Why Do Business In Weifang, China? Third Tier Does Not Mean Third Rate
I just never knew writing this blog would give me such incredible power.
A couple of days ago, I did a post, entitled, "The Basics of Getting Your Business Into China By WFOE/WOFE," that post briefly mentioned setting up a WFOE (Wholly Foreign Owned Entity) in "lesser known cities that encourage specific types of business development." Kevin Smith of the Weifang Radish blog picked up on that line and posted a comment on how he thought his former town, Weifang, is a good place for foreign business:
I really love how "setting up in new industrial zones that are eager for overseas investment or lesser-known cities that encourage specific types of business development" is mentioned. When I was living in Weifang I got to know a number of businessmen engaging in or setting up business in Weifang. All of them expressed to me how impressed they were by the price and quality of office space and other resources available in and around the city. Furthermore, some of them had lived in or been in China multiple times on business over the years, and so weren't just wide-eyed newbies. If I were an entrepreneur looking towards China, I would probably set up a business in a lesser-known Chinese city. Seeing how come May 3, I will be leading a session on second tier cities at a "Real Estate Investments in China" seminar in San Francisco, I am getting a bit "second tier obsessed."
So in my follow-up comment to Mr. Smith's comment, I "ordered" him to provide more information on doing business in Weifang:
You have two choices. Either you will write a long post on your blog, explaining why you would set up your China business in Weifang or some other second tier city (is Weifang, second or third tier?), and exactly what sorts of business make sense for Weifang and why. Perhaps 3 pages, minimum, single spaced.
Or, you will allow me to grill you on all of this via telephone or e-mail.
I am leading a one hour session in early May at a big time Real Estate in China Seminar in SFO and the session I am leading is on second tier cities. Pick your poison, big guy.
He wisely chose not to allow me to grill him directly and wrote the blog post instead. It is entitled, "Why Do Business in Weifang," and it is excellent.
The post starts out listing some points favoring setting up a business in China's smaller cities:
- It is easier to get to know top government leaders in small cities. For example, in Weifang I met and chatted with the Mayor and Vice Mayor on more than one occasion, and I'm just a foreign teacher. I think this is a major benefit. How likely would it be for me or a person running a small to medium sized business to meet and chat with the city leadership in Beijing?
- Smaller cities have cheaper real estate prices. I don't know about business properties, but for residential you'd pay about 2k RMB/sq meter in Weifang out towards the edge of the city (only about 10 minutes from downtown by car) and nearly 10k RMB/sq meter in Haidian in Beijing if you were looking to buy.
- Smaller cities have lower wages. Teacher at Weifang University made between 1k and 4k RMB a month [roughly $125 to $500 USD]. No one made over 4k (officially anyway), not even the president of the university. I know this because I've seen the payroll. I'm not sure how much teachers at Beihang [in Beijing] make, but there sure are a lot of nice new cards on this campus, so I'm pretty sure that the answer is more than in Weifang, where the few teachers who had cars were the ones married to businessmen.
- Smaller cities typically have less pollution and less traffic and thus are easier to get around in.
The post then goes on to describe Weifang as follows:
- It is a third tier city.
- Grade A office space for cheap prices. (This is according to some American businessmen I talked to. Having no personal experience in this area, I wouldn't be able to judge this myself).
- Infrastructure is just as good as in larger cities - reliable electricity, Internet, telephone, cellular, roads, rail, even an airport (small but nice, not some scary relic of the Cold War) with daily flights to Beijing and Shanghai.
- Located smack in the middle of the Shandong peninsula making it a major hub between the larger cities of Qingdao, Jinan and Yantai. Because of its location, it is a good place to set up headquarters if a company has branches or often does business in each of those cities.
- Good hotels and conference space. Weifang has one five star hotel and at least seven four star hotels. Also, because most of the year these hotels are underused, good prices can be had.
- Just under two hours from Qingdao International Airport, which has flights to Seoul, Busan, Tokyo, Osaka, Fukuoka, Nagoya and Hong Kong in addition to around thirty domestic locations.
- International Kite Festival - According to Jiaoyitong.com News, the 2005 Kite Festival resulted in the signing of 227 contracts worth a total of 16,510,000,000 RMB, of which 1/3 was foreign capital. This annual event is basically what puts Weifang on the map.
