• 1. ENTRY FOR PROFIT TRANS-COSMOS INC. CHINA ENTRY STRATEGY PRESENTATION February 8, 2001
    • 2. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 3. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 4. CHINA IS BECOMING A HIGHLY DYNAMIC CC MARKETChina’s call center market took off since 1998 with an annual growth rate over 100% Non-paging market size reached 54,000 seats in 2000 However past growth was largely driven by demands from administrative driven sector Over 60% of the new CC demand comes from four pillar industries: Banking, Post Services, Fixed-line Telecom, and Insurance Distinctive purchasing behavior identified for these purchases Future growth will be propelled by service oriented and outsourcing segments Service oriented segment expected to be 50% of total CC market Outsourcing market will grow at least 50% a year for the next few years However large variance exists for outsourcing segment growth Overall, China CC market is expected to reach over 130,000 seats in 2004 and 340,000 seats in 2010
    • 5. CC OURSOURCERS ARE EMERGING BUT STILL EXPLORING (I)Currently, CC outsourcing business is brand new in China No more than 30 companies providing merely about 3,200 seats in service Over 70-80% supply concentrated in 4 major cities Future outsourcing development is highly dependent on current player’s performance and strategies Potential customers concerned about quality, confidentiality, information processing ability, HR, and price Growth will fluctuate widely according to the industry’s ability to satisfy customer concerns and requirements now In short term, competition will be minimum due to highly differentiated positions and large number of unexploited potential outsourcing customers In medium term, paging companies can be powerful and desperate competitors in the low-end outsourcing market That might distort the industry profitability and trigger vicious competition However high-end outsourcing market might be intact
    • 6. Currently, only low-price/standard service vendors are profitable Utilization, and therefore, long-term customers, is the key for profitability However, high-priced outsourcing solutions not widely accepted by the market But in the long-run, we believe high-end services will be valued by customers We are encouraged by recent positive news on clients’ long-term commitments to high-end outsourcers With China’s pending WTO Entry and continued economic growth, we believe it’s the direction High-end outsourcers can win the game by aggressively establishing long-term client base, and targeting various outsourcing opportunities along the value chain Five successful strategies identified for new customer development Telemarketing and value-added information service most likely to be outsourcedCC OURSOURCERS ARE EMERGING BUT STILL EXPLORING (II)
    • 7. TCI SHOULD PARTNER WITH RIGHT LOCAL CC OUTSOURCERSA partnering strategy is essential for TCI to capture the great opportunities in China TCI lacks a bunch of local capabilities, while time is contingent TCI should target both money making, and money losing tech advanced outsourcers during negotiation process, based on two plausible partnership strategies Money making ones: share profits and leverage local strength Money losing ones: control and negotiate for a bargain deal Considering the limited number of candidates in China and TCI’s tight schedule, a broader search can strengthen TCI’s negotiation position Five promising outsourcers identified during the interview process Money making ones: China Motion, 800 Teleservices, and Compaq-Star Money losing ones: TCY, ITS Shanghai
    • 8. EC: ONLY SOFTWARE FIRMS AND SIs WORTH PURSUINGAlthough under booming, China E-Commerce market are experiencing bottlenecks Online population and revenues grew 10 times in the past 3 years However, macro-environment and infrastructure are problematic… … and only few ICP/ISPs are making money ICP, ISP and technology companies, as a sector, are not worth TCI’s pursuit ICP: Market is down while most China ICPs are still at their early stage development ISP: Highly fragmented and regulated, which suffocate both foreign participation and profitability Tech companies: Superior ones can hardly survive in China However, several top ventures in the above sectors are quite interesting, which are identified and illustrated in detail for TCI’s further interest ICP: 51job.com; Stockstar.com; Alibaba.com; Dangdang.com ISP: 263Net; Eastnet
    • 9. TCI-TJ: RSTRUCTURING AND BUILDING STRATEGIC ALLIANCESTCI-TJ experienced difficulties due to both promotion and management issues Though improving, the firm is intrinsically uncompetitive in China market It should restructure for better performance… Redefine corporate missions and strategies Restructure project arrangement, reporting, measurement and incentive systems Refocus its sales on Japanese companies in China and in Japan … and find strategic alliance for TCI’s China expansion TCI should only partner with prestigious local software company or system integrators Wiseway screened all the potential candidates lists and funneled down 5 most promising companies for TCI’s further contact Longshine; Global eForce; eBIS; Modern Computer; Huateng Software
    • 10. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 11. CC MERELY A BUSINESS PRACTICE BEFORE 1997High telecom chargeLow phone penetrationWeak service attitudeWidespread industry monopolyCommercial CC less than 10,000 seats in 1997(2)Phone call charge (cents per minute)ChinaUSPhone penetration (%)# of phones(1) (million)1997825399229Automotive Example: Expert Survey 1997PriceCompetition focus (%)(1) Fixed line + mobile (2) Excluding about 50,000 seats in paging company Source: World Development Report 1999/2000; China Auto Market 1997; Jarding Fleming Research; interviewsQualityServiceStyleNational monopoly Banking Telecom Insurance Utilitity Regional protected Steel Auto Petrochemical Tobacco ...Monopolized industry estimated 55% of industrial output
    • 12. Higher telecom penetrationCOMMERCIAL CC TOOK OFF SINCE 1998 Especially in Non-Paging Service SectorPenetration (%)YearCAGRFixed line Mobile37% 83%Non-paging CC seats (’000)YearCAGR = 129%Intensified competitionMost industries capacity over production Declining retail pricesYearGDP index Retail price indexIndexGrowing awareness of technologyInternet users (mio)E-Commerce revenue (US$M)Gradually reduced telecom feeSource: Jarding Fleming Research; China Statistics Yearbook; interviews; OECD; China TelecomLong distance (RMB/min)(1.2)(0.8)(1.0)(0.7)>800 km <800 km
    • 13. CC INDUSTRY WILL REACH 330-370 K SEATS IN 2010IllustrationIdentify major driving factors to CC adoption - market competition and service awareness - telecom charges and phone penetration Quantify relationships between drivers and CC adoption here we used US benchmark Project CC development by forecasting development of drivers Project CC penetration in major user’s industries - banking, telecom, insurance … Add up numbers of each industry to give a CC market overview Interview industry experts or knowledgeable industry practitioners for their opinion of CC market growth - system integrators and experts2004 projection(1) (’000 seats)158 132 1452010 projection(1) (’000 seats)368 337 N.A.Driving factor analysisBottom-up analysisExperts opinions(1) Without paging company
    • 14. TOP-DOWN APPROACH REVEALS A PROMISING END GAMEPhone line per 1000 peopleCC agents per 1000 peopleUS benchmarkY = 0.00146X + 4.79Deflated telecom fee indexPhone line per 1000 peopleChina phone lineYearNon-paging CC seats (‘000)Source: US Telephone Statistics; Datamonitor; MII data; China Statistics Yearbook1998992000010410
    • 15. REDUCING TELECOM CHARGES WILL BOOST FIXED-LINE ADOPTIONBackupCompetition pushes further telecom reductionMost alternatives at least 50% cheaper IP, internet phone call, “call back” services … Ministry determined to further reduce telecom charges “Current telecom charge still does not reach its optimum stage yet” - Minister of MIITelecom reduction projectionPhone penetration per 1000Deflated price index(1)Phone line per 1000 peopleYear(1) Price deflated by GDP index Source: China Telecom Charges Policy Book; BCG analysis
    • 16. TELECOM IS THE MOST SIGNIFICANT CC USER NOW Bottom-up AnalysisIndustry Telecom Mobile Banking Insurance Post service Manufacturing Computer Airline Security Courier Home appliance TV selling Others OverallProjected seatsCAGR2000 25,000 7,667 4,545 2,000 1,600 1,501 800 594 257 240 240 300 6,675 51,4192004 35,714 22,857 11,100 3,760 6,000 7,519 5,250 4,100 4,158 1,000 2,460 1,000 26,669 131,5882010 41,667 50,000 47,000 9,850 20,833 25,184 14,000 9,600 32,600 3,333 8,800 2,000 71,965 336,8322000-04 9% 31 % 25 % 17 % 39 % 50 % 60 % 62 % 101 % 43 % 79 % 35 % 41 % 26 %2004-10 3% 14 % 27 % 17 % 23 % 22 % 18 % 15 % 41 % 22 % 24 % 12 % 18 % 17 %Source: interviews; online research; experts opinions; BCG analysis
    • 17. EXPERT OPINIONS REVEAL A MARKET OF 145,000 IN 2004“Fast development is expected to continue in the next five years. I believe that call centers seats will grow at 30% a year for the next five years (which means 145,000 in 2004)” Director, CTI Forum “Compared to 1999, in 2000 call center seats increased by 142%, or 16,000 seats” China Computer News “In the next three years, we project that call center seats will double. It’s our conservative estimate.” Manager of Business Development Dept, HuaweiSource: BCG interviews
