This is China! blog

Originally published in the China Economic Review

January 2008

by Bill Dodson

In China’s garden city, you can get your company ahead while retaining peace of mind

Chinese call Suzhou “the Venice of China.” Though far from sinking, the saying nowadays applies as much to the scenery and history of the city, which is only a 30-minute train ride from Shanghai, as to the fame it is now gaining as one of China’s premier commercial centers.

Suzhou municipality in a broader context incorporates five other cities within its boundaries, and in 2005 actually surpassed Shanghai in the amount of utilized foreign direct investment (FDI) by a ratio of three to one, at US$6 billion. Indeed, at last count in 2006, there were more than 16,000 foreign-invested companies in the municipality.

Park life

Suzhou is home to two of the largest, most successful economic development zones in China: the China-Singapore Suzhou Industrial Park (SIP) and the Suzhou New District (SND). About 50% of the investment in SIP is Western, with American companies taking the lead, while in SND Western companies account for about 20% of all investment. Hence, Suzhou is home to the largest concentration of Westerners in China outside the first-tier cities – Beijing, Shanghai and Guangzhou.

The city is clearly a manufacturing base, though the local government is developing an R&D and IT industry complexion. The local administrators in SIP and SND can be quite helpful in assisting investors to organize their application for business licenses, bank accounts, tax certificates and the like.

For instance, when we incorporated our company in SIP, administrators from the promotion department personally helped us organize and then audit our paperwork before we submitted it for approvals at the one-stop administrative center in the same building.

In SIP in particular, the Singaporean model for transparency and administrative rigor eases the process considerably compared to many development zones around China. As a result, Western firms tend to favor investing in SIP.

Still another reason for Western companies to invest in and around Suzhou is the large and vibrant expatriate community of several thousand who are clearly defined from their Shanghai or Beijing counterparts. Given the nature of their work outside large offices, you don’t see many businessmen wearing ties in Suzhou and when you do, it’s a rather exotic sight. Business-casual tends to be the uniform of choice.

Though Suzhou is a forward-looking city, it has gone to great lengths to maintain some sense of character through its low, whitewashed façades topped off with peaked black ceramic tile roofs. And at the City of a Hundred Gardens – as it’s been called for a millennium – tourists and locals often ride in tour boats along the canals that weave through the downtown area.

If you’re looking for an apartment, real estate companies that cater to Westerners – such as Maxelli and Joanna Real Estate – pre-qualify apartments to ensure they match normal tastes in design and decoration. The agents can help with negotiation to reduce the possibility of price gouging and ensure that landlords hold up their end of the bargain. English-speaking post-sale agents will personally assist you with everything from maintenance issues to utility-bill payments.

The city itself has a population of about 1.5 million, but socially, it’s very easy to be included in any number of circles and feel a part of what’s going on. No matter the size of your company, just show up a couple times at local pubs like The Blue Marlin in SIP or SND, and in little or no time other Westerners will introduce themselves to you.

Meeting others

For spouses following their partners to Suzhou, getting settled is equally convenient. The Suzhou Expat Association hosts monthly gatherings to introduce newcomers to old Suzhou hands to help with all the practicalities of life in a new city, from finding the right school or daycare services to knowing where to shop for Western amenities. The Blue Marlin in SIP has also launched a monthly event in which expats can learn about international services such as insurance, healthcare and wealth management.

One of the wonders of Suzhou is that you can one moment be walking down a sidewalk jam-packed with pedestrians, and the next find yourself in a secluded back alley taking in trees and  traditionally sculpted flower bushes beside a quiet stream. With an already well-founded industrial base of Western companies, Suzhou is aggressively pushing forward a “green” agenda that will only make the area more attractive and enduring as a place for quality investment and comfortable living.