Mr. Smith then lists the following as possible business opportunities in Weifang:
- Outsourcing manufacturing for diesel - Weichai is a large SOE that manufactures diesel engines for China Rail.
- Outsourcing manufacturing for toilets - Milim is a large company that manufactures toilets for Gerber.
- Outsourcing manufacturing for pharmaceuticals - Yaxing Chemical is a large company that manufactures pharmaceuticals for Bayer.
- Trade in textiles - according to an African-Australian friend of mine in this business in Weifang, there are lots of textiles factories in and around the city. These factories do sell product directly to overseas retailers, but a middleman can negotiate lower prices with the factories and turn around and sell the same product even cheaper than that factories themselves to retailers.
- I have met American and South African entrepreneurs of medium-sized businesses who were outsourcing the manufacture of children's furniture in Weifang and looking to outsource the manufacture of pipes used for plumbing and were strongly considering setting up a JV in Weifang with a local company there.
Excellent post.
My own thoughts:
- Weifang has a population of 8.5 million. I have never been to Weifang, but I have spent a considerable amount of time in Qingdao and in Yantai (two of my favorite cities in China), both nearby and in the same province (Shandong). Co-blogger Steve Dickinson has spent even more considerable time in Zibo, also near and in Shandong, and he has told me much about it. This does not for a moment mean "I know" Weifang, but it does allow me to put it in some context.
- I like and agree with Kevin's point about it being easier to get to know the powers that be in smaller cities. Big companies get to know big city mayors, smaller companies rarely do. However, it is typically less important in the bigger cities for smaller companies to have dealings with the city's higher ups.
- I am certain Kevin is right that business space and labor will be far cheaper in Weifang than in Beijing or Shanghai. I am also not surprised by Kevin's touting the benefits of Weifang's high end physical infrastructure and reduced pollution and traffic. I am not surprised because all of this holds true for Qingdao and for Yantai as well.
- But, unless your company has someone fluent in Mandarin with substantial business experience in China, I can see Weifang being very difficult. Weifang just will not have the experienced, bi-lingual consultants, accountants, and lawyers of Beijing, Shenzhen, or Shanghai. Not really a reason to avoid it for OEM, but a very good reason to think long and hard about setting up an office there.
- Weifang is also not going to have the expat social life of Beijing or Shanghai either. Granted, there are many who do not care about this, but it has to be tougher to find a good American manager for Weifang than for Shanghai. I also think it would be tougher to find a good Chinese manager or engineer for Weifang than for, let's say, Suzhou.
- Kevin did a great job outlining possible business opportunities in Weifang. It sounds like Weifang is doing just fine economically and I wonder about it as a location for foreign retail, like fast food, hotels and clothing. How much foreign retail is already there? Shandong is a big food production region. How connected is Weifang to that? Are foreign companies coming in for food?
As always, the comment lines are open, and I urge anyone with views on other second and third tier Chinese cities to pipe up.
Comments (34)
Read through and enter the discussion by using the form at the endDaguang - March 20, 2007 8:42 PM
thanks, that's my hometown!
who are interested in? i can help!
Kevin S. - March 20, 2007 9:03 PM
Thanks a ton for the praise and the publicity. I completely agree with all your points as well.
Weifang *county* has a population of 8.5 million. The population within Weifang city limits is smaller, though I have no idea what the actual figure is.
"Shandong is a big food production region. How connected is Weifang to that? Are foreign companies coming in for food?"
Tyson Foods has a poultry processing plant in Zhu Cheng, a town in Weifang county. I think they are a major supplier of chickens to KFC in Shandong.
nanheyangrouchuan - March 20, 2007 9:16 PM
CLB:
Doesn't this all sound a little too rosy? And you've been dealing with China for how long? This guy is a teacher, perhaps the only one or one of a small number of foreigners who live in the town and therefore the city gov't is naturally interested in working with them to "get the word out" about this town. Nothing inherently wrong with that, but flowerly promotions, big promises and banquets are always how unknown localities in China attract and treat potential new business. And of course the rankings and stats cited by this guy should be automatically suspect, or do you now believe chinese accounting methods?
