News of GM's decision to move its regional headquarters from Singapore to Shanghai spotlighted a trend that has been gaining momentum. More multinationals want to be at the center of the action, no longer content to stay on the periphery in centers like Hong Kong and Singapore.
"China is increasingly a manufacturing base. But it's also more and more a consumer base. That and low labor costs are driving the relocations." said Diarmuid O'Brien, a corporate lawyer at Squire Sanders' Beijing office.
Both Shanghai and Beijing offer relocation benefits to companies making the move, but Shanghai is easily proving the destination of choice.
GM is relocating regional finance, product planning, personnel and purchasing operations to China and while that sounds like a lot of moving, it will only mean shifting 90 positions to Shanghai. The company will continue to have a sales and service center in Singapore.
Beijing and Shanghai governments, keen to get as much value as possible shifted their way, have tweaked regulations to entice big names. But to qualify companies have to meet some strict guidelines. By their definition, for example, regional headquarters must be the sole regional head office of a foreign multinational company, conducting overall management and service functions for existing enterprises in a multi-country region.
In mid-2002, Shanghai unveiled policies offering tax relief, training subsidies and fasttrack visas to companies consolidating headquarters in Shanghai. With those changes, companies were encouraged to move their R&D, HR management, sales and marketing, technology support and import/export operations.
In Shanghai, a regional headquarters with purchasing or distribution functions in Shanghai gets import and export rights, and VAT rebates on exports. Companies setting up regional headquarters which house R&D operations get extra tax breaks.
Moving regional headquarters to China is also a political gesture, says Eduardo Morcillo at InterChina Consulting in Shanghai. "It's a huge vote of confidence in China and brings with it preferential treatment in land prices, licensing and taxes.
Beijing, lagging but keen to compete, exempts regional headquarters from local enterprise taxes and offers tax rebates to companies reinvesting profits in local operations. The capital also offers preferential access to land sales and utilities, as well as long-term visas and "commendations" – which have, controversially, included cars and houses for executives of large multinationals headquartering in Beijing.
Indeed, the capital could yet get a jump on Shanghai with the run-up to the 2008 Olympic Games, said Cyrill Eltschinger, president of the Swiss Chamber of Commerce in Beijing. "All of the chances will be Beijing's then, before the spotlight returns to Shanghai and the 2010 World Expo."
To deter companies from opening phony headquarters to grab the incentives on offer, Shanghai has stipulated that parent companies must have US$30 million invested in China. The parent company's total assets must also be at least US$400 million, and the headquarters itself must be authorized to manage at least three enterprises in China or abroad.
Companies prefer to move all their functions to Shanghai, said Patrick Horgan, managing director at business consultancy Apco. "There are skills shortages in HR and financial management but corporate professionals today are mobile and can be transferred as easily to Shanghai as anywhere else."
Like Beijing: US microprocessor maker AMD chose Beijing's Zhongguancun Science Park as its a base for overseeing China and Hong Kong operations.
Kodak and healthcare group Roche have both put their regional headquarters in Shanghai. Aviation electronics maker Honeywell moved its regional base from Singapore to Shanghai to keep up with business growth. So far, Honeywell has invested US$300 million into 23 wholly owned subsidiaries and joint ventures around the country. Sales in Mainland China account for more than a third of the firm's Asian revenue.
Some recent arrivals have been Asian. Among the dozen companies getting the green light in June were Japan's Shiseido and Toyo Ink Corporate Management and GT Tire of Singapore. Now big European names are contemplating the move too, Eltschinger said.
All the moving has brought some stresses and strains. A shortage of skilled labor and service contractors in Pudong could make a move to Shanghai costly, warned Morcillo. "Certain services such as legal professionals are harder to come by in Shanghai – and more expensive."
Communication can be expensive too, he said, citing the cost of broadband And compared to Singapore and Hong Kong, import and export control, customs clearance, immigration and visa processes are still restrictive and complicated in China. Tax and import duties are higher too, while infrastructure, government accountability, and quality of life in mainland cities lag Hong Kong and Singapore.
Then there is the bureaucracy to consider. Compared to Hong Kong and Singapore, the rules can be minefield of do's and don'ts. In China, for example, regional headquarters do not have the right to import and export – unless they also qualify as an investment company under state regulations, or unless they set up a purchase or distribution centre. O'Brien said.