Choosing The Right Location
There are significant divides in China’s regional economies. Coastal provinces in the Chinese eastern seaboard are the most economically advanced, benefiting from historical trade links and better infrastructure. These regions were among the first to respond to the reform and opening-up policy and have enjoyed sustained growth spurred by export and investment. It is also noticeable that the majority (70 per cent) of the Chinese population live in the eastern part of China. By contrast the vast inland regions in China are more domestically oriented and more abundant in natural resources. However, many of these regions are still developing to catch up with the coastal areas.
The question of “where to start” is often asked by companies who are new to the market, and those who seek business expansion. China offers a wide variety of potential locations, and beyond the more familiar established regions and cities it can be difficult for firms to choose.
Traditionally, business interest from British companies has generally focused on a few business “hot spots”, first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen. However, business conditions in these cities are evolving quickly. In particular, numerous British companies are experiencing mature and increasingly saturated markets in these locations, with only niche opportunities for development, and growing competitive pressures from other foreign firms and increasingly sophisticated Chinese companies.
Moreover, factor input costs in China are at their highest in these cities and the costs of land and labour are rising fast. As a consequence, many British companies with a presence in these cities are actively seeking fresh business opportunities in a variety of China’s regional cities.
In addition, the Chinese economy is increasingly seeking growth driven by domestic dynamism, particularly consumption and development in inland and rural areas. Often the rate of development in the lower-tier cities is faster, and international competition is often lower.
There are a number of regional economic hubs within China, where several cities interact to create a wider economic area. The most significant are the Bohai Rim region, the Yangtze River Delta region and the Pearl River Delta region. See “City Clusters” later in this guide.
The global financial crisis and recession which began in 2008 has changed the international economic landscape. China was not immune to this and the country launched its own financial stimulus package of $400 billion in late 2008. As a consequence of the global economic challenges, annual inward foreign direct investment shrunk by a third in 2008 but has recovered since. The positive development is reflected by the Chinese economy being valued at $5.8 trillion in 2010, overtaking Japan to become the second-largest economy behind the USA. In 2010, China was the second-largest exporter nation and fourth-largest importing nation.
China’s economy continues to grow almost 10 per cent per annum. In recent years, the less populated, less developed western and central regions have outperformed the historic economic growth engines of the Eastern Coast. A number of factors have brought this about, including a policy shift from prioritising export driven growth to one driven more by domestic consumption and a stronger integration of the provincial economies. One of the most important factors is the national government’s stimulus package which has, among other things, directed funds towards major transportation infrastructure projects in Western and Central China and which has promoted the development and opening of new domestic markets.
To illustrate, the municipality of Chongqing, home to some 32 million people, recorded a gross domestic product growth of 17.1 per cent from 2009 to 2010, driven largely by infrastructure construction investments but with significant increases in the manufacturing and service industries. This is mirrored by similar levels of economic growth in other regional cities.
China's 12th Five Year Plan
The current Five Year Plan was launched in March 2011 giving a clear indication of the government-supported priorities nationally both by province and city. In addition to economic and social targets, this plan sets out clear environmental objectives. Although the content of this Plan is developing further during the five-year period, it's therefore now worth reassessing the opportunities for British industry in China and, in particular, in its regional cities in light of these developments. As always though, opportunities on-the-ground are evolving very quickly, so it is best to contact the CBBC for the latest developments.
The predicted surge in urbanisation presents challenges for the Chinese authorities, which are recognised in the 12th Five Year Plan: greater emphasis is placed on education, sustainable housing and infrastructure, universal healthcare, environmental protection and the expansion of financial services. These internal challenges of urbanisation in all China’s cities match many of the UK’s manufacturing and service skills, which therefore opens opportunities for UK businesses. However, opportunities are continually evolving, so it is best to contact the CBBC for any latest developments.
The focus of China’s Five Year Plan will require greater domestic technological development and upgrading along the value chain. British firms can benefit from this by being better integrated into the supply chain of multinational enterprises operating in China or into those of national Chinese firms. Likewise, British firms can exploit their expertise and explore new business models in joint research and development projects with Chinese organisations. In the aerospace industry, for example, Airbus and Rolls-Royce have supply chain and training centres in Tianjin, 40 minutes south-east of Beijing by high-speed rail, and Rolls-Royce is jointly developing products with two major domestic suppliers from Xi’an and Chengdu, the gateways to West China.