    • 18. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 19. CHINA CC USER BASE VERY DIFFERENT FROM U.S.Selected industry explanationTelecom China telecom call center investment is still quite government driven. To promote “189” service line, MII demand call center at each city/county level Manufacturing Manufacturing CC usage still not widely adopted yet. Most state-owned companies are unwilling and unable to invest in service Remote shopping Although remote shopping is the biggest CC user in the US, it’s merely the case here because of inconvenient payment, credit and delivery system. Also, shopping convenience in metropolitan area and general poor consumption power make remote shopping economically unsoundOthers OutsourcingSecurity TV selling News & media Airline Computer/TechManufacturing Post serviceInsurance Banking Mobile Fixed-line TelecomChinaUSOthers Outsourcing Transport Healthcare Utilities Remote shopping SecuritiesAirline Technology ManufacturingInsurance Banking TelecomOur 1.5 months interviews have well covered the above industries Source: Datamonitor; Interviews; online research; expert opinions; BCG analysis
    • 20. CC MARKET ROUGHLY SEGMENTED INTO FOUR CATEGORIES According to Area of CC Usage, and Willingness to OutsourceSelected industry examplesWillingness to outsourceHighLowService-orientedOutsourcingGeneric serviceAdmin-drivenSecuritiesHome applianceComputer/technologyCourier servicePublicationTV sellingMessagingTravelSimple order takingPagingTelecomInsuranceBankPost serviceCommunity serviceUtilityCore areaNon-core areaArea of CC usage
    • 21. THREE CRITERIA TO DISTINGUISH CORE AND NON-CORE AREAIndustryCore AreaSecurities Courier service Computer/technology“Grey Area”Home appliance Banking Insurance Publication Telecom TravelingNon-core Area (generic)Paging service Messaging TV selling UtilitiesFunctionalityTechnical assistance Aftersales service Customer complaint settlementSourcing/supplier coordination Customer inquiry settlement TelemarketingMessage delivering Simple order taking Call Center’s impact to overall business - Core: When CC function is critical to the performance of the industry Confidentiality requirement - Core: If the industry/functionality commands strict confidentiality Call Center operational complexity - Core: If operating CC in this industry requires great sophisticationCriteriaMany industries have both core and non-core areasBackup
    • 22. MANAGEMENT AND OWNERSHIP STRUCTURE AFFECT WILLINGNESS TO OUTSOURCEConsiderationsOwnership structure Company size Competition Management sophistication ReasonsSOEs consider economics less and “management authority” more - Prefer to build in-house in order to increase management power and assets Call Center investment is less significant to large companies. Also, their agents’ needs can justify a sizable in-house operation Monopolized industry tends to be admin-driven, or to disregard CC solution totally Poorly managed companies/industries see much less value of call centers to their business improvementSOE(1) Large Monopolized industry Poorly managedPrivately owned foreign invested Small-to-medium Market-driven, competing industry Well managedLess willingMore willing(1) SOE = State-owned enterpriseBackup
    • 23. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 24. ADMIN-DRIVEN SEGMENT: MOST IMPORTANT FOR NOWHigh % in total new CC demandDriven by “Pillar industries”Demand surged in a group of China’s important industries since 1999, aiming to improve service level Bank Post service Fixed-line telecom Insurance Required mostly mid-to-high end call center solutions (Nortel, Lucent, IBM, Huawei…) Big, monopolized, profitable corporations High cost of failure Budget approval from above Often in conjunction with structural reform4.9# of new CC seats (’000)YearAdmin-driven11.229.5Total new demand Admin-driven66%76%62%Source: BCG modeling
    • 25. HOWEVER DEMAND EXPECTED TO FLUCTUATE IN THE FUTUREUnderlying ReasonsAdmin-driven segment orders come in batches Call center construction proposal often initiated by government-controlled corporate headquarters, or even ministries Branch companies required to complete call center construction within similar period of time Admin-driven corporations tend to over-invest Branch offices incentivized to use up the budget advised by headquarter However few admin-driven industries are expected to invest in call centers for the following years Only two industries expected: utility and rail transportation# of new call center seats (’000)YearBanking exampleSource: BCG modeling; interviews, literature researchAdmin-driven
    • 26. UNIQUE THREE-TIER DECISION MAKING PROCESS System Integrators Should Put Efforts to AllTop-down initiativesAdvocate improving service standard Make “service facilities” an evaluation criteria May suggest call center as an option Determine rolling out call centers in the corporation Raise a list of recommended system integrators Present the list to branch companies Set a budget for different branch companies Decide call center size and sophistication based on corporate budget Negotiate and select a system integrator mostly suitable to the branch’s requirementsSI should pay attention to Ministry’s recent service improvement incentiveMinistrySI should approach promising corporate headquarters in advance to get the name on the listCorporate headquarterSI should put most efforts to influence branch company’s selectionProvincial/regional branchesAdmin-driven
    • 27. OUTSOURCING ALMOST NEVER AN OPTION FOR ADMIN-DRIVEN COMPANIESOutsourcing is not considered an option for CC adoption at corporate level Worried about unforeseeable consequences Money saving is not a priority for these big, monopolized SOEs Unable to distinguish different conditions in different geography some areas don’t have satisfactory outsourcers Politically risky for branch managers to be “creative” If using outsourcers, branch managers have to bear all responsibilities potential for failure is considerable CC construction budget would be in vain if not used up while outsourcing budget needs to be reported for upper approval And … the money is not mine Only exception is Guangzhou Mobile Company’s outsourcing of its “Mobile Secretary” service By nature a paging service: Ideal to be done by a paging company “Mobile Secretary” service is not planned and budgeted from the corporation (China Mobile) Guangzhou’s business practice is more liberal than rest of China Admin-driven
    • 28. SERVICE-ORIENTED SEGMENT: A DRIVER FOR LONG-TERM CC PENETRATIONRapid growth in the long-termWidespread adoption expected in market-driven industriesHeated competition will stimulate CC usage in mass-market industries WTO will not only lift various local protectionism, but also introduce global competition Current over-capacity situation won’t alleviate for the next several years Therefore, service will be more and more important to create differentiation With better market environment, consumers are educated to appreciate service WTO will introduce world-level service concepts, including call center, to ChinaTotal non-paging CC seats (’000)Service-oriented10Year50337Total CC seats Service-oriented26%24%50%13242%Source: Interviews; online research; expert opinions; BCG analysis
    • 29. MORE INDUSTRIES ARE LIKELY TO ADOPT CC OVERTIMECC Adoption AreaHome applianceAutomotiveComputerMobileSecuritiesRetailingPetrochemicalDistributionFMCG(1)TaxiTextileMachineryChemicalPublicationHealth careGovernmentEntertainmentBroadcasting/TVAviationGeneral TechnologyHighModerateLowCompetition intensityHighHorizontal will extend overtimeImportance of service(1) Fast-moving consumer goods Source: Interviews; literature research summaries; BCG analysisHorizontal will extend overtimeService-oriented
    • 30. COMPANIES QUITE SELECTIVE ON CC USAGENot blindly chasing after high-end solutionsIntegrating call centers with its core business practiceInterviews summarySource: Interviews%Investment per seat (’000 RMB)Interviews summary%Aftersales serviceOrder takingInformation serviceTelemarketing10-70Service-oriented
    • 31. VERY CAUTIONS ON CC OUTSOURCINGPrice “The price for outsourcing is too high now, for example, 95Info charges 15,000RMB/month (180,000RMB/year) per seat, most companies can not undertake it.” Sales Manager, SIEMENS Quality “Chinese call center outsourcers have inadequate service mentality, we mostly worried about their service quality.” Hot Line Supervisor, EPSON China Human resources “Ordinary outsourcer’s agents can only handle simple questions. It requires experienced engineers to deal with complex problems.” Hot Line Supervisor, EPSON ChinaConfidentiality “We once wanted to outsource management to 95Info, but sales data are secret to the company, so we gave up the outsourcing option.” Call Center Vice -Manager, Founder ComputerInformation processing “Our call center is mainly used to provide cross-department information for management, outsourcing call center might make the information processing losing control.” Executive Officer Beijing, Guangdong MacroMajor concerns about outsourcingTheir outsourcing possibility highly depends on outsourcers’ ability to satisfy their concernsSource: InterviewsService-oriented
    • 32. GENERIC SERVICE: A GENERALLY DECLINING SEGMENT Consists Mainly of Paging Services Generic serviceDeclining paging service segment...… Because of strong substitution# of paging seats (’000)YearPaging service market has been gradually eroded by widespread mobile and internet communication services fulfilled pager’s message function, but being either more economical (internet communication), or more versatile (mobile phone) paging customers will decline from 50 million in 1998 to 20 million in 2010 Small-to-medium, non-scaleable paging companies are being squeezed out of business# of companies1998 20002000 17362004 5002010 200Source: Interviews
