This is China! BLOG

Lights-on in Central China

I recently met with representatives of a business development team of a major lighting and consumer electronics manufacturer. The Board of Directors dispatched the Team to develop a projection of what would be the best Chinese cities for the company to invest in over the next five years. The Team was quite multi-national, with members in Europe as well as in China working on the project. The trend analysis was to reach throughout all of Asia, including India, Vietnam and as far south as Indonesia. The couple of fellows I met with were charged with analyzing Central China.

One of the team members had attended a talk I had presented a couple months before on “Investing in China’s second- and third-tier Cities.” He apparently was inspired enough by the presentation to offer the slides up to his team mates, who had stalled in their analysis of four primary sites in central China: Xi’an, Chengdu, Chongqing and Wuhan.

The company already had a plant in Wuhan, in the city’s Wuhan China Optical Valley. However, what was the viability of the city in five years time? And what of the other three cities, with which they had no experience and in which the company had no investments. Chengdu, in particular, was coming onto the radar for many Western companies as the next hot investment target in China; however, was the rave warranted, or just another March of the Lemmings?

Their colleague had already told them of my advice to Follow the Asian Tigers. Hence, we see the Japanese investing more in Xi’an and the Taiwanese and Wenzhou people more in Chongqing.

We discussed two broad markers among others the team hadn’t considered in its analysis: per capita GDP and government effectiveness. Per capita GDP matters to Western companies to the extent that the richer a Chinese city’s people, in general, the higher is their educational level and more refined their skill-set; hopefully, as well, the affluence will equate to a greater sense of international norms for living and working. Affluence also shapes the attractiveness of a location for domestic talent – whether native to the region or imported from tier-1 or tier-2 cities like Beijing or Shanghai.

Government effectiveness measures – which the World Bank has done a great job of quantifying for many cities across China – is a guage of government transparency and the level of bureacracy with which an investor has to deal. It can also be a pointer of the degree to which the locale is mired in guanxi-based business transactions, which over-complicate business issues and make matters opaque.

In both subjective measures I put Chongqing at the bottom of the Team’s short list: Chongqing is a very closed environment, geographically and politically. The city essentially sits perched on cliff walls that overlook the Yangzi and Jialing rivers. The city is enshrouded in mist and cloud and drizzle much of the year. It is governed very much like a fiefdom, with the Changan Automotive Group holding sway over much of the investment environment. Because the city is relatively remote for Chinese – culturally and geographically – it is the least favorite destination of the four for Chinese professionals. And because very little business occurs in the region without guanxi somehow reaching back to the Changan group, government effectiveness in the group of four is also severely limited. Still, I love the city for its unique culture, food and history. You can read more about Chongqing in my article: Billy the Kid and China IT.

I placed Chengdu on the list as the top destination for professional Chinese: the lifestyle in Chengdu is reputedly relaxed – almost sanguine – and the city is becoming a major destination for industries such as semiconductors, IT and electronics. Meanwhile, Chengdu as a Central China local government, still has a ways to go in internationalizing its government practices so they are more transparent and not as laden with guanxi.

I placed Xi’an in the number two slot for livability and for government effectiveness: the city is driving hard to fulfill its appointed role as one of China’s ten IT- and BPO- centers, and has some of the best science and technology universities in the country. The mayor of Xi’an, Chen Baogen, was formerly mayor of Dalian, now one of the most livable cities in China. And because, Xi’an is focused on attracting foreign investors specifically in the technology-services industry, working with government should become easier for Western companies.

The company’s investment in Wuhan apparently went without a hitch. Wuhan, too, has been marked as a high-tech services hub, like Xi’an. The city – from the company’s experience – will become easier to work with. However, Wuhan has a heavy-industry image and reality it needs to shed as one of China’s hottest (temperature-wise, not just investment-wise) cities in China. The city is not considered attractive by Chinese because of the heavy industry in evidence in the city; and, for the same reason, pollution levels are considered prohibitive.

Of course, there are a myriad other conditions to consider when choosing an investment site in China – Silk Road Advisors has a total of 35 critieria – but it is clear that Central China is moving into the investment spotlight for Asian and Western companies alike.

Bill Dodson
SUZHOU, China