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Outsource magazine: thought-leadership and outsourcing strategy | June 26, 2017

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Chinese choices: location selection considerations for global enterprises

Chinese choices: location selection considerations for global enterprises
Philip Hadcroft

The size and growth curve of the Chinese economy, relative to those countries more seriously affected by the recent crises in global finance and sovereign debt, is stimulating many companies to think more deeply about where their business is represented.  Which markets offer the best potential for growth and positive shareholder returns?

Certainly those companies that position themselves as global services enterprises and as multinational corporations must be reaching the conclusion that their market positions require them to have a presence in China.

Beyond that point, however, the deeper questions focus on where in China should the company establish its presence. To properly answer that question, companies must probe their own business strategy – and need to be clear about exactly what processes they will undertake there, which markets they will serve from there and what support networks they will need to be successful. The answers to those questions, when contrasted against the relative capabilities of Chinese cities to meet the company’s specific needs, will go a long way to guiding the choice of optimum destination.

Diversifying into unfamiliar markets carries intrinsic risk, and post-GFC most companies are more cautious than they were before. Therefore, to guide your initial thinking about how to get the most out of your selection of Chinese destination, the following diagnostic tool may come in handy:

1. Firstly, you should look at which countries you wish to serve, because language competencies, and the sustained availability of graduates with the requisite language skills, will vary significantly from city to city. By way of example, Dalian is renowned for serving Japan and Korea – but it’s not the only option for these markets. If you are serving English-speaking markets, there may be better choices.

2. Secondly, you should ask whether you are intending to service the domestic Chinese market, as location, cost of labour and the sheer size of that market will have a bearing on the mix of your talent pool.  It could be that 80 per cent of your staff in China will be serving China’s domestic market and 20 per cent serving other markets – or it could be the other way around. That will significantly affect your labour mix, operational economies and ultimate profitability.

3. Thirdly, you should look at what processes your employees will engage in: screen-based, voice-based or something else. The required level of education in languages (English, Japanese, Korean and others) is significantly higher for voice-based services than for back-office services. This may mean assessing the local availability for IELTS certification. It may also mean assessing the cultural affinity of graduates with the audiences they will serve (e.g. insurance products vary significantly from country to country, and some Chinese workers may / may not be able to understand / empathise with a consumer experience that is entirely unfamiliar to them). The needed skills can vary significantly from city to city, sometimes based on twentieth century geo-political history (i.e. the prolonged presence in parts of China by the Japanese, French, British, American – and the internal migration of the Chinese populus during the Cultural Revolution), as well as proximity to contemporary western trading centres such as Shanghai, Guangzhou, Shenzhen and others.

4. Fourthly, recent increases in local labour costs are making some cities relatively less attractive. Companies that are long-established in historically strong outsourcing cities are seeking new locations for their own back-offices and are rebalancing their workforces into secondary locations – sometimes nearby, and sometimes further afield. If labour arbitrage and lower operating costs are a key part of your value proposition, then you may find the business case weaker for established outsourcing cities than for other cities in China where an emerging emphasis on the services economy is driving fast-paced change.

5. Fifthly – and in direct contrast to my last point – you should look at the maturity of the high-tech parks and economic development zones in which your business might be located. The presence of an established western peer-group, with longstanding in-country experience, should not be underestimated. Many ‘potholes’ can be avoided by leveraging the experience of friendly ex-pat companies in the same location – and the historically strong outsourcing cities have many such companies.

6. Sixthly, you should consider the availability of first-class infrastructure, high-speed roads, clean air and water supplies, high engineering and construction standards, reliable power supply, access to high-speed internet connectivity, the availability of senior managerial talent in sufficient numbers. In all of these things China can meet your needs – but relative strengths and weaknesses in these factors do vary from city to city.

7. Seventhly, consider where you will be sourcing talent in the years to come. Will you be recruiting from university campuses / post-graduate language schools?  Is it preferable for you to be located close to a city with three universities – or one (such as Xi An) that has 63 universities and over 90 tertiary institutions?  It’s a wide choice, and you may not necessarily need to take a polarised position. It may be enough to select from all cities that have a sufficient number of graduates within the total employee pool.

8. Eighthly, it will be very much in your interests to consider the range of financial incentives you can gain by locating in various cities. Some cities are being specifically funded by the central government to attract foreign companies. There are income tax incentives, company tax rebates, rental holidays, training subsidies, recruitment cost absorption, energy tariff benefits, employee transportation and housing initiatives and many other potential ingredients to the business case that can substantially affect your ROI. These incentives are available at four levels: federal, provincial (state), municipal (city) and sometimes from the hi-tech parks. Selecting the right location is a key part of this – but the benefits are also often highly negotiable and some patient persistence and flexibility may be needed to attain the best outcome.

9. Ninthly, some cities are specifically focused on driving the transformation of heavy manufacturing industries, other cities may have a focus on new-age manufacturing (pharmaceuticals, telecommunications, bio-technology). These cities will also want to attract services companies – but it won’t be their ‘core competence’. Cities that are specifically trying to establish themselves as services outsourcing centres of excellence may be more proactively cooperative in meeting your requirements, and in providing you with the incentives and support resources you need. They could also be better equipped and configured with resources to help western services outsourcing companies.

10. Tenthly, take a look at where China’s top services outsourcing companies are locating themselves. This includes the top ten western companies operating in China. They are placing their branches across 94 cities, not based on government policy, but based on which locations are best for doing business. Which types of businesses are in the same broad category as yours, and where have they elected to locate? Often, looking at what the locals are doing can be a good litmus-test, to validate / support your preferred selection.

This is not an exhaustive list, but if you take these factors into consideration, you will have addressed the major issues in selecting a Chinese location. As part of this process you should consider scoring various cities on these criteria. If you do that, then be sure to weight the criteria according to their relative importance to your business. Taking a well-considered and methodical approach is a key strategy for mitigating risk.

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