Just by glancing up from his desk, Richard Allan Lorentz, an executive at Pearl Energy, an oil exploration, production and development company, can see the office buildings of Standard Chartered, HSBC and ABN AMRO from his office window in Singapore city centre.
Mr Lorentz is not a banker – although as chief business development officer for the company, he spends so much time in bank offices that he might as well be. Likewise, Singapore is not immediately thought of as a banking centre or financial hub of the same ilk as, say, Hong Kong (and, increasingly, Shanghai). But just like Mr Lorentz’s de facto banking and financial engineering role at Pearl Energy, it might as well be.
Most of the internationalised cities in the Asia Pacific region, including Singapore, have gone to great lengths to attract banks, financial service organisations and their related hub operations. For Mr Lorentz, Singapore’s financial footprint is an added benefit of a location that he considers ideal for his specific business.
“Singapore is the centre of the south-east Asian oil and gas industry – all roads pass through here in this industry. We set up shop in Singapore because we wanted to get the message across that we are a serious player in this industry,” he explains.
However, without that imperative, the choice of headquarter location would have been a little more difficult. “All of these cities – including regional enclaves you might not automatically consider, such as Jakarta and Kuala Lumpur – offer distinct advantages,” says Mr Lorentz. Selecting one over another without a clear driver, such as wanting to be in the centre of Asia’s energy industries, would not have been easy, he says.
For this reason, financial service companies seeking to set up hub operations in the Asia Pacific region might find themselves at a crossroads. Simply put, there is a strong case to be made for most cities in the region, from Sydney to Seoul, to Singapore to Shanghai.
It can be difficult to discard the old models completely, though. “Singapore is one of the leading areas in the world for pharmaceuticals, biotech, technology, oil and energy,” according to Phil Schneider, leader of Deloitte Consulting’s global expansion optimisation and location strategy practice. “If you are in one of those industries, you want to have a headquarter or hub operation there.”
Hong Kong, for its part, has long been a banking centre, with about 75% of the world’s largest banks’ Asia operations headquartered there. “It is the centre of gravity for banks,” says Mr Schneider. “Everything about that economy is geared to the banking industry, down to the MBA schools that churn out banking graduates.”
However, over the years other cities have advanced enough in their legal regimes, infrastructure development and tax environments to become serious contenders. Shanghai, for example, has been growing rapidly and is seeking to knock Hong Kong off its banking industry pedestal. “China wants Shanghai to be the financial capital in Asia,” says Mr Schneider. “We are seeing a dramatic change in the skyline and in the rules for foreign investment. The amount of interest in Shanghai as a banking centre has skyrocketed as a result.”
In short, choosing an Asia Pacific hub for a financial service operation is no longer an ‘either/or’ decision. Indeed, it is no longer simply a question of Singapore versus Hong Kong.
Increasingly, for example, India is entering the mix, says Tom Cash, head of Opera Solutions’ business process outsourcing (BPO) practice and a veteran of American Express. “If you are talking about a larger financial function, such as shared services, and are seeking a large pool of well-qualified accounting majors, then India is the place to be,” he says. “Bangalore and Mumbai are two locations considered to have good pools of excellent labour. Also, real estate is still very attractively priced there.”
India’s new status as a viable option is a reflection of the changing business model of the financial services industry. Like their counterparts in the manufacturing industries, banks and financial service organisations have not been immune to the efficiencies promised by offshoring and near-shoring.
Increasingly, financial service firms are basing their centralised financial operations, such as credit card processing and shared accounting or treasury or accounts payable services, in lower-cost cities in India and the Philippines. However, even for a larger operation that needs mainly entry-level financial skills, costs are rarely a defining factor in the site selection decision, especially for one as strategic as a financial service operation. Tax regimes, for example, are typically not considered to be an important factor in the site selection decision, says Mr Cash (see ‘Setting up a financial hub’ below).
“There is a series of criteria or factors that you want to think about, with costs not unimportant but also not driving the decision,” he explains. These factors range from IT infrastructure to cost of labour to the price of real estate (see ‘Transfer pricing’ below).
Other factors are more amorphous, such as where a firm’s future client base might develop. “There are so many factors and contingencies to consider that it is impossible to tell a company to locate in Hong Kong or Singapore or Sydney without an in-depth analysis of the company,” says Mr Schneider.
Such an analysis includes researching how difficult it would be to hire or relocate key staff; the impact that the particular regulations of an industry would have on local operations; the tax rates; and the local real estate market.
“I have had firms seriously consider whether they can project the image they want from one particular city over another,” says Mr Schneider.
Nowadays this last question is not much of a consideration for companies. In many ways, Mr Lorentz says, the top cities in the Asia Pacific region are closer to New York and London in terms of amenities and business environment than they are to secondary cities in their own countries.