    • 33. GENERIC SERVICE DEFINED AS A CROSS OF INDUSTRIES AND FUNCTIONSGeneric serviceFunctionalityMessage taking and delivering Simple order taking Standard telemarketing Standard customer question answering Standard value-added information serviceIndustryPaging industry TV/catalogue selling Utilities collection“Secretary” servicesBackup
    • 34. GENERIC CC USERS HAVE STRONG INCENTIVES TO OUTSOURCE Generic serviceCost-effective for small CC usersResolved concernsSatisfactory quality Standard practice and trained agents Trusted human resources Professional agents, central recruited and trained, familiar with their jobs No need for information processing Little requirement on confidentiality (1) Assume 10 seats, and utilization 100% Source: CTI forum; BCG modelingTV selling exampleCost (’000 RMB) per month per agent10-12Self-build(1)Outsourced
    • 35. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 36. FOUR DISTINCTIVE TRAITS FOR CHINA’S CC OUTSOURCERS Traits for An Emerging SegmentOverviewOutsourcerJust emergingHigh Geographic concentrationFocus on generic servicesInterviews SummaryMany are losing money Interviews Summary# of outsourcers%(%) Source: Interviews; CTI forum; China Statistics Yearbook# of seats (’000)(% of outsourcers)
    • 37. DEMAND PROJECTION DEPENDENT ON A CYCLE OF FACTORSWide variance in projection...…dependent on a group of factors# of outsourcing seats (’000)Virtuous or vicious cycle?Outsourcer’s PriceOutsourcer’s professionalismCustomer satisfactionOutsourcer’s service sophistication# of new customer trialEducation effect to potential customersOutsourcing industry reputationIt’s hard to tell whether the industry can establish its reputation or go underdeveloped, at the very beginning of its emergenceDemandOutsourcer51.26.6CAGR = 100%CAGR = 20%CAGR = 20%
    • 38. POSITIVE CUSTOMER EVOLUTION OBSERVED IN CHINA’S OUTSOURCING BUSINESSPositive projections for futureHistorical trends showed increasing penetration into high-end business China’s massive small-to-medium business constitutes good potential customer base Massive un-exploited geography: outside top 3 cities Good outsourcer will emerge with increased business, which will generate more business for the outsourcing industry Outsourcing service sophisticationTimeLowHighBeforeRecent 2 yearsWe believe in the positive argument and project demand to grow at least 50% a year for the next 4 yearsPaging service outsourcing for Hong Kong“Secretary” serviceSimple telemarketingOrder takingAfter-sales serviceNegative projections for futureCustomer’s negative thoughts about outsourcer’s quality haven’t changed Professionalism will continue to be a headache for China service industry, including outsourcing Low-end entry (paging companies) will ruin outsourcing industry’s pricing structure and make good outsourcer’s unprofitableDemandOutsourcer
    • 39. BALANCE BETWEEN LONG-TERM CLIENTS AND PERIODIC ASSIGNMENTS IS CRITICALCustomersOutsourcerLong-term clientsLong-term clients are most important to the profitability of an outsourcerJob natureCustomer requirementCompensation“Secretary” service Order-taking After-sales service Value-added information Others Trust between company and customer Training to agents Good understanding of clients’ business Smooth communication and feedback of important information A monthly payment per agent seatTelemarketing Campaign/activity phone reception Brand name in outsourcing industry Trained agents and effective management Information feedback Reasonable price Payment per callPeriodic assignments
    • 40. INTERVIEWED OUTSOURCER’S LONG-TERM CUSTOMER LISTOutsourcerLong-term clientOutsourced business typeLocationProfitable?TCYPfizer Pharmacy ChinaAfter salesBeijing, ShanghaiDeficitCCID Call CenterChina InfoWorld (Newspaper)Inbound serviceBeijingDeficitGuangzhou MobileHighway & BridgeFee collection call outGuangzhouCOMPAQAfter salesShanghaiNEC Mobile ChinaAfter salesShanghaiChina MotionChina MobileManagement outsourcingN.A.ProfitableBeijing HongfanSun Micro SystemsSimple question handlingN.A.Channel BeyondProfitableCompaq StarProfitableBackupAfter sales “Secretary” service Fee collection call outGuangzhouVankeCommunity serviceGuangzhouBeijing TelecomMessaging serviceBeijingDeficit95 infoNokiaAfter sales (mobile)BeijingDeficit800 teleserviceMotorola After sales (mobile)ShanghaiN.A.ITSPharmacy companiesN.A.ShanghaiDeficit
    • 41. MULTINATIONALS NOT FULLY READY FOR OUTSOURCINGCustomersOutsourcerMultinationals need customer information to assist decision making Especially important in info-scarce China Confidentiality is also a big concernThere are little established outsourcers in the market to useMany multinationals don’t resort to outsourcers at parent company Hard for China subsidiary to outsourceA number of multinationals outsource their sales and service functions to focus on core capability No need for call centerOnly a few multinationals outsourced their call center operations
    • 42. OUTSOURCING SALES AND SERVICE HELPS MULTINATIONALS TO FOCUS ON CORE CAPABILITIESAdvanced product design Technology Financial muscle Operational management Manufacturing Distribution network Customer relationships Local marketing Facilities (land, house…) Regulatory knowhowServiceSourcingManufacturingSales X X XMultinational’s strengthsLocal company’s strengthsX X X X X X XX X X X X X X X XExample of multinationals outsourcing sales and service Panasonic Shanghai VolkswagenCustomersOutsourcerBackup
    • 43. HIGH-END OUTSOURCERS ARE GENERALLY LOSING MONEYThe key determinant: UtilizationProfitabilityEconomicsOutsourcerHi profits Low profits Breakeven Low deficits Hi deficitsPrice/seat (RMB/month)China MotionShenghuaCheng BoCompaq-StarCCIDHong FanTCYITS95InfoSource: Interviews; BCG analysis
    • 44. High-end outsourcersMid-end outsourcersLow-end outsourcersUTILIZATION IS CRITICAL TO CC OUTSOURCER’S PROFITABILITY Simplified ModelEconomicsOutsourcerFor a 100-seat call centerMoney (‘000 RMB)55%Source: Interviews; literature research; expert inputs; BCG analysis(0%, 1414)(100%, 3120)(100%, 1954)100%Utilization (%)RMB 80/hourMoney (‘000 RMB)50%(0%, 884)(100%, 2340)(100%, 1424)100%RMB 60/hourMoney (‘000 RMB)48%(0%, 573)(100%, 1560)(100%, 933)100%RMB 40/hourUtilization (%)Utilization (%)Price
    • 45. A SUBTLE BALANCE AROUND UTILIZATION Revenue Price per seat Cost Equipment investment Service level Human resources TrainingEconomicsOutsourcer RMB25,000/month or higher RMB200,000/seat Customized service Customized software Specially trained staff Individual service line Additional equipment High caliber agents Multi-language High education RMB3000 above monthly salary Intensive training Often take months before actual work RMB10,000/month RMB10,000~70,000/seat Standard service Using existing facilities No additional agent training Normal agents No college education RMB2,000 monthly salary Quick training At most weeksP&L CategoriesHigh-endLow-endHow much are customers willing to pay? How much should outsourcers invest to obtain customer satisfaction?Game around utilizationBackup
    • 46. LITTLE COMPETITION AMONG CURRENT CC OUTSOURCERSOur interviews revealed that competition among current outsourcers are not significant Only a limited number of players, each satisfied with several key customer accounts A highly relationship-driven business, high barrier to make competitor’s clients switch There are many promising opportunities not yet explored Service requirements and industry specialties well differentiated Entry barrier to non-CC operators is relatively high Significant up-front investment Scarce high-quality agents: training investment inevitable Clients are hard to develop in a short timeCompetitionOutsourcerCurrent battlefield: How to make CC outsourcing accepted by companies
    • 47. BUT HUGE AND DESPERATE POTENTIAL COMPETITORS AWAITINGCompetitionOutsourcerPaging industry shakeout inevitableCC considered a plausible transition# of paging companiesA recent survey of 62 big paging Co.Plan to launch call center service in 2001Already equipped for call center serviceNo planPlan to launch CC after 2001Source: ChinaInfoBank; literature research; BCG analysis
    • 48. PAGING COMPANIES ONLY SUITABLE TO TARGET LOW-END CC OUTSOURCING MARKETCompetitionOutsourcerPaging’s AdvantagesPaging’s DisadvantagesImplicationsAble to leverage trunk line electronic transmissionLow-end computers and information processing systems PBX may not have call-out functionAlready very experienced for standard call-in takingManagement process highly streamlined for message delivering serviceWell known brands among the publicOnly trained and experienced for standard call-in taking Usually lower-than-college level educationNo flexibility and experience for other call center serviceBrand name associated to routine telephone serviceEquipmentAgentsManagementBrand namePaging companies, if transitioned to CC outsourcers, would be only suitable to target low-end market
    • 49. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 50. ONLY LOW-PRICE/STANDARD SERVICE MODEL PROVED SUCCESSFUL Current Situation, Takeaway from Interviews Not technically feasibleDoomed failurePossible to be successful, too?Several successful examples observedCustomize/High-endStandard/low-endLowHighHigh-end outsourcers hard to achieve breakeven Difficult to persuade clients to accept a high price point Little trust to these new names Business not fully streamlined software and high-end customer support not available Most assignment periodic Well-positioned, efficient low-end outsourcers can be very profitable 70% or above business from long-term clients Both equipment and human resources are easy and cheap to sourceService LevelPrice
