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Choosing the right location in mainland China

Background

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%) 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 the “Regional city clusters” section.

 

Economic overview
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 US $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 US $5.8 trillion in 2010, overtaking Japan to become the second-largest economy behind the USA.

China’s economy continues to grow around 7.5% 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% 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. Thirty-three of the 35 mainland China cities covered in this guide saw their population rise from 195 to 205 million between 2005 and 2009 and their combined GDP grew by US $828 billion, or 16.5% per annum, within the same period.

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 set out clear environmental objectives. Although the content of this Plan has been developing 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.

Following the regional city descriptions later in this guide, sector-specific opportunities for UK businesses have been included reflecting the needs highlighted in China's current Five Year Plan. Bear in mind that the next (13th) Five Year Plan will run from next year (2016), and although it has not yet been announced, it’s very likely that environmental issues will be high on the agenda.

The focus of China’s current Five Year Plan  requires 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 – see the “China’s Middle-Income Consumers” section later in this guide. China 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 Hong Kong and international transportation hubs. However, the situation is evolving quickly. 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 into the Chinese hinterland.

In addition to the four major cities of Beijing, Shanghai, Guangzhou and Shenzhen there are arguably a further 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.

As costs in more developed areas continue to rise and markets become more saturated, businesses are increasingly moving inland. The research company Mintel suggests that with the recent growth of e-commerce, it’s now very common for consumers in 2nd and 3rd-tier cities to purchase on-line and have their goods delivered the same day. If British companies can resolve the challenge of localised logistics then this can 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.

The location opportunities for those companies looking to manufacture only, are more likely to be 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, 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. The CBBC can help you to identify where the best opportunities can be found among China’s regional cities, while taking activity type and industrial sector into account. See also, the “China’s Middle-Income Consumers” and “Marketing” sections of this guide for more information on demographics, customer segmentation and developing a regionalised marketing strategy.

 

Regional City Clusters

“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 黑“hei”) and Jilin Province (abbreviated to the single character 吉“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

City Clusters

 

City Cluster Key

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.

Though it is often said that China is a land of regions differentiated by local languages, foods and customs, this is an oversimplification of the country and does not 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. See also the “Marketing” section in this guide.

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Source – UKTI


 

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