LOCATION,LOCATION: STRATEGIC SHORING CONSIDERATIONS

China as a strategic shoring destination Philip Hadcroft PhD

Managing Director Practical Logic Pty Ltd

Sydney, Australia

The People’s Republic of China comprises 22 provinces, 5 autonomous regions, 4 directly administered municipalities 2 special administrative regions 1.34 billion people 656 cities 8 cities have over 10 million people 93 cities have over 5 million people China is 1¼ x the area of Australia It has 100 cities bigger than Sydney / Melbourne.

UNDERSTANDING THE SCALE OF CHINA

Since 1980:

• In 30 years, China’s per capita GDP has risen from US$205 to US$4,382 (up 8,563%)

• 500 million people have been lifted out of poverty. (equivalent to almost half of India)

• China’s urban population has risen by 446 million people ( 20x the Australian population)

In 2010

• Only 15 nations on earth had a national GDP exceeding US$1 trillion.

• Australia attained this level only 3 years ago

But by 2020

• China will have six provinces with an annual GDP of more than US$1 trillion

• That’s equal to six economies the size of Russia , Spain or Canada.

% of USA 1980 GDP 2010 GDP CAGR 2011 GDP

2011 GDP Growth % of USA

100 USA US2,788.15 billion US$ 14,657.8 billion 5.7% US$15,087.7 billion 1.6% 100

6.54% India US$ 182.472 billion US$1,537.97 billion 7.4% US$1,729 billion 6.9% 11.46%

7.26% China US$202.458 billion US$5,878.26 billion 11.9% US$7,492.48 billion 9.2% 52.64% http://www.economywatch.com/economic-statistics/year/

UNDERSTANDING THE WEALTH OF CHINA

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UK USA India China

The UK, Europe and USA are still struggling

with the global financial crisis, characterised

by:

• low GDP growth

• excess liquidity and

• high volatility in finance markets, and

• a crisis in European sovereign debt.

China’s economy has been affected far less.

UNDERSTANDING THE WEALTH OF CHINA

Since 1980, China has succeeded as the world’s strong outsourced manufacturing base, providing high volume, high quality, low cost outsourced manufacturing .

Most of this has been along the eastern and southern coastal regions. Much of it is seen as old-tech, high energy consuming and ecologically unsustainable.

So China is moving it. Entire industries are going West and North. New manufacturing plants are being established using hi-tech, green production systems, lowering China’s carbon footprint, and lowering the cost per unit of output.

China’s western and outlying provinces, with their abundant populations of lower cost labour are sharing in China’s growing wealth and revitalising China’s flagging global competitiveness.

Eastern sites are embracing new-age manufacturing, hi-tech electronics, optics, pharmaceuticals and new-age materials.

Transportation, ultra high speed trains, inland waterways, logistics infrastructure, power generation plants – are all being ramped up at a breakneck pace.

TRANSFORMING THE MANUFACTURING ECONOMY

The Eastern seaboard has accepted the challenge of transforming China’s cost-driven manufacturing economy into a value-creating service-based economy.

China’s Ministry of Commerce has invested trillions of RMB into 21 model cities, to transform them from their traditional manufacturing bases to strong service outsourcing economies.

Cities, provinces and companies are competing intensely to attract foreign and government investment – and to win, they need to be attractive, dynamic and thriving modern locations where Gen Y people want to live.

CHINA’S DRIVE TOWARDS A SERVICES-BASED ECONOMY

CHINA’S DRIVE TOWARDS A SERVICES-BASED ECONOMY

NEW ATTRACTIVE LOCATIONS THAT MAY SURPRISE YOU

Rank City No. Top 131

Companies Model City?

1 Shanghai 64 Yes

2 Beijing 62 Yes

3 Nanjing 32 Yes

4 Chengdu 31 Yes

5 Dalian 30 Yes

5 Guangzhou 30 Yes

7 Hangzhou 28 Yes

8 Shenzhen 27 Yes

9 Wuhan 23 Yes

9 Xi An 23 Yes

11 Jinan 20 Yes

12 Chongqing 18 Yes

12 Hong Kong 18 Yes

12 Suzhou 18 Yes

15 Changsha 15 Yes

15 Taipei 15 Yes

15 Tianjin 15 Yes

18 Wuxi 12 Yes

19 Shenyang 11 No

20 Fuzhou 10 No

20 Hefei 10 Yes

20 Kunming 10 No

20 Qingdao 10 No

20 Xiamen 10 Yes

• CCIIP – a section of China’s Ministry of Commerce, commissions Gartner, IDC and others to conduct an annual survey, using 6 criteria.

• 131 companies were ranked as China’s leading services outsourcers in 2011.

• Those companies have located 710 branches in 94 cities across China

• If you’re thinking of sourcing services from China, these are the cities in which China’s top services outsourcing companies are located.

