China Business: Location, Location, Location, Part II
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 do usually make for an interesting read.
China's notoriously unreliable National Bureau of Statistics just came out with its 2006 list of "cities with the best investment environment" and Beijing, Tianjin, and Shenyang(?) took the first three places, followed by Shanghai, Nanjing, Suzhou, Qingdao, Guangzhou and Shenzhen. The list is 100 cities long, but I have yet to find anything on the web that goes beyond the first nine.
I was also unable to find anything enumerating the criteria employed in making up the list, beyond this exemplar of bureaucratic-speak:
Zhang Weimin, the deputy director of the National Bureau of Statistics of China, said that the investment strategy in every area of China has been changing. The focus has shifted from quantity to quality, from investment volume to investment structure, from preferential policy competition to investment environment competition. The most important element of the investment environment has shifted from hardware construction to perfecting the software environment.
Half of the top 100 cities are in the provinces of Guangdong, Jiangsu, Zhejiang and Shandong, indicating "the advantages of the investment environment in cities in the Zhujiang River Delta, Changjiang River Delta and around Bohai New Area."
How did Shenyang make it over Dalian or Chengdu? Is it because it is in need of a lift? Is it because it is where China very much wants to see more investment? We are always counseling our clients to be wary of the company the government is saying will be an ideal partner; that company is likely a failing state owned entity (SOE) in dire need of a foreign infusion. Is Shenyang the equivalent here?
Not sure what we can take from this list but it sure is great fun.
Comments (20)
Read through and enter the discussion by using the form at the endDavid Scott Lewis - December 12, 2006 1:15 AM
Dan, a lot of money is being poured into SY. Yep, it's rat hole, but the central and provincial governments are trying to change this. DL has been their spotlight city ... and a showcase for success. Now their focus is on SY.
TJ is still the hottest ticket in China, like it or not. (I don't, but my vote doesn't count.)
It's hard to argue with the other choices on their list, although I'm (pleasantly) surprised QD made it.
China Law - December 12, 2006 1:33 AM
Mr. Lewis --
You and me both re Qingdao (QD). All I know is that most of our clients choose Shanghai (broadly defined) and then start branching out from there later.
Rich Brubaker - December 12, 2006 3:14 AM
If you add up all the chemical and auto deals that Shenyang has landed, it is not difficlt to see how they got the lionshare of "contract" foreign investment. It is not necessarily invested, and this could also include loans (need to troll a bit deaper for that).
For more on second tier investment, go to All Roads. I have already covered the regional trends, and have started my seriour of city profiles (have 15 completed and have released 2 overviews).
Alternatively, go to my post on the World Bank report detailing investment in 120 cities. The report is an excellent read. http://www.allroadsleadtochina.com/?p=122
Good luck with the vote.
Chris - December 12, 2006 5:37 AM
If the government can somehow turn Shenyang into Dalian, I'll forever (or at least for a while) stop saying bad things about China.
The Irish ambassador spoke in Dalian yesterday, and while there was talk of what China is doing in general, he wasn't shy in heaping praise on this city in particular. The Irish just love it here.
nanheyangrouchuan - December 12, 2006 8:37 AM
This is the same statistics bureau that turns out the numbers on China's economy. And Tianjin is hot because Beijing says its hot and wants the foreigners to invest there.
Other Lisa - December 12, 2006 10:00 AM
I agree with posters who believe this list reflects the central government's priorities for investing, rather than inherent advantages for investing. I don't know if Chengdu's location is a big disadvantage, for example, but for my money it's one of the most pleasant large cities in China. I'd have to think that would be attractive to a certain class of foreign investors.
China Law Blog - December 12, 2006 4:19 PM
Rich --
I had seen that report but found it to be so dense, and so packed with things that just didn't seem terribly relevant to a foreign business(such as measuring "progress towards a harmonious society" by, among other things, looking at the percentage of female students) that I passed on posting on it. I look forward to seeing you tease good helpful information out of it.