At the same time, Chinese middle to high-end consumers are becoming increasingly sophisticated and demanding. China has recently surpassed the USA as the largest national market for cars with sales of 19.3 million units in 2012, of which two-thirds are foreign marques manufactured by five Sino-foreign joint ventures. Baotou, the Inner Mongolian cashmere and mining city, has the highest number of luxury cars (including Rolls-Royce and Bentley) per capita in China.
In the past, British businesses have focused their investments and operations in Beijing, Guangzhou, Shanghai, and Shenzhen for good reasons. As the national capital, Beijing will always attract the public relations operations of foreign firms. Shanghai is the largest commercial centre in China and is home to the world’s leading financial and professional service companies. The manufacturing centre for exports remains firmly situated in and around Guangzhou and Shenzhen with their good links to international transportation hubs. However, the situation is evolving. For many British companies that have spotted business opportunities outside of the major conurbations of China, it will be more appropriate for them to build public relations activities with local governments rather than in Beijing.
Increasingly, professional services companies are following their international manufacturing clients into regional cities in China and financial services are establishing new offices in those cities that are opening specialised exchanges. Similarly, manufacturers are benefitting from lower operational costs and improving infrastructure in the Chinese hinterland.
In addition to the four major cities of Beijing, Shanghai, Guangzhou and Shenzhen there are another 270 cities in China with a population in excess of one million. Across these highly populated cities there are other factors evident to different degrees. These include the level of economic and social development, industry structure and business environment.
Is sustainable growth realistic?
The trend in China in 2012 was relatively fast growth in less developed inland provinces, and slower growth in the more developed coastal areas. Some argue that this reflects rising costs in more developed areas together with growing opportunities inland. However, in the Pearl River Delta two of China’s most affluent cities, Guangzhou and Shenzhen, managed to maintain growth rates of over 9 per cent. Analysis suggests that this impressive performance is largely based on sustainable growth in the services and hi- tech sector. Does this mean China’s most developed cities still have the capacity to grow at nearly 10 per cent a year? Relatively low growth of 3.5 per cent in Dongguan, another wealthy southern city, suggests caution; at least some coastal areas will indeed struggle to replace low-end manufacturing as costs rise. Understanding the story behind these very different growth rates should help us learn what factors will determine whether China can move up the value chain and sustain fast growth in both coastal and inland areas.
The Pearl River Delta (PRD) is a coastal area in Guangdong adjacent to Hong Kong. China began its process of reform and opening up here, and the region remains a significant driver of growth. Despite only accounting for 3.6 per cent of the population and 0.6% of land, the PRD contributed more than 9 per cent of national GDP and nearly a quarter of the country’s international trade in 2011. Three decades of economic expansion have made the region rich – Guangzhou and Shenzhen are two of the most affluent cities in China. In 2011 their GDP per capita was RMB 97,588 and RMB 110,421 respectively. This makes them significantly more affluent than Chongqing, one of the fastest-growing inland cities, more affluent than Beijing and Shanghai, but still poorer than Hong Kong. The initial economic success of this region was built on labour-intensive manufacturing, and as the costs of labour and land have risen, manufacturers have started to find it increasingly difficult to make a profit.
Therefore it might be expected that the PRD would experience particular difficulties in maintaining high growth rates. However, although growth has slowed, over the course of 2012 the PRD still grew at 8.3 per cent, faster than the national average of 7.8 per cent, and the two most important cities within the region, Guangzhou and Shenzhen, did particularly well; both had a GDP growth rate for Q1-Q3 above 9 per cent. But this strong economic performance was not uniform. For example, Dongguan, the region’s 4th largest municipal economy, grew only 3.5 per cent over Q1-3. What explains these variations?
Optimistic explanations of the fast growth in Shenzhen and Guangzhou emphasise the success that these two cities have had in developing their hi-tech and service sectors and contrast this with Dongguan’s continued reliance on labour-intensive manufacturing. Electronics and hi-tech products now account for more than 40 per cent of Guangzhou’s industrial output. In Shenzhen the service industries are particularly strong. It is estimated that the service industry contributes more than 70 per cent of Shenzhen’s economic growth.
