THF view across picturesque Xuanwu Lake to the northern ramparts of Nanjing's ancient city wall was once testimony to the city's past glory as capital of 10 dynasties. These days, the cityscape is a holder statement about the future a visitor's gaze is drawn beyond the city wall to lofty silhouettes in progress, crowned with giant construction cranes.
In a bid to keep pace with Shanghai and booming satellite cities such as Suzhou and Kunshan, Nanjing is pushing hard to improve the investment environment. The city is busy at work on its third bridge across the Yangtze River, a modem subway system, new roads and host of commercial and residential building projects that grind and flash through the night. In May, a USS 100m traffic tunnel underneath Xuanwu Lake was opened to traffic.
Despite being criticised for his poor handling of the SARS epidemic in Nanjing, the city's mayor, Luo Zhi-jun, has earned a strong reputation for his efforts to simplify administrative procedures. Approvals for foreign investment have become more efficient. Red tape has been scaled down and 'express service windows' provided at relevant bureaus. "The government is pretty on the ball," says Steve Banu, chief executive of the Nanjing-based consulting firm J&S Associates. "There are a lot of infrastructure improvements, and the level of service and general attitude are getting better all the time."
As the city looks to build its economic standing, one of Nanjing's greatest assets will be the strength of its chemical sector, which already holds a leading position nationally. The basic framework for the new 3.8 sq km Nanjing Chemical Industry Park NCIP) is com-plete and its US$ 130m first phase should be finalised some time next year. The park has drawn interest from an impressive list of international chemical firms, such as Messer, DuPont, Praxair, Shell, Formosa Plastics and PP. Germany's Celanese received approval earlier this year for a wholly-owned acetic acid plant in the park, which should be up and running by early 2006.
A number of the companies that are evaluating the park have interests elsewhere in the city. In October 2002, for example, ChevronTexaco Worldwide Power & Gasification announced that it would license its gasification technology to Sinopec (China Petroleum & Chemical Corporation) for use at its naphtha steam reformer plant in Nanjing's northern suburbs. The following month, Shell Global Solutions International signed a memorandum of understanding with Sinopec to transfer industry best practices to the Jinling refinery in Nanjing and improve the facility's profitability.
Of course, Nanjing's jewel in the crown is the massive US$2.9bn BASF-YPC project, a 50/50 joint venture between BASF and Sinopec subsidiary, Yangtze Petrochemical.
When completed in 2005, the world-class steam cracker facility will output 600,000 tounes of ethylene annually. The project's nine downstream plants will produce I .7m tonnes of chemicals and polymers a year for the domestic market. Last month the joint venture said it would increase the annual capacity of its dimethylformamide plant at the site from 10,000 tonnes to 40,000 tonnes because of surging demand for the solvent.
The powerful potential of China's domes-tic chemical market excites Nanjing's economic planners and foreign investors alike and with good reason. Steady domestic GDP growth of 7-8 percent can be expected to generate a corresponding increase in demand for chemical products. "The market demand for chemical products will increase in the next three to five years at a rate above GDP growth," says Andrew Yuen of Eastman Chemical, which has a manufacturing base in Nanjing for adhesive raw materials. "Assuming a long-term growth of 7 percent, we are talking about 9-10 percent [growth for the chemical sector]."
Rapid economic growth has also led to an expanding chemicals shortage in China, which the government is addressing by opening the sector to foreign investment in the hope of bolstering production. "China is rapidly becoming a global manufacturing base with an increasing need for chemical raw materials electronics, plastic processing and pharmaceuticals to name just a few industries. China's chemical industry is in growth mode with a long road to maturity compared with developed countries. The low cost of capital budgets combined with low operating expenses makes it very attractive [to investors]," says Yuen.
The outlook is bright on the policy side, too. The central government has taken important reform steps, such as restructuring its petrochemical industry to form three major domestic companies – Sinopec, China National Petroleum Corp and China National Offshore Oil Corp all of which have successfully floated shares outside China. In a farther step to reform its down stream chemical industries, the government intends to combine Blue Star and Haohua Chemical to create China General Chemical United, with an asset base of US$2.4bn.
