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China’s Other Boomtowns: An Emerging Second-Tier MarketWhen people talk about the China market, it is usually names like Beijing, Shanghai, Guangzhou or Shenzhen that leap to mind. No doubt, these cities have represented the centers of the steady, rapid growth that the world has witnessed in China, especially during the ’80s and the ’90s. However, driven by socio-economic shifts, their success has also given rise to an emerging second-tier market where an even greater scale of vibrant growth will continue. This second-tier market consists of major cities found in regions and provinces surrounding the first-tier growth centers named above. They include:
CHINA OPENS ITS DOORS Before the 1980s, China, while under Mao Zedong’s leadership, took pride in its self-sufficiency. After Deng Xiaoping came to power at the end of the 1970s, a bold reform and opening policy was implemented, setting the course for a market economy and opening China’s door to foreign investment and trade. Overseas investors—at first small and medium-size manufacturers from Hong Kong and Taiwan, followed by Japanese, European and American multinationals—came to the scene. As a result, buffer zones—the so-called jingji tequ (Special Economic Zones, or SEZs)—were established to help deal with a completely different economic system from outside the country. A MANUFACTURING POWERHOUSE Shenzhen in the province of Guangdong, a city across the border from Hong Kong, was the first of such SEZs and has remained the most prominent even to date because of its proximity to Hong Kong. Its importance is such that its mayor, unlike other city mayors, ranks as high as a provincial governor in the Chinese bureaucracy. Tens of billions of dollars, mostly from SME manufacturers in Hong Kong, have since poured into this former rural village and flowed into its surrounding cities and towns throughout the province—the region where most of the Hong Kong population is from and where common dialects, Cantonese being the main one, are shared—creating a manufacturing powerhouse region known as the Pearl River Delta. The industries there mirror those traditional strongholds of Hong Kong during the 1960s and 1970s: toys, apparel, gifts, watches and jewelry, and consumer electronics. Those labor-intensive industries demanded vast manpower, and millions of young peasants in their late teens or early twenties from poorer inland provinces, especially those nearby ones with high population densities such as Hunan and Sichuan, have since been drawn to Guangdong by the prospect of earning a salary 10 times what they could get at home. To solve the hukou (residence quota) and its related food rationing problems, employers started providing dormitory-style room and board to these migrant workers. This method has worked so well that it has become a standard practice throughout the southern coastal regions where large numbers of migrant workers live and work. It has not only enabled employers to better control their workers and maximize efficiency and productivity, the economy of scale has also helped them trim costs otherwise needed to make their salary competitive were the workers to find room and board individually on their own. Moreover, it has also allowed the workers to send home more savings. All the money that the migrant workers have sent back has injected much needed capital into local economies. What’s more, many of them, although not the majority, were able to save enough and go home to start their own businesses. Apparently the cumulative economic stimulation from these entrepreneurial and investment activities was not insignificant. Tens of millions of migrant workers in the Pearl River Delta region have come from Sichuan and Hunan—two of China’s most populous provinces. Coupled with a fast-growing market economy—while both provinces are major agricultural producers, they are also key industrial players, with Hunan boasting rich mineral resources and Sichuan supplying iron, copper and coal—it is no surprise that major cities like Changsha, the capital of Hunan, and Chongqing, the largest city in Sichuan, all have seen rapid development since the late 1990s. THE TAIWAN INFLUENCE Since there is no direct transport link between the Communist-ruled mainland and Taiwan and since Hong Kong is the most convenient third-party transit point, the Taiwanese investors, mostly SMEs, also entered the mainland market through Shenzhen. Later, many Taiwanese investors went farther up along the coast to Fujian Province, which is separated from Taiwan only by a sea strait of the same name—it would have been the most convenient place to reach had the mainland and Taiwan established transport links. Again, just as Guangdong is where most of the Hong Kong population finds their ancestry, Fujian represents Taiwan’s cultural