Increasing doubts over the viability of the 100-seater aircraft due to be built at a site near Shaanxi's provincial capital Xian (see Project News) are of great concern to local government officials who have been striving to attract greater foreign investment into the region. The provincial governor, Cheng Andong, remains openly confident, pointing to the fact that the project is backed by the central government. A letter of intent has been signed in Beijing and only the details need to be concluded, he adds.
Shaanxi may be one of China's poorest provinces, yet it is also the nation's leading centre for the construction of air-craft and the new project involving Airbus and Singapore Technologies is central to reinforcing this position.
"Growth is a matter of time," Bai Qingcai, former Governor of Shaanxi province, told central government leaders four years ago. "The coastal regions have started earlier but we will be able to catch up." Today, that claim has still to be realised but at least Beijing is now committed publicly to redressing the country's regional imbalance between coast and interior.
Xian is a city of historical importance, being an imperial capital of 11 Chinese dynasties and situated at the eastern ter-minus of the old Silk Road. That political influence has long since gone but it remains an important national transport hub, even if much of the province remains difficult to access and is consequently unattractive to investors.
With its 36m people spread over an area of 205,000 sq km that includes some of the most desolate and poorest areas of China,- Shaanxi is not regarded as a priority. destination by many investors. Poor infrastructure and red tape are cited as the most common obstacles, in contrast to the conditions which can be found in some thriving coastal areas.
These obstacles have tended to over-shadow the few advantages that Shaanxi can offer. For example the province is a natural resources base that includes reserves of 26()hn tonnec of rnal anri education centre. Home to 1,076 research institutions and 820,000 technicians and engineers, Shaanxi ranks high in terms of research and development capability. Even so, the success story of Xian Janssen (see page 34) at the beginning of the 1990s remains a rare example of a joint venture taking early advantage of this potential, although there are signs that recent improvements in infrastructure are attracting more foreign. investors. Only last month Mitsubishi Electric announced a US$16m joint venture in the city to produce circuit breakers and switches for electric-power companies.
During the last decade there has been a dramatic modernisation of the transport network. The province plans to expand existing airports at Hanzhou and Yulin and to handle 6m passengers a year by 2000. Northwest Airlines flies to 60 main-land cities and also to Nagoya, Hiroshima, Hong Kong and Macau.
Within the province, the infrastructure is also being developed. Shaanxi contains 11 trunk railway lines and, of the 10 national railways lines which China has pledged to build in the next five years, four will cut through the province, including the Xian-Nanjing line. Shaanxi is also completing a rail-way line financed by World Bank and Asian Development Bank loans that will stretch from the north to the south of the province. In addition, it has developed a network of provincial highways, the most important of which include the Xian-Liantong-Weinan, Xian-Baoji and Xian-Tongchuan expressways.
This transportation corridor crossing the middle of the province only serves to accentuate the existing geographical strengths of the province. "Communications are still a problem ?investments tend to focus on this central corridor," says Liu Ajin, division chief of the department of foreign trade and economic co-operation of Shaanxi.
Statistics reveal this imbalance. Of the US$1.6bn total investment the province had attracted up to the end of 1997, of which US$862m was actually used, most investors chose the central region around Xian. Some 184 foreign-invested projects were approved last year and 138 will be set up in the Xian region, where investors feel confident about the infrastructure and skills base needed to launch larger scale projects.
"If the number of new projects has fallen, their scale has become larger and the overall investment total keeps on increasing," notes Liu. This may be a result of Shaanxi's efforts to improve the environment for foreign investors. One of the most successful vehicles in this regard has been the development of five development zones for high-technology industries. Two of them were directly approved by the State Council and the three others by the Shaanxi government.
By the end of 1996 there were 2,492 enterprises located in this high-tech development belt, generating a total income of Yn16.7bn. Approved by the local government, Xianyang High-tech Development Experimental Zone is located south-west of the international airport and covers an area of 12 sq km. It specialises in developing electronic components and products.
East of Shaanxi, Weinan Hi-tech Development Experimental Zone covering 10 sq km, specialises in the development of chemicals products such as fibres, medicines, plastics and additives, while the
third zone, `angling Hi-tech Agricultural Development Experimental Zone is the only one in China focusing on bioengineering research activities. Being one of the two zones approved by the State Council, Baoji High-tech Industrial Development Zone specialises in the development of electronic information technology, composite materials of rare metals, metal fibres and magnetic materials.
