Drinking cappuccino by the ocean as the breeze cools the hot summer night, one might mistake this transportation hub and manufacturing center for the Riviera or a San Francisco suburb. In Qingdao, the fog rolls in slowly, taxi drivers are just a little bit less scary than elsewhere in China, and the simple wide box towers of Hisense, Aucma and Tsingtao are understated compared to the gaudy sky-scrappers of Shanghai.
The buildings are quiet monuments to Qingdao's brand-building success – and its dominant role in the home appliance industry. The northern city, located in Shandong province, has managed to develop beyond low-cost textile and light-industry factories into one of China's major electronics and home appliance centers. Qingdao-based Haier, now the world's third-largest white goods manufacturer, is currently engaged in a radical bid to buy out US home appliance maker, Maytag. Wang Dongkai, vice chairman of the Qingdao Association of Enterprises with Foreign Investment, compared Qingdao, with its high-tech zones and research institutes, to Silicon Valley.
The Hi-Tech Zone, home to many of Qingdao's electronic plants, appears more Silicon Valley post-bubble and nuclear attack than vibrant techno-center. Vacant lots hold half-finished concrete structures and tractors abandoned in the midst of moving ten-meter mounds of dirt. Patches of roads are inexplicably unpaved.
Jim Zhao, General Manager of German electronics maker Digatron's Qingdao branch, located in this high-tech zone, proudly pointed out the 23 computers-all connected to the Internet-for his plant's 38 employees. But he laughs at the comparison of Qingdao to the Northern California IT belt. Qingdao is still about manufacturing. There is no substantial R&D sector, Zhao said.
Businessmen, bureaucrats, tour guides all mention Qingdao's main economic hurdle: the small (7.3m) second-tier city hasn't successfully marketed itself. "A few foreign friends might know the beer, but not the city," said Zhang Hui, manager of the Qingdao sub-council of China Council for the Promotion of International Trade (CCPIT).
Qingdao must be doing something right. Last October CCTV released a poll showing Qingdao as the Chinese city 'most satisfying to investors.' GDP grew 14.6% last year reaching US$26.12bn, 43% of the GDP of Shandong province, 2% of the GDP of China as a whole. Seventy-six Fortune 500 companies have factories in the greater Qingdao area. Qingdao's municipal government once aimed for an economy the size of Dalian's. Having surpassed its northern neighbor, now Qingdao looks to Suzhou as a model.
Qingdao is home to some of China's most famous brands: Haier, Tsingtao, Hisense, Double Star, Aucma. In the 1980s and 1990s these state-owned enterprises got government support in the form of tax breaks and economic incentives and today have achieved success beyond China's borders.
Big foreign investors also have set up shop. In Qingdao, Lucent, the American telecommunications firm, has built factories sprawling across 30 acres of land. LG, the Korean behemoth, recently opened a chemical processing joint venture, and soon plans to start assembling electronics in Qingdao, Wang said. Small and medium foreign enterprises like Digatron also have come to compete. While Qingdao's chief industries are textiles, home appliances and machinery, the government is actively promoting the auto shipbuilding and chemicals industries.
Production costs in Qingdao (including land, labor and resources) are one eighth those of Korea and Japan, one fifth those of Europe and the US, according to Qingdao CCPIT. The costs are 20% less than the costs of doing business in and around Shanghai and, prodded by rising costs in the Southern China, Taiwanese and Hong Kong investors are moving their capital north.
Apparently the city's manufacturing standards remain high. Joachim Jensen, quality manager of a German textile company, has been extremely satisfied with the goods his factories have produced here. The quality is much higher than that produced by his company's Bulgarian and other Eastern European plants.
Farhad Fouladi, a mechanical engineer at an Iranian home appliance maker, comes to China for appliance molds, and buys parts from Haier and Hisense. He could go cheaper in Iran, but nothing there compares to the quality of the parts and the speed at which they?re produced in Qingdao.
Of course, Qingdao's municipal government also offers up alluring tax breaks and investment friendly policies. The city has 'the largest number of preferential policies in China,' according to the municipal government. There are five key development zones: Economic and Technological Development Zone, Free Trade Zone, High-Tech Industrial Zone, Export Processing Zone, and Shilaoren National Tourism and Holiday Resort-each offering anything from 30% land price discounts to hi-tech importers, to discount loans for R&D centers.
Shandong province has plans to build a nuclear power plant, hoping to provide more reliable power than other provinces. And infrastructure projects to improve logistics are underway. But it's not just good policy that keeps the FDI coming.