roots and thus shares the same dialects with most of the Taiwanese population. Taiwan-backed businesses have flourished there, creating another hot growth center around a Shenzhen-like boomtown called Xiamen. Again, as in the case of the Pearl River Delta and Hong Kong, the manufacturing industries in this region have more or less mimicked those representative of Taiwan during the 1970s and early 1980s, such as plastic and rubber-based consumer products. During the 1990s, while the Hong Kong and Taiwanese SMEs were continuing to invest in what was now a much expanded coastal area in the south and were busy reaping huge returns through drastically depressed labor, property and material costs, large multinationals from Japan, Europe and the U.S. were eager to tap into the metropolises further north, namely, the Greater Shanghai and the Great Beijing areas. The Japanese (followed by the South Koreans) have a particular interest in northeastern China, especially the coastal cities like Dalian and Shenyang, not only because of the geographical proximity, but also because of the historic ties they have had with the area, dating back to pre-World War II days when the entire northeast of China (known as Manchuria back then) was under Japanese occupation. HONG KONG HANDOVER After the transfer of Hong Kong from British to Chinese rule, a large number of multinationals relocated their Asian Pacific headquarters from Hong Kong to Shanghai. Shanghai was already Asia’s financial center before the Communists took power in 1949. Although the Communist rule stripped away its financial role, Shanghai continued to develop as China’s most prominent industrial center and seaport throughout Mao’s reign. Championed by the new government under Deng’s leadership, the effort to return the city to its former financial prominence had already begun by the mid-’90s, even ahead of the handover of Hong Kong. The influx of foreign multinationals as well as their capital following the handover helped speed up this process. As a result, Pudong, a new district in Shanghai built from scratch in the late 1990s to help re-erect a world-class financial center, has experienced incredible advances in both its appearance and its property valuation. In fact, Shanghai’s recent winning bid to host the 2010 World’s Fair helped set off another “gold rush” in its real estate market. MANUFACTURING HUB With Shanghai and its surrounding areas attracting massive foreign direct investment during the late 1990s, a new manufacturing hub—characterized by heavier, larger-scale industries backed by multinationals from around the world—was gradually established in the region, forming what is now known as the Yangtze River Delta. Over time the economic ripple effect has benefited many neighboring cities, such as Suzhou, Ningbo, Hangzhou (capital of Zhejiang Province) and Nanjing (capital of Jiangsu Province). 2008 OLYMPIC GAMES After Shanghai, Beijing is China’s next most important metropolis. As the nation’s capital, Beijing has always enjoyed its lion’s share of the national wealth, and it has always been well supplied and well nourished through thick and thin. Beijing has always had a developed look and feel from the outset, even before Deng’s reforms took place. Its latest modernization has been mostly marked by massive infrastructure upgrades, particularly the “Ring Road” highway system around the city. Its hosting of the 1998 Asian Games brought about the first round of such upgrades, followed by the bidding to host the 2008 Olympic Games and now the actual build-up for the Olympics. CENTRAL GOVERNMENT One of the most prominent aspects of Beijing is that it houses a huge central government bureaucracy. To understand its structure, one must realize that the Communist Party of China (CPC) represents both the source and the core of all political power in this country, since a CPC membership is a prerequisite for all government positions, with the exception of the People’s Political Consultative Conference (PPCC). However, leaders of every central government branch (including PPCC) come directly from the Communist Party’s governing body—the Central Committee of the CPC (CCCPC). At the center of CCCPC is its Political Bureau (Politburo), which is governed by a Standing Committee (currently with nine members). A DIRECT SHIPPING LINK With a long industrial history stemming from both foreign occupation during the early part of the 20th century and Russian aid during the 1950s, a number of major cities in provinces surrounding Beijing have very strong industrial bases. Qingdao in Shandong Province, for example, boasts one of China’s largest seaports. In fact, it now enjoys a direct shipping link to and from Boston provided by the China Ocean Shipping Co. (COSCO) and its partners. The weekly sailings from each port to the other have cut the transit time by a