The multinationals' choice
The most impressive showcase of Shaanxi's efforts to attract foreign investment is the Xian High-Tech Industrial Development Zone, approved in 1991 by the State Council. Covering a total area of 29 sq km, one-third of which is already built, the zone ranks fourth among the 53 Chinese high-technology zones. It has so far attracted 2,000 Chinese and 300 foreign-invested companies. By the end of 1997, total investment had reached US$704m, of which US$378m came from foreign sources. Hong Kong companies topped the ranks of 'foreign' investors with US$92m, followed by US companies with US$63m, Japanese with US$57m and Germany US$22m.
Prominent investments include Xian Typical Brother Industry, a US$30m joint venture set up by Brother Industries of Japan,and China Typical Sewing Machine which was put into operation in 1995. Another is the US$30m joint venture established in 1996 between Bosch of Germany and China United Automobile Electronics Systems to produce automobile engines. Qin'an Group and Daikin of japan have also invested US$30m to produce advanced air-conditioning cornpressors. But the biggest investment of all is a US$50m joint venture involving the American company MEMC which is to produce silicone chips.
Other multinationals have chosen the zone for its research and development potential. In 1994 Philips started a US$lm project to develop mobile phones and the Canadian Northern Telecom recently opened a US$6m training centre. General Instruments of the US is currently negotiating to set up a facility in the zone.
Behind this rush is a familiar blend of tax incentives and promises to cut bureaucracy. "We enjoy the same economic authority as Xian municipality," explains Zhang Longhu, general manager of the administrative committee of Xian High-tech Industrial Development Zone. "That means we are granted the same economic powers as Xian municipal government. For example, the process approval for a new joint venture investment project under US$30m can be completed in this office."
Income tax for foreign invested enter-prises is levied at 15 per cent and is exempted altogether in the first two years after the company begins to make profit. For the next three years, this tax will be levied at 10 per cent.
The zone has also tried to provide a comfortable living environment for foreign employees and to help redress the city's reputation for being heavily polluted. It provides hotels, entertainment centres, a golf course and tennis courts, in addition to guaranteeing a reliable power and water supply which can sometimes be erratic in others parts of the city.
Xian is home to around 150 expatriate families, brought in by the influx ofinvestments and the maintenance needs of the expanding Airbus fleet of China Northwest Airlines. Most stay in serviced apartments at the Shangri-La, Sheraton or Hyatt. Shaanxi is also gearing up to receive up to 300 long-stay engineers with the arrival of the 100-seat airplane project involving Airbus and located at Xian Aircraft Group, two hours away from the provincial capital.
"I think initially everybody will stay in hotels in Xian and the hotels will reap the benefits from this expanding expatriate population for the next three years, until developers build separate serviced apartments," says Mr James Greig, general manager of the Sheraton, where a Yn4.5m renovation programme has just begun.
If the project goes ahead, night spots would be one of the sectors to benefit. A few Western bars such as Fashion Bar, Casablanca and Dodo Bar have recently been opened in Xian, prompting a competitive response from the hotels. The Sheraton, for example, is turning its karaoke lounge into a full disco.
The bright lights are of little relevance to most locals in a region where poverty is widespread and unemployment is growing. By the end of last year, 46 per cent of Shaanxi's large and medium-sized enter-prises were running deficits amounting to Yn3bn and more than 400,000 workers had been laid off. "This is very serious and we have to solve this problem," says Cheng Andong, governor of the province. Although the structure of unemployment allows many workers over 50 to retire early, thanks to a retirement fund financed by the social security bureaux, most of the inhabitants of Xian believe that the unemployment situation is worse than the local government makes out.
It can only become more severe as Shaanxi plans to reduce the proportion of factories operating at a loss to less than 25 per cent over the next three years. "There are people coining to me to discuss the situation, saying they don't get salaries," says the governor. "I can understand that after working in a state-owned enterprise for dozens of years, one cannot be happy to be laid off. But I have to tell them that those temporary problems will be overcome together, that the government will help them to guarantee a basic living and that they will have the hope to find a job again."
With two million people still living in absolute poverty in its countryside, Shaanxi is equally aware of the need to pay closer attention to growing urban
Janssen's inland base
Xian-Janssen Pharmaceuticals is a rare example in central China of a thriving, large-scale joint venture. Nominated among the top four national joint ventures every year between 1991 and 1994, the Sino-Belgian enterprise achieved an after-tax profit of Yn300m (US$36m) in 1997 ?50 per cent up on 1996 ?and it sees scope for considerable future improvement. "There are 2,000 big hospitals in this country and at pre-sent we are covering fewer than 500 of them," says Hao Junguo, chief administrative manager.