China Law Blog - December 12, 2006 4:23 PM
Chris --
Thanks for checking in from Dalian. I too am a fan of Dalian, but the lawyers with whom we work there say its biggest shortcoming is not so much the city itself, but the surrounding area. The feeling is that the government of Liaoning Province is doing Dalian no favors.
I give Dalian huge credit for its capitalizing on its location near Koree and Japan by becoming a call center for those countries.
laowai - December 12, 2006 5:34 PM
Think of U.S. cities with 'great' investment climates ... Dallas-Ft. Worth, Atlanta, Las Vegas, Phoenix. Now, name U.S. cities where you'd like to imagine yourself ... is it the same group of cities? Probably not. OK, Dalien and Qingdao are lovely. So is Kunming. Shanghai is hot. But if you want to follow the money, maybe the report is right.
By the way, Tianjin is way overdue for investment. It was neglected for years due to its proximity to Beijing. But TJ is an old port city and in many ways the 'Shanghai of the North'. Beijing doesn't have near the entreprenuerial history Tianjin does; BJ is strictly a creation of government and a bad one at that. It will be hard to rescue BJ from environmental disaster although the government will try very hard before the Olympics.
China Law Blog - December 12, 2006 6:13 PM
nanheyangrouchuan --
I think you are right about Tianji. But since it is hot, who really cares why?
China Law Blog - December 12, 2006 6:29 PM
laowai --
Thanks for checking in. That all makes sense to me.
China Law Blog - December 12, 2006 6:44 PM
Other Lisa --
Thanks for checking in. We actually have a few high tech clients who are looking very closely at Chengdu. They say there is a well educated and inexpensive workforce there and we lawyers say think about the IP.
nanheyangrouchuan - December 12, 2006 9:38 PM
the better educated workforce in Chengdu is due in part to the large concentration of PLAAF and space related stuff going on there. At least you know where your stolen IP will be going.
PiPi - December 12, 2006 10:23 PM
Some companies can spend a fortune and a lot of time trying to decide where they want to locate in China. Most times it is because they are reluctant to make the move without getting a 100% fuzzy-feeling about their investment and minimising the risk. In the meantime, they miss out on opportunity and sometimes the boat sails. It all depends so some degree on how much you're investing and how big you think your market is going to be. In todays 'Lean' and competitive environment, dealing with any (manufacturing) customer in China, locale is very important and they place great importance on ability to deliver at short notice, quickly and regularly. This should not be the deciding factor as you say, but should be considered. China, more than most countries, tends to group industries in the same areas due to scale of logistics.
Obviously a workforce is important as are well educated and trained staff and engineers so demographics is important. Again, in manufacturing, your suppliers are key to being able to compete in terms of delivery and price and affect more than anything else your ability to offer best-service to your customers.
We're based in Nanjing and I wouldn't change it for anywhere else. We have the right fit in most areas. It's not perfect but then you can't have everything. I can also think of better places to live, but from a business point of view I guess we have to give up some personal things to reap the rewards of what we sow at work.
China Law Blog - December 12, 2006 10:44 PM
nanheyangrouchuan --
Thanks for checking back in. Not sure if there is more IP theft in Chengdu than in places Shanghai or Beijing, but I am pretty sure the courts there are less likely to enforce a foreigners IP rights than the Shanghai or Beijing courts.
China Law Blog - December 12, 2006 10:47 PM
PiPi --
Thanks for checking in and thanks for bringing up a very good point which, amazingly enough, had yet to be mentioned: the tendency in China for industries to be grouped in one place. This obviously can be crucial for certain businesses. China is moving away from this some, but it definitely remains true of various industries and the advantages of locating near where others already have planted stakes can be overwhelming for some.
laowai - December 13, 2006 8:11 PM
More on the 'why Shenyang' question ...
