Shenzhen: China’s New Bangalore Robert Fraser KPMG Advisory University June 12, 2008  Chicago, IL - Opportunities and Incentives in BPO/ITO.

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Presentation transcript:

Shenzhen: China’s New Bangalore Robert Fraser KPMG Advisory University June 12, 2008  Chicago, IL - Opportunities and Incentives in BPO/ITO

Outline Outsourcing to China What’s Shenzhen? Why Shenzhen? What Does Shenzhen Offer?

Outsourcing to China Outsourcing to China would have once been considered a gamble. Now, companies have a wide range of choices to diversify their operation. With cost, talent, infrastructure, government support advantages over other outsourcing destinations, and strategic benefits, there are powerful reasons to outsource to China. China will be emerging as one of the world’s most promising ITO and BPO destinations.

Outsourcing to China CountryCo-Locating China66% Eastern Europe32% India33% Latin America42% Philippines18% CountryProduct Development China56% Eastern Europe27% India30% Latin America24% Philippines14% The predominant reason for companies to choose China as an offshore location is the opportunity to co locate…. ….and the preferred activity is R&D, Product Development and related services. Source: Duke University CIBER/Archstone Consulting 2nd Bi-annual Offshore Survey Results December 2005

China’s Strengths China’s Strengths: Infrastructure & Environment Key IndicatorsChinaIndia GDP Annual Growth9.9%8.5% FDI Investment (in millions 2004)60, Electricity Production (billion Kwh)1, Telephone Penetration Internet Penetration PC Penetration Source: ITU; WDI 2006, UNCTAD, Hewitt Research China’s superior infrastructure and business environment is a major reason for attracting offshoring activity. These 2 factors provide the required context for IT and BPO offshoring.

China’s Weaknesses: China’s Weaknesses: Language & Awareness Lack of English language proficiency –May not be fluent English speakers, but possess value- added functional skills quickly Lack of global awareness of China’s competitiveness in service outsourcing Western culture and business nuance gap However, the pitfalls that some companies may experience are rapidly being addressed by the Chinese government

Shenzhen is in the seaboard area of South China neighboring Hong Kong Special Administrative Region, and in the Pearl River Delta What’s Shenzhen?

Shenzhen Position in Asia Shenzhen

Shenzhen: Shenzhen: Facts and Figures China’s 1 st and most successful Special Economic Zone Population: 12 million, including the resident population of 8.61 million. Area: 1,953 square kilometers China’s 4th largest city economy; China’s manufacturing, technology, trade and port city New city, high priority for international trade and foreign direct investment A clean, safe, recreational city with mild weather and the best living quality in China

Consumer products manufacturing –IT related products –Traditional consumer products High-tech products manufacturing and R&D Logistics center in South China –Port of Shenzhen is world 4 th largest container seaport –Shenzhen Airport is China’s 4 th busiest airport –Shenzhen has an advanced and extensive highway and railway system Regional financial center –Shenzhen Stock Exchange is one of two stock markets in mainland China Shenzhen: Major Industries

Emerging Outsourcing Industry Shenzhen is certified as one of the first 5 pioneering cities in China to develop ITO/BPO business by the Ministry of Commerce, the Ministry of Information Industry and the Ministry of Technology. More than 120 ITO/BPO enterprises in the area of finance, IT, logistics, software, animation, etc. In 2007, the revenue of ITO/BPO reached USD 605 million, with an annual growth rate of 65.8%; and the ITO/BPO exports USD 284 million, with an annual growth rate of 32.7%.

Some ITO/BPO Companies in Shenzhen: IBM call center ORACLE R&D center Microsoft hardware development center UBS finance and IT development center Kodak imaging service center Lufthansa service center Wal-Mart global procurement center Freeborders Achievo Emerging Outsourcing Industry

Shenzhen in 1985

Shenzhen Today

Why Shenzhen? Why Shenzhen? Element 1: Proximity to Hong Kong Proximity to HK Immigration & Migration Cultural Adaptability Multicultural Multiracial Talent Inflow Open Economy Multilingual Financial Services Center Shenzhen was established due to its proximity to Hong Kong, then a prosperous British colony. This historically led to a great deal of cross-fertilization due to a constant exchange of people, ideas, culture, business practices and norms.

