Fading appeal

A stream of Chinese from the hinterland continuously pours from the doors of Xiamen train station. Their possessions slung over their shoulders, small groups drift over to a nearby construction site where thin pieces of pink, red and white paper plastered on a wall advertise, the few jobs available in nearby factories and businesses.

"People come here because it's a special economic zone and there are a lot of jobs," says a middle-aged woman from Guizhou, who is not one of the lucky job searchers. "I'll leave in a few days if I can't find anything."

She is not alone. Few seem to be finding jobs these days in Xiamen as foreign and local investment continues to dwindle in the wake of what has been called the biggest corruption case since the Communists came to power in 1949. The Xiamen-based Yuanhua Group smuggled automobiles, crude oil and other goods into China worth an estimated Yn23bn, before the government discovered what was going on in 1998.

The investigation into the scandal has been far-reaching, with some 200 people involved. Fourteen death sentences have been handed down to senior officials as high as the deputy mayor and the head customs official. The top national police officer in charge of smuggling is also under investigation. Seven people have already been executed for their role in the scandal, sending waves of fear through local government and business circles.

It's no wonder investors are adopting a wait-and-see attitude before putting more of their money into the city. "The wild west enthusiasm is gone as far as companies are concerned," says a European businessman with a factory in this SEZ. "Investments are falling."

Enthusiasm began to fade more than two years ago as news of the immensity of the scandal began to leak out. In 1999, contracted foreign investment dived 24 percent and utilised foreign investment fell 2.8 percent, both to around US$1.3bn. Utilised foreign investment fell another 23 percent last year to US$1.03bn, and it is continuing to fall in the early months of 2001.

Analysts, pointing also to structural problems, say a downturn would have come even without the scandal. One reason is that, while wages, land, water, electricity and other production costs have been shooting up in Xiamen in recent years, the investment environment in less developed regions has shown marked improvement.

"The quality of business people in the hinterland is increasingly dramatically," says Mr. Bruce Grill, a trader with more than 20 years' experience doing business around China. "To a trader like me, the area I go to is driven by the people I have to deal with. Jiangsu now reminds me of Guangzhou in 1990, or Xiamen in 1995. The quality of people is improving, and so the business I'm doing is becoming more doable in places like Jiangsu or Shenyang.

"There is no reason to bring Jiangsu people to the coast if you can get the job done there," he adds.

Smaller foreign companies already in Xiamen have been complaining about unclear regulations and what they term are `excessive' fees and fines. "We paid way too much when we were setting up our factory here," says the European businessman. "We were charged twice for some things, and we paid fees and fines that we were not really sure were necessary or even legal. A lot of people got rich from us."

Furthermore, he says, regulations are a grey area. "You never know the legal basis of something, and sometimes you have the feeling that a regulation may only be in effect for a while. It's a bit of luck and guessing."

He believes that smaller companies are sometimes at a big disadvantage in legal disputes, pointing to several instances where foreign companies lost court cases against local companies in which he felt the foreign party was in the right. "Had this same case happened in another country, the foreign company definitely would have won," he comments.

He says the excessive payments were at an "acceptable level" for a large multinational like his, but would have sunk smaller operations. "What is small for us, could be a big problem for smaller companies."

Environmental showcase
Xiamen is a showcase for clean environment in China, in part due to the historical role the city has played. Once on the front line between the Communists and the Nationalist enemy across the Taiwan Strait, Xiamen, like other Fujian cities, was denied infrastructure funds during the 1950s and 1960s. As a result, the city today benefits from a green-field advantage.

The Xiamen government has been making a strong effort to keep the environment clean – investing 3 percent of GNP on environmental protection each year, rejecting polluting industries, and being stricter than other cities in enforcing environmental protection regulations.

In line with this, the city is now favouring high-technology projects over more traditional labour-intensive industries. In March, the city announced that as part of its 10th five-year plan, it would promote the development of information technology, micro-electronics, laser technology, new materials, biological engineering and other areas.

