Business centres, or serviced offices as they are also known, appear to be taking root in China. Established as a quick and cost-effective means for multinational companies to enter a new market, an increasing number of domestic Chinese companies, particularly software firms and consultancy groups, are warming to the concept.
"We now have three or four Chinese clients. It's a very encouraging trend," says Song Hoi See, chief executive of Hong Kong-based Plaza Business Centres. Plaza has several business centres in Asia, including one in Beijing's Kerry Centre and another about to open in the city in the China Life Insurance Building on Chaoyang Avenue. Servcorp Shanghai's clients include a Chinese fashion company and a consultancy firm though, says manager Yvonne Lu, "Foreigners still understand the concept better."
For domestic and foreign companies alike, moving into a serviced office means not having to physically own, install or manage any aspect of the traditional office environment. They also receive help in getting their business started – for example, registering a representative office, getting documents translated or even advice for staff on housing.
Protected industry
Despite the benefits, there are still relatively few business centres in China and these are mostly confined to Beijing and Shanghai. They are regarded by the government as a protected service industry, similar to the retail sector. Wholly foreign-owned entities cannot be issued with an operating business license, so the only legal alternative is to form a joint venture operation with a local partner.
According to Song, this restriction has limited the number of operators in Mainland China. However, the policy is likely to be relaxed in coming years, following China's accession to the World Trade Organisation, and this could lead to substantial growth. The potential is evident in Hong Kong, where there are 70-plus business centres.
At the top end of the market, business centres can be found in prime Grade-A office accommodation, operated by specialist providers such as Plaza, Servcorp, The Executive Centre and Regus. There are also a number of opportunist suppliers who rent space from landlords and then offer a business centre service. Here, however, the quality of the building, amenities and services can be sub-standard.
Costs for prime space can appear high – around US$1,500 a month for a one-to-two person unit. Servcorp, however, claims that for businesses of between one and 10 people, its services can yield savings of up to 80 percent over traditional office costs, when items such as equipment depreciation and the full costs of telephony services and internet access are factored in.
China is one of the strongest markets in the Asia-Pacific region, according to Filippo Sarti, managing director of Regus Asia- Pacific. His company's three China properties are currently recording their highest ever levels of occupancy, at 80-90 percent. Other suppliers are also doing well. The Plaza in Beijing's Kerry Centre saw levels drop to 75 percent in the wake of September 11 but it is now fully occupied. In Shanghai, the Executive Centre in Puxi claims a 'stable' 90 percent occupancy level. This 49-unit centre opened in late 2000 and is located in Citic Square on Puxi's Nanjing Road, just a couple of minutes walk from the Ritz-Carlton Hotel. Kevin Crowe, its general manager, attributes its initial success to a combination of a good building, a good area and good staff. "We have integrity," he says, "which is not always the case in this industry."
Servcorp, which has 25 units of varying size in the HSBC Tower in the Lujiazui financial district in Shanghai's Pudong area, says it has increased occupancy to 90 percent from 70-80 percent in 2000. It has also managed to increase its rates over the past year, in line with rising commercial rates in the city. Having postponed expansion plans a couple of years ago, Servcorp intends to open two new centres by early 2003, one in Puxi and the other in Beijing.
Franchise expansion
Regus has three business centres in Mainland China: one in Shanghai's Jinmao Tower and the other two in Beijing's Chaoyang district, at Pacific Century Place and the Lufthansa Centre. In total, it has around 425 units, ranging from one-person offices to open-plan spaces for 40-50 people. Regus has plans to expand, either in Beijing or in secondary Chinese cities, but the group's dire 2001 trading performance, when it lost about US$150m and cut worldwide staff numbers by nearly a quarter, means it does not have the resources to expand alone. Instead, it is likely to sign a franchise deal with a corporate partner with good knowledge of the local market.
Sarti admits that it will be a challenge to ensure high levels of quality under a franchise arrangement. The company will apply its own training regime and internal standards, rather than seeking an external quality assurance certification.
Plaza, by contrast, is spending heavily to acquire ISO certification in all its Asia locations. Song says that the arrival of a new manager inevitably brings different systems and procedures, which leads to an inconsistent service. "All processes and procedures need to be documented," he says. "A consistent service is the main element to win the heart and mind of the customer."
Traditionally, business centre clients have been companies with relatively small requirements, typically those setting up representative offices or performing marketing services for the head office. Established foreign companies also need temporary space, for example when taking on special projects or when moving to new premises.
Regus, unlike other operators, is now targeting clients who require larger office space for a longer period of time. It hopes to take advantage of the trend for companies to outsource more and more of their business requirements, including property and services such as telephony and administration. Those fearing an erosion of visibility by entering a serviced office arrangement will be given their own external identity in the form of separate entrances and door signage.
Worldwide deals
With its global presence, Regus has been able to secure major deals with multinationals to transfer parts of their workforce to its centres. It has a tie-up with Nokia that could lead to the mobile phone maker basing up to a fifth of its worldwide offices in Regus business centres within the next three years, including some in China. Such deals should help the group to lock in future income, albeit at the expense of average prices. "Obviously if you have a client taking space for three years, they will be looking to pay a different rate than a client who stays for just three months," says Sarti.
This strategy also entails risk, according to Crowe. If a single client occupies a lot of office space and then decides to terminate the contract, it leaves the supplier with surplus space. "Occupancy might fall from 90 percent to 60 percent, which could be a killer," he explains.
Sarti says that his company is simply reacting to the changing way that multinational corporations view business centres. In the past they would have used them simply as a bridgehead into a new marketplace, providing a base for a handful of staff. Now, he says, they see business centres as more cost-effective than taking out their own space. Because it is becoming increasingly difficult to predict business growth over a two- to three-year period, companies often take on more space than they really need. A business centre gives the flexibility to expand an office over time.