And why has this town not been "discovered" by other foreigners or chinese business people. I hardly think this town is new. A little due diligence w/regards to this town is needed before promoting it on your site.
China Law Blog - March 20, 2007 11:49 PM
Daguang --
Thanks for checking in. Are you still in Weifang? Does Kevin have it right?
China Law Blog - March 20, 2007 11:50 PM
Kevin S. --
Interesting about Tyson. Thanks for the post!
China Law Blog - March 20, 2007 11:54 PM
nanheyangrouchuan --
1. I was NOT promoting it.
2. Do you really believe anyone out there would set their business up in Weifang based on this post? And, if they did, could we agree they deserve whatever they get?
3. What statistics? I don't see any.
The whole point here was NOT to promote Weifang but to get a discussion going and to learn more about China's second and third tier cities as places to do businesses.
Shanghai we all know about and everyone is chasing it. Sometimes it is better to get 50% of a small untapped market than 5% of a big one.
chris - March 21, 2007 1:17 AM
I wouold agree that the 3rd tier cities offer a lot of great opportunities, but I guess the biggest opportunities in those cities are selling to the local market and not international business (at least for now) because of the lack of local know-how to conduct international business, the Human resource issue (as you mentioned briefly) should not be underestimated and will remain the biggest hurdle setting up any kind of business there.
Tim - March 21, 2007 8:58 AM
I too was only a foreign teacher but my opinion is that these cities will remain cheap because of barriers to entry.
Beijing has some history of allowing foreign businesses both large and small to set up shop within its area. I would assume that there is a system in place for doing so, however bureaucratic that system might be.
An hour and a half southwest however in Hebei, Baoding becomes a different story in my experience. Smaller FOEs, while able to meet with government officials often have found that these men are simply looking for foreign capital for their own projects, and not a JV of any kind.
I guess this struggle of give and take (money and control) is common to any business relationship, but my point is that some of the more old guard conservative cities can be very prohibitive for business.
Weifang sounds more progressive to me though despite its similar size. Baoding is about 1 million city and 11 million county last I knew.
The only successful story I'm aware of (in terms of entry only) involves a multinational brewer. Maybe Baoding just needs more kites.
Lo Kok Kee - March 21, 2007 9:11 AM
Dan, I agree with the post that smaller towns/cities roll out the red carpet for foreign investors that would not even be noticed in the larger cities. I was in a small town in Anhui Province a few years back as part of a due diligence visit on a local copper mine owned by a Canadian listed junior miner. We had dinner with the local party Secretary, the head honcho of the jurisdiction, got briefed by the business promotion unit on the various SOE looking for foreign investors, driven around in a government car. We are not exactly Goldman Sachs or Freeport Mc, but to them, a foreign investor looks all the same to them and they got no way to do a due d. on us.
Romain Guerel (French working in Beijing) - March 21, 2007 7:20 PM
For the long time expats in China, Shanghai, Beijing, Guangzhou or Shenzhen were like Weifang 10-15 years ago. What applies now for Weifang previously applied for those cities!
Romain Guerel (French working in Beijing) - March 21, 2007 7:26 PM
I agree with Chris D-E but I would add that time delivery and logistic processes are also a concern. When you sell your products to Europe or US, one or days additional time delivery can make the difference to get the contract.
nanheyangrouchuan - March 21, 2007 9:50 PM
The ability of the local gov't to deal with foreigners is an issue to. The gov't personnel of SH, BJ, and often some of the bigger second tier cities have either been educated abroad or received extensive local training from foreign experts (REAL foreign experts) brought to China.
3rd tier mayberry RFD may have their hearts in the right place, but make no mistake, these guys are used to running the show and being the bosses, not making difficult compromises.
China Law Blog - March 21, 2007 11:28 PM
Chris --
Yes, but I would actually think manufacturing is better suited to the third tier than retail.
China Law Blog - March 21, 2007 11:29 PM
Chris D-E --
Yes, but there are second tier cities with great ports. Qingdao, Dalian, and Tianjin. Maybe these three should be considered 1.5 cities. Intel's going into Dalian.
China Law Blog - March 21, 2007 11:32 PM
Tim --
You are exactly right. Setting up a company in Shanghai is pretty much routine these days. Who knows about some city of "only" a million off somewhere? We recently talked a software company out of locating in a second tier city because we thought the minimal amount it might save on wages would get eaten up the first time they had an IP issue before the local court.
