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China’s Western Regions. Their Time Has Come.

By Dan Harris on Posted in China Business

For about as long as I can remember, China has sought to encourage foreign companies to locate in its Western Regions and for that same amount of time, few have done so. Sure, some really big companies like Ford and Intel have set up large facilities in China’s Western Regions, but for most foreign companies, including the overwhelming bulk of SMEs, the difficulties and risks of the West outweighed its lower costs.

I am seeing that changing. 

Not only is my law firm getting more companies looking to establish their initial China beacheads out West, we are also getting strong interest from companies already in China seeking either to move all of their operations West or to establish an outpost there. We are seeing this both from companies that manufacture product in China and from companies that sell product to China. But the greatest interest has come from smaller software and gaming companies interested in setting up operations in Chengdu.

There are many reasons for this new focus on the Western Region, most of which are pretty obvious. Manufacturers and high-tech companies are moving West to escape the much higher costs of the Coast. Product sellers are moving West to take advantage of the increasing wealth there. Many of these companies are also seeking to take advantage of the West’s tax incentives.

Just last month, China’s Ministry of Finance extended various Western Region tax incentives through 2020. To qualify for these tax incentives, an enterprise must be set up in the Western Regions, defined to include Chongqing, Sichuan, Guizhou, Guangxi, Yunnan, Tibet, Gansu, Ningxia, Qinghai, Shanxi, Xinjiang, Inner Mongolia.  These tax incentives include an exemption from Customs Duty on equipment imported for use by the Western Region company and a reduced corporate income tax rate for encouraged industries of 15 percent, as compared to the regular 25 percent rate.

Are you seeing the same things?

  • http://www.foarp.blogspot.com FOARP

    “To qualify for these tax incentives, an enterprise must be set up in the Western Regions, defined to include Chongqing, Sichuan, Guizhou, Guangxi, Yunnan, Tibet, Gansu, Ningxia, Qinghai, Shanxi, Xinjiang, Inner Mongolia, and the Xiangxi Tujia-Miao and Enshi Tujia-Miao Autonomous Prefectures in Hubei Province and the Yanbian Korean Autonomous Prefecture in Jilin Province.”
    Wow, my geography may not be all that good, but even I know that Jilin is in the extreme-east of China. Kind of like referring to someone from Oregon as a East-coast intellectual -but then no-one is surprised when tax-offices declare things to be what they emphatically are not.
    On the subject of software in Sichuan, I was in Chengdu in June on assignment from the medium-large software firm I work for nowadays and was quite impressed by the software part out by (in?) Century City. They have a good set-up there, and my (very limited) information is that the government there is at least trying to take a more active hand in IP enforcement – at least in those areas where infringement appears to the naked eye. Word of warning, a certain large, allegedly military-linked Chinese company is likely to poach workers from you if you set up there and aren’t too careful.

  • http://wangbo.blogtown.co.nz Chris Waugh

    Nitpicking, I know, but Xiangxi Tujia-Miao Autonomous Prefecture is in Hunan – Xiangxi (湘西) means Western Hunan. The way you’ve worded it seems to place Xiangxi in Hubei with Enshi. Just to try and avert any potential confusion…

  • Anon

    We are in the process of moving our software company from Beijing to Chengdu because we are tired of the salaries constantly rising 20 percent a year and yet still losing 30 to 40% of our employees every year. We concluded that a small tech company simply cannot compete for people in Beijing. I know Chengdu will be more difficult on we foreigners, but I feel we have no choice. We seriously considered Hanoi but our lack of Vietnamese speakers caused us to why away from Vietnam.

  • http://www.commencepartners-usa.com Kevin

    Yes, I have been seeing this for the last 12 months or so. As an additional note, Chongqing has taken a very hard line toward IP infringement. You would know better with regards to the law but Chongqing is much more strict in many areas that Beijing ever was.

  • Wally T.

    You have previously talked of how the choice is between the Western Regions and Vietnam. Are you moving away from that view?

  • http://www.chengdutime.com Chengdu Ren

    You’ve got your incentives and geography mixed up, some are for the West and some are for developing trade with North Korea and the Tumen region in the Far East. They’re completely different things and incentives. Plus cities like Chengdu, Chongqing and Provinces such as most of Sichuan, Hubei and Yunnan aren’t very reflective of what is meant by the policies determined. There are no 15% tax breaks in Chengdu or Chongqing for example.

  • J

    Yes. I have seen research with a simialr idea suggesting that Western China has a faster GDP growth in China’s coastal provinces since 2007. With the tax incentive you’ve mentioned and “Develop the West” policy will definitely make this the West the way to go.

  • Chris

    @ Anon
    Chengdu tough on “we foreigners”? Chengdu rocks! I love the place. It is Beijing that is the complete dump. Unfortunately you won’t be escaping traffic jams out in the West with Kunming, Guiyang and Chengdu having some of the worst traffic in China. Over and above that, the West is a great place to undertake a range of projects, particularly software and IP development, education services, etc. The local markets a bit tougher and premium products sell more slowly that in the big cities on the East cost but development costs are lower.
    In going West you won’t escape competition for your staff. As anywhere you will need to build great internal systems for retaining and developing the best people.
    I’d avoid Chongqing…. sounds like a weird cult of personality retro 60s type thing happening out there and that doesn’t bode well for the rule of law. Plenty of domestic examples of justice going feral in Chongqing in the past 2 years.

  • Amy L.