    • 51. SUCCESSFUL HIGH-END MODEL WILL EMERGE IN A FEW YEARS Wiseway’s BeliefLong-term clients are most important for high-end CC outsourcer’s success Periodic assignment demand is inherently unstable, and demand fluctuation will worsen utility rate Current high-end CC outsourcers lack long-term clients Strong long-term client commitments give outsourcers credibility for other call center assignments Prestigious long-term clients are beginning to commit to high-end outsourcers 95Info’s deal with Nokia in Beijing 800 Teleservices’s deal with Motorola in Shanghai There are clear directions for high-end outsourcers to be profitable Establish long-term client base for a medium-sized call center, 1~2 long-term clients can turn it into profits Identify potential areas for CC outsourcing
    • 52. HIGH-END OUTSOURCERS CAN DEVELOP BUSINESS ALONG TWO DIMENSIONSCustomer penetrationBusiness penetrationEstablish long-term client base Build relationship through periodic assignments Invite client’s equity investment Provide “one-stop shopping” Serve overseas market Leverage existing relationship12345Target various outsourcing opportunities along the value chain Breakdown value chains to find out promising outsourcing opportunities5Since it’s a new industry, there are plenty rooms for expansion
    • 53. FIVE SUCCESSFUL STRATEGIES TO WIN LONG-TERM CLIENTS...Building relationship through periodic assignmentsOutsourcers contact clients first for periodic assignments, such as telemarketing or promotion call reception, and sell long-term assignments when trust and relationships are built Example: Guangzhou China Motion vs P&GProvide “one-stop shopping”Outsourcers also provide, or have alliances to provide, other services that are compatible to call center service. So customers can get all they need from one company Example: Guangzhou Channel Beyond Leverage existing relationshipOutsourcers develop domestic multinationals clients leveraging overseas relationship Example: 800Teleservice v.s. MotorolaServe overseas marketOutsourcers provide low-cost services to Hong Kong, Taiwan or other overseas clients by leveraging low-cost agents and language ability in China Example: Guangzhou ShenghuaInvite client’s equity investment Outsourcers ask an important client to make equity investment, in order to lock in the relationship and establish needed trust Example: Compaq-StarStrategies proved successful12345
    • 54. … EACH WITH ITS UNIQUE ADVANTAGES AND DISADVANTAGESConsLowered entry barrier into potential clients Easier to build relationship and mutual trustTime consuming Periodic assignments might not necessarily turn to long-term commitment example: Good telemarketing work for marketing dept. might not grant outsourcers opportunity at after sales service area Lock-in relationships Shared risksControlled by clients Limited opportunities for other clients restrained growthIncreased customer satisfaction Stronger advantages against all competitors at “one-stop” areaStrengths restrained in one particular area Difficult to extend business to other areasProfitable business Stable client relationship once obtainedCompetition Generally low-end services clients only pursue “low-cost” Difficult to acquire overseas clientsMonopolized client base Familiar service standard Leverageable software and managementNot a lot Bad service in China might deteriorate corporate’s relationship to the outsourcerBuilding relationship through periodic assignmentsInvite client’s equity investmentProvide “one-stop shopping”Serve overseas market Leverage existing relationship 12345Pros
    • 55. OUTSOURCING MOST PROMISING FOR TELEMARKETING AND VALUE-ADDED INFORMATION SERVICESPotential Call Center Adoption AreasAfter-sales serviceValue-added information serviceTrouble-shootingComplaint handlingConcernsService qualityIndustry knowledgeInformation processingConfidentialityManu- facturingSourcingOrderingSupplier mgmt.SalesTele- marketingInquiry handlingOrder takingMost promisingMost promisingNot a concern Significant concerns
    • 56. OUTSOURCING OPPORTUNITIES FOR SELECTED INDUSTRIES (I) Value Chain Breakdown for Sales and ServicesAftersales serviceTrouble-shootingComplaint handlingTele- marketingCustomer inquiry handlingOrder takingValue-added information serviceSalesIndustryTelecomComplaint reception Customer satisfaction surveyMobile serviceComplaint receptionPhone-line problem calling General trouble - shootingMobile problem calling (lost, disconnected)Call dialing helpdesk Phone number inquiry (“114”) Phone bill information, etc.“Secretary” service Phone bill inquiryFixed-line service application Other value-added service applicationMobile service application Value-added service applicationPotential customer call-in receptionPotential customer call-in receptionLong-distance service promotion General information of new products/servicesNew service/products promotionLikely UnlikelyBackup
    • 57. OUTSOURCING OPPORTUNITIES FOR SELECTED INDUSTRIES (II) Value Chain Breakdown for Sales and ServicesAftersales serviceTrouble-shootingComplaint handlingTele- marketingCustomer inquiry handlingOrder takingValue-added information serviceSalesIndustryBankingGeneral complaint handlingSecuritiesGeneral complaint handlingGeneral trouble-shootingGeneral trouble-shootingTelephone banking Personal financial consultingInvestment analysis, suggestion,etc General market informationDeposit or other ordersTelephone transactionGeneral question handlingGeneral question handlingNew service promotion Corporate client relationship buildingN.A.InsuranceGeneral complaint handlingGeneral trouble-shootingN.A.Telephone transactionGeneral question handlingPromotion of insurance policiesLikely UnlikelyBackup
    • 58. OUTSOURCING OPPORTUNITIES FOR SELECTED INDUSTRIES (III) Value Chain Breakdown for Sales and ServicesAftersales serviceTrouble-shootingComplaint handlingTele- marketingCustomer inquiry handlingOrder takingValue-added information serviceSalesIndustryTechnologyHome applianceTechnology guidance ConsultingN.A.Fast-moving consumer goodsN.A.Likely UnlikelyBackup
    • 59. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 60. ONLY PARTNERSHIP FITS INTO TCI’S SPECIFICATIONSelf-construct a call centerPartner with local CC outsourcersProvide CC outsourcing training, management and consultingNo China experience in call center No enough human resources to commit Little local client knowledge Time consuming Complement TCI’s local capabilities Satisfy time stringency concerns Commit little TCI resources Serve TCI’s potential clients well with existing capacity Fit into TCI’s strengths well Demand less TCI’s commitment However Need to establish local facilities and assign knowledgeable people to China Profits will not be bigMaybe an opportunity
    • 61. TCI SHOULD ALLY WITH A LOCAL PARTNER TO ENTER INTO THE MARKETNow is good to enter...Nevertheless, China CC outsourcing segment is a fast growing market There are few high-profile CC outsourcing companies in China Competition at high-end is not severe And…, TCI is in discussion with two possible long-term clients… But should ally with a local outsourcerTCI lacks a lot of local capacities Local market understanding Local clients relationship Experienced agents Language … And time is tight A decision should be made very soon A local partner with complementary capabilities is ideal for TCI’s fast rollout in China
    • 62. DIFFICULT TO FIND A PARTNER SATISFYING ALL CRITERIAStrong local market understanding Good local client relationship Provide TCI with most needed capabilities1Be profitableDemand not too much TCI’s involvementAllow TCI to develop own brand and share client base234Partner’s profileMature, professional operations Experienced agents Sufficient long-term client base Strong, mature operations alreadyProbably not strong self-brand and customer base Eagerly in need of TCI’s client, money, management What TCI might faceCommand very high valuation for its shares TCI probably have to pay more under time pressure Stick to its right of control might agree in appearance, but suffocate in action TCI’s brand building efforts Persist on its own business practice TCI might feel difficult to configure to “Japanese standard”The outsourcer might be very bad no local client base losing money low morale TCI has to invest a lot money human resources
    • 63. Partnership StrategyPartner with strong, money-making local outsourcersPartner with money-losing, but high-end equipped local outsourcersLeverage partner’s capabilities to expand business Demand less TCI investment Create synergy more easilyLeverage partner’s advanced facilities Easy to control and develop TCI’s own brand Might be cheapTWO POTENTIAL PARTNERSHIP STRATEGY SUGGESTED Reflecting Different Entry FocusAdvantagesDisadvantageEntry FocusExpensive Hard to control Potential conflict with TCI’s practiceProfit sharing Fast rollout Synergy creationTCI might not benefit too much from local partner TCI has to invest a lot High risk is entailedControl TCI brand and practice development A bargain deal
