This is China! blog

National Public Radio recently interviewed me on the Chinese government’s interests in promoting a domestic wind industry. The piece, run by the talented Scott Tong out of the Marketplace’s Shanghai bureau, is called, “Wind farms change the air in China.” I admit I got a bit woolly when I said:

“We may see wind turbines off the coast of Saudi Arabia, or off of Vietnam, off the Ivory Coast. Because the Chinese were able to bring the technology down to a cost level that these developing economies could afford.”

Wish I could have taken out the Saudi Arabia bit; after all, they won’t be running out of oil for another fifty years.

Still, I was able to make a couple other good points, which did not make it into the piece; like, the Chinese government is requiring that domestically made wind turbines have 70% domestic content. Now, since domestic makers like the National Railroad Company do not do a good job at making such components, international components makers from Denmark and Germany mostly are making their way in-country.

However, the international players do not seem to realize that very shortly not only will domestic Chinese manufacturers learn how to make the same components, but the Chinese will more quickly customize the sets for Chinese geographies and economies, and will produce competing parts at half or less the cost – and perhaps half or less the lifetime.

Originally published in Chaina Magazine

July/August 2008

by Bill Dodson

It’s a long way to Meishan Free Port right now. The last few kilometers into China’s newest Free Trade Port are spent slowly driving a temporary bridge tiled with thick steel plates followed by winding gravel roads. Visitors driving those last tortuous bends must make way for the constant stream of dump trucks that return from filling ocean with landfill. By 2010, the small island off the coast of Zhejiang , an hour’s drive west of Ningbo city, will rival the Yangshan Port near Shanghai for the volume of containers the Port will support.

Ningbo Meishan Free Trade Port Area is the fifth free trade port area China’s Central Government has approved; other Port Areas being: Yangshan, Tianjin Dongjiang, Dalian Dayaowan and Hainan Yangpu. Currently the island is only about 27 square kilometers, with 7 kilometers of coastline. It’s shores are natural deep-water ways, and a logical supplement to Beilun Port, a network of ports on the northern shore of Zhejiang Province. Beilun has ranked second of all ports in China since the beginning of the millennium, and fourth place in the world, according to Ningbo administrators. Meishan Free Trade Port was only recently approved by the state government on February 24^th, 2008.

Through an extensive landfill project, the local government will enlarge the island to 36 square kilometers.  Interestingly, the island already has a population of 150,000. The primary industries on the island until the construction of the Port facilities began in February this year were fishing and salt processing. Indeed, the foot prints of old salt processing facilities can be found along the rough route to the government offices, on the east coast of the island.

“The advantage of free trade ports is that ships can dock, off-load their cargo and processing can be done right at the Port, then re-loaded on other ships without customs duties paid and VATs tabulated,” according to Jeffrey “Casper” Yu, a senior administrator in the Promotion Bureau for the Free Port. Yu worked for nearly five years in the Ningbo Free Trade Zone, and so has a great deal of experience in developing a bonded zone in China. “Another point is that domestic companies that sell into a Free Trade Port can apply for VAT rebate,” he explained, “while those that sell into Free Trade Zones are not eligible.”

Ultimately, the island will have three bridges spanning the half-kilometer of water that separates it from the mainland. The current make-shift bridge will disappear, Yu said, “The Island will serve several roles:  to serve as a port logistics hub; to support service industries such as customs, port affairs, ship inspections, finance, law firms, audit firms and the like; tourism – including the development of an international cruise ship port in the north of the island; and convention and exhibition of import and export commodities among others.” The Island’s authorities will also entertain commercial and logistics real estate projects.

The island has been slated to be developed into several areas, including: International Transfer; International Distribution; International Purchasing and Export Processing, among others.

By 2010 the first phase of the Port will be put into operation. The first phase will include two 100,000-ton container berths put into operation, as well as completion of Meishan Bridge, the construction of a main thoroughfare Maishan Boulevard, and the Container Truck Highway. The project also plans to have complete by 2010 an additional 9 square kilometers inning project to expand the land area to 36 square kilometers. By 2020 the Port should be complete and in full operation, with an annual throughput of 5-6 million TEU.

Mr. Yu explained, “The Meishan Free Trade Port will not compete with Yangshan Free Trade Port for business. The plan is for Meishan Free Trade Port to cover port requirements for Zhejiang Province, Anhui Provinde, Jiangxi Province and Fujian Province. Meanwhile, Yangshan Free Trade Port will address many of the containers coming down the Yangtze River from river port towns, and north China, including Jiangsu Province, Shandong Province and Henan Province.

Copyright © 2008 William R. Dodson

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