Between January- March 2019, CBRE conducted a study of Asia Pacific’s leading tech cities by assessing 15 markets including mature gateway cities and locations where the technology sector occupies 10% or more of total office stock.

The study considers more than 20 factors under three major criteria – business conditions, innovation environment, and cost and availability – then assigns each city with a score out of 100 and gives them an overall rank.

Business conditions (40% weighting) refers to the ease of doing business. Factors considered include government policy, availability of funding and market size and competition.

Innovation environment (40% weighting) includes the number and scale of start-ups, the quality of education and size of the talent pool, and public and private investment in research and development (R&D).

Cost and availability (20% weighting) are assessed according to occupancy and labour costs for a software engineer along with the availability of office buildings and tech parks.

CBRE’s study found that unlike Silicon Valley, which provides a strong well-rounded environment for tech sector development and growth, individual cities in Asia possess distinct strengths and weaknesses.

Leading cities include Beijing, Bangalore, Shanghai, Singapore and Gurgaon. These cities score highly in terms of business conditions and innovation environment, as well as providing costs and availability that are supportive for business growth.

Competent cities are Seoul, Tokyo, Hangzhou, Shenzhen and Hyderabad. These cities already host tech industry sub-sectors and demonstrate solid performance across most categories.

Supplement cities are Hong Kong, Sydney, Hsinchu, Taipei and Auckland, all of which rate favourably on certain important aspects.

These findings reflect the multi-nodal approach adopted by tech firms in Asia Pacific, which tend to select locations according to their suitability for certain business functions and units.

Tier II cities in India and China are suitable for tech firms seeking to engage in cost saving and outsourcing due their low occupancy costs, affordable labour and availability of new office supply suitable for tech firms.

R&D operations should be placed in major cities such as Beijing, Shanghai, Tokyo, Seoul and Singapore, which offer high quality universities, research institutions and a large number of start-ups.

Mature gateway cities including Hong Kong, Tokyo, Singapore and Sydney are best suited to hosting marketing and sales functions and data centres due to their business-friendly tax policies, access to funding and advanced infrastructure.

Figure 1: Strengths of individual tech hubs in Asia Pacific

There is also little evidence of tech sector growth has powered a boom in commercial real estate rents in Asia Pacific.

Office rental growth in the leading cities is projected to be steady from 2019-2021. Gains are expected to be led by Bangalore, where tech sector expansion is set to be especially strong.

Beijing has recently seen an increasing number of unicorns and start-ups competing for high quality premium office space but the availability of other options means rents have only risen at a steady pace.

While the proportion of tech sector demand is steadily growing in Singapore, Seoul, Shanghai and Tokyo, it remains under 15% of total leasing volume as these cities play host to a wide range of other industries.

Figure 2: Growth in occupancy costs and tech city ranking in Asia Pacific

Sources: CBRE Research, April 2019

At a time when every company is becoming a technology company and demand for advanced IT and programming skills is stronger than ever, constraints on the supply of skilled tech labour pose a significant challenge.

While mature markets like the U.S. and Western Europe continue to face shortages in their tech manpower requirements, this phenomenon is more acute in the IT offshoring hubs around the world, in particular, the Asia Pacific region.

In today’s rapidly changing digital world, companies that understand their tech talent requirements and develop strategies to meet them will command a competitive edge.

Ensuring companies have access to the right talent will make a difference far greater than real estate alone, creating significant and lasting operational savings.

India remains the outsourcing backbone

Over the past decade, many global companies have developed a significant offshore presence in Asia and now leverage multiple locations for service delivery.

While these companies are focused on diversifying their footprint, exploring new markets and reducing location concentration risk, headcount growth is still confined to a few key markets.

India has long been the regional backbone for tech outsourcing owing to its size, English proficiency and relative affordability of its talent pool.

Other growing markets include China, where demand is predominantly driven by large domestic tech firms, which are luring talent by offering high salaries, stock options and joining bonuses. Close to the mainland, Taiwan also has robust demand for software engineers.

Whilst the Philippines remains an alternative hotspot to India in the BPO / Shared Service Centres segment, we have seen the emergence of other markets like Malaysia for similar functions.

Japan and Korea remain comparatively insulated, with international companies setting up local bilingual support centres to cater to those markets.

Growing demand for specialist skills

Technology companies have traditionally led demand for tech talent but significant investment in technology across all industries, particularly in the BFSI (banking, financial and insurance) sector has created fierce competition for this labor pool.

At the same time, demand for tech talent is also evolving and shifting away from generalist computer science graduates towards individuals with specialist skills such as machine learning and artificial intelligence.

Nowhere is this phenomenon more apparent than in India, where the rapid evolution of the country’s technology landscape has induced a demand-supply mismatch for skilled tech talent with advanced technical know-how.