It might be instructive to look at the geographic pattern of foreign investment by nationality of the investing country and see what falls out.
Here is the 30K-foot view (not based on any particular data):
- Japan invests heavily in certain areas close to Japan (e.g., Dalian)
- Taiwanese investors favor Fujian and Zhejiang
- Hong Kong investors favor Guangdong
- European and American investors favor Shanghai
For years the government encouraged investment in pretty much all of the places in the 'favored' list (a coastal geography, for the most part, plus Beijing).
This left huge swaths of China under-invested and with relatively cheap labor. The government came under pressure a few years ago to level the playing field and there are indications that it has started doing that.
This may or may not help to explain Shenyang (it is not coastal and just because it is near Japan and South Korea does not mean that it has received much investment from those countries).
In any case, investors willing to pioneer might consider looking at some of the areas of interior China where the government has started to build infrastructure in anticipation of this shift away from the coast.
China Law Blog - December 13, 2006 10:10 PM
laowai --
Thanks for checking in. You are right to point out the locations favored by various countries, to which I will add Qingdao by the Koreans. A friend of mine is an editor with the yomiuri shimbun (Japan's largest newspaper) and he told me one of their first (maybe even their first) Chinese offices was in Shenyang.
If my law firm were the measure of where FDI goes, it would be overwhelmingly to Shanghai.
David Scott Lewis - January 8, 2007 3:33 PM
This has been a great thread.
Seems like there are a lot of comments from those of us living in China -- rather than by tourist executives and VCs who live in Five Star hotels and have limo drivers (and don't have a clue what China is really like).
Frankly, this is an area where there is a ton of academic studies published both in Chinese journals and by foreign journals. For the ten reasons that SH is the best spot as noted a paper, another research paper will point out why DL is the best spot.
There are so many factors to consider that it's not a slam dunk. However, I strongly caution Western firms from making their first (ad)venture in China in either BJ, SH or SZ (Shenzhen, not Suzhou). Yes, for some CD or even ZZ might be the best bet. But for most Western firms, BJ, SH or SZ are most likely the better plays. However, even this needs to be carefully considered. For example, for manufacturing, SZ (Suzhou, in this case) might be fine. Same with HZ, especially for higher-in-the-food-chain products (e.g., electronics). For textiles, it's generally hard to beat GD province, although there are a few exceptions along the YR.
My point: Manufacturing is a different animal. For manufacturing, it's either the YRD or PRD. For a sales office, it has to be SH (maybe BJ). For R&D, it depends on the sector, but BJ is generally the best spot (better schools, more graduates).
China Law Blog - January 8, 2007 6:37 PM
Mr. Lewis --
Thanks for checking in.
I hate to use this analogy, but because my wife is a school/child psychologist and we just had a long discussion on this over the weekend, I cannot resist. Many parents seem to think there is one perfect school out there, when the better thing to be trying for is the right school for YOUR child. The same is true in choosing Chinese cities. What is right for a textile manufacturing company is obviously not necessarily going to be the same city for an advertising agency. Indeed, what was the right city for one textile manufacturing business five years ago may not be right for another textile manufacturing business today.
I agree with your caution about Western firms makign their first "(ad)venture somewhere other than BJ (Beijing), SH (Shanghai) or SZ (Shenzhen). I am always amazed when newbies talk about setting up in CD (Chengdu -- this is fun guessing your abbreviations. This was the first one that made me think for a second) or ZZ (Zaozhuang) as though it is no different from opening an office in Omaha or Liverpool.
I also agree with you that for manufacturing somewhere along the YRD (Yangtze River Delta, though for some reason Yellow River Delta was the first thing that popped into my head) or the (PRD) Pearl River Delta will make sense, but I think even that is slowly changing.
I also think you are right to say Shanghai (maybe Beijing) for a sales office and to say R&D depends on the sector.
More than anything though, companies need to get a decent understanding of China as a whole before they try to figure out where they belong in it.