The first thing a traveler to Hangzhou might observe is the train from Shanghai. Like any other chugging across China's busy landscape, this one features travelers pulling snacks from bags, creases of worry crossing their faces lest a favorite is discovered forgotten.
The big difference on the Hangzhou run is that so many passengers carry laptops. And out they come, after the food is arranged, as their owners resume work on presentations, spreadsheets or tend to other tasks before the 180km journey ends two hours later. With expressways jammed despite continuous widening efforts, trains in this part of China have sprouted business travelers.
Draw a line from Hangzhou up to Suzhou in the east, then further east to Shanghai and then west southwest again back to Hangzhou, and the result is a triangular wedge that accounts for 70% of global laptop production, according to Nobuyuki Kojima, CEO of Hangzhou Toshiba Home Technology Electronics Co. Despite the name, Kojima's company is focused on only one thing – making the fans that keep laptops from overheating.
Toshiba Home Electronics is one of several subsidiaries that make up Toshiba Corp's huge establishment in the Hangzhou Economic & Technological Development Area (HEDA) and it turns out 5m fans a year, supplying, besides Toshiba's enormous notebook plant here, Dell, IBM (at least for now) and other laptop makers. But it is not HEDA's History and high-tech meet in Hangzhou ImagineChina 39 biggest investor; that title belongs to Panasonic, part of Japan's big Matsushita industrial group, which churns out home appliances for export. (One HEDA official said Panasonic has since decided to move its entire manufacturing arm out of Japan.)
Hangzhou's place in the world
Hangzhou, the capital of Zhejiang province abutting Shanghai, hugs one end of China's fabulous West Lake tourist region. One of China's seven ancient capitals, Hangzhou, it is said, goes back 2,200 years, covering five dynasties in all.
History has its charms, of course, but in the third quarter-century of China's evolving Communist dynasty, this city of over 6m is very focused on business – and attracting foreign investors like Toshiba with industry parks like HEDA, one of three offering tax and other incentives.
HEDA has even gone so far as to plunk down 14 universities, covering a raft of scientific, technological and other disciplines to ensure a continuous flow of skilled manpower to the zone's steadily expanding population of companies.
In terms of economic might, Hangzhou claims to be second only to Shanghai in the Yangtze Delta region. One hotelier recently ventured that Hangzhou is destined to become one of China's wealthiest cities. In 2003, according to government data, its GDP was US$25.26bn, 15% up on the year earlier and five or six points higher than GDP growth nationwide.
Not to get carried away: Shanghai's GDP over 2003 grew 11% year on year, to US$73bn, accounting for 5% of China's GDP. But divide the figures by their respective populations and the numbers start to even up: For 2003 Shanghai's GDP per capita works out to US$4,568; for Hangzhou it comes out at US$3,947 ?and its economy is growing faster.
Investors pile in
Among Hangzhou's industrial zones, HEDA is the big deal. With 104 sq km marked off for development, it dwarfs other local parks both in size and in foreign direct investment. In 2003, HEDA drew US$402.22m in FDI commitments – 19.2% of Hangzhou's total inward foreign investment – nearly twice the FDI commitments made to Hangzhou High- Technology (US$220.6m) and Xiaoshan Economic & Technical Development Zone (US$211.5m), according to the Hangzhou Municipal Foreign Trade and Economic Cooperation Bureau.
Business here moves along at a brisk pace. Toshiba's fan plant was opened in January 2003 and started producing cooling units, as they are properly called, in May.
It has since scaled up to full capacity. The transition to Hangzhou put Toshiba Japan out of the fan-making business, although Japan still supplies 20% of the parts not yet sourced in China.
Kojima says the move reduced costs by about 20%. That seems a modest saving given the wage differential between Japan and Hangzhou, not to mention the tax benefits Toshiba Home Electronics gets for shifting operations to China: no profits tax for two and a half years and only half the corporate tax rate for three years after that.
