Location, location, location

Today is my 20th anniversary since I started my sensational business journey in China. It all began when my previous employer, State Street Bank signed the MOU with Industrial Commercial Bank of China (ICBC), China’s largest bank to establish a strategic cooperative partnership. The cooperation has lasted for a decade that helped us understanding the Chinese financial market from the inside, when the US bank provided business & technology advisory in return, from a global perspective.

Six months later, China joined the WTO. It was the time when foreign exchange certificate has just been abolished, the mainland’s mutual fund market was at its infancy, and the stock market celebrated its 10 years anniversary. Foreign banks were rushing into China and prepare to break into this untamed market. Around that time, global investment community only talked about business opportunities for the Chinese consumer market, and Japan seem to be lost in the wind. And yet, no one paid attention to China’s emerging high-tech sector, which already exist. 

Lenovo, China’s largest PC maker is way into its 16 years of operation. Kingdee, leading ERP/financial software company went public in HK Stock Exchange in 2001. Huawei already exporting network & teleconference equipment to the third world. Kingsoft software, which was commissioned to replace Microsoft Office was set up in 1988. It was also an era when numerous software start-ups entered the market to change the world- well, China to start with. Tencent, the internet giant was founded in 1998. Alibaba was established a year later. And for the past two decades, these technology pioneers have transformed the country beyond recognition.

In 2000, when I was at a client’s Beijing office preparing a presentation and needed to print a PowerPoint for the audience, but the PC was not installed with the proper printer driver. In a normal circumstance, technician would have gone to their IT department and look for the 3.5-inch floppy disk. But due to the distance and time constraint there was insufficient time to obtain such software. While I was prepared to give up the printout option, the technician sat down in front of the PC, roll up his sleeve, and started coding. Within 30 minutes, a printer driver was up & running. Subsequently, my presentation was done successfully. That was a Sputnik moment (in a positive way) for me, when I realize the technology potential in the middle kingdom. But never did I imagine the transition speed from being idiots to imitators then innovators in such warp speed (borrowed from Warren Buffett's wisdom).

As part of the national strategy, China has established 169 High-tech Industrial Development Zones across provinces, municipalities and autonomous regions (excluding Hong Kong and Macau) since 1988. High-tech zone is a designated science and technology industrial area with a mission to proliferate the development of advance technology and products in China. In return, government preferential policies towards taxation, loans and grants are offered to qualified organizations choose to set up their presence in the industrial development zones. To address specific industrial demands, Software Parks are also set up to provide an environment (& incubator) for the software industry. 11 state-level software parks are established since 2001, which reside in Beijing, Shanghai, Xi’an, Nanjing, Jinan, Chengdu, Guangzhou, Hangzhou, Changsha, Dalian and Zhuhai. In addition, there are numerous ‘industrial parks’ that are funded by private sector or local government that provide additional choices for the business community.

Throughout the last three decades hundreds and thousands of local and foreign enterprises have established their manufacturing plants, training centres, R&D hubs, outsourcing arms that contributed to China’s economic growth and technology advancement. The high-tech scope covers extensively from electronic & information technology, bio-engineering & new medicine, new materials & applied technology, advance manufacturing, aerospace, ocean engineering, nuclear application, new energy, environmental protection, and modern agricultural.

Microsoft is one of the first foreign technology companies entered China during the early nineties. Today, Microsoft China houses the most complete subsidiary and largest R&D centre outside the US. By 2019, according to ministry of commerce, there are over 2,000 multinational R&D centres in China. At least 15 of them are set up as part of the global research & development centres. In recent years, more start-ups (local and foreign) have emerged and become part of the driving force in many of the industrial development zones. 

While local banks leverage government incentives by setting up their development and operation centres way before turn of the century, global banks started to explore establishing their IT & operation subsidiary in China around the new millennium. Capital One was the first foreign financial institution setting up a development centre in China (1999), before deciding to close down after two years operation. State Street Bank first engaged with Zhejiang University in exploring the first taste of software outsourcing to the academic institution before turning into a Joint-venture and finally banking subsidiary in China. Around that time, many other banks have similar plan. Some of the examples are: HSBC (2000), Citi (2002), Morgan Stanley (2006), Fidelity (2007), Nomura (2012), ANZ (2013).

Location selection is utterly important. Every city in China possess its unique value proposition. It is like searching for a spot of a retail store. Ending up in a wrong location could be disastrous and result in lost investment and closing of the business. This goes the same when searching for an ideal location for a R&D centre. Location decision require a fundamental question that need to be answered.

For example, what is the strategic position of the venture- Is it a technology delivery centre, operation centre, or call centre? Does this centre operate independently in China or require overseas collaboration (which country/city, & language)? What client segment does the centre serve (retail, institutional)? What is the proximity to other offices (inside & outside China), and the capabilities & capacity suitable to the centre?

