Banks on the move Midwestern China the regional service delivery location of the future? Contents Management summary 1 General trends 3 Traditional and emerging hubs 5 The rising midwest 8 Tying everything together: location strategy considerations 11 Authors 13 Endnotes 14 Banks on the move | Management summary Management summary China's aim of attracting multinational From international banks' perspective, should international banks invest in corporations to establish service Mainland China has remained an alluring service delivery center capabilities? delivery centers — offshore centers and viable service delivery center that perform designated functions option, due to its well-educated labor To form a view, Deloitte looked at for organizations — is embedded as pool, rising innovation and technology the historic service delivery center part of the 13th Five-Year Plan for focus and an acceptable cost-base footprint for international banks, Economic and Social Development supported by governmental incentives. Chinese banks, and IT service (2016-2020). This goes hand in hand with It is expected that the support needs providers as well as trends in location its strategy to shift from a heavy industrial of international banks in Greater China strategy decision factors. Based on our and manufacturing economy to a will continue to grow, which raises the analysis, we found the following: consumption and service driven economy. question — where in Mainland China 1. There are four key regions for banking service delivery centers, each with different advantages: men atona oatons oatons Bohai Rim Region Ben ann aan Mature nrastruture g ensty eerene taent an ne grauates s rean an aanese anguage ante ve eta eon ho anho hanha Mature nrastruture aaaty workforce, financial center, English anguage M s esten eon hen honn ea ve eta eon an han anho henhen aaty rre Mature nrastruture uster st sangs grt ne gte manes enngu gernmenta nentes es sea enm ne Graph 1: Emerging vs. traditional service delivery center locations Source: Deloitte Research 1 Banks on the move | Management summary Brochure / report title goes here | Section title goes here 2. Location options are becoming 3. International banks' investment less concentrated: decisions have shifted from "if Historically, the coastal regions China" to "how China": (Bohai Rim, Yangtze River Delta, A growing share of affluent and Pearl River Delta) were hubs individuals, paired with the Chinese for both Chinese and International governments more open policy, is IT and banking service delivery prompting foreign banking players centers due to sound business to rethink their China strategy. infrastructure, abundant talent, Rising education levels and supply early governmental incentives as of talent are likely to overrule pure well as proximity to clients and economic evaluation criteria, in existing operations. Development an aspiration to not miss out on in the Midwestern region of China, China's prosperous future. We are combined with a large available likely to see more service delivery talent pool, lower labor costs, and centers being placed in China as novel government incentives is more banking players enter the pulling service delivery centers market and respective licenses will toward Midwestern China, a large be granted. inland zone centered on the municipality of Chongqing, creating more location options. 2 Banks on the move | General trends General trends China is not a new name among service taken place, as well as global IT service This is especially the case for IT delivery center location options. In the providers having established presence and banking operation functions. mid 90's, many international banks and further expansion in China. Key differentiators compared to developed technology, operations other popular global outsourcing and risk management centers in At present, banking institutions continue hubs include China’s noticeable China, capitalizing on the favorable to monitor the increasing potential transformation to a service driven cost structures, as well as effectively of China for service delivery center economy paired with a significant souring language skills such as Korean establishment, serving both domestic and growing supply of well-educated and Japanese. At the same time, many and Asia Pacific customers. For many and tech-savvy talent. Additionally, domestic Chinese banks have set up international institutions, Chinese centers on a provincial level, government their software development, IT support, are typically considered as additional incentives encouraging selection of research and training facilities away service nodes to traditional hubs such special economic zones and IT parks from their headquarters. All this has as India, Malaysia and the Philippines. for service delivery centers. Graph 2: Service delivery center overview in China1 honn Ben International banks Chinese banks IT service providers hanha hen anho Source: Deloitte Research 1. Banking providers assessed in this study: Australia and New Zealand Banking Group (ANZ), Bank of China, China Construction Bank, Citibank, HSBC, ICBC, Morgan Stanley, Nomura, Standard Chartered and UBS. IT service providers assessed in this study: Accenture, Arvato, Capgemini, Genpact, HCL, Hewlett Packard, IBM, Infosys, Sutherland Global Services, TCS, Xerox, Wipro and WNS. 3 Banks on the move | General trends The graph above provides an overview also Deloitte China launched its own Chinese banks tend to have two or of key service delivery center locations Global Delivery Center in Chongqing, more service delivery center locations; of representative international banks Midwestern China, in early 2015. The some opting for proximity to their (blue), Chinese banks (green) and center focuses on IT delivery, finance headquarters while many others IT service providers (aquamarine), and tax as well as human resources choose a geograpically dispersed covering a range of IT and banking services and employs more than 1,400 footprint. A key reason for the operations. These three groups have members of staff. geograhical dispersion is due to the traditionally favored more developed operations of Chinese banks’ being regions, surrounding tier-one cities2 Nonetheless, most international banks, much larger and farther reaching along the east-coast region due whilst maintaining a presence in China than international players, both in to abundant talent, governmental for decades, have made relatively terms of customer base and branch incentives as well as proximity to little progress in the geographic network. This, coupled with their desire clients and existing operations. In diversification of their service delivery to establish centers close to these recent years, the establishment of centers location strategy beyond established operations can account for service delivery centers inland, in their core operations sites. This is the scattered footprint. China's Midwestern region, has seen understandable, as some players do a steady growth in momentum given not yet possess a full banking licence, In contrast, IT service providers tend to the continuous development of the or operate through a joint venture. have multiple service delivery centers region paired with a large available Furthermore, international banks established across the country and talent pool, lower labor and occupancy typically have comparably smaller rarely elect to operate centers within costs, and novel government operations, which do not justify major close-proximity of each other. It can incentives. As an example, for a decade investment into service delivery be assumed that IT service providers already, China Construction Bank has centers. However, as announced prefer to leverage their centers to an operations center in the city of by the Chinese government, more support local clients directly and Chengdu, in the Midwestern province international banks will be granted therefore they are more likely to of Sichuan. Likewise, in 2011, ANZ set licenses in the financial market and we operate on a larger scale in locations up an operations hub in the same city will likely see more of these banks to where their clients are based and with the aim to support the bank's set up Chinese service delivery centers talent is abundant. growth across the region. Furthermore in the future. 1. 2. Traditional tier-one cities are defined by Chinese authorities by all or at least two of the following factors; GDP over USD 300 billion, more than 15 million inhabitants and/or directly controlled by central government (e.g. Beijing, Shanghai, Shenzhen and Guangzhou). 4 Banks on the move | Traditional and emerging hubs Traditional and emerging hubs China can be split into four key regions. on the municipality of Chongqing. region displays some promise when Traditional hubs are the Bohai Rim For comparative purposes, we have comparing key selection criteria: Region, surrounding Beijing and defined each region based on specific high-level macro-economic prosperity, Tianjin; the Yangtze River Delta provinces (see graph 3). infrastructure readiness, availability around Shanghai; the Pearl River and quality of talent and operational Delta encompassing Guangzhou and Although coastal regions have a longer cost considerations. Shenzhen; and an emerging hub in the history of national and international Midwest, a large inland zone centered focus and investment, the Midwestern Growth and Foreign Direct Investment (FDI) flows have shifted Macro-Economic factors3 such as Midwest region is