But then fans are a very capital-intensive business. For all its output – Kojima says his company now supplies fans for one in three laptops worldwide – Toshiba Home Electronics employs only 200 workers. In fact, the primary reason for moving to the Mainland, he says, was to get closer to customers. As in so many other manufacturing sectors, computer makers were quitting their traditional production bases for China.
Currently, virtually all Toshiba Home Electronics production goes for export and that pattern will only change, Kojima says, when his laptop-making customers start tapping into the domestic market.
Links between Hangzhou and Japan have been tightening generally. Last year, four new daily flights to Tokyo and Osaka were added to the flight roster at Hangzhou's new Xiaoshan International Airport. Opened in 2000 with direct flights to Japan, South Korea, Hong Kong and Singapore, the airport was a deliverance for overseas business travelers who till then had to travel to and from the city via Shanghai.
The city is reaching out in other directions, too. Direct flights to Frankfurt, originally scheduled to start last October, are set to begin early this year. And now there is talk of direct links with the US West Coast.
Hangzhou has been fast expanding from one of China's most prized holiday destinations into a major business and light industry center. The old town, originally renowned for silk-making and textiles, stretches back from the eastern end of West Lake, which still qualifies as one of the few pockets of serenity in China's constantly buzzing coastal economy. A wander down one of the many tree-lined streets off the city's lakeside drive is a journey into the past, revealing odd strands of history – like an old YMCA building modeled to the last brick on the old YMCA headquarters in Boston. Hangzhou's first one-star.
Taiwan makes its mark
Long before Starbucks started adding value to coffee beans in China, it was easy to find a cup of steaming java at coffee houses virtually anywhere along the lake. The only problem was, it more often than not came with a snifter of brandy and was priced to match. To travelers who questioned this strong alliance at 8am, the answer was always the same: This is the way Taiwanese like their coffee.
Investors from Taiwan certainly count here, and have done long before HEDA mushroomed into the giant economic zone it is today. But even at HEDA, Taiwanese officially weigh in as the zone's fourth largest investor group, accounting for 14.7% of industry investment to date. In fact, their investment is considerably larger.
According to Nick Yang, deputy section chief at HEDA's Investment Promotion Bureau, much of the investment credited to first-place investor Hong Kong is actually Taiwan money, though he could not say how much. After Hong Kong, which officially accounts for 23.36% of overall industry investment in HEDA, comes Japan (17.24%) and the US (16.14%) – and even some of that investment is credited to Hong Kong because it came from Japanese and American subsidiaries based there.
HEDA's biggest American tenant is mobile-phone maker Motorola. Germany's Siemens, which makes high voltage switches, is another important tenant. France also makes a strong appearance with food processing giant Danone.
Besides Chinese companies pouring in, investors from 28 countries or territories have set up operations in the 12 or so years since the HEDA project was approved by China's State Council. The count has soared to 400 foreign companies, either wholly owned or joint-venture operations. And these are early days, HEDA promoters will tell you. Only a third of the zone, situated 20km from Hangzhou's city center, is occupied.
Universities by the campus load
The park, which will eventually become a fully fitted out satellite city if planners have their way, has three parts to it: an export processing zone, a general industry zone and a "university town," this last feature unique among China's 32 state-mandated economic development areas, HEDA promoters assert.
Certainly, it is a sight to behold: Tao Jiazhing, HEDA's senior investment administrator, offered a fast-track tour of the town, singling out Zhejiang University of Sciences, Zhejiang University of Finance and Economics, Zhejiang Water Resources and Hydroelectric College, Zhejiang University of Broadcasting, Zhejiang Meteorology University, Hangzhou Institute of Electronics Engineering, Hangzhou Teachers College, even the Zhejiang Police Academy.
It was all a bit dizzying, and since no building in the 14 is more than three years old, a bit austere. By Western standards, this great marshalling of academic forces might be organized as a single university with different faculties and schools attached to it, but it would certainly be a big one. According to Tao, HEDA's university town population runs to more than 120,000 students.