Why Shenzhen? Why Shenzhen? Element 2: China’s 1 st SEZ China’s 1 st SEZ Investor friendly environment Benefits & SOPS Infrastructure Domain Skills Industry knowledge Mix of Industry Verticals Talent variety & depth Mix of Manufac &Services Industries Shenzhen was granted SEZ status on August 26, 1980 established by leader Deng Xiaoping to boost the country's reform process, open up the economy and commence China’s modernization drive. This resulted in the creation of a liberalized and planned environment long before it happened anywhere else in China.

Combining these 3 elements gives Shenzhen unique locational advantages for the ITO/BPO Industry ElementsShenzhenBeijingShanghai GDP Growth Rate ( )17.30%13.20%13.60% Population Growth Rate ( )38.60%9.38%4.07% % of Employed Population76%49%48% Growth in Employed Population ( )7.95%3.16%2.88% Pay Difference Index China’s 1 st SEZ Investor friendly environment Benefits & SOPS Infrastructure Domain Skills Industry knowledge Mix of Industry Verticals Talent variety & depth Mix of Manufac &Services Industries Demographic Advantage Element 2: China’s 1st SEZ Element 1: Proximity to Hong Kong Proximity to HK Immigration & Migration Cultural Adaptability Multicultural Multiracial Talent Inflow Open Economy Multilingual Financial Services Center

Since 2003, China has become the country with the most graduates of higher education. Among China’s 5 million annual university graduates, 600,000 have engineering degrees while India has 400,000, U.S. 70,000, and Europe 100,000. Increasingly, more major in finance, accounting and management. Human Capital

Shenzhen people have an average age of 28 years. Shenzhen area has 121 full time colleges and universities with 220,000 graduates every year. Shenzhen also draws graduates from China and overseas because of the dynamic economy and abundant opportunities. Shenzhen has 791,000 skillful technical and engineering personnel, mainly IT engineers. The English level is higher than the average level of the country. Labor cost is highly competitive.

Infrastructure Telecom –China has 888 million phone lines, 372 million are land lines and 516 million are mobile –Shenzhen has 22.3 million phone lines, 3.8 million are land lines and 18.4 million are mobile Internet Access –Dial-up networks, broadband networks, IP metropolitan area networks, wireless data networks –10 GB/s backbone bandwidth and 2.5 GB/s transmission bandwidth –China has 162 million internet users and Shenzhen has 1.9 million Power Supply –Shenzhen’s Municipal Power Authority provides an uninterrupted source of electrical power to 2.16 million users

0 SEAPORT Million (passenger) 1st in China Million ( passenger) 4th in China Million (TEU) 4th in the world LAND PORTAIRPORT Infrastructure 2007 Figures Hong Kong International Airport is 45 minutes from Shenzhen with non- stop flights to all major North American cities.

In 2010, the ITO/BPO market in Shenzhen will total USD 7.14 billion and export will hit USD 5 billion. What Does Shenzhen Offer? What Does Shenzhen Offer? Software R & D Financial Services Animation Supply Chain Management Opportunities in ITO/BPO

What Does Shenzhen Offer? City Policies –Shenzhen Municipal Government’s Provisions on Developing High-End Services Industry –Shenzhen Municipal Government’s Provisions on Expediting the Development of Shenzhen Services Outsourcing Industry

Exemption and/or rebate of corporate income taxes. Exemption of tariffs and import value-added taxes for self-use imported equipment. Financial support for enterprises applying for international certification, e.g. ISO, CMMI/CMM, etc. R&D expenditure subsidies. Financial support for enterprises developing products with independent intellectual property. Loan interest subsidies. What Does Shenzhen Offer?

Shenzhen City Government attaches great importance to IPR protection, with a strategic position to build the city as an innovation-oriented city. China’s State Intellectual Property Bureau and Shenzhen City Government signed the "Protocol for Jointly Building a Strong IPR City," making Shenzhen the first city in China to position IPR as a priority (December 13, 2007). What Does Shenzhen Offer?

Q & A Thank You!