Talents are the main ingredients that determine the success of a R&D centre: Are there adequate academic institutions nearby that provide the talent pipeline for your firm? What about on-job professionals (experienced engineers, managers, and practitioners)? Are there companies in the region with similar type of engineers (hard & soft skills)? What about the FinTech ecosystem that may form partnership with incumbent banks?

The good news is that there are around 8 million graduates (2019) in China each year, 100,000 of them are of computer science discipline (Ministry of Education). An estimate of 1.6 million software engineers are in the market today (Evans Data). Last year, there were 350,000 Chinese returnees decided to come home for work. All of these are good indications of a sizable talent pool in China. However, when building a R&D centre, one needs to validate whether the location has such talents, infrastructure and environment that aligns with the company strategy and vision.

Many banking R&D centres in China were not strategically set up, meaning that not all the firms have done sufficient homework before deciding the site. In one case, the decision of setting up an operating centre in a Chinese city for a global bank was based over a dinner conversation. The bank’s CEO happened to sit next to the city mayor, who has skillfully convinced his guest of the proposal. A follow-up due diligence was conducted but naturally favouring the city of choice and passed with flying colours. Fortunately, the location was a good choice, but due to luck. In a different setting, the major shareholder of a financial institution who wanted to select Wuzhen as the company’s technology hub (owing to local government incentive). Just to give some perspective: Wuzhen is a historic scenic town (not city) with a population of 60,000 and considered a tourist spot. What made Wuzhen famous in the tech world is the annual World Internet Conference that has been hosting in this town since 2014. The population of carps swimming in the waterway will no doubt outnumber software engineers if a tech hub is set up there. Fortunately, the idea was dropped after much opposition.

Chinese employees are quite mobile, who are willing to relocate to another city given job opportunities. Especially when housing price that has gone through the roof in the past 10 years, there is a trend of people moving to a more affordable city (to buy property), less hectic location, or places nearer to their hometown. China also attract foreign professionals pursuing their career in this country. At ANZ, the strategy is to have around 90% local hire, with majority of employees from Southwest China (where the centre is built)-ensure people do stick around. A small percentage of staff were hired from outside China (foreign professionals) which constitute US, UK, India, HK, Taiwan, and New Zealand, who possess certain skills that are hard to find locally. Also, as a global bank, foreign workers have their role to play in an international setting. When we built Morgan Stanley delivery centre in Shanghai, graduates were hired extensively from top schools across the country. The reason is simple. Morgan Stanley offers the best IT graduate training program in Wall Street, with a 4 months make-or-break intensive schedule that matches Navy Seal training that turn kids into men.

For entrepreneurs who want to set up a tech firm in China. The environment today offers a far better condition than 10 or 20 years ago, with more favorable government policies, transparent processes, investment options and even better infrastructure. During the set up our retail lending business in Shanghai at the start of the P2P boom, we have managed to snatch great talents from the market at a relatively low price, as compared with foreign banks. Its very simple-our tech & operation specialists did not required fluent English skill, international banking knowledge, or overseas experience. The business is to serve the local market. But yet, that was one of the best teams I have ever hired.

China’s labour cost is not cheap. It has gone up substantially for the past 10 years. In general, Chinese software engineers are more expensive when compared with India & Philippines, about the same cost as Poland & Ukraine, catching up with HK & Singapore, and cheaper than UK & US. Getting most of the local talent market should not compete in cost. The best value proposition from China are their: highly skilled labour force, emerging technology capability, growing FinTech ecosystem, developing financial market, and the rising economy. 

China market has two unique offerings. Firstly, the consumer market consists of a huge buying power from baby boomer, millennium, Gen X, Y & Z with rising demand, which accelerates product innovation and service excellence. Secondly, the producer market with an army of skilled labour force that ranges from manufacturing sector, high-tech industry to financial market that bring innovation, new products and brand-new user experience that can satisfy tough customers. 

We are in a different era now. Twenty years ago, companies entered China setting up shops to save cost. Ten years ago, foreign firms reinforced their local teams to better serve the local market of growth. Today, companies come to China looking for investment opportunities in unicorns, expect local technology that resolve global problems, as the local financial market is already entering Bank 4.0. A few months ago, UBS has announced an ambitious plan to launch a new digital banking platform in China first before subsequently bringing it to the global market. This could set the norm in China.

Geopolitical tension will have impact to the way technology centres operates in China, especially when it involves global business nature. Throughout my career setting up global footprints in China, there has always been regulatory & compliance challenges, defining what China can or cannot offer. In most cases, its manageable. Most regulations are quite clear in what can be outsourced, but it is down to the bank to decide on their risk appetite when operate under unchallenged area. However, with growing geopolitical uncertainty, banks should ring-fence their China presence to avoid regulatory changes (or abrupt escalations similar to recent US-China trade war) that may have negative impact to their investment and setup. But all of these do not alter the facts that the continuation of an explosive growth of the local consumer market, further opening up and liberalization of the financial market, emerging technology ascendancy that already disrupting China, and the abundance of talents from this nation.