China is Expensive -- NOT. Go Second Tier and Life Will Be Good.

The China media story du jour seems to have shifted recently from raves about two dollar meals to stories on how China is getting too expensive for business.  This new line says wages in China are up, good Chinese employees are difficult to find, and foreign companies are leaving China for cheaper and more abundant labor.  What's a foreign company to do?  Not worry. 

Wages are rising in China, particularly in places like Shanghai and Shenzhen, but also in less "foreign populated" cities like Dalian and Qingdao as well -- but much more slowly.  However, productivity increases are still outstripping wage gains and none of these newly reported economic ills are at all new.  The most cited of these "will the last foreigner in China please turn out the lights" articles, "How Rising Wages Are Changing the Game in China," admits (though buried deep within the article) that "improved productivity in China has so far offset higher wages." 

It can be exceedingly difficult to find good employees in China, particularly those with high level management or technical skills, and particularly in the more foreign dominated areas, like Shanghai or Beijing.  But this has always been true.   

These "China is getting expensive stories" make the mistake of equating Shanghai and Beijing with all of China, effectively ignoring more than a billion people, whose wages are lower than those in China's ex-pat centers.  The story I would be writing is how western companies are coming to realize there is more to China than just Shanghai and Beijing, and how they are beginning to consider a greater number of factors in deciding where to locate within China. 

I am seeing more western companies interested in starting their China operations in cities outside the typical favorites like Shanghai, Gaungzho, Beijing, and Shenzhen.  I also am hearing more talk from companies already in those cities about expanding elsewhere, with reasons as varied as the companies themselves.  Some are interested in regional or city tax incentives.  Some are thinking about logistics.  Some want greater exposure to China's internal market.  Some just want to be somewhere quieter and/or less polluted. And yes, some want to be where wages are lower or where the workforce they need is more accessible.  Westerners (in the footsteps of Japanese and Korean companies) are now starting to recognize that for many businesses, particularly low and mid range manufacturing operations, there are many reasons to consider China's so-called second tier cities, such as Yantai, Tianjin, Dalian, Wuhan, Wuxi, Qingdao, Harbin, Chengdu, Chongqing, Shenyang, and Changzhou.

You can read more about China's second tier city phenomenon in "Shanghai Seeing the Bigger Picture," and in "Crouching Dalian, Hidden Dragon."   Real estate mega-firm, Cendant, recently conducted an extensive executive survey survey that concluded there would be a "sharp increase in executive assignment volume to cities such as Chengdu, Dalian, Tianjin, Qingdao, Shenyang and Chongqing." 

Many of China's smaller cities are recognizing their ability to bring in foreign business and are aggressively marketing themselves.  A good example of this can be found in a recent San Francisco Chronicle article entitled "China Throws a New Pitch: Changzhou Hopes to be a Magnet for U.S. Companies" detailing Changzhou's recent Silicon Valley road show:

Located 100 miles west of Shanghai, Changzhou offers very low costs and an ease of doing business matched by few other places, according to Changzhou's mayor, Wang Weicheng. Wang led a delegation of executives and municipal officials to San Jose on Monday in search of investors and U.S. firms interested in starting operations in his city.

For ambitious cities like Changzhou, Silicon Valley is a rich potential source of capital and technology. For Silicon Valley, Changzhou is a deep well of talent and an inexpensive place to operate, compared with bigger, more mature cities like Shanghai, where costs are rising fast.

The Chinese Academy of Social Sciences' just released Study on the Competitiveness of China's Cities listed the following cities as Greater China's twenty most competitive, in order: Hong Kong, Taipei, Shanghai, Beijing, Shenzhen, Guangzhou, Kaohsiung, Macao, Hsinchu, Keelung, Hangzhou, Ningbo, Suzhou, Tainan, Tianjin, Xiamen, Dalian, Wuxi, Shenyang and Qingdao.  Unfortunately, I could not find anything that clearly describes the criteria used to compile this ranking. 

Bottom Line:  In considering where to enter or to expand in China, you will probably want to consider some combination of costs, taxes, quality of life, location, work force, market, logistics. Depending on the weight you give to each of these factors, you may find yourself joining the growing list of foreign companies who have realized China is more than just Shanghai and Beijing.