Silks to silicon

Suzhou, once a pleasant merchant town known for its fine silks, elegant gardens and canal-lined streets, has much more than tourism going for it these days. A foreign investment-focused plan, carefully instigated in the 1990s, has seen the city transform itself into a major electronics export hub and a Mecca for high-tech investment.

About 100 kilometers west of Shanghai – about an hour away by car and less by train – Suzhou is Jiangsu province's oldest and wealthiest city, capitalizing on its bustling next-door neighbor's success. Suzhou municipality, which extends north to the Yangtze River and west to Tai Lake, includes an area larger than all of Shanghai, though with a smaller population of 5.9 million (2 million within the much smaller city limits).

Still, the city is routinely one of the most productive in China. Suzhou's 2005 GDP ranked fifth in the country at US$50.8 billion, and industrial output totaled US$150 billion, good enough for second place behind Shanghai after topping the list in 2004. It received over US$6 billion in foreign direct investment last year, also second only to Shanghai.

But Suzhou's prosperity has not always been tied to Shanghai. It once thrived as a trading city along the Grand Canal built between Hangzhou to Beijing in the seventh century. It gained a reputation for its silks (supposedly made softer by the area's wet climate), and the silk trade and textiles remain a bulwark of its modern-day economy. Although the city's own canals may have invited the nickname the "Venice of the East," they do not compare in scale or commercial value with their Italian counterparts.

In the Ming and Qing dynasties it became popular for mandarins and well-to-do merchants to retire among Suzhou's peaceful canals. Many made their homes into stately gardens, inspired by descriptions from classic poetry. Today's restored versions, among them the Garden of the Humble Administrator and the Lingering Garden, are the city's top tourism draws.

Suzhou's good fortune was interrupted by the disastrous Taiping Rebellion of the 1850s and 60s, during which it was captured and recaptured four times, suffering unprecedented destruction and loss of life. Around that time, foreign-controlled treaty port Shanghai began its transformation into China's dominant trading city, a title it has held ever since.

Model growth
In the 1970s and 80s, government-led development of Suzhou's economy focused on township and collective enterprises – the so-called "Southern Jiangsu economic model," also used in nearby cities Changzhou and Wuxi. However in the next decade Suzhou switched gears, reducing the role of state-owned companies and concentrating on bringing in foreign capital.

From 1997 to 2002, the share of industrial output for state and collective enterprises dropped from 58.9% to 9.8%, while that of foreign-invested entities shot from 33.2% to 55.8%. Changzhou and Wuxi followed suit, and together the three cities are known as the "Golden Triangle" for their runaway double-digit annual growth, which has yet to come to an end.

The Suzhou model, as it is now known, relies heavily on careful planning to create an attractive investment environment, at which the city's government has become quite adept. "The government here is very progressive," said Daniel Aylmer, general manager of the Suzhou Sheraton Hotel. "They're very fast, they encourage development and as a result it's much easier to do business here than other cities nearby. They've really got it down to a tee now after all these years of experience."

Those years of experience benefited considerably from the forming of its largest industrial zone, Suzhou Industrial Park (SIP), which began as a 35-65 joint venture between the Chinese and Singapore governments in the early 1990s. The Singapore side effectively jumpstarted Suzhou's snowballing foreign investment with its technical know-how, and the large swath of land east of the old city morphed into a meticulously planned suburban community with efficient infrastructure and corporate campuses as far as the eye could see. It appeared that Suzhou was quickly learning how to make it the Singapore way.

But the JV partners had a falling out in the late 90s, when Singapore Prime Minister Lee Kuan Yew angrily accused local officials of playing favorites with Suzhou New District (SND), a rival zone to the west of town. While Lee's claim appears exaggerated in hindsight, the upshot was the Chinese side buying out 30% of Singapore's stake in the venture.

There are now 100 Fortune 500 companies with operations in Suzhou, and more than 5,500 foreign enterprises overall, most of which establish their bases in SIP or SND. "SIP is still full of Singapore JVs, but it also tends to have more European and American companies, whereas in SND you see a lot more Korean and Japanese companies," said Aylmer.

Big ambitions
Two of the city government's stated goals, to become China's "leading destination of FDI" as well as a "base for new and high-tech industries", are well on their way. Electronics and telecommunications equipment makes up the largest portion of the city's broad industrial base. High-tech firms like Panasonic, Philips, Nokia and Alcatel have large presences here. Meanwhile, a stretch of leading IT component makers including TSMC, Samsung, Hitachi and Philips grouped along the road to Shanghai has been labeled the "silicon corridor."

"Business here is very IT-driven," Aylmer said. "When companies come to Suzhou, they come in a big way." Indeed, electronics producers here are posting outsized numbers. Suzhou exported 16 million laptop computers valued at US$10.9 billion in 2005, and makes more than a third of the world's mice as Logitech's largest production base. Semiconductors have also become a major business, as chipmakers National Semiconductor, Solectron, Fairchild and AMD have all moved into town.

Besides being a manufacturing behemoth, Suzhou is also gaining a reputation as an R&D-friendly town. More than 30 top-500 companies in the city have set up research and development centers, and SIP plans to push for more growth in technological and R&D sites. Even as some firms move their assembly operations to cheaper, mid-sized cities they are staying in Suzhou for research – Samsung recently relocated a factory to Changxing in Zhejiang province, but opened a Suzhou chip R&D center.

Though certainly not as expensive as Shanghai, costs in Suzhou are increasing. "The closer you are to Shanghai, the higher your costs are," Aylmer said. "However, a lot of people feel the benefits of doing business in Suzhou still outweigh the negatives, which can be cost-related. It's still worth investing here, there's no question."

Aylmer cites Suzhou's pleasant atmosphere and quality of life as one of the clear benefits. "People come here to work and they never leave – they love it," he said. "The standard of living is very high, people are well paid and as a result you have very low turnover."

But if Suzhou's FDI-heavy strategy gets rave reviews from foreign companies, it has drawn some criticism from locals, who have received less attention overall. Of the city's bounding growth figures in recent years, foreign investment accounts for over 70%. The Suzhounese have become relatively poorer – while Suzhou's per capita GDP is higher than Shanghai's, its per capita income is about half that of Shanghai. For all the thriving FIEs in town, there are practically no significant homegrown businesses.

Of course, this is the way Suzhou has chosen to operate, and it has brought success, after a fashion. An alternative (and opposite) model would be Wenzhou in Zhejiang province, which depends more on a fiery local entrepreneurial spirit than government initiative and foreign investment.

The fact remains that Suzhou has become the best in China at what it does – producing the world's electronics and reeling in the investment dollars. It is not likely to change its plans any time soon.