To see the names of all 94 cities, go here:

http://www.bigredbookofoutsourcing.com/wp-content/uploads/2011/10/Services-Outsourcing-Cities-of-China-2011-Synopsis.pdf

The early stages of China’s service economy (2000 -2010) focused on offshoring

• leveraging low cost labour in China

• building a broad range of outsourced service applications

• attracting BPO and ITO work from USA, UK, Europe and Australia to be undertaken in China.

Chinese students in western universities (UK, USA, Australia, NZ) have returned to China to build companies that bring digitised BPO applications from foreign customers.

China’s 11th 5-year plan, published in 2006, included the 10: 100: 1000 plan.

1. Establish 10 major cities dedicated to services outsourcing

2. Attract 100 multinational outsourcers to establish bases in China

3. Take 1,000 Chinese SMEs and help them to attain international service standards (ISO, CMM)

They overshot the goal and established 21 major services outsourcing cities.

BUILDING CAPABILITY – LEARNING HOW TO COMPETE

From 2001 to 2010

Chinese BPO service providers have

• built their scale,

• matured their business models,

• refined their operating platforms,

• attained ISO and CMMI accreditations, and become world class.

China has built the world’s second largest outsourcing industry, equipped it with hi-tech environments, well-trained personnel, internationally-educated management, and accredited ISO and CMMI systems & processes.

By 2010

• China was the world’s third-largest exporter of commercial services worth US$171.2bn. That’s a 32 % increase over 2009.

From 2011 to 2016

China’s 12th 5 year plan, published in March 2011, re-focuses China’s growth on domestic transformational change.

• drive the 1,000 Chinese service providers to the size of multinational corporations, by assertively outsourcing work from government owned banks and companies in insurance, transportation, logistics, utilities and telecommunications.*

GO LONG – HOW CHINA IS BUILDING ITS SOURCING LOCATIONS

TOP OUTSOURCED SERVICES COMPANY DISTRIBUTION BY PROVINCE 2011

IDENTIFYING THE MAIN DRIVERS IN YOUR SHORING STRATEGY

• China’s top 131 outsourced services providers have located their 710 branches in 94 cities, across 29 provinces – so which ones best suit your sourcing needs?

• The answer will NOT be in a generic ranking and rating of service providers

• Instead, it will be found in a close matching of your corporate strategy with a select set of sourcing providers

• Many, in China’s north-east are linguistically and culturally best suited to addressing the Japanese and Korean markets

• Beijing locations may suit purchasers looking for suppliers with government endorsement & contracts to serve the domestic market

• Cities in Jiangsu, Shandong and Zhejiang provinces have strong experience in delivering back-office BPO solutions to English-speaking clients

• Wuhan has an exceptional transportation & logistics advantage that suits hub-and spoke strategies, such as document-centric information management

• Geographically remote locations can offer lower labour costs, with high competence levels in specific appliactions

• Contact centre work abounds in China – but mainly supports the massive domestic market. Southern locations may also support South East Asia.

OFFSHORE SHARED SERVICES AS A PLATFORM FOR INTERNATIONAL GROWTH

• Many multinational service providers have preferred to establish their sourcing centres in countries where the languages and cultures are more familiar to them

• USA and Europe have been the primary markets served by sourcing vendors because of the population densities, relative wealth and cultural affinity

• As the impacts of the extended financial crisis deepen, formerly lucrative markets are no longer driving growth and shareholder value

• There is increasing interest in penetrating markets that are not as easy as their 1st preferences

• Many companies have identified that China is not just a location for sourcing services – it is also a massive market into which services can be delivered

• As Chinese service vendors are growing quickly, they are in need of strategic partners who can offer them domain expertise, vertical market expertise, applications knowledge and skills in large company leadership that they have not yet experienced.

• This brings opportunities for western companies, (buyers, vendors and advisors) to participate in China’s growth

In the period 2016 to 2020

• China will offer the world a scope and scale of high-quality, well-priced outsourced services, with value propositions that other geographies will find hard to match.

PRACTICALLOGIC PTY LTD

TM

THANK YOU

www.bigredbookofoutsourcing.com

See SSON for preferential rates to this research data

“Remember, in 1980, China's GDP was just 7.3 per cent the size of the US economy.

When China will actually overtake the US economy in terms of absolute size is hotly debated.

But what isn't in debate is that on current projections,

China's economy is likely to be the largest in the world before the end of the third decade of this century.”

The Hon. Kevin Rudd. (formerly) Australian Minister for Foreign Affairs.

Rudd, K. (2011) Australia-China 2.0: The next stage in our economic partnership. Australian Minister for Foreign Affairs . Guangdong University of Foreign Studies. Guangdong, China. http://www.foreignminister.gov.au/speeches/2011/kr_sp_110522.html