Last year was a stellar one for Liaoning province in China's Northeast, with authorities reporting the launch of 80 major technology reform projects and industrial investment climbing 23%, over 2002. The biggest news actually came early, in March, when Huacheng Golden Cup Co signed an agreement with BMW to establish a .450 million-euro 30,000-unit capacity joint venture plant, the German carmaker's first production line in Asia.
Then came other deals, Shenyang Liming Co's deal with GE on a US$50 million JV to make gas turbine parts, and by December – at the buzzing Dalian end of the province – ThyssenKrupp Stahl (TKS) launched its US$180 million joint venture with Angang New Steel.
Liaoning has been on a roll. But it has not always been thus. Despite the new expressways and gleaming office towers, Liaoning is still shadowed by its communist rust-belt past. State-owned enterprises, some shriveled, some dead and finished, still lurk like old hulks. Some lucky ones, like Shenyang Aircraft Corp with its JVs with Airbus and Boeing, have held on. But it is a far cry from the days when central planning held full sway and 10% of China's SOEs called Liaoning home.
Liaoning is tucked into China's Northeast, bordered by Hebei to the west, Inner Mongolia to the north and by Jilin province, and – crikey! – nuclear-charged North Korea to the east. Its coastline could almost be called extravagant. From the west, it hooks around the Liaoning Gulf to the southern tip of the peninsula – where Dalian sits like an anchor the way Singapore does at the tip of peninsular Malaysia – and then tracks north again to the Democratic People's Republic of Korea.
The border town of Dandong does a good trade drawing tourists to gawk at the DPRK's depressing emptiness across the Yalu River. But for a spin in the communist time machine on the Chinese side of the border, visitors can do worse than take a stroll around Sun Yatsen Square in Shenyang, the provincial capital 300km inland. More circus than square, the traffic-ringed expanse of concrete is dominated not by Dr Sun, but by an enormous statue of a great-coated Chairman Mao Zedong striding forth with what looks like a very serious agenda.
Out of the statue's massive concrete base, all sorts of fantastically muscular, oversized people maniacally spring out – peasants wielding sickles, miners with hammers and pickaxes, PLA soldiers brandishing pistols and rifles, even a doctor appears with stethoscope askew and assorted others, all looking uniformly crazed.
But on a Sunday evening the surrounds of the statue serve as a boisterous hangout for T-shirted locals, more concerned about finding elusive tracks on their MP3 players than uplifting passages from Chairman Mao's Little Red Book.
Yet abandoned building projects, some 20 or more stories high, leave evidence of capitalism's false starts, too, in Shenyang. One of the area's better known false starters was Yang Bin, who built up an orchid-growing empire called Euro-Asia Agricultural Holdings on the outskirts of the capital, which Yang turned into a test bed for assorted oddball projects, including a model Dutch village built with canals snaking through it.
Euro-Asia reported earnings so fantastic ahead of its 2002 Hong Kong initial public offering that regulators grew curious. Then unpaid taxes came up, then charges of embezzlement – over siphoning off of IPO proceeds for no good purpose. Yang was eventually arrested and the company was put in receivership – its partner investment bank, ICEA, was just last month fined HK$30 million for its part in the IPO – but for a fleeting moment the Nanjing native with the Dutch passport enjoyed a reputation for being a real tycoon, China's second richest according to Forbes.
Mandate from North Korea
Before Yang's fall – perhaps even precipitating it, some speculate – Dear Leader Kim Jong Il gave the orchid king a mandate to establish a capitalist economic zone inside North Korea, just a hammer's or sickle's throw from Dandong.
Yang was even appointed governor of the newly designated Shinuiju Special Administrative Region and jetted around with international media in tow, telling of his bold plans for the zone, including demolishing every building in it and expelling the entire population then living there.
Only weeks ago, in September, Pyongyang finally managed to pick up where Yang left off, appointing a Korean-born Chinese California real estate baroness and restaurateur to fire up the project. This time, it may even come off, now that China has expressed an interest in setting up a parallel zone on the Dandong side of the river.