The move from leafy Hangzhou to the industrial barrens was funded in part by the sell-off of campus land in the city, where land prices have been soaring – an unhappy turn of events for some investors. Production line workers may cost only RMB800 a month, RMB1,200 with insurance and housing included, but the challenge of filling senior company ranks, given Hangzhou's rising property market, has been a source of rising concern.
The university town was allotted 10 sq km of the 30 sq km HEDA has under development so far; the export processing zone occupied a comparatively minuscule 3 sq km while the rest is given over to general industry, recreational and living space.
That still leaves 74 sq km for development, and there is a story about that. Six months ago, the State Council, China's cabinet, suspended approvals of applications that allowed the land – currently used for agriculture – to be reassigned for industrial use. Tao links the suspension not to central government efforts to cool overheating parts of economy, but to containing unanswerable energy demand. Indeed, energy shortages over August and September induced many companies here to buy their own diesel generators as a workaround for electricity rationing.
The summer crunch came as a jolt. While Tao said there were no outright power shutdowns, there was certainly rationing. "We said, 'here is five days' power – you make your own arrangements,'" he recalls, hinting that shortages could return next year. Though a host of private and government initiatives to increase power generation have been launched, he says it will take till 2006 to bring supply and demand into uninterruptible balance.
Infrastructure is stretched in other ways. Hangzhou is the place where the rail lines from Shanghai, Ningbo and other major regional cities intersect, although with the railway's preoccupation with moving people and coal and heavy industrial goods, one hears little railway talk in the industrial parks.
As fast as China's road builders build – the vast highway system that now snakes through Hangzhou did not exist a few years ago – expressway links to the city's two outports are often jammed. HEDA, like Hangzhou itself, is served by two ports, about equally distant: Shanghai, on the north side of the enormous Hangzhou Bay that opens wide into the South China Sea, and Ningbo on the south side. This challenging patch of geography will by 2008 be the site of one of man's more amazing feats – a 36km six-lane ocean-crossing bridge replete with an inconceivably enormous platform supported by pylons buried in the seabed supporting a vast service area for motorists at the halfway point.
The bridge should ease pressure on the Hangzhou-Ningbo link because much of that is crammed now with Ningbo-Shanghai traffic, which will simply cross the bay instead of taking several hours looping west to Hangzhou and then all the way east again to Shanghai.
HEDA now boasts two 6-inch wafer semiconductor fabs, both Chinese companies, one actually a subsidiary of Zhejiang University, which works closely with ON Semiconductor, a division of Motorola before it was spun off a few years ago. There is even talk of introducing a more ambitious 8-inch line, and the topic brings Yang back to the challenge of building a well-rounded industrial community.
He says it is a business of constantly building supply chains for different industries, of recruiting one company to draw others who draw still others – ideally so that every piece of the end product can be sourced within the park. Yang gives the example of Toshiba. Its arrival drew a supplier of keyboards, a supplier of plastic molds, and so on, and bit by bit, companies – not huge companies, but lithe SMEs – moved in. "It's not just a question of attracting companies with incentives and prices," Yang said. "It depends on the kind of industrial supply chains you have – so that a new company can come in and see that everything is locally available at a competitive price – enabling good lead times, which is very important."
Yang figures that HEDA has achieved that depth in mobile phones – with tenant companies like Motorola, cell phone and notebook OEM and component maker Foxconn Electronics of Taiwan, Mitsubishi and others – not to mention companies, like Eastcom, in Hangzhou itself.
"You can get the PCBs [printed circuit boards] in our zone, the molds in our zone, the keys in our zone and the displays in our zone," Yang said. "That supply chain was nurtured for a long time. Now we are trying to copy this model for laptops and the automotive area."