week or more since the direct link was established in March 2002 (Qingdao to Boston) and March 2003 (Boston to Qingdao). The province itself is rich in petroleum, natural gas, coal, gold, iron, diamonds and bauxite. Similarly, Shenyang, capital of Liaoning Province and China’s fifth largest city, is a transportation (rail and highway) and commerce hub in the northeast supported by satellite cities with abundant natural resources: Anshan (“Steel City”), Fushun (“Coal City”), Benxi (“Iron City”), and Fuxin (“Electricity City”). INDUSTRY CLUSTERS Wool and Cashmere: Further west, Baotou in Inner Mongolia claims more than 70 percent of the world’s entire rare earth deposit and some of the world’s finest wool and cashmere. It also boasts such natural resources as iron, the nation’s second largest coal deposit and one-sixth of the country’s timber reserve. Electronics: South of Baotou, Xi’an, capital of Shaanxi Province and a central city in China’s latest “Go West” development plan, has a mature semiconductor and electronics industry from its aerospace/defense industry origin. Tourism: Further southwest, the capital city of Yunnan Province, Kunming, a trading hub with Indochina countries and an ethnic tourism destination, together with neighboring provincial capital cities Guiyang (Guizhou Province) and Nanning (Guangxi Province), form another cluster of emerging markets in the West. VIRGIN TERRITORY With China’s WTO entry at the end of 2001, designating a whole city as a Special Economic Zone (SEZ) with wholesale preferential policies has fast become a thing of the past. Instead, smaller, more focused, industrial park-like economic and technology development zones (ETDZs) or areas have mushroomed in all major cities throughout the country. Among them, the most prominent ones are those that have been approved by the central government and received national development zone status. Like their larger predecessors, the ETDZs offer resident businesses many incentives such as tax breaks and better infrastructure. The early growth centers during the 1980s and 1990s have been largely saturated by Hong Kong and Taiwan manufacturers (most in southern coastal provinces) and Global 1000 multinationals (most in mega cities up north). The second-tier market described here represents not only a vast virgin territory for everyone, but also potential niche opportunities for American SMEs who nowadays feel the increasing need to enter the China market. They are either being pressured by their customers who want their supply chain to follow them into China, or being drawn to the country by its great market or cost-saving potential. Or they simply may be pushed away by meager domestic market conditions. SELL TO CHINA China has become a formidable manufacturing competitor to many U.S. SMEs, and many of them have since transformed their business model from a manufacturing one to primarily a sourcing one. To others who can’t easily do that, the key is to sell the Chinese what they don’t have but need, such as technology and know-how, or raw materials that they don’t possess. For the former, the trick is try to combine know-how or technology with something tangible. A good example is high-end medical equipment. As for the latter, China is a large buyer of nickel in the international market. With many of the severe financial problems that China is facing—notably its gigantic bank bad-debt and huge savings as its thrifty population saves even more in anticipation of rising unemployment—the country has to rely on three main lifelines to stay afloat: namely,foreign direct investment, exports and public spending on infrastructure development. While an appreciated currency against the dollar would make returns in local currency (RMB Yuan) from exiting investments more attractive after converting them back into dollars, it would discourage new investments from coming in because a lower exchange rate (from the current RMB 8.2 = US$1) would result in a smaller investment in the local currency. In addition, an appreciated RMB would no doubt hurt China’s exports. What’s more, higher interest rates associated with a more valuable RMB would render all capital-intensive infrastructure projects more costly to build. The government has already been having a hard time stimulating consumer spending. Higher interest rates would certainly make the situation worse. Given these circumstances, it is unlikely China will want to appreciate its currency in the short run. Apparently, that is what it told the United States. With its promise to do so in the near future, though, China may be looking for a window of opportunity that could bring about maximum benefits, such as when the country needs to be on a shopping spree for products and services ramping to its 2008 Olympics. China’s Leading Emerging Areas ZonesCHANGSHA NATIONAL ECONOMIC AND TECHNICAL