When Jack Ma, chief executive of online marketplace Alibaba.com wanted to escape the high costs of doing business in Shanghai, he didn't have to look far for a new location. Just a few hours away by train is the small city of Hangzhou, best known as a one of China's most attractive cities. Not only was it easier and cheaper to hire and retain good engineers in Hangzhou, but also city officials were very welcoming. "City and government officials have visited us three or four times and asked 'what can we do for you??? Ma says.
It doesn't hurt that Ma was born and raised in Hangzhou, but his company also fits in with the local government's plans to make the city a high-tech centre rivalling its massive neighbour to the east, Shanghai. From tax breaks to technology parks and programmes to attract Chinese students from overseas, Hangzhou is going all-out to become more than just a tourist destination.
Like most Chinese cities, Hangzhou is trying to channel high-tech investment into certain areas by establishing 'development zones'. The newest and most ambitious, cumbersomely known as the High and New Technology Technological and Industrial Development Zone, lies across the Qiantang River from the main city.
Foreign firms including Motorola and Alcatel, as well as local firms such as telecoms equipment manufacturer Huawei, have already set up operations there. Telecoms equipment powerhouse Eastern Communications Co (Eastcom) is working with the government to lure other suppliers there to form a complete mobile industry, say sources. "You bring the whole food chain together so you get massive scale," says Craig Watts, a Beijing-based analyst for telecoms consultancy BDA China. Eastcom is "on the warpath," he adds, although the company itself declined to comment.
In a bid to lure Chinese studying overseas back to Hangzhou to start businesses, the zone provides them with free office space, seed money and other preferential policies, says Zhu Huan, a project officer with the Hangzhou Municipal Foreign Economic Relations and Trade Commission (Moftec). The city has two additional high-tech development zones that offer similar inducements.
Hangzhou has high hopes for its riverfront property. "The government thinks the Qiantang River in Hangzhou is going to be like Shanghai's Huangpu, with a lot of development on both sides of the river," says David Tan, marketing manager for the Sunny Hotel, a four-star business hotel in the downtown area of the city.
There are plenty of incentives to attract high-tech investors to Hangzhou. Companies in the info-tech, biomedicine, new materials and environmental technology sectors are eligible for special government funding. Tax breaks are another lure, and are available to all joint venture and sole proprietorship companies with foreign investment of US$1.5m or more. As well as a two-year tax break and a 50 percent tax reduction in the third year, customs duties and value-added taxes on capital equipment imports are eligible for government subsidies.
Then there is the ready supply of cheap labour. An engineer's salary in Hangzhou is about Yn3,500 a month compared with Yn6,000 in Shanghai, points out Ma. With some 80 universities and colleges already operating in the city, finding qualified workers isn't hard.
The government has a scheme to make it even easier. Hangzhou hopes to entice both existing and new universities to set up campuses on the south side of the river, alongside the high-tech park and across from some of Hangzhou's famous tourist sites. Universities from Beijing, Shanghai and Guangzhou are planning campuses in the zone, says Zhu, and Hangzhou hopes to boost its student population from the current 120,000 to 250,000 by 2005, and to 300,000 by 2008.
Hangzhou is the capital of Zhejiang, a province famed for its entrepreneurial spirit. Indeed, Zhejiang nurtured a large number of capitalists back in the 1930s, before China's Communist revolution in 1949. Those roots remain. Wenzhou, another city in Zhejiang, is known for its many private businesses.
In 2001, the non-state-owned sector represented 42.5 percent of Hangzhou's Yn156.8bn gross domestic product. Foreign-invested firms, and privately- owned and shareholding firms accounted for 77.4 percent of the city's industrial output in 2001.
The large private economy may help to explain Hangzhou's fairly robust trade growth in 2001 despite a slowing world economy. In 2001, Hangzhou recorded exports of US$7.28bn, up 4.4 percent compared with 2000. Imports were US$4.01bn, up 14 percent. That growth pales beside earlier stellar growth, however. Over the past three years, Hangzhou's exports have grown annually at 18 percent, while imports have risen at an average of 31.3 percent.
Foreign funds have also poured into Hangzhou, especially last year. In 2001, utilised foreign direct investment topped US$500m, up 16.7 percent on 2000. Contracted investment soared 60 percent to US$1.03bn. Moftec's Zhu attributes the huge jump to hard work by the municipal government as well as heightened interest in China because of the October APEC meeting in Shanghai and the country's WTO entry.
Business hotels are certainly benefiting. For example, the number of corporate meetings in the Shangri-La Hangzhou is up some 10 percent this year, says Wai Y Leong, director of marketing for the hotel. "Even in the last nine months, the [percentage] contribution to our business from meetings has grown from single digit to double digit," she says.
The Hangzhou government is actively targeting investors. The city takes part in three or four international exhibitions annually, says Zhu. Each year the government chooses one country to focus on, and this year it is Japan. "In June we will go to Japan to be part of an economic and trade conference," says Zhu. In the second half of 2002, a smaller group will visit the US state of Maryland seeking out commercial cooperation.
The government has also revived the tradition of holding a huge trade exhibition each year to introduce foreign and local businesses to Hangzhou's various industries. The 2001 'West Lake Exhibition'was actually an umbrella for 23 industry-specific exhibitions, covering everything from tea to hardware and electronics. It generated business worth Yn7.4bn. The 2002 exhibition will be held October 20-November 10. During the final three days, Hangzhou Moftec will host a seminar to introduce potential investors to opportunities in the city.
For all of Hangzhou's alluring policies, and charming scenery, it is still a city of mostly low-rise older buildings and infrastructure that is just beginning to blossom. The shiny offices of Alibaba, in the heart of one of the city's high-tech development zones, sit atop an older, dirty building with ancient elevators and a lobby full of small stalls selling mobile phones and other high-tech equipment. The city is reminiscent of the old China in other ways. Requests for interviews with some government departments are met with little enthusiasm, if anyone even bothers to answer the phone at all. Moftec is an exception.
Big plans for infrastructure improvements, including a light rail system and a high-speed train link to Shanghai, are just getting started. But the city has come far in the last decade, points out Moftec's Zhu. "Ten years ago, you could walk the length of the longest road in Hangzhou in just 10 minutes," he says, "and the highest building was just seven or eight storeys high." Now, that walk would take an hour and several buildings of at least 20 storeys are strewn throughout the city. "In another two years, Hangzhou ought to be really beautiful," says the optimistic Sun.