The Leader - September/October 2008 - (Page 48) You th IN k th eY’r e h ot, B u t the Y’ re No t: to p -10 o v e rrate D I Nv e s tme Nt De s tI NatI o Ns F IG. 2 top-10 hot-But-Not locatIoNs for It/kpo/Bpo INvestmeNts IT/KPO/BPO Rank 1 2 3 4 5 6 7 8 9 10 FDI Destination bangalore hyderabad chennai manila pune mumbai bucharest budapest new delhi shanghai the Victoria Square area, and €€14-18 (US$22-28.30) per sq. m. elsewhere. High demand is pushing up wage rates, and wage inflation is 13 percent per annum while unemployment remains below 3 percent. Investors considering a commitment in the hotspot Bucharest may find that the city is already too hot to handle. maNufacturING In Bucharest, growing bureaucratic transparency, a rapidly growing economy, Romania’s recent entry into the EU, numerous incentives programs and improved real estate fundamentals have spurred a huge increase – 1,464 percent between 2005 and 2006 alone — in IT/KPO/BPO FDI. Commercial buildings have extraordinarily low vacancy rates – below 2 percent in Bucharest as a whole, and approaching 0 percent in the downtown Victoria Square area. Though construction is speeding up, demand for quality office space is likely to continue to exceed supply by a wide margin in the short term. As one would expect, rental rates are thus also likely to remain relatively high for Central Eastern Europe €2022 (US$31.45-34.60) per sq. m. in The top-ranking investment-saturated manufacturing locations are (see Figure 3): Shanghai, Guangzhou, Suzhou, Tianjin, Beijing, Pune, Wuhan, Saint Petersburg, Changchun, and Nanjing. Shanghai’s position as the numberone destination for FDI in manufacturing is unrivaled. The city saw the greatest number of manufacturing projects of any city in the world every year between 2003 and 2007 – almost double the number located in thirdranked Suzhou. During this five year period, Shanghai’s total inward FDI – just in the four sectors we studied (automotive components, automotive original equipment manufacturing (OEM), consumer electronics and industrial machinery, equipment and tools) – topped US$9 billion. Grade-A office rents increased 7.8 percent quarter-on-quarter in the first three months of 2008 to reach and average of US$36.74/sq. m./month. Though the constant influx of rural immigrants keeps the city’s government-reported unemployment rate relatively healthy at 4.3 percent (unemployment rates below 4 percent are a good indicator of a coming rise in attrition and wage inflation rates), wage levels – US$2.30/hr for manufacturing assemblers, as compared to US$1.05 for the same personnel in X’ian – are among the highest in China and reflect the immense demand for labor in the city. While these wage rates still look low, multinationals that require highly skilled labor will find themselves competing for a dwindling pool of professionals whose wages far exceed these minimums. By one estimate, a general manager working for a multinational in Shanghai can earn 20 percent more than his United States counterpart with only 75 percent of the skills, according to a report in The Economist. While some might argue that the Chinese manager, unlike an American expatriate, both has local knowledge and speaks Mandarin, the salaries that senior Chinese managers command in Shanghai often far outstrips their competence level. Moreover, companies face attrition rates much higher than the global average – over 20 percent – and significant wage inflation – the compound annual wage growth rate of over 15 percent per annum, with salaries for staff with specialized skills and managers rising much faster, according to Hewitt Associates. Guangzhou, ranked fourth in terms of number of new projects and sixth in terms of total capital investment during our period of analysis, has historically been the destination for light manufacturing in China. While this reputation remains untarnished upon initial review, a closer look at the data reveals a less attractive investment destination. Unemployment levels are at a mere 2.29 percent, and attrition rates, can top 50 percent. An unskilled 2 0 0 8 th e le aDe r 48 septemBer / octoBer
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