Every province of China has its wild and wooly past, Liaoning no more than the next. But parts of it still exhibit an outpost quality where foreigners dispatched to Shenyang to manage plants and projects opt to live in international five-star hotels rather than settle into more permanent housing – even after years on the job.
If you stay at the InterContinental and wander around the executive floor 20 stories up, for example, you chance bumping into people from Boeing, Airbus, Tyco, BMW and other companies, not to mention US consular staff who all call the hotel home.
In fact, it was there that Airbus UK Quality Team Leader Ivan Gooding explained over dinner what he and his team of 100 did at the Shenyang Aircraft Corp (SAC) works: they make track ribs for A-320 single-aisle series aircraft. The planes that compete with Boeing's 737? "That's right," Gooding said. "Now if you mention Boeing again, I won't speak to you."
With a hearty ho-ho-ho, he went on to explain that the ribs are what secure the elevator slats along the front edge of the wing. (Wings are the UK piece of Airbus Industrie's four-nation consortium.) Getting that rib production line going constituted Phase 1, and the team has since moved on to Phase 2, which calls for making the whole length of the leading edge, in other words the whole front of the wing. (Shenyang production complements work in Xi'an, where Airbus UK puts together the trailing edge of A320 series wings.)
"In fact, we just completed the first one, and it left today for the UK in a big box 20 meters long – in an Airbus."
But don't ask Gooding how the second one is going. There have been bumps along the way, mostly arising out of conflicting production styles, Gooding said. Were he left to his own devices, the Airbus man would have deployed different teams to troubleshoot problems that recently surfaced on two production jigs; SAC opted to solve one problem before moving on to the second, stretching out downtime and causing what Gooding contends is a month's delay. "But it's our fault, too," he conceded, explaining that guidance on how equipment needed to be tweaked for the new assembly was not passed along from the UK, precipitating the problem in the first place.
Airbus's German arm also works out of SAC, building escape doors. Boeing, Bombardier and other foreign plane makers also make parts at the company's plants, whose main role outside of JV activity is turning out military aircraft for the PLA.
Dennis Adams, general manager of Tyco Safety Products Shenyang (Sensormatic before it was gobbled up by Tyco International), is another InterCon resident, and a bit of an old Shenyang hand after setting up operations five years ago.
Indeed, this is his second plant, having just moved across town into Shenyang's New Industrial Park in September. His branch of Tyco is in what is known as the electronic articles surveillance business, supplying tags that explode with ink when consumers try to remove them from stolen garments, or that set off store alarms when shoplifters try to slip out without paying.
Tyco, as Sensormatic did before it, owns the business worldwide. Adams guesses it supplies 60-65% of tags worldwide, to Wal-Mart, Federated Stores and other big chains. The big trend at the moment is the retail industry's shift from recycled tags to throwaways that cost the chains US$0.15 apiece, a bargain given the 25 cents they were paying out to recycle tags. To cope with growth, Adams said he will increase this year's investment of US$10 million to probably US$25 million next year, pack the building with more equipment and push headcount up from the current 850 to 1,500. "And if we need to expand, there's land right next door."
Adams made the decision to set up in Shenyang, and the decision came pretty easily by the sounds of it. Qingdao and Shenzhen, which were briefly on his possibles list, both required investors to buy land and build a building; Sensormatic wanted to rent. But Shenzhen was especially easy to cross off the list – land costs aside, their labor rates were double to three times Shenyang's. Another consideration was turnover. With labor in the south coming from somewhere else, there was always the pull of home, whereas in Shenyang, all labor is local. "We don't have dormitories here," Adams said. "The workers live with their families." He says the company also wanted to set up its own wholly foreign-owned enterprise, or WOFE, and Shenyang was amenable to that. "Shenyang has a good business atmosphere."
What's more, it has a golf course. Adams is a golfer, and when there's time, a volunteer English teacher at two neighborhood schools. Compared to his namesake and infamous former colleague, Tyco International Chairman Dennis Kozlowski, who blew millions in company cash doing silly things including buying a US$6,000 shower curtain, it all sounds a bit prosaic. But Dennis Adams seems content to keep driving a roaring China operation he started from scratch.