China Law Blog - March 21, 2007 11:33 PM
Tim --
You are exactly right. Setting up a company in Shanghai is pretty much routine these days. Who knows about some city of "only" a million off somewhere? We recently talked a software company out of locating in a second tier city because we thought the minimal amount it might save on wages would get eaten up the first time they had an IP issue before the local court.
China Law Blog - March 21, 2007 11:37 PM
Lo Kok Kee --
Always nice to be so well treated, yet I am never sure whether it is better to have dinner with the Chinese government or to be completely ignored by them. I think I lean towards being ignored, unless you are Goldman Sachs or Freeport Mc.
China Law Blog - March 21, 2007 11:39 PM
Romain Guerel --
Seems like a good analogy, except there is one big difference. For Weifang now, there is Shanghai, Beijing, Guangzhou or Shenzhen, but back then for those four cities, there was nothing else.
China Law Blog - March 21, 2007 11:41 PM
nanheyangrouchuan --
I agree.
Jethro Cramp - March 22, 2007 1:31 AM
As someone who has set up and built an SME in a small city in Shandong (Jining) I know that third tier cities are not an attractive place to set up a foreign business.
1. Being able to know the Mayor - If you operate in a small city, you had better know the mayor because you are going to have problems that only the mayor can sort out. You simply are not going to have these kind of problems in Beijing. And secondly once you know the mayor you'd better hope that you don't get on the wrong side of him or he can cause you more trouble than you care to imagine. I can think of one recent example a friend experienced in a real estate project in Weihai where he went to the mayor to get help with a problem and the mayor ended up joining forces with his Chinese partners and made sure that the 'fleecing' of the company was completed.
2. The off-book cost of doing business in a small city can be surprisingly high. As one of a limited number of foreigners in the city you will be an obvious target. By off book cost I mean things like entertaining (have you tried operating without the fire department's approval or running a factory with out either health and safety or environment signing off), or just the red packets you give out at Chinese New Year to all the low level officials that your paperwork passes through on a daily basis.
3. I can not speak for all third tier cities but have yet to see 'A' grade offices with 'A' grade facilities. A simple case in point that up until now international courier companies (FedEx, UPS etc) offer a very limited service in China. The same case can be made for many other services that a foreign business might need. Although this situation will change and in the case of courier services change quickly, as of this moment third tier cities can not offer the same environment that first and to some extent the second tier cities offer.
4. Similar to offices what about housing? How are you going to house your foreign staff. In Jining there was an american company set up to build mining safety equipment. They had a dozen rooms permanently in the city's best '4 star' hotel. When I last met up with them they had decided to build their own housing compound to house their staff - there simply were no other acceptable options.
5. Cheaper office space. As a foreign business, unless you need vast amounts of space, if you are choosing to go to a third tier city because you need the cheaper rent, then you have to ask how viable is this business?
If you go to a third tier city at this stage it should only be because there is something local there that you have to be near to that you can't get elsewhere.
China Law Blog - March 23, 2007 8:15 PM
Chris D-E --
Your city figures are way off. There are less than 50 cities in the entire world with a population of more than 5 million.
I completely agree with your assessment of what it can be like to do business in the 2nd and 3rd tiers, including the numerous requests that come with it.
A few months ago, friend/client invited me to lunch with a company owner who was doing business in Qingdao because he thought this company owner needed all kinds of legal help. I sat through the lunch listening to this guy boast of all his government connections and that they made it so he had no need for written contracts, which are "not enforceable in China anyway.' I said almost nothing.
Later my friend asked me why I had not made any effort whatsoever to steer this guy in the right direction and maybe pick up some work in the process. My response was that this guy is an idiot and I would get a lot more pleasure watching the government tank his business than having to deal with him as a client.
A few days later my friend called me back to say I was right.
China Law Blog - March 23, 2007 8:18 PM
Mr. Cramp --
I tend to agree with you on all counts. But, I do see the need for retailers, among others to push out.
China Law Blog - March 23, 2007 8:27 PM
Chris D-E --
I think what Mr. Cramp is saying is that you have to know the mayor in the smaller cities and you have to just hope he is not going to cut into your business.
