Motivation Drivers Driver 1 Driver 2 Driver 3 China Career Opportunities Pay Performance Assessment HK Work Processes Work Activities Singapore Career Aspirations Korea Policies & Practices Japan Labor shortage for BPO operations requiring non-native language, due to mismatch of skills and jobs. Generally, those with the language skills have better job/income opportunities than BPO operation can offer. BPO operations are viewed as low-end job by these people and their language and education give them opportunities such as equity analysts or investment banking. BPO ops are experiencing increasing turnover rates, due to competition and wage inflation as BPO’s struggle with small labor pool. As new foreign operations come in, many will gladly pay premium to get talent as they cost increase is still very low relative to other markets. Example: a BPO rep might leave one job that pays $200/mth for a similar job at a new company and earn $400/mth. Source : Accenture (2008) Source : Hewitt (2007)

Beijing TIER I MARKET STRENGTHS WEAKNESSES LABOR AVAILABILITY Population: 12,130,000 Number of graduates: 466,166 Population Growth : 1.6% (avg) Unemployment Rate 1.8% 83 universities / colleges Major schools: Tsinghua University, Beijing University, Beijing Language and Culture University, University of Science and Technology Beijing Multinational banks – Citibank, ABN AMRO Bank, HSBC etc Telecoms companies – Oracle, Motorola, Samsung, Ericsson, etc IT - Acer Computer, Microsoft, IBM, Yahoo, etc Others – Hitachi, Nestle, Ricoh, Shell etc COLLEGES & UNIVERSITIES MAJOR OCCUPIERS STRENGTHS Beijing is the capital of the country, with close access to government authorities. Good infrastructure – significantly improved in preparation for the 2008 Olympics. Improved English skills in recent years. Availability of labor in various foreign language (high concentration of universities/foreign schools) Rising costs in the recent years (both labor and accommodation) but still lower than Shanghai Heavy traffic congestion and pollution issues (the latter has improved in recent years) Beijing is political center, Shanghai is financial center. Shanghai is 10%-15% higher cost than Beijing – stronger ties to international business. Companies that benefit from close proximity to Chinese political system want to be in Beijing. WEAKNESSES

Guangzhou TIER I MARKET STRENGTHS WEAKNESSES LABOR AVAILABILITY Population: 9,487,500 Number of graduates: 330,000 Population Growth : 1.4% Unemployment Rate 2.3% 63 Universities ./ Colleagues (14 foreign language schools) Major schools include: South China University of Technology, Guangdong University of Foreign Studies Hong Kong-based banks - Hang Seng Bank, HSBC etc) Telecoms companies -. Hutchison Whampoa, PCCW, CTI Telecom etc Others: IT - Genesys Telecommunications Laboratories & IBM, KLM / Air France flyers Accenture Delivery Centres COLLEGES & UNIVERSITIES MAJOR OCCUPIERS STRENGTHS Close proximity to Hong Kong (geographically and culturally) Availability of Cantonese speaking labor (which can serve the Hong Kong and Macau markets) Well-developed infrastructure and transportation system (international airport/intra-city railway) Government policy – development of pan Pearl River Delta in Southern China Social infrastructure and good standard of living High attrition due to the presence of competitors in the voice-based BPOs. Heavy traffic congestion and pollution issues All of HSBC’s Chinese call centers (4-5) are located in Guangzhou. They service the Chinese customer base. Well-educated workforce (lots of college students) and lower cost than Beijing/Shanghai. But more BPO competition. Popular location for internal BPO’s requiring Cantonese. WEAKNESSES

Dalian TIER II MARKET STRENGTHS WEAKNESSES LABOR AVAILABILITY Population: 6,130,000 Number of graduates: 36,000 Population Growth : 1.25% Unemployment Rate 2.4% The city has 23 general institutions of higher education. Major schools include Dalian University of Technology, Dalian Polytechnic University, Dalian Jiaotong University. Key product development centre for GE, Intel, Dell, HP, IBM, Siemens, Sony Microsoft, Philips Other electronic firms for hardware design and embedded software. COLLEGES & UNIVERSITIES STRENGTHS MAJOR OCCUPIERS ITOs are getting traction, especially in software development, due to government support - preferential tax policies and establishment of IT/hi-tech parks. Proximity to other Asian markets (Japan and Korea) + Ability to serve domestic markets. Availability of labor with other Asian language (such as Japanese and Korean) Lower costs than 1st-tier cities (both labor and accommodation) WEAKNESSES City development and infrastructure are not as mature /developed as compared with 1st tier cities Labor with English skill is considered limited In general, less exposure to western culture.

CBRE Consulting, Hong Kong Contact Information CB RICHARD ELLIS CBRE Consulting, Hong Kong For more information, please contact: Karen Chan Director, CBRE Consulting Hong Kong Dir: +852 2820 2809 karen.chan@cbre.com.hk Ellen Li Associate Director, CBRE Consulting Hong Kong Dir: +852 2820 2897 ellen.li@cbre.com.hk