Deloitte CEO focuses on China growth

Date: 14-04-2008
Source: China Business Weekly

James Quigley, who was named chief executive officer (CEO) of Deloitte in June 2007, has visited China four times since he took the new position.

In the past nine months, Quigley also visited Moscow and Sao Paulo, but just once each. "I believe what is happening here in China will bring Deloitte huge opportunities [in both consulting and accounting]" he says.

Indeed, the firm says it will spare no effort to capture this opportunity. In 2004, Deloitte unveiled a five-year China growth strategy, which included an investment of $150 million in China, a 400 percent staff increase and a plan to increase revenue four to five fold.

However, unlike many multinational companies that witnessed decades of exuberant growth after the country opened its gate to the rest of the world in 1978, top executives at Deloitte believe their story in China is just beginning.

In fact, the international accounting firms' business in China grew relatively slowly in the first decade after 1978. It was not until the beginning of 1990s, when the Chinese government resolved to build up a modern enterprise system in order to match an economy that was gradually geared into a free market, did global accounting firms see a significant role to play.

China started a series of reforms of its accounting standards in order to catch up with the reform of its State-owned enterprises. These reforms ended the 40-year-history of the old accounting standards, which were built on a planned economy.

The new accounting standards are more in line with international accounting standards and give international accounting firms good opportunities to provide services in China since most local accountants are unfamiliar with the new standards.

In December 1992, Deloitte established its first mainland office in Shanghai. In the same year, another major global accounting firm, Ernst & Young, also established its first mainland office in Beijing through a partnership with a local firm.

By the end of 1990s, 11 international accounting firms had set up 26 offices in the Chinese mainland. And the top five global accounting firms, Deloitte, Arthur Anderson, PricewaterhouseCoopers, Ernst & Young and KPMG, who accountings for less than 1 percent in term of total global numbers, occupy a market share of more than 10 percent.

Comparatively, local accounting firms still remain on a small scale, with each firm having an average of 20 staffers and limited services.

International accounting firms reached another growth landmark when China joined the World Trade Organization in December 2001.

Accounting service businesses developed quickly in the post-WTO years, along with increased merger and acquisitions, onshore and offshore initial public offerings conducted by Chinese companies.

For example, ten years ago, Deloitte China's staff accounted for about 1 percent of the firm's total global employees. Now it accounts for 5 percent. But Peter Bowie, CEO of Deloitte China thinks the firm is still in "a very very early stage."

Indeed, the service firm has every reason to consider its future in China to be bright. As Quigley points out, in the United States, Deloitte has 40,000 staff. It has only 7,000 staff here in China. "Considering China's economy of scale, the business opportunity is critical to us," he says.

Deloitte is hoping to tap the development potential of the service industry in China, which only accounts for 40 percent of GDP, compared to 70 percent in some developed countries.

"Some people wants to characterize China as the world's factory and I think that is not what China is going to be," Quigley says. "The economy will begin to take on a much more balanced perspective where services play an increasing role while manufacturing will also be dominant. The growth of Deloitte is evidence of that," Quigley says.

Looking at China's capital market and capitalization, professional services such as accounting services and legal services are benefiting from a broad range of financial services.

"If you just look at the capital market in the emerging markets, you see very significant services are building up around it," Quigley says.

Even though the markets may suffer serious corrections, Deloitte's top executives remain confident.

"Surely, the downturn in the United States will affect Europe and China. I think it will probably last 8 to 18 months. But what we are investing in is the long term. You cannot turn on and off because the market is too big in terms of opportunity," Bowie says. "It is not a short term decision."

It is not only Deloitte capitalizing on the opportunity. Deloitte's other major competitors, including Ernst & Young and PricewaterhouseCoopers, all have ambitious recruitment plans in China.

For example, both Ernst & Young and PricewaterhouseCoopers initiated plans to recruit around 10,000 new staff in China for five years beginning in 2006.

However, for accounting service companies the talent challenge can't be ignored.

"The talent challenge exits on a global basis and it is even more important here," Quigley says. "So our ability to develop and retain people is going to be the source of our sustained comparative advantage."

From Deloitte's perspective, talent shortage isn't a problem at the entry level, but on the experience level.

"The challenge becomes that you grow so fast, people in the middle who have experience will be in a great demand," Bowie says.

To tackle the problem, in the next six months Deloitte plans to bring 40 new local partners here. That is part of the reason why both Quigley and Bowie denied calling the firm a multinational company (MNC), since 92 percent of its partners now in Deloitte China are from China.

"The company is different from a MNC. Rather, as a partnership firm, Deloitte China is a member firm of Deloitte Global," Bowie says.

"We are local," Quigley adds. "It is not that we think we are local; we are local. That is even a theme we are using to drive our strategy."

At Deloitte, the strategy is called "local routes and global connections".

"We understand the language and culture," Quigley adds. "In addition to the local routes, Deloitte then has global connections to give our staff a window to the world. It also gives us access to a very powerful network of professions, namely, 165,000 professions on a global bases," Quigley says.