Building ahead of demand

Walk into the bright and shiny Shanghai International Financial Center (IFC) in the city’s Lujiazui district on the Pudong side of the Huangpu River, ride the elevator up to the fifth floor, and you’ll step into the Harvard Center Shanghai, opened in March 2010.

You won’t feel cramped. Harvard has taken the entire floor – 2,400 square meters. The facility features an array of offices, meeting and seminar rooms, and a multi-function area on the northwest side of the floor that must be 1,000 square meters by itself. The facility is so vast, and currently so empty, that you feel as if you should be able to hear the echo of your voice when you speak. The ten current staff might need floor plans in their hands just to navigate around the place.

Harvard did more than just take a big space – the two seminar rooms are designed to be precise analogs of those on the home campus in Cambridge, down to the furniture and the material used in the high-tech blackboards (yes, blackboards – Harvard faculty prefer chalk, albeit the 21st century version). The entire floor screams gravitas.

Here and there in China, one still sees real estate developments that are built ahead of demand – complexes that are erected not to meet immediate needs of retailers and other potential tenants, but to meet an anticipated demand. In economies that are more market driven, such building ahead of demand doesn’t happen because of opportunity cost – capital is expected to generate competitive returns in a timely manner. Building ahead of demand in China is virtually always driven by government funding, policy-based lending or other non-market forces.

One wouldn’t expect one of the world’s most famous universities, with one of the world’s most famous business schools as an integral component, to ignore a fundamental principle of business such as opportunity cost. Harvard didn’t: The entire floor has been donated rent-free for several years by Hong Kong’s Kwok family/oligarchy, the owners of the Shanghai IFC. The benefit to Harvard, in addition to rent-free occupancy, includes a prime location in Shanghai’s financial district and a direct tie to one of Asia’s richest family groups. The Kwok family of course gains the affiliation with Harvard, plus a marquee tenant at a time when commercial property holders are still faced with a bit of a buyer’s market. Harvard’s alumni in the region, and visiting faculty, gain the consequent prestige.

In an earlier column, I looked at the growth of Webster University’s MBA programs in China, suggesting that Webster, which is not a highly ranked university, gains some flexibility precisely because it doesn’t face the severe risk profile of a highly ranked b-school. Harvard, at the extreme high end of the risk profile spectrum, must ensure that every detail of its entry into any market is planned and executed with exceptional care. At the moment, it has an extraordinary facility in Shanghai, with little activity in it, which is reasonable considering that:

People in the United Stated use the expression “watch this space” to indicate that something offshore and interesting is headed toward port. In the case of the Harvard facility in Shanghai, there’s a lot of space to watch – and it will be well worth watching to see how one of the world’s most famous academic brands is able to develop in China.

John D. Van Fleet works in the university sector in China. He lives in Shanghai.