Copyright William R. Dodson, 2008

Originally appeared in the China Business Guide 2009

Published by the China Economic Review

by Bill Dodson

1. What is your outlook for manufacturers heading into 2009?
Manufacturers will be dealing in an even more dynamic global economic environment than in 2008. Though commodities traders are betting that economic recession in many Western countries will lead to less use of resources such as metals and oil – forcing prices for raw materials to two-year lows – it remains to be seen just when Western economies will move into recession and consumers reduce their buying patterns. China’s domestic market, however, will weather the global economic downtown, becoming more attractive to foreign producers that need to make up for slower demand globally by investing more in China.

Manufacturers in the renewable energies and food processing industries will see growth in the China domestic market. The Central Government will continue promote the renewable energies industry through subsidies and tax incentives. Meanwhile, recent crises involving domestic foodstuffs producers will bring tighter regulation and inspection routines, and a heightened awareness  of and opportunity for international brands.

2. What are some of their most pressing challenges?
Reducing the cost of operations will be of paramount importance to Western manufacturers that want to sell into the Chinese market. The bulk of Chinese manufacturers across industries are speeding up the value curve to capture markets in China that even five years ago would have seemed a wild dream to everyone. Meanwhile, Western companies are struggling with rising wages, constrained talent pools, requirements from home offices and increased competition from other Western companies and from domestic producers. Western companies will need to reduce their costs to levels domestic rivals are used to operating at while maintaining quality levels that make their international brands valuable to Chinese buyers.

3. Which government policies had the biggest impact on foreign manufacturers in China in 2008?
The new Enterprise Income Tax law and the new Labor Law implemented at the beginning of 2008 made investing in China as an export base less appealing than in the past. Now, mostly foreign investors that want to sell into the Chinese domestic market find it economically viable to invest in China from a taxation point of view. Also, companies “grandfathered” by the implementation find themselves racing to use up their tax treatments before 2010, when all preferential treatments for traditional manufacturing sectors will be phased out.

The new Labor Law made it difficult for all enterprises in China to fire under-performing employees without great penalty. Labor Law interpretation also exposes companies to greater to possible litigation from former staff. The new Labor Law increases costs to companies by forcing businesses to maintain staff that under perform. In leaner times, when companies need to survive downturns in business, costs of maintaining and firing under-performing or excess staff will be onerous.

4. What kind of regulation do you expect to see in the near future?
China national policy will tighten in the areas where industry and living standards meet: that means greater regulation and enforcement of environmental standards, and food and drug administration. Huge and deadly pollution and food scandals have embarrassed national and local governments in China into action lest they lose “the mandate of Heaven” – the permission of the people to administer their country.

In particular, the Central Government will continue to put greater attention to industries that are heavy water polluters along the east coast; Central and Western provinces are still open to such polluting businesses, as they are still starved for investment. Air pollution regulation will continue to be an issue as power generation from coal will predominate for the foreseeable future.

Food scandals will force a reorganization of government agencies such as the Food and Drug Administration and the Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), bureaus that have direct responsibility for the testing, certification and enforcement of food quality in China. Stricter qualifications will be put in place for ensuring food safety and local government leaders will be held to more transparent requirements for food-related incidents.

5. Will the global economic crisis affect Beijing’s long-term plan for manufacturers?
The downtown in the global economy has accelerated Beijing’s long-term to move from low-margin manufacturing to higher value production and services. The loss of consumer markets abroad as well as a stronger currency compounded by increased material costs and rising salaries have all conspired to put exporters in traditional industries under great strain. The global downturn will accelerate the decline of traditional exporters in China by three to five years.

6. How did the industrial zone landscape change in 2008? What’s to come in 2009?
With the new Enterprise Income Tax law Economic Development Zones (EDZs) along the east coast had fewer tools with which to attract foreign investors. EDZs countered the loss by promoting the geographic and economic comparative advantages they each have with a mix of local city and county tax advantages. Meanwhile, EDZs in central and west China still have the nationally approved tax treatments as incentive to lure investors to their nascent regions.