The auto sector illustrates how park planners look where they can for seeds to germinate. Japan's Yazaki, the world's leading supplier of cable harnesses and metering boards to the auto industry, moved in. (No surprise given the age, electronics accounts for an ever-increasing portion of a car's value-added, and the complexities have grown exponentially.) Why? Because HEDA had an interesting complementary tenant – a big maker of land excavators. "These aren't cars exactly," Yang had to allow, but between the harnesses and moving vehicles, there was enough for planners to envision a new industry supply chain developing.
He said Hangzhou is getting to be widely known in Japan, and among SMEs in the US – auto industry suppliers being an example – who see their competitors moving into China and grabbing business, not to mention lowering their cost base.
The mix and match strategy is paying off, to hear Yang tell it. HEDA industrial value, the sum of sales of all tenant companies, has been growing at an average 30% a year since 1992, he said. "In 1992, it was RMB2.9bn, last year it was RMB38.8bn and this year it will be RMB50bn." In Beijing's rating of China's 32 provincial capital development zones for 2003 – an annual exercise measuring growth in GDP, contracted and utilized FDI, industrial value added, industrial output, exports and other factors – Hangzhou came in second after Guangzhou in southern Guangdong province.
Signs of wealth
With Hangzhou's economic indicators pointing in the right direction, the city is showing signs of lift in the streets, with several five-star hotels sprouting up here and there – and none more glorious than the Hyatt Regency on the edge of West Lake, David Ying would argue.
Ying sees unmistakable signs of rising wealth, like a taste for upscale brands. "Louis Vuitton doesn't come unless they've studied the market and see the potential," he says, noting their recent opening to long queues. "In that respect, they're a little like Hyatt International. We're going after quality, not quantity."
The Hyatt, in fact, just held its soft opening, unveiling some facilities ahead of its scheduled official launch over Chinese New Year. If that sounds like rushing things, there's a reason.
The hotel was supposed to open in 2000, before local and Taiwan investors ran out of money – only to be saved by the People's Daily, or a subsidiary of same, which came in with a cash injection. Asked how that bizarre alliance came about, Ying would only say it was a case of an [investment] opportunity.
Ying, a 32-year Hyatt veteran who has managed hotels in Seoul, Hawaii, Guam and Saipan, has been at his current post for over five years, planning for different opening dates along the way. Each time it meant recruiting top talent from the Hyatt organization to train up locals – only to send them back to be redeployed in their old jobs when each opening was scrapped.
It meant hiring and letting locals go and planning and scrapping menus and services. Hyatt management in Chicago repeatedly weighed the odds of this wobbly project but always decided to hang on in the end.
The delays brought their blessings. Redevelopment of adjacent lakefront land in 2000 was a messy business that would have had dust clouds permanently hanging over the area for its first year of operation. And over time, Ying said city planners decided to make the handsome but unfinished shell of a hotel the centerpiece of their boardwalk plans – so it now looks as if the elegant stonework and landscaping that runs far into the distance along the lake is "all Hyatt."
The delay also allowed Ying to jettison worn-out concepts like the hotel entertainment center and use that space for more banquet facilities.
In his time in Hangzhou, Ying has watched the city turn from a leisure tour group destination into a serious business market, largely off the back of Shanghai's spectacular growth. "We see it in the flight loadings, particularly from Hong Kong," he says. And with planes constantly filled to near capacity, the traffic has helped push up four and five-star room rates by 25% in five years.
"It's the five-star hotels that have been doing well, which tells me that people have learned about quality," Ying said. "Now there is no off season," just the peak season with a short 'shoulder' period.
"For such a relatively small city, the government has done a very good job. They have been very aggressive in going out and holding road shows and attracting investors, very good about licensing, and very good about improving infrastructure." You see the results, Ying says, in the international facilities – hospitals, schools, supermarket – and "in the clothes people wear now."
Hangzhou people are more entrepreneurial than Shanghai people, Ying reckons. SME describes their mindset, rather than big corporate, he says. "When they spend money, it's their money, so things better work. They adapt faster. They've seen it on the Internet and know what has to be done to be number one."