While the Indian IT sector boasts more than 4.0 million employees, the country’s elite universities produce just 2,500 graduates between them every year, meaning that there is only a small pool of labour with exemplary credentials.

Competition for these graduates is fierce, with global companies scouring campuses for top talent, conducting educational roadshows and enticing them with international placements.

Attracting top tech talent

Aligning labour, economic incentives, real estate and investment strategies can help companies dramatically improve their competitive advantage and increase profitability.

A company’s location, its talent pool and its workplace environment are powerful tools to drive savings, innovation and growth.

While it is relatively straightforward to assess the size of a market’s overall talent pool, it is more challenging to determine the number of individuals with specialist skills, which are most in demand.

CBRE’s Labour Analytics & Location Advisory Services team helps companies create an optimal location strategy by evaluating the availability and cost of talent, maximising economic incentives and analysing and structuring financial options.

This can then be used to help companies make informed portfolio strategy, workforce optimisation and location planning decisions, whether they be firms seeking labour arbitrage in tier II and III cities, or companies simply wanting to know the best colleges to recruit from in a specific location.

Does automation pose a threat?

With companies increasingly requesting that their offshore vendors invest in automation tools, there are concerns that automation may seriously disrupt the outsourcing sector.

However, CBRE believes automation will herald an evolution, not a revolution, and will improve efficiency as opposed to eliminating entire categories of jobs.

At the same time, new fields of IT are expanding rapidly, with machine learning engineers, application development analysts, back-end developers, full-stack engineers and data scientists the top five fastest growing jobs in India, according to a recent LinkedIn survey¹.

This points to the need for companies to review their talent recruitment and training strategies for a new era of skilled tech labour scarcity.

Ultimately, CBRE believes that businesses will need to adopt a far more innovative and proactive approach towards assembling a tech workforce that can propel them into the future.

Leveraging labour analytics is one way in which employers can obtain robust and evidence-based solutions to finding the right talent, right now.

Contact

Arpan Barua Senior Director Advisory & Transaction Services, Asia Pacific [email protected]

Arpan Barua Senior Director Advisory & Transaction Services, Asia Pacific [email protected]

¹https://timesofindia.indiatimes.com/business/india-business/fastest-growing-jobs-in-tech-survey/articleshow/65694557.cms

China’s tech sector has grown in significance in recent years. The country is now the second largest global market for Research & Development (R&D) spending and is expected to surpass the U.S. by 2020. Total spending on R&D, predominately in the software and internet as well as industrial sectors, reached US$60 billion in H1 2018¹.

The country also possesses a deep pool of tech talent, with 4 million STEM graduates every year supporting the growth of homegrown tech companies and the entry of major international tech firms.

Beijing, Shanghai and Shenzhen are firmly established as the country’s leading tech hubs, while Hangzhou, home to Alibaba’s headquarters, is also a major focal point for the industry.

Tech innovation has also been identified as a strategic focus of the Greater Bay Area, which includes Hong Kong, Guangzhou and Shenzhen.

Emerging tech cities

With China aiming to establish itself as a technological powerhouse, many tier II cities are upgrading their value chains as they look to shift away from serving as traditional manufacturing hubs.

CBRE has identified several emerging tech cities in Chengdu, Nanjing, Wuhan and Xian, where there has been significant investment in research and technological development.

Other factors supporting the rise of emerging tech cities include infrastructure development such as the High-speed Rail (HSR) network, which are improving talent accessibility and mobility nationwide.

Although top tech talent usually prefer to be based in tier I cities, looser household registration policies (“hu-kuo“ 戶口) and tax incentives in emerging tech cities are luring skilled employees.

Examples include Chengdu, which provides citizenship for migrants obtaining undergraduate degrees or above in the city, along with various financial incentives for start-ups.

Second headquarters and start-ups

Emerging tech cities are an increasingly popular choice for large domestic tech firms seeking to establish secondary headquarters outside tier I cities.

In addition to infrastructure, government policies, incentives, and the availability of talent, criteria for setting up second headquarters include the cost of doing business and livability.

Examples include Tencent in Chengdu, Xiaomi in Wuhan, Netease in Guangzhou, Alibaba in Nanjing and ZTE in Xi’an.

These cities are also home to several burgeoning start-ups, including Guangzhou’s Unicorn XPeng Motors and Wuhan’s DouyuTV, which are poised for major growth nationwide.

China’s emerging tech cities each possess their own unique strengths and areas of expertise and should therefore not be viewed as competitors.

Chengdu has carved out a niche as the leading tech city in the West, specialising in R&D, tech manufacturing and new media.

Xi’an, already a leader in semi-conductor manufacturing, is also attracting an increasing number of start-ups following Samsung’s decision to open a production facility.

Ambitious development plans

As part of the central government’s policy to promote the tech sector, specific areas to host tech companies have been identified in major cities.