I will say that Russian officials in 2nd and 3rd tier areas in Russia make Chinese officials seem pure by comparision. And in Russia, there are multiple players with which one must contend: FSB, Military, Mafia, Government.
ash - March 26, 2007 3:42 AM
Spent the day in Weifang today working on a business deal worth several million dollars per year.
I cant honestly say - there is honestly NO reason to invest in Weifang when there is the East and North sides of Qingdao that have everything Weifang offers, plus the benefit of being close to the second biggest deep water port in mainland China (after Shanghai) close to an international airport. Lots of cheap apartments, office space and industrial parks in that area of Qingdao too, plus all of the creature comforts of 'the west' are a 30 minute car drive away.
Weifang Government must have to do something very, very special to get any kind of foreign companies to open there.
China Law Blog - March 27, 2007 2:56 PM
Chris D-E --
That makes sense. Anyone who eats anything on a short haul flight deserves what they get.
China Law Blog - March 27, 2007 2:58 PM
ash --
I am guessing you are right. I am a huge fan of Qingdao--my firm actually had an apartment there for a year. And even Qingdao is a tough sell because it lacks so many of the things cities like Beijing and Shanghai have. Many of those things are not even necessary, but they do make life easier for the ex-pat.
China Law Blog - March 27, 2007 4:27 PM
chris --
Sounds to me like you know a lot more about siting issues than I do and what you say certainly seems to make complete sense.
nanheyangrouchuan - March 28, 2007 9:30 PM
"Most of China's civil aircraft production is now based (but not exclusively) in Chengdu."
That is probably due to the center of PLAAF R&D also being in and around Chengdu. The J-10 and J-11 were born and raised there.
Xinyi Yu - April 25, 2007 8:14 PM
First time blog.
Very impressed with Dan Harris� summary of the City.
I'm a native of Weifang, Shandong, China: attended the best high school there and lived in the City Government Complex. My last 16 years is in US.
Just had an extended stay in Weifang back in February. Met old high school classmates, friends and relatives.
I witnessed 1st hand of what Dan had described about Weifang. It's a city thoroughly reborn from its past with modern buildings and impressive energies. Only half-street can be identified, still resembling my memory!
To my pleasant surprise, Dan also feel Weifang is a 3rd tier city!
In my humble opinion, Beijing and Shanghai are clearly the 1st tier. Tianjing, Qingdao, Chongqing, Guangzhou etc are the 2nd. So here left the large number of 3rd tiers that are supporting the next 5-10 years of growth in China.
The city is booming. Might just be a special class of the City, my acquaintances all had ambition and visions of being the best in their fields - Banking, Life Insurance, Mobile Phone, Real Estate, Textile IM/EX, manufacture�. To them, sky is the limit right now and I rightfully agree. As a fact, I identified some business opportunities to explore with others. It is the Gold Rush. You can be part of the thrill.
China Law Blog - April 25, 2007 8:55 PM
Xinyi Yu --
Thanks for checking in. I have to confess, I have never been to Weifang. It was Kevin who provided the commentary.
Do these friends of yours plan to stay in Weifang and if so why? Is it because they like it there or because they think the opportunities are so good for them there or both?
xinyi yu - April 26, 2007 8:29 PM
Dear Dan �Apology for my confusion. Came a little late in this discussion.
Great question on the why. Here is my thought:
The city offers an abundant opportunity for one's development. Strange as it sounds - most of my high school class mates came back to Weifang after college. Even my father, as southerner from ZheJiang NingBo, chose to stay in Weifang eventually, living his life as a general manager of 30M employee enterprise, city officer and now an author of more than 10 books. Weifang offered him the opportunity.
The City also had a long history, deep Lu culture, own tradition, natural resources and good weather. People there are outgoing, open-mind, friendly to outsiders and proud. Now, with new coffee shops, night clubs, theme park, brand-new train station for high speed trains, and wide roads, the Weifangner can't think anywhere better than where they are. What I also enjoyed was its low cost, comparing to the Qingdao, for a very comfortable life.
You can see I'm still deeply attracted to this place while living in the suburban New Jersey and working in the exciting city of New York.