    • 64. FIVE POTENTIAL TARGETS IDENTIFIED THROUGH INTERVIEWSChina Motion 800 Teleservice Compaq-Star Cooperativeness Understanding of each other’s business Local outsourcer’s valuation % of shares participated Profit sharing theme TCI brand and practice development plan Shared vision and willingness to cooperate A good priceMoney makingTCY ITS Shanghai Technology and equipment advancement Controlling shareholding Local outsourcer’s valuation negotiate for a bargaining price TCI’s needed commitment to the new venture A bargaining price Total controlMoney losingNamesNegotiation prioritiesWhen to decideTCI should proceed both options simultaneously, and choose a best option in the end
    • 65. POTENTIAL PARTNERS’ PROFILE (I): CHINA MOTIONBackgroundEstablished in 1992 in Shenzhen, strategic aligns with China Motion HK China Motion HK IPOed in Singapore in 1996 and in Hong Kong in 1997 1.8 million subscribers-currently 2.5 million paging, 0.1 million mobile, 0.4 million Internet, 1 million e-mail users 7000 employees Wide coverage of service in telecom & Internet service Key strengths and weaknessOperational and financial dataAttitude towards partnershipStrength + Already profitable + National network in Beijing (100 seats), Shanghai (50 seats), Shenzhen (100 seats), Guangzhou (100 seats) + Good infrastructure + Good local customer base + Multi-lingual (Mandarin, Cantonese and English) Weakness - Appear to be a bit low-end Outsourcing call center in 1997 Telecare Company in June 2001 with multi-sites Revenue 20 million RMB in 2000, will be 40 million in 2001 800 staff+ Willing to align with international Co. + Looking for expertise & customer sources - Might not give up major stake - Will also keep branding (co-branding might be acceptable)
    • 66. POTENTIAL PARTNERS’ PROFILE (II): COMPAQ-STAR (EFOTEC)BackgroundEstablished in April 2000 by Compaq & Star (local computer producer) Four major business fields Efo 800-Call Center outsourcing Efo Web-Web solution Efo Consulting-E-solution & CC consulting Efo Systems- System Integration One site in Shanghai 120 seats, building another site in Fujian Key strengths and weaknessOperational and financial dataAttitude towards partnershipStrength + Highly professional + Technologically high-support + Compaq brand + High-quality HR/good management + Have Compaq as the steady customer Weakness - No other major customer except Compaq & NEC - The Compaq brand-name might be excluding other IT companiesStaff: 60 in total, 30 part-time Major operation in Shanghai for Compaq (about 30 seats) Revenue: 8 million USD in 2000, 2 million USD from Call Center Targeting MNCs and Fortune 500 Client also include NEC Mobile Phone+ Active for alignment with TCI + Willing to discuss equity cooperation + Look for Japanese clients
    • 67. BackgroundFounded in 1997 in HK by US & HK companies, now with shareholders from publicly-listed companies in US & HK and Taiwan Three sites operations, 110 seats in HK, 50 seats in Taipei, 120 seats in Shanghai Shanghai CC Site opened in November 2000, and in operation in December 2000 Mainly serving regional customers Have IPO plan in 2001 Key strengths and weaknessOperational and financial dataAttitude towards partnershipStrength + High-end service + Operations multi-sites + Already in profit at least operationally, so little risk Weakness: - Less local experience and connections being a HK Company, so can provide less help on local market - Might be difficult to accept TCI branding Have just started operation in Shanghai, with customers obtained before operation Biggest client: Motorola, others are telecom, banking and insurance Already in profit the first month of operation 40% of the capacity in operation, which means 50 seats roughly Targeting mainly upper-high end customers Building local marketing & sales capacity, and will have local customer within the next few months + Open to various investment possibilities + Might be interested in the customers TCI might bring in - Unclear what they expect from TCI as they have already shareholders of various background: Technology companies, VC etc. - might need to pay a higher entry costPOTENTIAL PARTNERS’ PROFILE (III): 800 TELESERVICES
    • 68. POTENTIAL PARTNERS’ PROFILE (IV): ITSBackgroundEstablished in August, 1998 100 seats positioning, 50 in operation AT&T network solution 15% shares by Mr. Rong (GM) and 85% by Schmit ITS Key strengths and weaknessOperational and financial dataAttitude towards partnershipStrength + Existing facilities and experience + Good connection in local MNCs + Sales promotion assistance Weakness - Still in red - No long-term big contracts - Lack of technology support Staff: 40 fulltime, 120 part-time Clients: 20, mostly MNCs, but not large contracts 80% inbound, 20 outbound Strategy: assisting promotion efforts+ Willing to cooperate with TCI + Might be low in entry cost
    • 69. POTENTIAL PARTNERS’ PROFILE (V): TCYBackgroundPrivate investors with lawyer background May 2000 start in Beijing with 35 seats, Nov 2000 start in Shanghai with 30 seats AT&T backup support (exclusive on management & outsourcing call center supply) 1.6 million USD investment for each center Key strengths and weaknessOperational and financial dataAttitude towards partnershipStrength + Existing facility & experience + AT&T brand-name and support + High-end market orientation + Two-sites operations Weakness - Still in red - No major business - Comparatively small & young - AT&T management might not be good for Chinese customers Targeting MNCs Clients include Motorola, Pfizer General Managers in Beijing & Shanghai are appointed by AT&T Revenue in the past 6 months: 330,000RMB, expected to rise to 1 million USD + Willing to work with TCI as they are looking for 2nd-round investment + Might be low in entry cost
    • 70. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 71. Growing on-line populationIncreasing E-commerce online revenueInternet usage dominated by young generationVersatile online spending patternsCHINA E-COMMERCE MARKET ARE BOOMINGPeople (million)Year>35 18-35 <18eCommerce revenue from “personal spending” (US$m)Source: IDC China Internet Report 2000; Online research; China Statistics Yearbook Intranet users Internet users1.383.015.1710.4517.7128.441.656.1Revenue on WWW (mio $)Year100%Age group
    • 72. BUT STILL A LONG WAY TO GOE-commerce not widely adopted in businessWebsite still focused on information providingHighly concentrated E-commerce marketAlmost all ICPs losing moneyThe only definite profitable online E-Commerce provider is 51job.com, an online job search portal - No successful business model gets demonstrated yet%(%)Rest of China Top 3 cities(1)A survey of 3800 enterprises(1) Shanghai, Beijing and Guangzhou# of sitesBy July, 199999001400320Online transaction Technical service Information service
    • 73. BIG BOTTLENECKS TO HIGH TECH INDUSTRY DEVELOPMENT Environment bottleneck Unpredicted government interference Chinese companies unfamiliar with E-Commerce and new economy Management vision and technology capabilities lagged behind Credit system still primitive Company’s E-Commerce initiatives suppressed by low overall internet penetration Widespread piracyInfrastructure bottleneck Complicated and restraint online payment system Online security a big headache Expensive and inconvenient physical delivery system Very slow internet speed High cost getting online
    • 74. EMERGING LAYERS OF CHINA HIGH TECH INDUSTRYExamples ICP Sina/Sohoo/Netease Alibaba/MeetChina/eGuo Netease/Dangdang/51job ISP/ASP China Telecom/263.net/East.net.cn Technology company Few in China Software company/system integrator Hua Teng/Longshine/Orient Legend ZhuiRi/Tong Guang-Nortel/Avaya Hardware/system manufacturer Huawei/Zhongxing IBM/Lucent/Nortel/Cisco/HPClientsICPISP/ASPTechnology CompanySoftware company/ System integratorHardware/System manufacturer
    • 75. BOTH ICP AND CHINA CONCEPT TUMBLED IN NASDAQ IPO Cash-Out Extremely Difficult Under Current Market ConditionNASDAQ investors have driven B2B and B2C stocks to junk level Cautious about profitability Unfulfilled promise of entrepreneur Venture capitalists ceased to invest in B2C and B2B in US Afraid of closed door for cashing out China concept is no longer sexy to western investors Aware of all the bottlenecks for China ICP development NasdaqStock index2001Source: Wall Street Journal; Smartmoney.comAmazonSina.com2000FMAMJJASONDJFICP
    • 76. HONG KONG AND MAINLAND MARKET ALSO NOT A GOOD ALTERNATIVEHong Kong: a strict follower to New YorkHong Kong market plummets together with NASDAQ Hong Kong’s market capitalization is only 5% of NYSE Much more volatile and easier to be attacked Most significant IPOs in Asia will list not only in Hong Kong, but also in New York Expand capital pool Use NY’s market mechanism to stable HK’s price Mainland: highly regulatedICPChina stock market has a long tradition of manipulation Problematic financial reporting integrity Government subsidy Irrational valuation Foreign-owned enterprises are forbidden to list in China’s market Government intention to focus domestic financial resources on state-owned enterprises Easy to control and manipulate China about-to-open tech stock market is depressed by global technology sector meltdown
    • 77. FEW ICP MAKES MONEY NOW And Not Many Have Breakdown PotentialICPOver 27,000 ICPs in ChinaMoney makingWith short-term breakeven potentialWith long-term breakeven potential51 job.com CareerFinancial services Stockstar.com Yestock.com B2B portal Alibaba.com MeetChina.com Job hunting ChinaHR.com Zhaopin.com Online retailing Dangdang.comPortal Sina.com China.com Sohu.com Healthcare 999.com.cn Chinait.com Education Chinaedu.com Online auction Eachnet.com Coolbid.com Tourism Ctn.com.cn Ctrip.com Online info service Chinainfobank.comCurrently, only No. 1 in each industry/has potential to win
