China Business: Location, Location, Location
I was recently contacted by someone putting together a China conference regarding my speaking on where to locate a business within China. I quickly made clear I was not the right person to give this talk, but it did get me to thinking about what goes into choosing a business location.
I myself am always getting asked why my firm initially posted our lead China lawyer in Qingdao, and then shifted him to Shanghai after about a year. The answer to that is actually quite simple, particularly when compared to the high level analysis many companies employ in making their location decisions. We started out in Qingdao because we had (and still have) an excellent relationship with Qingdao's biggest (and I think best) law firm. We really liked the city and we considered it a great place for FDI. Our business is throughout China and we had to locate somewhere. So why then the move to Shanghai? Plain and simple: well over 50 percent of our business is in or around greater Shanghai and even those clients located elsewhere in China either pass through Shanghai frequently or expect to need to go there to meet with their lawyers. We had always had a great relationship with an excellent Shanghai law firm, headed up by one of Steve's former law students, so Shanghai became the right place for us to be.
For most companies the decision whether and where to locate in China is of much greater complexity and I am always interested in hearing the methods employed in making this decision.
I have worked with companies that have hired high-powered consultants, spent hundreds of thousands of dollars and more than a year on their decision on where to locate. I have also worked with companies that went into Shanghai "because there are already so many Americans there" or went into another city simply because that city was where their best and most trusted Chinese contact lived. I have worked with companies that went into a particular city only because their competition did and they assumed their competition did all the right groundwork.
I have seen all of these methods work and I have seen all of these methods fail.
A manufacturing client told me they spent months determining China was the place for them to build a new plant and then spent more months compiling a list of the following factors to be used to determining the right China city (NOT in any order of importance Human Resources
I recently engaged in e-mail correspondence with the manager of a big manufacturing company with a large China presence that had recently expanded its manufacturing into Malaysia. I asked why Malaysia and not Vietnam and got this reply:
Vietnam is a growing market for our customers, but the major players there are all US based companies with internal engineering capabilities. The Malaysian company with which we work is unique in that it is "homegrown."
My opinion is that each country (or region) requires a different approach. For example, if my company were manufacturing clothing, China would be the place to be as you have cheap raw materials + local raw materials + cheap labor = profit + local demand. However, if you are manufacturing lawnmowers, you have no local demand in China. For those items that have no local demand, I believe you really have to be careful in selecting where to locate an overseas plant. Too many companies fail in China because of this. They seem to forget the whole reason England (and others) tried to open China up (by force) to foreign firms was to sell to the Chinese.
Having said that, Vietnam is a good choice for a lot of companies. We work with two engineering firms based there. Is it true that Vietnam's level of English is considerably higher than China's?
I am really surprised other companies don't have facilities here in KL [Kuala Lumpur]. Wages of workers in the manufacturing and service sectors in KL are very different than China. For these examples, I am using greater KL area. Outlying areas are much cheaper. Factory Workers in Malaysia make $160-$265 compared to $150-$300 in Shanghai. Hotel Waitresses (5 star) in Malaysia make $105-$215 compared to $40-$65 in Shanghai. Engineers in Malaysia make $215-$535 compared to $150-$375 in Shanghai. A 900 sq.foot condo in a new building in a KL suburb costs about $20,000 USD, with rent at about $530 per month. In Shanghai's Baoshan District, you will pay around $30,000, but the rent would only be about $500 per month. Inside Shanghai's ring road of Shanghai, the purchasing price goes way up, but rental costs top out at about $625.
Living costs obviously vary from place to place, but I think too many foreign companies look at only workers' salary+benefits in deciding to enter the China market, when there are so many other factors influencing costs. Also, many US consumer goods manufacturers use salary for determining whether or not to market their products or services in a particular country and decide against China because of this. Dan, let me ask you a question. The Motorola RAZR cellphone is not cheap. Which country has bought more? The US or China. How is it possible for a person who earns 400 RMB/month (approximately $50) to own a telephone costing 3000 RMB (approximately $375)? For the most part, China's disposable income cannot be tied to officially listed salaries.
Yesterday's Wall Street Journal has an excellent article, entitled, "Indonesian Labor Rules Take Toll on Investment: High Severance Costs
Deter Manufacturers; Turning to Vietnam" [subscription may be required] highlighting the role a country's laws can play in determining its attractiveness to foreign investment. The article starts out by describing a jeans manufacturer that had to shut down rather than downsize, because downsizing would have required such large severance payments it would have bankrupted him anyway.