7. Are low-end manufacturers leaving China for lower-cost destinations?
For almost two years now low-end manufacturers have been moving to southeast Asian countries and central China to reduce their costs of manufacturing. The cost of operating along the eastern seaboard with such slim margins has made production along the coast unaffordable for all but the most resourceful or well-captialized. However, many southeast Asian countries – such as Vietnam – will continue to suffer from hyper-inflation or political instability; while central China has the challenge of an immature production and logistics infrastructure that will continue to make life difficult for export-driven companies.

Copyright William R. Dodson, 2009

Originally appeared in the China Business Guide 2008

Published by the China Economic Review

By Bill Dodson

China’s first-tier city economies are shedding traditional secondary-industries – also known as ‘light’ industries – to develop tertiary, service industries and manufacturing industries that are more capital-intensive than in the past. Representative light-industrial products are typically small in size and produced in high-volumes in labor-intensive “assembly lines,” and do not require as much R&D as, say, the production of microchips. Some light industry products that helped Chinese first-tier cities jump-start their economies include: toys, small components that work in computers, computer accessories, shoes, textiles, furniture, automobile parts and more. Light-industry products are easily commoditized. Guangzhou’s own economy gained great impetus by becoming the center of toy-manufacturing for Hong Kong businesses. Shanghai has become a nexus for automobile parts, while Beijing originally gave preeminence to smelting, steel production, petroleum processing and coal-extract products.

Capital-intensive and heavy industries include: sophisticated IT-related products such as telecommunications equipment and semiconductors, automobile assembly, engine manufacturing, heavy machinery, shipbuilding, petrochemical refinery, marine parts, aviation and aerospace, biotech and medicine.

The Chinese government has several motivations for promoting the capital-intensive industries in China: job creation, wealth creation, the rising cost of manufacturing inputs and the environment. The central government knows that light manufacturing with its thin margins can employ only a limited number of people economically, and that it needs to develop alternate channels for employment. China’s leaders seem all too aware that a nation’s wealth rises with the value of the products and services it produces; light manufacturing offers limited returns in the long run.

The costs of unregulated manufacturing

Issues such as the limited availability of arable land, spiraling natural resource usage and increased pollution levels constrain the degree to which China – or any country – can industrialize through traditional manufacturing. In particular, over the last three years, land for building low-value manufacturing facilities has become highly restricted through central government “macro control policies,” and economic development zones in China can no longer expand the size of the land available for investment in their locales.

The cost of materials has been steadily increasing at double-digit rates the past five years, as labor-intensive Chinese factories have sucked in greater amounts of metals, plastics, wood and other resources to meet production quotas inside and outside China. The havoc unregulated light manufacturing has wreaked on the environment will take decades to reverse. Air, water and land throughout China is poisoned to an extent that in some regions in China the pollution has entered the human food chain, for instance, in Daqing, Heilongjiang province, where cancer rates near a Chemical Industry Economic Development Zone have skyrocketed in recent years, according to the Economist.

The Chinese government sees the heavy industries as a social release-valve, of sorts. Currently, Chinese universities are annually churning out hundreds of thousands of engineering graduates that are un- and under-employed. Further, with per capita GDP in the nominally poorer interior of China rising, more students are able to go beyond the compulsory nine years education to complete twelve years, gradually increasing the overall education level, sophistication and expectations of the population. The Chinese government realizes it has the added responsibility of creating jobs for the millions that do not go on to university but who are better educated than previous generations. Heavy industry provides an outlet for a labor pool that a diminishing light manufacturing sector cannot.

Finding a base of operation: Shanghai, Beijing, Guangzhou

Shanghai

Shanghai is often considered the flagship of China’s economic development, and there have been dramatic changes in its mix of light-industry and heavy industry. Shanghai’s commercial investment policies through its 11th 5-year plan have de-emphasized its cottage industries such as textile, chemical refinery, paper processing, plastic molding and others to encourage others: electronics and information processing technologies, photoelectric and sophisticated mechanical products, and biology and medical technologies.