SETTING UP A FINANCIAL HUB
Are you aiming to establish a financial hub in the Asia Pacific region? The first question you have to ask yourself is what do you mean by financial hub: a headquarters in which business decisions and high-end financial skills will be needed, or a back-office processing centre in which accounting, accounts receivables and other low-end financial processes take place?
The answer is important, says Tom Cash, head of Opera Solutions’ business process outsourcing practice and a veteran of American Express. “There are a series of factors that a company has to consider, depending on the role this ‘hub’ is going to play in the organisation,” he says.
According to Mr Cash, a company seeking to set up a centre in which to centralise its accounting, accounts payable or credit card processing activities should take into account the following issues:
- The total cost of all salaries, benefits, transportation and other human resources-related costs must be estimated. The way to do this, according to Mr Cash, is to compute (on a basis of cost per hour worked) the number of hours in the working week, the number of holidays and the amount of paid time off, which can vary greatly;
- Real estate costs on a cost per workstation basis;
- Technical infrastructure costs;
- Incremental telecoms;
- Sustainability of costs, including currency fluctuations.
- Availability at the agent/ representative level, based on skills and desire to do the type of work that will be moved;
- Availability at the supervisory/ managerial level for the type of work;
- Labour attrition rates in the market;
- Language skills (including accents if there is customer interaction);
- Experience with the type of work if this is perceived to be a requirement.
- Whether suitable facilities are available in the time frame required;
- How much customisation of the facilities will be necessary and whether there are skilled contractors to do it.
IT and telecoms
- How difficult it will be to establish the appropriate IT infrastructure;
- How good the telecoms connections are for both international lines and local carriers.
(if the processes will be outsourced rather than managed in-house)
- How many vendors there are to choose from;
- What their record has been in handling similar work;
- Their employee turnover rates both externally and switching internally;
- Their financial stability and capitalisation.
(this typically includes functions that should be co-located with regional management, such as treasury functions)
- Geographic proximity to main regional markets;
- Availability of senior management talent in the location;
- Desirability of the location for expatriates;
- If there is a current headquarters, what the cost to relocate will be and whether key employees move as well;
- All of the factors for a processing facility, except vendor quality factors, aimed at a senior management location.
TRANSFER PRICING: TOUGHER RULES ON THE WAY
Shifting transfer pricing regimes in the Asia Pacific region could have an impact on financial services companies that are seeking to set up operations there. “Many countries, such as China, are in the process of establishing new documentation requirements,” says Lili Zheng, international tax partner at Deloitte Tax and deputy managing partner of Deloitte & Touche’s Chinese services group in the US.
Transfer pricing refers to the price of goods or services bought and sold between affiliated companies in different countries. Tax authorities follow such transactions closely to ensure that profits are not sent out of a high-tax jurisdiction in the guise of excessively low-priced goods or services.
Most countries have requirements that such transactions be set at ‘arms-length’ prices – that is, a price that an unrelated company would charge.
Without question, a transfer pricing regime can be an onerous burden for companies, both for manufacturers that build products in offshore factories and for the service providers that outsource certain functions.
However, Ms Zheng says that the latest round of changes will only affect site selection decisions “at the margins”. “If you have two sites that are equal in all factors, then a more relaxed transfer pricing regime in one country could tilt the scales,” she says.
For many years, the Asia Pacific region was seen as a tax haven of sorts – at least compared with the North American and European regimes. That, however, is changing as more countries follow Australia’s lead on the issue.
Stephen Breckenridge, a partner at Baker & McKenzie’s office in Sydney, Australia notes for example that Thai companies look for guidance from Australia, which has strict laws and documentation requirements, rather than from Japan or the US.
Singapore, too, has begun to put legislation in place to stop what was regarded as corporate profit tax leakage, he says.
“The Australian tax office has been very vigilant and very public about its examination of Australian exports of minerals and raw materials into China. They don’t want to see a hollowing out of the manufacturing base, and look to tax rules such as transfer pricing to prevent that.”
These requirements, though, could pale in comparison to the new documentation requirements that China is finalising. “China’s actual transfer pricing rules have been similar to the US’s but they have never required formal transfer pricing documentation before,” Ms Zheng says.
The new requirements promise, or rather threaten, to be onerous for firms. “They require a three-year period look-back to related party transactions, which will create a burden for most companies, especially in the first year when companies are rushing to implement the documentation,” says Ms Zheng.
Because the documentation requirements are expected to be complex, and must be filed in Chinese, many companies have begun investigating setting up advance pricing agreements with the tax authorities in China, Ms Zheng says. “These agreements provide a little certainty to companies.”