DEVELOPMENT ZONELocated in the eastern suburb of Changsha, the capital city of Hunan Province (a neighboring province of Guangdong to its north), CNETDZ was first established in 1992 and later approved and designated by China’s State Council in 2000 as a national-class economic and technology development zone. Infrastructure: Occupying a total planned area of 60 square kilometers (23.4 square miles), CNETDZ is strategically situated at the juncture of several national/regional highways, with Changsha’s main transport terminals—the Huanghua International Airport, Changsha Train Station, Xiangjiang River Port, as well as the site for a planned freight train terminal— all within an eight kilometer (five mile) radius. The development zone is also supported by excellent infrastructure: a water plant of 160,000 tons-per-day capacity, a sewage plant capable of processing 10,000 tons of waste water daily, a 200,000-line capacity telephone network, high-speed broadband on fiber optic, a 2.4 million kilowatt power supply capacity with more to be added, and a natural gas and liquefied propane pipeline network. Facilities: To make the zone more business- friendly and a better place to live and work, CNETDZ also provides residential quarters for constituent companies in the zone to house their employees. What’s more, it features three higher education institutions, two secondary and five primary schools, and a variety of other quality-of-life-enhancing facilities, such as hospitals, hotels and recreational facilities like a golf course and tennis courts. In addition to these physical amenities, CNETDZ also provides a range of value-added services including a start-up incubation center, a logistics hub and a consultancy to help bridge its member companies to the outside marketplace. Industry mix: Currently, the industries that the constituent companies in the zone represent include 1) manufacturing: construction machinery, automotive, transport, electrical and environmental equipment, and meters; 2) electronics and IT: monitors and displays (e.g., an LG Philips joint venture), digital audio/visual products, and telecommunications network products; 3) printing and packaging; 4) consumer electronics: PDAs, automotive/power/medical/ communications electronic devices; 5) food and beverages (e.g., a Coca-Cola joint venture); 6) new materials: environmental batteries and power storage materials, new construction materials, and bio materials; 7) bio-engineering; and others. Preferential policies: To further encourage businesses to set up operations in the zone, CNETDZ also offers tax breaks and other incentives as part of the preferential policies granted to national-class economic and technology development zones by the central government. For example, foreign-invested manufacturing operations will be exempt from all local taxes for 10 years, with zero income tax for the first two years and half for the following three years. Contacts: Changsha National Economic and Technical Development Zone Management Committee, Xingsha Town, Changsha Eastern Suburb, Hunan, Postal Code 410100, P.R. China. Tel: (86-731) 401-8336 and 401-1101, Fax: (86-731) 441-6898, 401-1108 and 401-6143. Web site: www.ncetdz.gov.cn. E-mail: buchun@csx.gov.cn. Contact Person: Shuxun (William) Wen, executive director. QINGDAO INTERNATIONAL SME INDUSTRIAL PARK A fast-growing local economy, coupled with continuously improving port facilities and strong marine research, has enabled Qingdao (formally “Tsingtao”), a coastal city in Shandong Province, to attract increasing foreign investment, including some 100 of the Global 500 companies, such as Coca-Cola, Lucent, Degussa, Nestle, Mitsubishi, Pirelli, America AB Company, LG, Carrefour and Maersk, who have not only commenced production or operation here, but who also have realized huge returns. Under the leadership of Qingdao Municipal Economic Commission, a prominent government organization promoting foreign cooperation, business and trade, Qingdao International Cooperation Association of Small & Medium-sized Enterprises is one of the largest and the most effective organizations in Qingdao. It serves more than 30,000 constituent enterprises in the area, helping them build partnerships with others at home and abroad. In 2002 alone, it organized more than 20 matchmaking trade missions to many countries in the world, including the United States, Europe, Japan, South Korea, Russia and Brazil. It has also received more than 10 delegations from the United States, France, Holland, Germany, Japan, South Korea, Taiwan and Hong Kong, achieving great results in cross-border business cooperation. To help further advance the development and globalization of Qingdao industries, and to make Qingdao more investment-friendly, the Association founded Qingdao Industrial Park for | |||||||||||||||||||||||||||||||||||||||||||
