Shenzhen: Shenzhen: China’s New BangaloreChina’s New Bangalore

Robert FraserKPMG Advisory UniversityJune 12, 2008 Chicago, IL

- Opportunities and Incentives in BPO/ITO

OutlineOutline

• Outsourcing to China

• What’s Shenzhen?

• Why Shenzhen?

• What Does Shenzhen Offer?

Outsourcing to ChinaOutsourcing 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 Outsourcing to China

Country Co-Locating

China 66%

Eastern Europe 32%

India 33%

Latin America 42%

Philippines 18%Country Product

Development

China 56%

Eastern Europe 27%

India 30%

Latin America 24%

Philippines 14%

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 StrengthsChina’s Strengths: Infrastructure & Environment

Key Indicators China India

GDP Annual Growth 9.9% 8.5%

FDI Investment (in millions 2004) 60,630 5335

Electricity Production (billion Kwh) 1,907 633

Telephone Penetration 26.63 4.51

Internet Penetration 8.44 5.44

PC Penetration 4.08 1.54

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?What’s Shenzhen?

Shenzhen Position in AsiaShenzhen Position in Asia

ShenzhenShenzhen

Shenzhen: Shenzhen: Facts and Figures

• China’s 1st 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 4th largest

container seaport– Shenzhen Airport is China’s 4th 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: Shenzhen: Major IndustriesMajor Industries

Emerging Emerging Outsourcing IndustryOutsourcing 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 ce

nter• UBS finance and IT development cen

ter• Kodak imaging service center• Lufthansa service center• Wal-Mart global procurement center• Freeborders• Achievo

Emerging Emerging Outsourcing IndustryOutsourcing Industry

Shenzhen in 1985Shenzhen in 1985

Shenzhen TodayShenzhen 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 ServicesCenter

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 1st SEZ

China’s 1st

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

Elements Shenzhen Beijing Shanghai

GDP Growth Rate (2003-2004) 17.30% 13.20% 13.60%

Population Growth Rate (2000- 2004) 38.60% 9.38% 4.07%

% of Employed Population 76% 49% 48%

Growth in Employed Population (2003-2004) 7.95% 3.16% 2.88%

Pay Difference Index 100 134 112

China’s 1st

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 SEZElement 1: Proximity to Hong Kong

Proximity to HK

Immigration & Migration

Cultural Adaptability

Multicultural

Multiracial

Talent Inflow

Open Economy

Multilingual

Financial ServicesCenter

• 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 CapitalHuman Capital

Human CapitalHuman 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.

InfrastructureInfrastructure

• 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

177.7 Million

(passenger)

1st in China

20.62Million

(passenger)

4th in China

21.10 Million

(TEU)

4th in the world

LAND PORT AIRPORT

InfrastructureInfrastructure

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?

Softw

are

R & D Financial Services

Animatio

n

Supply Chain Management

Opportunities

Opportunities

in ITO/BPO

in ITO/BPOOpportunitie

s

Opportunities

in ITO/BPO

in ITO/BPO

What Does Shenzhen Offer?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?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?What Does Shenzhen Offer?

Q & A

Thank You!Thank You!