Economic Development Zones (EDZs) in the Shanghai municipality have not been renewing the business licenses of light-industry companies that are considered labor-intensive, polluting or not involved with higher-value technologies. EDZs are areas in or near cities and towns in China that offer special tax incentives, subsidies and locations in which foreign companies can build manufacturing operations, among others. For instance, companies invested in the Waigaoqiao Free Trade Zone, report the zone has been actively discouraging investment from traditional manufacturers who, five to 10 years ago, it was courting without restraint.

Meanwhile, new EDZs have been barreling ahead to develop facilities and logistics that capital-intensive industries require. The Lingang Economic Development Zone, just south of Shanghai city, is certainly positioning itself to take advantage of the trend toward hi-tech and heavy manufacturing. The zone lines the coast that supports the Yangshan deep water port. Yangshan is an island some 30 km from the coast, accessible by one of the longest deep water bridges in the world. The port is positioning itself to become one of the busiest in the world by 2015. Lingang EDZ as a locale for heavy manufacturing allows manufacturers that produce huge products that weigh tons – such as engines, avionics parts, marine parts, logistics equipment and the like – to quickly and efficiently move their products offshore for foreign markets. The EDZ, by moving products through its Logistics Park, will then also become a major logistics hub. The EDZ is also positioning itself to become a major R&D and IT hub through its Comprehensive Industrial Zone.

Beijing

The Beijing municipal government has been capitalizing on its heavy concentration of top-notch universities such as Beijing University and Qinghua University to develop its own Silicon Valley, the Zhongguancun High and New Technology Development Zone. Established in 1999, the area supports 39 higher education institutions focusing on scientific and engineering disciplines, the highest density of its kind in China. More than 200 research institutions provide talent to the likes of Motorola, Microsoft and Intel, who have R&D and manufacturing centers in the Park. The Park is an umbrella for ten sub-parks, among them: Haidian Park, Fengtai Park, Changping Park, Desheng Park and Daxing District. Haidian Park is a 100 square kilometer park concentrating on IT. The Fengtai Park is an eight square kilometer zone with a focus on bio-engineering and pharmaceuticals, as well as the development of new materials. Desheng Park, established in 2002, highlights its business incubator policies and workshops where high-tech manufacturing start-ups can move products from conception to production. Daxing District is the base for the China Bioengineering & Pharmaceutical Industrial Park (CBP).

Guangzhou

August 2006 saw the approval of the largest-ever petrochemical deal in China, with Guangzhou as the municipal administrator of the project. The China National Petrochemical Corporation (Sinopec) and Kuwait Petroleum Corporation (KPC) are jointly funding the project, projected to cost as much as US$5 billion. The project will outsize the US$4.3 billion Nanhai Petrochemical Project, a JV of China National Offshore Oil Corporation and Shell Petrochemical. Guangzhou will then become the hub of a major petrochemicals refinery alley that will stretch the length of the seacoast along Guangdong province. Official sources reckon that Guangdong’s overall petrochemical production value will total US$100billion in 2010, with an average annual increase of 20% over the next five years. The refinery belt would be made up of five petrochemical bases: Guangzhou, Daya Bay (Huizhou), the Western Coastline (including the cities Zhanjiang and Maoming), Yamenkou (including the cities Zhuhai and Jiangmen) and the Eastern Coastline (including the north Guangdong cities Shantou, Chaozhou and Jieyang). The overall development plan involves bolstering upstream businesses such as exploration and production, and middle- and downstream businesses including oil refinery and petrochemicals.

Looking west

Domestic, Taiwanese and Hong Kong companies are moving to the interior of China to capitalize on lower labor, utility and land costs. Provinces such as Henan, Jiangxi and Anhui are seeing higher rates of investment than before, as companies seek to escape the pressures success in the Bohai region, the Yangtze River Delta and the Pearl River Delta has wrought. Meanwhile, the first-tier cities Beijing, Shanghai and Guangzhou will continue to develop their leads as service centers and as centers of heavy manufacturing that rival any in the world.

Copyright William R. Dodson, 2008