According to the article, Indonesia's labor laws require severance payments averaging 108 weeks in wages and this law is costing Indonesia a chance to lure foreign shoe, garment and other manufacturers looking for alternative production sites to China. Vietnam -- where wages are lower and productivity higher than in Indonesia -- is considered "well placed to woo manufacturers looking for new bases outside China." Indonesia should be realizing these same benefits, but its severance law, "is proving a major deterrent to investors." On top of this, the law "allows local governments to set minimum wage increases for private-sector workers, rather than letting employers link the annual raises to productivity.
Indonesia's President, Susilo Bambang Yudhoyono, supported a bill that would have cut severance pay, but that bill was withdrawn after hundreds of thousands of workers took to the streets in protest early this year. The article then talks about a couple of South Korean factory owners who shut down their plants, layed off 18,000 workers, and then left town without paying any severance.
Despite all this, Indonesia does have its advantages. According to Duncan Scott, head of global footwear sourcing for Adidas, Indonesia remains attractive to Adidas, because workers there "tend to stay in their positions longer than in Vietnam and China, making it easier to keep skilled staff."
There are few common themes in choosing a location for business, beyond the big issues like cost, labor force quality, and access to markets. The factors one can and should use in choosing a business location are nearly limitless and the decision itself heavily depends on the company searching out the location.
How did you choose your location? As always, comments are welcome.
http://www.chinalawblog.com/cgi-bin/mt/mt-t.cgi/1628
» China Business: Location, Location, Location, Part II China Law Blog
I recently posted on the methods companies use in determining where to locate their businesses in Asia and within China. Though lists on the best cities for business are usually too general on which to base specific location decisions, they []
» Sneak Peak On China 2007 China Law Blog
Just came across another thoughtful set of predictions for China 2007, this one from Shu-Ching Jean Chen of Forbes Magazine: The Chinese Communist Party will continue to entrench its one-party rule. It is pursuing a Singapore-model, both on the mainland []
Comments
Well, the University of Tokyo has established an office for recruiting bright Chenese students in Beijing. In this case, Beijing was chosen for the cluster of good universities. In other words, Beijing has a lot of potential customers. In the future, probably my Univ will establish offices in Delhi,Hanoi,and Bangkok or such cities. Bright students are always a key to the survival. Oh,as I promised, I voted for you.
Posted by: Susumu | December 8, 2006 11:51 PM
Susumu --
Interesting how Beijing is perceived to be the place for brains. It is generally considered China's high tech and media center.
Thanks for the vote. Definitely could use many more as I am now a distant second.
Posted by: China Law Blog | December 9, 2006 9:52 AM
Great post!! I've done an extensive QD/BJ gig, with a SH "retreat" option. Three years here (in China), still splitting my time between QD and BJ. My firm is the outsourcing hub for Tsinghua University, China's MIT; hence, lots of trips to BJ -- although I can't stand BJ.
In the I(C)T sector ("IT" for those in Western countries; "ICT" in China), the "brains" are definitely in BJ. Better and more universities. Xi'an and Wuhan would come next. SH and Chengdu would follow. (There are only two world-class universities in SH.)
A problem with QD, as you well know, is that there are really only three universities here -- and only Ocean University is a "national"-class school. True, it's not too difficult for QD firms to recruit from Jinan and JN has over 20 universities. As one of the four furnaces of China, JN is hardly a desirable place to live. And QD is generally ranked by expats (and Chinese nationals -- or should I be "PC" and say "First Nation Han") as one of the four best cities in China. As you know, we have much less pollution than most other cities in China (maybe the least pollution of any city with a population greater than 1 million), better weather (only Xiamen compares in weather; Dalian is too cold and Zhuhai is too hot), and one of the best beaches in China -- although it's awful compared to Southern California beaches (and I was born and raised in West L.A.).
Back to the location decision. Municipal government incentives play a huge role in where companies locate. This should not be overlooked. Access to good talent, perhaps the greatest challenge facing every company in China, is also a factor. Turnover might be a factor, too. For example, turnover in a place like Wuhan is nil compared to BJ or SH.
There are also the planning cycles, i.e., getting in while the getting is good. It's pretty well known that the Hu-Wen dynasty is pushing Tianjin as China's next great city. Although I'm not a big fan of TJ, locating in TJ might make a lot of sense given that the central government is touting TJ. (Yes, I've morphed into a China guy. "TJ" to me means "Tianjin," not "Tijuana". That's a huge leap for a guy from Southern California.)
Bottom line: It really depends on what your firm is doing. There are a lot of great places to locate in China. Two of my favorites that I haven't mentioned are Hangzhou and Suzhou (and I have a personal preference for the Yangtze River Delta versus the Bohai Bay or Pearl River Delta).
