Capability Perspective

WITMAN HUNG - EXECUTIVE VICE PRESIDENT & CO-FOUNDER

"WITH INDIA ALREADY PAST THE CURVE, IT'S A VERY
EXCITING TIME IN CHINA FOR A FINANCE AND ACCOUNTING
BACK OFFICE LIKE OURS." - WITMAN HUNG

Witman Hung grew up in a wooden hut on the margins of rural China. Today, only less than 40 years later, he's a co-founder of a multi-million dollar company. A respected youth leader and philanthropist with both his time and money to some dozen youth and charity groups, he's committed to giving back as much as life has given. Witman was a Senior Volunteer at the 2008 Beijing Olympics, and was recently named as one of the 10 outstanding people under 40 in Hong Kong. He is also a member of China People Political Consultative Commitee(CPPCC).

Witman's but one of 1.2 billion believers, one face in the countenance of China, a personification of what used to regarded as the American dream but today is known as the China story. It's the story of the world's fastest growing economy, an economic juggernaut that's quickly making believers out of the rest of the world.

From Workshop Of The World To The World's Back Office

It's small wonder then that China's explosive growth in offshore outsourcing and back-office operations is, as usual, creating converts. Never mind the global consultancies setting up Business Process Outsourcing services and multinational shared service centers popping up across the mainland, even India's top outsourcing providers are clamoring for a foothold. Infosys, for example, currently has more than 750 employees in China with plans to hire an additional 4000 more.

With China's president Hu Jintao having announced that the government is targeting Business Process Outsourcing as a strategic growth industry with plans to develop ten outsourcing-based centres by 2010, that China will become a world player seems a foregone conclusion. In fact, the State Council had already named 11 cities.

"As China has demonstrated before with so many industries, it will, in its inimitable, lightening fashion be taken seriously in outsourcing very, very soon," says Hung. "With India already past the curve, it's a very exciting time in China for a finance and accounting back-office like ours."

Insiders, analysts and consultancies are predicting that China will win a 20-30 percent share of the offshore market within 15 years. Research group IDC forecasts that the Chinese Business Process Outsourcing market will grow substantially over the next five years at a rate of nearly 40 percent a year.

The Government's Proactive Approach Towards Business Process Outsourcing

Eager to move away from low-end manufacturing into more sustainable fields such as the service sector, China is keen for a slice of Business Process Outsourcing, a global market expected to be worth $290 billion by 2010, according to global consultancy Accenture.

To become the favored destination of multinationals, China's Ministry of Commerce will provide support such as interest rebates, research & development funding, personnel training, corporate qualification certification, export credit loans, credit insurance, commercial information and protection of intellectual rights. A recent example includes an announcement by the government in the southern city of Guangzhou, that it would match outsourcing companies investments in training with heavy tax incentives.

"THE GOVERNMENT IS OUT TO IMPRESS AND CONNECT WITH
THE WORLD, WITH UPCOMING EVENTS LIKE THE BEIJING
OLYMPICS, 2010 WORLD EXPO IN SHANGHAI AND ASIAN
GAMES IN GUANGSHOU IN 2010. IT CERTAINLY LEADS TO A
FACILITATED BUSINESS ENVIRONMENT." - WITMAN HUNG

China's ambitious plan will encourage 100 multinationals to shift outsourcing services to China and foster 1,000 large and medium-sized service outsourcing enterprises, Assistant Minister of Commerce Fu Ziying has said. Ultimately, the government aims for a fourfold increase in its service outsourcing export volume during the 11th five-year plan period (2006-2010).

"The government is out to impress and connect with the world, with upcoming events like the Beijing Olympics, 2010 World Expo in Shanghai and Asian Games in Guangzhou in 2010," says Hung. "It certainly leads to a facilitated business environment."

For example, in the firsthand experience of Next Horizon's senior management, in 1998 setting up a rep office in Shenzhen took one and a half years to secure government approval. In 2002, securing a wholly owned foreign enterprise (WOFE) license in Guangzhou took one year. In 2007, the same process took three months. CFOs worldwide are taking notice of China's ambitions. Accountancy PWC recently reported that in a study of 250 senior finance executives, 95 percent reported that they believed China would be their largest source of offshore professional labor within the next three years.

The New Outsourcing Trend: Matching Global Footprints

Whereas in the past, an outsourcing company's location was theoretically irrelevant, today's savvy companies are integrating offshoring activities into the wider architecture of their global footprint, geographically connecting supply chains, R & D centers, important overseas markets, etc into a cohesive, collaborative system. Simply put, for companies already doing business in China, be it manufacturing or selling into the domestic market, it makes sense to consolidate Business Process Outsourcing there as well.

