Patrick Chovanec, associate professor at Tsinghua University School of Economics and Management in Beijing, was not always an academic. He served as a political aide in Washington, D.C. and worked for several private equity funds in China, including an S&E fund in Chengdu. Today, he teaches two business courses: “Doing Business in America” is on Chinese companies going global and “American Business History” draws lessons from American companies and applies them to China’s contemporary economic development.
Q: You have spoken elsewhere about the special niches that these second-tier cities should be trying to carve out, as opposed to trying to develop in the same way as cities like Beijing and Shanghai. What kind of special niche do you see for Chongqing?
A: Chongqing, and the region as a whole which I call “the Refuge;” it’s an agricultural basin deep in the heart of China surrounded by mountains which have historically kept it insulated from the rest of the world. It has largely been self-sufficient in terms of resources. Every product that was produced in China was produced in this region for its own consumption as a kind of self-contained, self-sufficient region. It’s always been a farming region, it’s the region that Chongqing is basically the gateway to, and this is the role that Chongqing plays. It is an inland port upstream in the Yangtze. The construction of the Three Gorges Dam has opened it up even more: Because of the dam, much larger ships can make it up to Chongqing and the access point to the region.
Q: Can you contrast Chongqing’s development to that of other cities that it is often compared with, such as Chengdu?
A: As for the relationship between Chongqing and Chengdu, there’s always been a friendly rivalry. Chongqing used to be part of the same province. Chengdu controls a much broader hinterland so it draws upon all these resources surrounding it, whereas Chongqing plays much more of a gateway role. It’s the city that looks outward. It’s the port city that controls access in and out of this region; that’s going to be the role that Chongqing can play.
Q: What kinds of challenges do Chongqing and the larger region face?
A: The challenge that faces the Refuge is that it has been so insulated in the past. It’s been used to being self-sufficient and it hasn’t competed as part of the larger economy of China. It’s generally been an area focused on farming. In many ways, it’s like the American Midwest, but surrounded by mountains.
Q: What resources do they have to overcome these challenges?
A: People look at the people there and think, “They aren’t sophisticated like the people in Shanghai or Beijing. They are kind of simple and unsophisticated.” But I think that’s a strength. This is the region where Deng Xiaoping is from; this kind of simple attitude that doesn’t get wrapped up in ideology, this is a strength. The other strength is its lifestyle, where people sit around and eat hot pot and relax. One of the things we invested in when we were there was food products, because the Sichuan taste and the Sichuan lifestyle have great appeal around China. Products that can brand themselves along those lines have great appeal throughout the rest of China. Of course, that area also has great natural gas resources and the challenge has been to tap into them and to send them by pipeline throughout the rest of China. China is developing a pipeline to do that efficiently. That means a resource that used to only be useful to the people there will be useful to everyone around China. In addition, Chongqing is the planned terminus of the new pipeline being built to import oil from Myanmar, instead of shipping it through the Singapore Straits. Together with the natural gas pipelines originating in Sichuan, this has the prospect to turn Chongqing into an important energy hub.
Q: What are the pillar industries in Chongqing?
A: Chongqing has one particularly interesting industry, and that’s motorcycles. Chengdu is flat and you can easily ride a bicycle across it, but Chongqing is very hilly and you almost never see bicycles, so people ride motorcycles. To build a good motorcycle you have to build a good motor, so Chongqing has also developed to build auto parts and automobiles. The only other part of China where they make a lot of motorcycles is around Guangzhou, but the whole PRD is a leader in many industries, so in many ways it’s far more unique to find it in the interior of China. It’s also worth noting that the countryside west of Chongqing, near Dazu, is the world’s most important source of strontium, a mineral used to coat television screens in order to block radiation. Nearly two-thirds of the world’s supply comes from here.
Q: Are these domestic or foreign companies making motorcycles?
A: There are dozens of companies, mainly domestic, ranging from quite large to quite small. There’s been more foreign investment looking at Chongqing for automobile manufacturing.
Q: Is foreign investment in Chongqing focused on manufacturing and exporting goods or getting a piece of the consumer market there? What opportunities are there for foreign firms seeking either new manufacturing bases or new markets?
A: There’s been a great deal of interest among foreign retailers in tapping into the interior of China. The total population of the Refuge is about 100 million people. It’s hard to talk about a single region when there’s a 100 million people there. If you go to Chongqing or Chengdu, you’ll find all the Wal-Mart and Carrefour stores, McDonald’s, KFC – those are the sorts of companies that are leading the way. Overall, there’s very little foreign investment in the Refuge. Chongqing maybe has the most as the gateway. Trade as a whole so far only makes up about 10% of the economy, so these retailers represent the pointy tip of the spear. But whenever I visited Wal-Mart or Carrefour, they always seemed to be packed with people.
Q: What about domestic tourism in Chongqing? Are the people there travelling a lot?
A: Wages are lower in Chongqing, though some people in the urban areas might be earning as much as people in Beijing or Shanghai. Sichuan has a lot of tourist attractions, they also have a lifestyle that also attracts people to come and sit in a teahouse and relax and eat the good food, that’s what people come to Sichuan for. Combined with the lifestyle, [popular tourist sites in Sichuan] make the region to which Chongqing is a gate a very attractive place for Chinese people to come and take a holiday and relax. You do a see a lot of that taking place, so it’s mainly inbound tourism taking place, not so much outbound, but there’s very few foreigners going there. Until the infrastructure was improved recently, it used to be very dangerous to travel to Jiuzhaigou [nature reserve] and hardly anyone went there; now millions of people can go every year. The isolation that this region had that insulated and protected it, that presents challenges and also opportunities.
Q: With increasing development, what dangers are there for overcapacity in the real estate market there? What about overdevelopment of logistics infrastructure? Is this a risk or is all this development warranted by Chongqing’s impressive growth?
A: That’s a challenge that every city in China faces, including second- and third-tier cities. I don’t see Chongqing as being particularly at risk of that – it’s a concern when people are buying luxury apartments and keeping them empty, but you see that all over China. [As for logistics,] I took a bus from Chengdu to Chongqing a few years ago; we must have hit every pothole, bumping all night through villages. Now, the trip is three hours by expressway. It’s very smooth. And this is not the only expressway; there are other expressways in the basin. Just north of Chengdu was where the earthquake hit two years ago and everyone around the world saw how hard it was to get to that region. Once you get to that side of the mountains, still a lot of work needs to be done; those mountains ring the basin so if you want to get access to the outside you need to develop the roads.
Q: Can you share any information about the quality of life for expatriates there?
A: It’s a very pleasant place to live; it probably has the most hustle and bustle out of all the cities in that region. It’s definitely very outward-looking; people are very active and looking toward the future, as opposed to places like Chengdu where people are still very insulated. There are still many challenges to living there as with other second-tier cities in China: the availability of education for children, of international schools, of health care that would meet a foreign standard of care. Chongqing is not unique in this respect; every second-tier city in China struggles with these issues. But in terms of quality of housing and entertainment, it’s a very pleasant place to live. And I think when you live in a place like Chongqing; you get a much better finger on the pulse than if you live in an expat community in Beijing. What’s happening in Chongqing is very typical of what’s happening throughout the rest of China.