    • 78. MOST ICP COMPANIES STILL AT EARLY FINANCING STAGEB2B ExampleRMB 0.5-1 millionRMB 0.1-0.5 million> RMB 10 millionRMB 5-10 millionRMB 1-5 millionSource: Huicong IT Business NetworkICP
    • 79. SIGNIFICANT TRANSITION AND SHAKEOUT EXPECTEDSmall-to-medium, generic information service portals will face bankruptcy in a year Regional portals with similar business will seek merger to survive in the coming shakeout B2B will focus more on providing proprietary, value-added services (online and offline) to small-to-medium corporate customers Large corporations will extend it’s corporate web site into B2B or B2C area Only the top two to three E-Commerce web sites in each area will surviveHuicong’s Projection100%Under current volatile market, Wiseway believe market situation can only go harsher than Huicong’s projectionSource: Huicong IT Business NetworkEnterprise E-Commerce website Others Technical service Information serviceICP
    • 80. SELECTED ICP PROFILE: 51JOB.COMCompany backgroundStrengths and weaknessesEstablished in 1998 No. 1 job search online site in China Over 30,000 jobs posted Registered users over 100,000 Potential to provide HR services for foreign-invested companies Targeting white-collar workers and managerial level customersStrengths No. 1 job hunting portal in China, established brand name and customer base Synergies with “Career Weakly” magazine and a heal hunting firm Weaknesses Little information about job/career advisory Still small: vulnerable to competitionRevenue source and financial dataAlliances1999 revenue reached US$ 1 million, 2000 revenue projected to be US$ 8 million, and 2001 revenue to be around 20-30 million Current profitability 10-15% 1/3 advertisement income, 1/3 revenue from ASP service, and the rest from providing information of its HR databasePlanned Nasdaq IPO in 2001 Synergies created by building alliance with traditional HR functions “Career Weekly” magazine Career Head Hunting CompanyICP
    • 81. SELECTED ICP PROFILE: STOCKSTAR.COMCompany backgroundStrengths and weaknessesEstablished in 1997 No. 1 stock trading portal in China Business covered quote, information, advisory and online trading services Registered users over 1.5 million Positioned to provide not only trading but comprehensive investing servicesStrengths Established customer base Comprehensive services on trading, information and advisory Good relationships with security firms Weaknesses No stock trading license Projected competition in the futureRevenue source and financial dataAlliancesRevenues from securing companies advertisement, online trading commission, and data usage fees to institutions Planned to expand revenue sources to construct online site for security companies Only less than 10% cuts on promotion, 50% cash flow consumed on infrastructure and 15% on R&D Goldman Sachs second round financing of $ 10 million, based on $40-50 million valuation Shanghai Alliance Investment Co. and Shanghai Telecom controls 20% stake, respectivelyICP
    • 82. SELECTED ICP PROFILE: ALIBABA.COMCompany backgroundStrengths and weaknessesEstablished in 1997 No. 1 B2B portal in China, ranked the best Asia B2B portal in 2000 by Far East Economic Review Registered members over 420,000, representing 220 countries Daily trading involves 50,000 buyers and 12,000 sellers Provide quotes, industry information and advisory through 27 industriesStrengths First mover advantage One stop shop especially convenient for international trading Worldwide recognition Strong VC tacking Weaknesses Scalability not demonstrated B2B not hot concept anymoreRevenue source and financial dataAlliancesRevenue from trading information fee, registration, and advertisement Still not breakeven, but analyst quite optimistic about its financials New registration reaching 1000 members a dayFirst round financing of $5 million capital infusion by Goldman Sachs, Transpac, Singapore TDF, Investor AB and Fidelity Investment October, 1999 Softbank invested $ 20 million in January 2000 Planned but postponed IPOICP
    • 83. SELECTED ICP PROFILE: DANGDANG.COMCompany backgroundStrengths and weaknessesEstablished in 1996 No. 1 online bookstore in China Book online storage over 200,000 types, accounting for 90% of all domestic published books 20% registered users are resided in foreign countries Established transportation and inventory system Strengths Customer recognition and national reputation Business already reached scale Developed order to delivery system Weaknesses Severe competition: more than 300 online bookstores Pending alliance with publishers and book storesRevenue source and financial dataAlliancesRevenues from book retail margin and publisher’s advertisement Breakeven expected this year A new, 10 K square metre warehouse is under construction in BeijingFirst round financing completed in 1997 Second round financing completed in November, 1999 Third round financing by IDG, LCHG and Softbanks completed by April, 2000ICP
    • 84. ISP: A HIGHLY FRAGMENTED SECTOR WITH VOLATILE PROFITABILITYISP/ASPHighly fragmentedNot profitableOver 5001234 M5 nationwide ISPs(1) >500 regional/ local ISPsIn deficitProfitable ISP an attractive local government investment area Potential of high return Able to create monopoly locally Numerous agency costs Equipment purchase Appraisal of “New Economy Mindset” from the above More budget/HR to manage and control Significant upfront investment and fast upgrade Demanding frequent capital expenditure High marketing expenses and maintenance cost Market still small Only 16.9 million internet users (July 2000) Much smaller if only focusing on local market(1) They are: ChinaNet; ChinaGBNet; UNInet; CSTNet; CERNet Source: CIIC: China Info Bank
    • 85. FOREIGN PARTICIPATION IN ISP ONLY ERECTED IN NEAR FUTURE ISP/ASPChina’s WTO entry signed20012002200320042005Post-entry conditionPre-entry conditionSource: EIU; China Info Bank ICPISPOfficially, no foreign ownership in internet services sector (both ICP and ISP) is allowed. Yet foreign investment is known to have entered the ICP business via alternative path 30% ownership allowed in Beijing, Shanghai & Guangzhou49% ownership allowed in other 17 cities50% ownership allowed nationwide49% ownership allowed nationwide25% ownership allowed in Beijing, Shanghai & Guangzhou35% ownership allowed in major cities
    • 86. ISP SECTOR WILL CONSOLIDATE THROUGH BOTH VERTICAL AND HORIZONTAL INTEGRATIONSISP/ASPMany current ISPs are not profitable due to small subscriber base I.e, a 2M bandwidth line needs to attract at least 1650 customers Of all 28 inter-provincial ISPs, only 13 have more than 1000 subscribers after 2.5 years of service, let alone local ISPs, with even smaller base Future competition will only worsen the situation Only sizable ISPs can provide satisfactory services Both domestic and foreign players will raise wars on price and serviceMerge with nationwide ISPs to become an affiliateExtend business to leverage ISP advantage ASP (?) ICP Infrastructure
    • 87. SELECTED ISP PROFILE: 263.NETCompany backgroundStrengths and weaknessesTop ISP Provider in China: 40% market share in Beijing, with another 40% by China Telecom, and the rest 20% by other 170 ISPs in Beijing; Top ICP site with 6 million registered users and 25 million pageview each day; 263 IDC started in Beijing, and will also be in Shanghai, Guangzhou and 20 other cities; Shareholders simple but diversified: corporate and personal; strong backing from China Telecom.Strengths Big market share in Beijing Good combination of ISP, ICP and IDC, maximizing the customer base; Profitability; Started in Beijing, but are also spreading to Shanghai, Guangzhou, Wuhan, Xi’An and 10 other Chinese cities Weaknesses Business scalability in other citiesRevenue source and financial dataAlliances15 million RMB profit the first year, and has been profitable in the past three years; Internet connection fees collected from telephone bills; IDC serving coporate customers, providing E-commerce solutions; ICP (263.net) is also shifting to E-commerce business Good alliance with China Telecom (Beijing) Alliance also with other international hardware suppliers Have not heard of backing from international VC ISP/ASP
    • 88. SELECTED ISP PROFILE: EASTNETCompany backgroundStrengths and weaknessesEstablished in 1996 by BJ Telecom, Bank of China, and Tsinghua University Business covered dial-in connection, domain registration, and EC Built www.east.net.cn as a general information portal Also provided online and offline tech product sales, consulting and trainingStrengths Big loyal customer base Widely covered business scope Widely established alliances Profitable Weaknesses Localized: in Beijing areaRevenue source and financial dataAlliancesBoasted to be profitable for 3 years Registered ISP users over 150,000, growing at 10,000 members per month Homepage visited by 130,000 people per day Helped 3,000 domestic companies to register a domainAlliancwe with a lot of prestigious ICPs and ISPs Sina.com China Television Network Content sharing with major tourism, stock trading, entertainment and online book reading portals Allying with China Yellowbook on database developmentISP/ASP
