Follow the expats

Over the last decade or so, the market catering to expat needs such as housing, international schools, healthcare, food and entertainment has flourished alongside the foreign population in first-tier cities.

However, the financial crisis and a growing pool of top-level Chinese managers have made HR departments reconsider how much they spend on personnel brought in from overseas. Staying wise to emerging trends will help expat services companies adjust to this changing environment.

More of the foreigners arriving now are at the director level and above. Incoming executives, expecting rents in China to be lower because of the global economic downturn, are surprised to find that they are still high and rising. They resent having to accept lesser accommodations compared to their colleagues and predecessors.  But that has not stopped their employers from tightening housing and relocation budgets, particularly at US companies, which used to spend relatively more on their transplanted executives than European or Asian firms. 

Discounted

Companies that were paying up to RMB60,000 (US$8,760) a month for expat housing two years ago are now paying around RMB35,000 – still plenty for a spacious apartment, but not enough for a villa near an international school. This has squeezed relocation companies in first-tier cities that help newly arrived families adjust to China by arranging school hunts or organizing shopping trips for executives’ spouses. This also influences expatriates’ discretionary income, much of which was available for dining, shopping and travel.

Serviced apartments in Shanghai and Beijing have also suffered from slackening demand. China Market Research Group has conducted interviews with real estate agents and placement companies and found that towers which were filled to the brim with expats three years ago are now at 60-70% capacity, and more units are on short-term leases than before.

The majority of the expat business for real estate agencies now consists of local moves (foreigners who have lived in China for a few years moving from one house or apartment to another), not newcomers. These clients have experience finding a house in China and know how to bargain the price down, resulting in lower commissions for agents. There is room for real estate agencies to succeed but they will have to emphasize efficiency and choice for foreigners already present in first-tier markets. They should also consider moving into growing second-tier markets.

Demand for international schools is also changing. Waiting lists, while still long, are not as long as they used to be in first-tier cities. Now families moving to Shanghai, Beijing or Shenzhen in mid-summer have a shot at getting their kids into the school of their choice. International preschool programs are not faring as well as they used to, either, as many companies have stopped paying for pre-K education for executives’ kids.

These businesses boomed in the mid-2000s when companies were still sending foreigners over in droves and paying whatever it took to keep them happy. Now companies in the education market are facing shrinking demand. They should focus on second-tier markets as firms begin to relocate major offices outside of first-tier cities in the search for reduced costs.

Smaller is better

In second-tier cities like Chengdu, the market for expat-focused services is benefiting from accelerating activity from multinationals producing technology and pharmaceuticals. Companies have shifted their focus inward for both cost reasons and the availability of top-notch local technical talent. Intel, for example, shut down a chip plant in Shanghai last year while ramping up production in Dalian and Chengdu.

Such moves have been a boon to the expat services market in these cities, which are less developed than in the first-tier cities but are starting to resemble Beijing and Shanghai a decade ago. Foreign-run service firms are setting up to acclimatize newly arrived executives in cities where English is not the lingua franca and local merchants are not accustomed to dealing with foreigners.

One such company is Maxxelli, a real estate firm that helps expats do everything from setting up a bank account to exploring local culture and nightlife. Since its founding in Chengdu just over three years ago, the company has expanded to other cities including Chongqing, Hangzhou, Suzhou and Wuxi.

ParkwayHealth, a hospital operator that offers international-standard care and has English-speaking doctors, has long had hospitals and clinics in Shanghai and Beijing, and recently opened a medical center in Chengdu.

As with so many other areas of the economy, second- and third-tier cities are where much of the serious growth is happening in China and where expatriate-oriented businesses still have an opportunity to thrive in the years ahead.