"Multinationals doing business in China are more comfortable when their outsourcer matches their footprint or strategy," says Hung. "There's also the convenience factor and opportunity for senior executives to minimize business travel."

Not only Next Horizon's clients, but also Next Horizon itself stands to benefit from its China roots. That's because regional demand for Business Process Outsourcing services in China, particularly Japanese and Korean companies, are also driving growth for Business Process Outsourcing services in China. Next Horizon is much better places to serve the typically Japanese and Korean companies than linguistically distant India.

"People tend to think of India or the Philippines when looking for 'strong language skills,'" says Tom Reilly, CEO of Next Horizon who has run finance and accounting operations in China for the last 10 years, "but this is usually by someone who has limited their thinking to the English language. China has strong European language skills and is in a far superior position to all the others when it comes to Asian languages, especially pictorial East Asian languages such as Japanese and Korean. Of Course, 100% of our staff in China are fluent English speakers."

Avoiding India Outsourcing Disease: Skyrocketing Wage Inflation and Attrition

Whereas India is experiencing notorious wage inflation and employee churn rates as high as 50 percent, China looks to be an employer's market for time to come. For one, China is producing significantly more graduates than any other country, growing at 20 percent per year with five million students forecast to graduate in 2007, according to the Ministry of Education. This is compared with three million graduates forecast in India, two million in the US and 0.5 million in the UK.

"...THE GENERAL SUPPLY OF UNIVERSITY GRADUATES FAR
OUTSTRIPS THE DEMAND IN CHINA, AND THERE IS A
CONSTANT INFLUX OF PEOPLE FROM RURAL PARTS OF CHINA
TO THE BIG CITIES." - TOM REILLY

At the same time, fewer students in China are finding jobs. About one-quarter of 2007's graduating class will graduate without immediate job offers and further, the government estimates some 34 million people to enter the labor market from 2006 to 2010.

"Not only does the general supply of fresh university graduates far outstrip the demand in China, but there is a constant influx of people from rural parts of China to the big cities", says Reilly. "People forget that we are in the midst of one of the largest migrations in human history akin to the industrialization of the West over the last 200 years."

India meanwhile will face a talent shortfall in the Business Process Outsourcing sector, including finance and accounting, of up to 500,000 employees by 2010, according to global management consultancy, McKinsey, where, already, labor costs for the Business Process Outsourcing sector are jumping 15 percent annually.

College Graduates of Quality, Not Just Quantity

Higher education in China is highly valued and well developed, with more than 2,000 universities and colleges. The enormous talent pool also has the requisite skill sets that Next Horizon seeks, rating graduates high in terms of employability.

"We Chinese make better accountants - we invented the abacus!" jokes Hung.

In fact, it's analytical skills that count, meaning Next Horizon is focused more diploma holders than degree holders. "They don't need to be a CPA," says Hung. "Just as the trend in consultancies is to hire non-accountants, auditors use the same approach. This also dovetails nicely with the greater history of education in China, which values broader skill sets."

Equally important, graduates view Next Horizon as an opportunity to work in what they regard as the most coveted fields. According to the Ministry of Personnel, positions in finance, administration and foreign languages are among the most sought after.

English Spoken Here

The longstanding argument that India is a superior outsourcing location due to China's language barrier is losing traction as the Chinese rapidly ascend the linguistic learning curve. Students in China are increasingly better educated in English, given a booming service industry and renewed language emphasis for the Beijing Olympics in 2008 and World Expo in Shanghai in 2010. The Chinese government is also driving improvements, having announced in 2006 an initiative to spend more than five billion US dollars on English-language training to target the Business Process Outsourcing market.

What's more, the nature of Next Horizon's transactional processing means that English language mastery is less critical than other Business Process Outsourcing tasks such as IT work or customer service.

"Our function is back of the house, not front of the house," says Hung. "It's very process-oriented work and the level of English fluency really varies only in degree." "For example, 100 percent of our new hires have studied English in school and have passed a basic written English test and an English-language interview with a non-Chinese member of our management. They can communicate in English - but that doesn't mean they are ready to host The Tonight Show," he quips.

Adds Next Horizon's head of human resources, Diana Zhao, recalling when she headed an HR department in Guangzhou for a Business Process Outsourcing provider back in 2004: "I'm surprised by how rapid the evolution of English-language skills has been. Even applicants applying for junior positions are speaking English whereas they weren't only a few years ago."

Furthermore, Next Horizon is committed to providing ongoing education. "Once a new hire has joined our team, we focus on building confidence and communication skills through on-the-job and classrrom training delivered by recognized leaders such as Dale Carnegie and Berlitz," says Hung. "On top of this we employ strong supervisors with excellent communication skills -not just language skills-to handle the delicate client interactions."