Just some random thoughts on a Sunday morning in the Bohai Bay ...
Posted by: David Scott Lewis | December 9, 2006 7:03 PM
Mr. Lewis --
Great comment. I checked out Startech -- very interesting. Our guy, Steve Dickinson, is heading to Qingdao next week. Will you be there?
We had an IT client look long and hard at Chengdu, then decide against it for fear that it would be more difficult to get US venture capital funding due to Chengdu's "uncertain" enforcement of intellectual property rights, as compared even to Beijing and Shanghai.
I have a very savvy client who swears by Wuhan for all the reasons you say and he insists it is not as bad a place as people make it out to be.
As for Qingdao, one company we know claimed the workforce there was terrible, yet another one swears by it. They are in fairly similar industries. I love Qingdao. It is not polluted. It is relatively easy going. It is big, without being too big. It has the water. It has plenty of great food and excellent hotels. It is safe. It is relatively clean. Interestingly, nearly all the lawyers with whom we work in Qingdao are graduates of Peking University Law School. I even like the beaches, but seeing as how I come from Kalamazoo, Michigan, went to college in Grinnell, Iowa, and law school in Bloomington, Indiana, I will confess I am not exactly an expert on that score.
I have actually done a few posts on China's pushing Tianjin as the next Pudong, but other than companies in or related to the airplane business, my firm has not seen much going on there. What about you? People tell me that this is because there is no longer any real need for a "next Pudong" and so Tianjin is really just fighting it out with all the other cities.
I completely agree with your bottom line: "It really depends on what your firm is doing. There are a lot of great places to locate in China."
Posted by: China Law Blog | December 9, 2006 9:06 PM
Greetings Dan,
I'd love to hook up with Steve. I will send you an e-mail message with my itinerary and best contact info.
Of course, we know that the real advantage of Chengdu is that it's easier to recruit engineering talent -- male engineering talent -- due to CD's reputation for having some of the most beautiful women in China. ;-) That's the *real* CD advantage. Actually, this subject would make an interesting post, i.e., where are the most beautiful women in China. I can see a contest between DL (for those who like taller women), CD, and the "historical" choices of Wuxi and Suzhou. And we all know about Shanghainese women; alas, we can't go there in this post!! ;-) Notice that you never hear expat women talking about where the most handsome men are in China. But we won't go there, either ...
Wuhan: One of the four furnaces of China. But low turnover rates, good, solid engineers. And when it's not over 40 degrees C, it's not a bad place. Wuhan *seems* to be beating Xi'an for ITO work, although this is in large part due to Xi'an's decision to focus much more on BPO as a challenge to DL.
Regarding Tianjin, I'll sum up my views in five words: Buy TJ real estate -- NOW!! ;-)
Posted by: David Scott Lewis | December 10, 2006 7:49 PM
Mr. Lewis --
Can't go there. No way. But if there were a secret vote, I'd vote DL. Shhh.
I await your e-mail.
Posted by: China Law Blog | December 10, 2006 8:48 PM
If your business is based on luring the best Chinese science and engineering talent, I predict that you will see a shift away from cities that produce such people (e.g., Beijing) towards cities where these people want to live (e.g., Hangzhou, Suzhou, Shenzhen, and Shanghai). Beijing will continue to be a magnet, but not in proportion to the quality and number of people it graduates.
In fact, I see evidence in recent tech company relocations that this shift is already taking place.
Posted by: laowai | December 12, 2006 5:59 PM
laowai --
Thanks for checking in. I concur, but I think it will take a long long time for that to happen in China the way it does in the United States. There are some province to province movements that will remain difficult in China and very few countries rival the United States in terms of intra-country mobility.
Posted by: China Law Blog | December 12, 2006 6:27 PM
CLB,
Perhaps so, although I am not aware of what restrictions are in place now. It seems that you don't need a hukou in order to relocate any more (or, more precisely, you can buy one or your employer can buy one for you). I am sure a lot of people originally pulled strings to get to Shenzhen, but regardless of how they got there it's an island of people from all over China in the middle of Guangzhou. We have nothing comparable to that in the U.S. in terms of scale and rapidity ... a megacity in an instant. There have been other huge population movements in China in recent times: the whole of Manchuria has been settled only since the end of the Qing, and look at all the movements during and immediately after the CR (not all voluntary of course). What restictions do you see preventing a free flow of people within China now -- legal, cultural?
Posted by: laowai | December 12, 2006 9:09 PM