Doing Business in China - Making the most of the free trade agreement

In this section:

› Common entry points

Most companies entering China have targeted the three river deltas as the best way to get to the majority of the Chinese market. The deltas are the:

• Pearl River Delta (Hong Kong, Shenzhen, Guangzhou and inland)
• Yangtze River Delta (from Shanghai to Nanjing and further down the Yangtze River)
• Bohai Bay corridor in northeastern China (includes the cities of Beijing, Tianjin, Dalian, Jinan and Qingdao and their provinces).

The deltas account for:

• about 3 percent of China's land mass
• 20 percent of its population
• half the national gross domestic product (GDP)
• more than two-thirds of exports
• more than two-thirds of foreign direct investment.

Opportunities abound in the deltas, but competition with other world economies to have a slice of the China market is also at its toughest here. As these regions become more developed and affluent inflation will set in and prices escalate.

The latest strategy adopted by global companies towards China is the '15 gateway cities' vision. The aim is to expand beyond the three river deltas and select from among the 15 major provincial cities (also commonly known as 'second tier cities') that will experience phenomenal growth as infrastructure is extended into the northeast and west of China.

Factors to consider when deciding where to locate:

• proximity to market
• proximity to suppliers
• quality of logistics
• costs - for example land, labour, utilities
• reliability of local infrastructure, particularly the power supply
• availability of a good agent or distributor
• fast growth and high costs versus low costs and low competition
• entering through a gateway like Hong Kong
• availability and longevity of tax or other incentives
• coat-tailing on someone else's existing marketing and distribution network
• leveraging off an existing New Zealand relationship in a region, like a sister-city or existing New Zealand business
• the level of local authority support for foreign businesses
• where your competition is located
• using a foreign trading zone, trade development zone or special economic zone
• why another New Zealand company chose a particular entry point.

Common entry points

• Shanghai
  Shanghai (population over 20 million) is China's business hub and the gateway to east China.
  
  Shanghai is economically advanced and the outside world is getting attuned to its rising status as a strategic economic centre in the Asia Pacific region.
  
  It is very difficult to get good quality industrial space in Shanghai, either because the industrial parks are full or because prices are too high. As well as steep land prices, utility, living and labour costs have also risen.
  
  The Shanghai government is seeking more higher-end manufacturing and large investment projects and recommending that smaller investments be made in the satellite cities around Shanghai.
  
  Shanghai's GDP for 2008 totalled 1.369 trillion yuan, hit a 16-year low at 9.7 percent year-on-year. But it’s worth to note that the growth rate of 14.3 percent in 2007 was a record high for 2 decades. In 2008, added value created by Shanghai's primary industry hit 11.18 billion yuan, up 0.7 percent year on year. Secondary industry's added value rose by 8.2 percent year-on-year to 623 billion yuan. And tertiary industry's added value saw a year-on-year growth of 11.3 percent at 735 billion yuan. The foreign trade volume in Shanghai in 2008 amounted to 322 billion US dollars, up 13.8 percent year-on-year but down from 24.4 percent in 2007 (Xinhua News Agency correspondents).
  
  The Shanghai area accounts for 20 percent of China's imports and is the top city in China in terms of demand for New Zealand products.
  
  Shanghai will host the World Expo in 2010 and plans to invest billions of dollars in new urban infrastructure to prepare for this event. The New Zealand government has agreed to take part in the expo and will have a 2,000 square metre site.
• Shenzhen and Guangzhou
  Shenzhen and Guangzhou are cities of high economic development and well-established infrastructure located in the Pearl River Delta.
  
  The Pearl River Delta Economic Zone generates about 80 percent of Guandong province's GDP. The zone covers 14 cities - including Guangzhou and Shenzhen. The province has the advantage of a Closer Economic Partnership with Hong Kong, allowing goods to come into China more easily from Hong Kong. The region has a good logistics system.
  
  Shenzhen has the highest GDP per capita and is the information and communications technology (ICT) and manufacturing hub of China, exporting machinery, sports equipment and toys, apparel and furniture.
  
  The city's Special Economic Zone is the business and financial heart of the city and the reason why most visitors come to Shenzhen.
  
  For more information on Shenzhen see Choosing a Location Shenzhen - ICT and Choosing a Location - 2nd tier cities.
• Beijing and the Binhai business zone
  Beijing is home to the Chinese Communist Party, central government, the country's finest universities and research institutes, and is the leader in research and development. The capital city also offers 'Zhong guan cun' - the Chinese Silicon Valley.
  
  The city is also home to the China head offices of many major international companies and a large, wealthy expatriate community.
  
  Of the first tier cities, Beijing (population 15 million) has the most room for future expansion. Unlike Shanghai and Guangzhou, Beijing is not at the centre of a wider economic development region, meaning its commercial infrastructure and industrial sector are relatively less developed.
  