One of the most ambitious initiatives is the development of Xiong’An New District, located at the centre of the Beijing-Tianjin-Hebei city cluster.

Although details are still being drafted and construction will not commence for several years, the district has been earmarked as a pilot for smart city, high-tech R&D and financial innovation.

Other major initiatives in the pipeline include a plan for the Greater Bay Area, where it is hoped that closer collaboration between Guangzhou, Shenzhen and Hong Kong will drive the formation of tech hub to rival Silicon Valley in the U.S.

Although most tech companies regard government policy support and incentives as important criteria for location selection, business potential remains the foremost consideration.

While CBRE expects tech start-ups to remain close to their clients in tier I cities, expansion by China’s leading tech firms will support the development of the industry in these up-and-coming areas.

Figure 1: Profile of emerging tech cities

Contact

Virginia Huang Managing Director, Greater China Head of  Advisory and Transaction Services [email protected]

Virginia Huang Managing Director, Greater China Head of  Advisory and Transaction Services [email protected]

¹14th annual PwC Strategy & Global Innovation 1000 study

India’s deep pool of well-educated English-speaking manpower and relatively lower cost of salaries and operations have firmly established the country as a leading Technology, Business & Knowledge Process Outsourcing (BPO/KPO) market for western multinational corporations seeking to subcontract their office functions.

However, recent years have seen a shift away from the traditional focus of customer and technical support, data processing and help desk services, as India evolves beyond providing basic labour arbitrage and commoditised outsourcing.

Moving Up the Value Chain

Typical BPO companies have taken a back seat to companies that possess considerable expertise higher up the technology value chain and are providing a broad range of knowledge intensive and strategic technology services.

This is reflected by the number of Global In-House Centers (GIC) that are currently operational in India. There are over 1,500 GICs in India employing over 750,000 people across a range of industries such as software, internet, banking and financial services, insurance, automotive, research & consulting, semiconductors, and telecoms.

The emergence of an advanced Indian tech sector is further substantiated by the number of patents Indian firms have filed with the World Intellectual Property Organisation (WIPO) which stood at more than 46,000 in 2018.

This is attributed to many factors related to talent pool and cost arbitrage, such as operating environment, ease of doing business and changes to tax reforms.

Examples of major recent contracts include Mastercard, PayPal, Volvo, Limited Brands and Telstra, which have all initiated innovation hubs in India.

Additional instances include HCL, which announced in December 2018 that it had extended its existing agreement with an European bank to offer digital workplace services; and Infosys, which stated in March 2019 that its turbo machinery and propulsion practice had won a contract with Rolls-Royce to provide end-to-end digital and engineering services.

Domestic BPO providers are also now offering complex technological design and development services, with specialist mechanical engineering technology firms providing 3D modelling, rendering and tooling designs to western automotive sector clients.

India’s burgeoning reputation as a hub for tech excellence is also enticing overseas investment in its semiconductor and system design sector. A leading semi-conductor company recently announced plans to create a global technology centre in Hyderabad that will eventually host to 5,000 engineers, while a global technology company is building a new team of engineers in Bangalore dedicated to designing its own smartphone and data centre chips.

Tech startups and unicorns are beginning to flourish, supported by the availability of venture capital and the national government’s Startup India initiative, which provides entrepreneurs with fundraising assistance and simplifies the patent application process.

Tech and Real Estate

There was an 11% y-o-y increase in space take-up by tech firms in India in 2018, reversing the decline in leasing activity witnessed over the past two years. Growth was primarily driven by multinationals, which accounted for almost 75% of overall space take-up by tech firms in 2018.

With tech firms accounting for 34% of all office leasing activity in 2018, the sector’s specialised requirements are driving a strong focus on technology-driven, hospitality immersed and stimulating workplaces that can help attract and retain talent. Research by CBRE has found that 85% of Indian millennials place a strong importance on office design/layout when looking for a new job¹.

While Bangalore and Gurgaon are well established as India’s leading tech cities, and score highly in terms of business conditions, innovation environment, and cost and availability, Hyderabad is seeing a renewed influx².

This market had enjoyed robust tech demand for office space until 2008, when political instability resulted in the significant contraction of leasing activity. However, a resurgence of investment activity coupled with government incentives for the IT Industry such as allotments of government land, stamp duty refunds for property purchases and leases, and reimbursements for patent and trademark costs, has prompted the revival of demand in recent years.

CBRE expects this and other leading Indian tech cities to continue to attract substantial tech sector investment, with office leasing activity also expected to remain robust in the coming years.

Contact

Ram Chandnani Managing Director Advisory & Transaction Services, India [email protected]

Ram Chandnani Managing Director Advisory & Transaction Services, India [email protected]

¹Asia Pacific Millennials Survey, CBRE Research, 2016.

²Hyderabad 2.0 – India’s Original IT Hub Continues to Grow, CBRE Research, 2018