David Markham is general manager of the InterCon, and also the Holiday Inn on the other side of an office block sandwiched in between. Occupancy stands at about the Shenyang international hotel average – 85% – and the office block, which boasts Motorola, NEC, Samsung and other multinational tenants, is always full.
But occupancy comes at a price: five-star accommodation in this town starts at only US$50 a night, a fraction of rates in Dalian, let alone Shanghai. Markham manages all three Shenyang properties (besides watching over new Bass Group hotels going up in Inner Mongolia and Dalian). He says the chains arrived in Shenyang (population 7.2 million) only five years ago, and today international class rooms still number only 2,400 or so. Putting that figure in perspective, Markham guessed similar-sized Hong Kong has maybe 40,000. The wonder of it, Markham said, sounding a bit relieved, is that not one innkeeper in Shenyang's international bunch has ever suggested creating a cartel to push prices up.
Port city in overdrive
Dalian always has a new hill in sight, always a new horizon for the visitor to explore. This makes it an instant hit. It also has classy old trams, normally another big plus; the problem is there are no rules about traffic stopping when the trams stop in the middle of the road to collect or decant passengers – so the unwary de-tramming traveler risks being raspberry-jammed by an idiot doing 30 or 40 mph on the inside lane.
With its bustle of trams and snarling traffic, Dalian, a port city of nearly 6 million, is Liaoning's really big deal. Indeed, it is more than that. "Dalian is the main port not just for Liaoning, but for all of Dongbei," declared Chi Bing, deputy director of Dalian Development Area's (DDA) Foreign Investment Center. China's northeast region, while no match yet for the Yangtze or Pearl deltas in economic terms, is nothing to sneeze at: the region adds up to a market of 140 million, just shy of seven Australias in population terms. And it's not that larger China markets, like Shanghai, are so far away, Chi was quick to add. "With South Korea and Japan right here, we are right in the middle of everything."
The 47sq km DDA, 20 years old this year, today boasts a population of 350,000. It is a self-contained city, with parks and residential areas thick with trees, and a downtown with skyscrapers that aren't shy about standing tall. Everything, or nearly everything, is Singapore neat. And it is only a half hour away from Dalian's downtown, thanks to the excellent light rail system which pipes an exuberant mix of Strauss waltzes and Kenny G through the cars to soothe or rattle the nerves as the case may be.
Chi offered his kaleidoscopic tour of the DDA over coffee at the zone headquarters building just ahead of meeting a group of investors from Taiwan – he handles several tours a day – and he explained how his priority now was to fill gaps in different industrial food chains. One was getting more car parts makers to set up in the zone to provide more local content for companies like BMW.
"We're developing a little differently than Guangdong," he explained. "Hong Kong and Taiwan component makers moved in first. Here, big companies come in first and then we encourage the component companies to follow." In that sense, the DDA is following in the footsteps of Shanghai or Hangzhou, getting the end-product assemblers to set up first.
There are other items on Chi's recruiting list. Conceding everyone has climbed on the IT bandwagon, he said the DDA was focusing on building up Dalian's strengths in opto-electronics and related semiconductor activity, since Beijing already designated Dalian as one of the country's development areas in that segment. Another development focus is shipbuilding. "Dalian is already number one in China," he said. And undoubtedly headed for number one in the world, he almost added. "Just as shipbuilding moved from England to Japan, and then to South Korea, some predict it will move to China. Ship parts makers from Korea are already here."
Soon, he said, the DDA would formally open an office to promote the zone among Chinese companies, particularly any newly listed ones (with the requisite cash) to fill gaps in electronics, auto parts and logistics. "We've been talking to different companies in Guangdong, Shanghai and other cities and we're finding there is a lot of interest in Dalian," Chi said. Since China has been trying to level out its tax code to make the corporate bite even across the country, he said the days of one region trying to beat out another by offering would-be investors tax holidays and other breaks are just about over. Today, he said, the DDA must make its investment case on its merits, which are not inconsiderable.
They include cheap and abundant power – local rates are roughly half those of Guangdong – and water, university graduates (thanks to Liaoning's 69 tertiary institutions) and labor costs that Chi says are one quarter those of Shanghai. "Right now, companies are moving out of Shanghai and going to Wuxi and Suzhou," he began with what sounded like a well-practiced pitch. "But in three years they'll move out from there be- cause of the cost – and I mean the comprehensive cost of power, land and labor."