Guangzhou's the Go for Employers of Choice

Next Horizon is headquartered in Guangzhou, which, as the capital city in China's wealthiest province, has long been a magnet for the nation's ambitious college graduates. Of course, Guangdong, designated as one of four key education hubs in China by the central government, is also already rich in brainpower.

"PEOPLE FORGET THAT WE ARE IN THE MIDST OF ONE OF THE
LARGEST MIGRATIONS IN HUMAN HISTORY - AKIN TO THE
INDUSTRIALIZATION OF THE WEST OVER THE LAST
200 YEARS." - TOM REILLY

Next Horizon's decision to base itself in a first-tier city is part of a conscious decision to be "an employer of choice". "The reality is that many of the Chinese students want to move to top cities like Guangzhou to build a career," says Zhao. To become more alluring to graduates, Next Horizon focuses on more than salaries, such as providing exposure and experience in international business practices at a foreign-owned company, and training and ongoing education.

Guangzhou's Rich Commerce Traditions

Next Horizon also felt Guangzhou was a natural cultural fit. One of China's original cities of commerce and capitalism, Guangzhou has had extensive trade links with the rest of the world since the 16th century.

"Guangzhou has a long tradition of tolerance, openness and acceptance to different cultures," explains Hung. "Like India, there's also a British history in which they're very comfortable in dealing with foreigners. Comparatively, look at Shanghai-they're snobs and don't like outsiders, even Chinese ones. So it's much easier to create a harmonious workforce in Guangzhou."

Guangzhou's Impressive Infrastructure

Guangzhou's more recent history in the past 25 years as the world's leading production base has created unparalleled communications and transportation infrastructure multi-lane highways, commuter trains from Hong Kong in less than two hours, and a new airport with direct flights from around the world, a distinct contrast from India's infrastructural shortcomings and Bangalore's glaring lack of direct flights.

In fact, China regularly spends eight times more than India per year on infrastructure, according to Morgan Stanely research. China's highway network for example is seven times larger than India's, covering 1.4 million km compared with 200,000 km. IT infrastructure is rapidly improving as well. The bandwith of international internet broadband connecting is expanding 43 gigabits per second - and is now 120 times the bandwith in place just four years ago.

Solving the Middle Management Epidemic

Guangzhou's infrastructure also solves China's middle management crisis. If Next Horizon had put its headquarters in another first tier city like Shanghai, Hong Kong managers would have to relocate their family. However, in Guangzhou they can commute by train and avoid uprooting their family, no small sweetener.

"Lack of what Westerners would consider 'strong middle managers' is an epiemic in China," admits Reilly. "I believe this is a short-term problem that is rooted in China's traditional environment where the mid-levels of management were seen as communication or enforcement roles, not the leaders we expect in a global company."

"This problem will correct itself as more local Chinese come up the ranks of the large global companies who have entered China in the last 10 years. In the mean time, we fill these roles with people who have experience in global companies from Hong Kong, which is just a 90 minute commute to Guangzhou."

Bold Plans for Guangzhou's and China's - Future

Today, Guangzhou continues to thrive as a contemporary hub of commerce, and is part of the government's current five-year plan to become a logistics hub, R & D center and high-tech manufacturing base.

"It's not just a one-dimensional city like Bangalore," says Hung. "Guangzhou also has simple things, like a great international airport which can be reached directly from most major cities in Europe, Asia, and America."

"THE NEXT BIG THING WILL COME FROM WHERE IT ALWAYS
DOES - THE COMBINATION OF IDEAS, PEOPLE AND CAPITAL.
AND RIGHT NOW THAT COMBINATION IS CONVERGING ON
CHINA LIKE NOWHERE ELSE." - TOM MANNING

Every week, more than US$1billion of foreign direct investment flows into China, and the world's fourth largest economy consistently grows at a rate three times faster than any other major economy. Combined with a skills base both competent and vast, the country is set to becoming a major player in global services.

"The 'next big thing' will come from where it always does-the combination of ideas, people and capital," says Next Horizon chairman Tom Manning, who has run multinational companies in China for 25 years. "And right now that combination is converging on China like nowhere else. China will doubtless take on a significant role in global innovation of which Business Process Outsourcing will play a major rolein the decade ahead."

While there may have been a time when China vis-a-vis India as an outsourcing center was hotly debated, it's increasingly a moot point today."'Why China?'" asks Hung, rhetorically. "Why India?'"



For More Information:
E: witman.hung@nexthorizon.com
T: +852-3105-3168