On the other hand, low-tech products (including footwear, furniture and toys) accounted for more than 50 per cent of Dongguan’s exports in 2012, and as wages in the PRD rise many of these manufacturers are struggling to maintain a competitive edge. In the first half of 2012, 30 per cent of enterprises in Dongguan with an annual revenue of more than 20 million RMB reported deficits resulting from declining external demand and rising manufacturing costs. Furthermore, while in Guangzhou and Shenzhen the majority of investment in fixed assets comes from private investors, Dongguan’s investment is dominated by the government. This suggests private investors may lack confidence in Dongguan’s future development.
Those more sceptical about the sustainability of growth in Shenzhen and Guangzhou might highlight the role that rising real estate prices in Shenzhen and government investment in infrastructure in Guangzhou played in maintaining growth during 2012. Shenzhen includes real estate in its calculations of the contribution that service industries make to the economy and this sector experienced 15.9 per cent growth in the first three quarters of 2012. According to official data the Guangzhou government undertook RMB 236.2 billion of infrastructure investment from Q1 to Q3 in 2012 including starting work on a major expansion of the airport and a number of new underground lines.
However, there are indications to suggest that growth in the housing market in Shenzhen is not sustainable – a local independent housing market monitor reported recently that housing prices in Shenzhen experienced only modest growth in the first half of 2012, peaking at RMB 21,560 per square metre in August before starting to decline. They estimate that speculative buyers now only account for 6 per cent of the market. Furthermore, while the increase of government investment in Guangzhou has been substantial, the year-on-year growth rate, 8.5 per cent, was substantially below the GDP growth rate of 9.2 per cent. Finally growth rates for hi-tech industry in Shenzhen and Guangzhou were particularly impressive, 12.1 per cent and 14 per cent respectively.
Three factors could play a role in explaining why Shenzhen and Guangzhou have had more success in upgrading their economy than Dongguan: timing, policy environment and resources. Shenzhen and Guangzhou both launched their drive to upgrade the economy relatively early. Guangzhou declared its intention to increase its competitiveness in automobile, petrochemical and shipbuilding industries in the 10th Five Year Plan (2001-2005) and made great efforts to attract foreign investors, particularly Japanese car manufacturers.
The Shenzhen government made the shift even earlier. It set and realised the target of making hi-tech industries, including information technology, electronics and new materials the biggest pillar (42.28 per cent in 2000) of its economy during the 9th Five-Year-Plan period (1996-2000) and between 1999 and 2011 hi-tech industry grew from accounting for 34 per cent of industrial output to 56 per cent. Dongguan on the other hand only put real emphasis on attracting new, higher-value industry in the wake of the financial crisis in 2008.
These sectors are therefore more mature in Shenzhen and Guangzhou and they may benefit from a first mover advantage. Second, the governments in Shenzhen and Guangzhou both have more policy autonomy to introduce preferential economic policies. For example, Guangzhou has worked with Singaporean expertise to develop “Knowledge City”, designed as a national centre for Knowledge industries. Third, Shenzhen benefits from being right next door to Hong Kong and Guangzhou from being the provincial capital. Both cities have a relatively large number of highly educated and affluent people living in them, a number of good higher education institutions and a relatively developed cultural life.
Analysis of the strong economic performance in 2012 in Guangzhou and Shenzhen suggests that the commitment of these two cities to move up the value chain is delivering real results and that at least some of China’s most advanced cities may maintain the capacity to grow extremely fast. However, other cities across China may not find it quite so easy to emulate Guangzhou’s and Shenzhen’s experience. Guangzhou’s and Shenzhen’s success may at least be partly explained by their favourable location, developed cultural infrastructure, and the use of preferential policies to establish themselves as regional centres for high-value industry that are not available to other municipal governments.
Where to consider
However, beyond the main cities of Beijing, Shanghai and Guangzhou, it is still apparent that many regional cities in China do continue to offer a wide range of opportunities across a broad number of sectors to UK companies. Clearly, those companies seeking to serve local consumer markets in China will be attracted by the economic expansion, rising purchasing power and growing populations that the rapid urbanisation of China’s regional cities has engendered.
Generally, the location opportunities for those companies looking to manufacture only, are found in those cities near to the coast, from the far Northeast to the South of China. Recognition of local resources, client clustering, adequate logistics and governmental support within this wide area then becomes important. Furthermore, although many contributing factors can be used to calculate the R&D score, there is a strong match between the best R&D location and the density of leading Chinese universities. Hangzhou, Suzhou and Tianjin should be priority regional cities for any firm looking to locate production and R&D in China.