There is, Mr. Chi conceded, one wee wrinkle that must be factored into local business plans, though. Liaoning is a pilot province for insurance reform – and after employer contributions to accident, life and unemployment insurance schemes are factored in, labor costs effectively rise from RMB 600 to RMB 900 a month – for full-time employees, that is.
Old China hands would have already spotted the loophole: the well exercised option of hiring workers on a temporary basis. Undoubtedly, this will soon be plugged and another loophole will suggest itself, but the bottom line is worker compensation will eventually blanket all of China, adding insurance to everyone else's costs, leaving Liaoning miles ahead as the low-cost champion.
Insurance extras or not, the place just roars. The average investment of the 40 foreign companies in the zone is US$70 million. So far, it has drawn US$10 billion in contractual investment, nearly half that already in the ground. In 2003, DDA's GDP topped US$3.36 billion, 23.7% up on the year earlier – it now adds up to 17% of Dalian's total GDP.
The zone, launched as China's first economic and technological development zone by Deng Xiaopeng in a farmer's field exactly 20 years ago, has attracted big global players, and they make an eclectic mix. US pharma Pfizer makes Viagra here; German steel giant ThyssenKrupp Stahl's joint venture, TAGAL, turns out enough high quality galvanized steel to make every car body in China (and would if it wasn't preoccupied filling orders to Europe); Sanyo, through its joint venture with Dalian Cold Chain Co, makes refrigerator and cold storage products for supermarkets all around China and the region. Sun Yu, TAGAL's deputy general manager, says production at the nine-month-old venture is on target to turn out 400,000 tonnes of galvanized coiled steel for the auto industry. That's actually jumping ahead of the story a bit. Half of TAGAL's customers, when China Economic Review visited, were Chinese home appliance makers – but from October on, half the plant's annual capacity will be shipped to European automakers. "Europe cannot produce enough steel," Sun said, explaining why the company had broken into the export market before even making a dent in China's automotive sector.
Indeed, that shortage inspired the venture, TKS being the principal supplier of steel to Europe's auto industry. "We started in December last year and our ramp-up curve has been very good," he said. And right on target, they started making product for the car industry in September. In one fell swoop, TAGAL has managed to snare almost every major in the business: VW, BMW, Audi, Volvo (Ford) and Opal (GM). "We also sent steel to Italy (Fiat) and to PSA (Citroen)." Since these companies are all busy turning China into an automotive powerhouse, Sun, anticipating the question, said his company should start supplying their China affiliates as the months roll by – shipping to BMW Shenyang starting next year.
"Our line can fulfill all of China's automotive consumption right now," Sun said, doing the numbers in his head. Part of that is explained by fact that carmakers are using less galvanized steel and switching down to cheaper cold-rolled steel to trim costs. But given the country's current 5 million unit annual production, and current galvanized content, TAGAL can handle China's entire requirement. And as car production increases, TAGAL always has the option to set up a new line. Chi said the venture has already secured adjoining land to build a new plant next door, for just that eventuality.
Though obviously happy with the success of the venture, and the fact that everything cracks along, usually, ahead of schedule, Sun said putting the deal together with Thyssen wasn't easy; the feasibility study took a stretch of time; negotiations on the fine points of the partnership were an agony. Communications remains a big issue and requires constant and careful attention. "Misunderstandings always happen," Sun heaved. As a procedure gets lost in translation, workers resort to familiar practice which won't necessarily work in the new operation. The difference now is that they occur less often they did.
Germans have long had a fascination with this part of the world, dating back to the days when they planted a brewery in what used to be known as Tsingtao. Just as Germany introduced beer to China, it introduced the first foreign cars to the market – through the German trading giant Jebsen and Co. Now, of course, VWs are turned out like cornflakes in Shanghai and other centers and there is no need for Jebsen, which has moved on, too. Indeed, Robert Lu, chief representative of the company's Dalian office, confided that the company is now in negotiations to represent Porsche in the country. "There is a lot more money here now."