  However, this is likely to change with the further development of the nearby Binhai New Area business zone. China plans to turn the Binhai New Area, located 120 kilometres southeast of Beijing, into the country's third economic engine. Tianjin city (population 10.4 million) is the largest city in the Binhai area. Tianjin's per capita GDP is US$4,947. It has the largest port in North China and its international airport is the largest cargo freight centre in China.
  
  Beijing and Tianjin are the leading cities in the Bohai Rim Region strategy. This initiative is an effort to attract the sort of development to the central and coastal areas of northern China that has been so successful in the Pearl River Delta region. The Rim also includes the cities of Dalian in Liaoning province, and Jinan and Qingdao in Shandong province. Shanxi province and Inner Mongolia are also seeking to be included.
• Hong Kong
  Hong Kong's free trade agreement with China means there are no tariffs on all Hong Kong-origin goods along with preferential treatment in 27 service sectors. It is part of a Pearl River Delta trade block with nine Chinese provinces that aims to lower trade barriers among members.
  
  Although Hong Kong now competes with mainland cities, especially Shanghai, as a gateway to China, its modern business culture and an open and dynamic economy make Hong Kong (population 7 million) a relatively easy entry point into the Pearl River Delta region and Guangdong province.
  
  Hong Kong is still regarded as the world's freest economy and companies choosing it as a regional HQ commonly cite several advantages of Hong Kong as an entry point, including:
  
  
  • clean and efficient government
  • transparent legal system
  • simple and low tax regime
  • unfettered capital, information and talent flows
  • sophisticated banking and financial services
  • large pool of professionals
  • open and competitive markets
  • developed logistics infrastructure linkages to mainland China
  • English speakers are also common.
  The disadvantages include higher operational costs, particularly in shipping.
  
  A high standard of living (per capital GDP of US$27,527 in 2006) also makes Hong Kong an attractive market in its own right.
• China's second and third-tier cities
  The so-called second tier cities are promoting themselves by focusing on developing modern industrial zones, new infrastructure projects, the best telecommunications networks, and providing enough energy to prevent shortages. Infrastructure developments to ease transport to and from the coast to these cities are also under construction.
  
  Labour costs are 20 to 30 percent lower than what local employees are asking in the coastal cities. Salaries are also increasing at a slower rate than in the already established industrial cities.
  
  However, in the second and third tier cities it can be extremely difficult to find qualified and experienced employees who speak fluent and comprehensive English. In general the quality of education in these cities is lower than the first tier cities. They also have limited access to foreign schools. They are not ideal destinations for foreign or even local managers coming from the first tier cities.
  
  Skellerup Industries has a factory in Baochang village on the north bank of the Yangtze River, east of Haimen and Nantong cities. From Shanghai it takes 90 minutes to reach the river crossing. The boat ride across the river takes a further 30 minutes and from there it is around one hour's drive to the village. Keith Curry, Skellerup's China Chief Executive whose home and family are in Shanghai, says this location makes life tough for expats working there.
  
  “If I'm there [Baochang] by myself, and I am quite a bit, I'm in a scene where no-one speaks English. So once I walk away from work, I walk away from English speakers.”
  
  The central government is doing its best to eradicate disadvantages for expats to bring stability and further development to these regions. One such incentive is that the government provides and 'pushes' business licenses onto key industries of foreign enterprises.
  
  Intensifying competition in retailing is also forcing retailers to expand to China's second-tier cities, which offer more than twice the number of consumers (albeit with a lower per-capital disposable income).
  
  The advantages of second and third-tier cities include:
  
  
  • rising demand as manufacturers shift operations to smaller cities to cut costs
  • lower accommodation and wage costs
  • less competition
  • a growing middle class fuelling demand for consumer goods.
  Second-tier cities cover other key regions, including cities such as Shenyang, Dalian, Tianjin and Harbin in the industrial north east. The metropolises of Chongqing, Chengdu and Wuhan cover the more developed areas of western China. And Nanjing, Suzhou, Hangzhou and Ningbo cover the eastern coastal areas.
  
  The third tier cities are numerous and catching up rapidly. Many are key cities in the far west, the south west and central China. They serve areas that are economically undeveloped and less well provided for in terms of infrastructure.
• Trade development zones and special economic zones
  Special Economic Zones, and the hundreds of development zones, have in the past offered foreign investors incentives that include reduced income taxes, land use fees and import/export duties. They also offer favoured treatment in areas such as getting infrastructure and utility services and government approvals.
  
  Don Johnson, Marketing Manger Lumber, Pan Pac Forest Products, which has a warehouse and distribution centre in the Tianjin Free Trade Zone, says you need to be aware of your business scope in the future because once it is established it can be limiting as well as empowering.
  
  “For us, it was about planning for the future and also planning contingencies. And this zone in particular gave us the flexibility to do what we wanted, whereas other zones didn't.”
  
  The direct financial incentives to foreign companies are being phased out by the central government to level the playing field between local and foreign businesses.