5. INDUSTRY OVERVIEW 5. INDUSTRY OVERVIEW THE WORLD AND MALAYSIAN ECONOMIES OVERVIEW World output, projected to grow by 4.6% in 2004, is close to matching the strong global growth of 4.7%, the highest in the last 2 decades. The continued strengthening of the global economy is mainly driven by sustained consumption and export growth in the USA and Japanese economies. Elsewbere, the vibrant economies in the Asia-Pacific region, in particular the People’s Republic of China (“PRC”) and to a lesser extent India, further supported the strengthening of global growth. Amidst this optimistic development, world inflation continued to remain benign despite concerns over rising oil prices. Output growth in 2005 is expected to be broad based with manufacturing and services sectors remaining the growth drivers. The maoufacturing sector is envisaged to expand strongly, propelled by strengthened domestic demand and sustained performance of the external sector. Overall, production is expected to grow more than 10%, while exports at 11.3%. (Source: Economic Reporl 200412005j In 2004, the global economy expanded at its strongest pace of 4.8% since 1984, led by the USA reinforced by strong growth in the Asian region and revival of growth in Japan and Europe. Going forward, the outlook for 2005 remains favourable. World output and world trade are projected to expand at a steady pace of 4% and 5.8% respectively in 2005. The pace of slowdown in the USA and PRC is expected to be modest, on the basis that adjustments of the imbalances in these economies would be gradual. The prospects for the Malaysian economy in 2005 remain sound. Real GDP is expected to expand by 5 -6%. Growth in the mining sector meanwhile is expected to strengthen to 5% in 2005, supported mainly by higher production of natural gas in view of the anticipated rise in capacity utilisation of the MLNG plants in Sarawak to meet the increasing global demand. The Malaysian economy experienced its most rapid growth in four years, expanding by 7.I% in 2004 as a result of robust growth in both global trade and domestic demand. The improvement in the economy was reflected by positive growth across all sectors except construction. The main drivers of growth were the manufacturing, services and primary commodities sectors. Value added in the manufacturing sector expanded strongly by 9.8% as output growth in both export-and domesticoriented industries. The strong performance of the economy in 2004 reflected the broad-based improvement in the Malaysian economy, amidst the rapid growth of global trade in manufacturers and higher prices for oil and most non-oil commodities. There were notable shocks to the global economy in 2004, namely high oil prices, revival in inflationary pressures, tightening of global monetary cycle, tightening measures to reduce overbeating in the PRC, sporadic outbreaks of avian flu and effects of the tsunami in December 2004. Nevertheless, the Malaysian economy remained resilient. The 2004 and 2005 Budgets were formulated with the objective of generating stronger private investment activity and reinstating the private sector as the main engine of economic growth. In particular, public policy continued to emphasise on the need for Malaysian companies to identifY and take advantage of the opportunities available in new growth areas. The diversification of the economy would further enhance the resilience of the economy while providing opportunities for companies to move up the value chain. Among the sectors targeted included agriculture, services and high valueadded manufacturing activities. In order to further boost some of these activities, the Budgets provided additional funds to further develop the venture capital industry. Other incentives announced included the extension of the MSC status to Kulim High-Technology Park and Bayan Lepas, improving ICT infrastructures including broadband facilities and introducing a centralised Government portal as a single gateway to public services, as well as various tax incentives to specific sectors. (Source: Bank Negara Malaysia Report 2004 dated 23 March 2005j Premised on the above, the Board believes that the Group is poised to capitalise on the positive outlook of the world and Malaysia ecoDomies. 5. INDUSTRY OVERVIEW (Cont’d) DESCRll’TlON OF THE BPO INDUSTRY BPO can be defmed as the outsourcing or contracting of an organisation’s non-core processes to a third party service provider. These non-core processes might include finance, accounting, human resource, IT, customer service, or any other function that falls outside the scope of the organisation’s core activity. One of the main reasons an organization outsourcers these functions is as follows; Outsourcers are process-cenlric entities that typically are able to either derive efficiencies out of existing processes or re-engineer existing processes, replacing them with new ones, all leading to greater cost efficiency, improved productivity and better quality. In addition, by outsourcing, organisations manage to free up valuable management time which can be focused on more important revenue generating activities like marketing, strategic planning and research and development. However, the rise of offshore BPO activities was fuelled by two factors that happened almost simultaneously. These two factors led to companies and organisations rushing to take advantage ofthe wage cost arbitrage opporturtities present between low-wage cost nations and the West. The flISt factor that eventually led to the increase in offshoring BPO activity, was the global economic recession that hit the United States and Europe in 1998. The slowdown in global demand and subsequent drop in corporate profits forced companies to examine ways to slash their costs in order to return to profitability. By looking at low-return on investment, non-core departments within their organisations, Chief Executive Officers and their management tearns came to the conclusion that these tasks could in fact be off shored to third-party service providers in other parts of the world with substantial wage differentials. The cost savings gained from the offshoring of these typically labourintensive departments would easily cover any costs incurred in offshoring these functions. The second factor that supported the rise of the BPO offshoring phenomenon was an over-capacity in global telecommunication bandwidth infrastructure lead to the prices of data and voice traffic transfers over these networks, falling drastically. This allowed for the cheap routing of voice and data traffic from the United States and Europe to lower wage cost nations like India, the Phillipines, China and Malaysia, countries that would eventually rise to become major locations for BPO activity. However, a major stumbling block against the spread of BPO activity was the issue of trust. Organisations seeking to outsource were sometimes reluctant to entrust a third-party provider with the responsibility of managing and operating key elements of their organisations. This lack of trust was eventually overcome when BPO providers began adopting Western-style practices of transparency, corporate governance, international certifications and a corporate culture of strict adherence to process implementation. Some of the key drivers for change facing businesses today are as follows:(i) Reduce costs;
(ii) Increase revenue;
(iii) Add value -differentiate; (iv) Improve services, increase customer satisfaction and loyalty;
(v) Exploit new markets, cbannels and technologies;
(vi) Launch new products;
(vii) Reduce headcount; and (viii) Manage staff attrition rates.
