As manufacturing in China’s top-tier cities becomes more advanced, quality services are what really matters to foreign companies seeking a base for their operations. This was the expert consensus that came out of the CHINA ECONOMIC REVIEW manufacturing industry workshop held in Shanghai at the end of October.
Where once cheap land and tax breaks were enough to bring in business, the country’s industrial zones are now focusing more on removing administrative barriers and building strong supply chains for their customers.
“In the early 1990s, companies came to China because the labor was cheap and they got the land at low cost,” said Patrick Nawa, director of China industrial at Colliers International in Shanghai.
“Now you have to ask whether an industrial park is going to be able to provide you with the services you need to set up production as and when you’d like.”
This decision hinges on details such as the length of time it takes to get a company registered; how quickly tax reimbursements are made for investments into park; the transport connections between the park and ports and raw materials suppliers; and the availability of certain kinds of skilled labor such as IT support staff.
As such, specialization has risen high on the industrial zone agenda and, the event featured a trip to Lingang Industrial Area adjacent to Yangshan Port to the southwest of Shanghai to see the trends discussed in action.
Lingang was one of the event sponsors, alongside Colliers International, Hyatt on the Bund and Sinoconexion.
To a certain extent, this change in focus can be accredited to a tightening of the rules on the kind of sweeteners that can be offered to potential tenants. As of the beginning of 2007, Beijing introduced a price benchmarking system for all land in industrial parks. The practice of knocking zeroes off the leasing figure in exchange for foreign investment in people and facilities has been replaced by a bidding process with minimum prices.
Meanwhile, the new tax equalization law, which will see a single rate of 25% levied on all companies, is expected to cut back on the big breaks typically offered to foreign investors.
But this shift is part of a wider restructuring taking place in China’s first-tier cities. While the rise of the service sector captures the headlines – in Shanghai, for example, tertiary industry accounts for nearly 70% of GDP, up from below 5% in 1980 – manufacturing has not been idle.
“It is not necessarily that manufacturing is on its way out but rather undergoing a massive transformation,” said William Dodson, managing director of Silk Road Advisors, a strategic site selection consultancy. “It’s not unlike the mid-1980s when China really began to take off as a target for foreign direct investment.”
The likes of Beijing, Shanghai and Guangzhou are all looking to carve out their own high-end niches within the manufacturing sector. For Beijing, the focus is IT and R&D-intensive industries while Shanghai is targeting heavy manufacturing, logistics and financial services, Dodson explained.
Conscious of the pressure being put on its environment and infrastructure, Guangzhou has even decided to forestall investment. It is now pushing for quality in automobiles, petrochemicals, logistics and research and development.
Costs may be rising but this is being matched by greater labor productivity, the result of China’s willingness to incorporate more international standards and deliver increased efficiency.
“Manufacturing still has a very long life expectancy in and around the municipalities,” said Dodson. “I just think of the drive to the airport in Chicago – you pass through huge manufacturing zones on the outskirts of the city.”
SIDEBAR: Accessing India
Greater interaction between China and India will see bilateral trade between the two countries reach its US$40 billion target well before the 2010 deadline, according to Dr Montek Singh Ahluwalia, deputy chairman of the Indian government’s Planning Commission.
Alhuwalia made his remarks at a CHINA ECONOMIC REVIEW breakfast event, run in collaboration with the Confederation of Indian Industry. The November 15 event was supported by the Indian Consulate General in Shanghai and sponsored by NIIT.
Foremost in Alhuwalia’s thoughts as areas for integration is the infrastructure sector where he is keen to see India replicate the public private partnership model that worked in China. The former Indian finance and commerce secretary, who also held senior office with the International Monetary Fund, said his country presented huge opportunities for China in terms of investment in infrastructure.