    I always find it interesting how transparent the Chinese government really is when it wants to achieve something. It wants to grow out the West so it is always talking it up and giving tax incentives. It isn’t that hard to read the tea leaves.

  • Florie A

    I was travelling for leisure purpose in Yunnan (Jinghong, Kunming) and Guizhou (Guiyang, Kaili, and surroundings) and was impressed at the level of development that was shown there. All kind of foreign brands, and expensive ones, are now available in all regional capitals in China, and I was impressed by the money that has been invested in all public infrastructures.
    On top of that, our guide explained that in the countryside, remote villages close to the Burmese border, but I would think anywhere else, the government is supporting local families by offering a 50% reduction on buying home appliances, and helping as well rebuilding new, more solid houses. Would the Chinese government try to push internal demand with such action?

  • Paul

    @ Chris. “justice going feral” — splendid turn of phrase for what happens in so many places.

  • http://www.foarp.blogspot.com FOARP

    “Chengdu tough on “we foreigners”? Chengdu rocks! I love the place.”
    Seconded. Beijing is a polluted, politicised, and nationalistic dump, not to put too fine a point on things. Chengdu, on the other hand, rocked – nice people, food, relatively clean air, relatively good transport links.

  • Richard Beattie

    @AmyL – the government have had a “Go West” campaign with tax incentives since 2001, I didn’t see many use it then and I don’t see it now. You’d go to sell locally (good luck with Tibetan/Mongolia/Arabic/Maio languages and the religious sensitivities) – the cost of getting goods and products into and out of much of these regions is too high. As for Yunnan, the south of that is a Vietnam play. Let’s not confuse exoticism and adventure with operational realities.

  • Tahio

    This sort of thing always happens in China. One day everything you are doing is just great and then the next day you get shut down. Anyone who invests in China should expect this.

  • http://www.lisabrackmann.com Other Lisa

    Though I will make a defense of Beijing (fascinating place and there’s a lot going on there culturally that I don’t think you’ll find in most other parts of China), I second (third?) the praise for Chengdu. It’s a nice city and an easy one for Westerners to navigate, in my experience. And I mean, they have PANDAS!
    Not crazy about Guiyang but really liked Kali. That might get to be a bit claustrophobic for foreigners after a while and I have no idea what it’s like for doing business, but it’s a pleasant place and the surrounding countryside and villages are absolutely spectacular. Plus it’s maybe the friendliest place in China. Must be all that rice wine.

  • chinamike

    One of the biggest issues in moving west is how do you handle your supply chain?
    Transportation (by truck, rail and river) is full of potential problems. Everything from unreliability and speed to market to the complete lack of transport in some areas.
    Warehousing, distribution centers and pick and pack operations are all far behind the East as well.
    If you are in the food or pharma business the lack of cold chain infrastructure is also an issue.
    In some cases the additional opportunity, training, turnover, transport, costs outweigh the savings for moving West.
    These issues must be solved before the true tidal wave happens.

  • Twofish

    Tahio: This sort of thing always happens in China. One day everything you are doing is just great and then the next day you get shut down. Anyone who invests in China should expect this.
    It also works in the other direction.
    chinamike: One of the biggest issues in moving west is how do you handle your supply chain?
    They don’t.
    I don’t see of the standard export industries in Guangdong thinking about moving west. There’s really no point. Your supply headaches increase, and you don’t save on wages. Most of the employees in Guangdong are migrants from other places in China, and so you are still having to pay Guangdong-level wages if you don’t want people to move to Guangdong.
    The companies that I see moving to the West are:
    1) companies that intended on producing for local consumption. In that case supply chain headaches *help* you rather than hurt you. One weird thing is that it’s easier to manufacture something in Guangdong for sale in Gary, Indiana than it is to manufacture something in Guangdong for sale in Chengdu.
    This isn’t going to change quickly. The Chinese government has spend a lot of money on hardware to move stuff from one place to another, and you can build hardware pretty quickly. The parts that will take a while to fix is the software. I know someone that has seen the writing on the wall, and is trying to turn his successful export business into one that sells to local, and the process is *painful*.
    If you want to sell something in Gary, Indiana, you talk to someone that talks to Walmart. It’s not clear who you talk to if you want to sell in Chengdu, but whoever that is, I think they’ll be more willing to talk if you have a factory in Chengdu.
    2) companies in service industries. The market for industrial workers is national since you have to page wages to compete with Guangdong. If you don’t, people will go to Guangdong.
    The market for service workers is not, because the centers for that are Shanghai and Beijing, and if you are a white-collar computer programmer with hukou in Chengdu, the headaches of moving to Beijing and living without hukou are high enough so that you aren’t going to bother, and so you end up with a salary difference. Also with software, you can put your company in Siberia as long as you have good internet connections.
    What’s interesting is that the “go West 1.0 campaign” was a dismal failure, but it looks like “go West 2.0″ is going to be different because the companies that are going west are different.. Sort of like the Ipad versus the Apple Newton.
    chinamike: These issues must be solved before the true tidal wave happens.
    I am skeptical with statements that say X must happen before Y.
    What usually happens in both business and politics is that you figure out that X can’t change quickly, so the name of the game is to figure out how to get as much of Y done while X is not solved. You usually have to “compromise with reality” in that you find that you can’t get all of Y done, but you can see how much of Y can get done.

  • Taile

    Looking at the title of this article, and the regions included in this list, it’s somewhat interesting that you posted this article at the same time that rio-ts are going on in Inner Mongolia, and have been escalating throughout the summer. Incentives for investment are great, but some of these places are still the ‘Wild West.’