The rate of urbanisation and economic growth together with the government-supported development initiatives in each of China’s cities offers considerable opportunities across all business sectors for British companies. The more economically advanced the city it follows that the demand and solutions become more niche. The business opportunities tend to be higher up the value chain in those more economically advanced cities matching the skill set offered by UK industry and commerce, especially for SMEs.
The heterogeneity in economic growth, operational costs, competitiveness in local B2B and B2C markets, local government support and policy momentum in respect of regional development and the business projects provide both opportunities and challenges for firms to identify and select the optimum location in China. The choice of city will be influenced by the strategic objectives of the company and the types of activity it wishes to undertake - do check with the CBBC for the latest advice.
"City Clusters" is a term used to describe a group of cities in close proximity to each other. At the same time, they are also distant from the next nearest cluster creating an obvious identity of their own. As well as this geographic identity the City Clusters are also areas determined by their demographic characteristics of high population and high population density. 12 such City Clusters have been identified across China, namely:
Fujian - the cities of Fujian Province
Hei-Ji - the cities of Heilongjiang Province (abbreviated to the single Chinese character “hei”) and Jilin Province (abbreviated to the single character “ji”)
Henan - the cities of Henan Province, north and western Jiangsu Province and Anhui Province
Hubei - the cities of Hubei Province
Hunan - the cities of Hunan Province and western Jiangxi Province
Inner Mongolia - the cities of Inner Mongolia and northern Shanxi
Jing-Jin-Ji - the municipalities of Beijing and Tianjin and the cities of Hebei Province (abbreviated to the single Chinese character 冀 "ji”)
Liaoning - the cities in central and southern Liaoning Province
Pearl River Delta (PRD) - the cities around the Pearl River in Guangdong Province
Shandong - the cities of Shandong Province
Sichuan - Chongqing Municipality and cities in Sichuan Province
Yangtze River Delta (YRD) - Shanghai municipality and cities in Zhejiang and Jiangsu Province
In total these 12 City Clusters encompass 157 of the 287 cities which are referred to by Chinese state statistical reporting bureaux. More accurately, these cities are Prefecture Level Cities which link smaller outlying cities, towns and districts to one major city. For example the Prefecture Level City of Suzhou in Jiangsu Province comprises the seven districts of Suzhou City and the five County Level Cities of Changshu, Taicang, Kunshan, Wujiang and Zhangjiagang.
Prefecture Level cities also contain regions of agricultural production and are not purely metropolitan areas. They also have common political status and economic reporting processes. This means that the market access and market data for these cities is standardised and form a more suitable basis for comparison rather than equating a County Level City with a Prefecture Level City.
For sales, a key attractiveness of City Clusters is the ease of access to a large population within a defined area generating sales efficiency. The connectivity of different cities in a cluster has been developed with huge investment in road and highway construction in recent years and is now one of the defining characteristics of a cluster.
Almost the same size as Europe, with twice the population, China should NOT be regarded as a single national market, but as a varied region made up of over 30 different provinces and municipalities.
However, although it’s often said that China is a land of regions differentiated by local languages, foods and customs, this is an oversimplification of the country and doesn’t relate to the needs of companies. Issues relating to law, taxation, product quality and government procurement are certainly national. However, what is more relevant to business is the identification of sources of raw materials, supply chain and clients that can be most efficiently joined through a company’s manufacturing and sales bases and networks.
For companies who are able to define a client base, either consumer or corporate, within a City Cluster it is important to note that marketing activity to raise client awareness may be localised. Successful brand recognition in one City Cluster does not automatically lead to recognition outside that cluster. As each of these clusters is similar in size both by population and land mass to the UK, this leads to the potential of a more manageable market entry strategy, particularly for SMEs.
City Clusters therefore offer a defined geographical perspective of what can otherwise be a vast and intimidating market. Most of the clusters are within the constraints of a single province and so the politically-driven economic direction for the cluster can be more easily determined. As areas of large population, the size of the client base for either consumer or corporate markets supports a sustainable business model. Infrastructure, physical and business services, are well established. These individual clusters are areas where the marketing of a product or service can be launched and maintained. For all these reasons, for companies making a market entry and even for companies who have a presence in another region of China, adopting a City Cluster perspective can offer structure to the modelling of their development strategy.
Contact the CBBC for help or further advice on the latest regional perspectives, or help with developing your strategies further.
Please click here to view and download; 'China’s Regional Cities Business Guide 2013' PDF document, created by UKTI in partnership with the CBBC.
Source - UKTI
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