China Law Blog - April 29, 2007 9:11 PM
xinyi yu --
No apology necessary. Certainly not.
Great description and I know exactly how you feel.
I grew up in Kalamazoo, Michigan, population about 100,000. My parents still live there. I went to Chicago, found it to big, then moved to Seattle and found it just right in every respect. I love Seattle and I think it fits both me and my family perfectly. And yet, there are still many times where I wistfully think back on my hometown and how nice and easy it would be to live there. My father used to tell me to always be suspicious of those who seem to hate their past and I think there is some merit in that.
I have to believe as exciting as you find NYC, there are times when you are stuck in traffic and....
Matthew Allen Hodgin - May 11, 2008 3:46 AM
As a frequent visitor and then resident of Weifang since 2005, there have been many changes occurring as goes for the much the rest of China. Infrastructure has been given a face lift with most two lane thoroughfares converted or in the process of being changed into three- lane ones. This aspect of Weifang is not to be overlooked as it is one of the joys for business and personal life. With more and more drivers each year in China, Weifang is wonderfully an open-laned paradise most of the day.
I had the pleasure of training the staff of Foton-Lovol Business English for a semester, they being one of the largest (THE largest?) machinery and equipment producers in China. Think John Deere: tractors, harvesters, mowers, dump trucks, etc. The Weifang branch is the largest one in the country for producing this kind of machinery for all the reasons mentioned by others: cost and location, added to the fact that Shandong province is so agriculturally blessed.
Most definitely Weifang does not stand up to a Beijing or Shanghai, not even its neighbor Qingdao, in terms of entertainment or social/business opportunities for foreigners but different strokes for different folks. One of the foreigners here has been training Chinese staff, is overworked so he doesn't get out of Weifang much, but calls it 'the best place in the world'. He should get out more.
Greasing palms and red envelopes are a part of the culture here at the moment but the Olympics have forced to China to reform quickly in the bribery department. Local government officials are harder to reign in province to province but I've witnessed arrests and firings on account of the corruption. Not sure where Weifang stands, my guess would be middle of the road... for now.
Remember overhead - do you pay the 'bribery' money for rent in Beijing or Shanghai or do you grease some palms? Is the business a service or good to be used by the Chinese or a manufactured good to be shipped abroad? Lots of these questions pop up. Is Weifang a gamble? Isn't any business in any city just that? I'd choose Weifang over many other places because it is moving upward not simply out like so many 'burbs of big cities. The big, long-sighted question: offices in the downtown of "The Future Qingdao"? Or ones in the far outskirts of the present one?
The people of Weifang are arch conservative, but that also works to the favor of foreigners particularly with the Olympics coming. If the said company is seen in that light, leaders will always put their own country before their wallet. The patriotism here is near fanatical (read: Qingdao & Carrefour) about now and the mood for reform couldn't be any higher.
Strange coincidence about the agriculture of Shandong is while I lived in another city 2 hours away (Tai'an) I could buy Chinese vegetables not available in Weifang and while Weifang radishes are 'famous' in Shandong, I never once heard of them while living a few hours away. There are some big differences in culture and preferences from province to province but two hours apart? Maybe an infrastructure thing - roads have improved dramatically since that time or it could be just one of those clandestine Chinese conspiracies that foreigners are not meant to know... I kid.
About Tyson - no wonder there are so many KFC's being built in this city. In 2005 there was one in Weifang. This year, the fifth KFC will be built and the (finally) second McDonald's as well. No Pizza Hut's or Starbucks... yet.
As for couriers, I've received mail from DHL and seen their offices in the city. FedEx, etc. will surely follow.
From Weifang it is one hour by train to Qingdao and little over two to Jinan.
Graham - June 17, 2011 1:55 AM
I am a westerner living in Weifang for the past 2 years.
I am living in the center of Weifang, Kuiwen district, within sight and 5 minute walk of the beautiful "Rainbow Bridge" over our Bailang River.
Originally from UK, I worked mostly in Yantai, South Korea, and Singapore.
Now Weifang is my adopted home town.
For me, Knowing people with guanxi is important, if you want to move in the right circles, and get things done.
A good Chinese contact, or bussines man is invaluable.
I am currently relaxing, and therefore free and able to perform many required tasks.
Graham