New leader, new spirit
However, it has not all been plain sailing since the company was founded in October 1985. Starting out with an investment of US$190m and fewer than 400 employees, it wasn't until 1991 that the company was opened officially. Delays were partly caused by disagreements between the foreign and Chinese investors over organisational and management matters. The foreign shareholder, with 52 per cent of the capital, is Janssen Pharmaceutica of Belgium, a member company of Johnson & Johnson, while the main Chinese partner is Shaanxi Provincial Pharmaceutical Industrial Corporation.
The conflict was resolved in 1992, the first year of profitability for the company. Zheng Hong, a former vice-director of Shaanxi provincial pharmaceutical administration bureau, was promoted to chairwoman of the board of directors and the expatriate staff were replaced gradually by overseas Chinese managers from Singapore, South Korea, Taiwan and Hong Kong.
"For our company it was a big jump," recalls Hao Junguo. "We had a new leader, we changed the Board and they all worked towards the same goal ?no more arguments. Previously, there was this 'Chinese-foreigner' split. But now we just want to build a good company with good results. That is good for Chinese and for foreigners. Maybe we have better communication."
Janssen is also working to adapt to the growing market. The joint venture now manufactures 14 products, of which the biggest-selling is Motilium, the leading gastro-intestinal medicine in China. Every year, the company intends to introduce and market one or two of Janssen's patented products in China. But this is a costly exercise. "The company doesn't have its own R&D. We estimate it costs US$230m to launch a new product; it is very high, and most of our products are still under licence," says Hao Junguo.
Closer to the customer
Having chosen inner China as its base primarily because of its low costs, the joint venture has been forced to substantially build up its sales and marketing forces. Of the 760 staff Janssen employs today, more than 400 belong to the sales and marketing department. "We chose this region because of the cheaper labour costs, but right now the market is in the coastal area," explains Hao Junguo. "Xian remains a manufacturing base, but our general office moved three years ago to Beijing. We now have more than 70 sales offices in different provinces."
Decentralising sales offices so as to be closer to customers is important in order to be able to deliver medicines at short notice. Janssen has found a way to get close to its customers by establishing branch warehouses. Three in Shanghai, Guangdong, Beijing have already been set up and Jinssen is currently building a menced last year. The road, which aims to link Kunming and Bangkok with legs wrapping through both Burma and Laos, could be completed as early as 2005.
Other road plans that would link Yunnan to Burma in the north-west and Vietnam, Laos, and Cambodia to the south and east have been tabled at the Asian Development Bank (ADB). They include the 869km Class 1 and 2 express-way between Kunming and Lashio in Burma. Sections of the Yunnan portion of the road have been completed with central government funding. An ADB loan of US$150m will also help complete the road's 179km link between Chuxiong and Dali next year.
Upgrade of the road between Kunming and Hanoi is also being discussed at ADB. That would utilise the recently finished Class 2 highway linking Kunming with the Xishuangbanna city Mengzi, and extend to the Hekou border crossing south to Hanoi and Haiphong. There is also talk of building a road between Jinghong and Hanoi as a leg of the Kunming to Hanoi construction.
An upper Lancang-Mekong River navigation improvement project is alsounderway at the ADB. That would facilitate year-round navigation by 100-tonne vessels along the Lancang-Mekong River from Yunnan, extending south through Laos and Burma to Thailand. In 1994 the four countries established an administrative committee to address navigation issues along the river, followed in 1996 by a draft agreement to promote river trade.
Raising foreign funds
Other initiatives in the four-nation 'economic quadrangle' include the establishment of cross-country rail links. One such proposal involves the building of an international railroad stretching 925km from Dali in Yunnan's north-west to Bangkok, Thailand. The proposed rail-way would utilise track now being laid between Dali and Kunming that will serve as a leg in the Nanning line.
From here, new track would be required from Kunming south to Jinghong, then to Mengla, into Laos to Muongsai, Luangprabang and Vientiane, and finally to Nongkhai, where it would link up with the Thai railway system. The railway would service 1.3m passengers within Yunnan annually, along with an additional 2.1m passengers between China and Thailand.
Financing such massive infrastructure development remains a critical issue. Total investment for the Kunming to Bangkok railway project, for example, has been estimated at US$1.8bn-2.lbn, of which 80 per cent would be through foreign lending. For the time being, at least, China appears willing to go it alone. Beijing's Ministry of Railways will continue to back railway onstruction in the province, while the Yunnan provincial government intends to invest Yn2Obn-30bn during the five-year period between 1996 and 2000 to improve its road network. Half of that money would be raised through foreign funding.
In December, the province's department of communications announced that it would package four existing toll roads in a holding company to be listed at either the Shanghai or Shenzhen stock exchange later this year. The province also signed a letter-of-intent with Union Bank of Switzerland, which agreed to invest US$150m-200m to take a 30 per cent stake in the holding company.