    • 89. NON-GOVERNMENT BACKED TECH COMPANIES CAN HARDLY SURVIVE IN CHINATechnology companyLack of customers Chinese companies accustomed to import tech/equipments Incapable to commercialize high tech solutions No big need for technologyProblematic legal environment Patent rights inadequately reinforced Widespread piracy Strong local protectionism Lack of intellectual property conceptsInaccessible financing channels Domestic financial institutions hostile to startups Foreign investors blocked from specific technology development due to national security Very complicated formalities for non-SOE financingInsufficient human resources Top-tier engineers and scientists finding their home in US or other more tech-friendly countries Chinese educational institutions unable to catch up with best-of-breed technology developmentChina is not a playground for high technology research companies
    • 90. CHINA REPRESENTS GOOD OPPORTUNITIES FOR EC SOLUTION PROVIDERS Including Software Developers and System IntegratorsChinese manufacturing and service enterprises are in desperate need of better information and control system to compete effectively Many companies don’t have any MIS in place yet WTI and strong competitive pressure will push the demand There are demonstrated successful business models Software companies are successful by either serving domestic clients or working on overseas assignments (Hua Teng) System integrators establish themselves by getting recognized industry expertise and relationships Resources are easily located HR for software and SI doesn’t need to be top-tier world-class, and thus are easy to find No need for big investmentSoftware/SI
    • 91. SOFTWARE: GROWING INDUSTRY WITH HIGH-LEVEL CONCERNS Mass Market Software ExampleSoftware/SIMarket still fragmentedPrice still too lowModerately growing software industryScale (Bio RMB)689211213817612%25%63%System softwareSupporting softwareApplication softwareMkt share Mkt share office software 1999Price (RMB)Source: China Info Bank Year
    • 92. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 93. TCI-TJ EXPERIENCED TREMENDOUS DIFFICULTIES (I)Most projects not profitableOverhead out of controlRev.Profit rate16%-170%35%51%61%69%98%100%1999(’000 RMB)508997257517581990Gross profitSalaryManagement feeDepre.Misc.Source: TCI-TJ; BCG analysis
    • 94. TCI-TJ EXPERIENCED TREMENDOUS DIFFICULTIES (II)Programmer’s turnover is worryingUtilization rate is lowHuman resource From official statistics, on average about 1/3 of programmer’s working hours were not staffed, real situation can be worse Real estate The whole second floor was empty, while a depreciation of RMB 2.4 million, 60% of 1999 revenue, is counted each year as costProject schedule often out of controlLabelProgrammers turnover(7)(1)(20)(5)(4)17428155A 1997 projectPeople staffed(4)(1)Time3 months1 year2 yearsPlanned ActualSource: TCI-TJ; BCG analysis
    • 95. FIVE ROOT CAUSES IDENTIFIED FOR THESE PROBLEMSOverhead out of controlOver-investedProject out of controlInadequate programmer’s trainingMost projects not profitableIneffective and not disciplined sales effortsLow resources utilizationProgrammers not motivated properlyWorrying programmer’s turnoverCompensation and progression not enough to retain HR
    • 96. TCI-TJ IS NOT COMPETITIVE IN DOMESTIC SOFTWARE MARKETHigh fixed costIneffective domestic sales forceNo sales department Previous sales activities restrained in Tianjin And mainly through Japanese invested companies Targeting domestic customers means additional investment on HR and spending With unforeseeable resultsAnnual cost (RMB ’000)945(1) With same actively-used office space, at a metropolitan location in TianjinOffice cost example83%10%7%2926DepreciationTaxLand(1)
    • 97. AGENDAExecutive Summary Call Center Business Market Overview CC Customer Segmentation In-house users Outsourcers Demand Customer Economics Competition Recommendations Success business model Partnering strategy E-Commerce Market Overview TCI Tianjin Current Situation Analysis Recommendations
    • 98. TCI-TJ CAN DEVELOP ALONG TWO PATHSRestructure for better performanceQuestions are: What are advantages and potential risks entailed in different path? Which one to choose?New business developmentIntroduce TCI Japan’s best-of-breed technology to China through TCI-TJExisting business penetration and finance operationFind strategic alliance for TCI-TJ
    • 99. RESTRUCTURING FOR BETTER PERFORMANCETransplant company’s vision to each employee’s mind Create better culture through informal interactive channels Mentor system Company activities “General Manager Day”Declare what should not be done Policies and rules Establish a scientific system to evaluate, incentivize, and promote staff Staff, evaluation, compensation and promotionCustomer strategyFocus on Japanese market and Japanese companies around TianjinHR strategyRetain and promote the best people in the company Create a programmer-centric organizationProduction strategyAdjust product and programming to satisfy Japanese client specifications Aspire to efficient production Improve HR utilization rateMission Turn into profitability in the next several years Develop TCI-TJ’s capability in software programming and service Retain best human resourcesBelief systemInteractive control systemBoundary systemDiagnostic systemControl and measurement system
    • 100. ESTABLISH A THREE-TIER HIERARCHY IN PROGRAMMER’S TEAMTechnology DirectorProject ManagerSenior programmerJunior programmerAfter 2-4 yearsAfter 1-3 yearsCollege undergraduateOutOutResponsibilitiesProject manager Control the quality and time commitment of a project Choose and motivate a programmer’ team to get the job done Technology director Provide technical guidance Supervise project quality Senior programmer Be in charge of specific module in a project Undertake on-job training roles to junior programmer Junior programmer: probation position Program under instruction and supervision of project managers Learn fast to get promotionRightsFull rights to choose how many, and which programmer to get staffed on the team Full right to control the project progress Right to choose whether he would like to be put on a project Right to request mentor on technical support Right to choose whether to be staffed on a projectEvaluationWhether the project is completed under budget and time target Whether subordinate programmers are satisfied with project management and learning Whether clients are satisfied Whether he has done an effective job in handling a module Whether he coached junior programmers effectively Whether he has done an effective job as a programmer Whether he has learned fastBackup
    • 101. HUGE BENEFITS OF BUILDING A THREE-TIER HIERARCHYProject managers are motivated to successfully compete the project as quickly as possible evaluated by customer satisfaction and time/budget consumed Project managers won’t abuse human resources better-off to select a small but capable programmer’s team Good programmers will be the king in the company: Strong incentive to be good treasured by every project manager: Enough good project to do compensated well and promoted fast incapable programmers will feel not well and have to leave the company Junior programmers will have enough training and opportunities to perform Senior management is disciplined to their sales efforts overly sold projects will be objected by project managersProject managementHR developmentSales effortsBackup
    • 102. TCI-TJ MIGHT CONSIDER INTRODUCING NEW BUSINESSES Providing Best-of-Breed TCI Japan’s TechnologyLeverageable existing resources HR FacilitiesPromising market potentialLivepicture Flow image transmission Teasy Company training and education Call center software, system integration and knowhowHowever, there are potential risks considering this approach TCI-TJ has insufficient sales capability - whether it could successfully promote the new product? New product introduction needs big investment - potential risks entailed TCI should establish a sophisticated aftersales service and system integration team
    • 103. TWO TYPES OF STRATEGIC ALLIANCES PROPOSED TCI-TJAdvantagesUse partner’s human resources Benefit from partner’s brand name Leverage partner’s client base Introduce partner’s management skills Retain huge potential upside - IPO process will boost investment return Achieve potential synergies between a software company and an E-commerce companyDisadvantagesVery difficult to find such a partner - good companies probably will find TCI-TJ unattractive Lost control Potential risk of cultural conflict Increasing risk of a satisfactory IPO Partner’s experience of working with a software programmer Morale at TCI-TJWiseway’s preferenceNot preferred PreferredSell, or partner with a local esteemed software programmerPartner with a local system integrator, or E-commerce company with IPO potentialWe will discuss partnership list in detail in the next part
    • 104. Software company or system integratorONLY PROMISING E-C INESTMENT AREA NOW: SOFTWARE AND SYSTEM INTEGRATORICPISPTechnology companyIPO is practically not an option for most ICPs currently Consumption power for China Internet population is low Infrastructure bottlenecks hinder ICP business development Foreign invested ICP is forbidden to go public in domestic stock market Government controlled, private invested companies are difficult to survive without government connection Huge upfront investments needed, while severe competition generally drives payless ISP service Widespread piracy suffocates technology company’s development in China Overwhelmingly strong competition from the US China enterprises desperately need E-Commerce assistance, and are willing to pay for it Observed successful and profitable EC service providers/system integrators Such businesses are compatible to TCI Japan’s strengthsXXMaybe X