Nanjing is well placed to turn these factors to its advantage and fire up the chemical sector as a primary engine of growth. Improving road, rail and river links make the city an optimal base from which to launch distribution networks throughout the Yangtze River basin. Its chemical infrastructure is also strong, particularly with the imminent completion of the NCIP. Local chemical enterprises, such as Yangtze Petro-chemical, provide strong precedents for cooperation with foreign enterprises. "Our Nanjing plant is centrally located and has close proximity to customers. Yangtze Petrochemical, our partner, provides good and steady supply of raw materials and infrastructure, as well as a good labour force," says Yuen.
BASF-YPC president Dr. Berud Blumenberg also speaks highly of cooperation at all levels and expresses satisfaction with the selection of Nanjing as a location. "Nanjing has witnessed tremendous change over the last decade," he says. "I am particularly impressed by the volume of new constructions going on, the level of advancements and the fine quality of the people here."
Blumenberg stresses the importance of the ties it has developed with the local govermment and banks in securing US$ l.4bn in limited recourse financing in March. "These tangible and intangible infrastructures have given us the assurance and confidence to materialise a world-scale integrated production site here," he says.
The project is a key part of BASF's China and Asia strategy, which will have placed nearly a quarter of its total Asia investment in Nanjing by 2005. "We are confident that Asia, led by China, will be the major growth region in the world," says Blumenberg. "We'll have invested USSS.6bn in Asia by 2005. Out of the total sales of E32.2hn achieved by BASF in 2002, the Asia-Pacific region accounted for 12 percent. This percentage is targeted to increase to 20 percent by 2010, of which 70 percent will come from local production."
Despite the worldwide economic slow-down, which made 2002 a tough year for the chemical sector globally, the BASF-YPC project is on schedule. Blumenberg says the facility has met all of its major targets and will complete all engineering work and the procurement of major equipment by the end of this year. "We'll have this project mechanically completed by end of 2004," he adds.
BASF's project may he drawing most of the limelight in Nanjing, but a host of other companies are also taking advantage of the opportunities offered by the city's booming chemical industry. US-based Air Products, which has been operating in Nanjing for five years, is competing with three other multinational companies for a share of the lucrative gas products market supplying companies in a variety of industries from electronics and steel to other chemical companies, with gases used in the manufacturing process.
Jason Wang, sales manager for Air Products Nanjing, expects demand to increase steadily for the foreseeable future on the back of rising industrial production. "The outlook for the next five years is good," he says. "Market demand will increase. But… competition has become very fierce over the last two years, especially for clients among the steel mills, This is because the demand for steel has increased. The focus has been on steel mills in Zhejiang and Fujian, where steel owners are increasing production fast."
One of Air Products' competitors, Prax-air, already operates an air separation unit (ASU) in Nanjing to produce its products locally. In April Air Liquide Hangzhou, the engineering and construction division of Air Liquide in China, signed a contract with China Petrochemical International to build a large ASU to supply the Sinopee Jinling chemical complex in Nanjing. Air Products is currently working on its own Nanjing facility in the hope of bringing down costs and increasing competitiveness.
Strength in service delivery
But as Wang explains, competition in the gas products market, in which the end products are very similar, depends on service levels. "Some customers are only interested in price, but others compare relative strengths," he says. "Safety is one of our strengths… Some customers don't know how to use the gas, so we provide them with the technology. We have engineers on hand locally. If we need, we can also invite foreign experts in."
BASF, meanwhile, is building its competitiveness in China by introducing top technologies to its production facilities, including the BASF-YPC venture. In the past, the world's 'big five' chemical companies were party to a verbal agreement not to export key production technologies to developing countries, particularly China, say analysts in some cases, this was practised to the extent that even outdated technologies were off limits. EASE, however, sees cutting-edge technology in China as a key component of its strategy. "With China's accession to WTO., we expect keener competition from other foreign investors and local companies," says Blumenberg. "BASF will benefit because our local operations are already running effectively. We are building world-scale plants using modern technologies."
Blumenberg is confident that top technology and close partnerships will help to ensure the group's leading position among chemical companies in China.
However the domestic chemical sector" shapes out over the coming few years, Nanjing's planners are confident the city will benefit. Large ventures such as BASF-YPC should help to draw more overseas investment and serve as an example to local firms' as they brace themselves for further competition from foreign entries. And, of course, China's huge market potential means there will be plenty of opportunities for foreign investors, so long as they approach the market cautiously and with a strong sense of realism, says Eastman's Yuen.
"As a whole, as long as investors proceed with caution and not with too much optimism, there are many opportunities."