However, this new focus is said to be one reason cited for the decline in investment from Taiwan. Ms Eva Sung, director of Hwa Xia Industries, a Taiwan company that has been producing footwear in the SEZ for more than 12 years, says that many of Taiwan's high-tech companies investing in China have chosen other cities because these companies are interested in the local market.

"Xiamen does not have a big population," explains Sung, "and so unless you're exporting 100 percent, this may not be a good choice."

Mr. John Tkacik, president of China Business Intelligence, a Virginia-based consulting firm, says poor transportation links are another disincentive. Fujian province and Xiamen are relatively isolated, a holdover from the 1950s when Mao Zedong was afraid the Nationalists would invade and so did everything to make the Fujian beachhead formidable.

"Just look at a map," says Tkacik. "The railroad has to wind through hundreds of slow-moving miles of mountains, and it's only one track. The highways are narrow, even coastal movement is poor."

Tkacik says that Xiamen has excellent port facilities, but points out that they don't serve the rest of China, only catering to inter-national routes. "This is good for exporters, but bad for the Taiwanese who see the main-land as a huge market and who want to sell into China now."

The government is attempting to over-come this problem. Plans are under way to build a railway linking new cities in eastern China with Xiamen and the provincial capital of Fuzhou.

Not surprising, the Yuanhua scandal has dampened official corruption. "As a result ofdo things on the straight," says one American businessman." If you're doing things on the up and up, it's not that hard to do business here anymore."

Unfortunately for people like Sung, frightened customs officials, who have replaced those implicated in the scandal, have become overly cautious. One garment exporter tells of local customs officials frequently inspecting even export containers, sometimes resulting in containers missing their departure slots.

"For the export industry, time is very important," he says. "This is a big problem for us. Customs clearance has to be faster for exporters in an economic zone. If they can't streamline the procedure, exporting companies will not be willing to invest here."

Silver lining
Despite all the problems, local authorities see a silver lining in the string of large multinational companies that have been setting up in the zone in recent years. While total investments have plunged, the arrival of bigger companies pushed the average overseas investment to US$13.86m in 1999, up from US$6.15m recorded the year before. Recent major arrivals to the SEZ include Kodak, Dell, Linde Forklift and Panasonic.

Kodak's new plant in Xiamen is a major component of the group's US$1.2bn investment in China, the largest investment by the company in 30 years. With the support of the central government, Kodak took over several Chinese film companies in southern China, including Fuda Photographic Materials, a state-owned enterprise that was on the verge of bankruptcy. Kodak kept just 800 of Fuda's original 2,000 employees, with the remainder either retiring or losing their jobs.

The Xiamen operation produces for export markets in Southeast Asia and Australia in addition to selling in the domestic market. By September 1998, just four months after beginning production of photo paper and film, Kodak had already paid US$15.5m in taxes, making it the top tax-payer in the city, according to a report by the Economist Intelligence Unit. The company says China is already its second largest market in the world, and will become number one within a decade.

It remains to be seen, however, if Kodak will succeed in setting up a good distribution system, considering the lack of a proper inter-province highway system. Most of its products have to be shipped via waterways or rail, which are very congested and inefficient. Maintaining proper temperature controls while the film is being shipped to sales out-lets could also prove to be a problem.

Dell Computer opened a sales and manufacturing facility in Xiamen in 1999, its second in Asia. The plant, employing more than 2,000 people, will produce laptops, note-books and other products for the local market.

Linde Forklift Corp of Germany began production here in 1996. Mr. Heinrich Winzl, general manager of Linde-Xiamen, believes the quality of vehicles produced here is as good as that produced anywhere else.

"Sometimes the products manufactured in China do not have a good image," says Winzl, "but we are exporting to the US, Japan and other leading international markets from here, and the quality level is up to inter-national standards"

Time will tell, however, whether local officials – hit hard by the Yuanhua scandal and the challenge from other regions in China – will be able to make the timely changes necessary to keep investments rolling in.