Settled on a natural harbor, occupied alternately by the Germans, the Japanese and the Americans, separated from Korea by a quick hour's flight, Qingdao owes much of its economic success to its geography.
Qingdao is one of the top five shipping centers in terms of trade volume in China, operating more than 97 international routes and linking the port to more than 130 countries across the globe. In 2004, Qingdao port had a throughput of 5.14m TEUs. The logistics hub has been essential to getting crates of Tsingtao beer to the US, getting Lucent phones to Southern China and attracting FDI.
Also, Qingdao's history of foreign occupation has bequeathed the city with international connections and an international feel. The Germans occupied the port town from 1898-1914, leaving a legacy of spectacular Bavarian architecture and giving brewing technology to China's Tsingtao Beer, now a world-famous lager house.
Eighty years later, the historic connection proved productive again, when a German firm transferred trademarked refrigerator-manufacturing technology to Haier, then a fledgling company. During World War I, the Japanese occupied Qingdao; then in the eighties, Panasonic passed on television-making technology to the now publicly traded Hisense. Today these hallmark brands are independent of foreign investment and are major players in the China economy.
Qingdao's proximity to Korea and Japan offers a big draw to these Northeast Asian investors. Qingdao international airport offers daily flights to three Korean cities: Seoul, Taegu and Busan – all less than two hours time. Flying direct, it's less than three hours to Tokyo. ROK is the No1 foreign investor in Qingdao by a long shot- of the 5,000 foreign-invested companies in Qingdao, 2,421 are Korean. Japan, having invested in 608 firms, comes in number three, after Hong Kong, according to Qingdao CCPIT.
But, perhaps Qingdao's most unique natural draw is its seaside location and relaxed atmosphere. Ask any resident, Chinese or foreign, why they like doing business in Qingdao, and they'll point to the high quality of life – the temperate weather, the kindness of the people, the small-town feel. And then they'll tell you some story about getting stuck in Shanghai traffic for two hours, or having a wallet stolen in Guangdong.
Iran Haier's Fouladi spends every other month living in Qingdao and working six days a week in factories on the outskirts of major Chinese cities. Enjoying a rare walk along Qingdao's shore, Fouladi said, "As soon as I feel that wind make contact with my skin, it makes me alive."
Leafy green neighborhoods, relatively clean air, and the proximity of Laoshan Mountain are other unique attractions. "This is a great place for people who like drinking beer, eating seafood, and swimming in the ocean," said Wang. Along with enticing investors and managers, these luxuries draw a labor force.
The benefits of seaside culture attract trained graduates who may otherwise join the host of migrants heading to Shanghai and Beijing in search of higher salaries, said Wang of Qingdao Association of Enterprises with Foreign Investment. Wang himself is a Shanghai native, attracted to the northern port by its easy living.
The problem of obscurity
Even with the lures of seafood and sea breezes, Qingdao, as a second-tier city, can't compete with Shanghai, Beijing and Guangzhou in terms of foreign investment and human capital.
"Qingdao is good. But not good enough," said Digatron's Zhao, a mainland Chinese manager who studied and worked in Germany. With higher expectations than their fore bearers, young Shangdong-ren don't want to go to technical school to work in a circuits-manufacturing plant. They want an office job and a Shanghai salary.
For a small enterprise like Digatron's 38-person rectifier plant, competing for human talent against giants like Haier can be a losing game. Further, Zhao is frustrated by intensive labor regulations-national laws he says are more likely to be enforced in Qingdao than in Guangdong-partly because the workforce is more educated in the northern city.
Zhao, a former municipal government worker himself, also believes the Qingdao municipal organizations are not doing a great job attracting investment. There aren't enough experts who have contacts at multinationals and who know how to communicate with Europeans, he said. Of the 200 US companies invested in Qingdao, only 20-30 are the "right kind," according to Zhao.
Officials and managers alike complain that the international community simply does not know about Qingdao. Promoting the tourism industry, already growing at 10% a year, is a major part of CCPIT's plan to build a higher profile.
In July, the Qingdao International exhibition will host the China International Consumer Electronics Show, the China counterpart to the massive American Consumer Electronics Show. And, in a self-promotion coup, Qingdao will host the Beijing 2008 Olympics. sailing regatta, raising international awareness of the small-sized city.
Qingdao residents are confident once the world knows about their city, their success will be guaranteed. For those currently considering investment in China and unfamiliar with Qingdao, CCPIT's Zhang has some advice. "For most people the first stop is Shanghai. I suggest trying more than Shanghai. I am sure you will love this city."