    • 105. ASSEMBLED CHINA’S TOP 50 SI/E-COMMERCE COMPANIES LIST THROUGH VARIOUS RESOURCES (I)
    • 106. ASSEMBLED CHINA’S TOP 50 SI/E-COMMERCE COMPANIES LIST THROUGH VARIOUS RESOURCES (II)
    • 107. WE ASSEMBLED CHINA’S TOP 50 SI/E-COMMERCE COMPANIES LIST THROUGH VARIOUS RESOURCES (III)
    • 108. ASSEMBLED CHINA’S TOP 50 SI/E-COMMERCE COMPANIES LIST THROUGH VARIOUS RESOURCES (IV)
    • 109. THE TOP 50 LIST COMES FROM VARIOUS RESOURCESRaw material “Major venture capital investments in China, 2000” 35 companies planning to be listed in Shanghai Technology Stock Exchange The best companies presented by the China Infobank Best SI/E-Commerce companies from Sina.com and Sohu.com’s searchNot listed yet either at overseas or at domestic market Located in Beijing, Shanghai, Guangzhou, Shenzhen, Nanjin, Chengdu six major Chinese citiesTop 50 listBackup
    • 110. NARROWED TOP 50 DOWN TO 5 In Two StepsFirst screening Focused on clients in dynamic industries telecom, utility, banking, security, technology … Founded before 1998 Established long-term customer base Possessed proprietary know-how and able to provide total customer solutions Sized between 100-600 peopleTop 50eBIS Company Ltd. Beijing Hollybridge System Integration Co. Ltd. Putian System Integration Co. Ltd. Brilliance Group Lonshine Information Tech Co. Ltd. Beijing Teamsun Tech. Co. Ltd. Beijing Orient Legent Maker Software Co. Ltd. Beijing Linkhead Information Technology Co. Ltd. Shanghai Huateng Software Systems Co. Ltd. Global eForce Crop. Ltd. Modern Computer Manufacture Co. Liming Network Co. Ltd. Shenzhen Kingdom Tech. Stock Co. Ltd. China Weal Business Machinery Co. Ltd.Second screening Invested by prestigious Venture Capital Funds already (preferred) Management team with high education and international experience With no less than 5 subsidiariesTop 5
    • 111. LONGSHINE INFORMATION TECHNOLOGY COMPANY LIMITEDBackground Established in 1996 Started from 5 people, RMB 200,000 invested capital Business focused on high-tech technology development, system integration and services. Key target industries include Telecom and Electricity According to Morgan Stanley report, Longshine is the biggest Linux solution provider in Greater China Average age of the management around 36, mostly postgraduates from Chinese top universities, highly professional attitudes Proven products based on Linux technology Strength and weaknessStrengths: Very good management team, young aged Clearly and strategically positioned business Very deep technology understanding, especially at Linux area Good proven experience to serve big clients in Telecom and Electricity industries Already received recognition by international venture capitalists Weaknesses: Company’s product line is a little too narrow Financial/operational facts Developed from RMB 200,000 in 1996 to RMB 1 billion assets in 2000 Annual sales increase topped 100% 2000 revenue equals US$ 50 million Branch offices around China: Shanghai, Guangzhou, Hong Kong and other 5 metropolitan locations Received prestigious venture investment in 2000 Valuation and partnership In 2000, Intel, Goldman Sachs, PSINet, and Shenzhen Chuangxin collectively invested US$ 18 million into the firm Company’s management expressed willingness to initiate IPO as soon as market permits Intel not only invested in Longshine, but also co-developed some kind of E-Commerce solutions and market it in China
    • 112. GLOBAL eFORCE CROP. LTD.Background Established in Shanghai in 1994 Currently, running with three subsidiaries: Icon Company Ltd., AJT International Inc., and Nanjing Wins Company Ltd. 98 Employees Business focused on: strategic consulting services, e-business solution providing Major customers include: Government (mainly Railroad Bureau), Foreign-invested enterprise (IBM, 3M), and domestic companeis (Dongfeng Auto) Strength and weaknessStrengths: Highly professional management team CEO and vice-presidents all possessed postgraduate degree and worked at prestigious domestic and multinational firms Successful, multi-year track record to provide system integration or E-business solutions for big enterprises Proven good attitude towards cooperation or strategic alliances, effective in cooperating with others to jointly develop markets Excellent R&D capability. Very good cooperative relationships with esteemed educational institutions such as Shanghai Chiao Tung Univ., Southeast Univ. Financial/operational facts Revenue for 1998: RMB 15.86 million; for 1999: RMB 37.9 million; for 2000: RMB 70 million Net profit for 1998: RMB –2.38 million; for 1999: RMB 2.39 million; for 2000: RMB 5 million (estimated) Valuation and partnership IBM and as general solution provider Sun Microsystems China as SME solution provider China Academy of Science, software institute as technology cooperator Shanghai Chiao Tung Univ. co-shared E-Commerce software development efforts
    • 113. eBIS COMPANY LTD.Background Established in Beijing in 1994 Business focused on IT strategy and technical consulting, total E-Commerce solutions designing, developing, and system integrating Customers mainly at Financial Services, Government, Telecom, Post Services, Entertainment, and Infrastructure industries Company reorganized by PamSky, Senbell, Lixus, and TechSino in June, 2000 Strength and weakness Strengths: Very strong customer base across various industries High-caliber management team. High level managers have multinational management experience Familiar with government norms in China and understanding their requests on information technology Passed ISO 9001 certification Investors possesses different capabilities that creates greater synergies to the firm Financial/operational facts Developed from 28 people, to a company with 11 subsidiaries and over 700 employees Prominent customer list includes China Agricultural Bank, China Construction Bank, China Central TV Employees and International venture capitals mutually hold shares in the company, providing good incentives to create value The company itself has invested a number of projects or ventures in China already. Besides, investments focused heavily on software industries Valuation and partnership Cooperators: IBM, HP, Microsoft, Sun Microsystem, CISCO, Lotus, Compaq, SiBASE, Bea Expanding using merger and acquisition Planned IPO in 2000, however postponed Investors: Morgan Stanley; Singapore Government Investment Fund; China Construction Bank --- All investments are through China International Commerce Corporation
    • 114. MODERN COMPUTER MANUFACTURE COMPANYBackground Established in Shenzhen in 1990 Business includes intelligent security system, mobile technology, E-Commerce, Internet/Intranet construction, software development and etc. Company’s business is divided according to its divisions. It has six divisions: System Integration; Intelligent System; Mobile Tech; E-Commerce; Electrical Technology Divisions Employee in total about 500, Technical and managerial staff accounts for 90%. Doctors and postgraduates account for 35%, and average age is 28 years Employees are also shareholders of the company Major customers come from Telecom, Electricity and Petrochemical Strength and weakness Strengths: Multi-year software development and system integration experiences High-level managerial and technology development team Good environment in Shenzhen for technology development Financial/operational facts The biggest system integrator in South China Having 6 domestic subsidiaries, and 2 overseas offices Passed ISO 9001 certification in 1998 Annual sales revenue in 2000 exceeds RMB 200 million, and profits is about RMB 40 million The biggest shareholder is Shenzhen Investment Management Company Valuation and partnershipCompany is currently under preparation for an IPO domestically Cooperative partners: IBM, Sun Microsystems, Compaq, CISCO, HP
    • 115. SHANGHAI HUATENG SOFTWARE SYSTEMS CO. LTD.Background Established in Shanghai in 1993, Offices also in Beijing, Guangzhou, and Singapore Current employees are 400 people Business focused on system integration for Financial Services, Post Service, E-Commerce, and Computer industries Developed and launched China’s first Highly Secured Online Banking solutions in 1997 Shanghai Pudong Development Bank has signed an agreement to provide RMB 500 million line of credit to Huateng Strength and weakness Strengths: Ability to export softwares Strategically positioned at Financial and E-Commerce area. Fast development demonstrated Very good customer base, extensive experience in providing services to big clients Management all have US or international experience, and are good educated Clear shareholding structure Weaknesses Severe competition in China’s software industry Financial/operational facts Invested together by Scube Systems Ltd., Shanghai East China Computer Company, and Shanghai Information Tech Investment Company Market share ranks No.1 in Financial Services sector Possessed over 500 long-term clients, including Shanghai GM, Shell, CitiBank, Chase Manhattan,… Revenue for exports in year 2000 equaled US$18 million 2000 revenue reaches RMB 100 million, ranking No.1 in domestic software industry Currently patented over 10 software systems Valuation and partnership Jointly develop China’s Financial Services market with Nortel Work together with Motorola to promote Mobile business development in Financial area Invested US$ 20 million by Warburg Pincus Expressed desire to do an IPO at Nasdaq in 2001 Cooperators including Compaq, HP, IBM, Intel, Microsoft, Oracle