S. INDUSTRY OVERVIEW (CoDt’d) In respoDse to these key drivers, several trends are seeD to be emerging and are as follows: (i) Consolidation ofmany into ODe globalJregional or a small number of sub-regional centres; (ii) Consolidation into a Virtual model or Discrete centres; (iii) Emergence of Multi-media to support operations; (iv) Re-Iocarion of operations to low cost offshore countries, especially for English language; (v) Emerging trend to re-locate English language and back-office operations to India; Multi lingual Asian language to Malaysia/Philippines; JapaneselKorean work to China; (vi) Establishment ofOriental language customer support capability; and (vii) Socio-Political Issues slowing the offshore trend slightly
The following chart outlines the scope ofBPO today:Inquiry li,m41irJ;1. Field SUPllort
Dil’&Ct ProCUrifl’l901. 1r”J;\irr.!t:t Pmouf<lrrP.nl ConH~t Malluf:)Cluring. P,o..:h,cllSlll’\’Ic. Creahon (Source: BT) The state of the BPO industry today can be generally sununarised as follows: (i) Globally the BPO Market has not yet met expectations for growth; (ii) Media and communications, fmance and accounting (F&A), and energy and utilities are the vertical industry sectors with highest BPO adoption; and (iii) Manufacturing outsourcing still remains untapped.
The trend going forward would appear to favour Sales, Marketing and Customer Care or Demand Management strategies in propelling business activity into the future. Outsourcers who specialise in this are expected to maintain the competitive edge over their BPO counterparts who perfonn backoffice outsourcing. 5. INDUSTRY OVERVIEW (Cont’d) Malaysia continues to remain vigilant in its development as conducive environment for outsourcing. Although currently able to offer labour arbitrage opportunities, the proliferation of contact centres in the country will exert upward pressure on wage rates, eventually removing the arbitrage opportunities. In this environment, outsourcers who offer value-added and differentiated services will be able to command the price premiums to continue to be able to attract choice clients. 5.3 INDUSTRY GROWTH AND PROSPECTS By choosing to locate in Malaysia, Scicom took a pioneering stance in the notion that there was much potential for the growth ofBPO activities in the country. In addition, management consulting firm AT Kearney a!fmned Malaysia’s attractiveness as an outsourcing location by ranking it third (3″), behind India and China, in their 2004 Offshore Location Attractiveness Index. By billing Malaysia as a ‘rising alternative to the two (2) Asian giants, AT Kearney has placed Malaysia on the map as a country that has the potential to challenge India’s dominance in BPO in the next 5 years. The firm also cites a report by Datarnonitor, a business intelligence outfit, which considers Malaysia as one of the countries that will challenge India’s dominance in BPO in the next five years. AT Kearney stated in the index report, “Malaysia is an often overlooked, but natural, choice for offshore services. The country’s successful performance is a result of its low costs, particularly for infrastructure, as well as its strong score in business environment for an emerging market.” Other important elements include the government’s support for the ICT sector, and the strong global exposure ofthe workforce.” Scicom’s vision together with the affirmation by AT Kearney above were vindicated in recent years by the decisions of many MNCs to relocate their data processing, contact centre and IT facilities among others, to Malaysia and in many cases, Cyberjaya. Such organisations include but are not limited to the following:(i) Dm.; (ii) Ericsson; (iii) HSBC; (iv) ruM; and
(v) Standard Chartered Bank
(Source: www.msc.com.mv. extracted on 22 August 2005) Based on the above prominent MNCs that have invested million of dollars in Malaysia, it further underpins Scicom’s view that Malaysia is an ideal location for offshore outsourcing within the BPO space. In this regard, the future holds much potential for growth for BPO providers like Scicom.
