China's economy is long past being based on cheap manufacturing. It is home to a significant consumer class. The urban affluent, just 1% of the population but accounting for 10% of the disposable income, are the tip of the iceberg.
The challenge is access.
"The market is very limited if you want to go beyond the seaboard… there is no infrastructure," said Charles Merkle, president of CBC Consultants.
Beijing is keen to push business westwards to redress the wealth imbalance, but incentives – tax breaks, lower labor costs – for establishing business in far-flung provinces are countered by high logistics costs and long distances.
Foreign direct investment in western China didn't pass US$2 billion a year between 2000 and 2005, less than half the investment that went to Shanghai. Trade was US$164 billion over the same period, 5% of the nation's total.
If the west is to become the new frontier for growth, business and government need to lay the groundwork.
"The key, in my view, is for China to push west its investment in the logistics of supply-chain management," said Stephen Roach, global chief economist at investment bank Morgan Stanley. "It's not enough to provide locational tax subsidies without guaranteeing smooth and efficient flow of the supply chain."
This is already happening. At the end of 2005, the Ministry of Communications announced multi-billion-dollar investments in ports, inland waterways, shipping channels and highways.
More than US$200 billion has been spent on taking expressway coverage to over 120,000 km; a US$250 billion injection will add 25,000 km of railway over 15 years; inland waterways will get US$1.1 billion per year; and 100 new airports are planned by 2015.
According Jones Lang LaSalle, logistics firms are tracking this spending.
Currently, 85% of China's logistics facilities are in the main regional clusters of the Yangtze River Delta (YRD), Pearl River Delta (PRD) and Great Bohai Bay, largely set up to meet export needs. Chengdu makes up another 5%.
Trent Iliffe, head of Jones Lang LaSalle's industrial business in China, said the three clusters would continue to be the focus of investment but the emphasis is shifting away from the YRD to regional networks around the PRD, notably in Guangzhou and Shenzhen.
There is also more investment outside of the main hubs, including 10 emerging inland distribution hotspots.
"Logistics has really been driven by the export market but we are now seeing there is a shift from export to import as well as a focus on the local domestic market," Iliffe said.
Of the emerging focal points, Chengdu is perhaps best known for attracting Intel and Ford.
"Attracting a major brand manufacturer like that also attracts the peripheral service and component suppliers and sub industries," said Mark Millar, honorary chairman of the China Supply Chain Council. "That then puts an increasing need on getting the infrastructure in place."
Retailers are following the government's Five-Year Plan, trying to get the jump on areas in line for investment. Some use satellite imagery to look at changing infrastructure.
"The companies which are going to be successful are the ones that think smart about how they restructure their supply chains in China," said Jaime Bolton, Greater China and North Asia supply chain management lead for Accenture, a consultancy.
David Oldridge, an associate at consultancy JHK Hong Kong predicts that in 10 years China will have an integrated rail and road transportation system, like the American hub-and-spoke-based system. The greatest opportunity for Western companies, he suggests, is to be the first to offer railroad integrated logistics, connected with the ocean and airports. It's a big task with a huge potential payoff.
"The economy will continue to go inland and west," said Oldridge. "China is like a dry sponge dipped into an inkwell at one end. Economic development seeps inwards and upwards, and it's just going to continue."
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