China might be enveloped into one border, but the differences in development and culture from region to region is enormous. Albeit the central and western parts of China has seen tremendous development efforts the last 10-15 years or so, they are still a far cry from China’s Eastern seaboard in terms of everything from local government support, to infrastructure, salaries and standards of living. Every province has ups and downs; and more crucially, every region challenges Western business owners with some kind of trade off in terms of cost vs supply chain. So the big question for any international business owner looking to invest in China is – where to start? Scandic Sourcing has put together an analysis.
Setting up in Eastern China – pros and cons
The bulk of Chinese manufacturing is taking place in China’s Eastern provinces such as Guangdong, Beijing and Shanghai. These regions subsequently has the highest salary- and operation costs and the lowest provincial GDP-growth – as much of the Foreign Direct Investment (FDI) is now streaming westwards with provinces such as Chongqing now receiving almost as much FDI as Shanghai. But China’s Eastern seaboard do offer other benefits such as greater access to a full supply chain, logistics and labor.
The biggest benefit with moving West is the much reduced land and labor cost, which has skyrocketed in Eastern China the past years, especially in cities such as Beijing, Shanghai and Hangzhou. Just the cost of industrial land has seen an average increase with 11 USD to 21 USD per square foot in Eastern China and the minimum wages has risen with over 70% the last couple of years. Some western companies interviewed in a 2012 study by the British Chamber of Commerce claimed that the salary costs in Shanghai for an experienced engineer was almost the same as in the UK, whereas had they located in Xi’an in the Shaanxi province, the cost had been much lower.
The growth of Central and Western China
Western China and Central China has been targeted by two concurrent government campaigns such as the ”Go West” initiative in 1999 which targeted 12 Western provinces with over 8.5 trillion yuan over a decade, during which imports and exports in these provinces grew nine fold. Another campaign, the Rise of Central China campaign in 2004 saw a similar influx of government funds to bolster Central China’s regional development. The FDI to central China has risen dramatically with the growing development; for instance in Chengdu, the capital of the central Sichuan-province, 238 of the global fortune 500 companies has set up shop and the city now receives more foreign investments than Beijing. The future holds great promise for the Central and Western regions of China with cities such as Kunming, Chongqing and Chengdu destined to become future metropolises in par with Beijing and Shanghai.
Moving to Central China – pros and cons
The reasons to move to Western and Central China are, as mentioned, its much reduced labor and land costs. While the minimum wage can rise to 1600 yuan/month in regions such as Shanghai and Guangdong, it can dip well below 1000 in Western and Central China, and factory rental space can be one fourth of eastern counterparts. A study cited by China-Briefing from 2012 found that factory rental space fluctuated from 41 usd/square meter in the Eastern province of Tianjin, to 10 usd/square meter in Qingdao, which of course is significant.
One of the problems with these reductions in operating costs is that when they are balanced against the rising cost of transportation from the inland to China’s ports (a cost almost equivalent or more expensive than bringing the goods from China to its Western destination), the de facto cost savings for companies is not as big as one might expect.
Companies such as Kolkraft considered moving their operations to Hubei in central China and calculated that the total savings would only amount to 5-10% - which wasn’t enough to justify relocation considering the added difficulties in Central/Western China. Another company cited in a recent Economist article, Topline, found that moving inland would induce huge extra costs and take more time as shipping their products through China to the coast would take an extra week. Consequently, their supply chain remains on the coast.
Other problems with inland China is that the local government isn’t as professional as they might be in the East, as they are not as used to dealing with foreigners, and more often than not adopt a supervisor role rather than a service providing role (although this might be true to some degree in almost entire China). Firms setting up in Chengdu, Wuhan and Chongqing describe the efforts as almost completely unassisted by the local government, whereas they previously enjoyed thorough support in the regional city governments in coastal provinces.
China’s leading cities such as Shanghai and Beijing are surrounded by a cluster of smaller cities where conditions might be more ripe for investment for foreign business looking to reduce costs while not sacrificing access to supply chain and infrastructure. Sub-cities such as Kunshan, Suzhou and Hangzhou, west of Shanghai enjoys the benefits of the latters infrastructure and high speed rail network, while having lower operating costs (such as electricity, land and labor costs) as well as a more enthusiastic local government support. One company cited in a Brittish Chamber of Commerce report from 2012 said that the local government in Shanghai wasn’t interested in talking to them lest they invest a minimum of 100 million USD; but after inquiring into relocating to the neighboring city of Suzhou, half an hour west by the high speed train network, they found that the local government was much more willing to offer valuable support in form of tax breaks, reduced rent, accelerated investment approval and other preferential treatment without such requests.
Research the local conditions of various regions to find the one most suitable for your specific business. The most succesful businesses operating in China are the ones who adapts their business model to suit local conditions. Having adequate knowledge about local conditions, such as the legal environment, local customs, and potential business partners and suppliers in the area is crucial. One good place to start is to ask yourself where your competitors are located. Where are they and why are they there? Manufacturing in Central China can be a good choice if domestic customers are the focus. Similarly, if export is the main focus of your business, the coastal areas should rather be considered.