5.4 INDUSTRY PLAYERS AND COMPETITION Global BPO players that also provides customer contact centre management includes key players that have invested considerable amount ofresources to become a respectable global BPO service provider. Looking at these global competitors operating within the Asian region, it is clear to see that these major players in the outsourced contact centre industry view Asia as baving promising growth potentials. Scicom has marked its presence in Malaysia and Southeast Asia with its strong and competent workforce of over 740 individuals, a list of well-known and respected clients, and its operating mantra of providing ‘Total Customer Delight’. Scicorn believes as evidenced by the presence of established, large global players that the Asian region will continue to grow in terms ofcontact centre outsourcing. 5. INDUSTRY OVERVIEW (Cont’d) 5.5 RELEVANT LAWS AND REGULATIONS GOVERNING THE INDUSTRY AND PECULARITIES OF THE INDUSTRY There are currently no specific regulations governing the BPa industry in Malaysia nor is the Board currently aware of any specific material peculiarity in the said industry. Recognising the importance of the BPa industry in tile furore of Malaysia, the Government has introduced various policies and incentives to encourage the growth of the BPa industry. Malaysia views the growth of shared services and outsourcing centers very favourably, not only as a valuable source of employment and income, but also as a source of less tangible but equally important benefits. This includes the transfer of important skills and competencies to local knowledge-workers as well as exposure to international best practices and standards. As such, investments in this industry are highly-prized and competition among potential host countries for such investments is very keen. As such, the Government will continue to promote the MSC as the global hub for companies seeking to establish and grow shared and other high-value-added services. Furthennore, the Government will implement wide-ranging measures to boost Malaysia’S competitiveness in the shared services and outsourcing industry and the effort would be to focus on enhancing the attractiveness ofthe MSC as a preferred location for these activities. In addition, the global shared services and outsourcing sector would also play a major role in the second phase of the MSC’s development running from 2004 to 2010 and creating at least 100,000 additional jobs in the industry by the end ofthe period. To ensure that this will be met, the Government has taken multi-pronged approach which includes the following:(i) Lowering cost associated with training and certification of knowledge-based workers in order to enlarge and upgrade the pool of available knowledge workers; (Ii) Introducing measures to revitalise the science and technology component of the country’s education system which will result in an increased number oflCT; and (iii) Reducing financing cost for local companies which participates in global·level projects. Notwithstanding the above, incentives would also be given for shared services companies to partner local teChnology companies. (Source: Speech by fAE Daw’ SeTi Abdullah Haji AhmadBadawi, Prime Minister ofMalaysia at the launch ofthe 8”’ MS.C-IA.P. Business Summit Putrajaya Convention Centre at /st September 2004, 4.00 p.m.)
5.6 DEMAND AND SUPPLY CONDITIONS AND DEPENDENCE ON OTHER INDUSTRIES The Board believes that the demand for the Group’s BPa services is expected to be promising and this can be attributed to various factors as set out below:(i) The global economic climate of weak demand has forced companies to cut their costs in an effort to preserve profits_ By consolidating their non-core business divisions and outsourcing or offshoring these activities, companies can continue to recognise cost savings.
(ii) An over-capacity in global telecommunication bandwidth supply during the late 1990s led to the cost of date and voice traffic transfers dropping to a point where it becomes economically feasible to route customer contacts across continents.
(iii) By offshoring back-office activities to countries that are at opposite ends of the world, large global organisations can maintain the operation of these activities on a 24-hour basis, without incurring substantially bigher wage costs. S. INDUSTRY OVERVIEW (Cont’d) (iv) OtTsboring to Asia places the customer service touch points of a global organisation close to their Asian markets, a region acknowledge as the new growth frontier in all major industries.
(v) The Malaysian government’s rapid and dedicated positioning of Malaysia as an attractive location for BPO offshoring will continue to augur well for the demand of such services in the country.
(vi) The increasing focus on customer retention and brand loyalty-building will create an additional need for intelligent contact centres, capable of not only acting as customer frontlines but empowered to employ customer relationship management strategies to help an organisation maintain its competitive edge.
Scicom also believes that supply conditions for the outsourcing industry remain poised to be able to sustain the potential growth of this industry. (i) The large pool of cheap and educated workers in the Asian region that can be tapped to work in the outsourcing industry continues to grow and can be relied upon to provide the workforce needed for outsourcing to grow. Countries like India and China can offer low-cost and technically skilled workers for repetitive, technical outsourcing work while countries like Malaysia and Singapore, with its competent command of linguistic talents and educational expertise can provide premium voice support as well as a wide variety of other outsourcing activities. (il) Malaysia continues to otTer state-of-the-art technological and physical infrastructure, as well as financial and taxation incentives that benefit outsourcing companies. This pro-outsourcing environment may continue to attract outsourcing activities to locate in Malaysia. Scicom’s business is dependent on the telecommunication and data connectivity industry. Factors within this industry like costs, availability and government regulations can atTect the operations of data and voice routing to contact centre facilities. AlthOUgh mitigated by the competitive environment of this industry, which allows for multiple redundancies in the provision of these services, connectivity gaps and downtimes may still temporarily affect the business operations of Scicom and the industry as a whole. The outsourcing industry is also dependent on the labour market. Inflationary pressures leading to rising wages will result in the opportunities for labour arbitrage decreasing which will put pressure on operating margins. The outsourcing industry like any other regulated industry is subject to the legal environment and government regulations of the country of operations. Changes in government and its policies, changes in fmancial and tax incentives, or changes in the country’s legal framework can affect the business operations of Scicom and the outsourcing iodustry as a whole. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK