Small city, big dreams

When last July Beijing won the right to host the Olympic Games of 2008, there was another Chinese city that had plenty to celebrate on that day. It was Qingdao, the city where the Olympics sailing events will be held. The news marked the coming of age of this scenic port city located on the tip of a peninsula on the south coast of Shandong province in eastern China.

Qingdao is a relatively small city, with an urban population of 2.3m people. It has neither the political clout nor the sizeable local market of big urban centres such as Beijing and Shanghai. Yet recently Qingdao has been one of the nation's fastest growing cities, with a near doubling of its GDP from Yn64.2bn in 1995 to Yn115bn in 2000. The rest of the nation recorded single-digit yearly growth during the same period.

Qingdao, previously not known as an industrial centre, is now home to some of China's most famous brands, such as Tsingtao Brewery, the electrical appliances group Haier and Shuang Xing (Double Stars), the world's biggest manufacturer of rubber shoes. Qingdao was ranked as China's seventh most competitive city in a recent survey published in Economic Daily.

Qingdao's rise shows that second-tier cities can prosper with the right mix of policies and circumstances. For many years, Qingdao was a sleepy seaside town famous for its beaches and German-style villas. It also had a heavy navy presence, which inhibited the growth of business. While neighbouring coastal cities such as Dalian were opening their doors to investors, the military in Qingdao was suspicious of outsiders. "We were not even allowed to have direct international flights," says a local official.

Qingdao's chance came in 1992 when patriarch leader Deng Xiaoping called for a new wave of economic liberalisation. Two years later, the city got another boost: it was elevated from the rank of a city to one that was just below that of a province. There are 15 such 'semi-provincial' status cities in China. This means Qingdao is able to make important economic decisions more freely and retain a bigger share of the tax revenue collected locally than a city such as Yantai.

With its new-found autonomy, Qingdao embarked on an ambitious urban renewal programme. It built new roads, parks, squares and other public amenities. What was once a fishing village in the neglected eastern part of the city has been turned into a new business area. Government offices have been moved to the new district, leaving the historical colonial houses intact in the old town. It banned the construction of skyscrapers near the seashore, leaving space for lowrise villas, beaches and a huge public square.

With improved infrastructure, property prices in Qingdao have surged. Prices for popular low-rise blocks facing the sea have risen from Yn8,000 per sq metre a year ago to around Yn12,000 per sq metre, property agents claim. Many local people are buying housing units at the design stage, in anticipation of higher prices in the future.

There may be a property bubble in the making, but Qingdao's economic strength is anchored firmly on a group of highly successful local companies. Total sales of the city's top 11 companies account for 75 per cent of its GDP. These include Tsingtao, Haier and two other home-appliance makers, Hisense and Acuma.

Haier, the biggest firm in Qingdao, has become a legend nationwide. Every day, visitors from all over China come to learn how a small refrigerator firm was transformed into the world's sixth largest producer of electrical appliances. Zhang Ruimin, now 52, became manager of the firm in 1983. "We were near bankruptcy and had to borrow money to pay the staff," he recalls.

But a determined Zhang rode the massive pent-up demand of deprived Chinese consumers to transform the small collective firm into a global brand. Since 1996, the company has enjoyed an annual average sales growth rate of 24 per cent. It has also set up plants in Italy, Africa and the US.

Another corporate giant is Tsingtao Brewery, which was originally set up by the Germans during their occupation of the city between 1897 and 1914. In the early 1990s, this old established brand was losing market share to upcoming foreign and domestic rivals. Its sales stagnated and profits dropped and between 1996 and 1998 it stopped paying dividends to shareholders.

Thanks to a new management team, the firm used a fast-track strategy to reclaim its lost market share: mergers and acquisitions. To date it has acquired more than 40 breweries in China, boosting its production capacity from 400,000 tonnes a year in 2000 to an anticipated 3m tonnes in 2001. Its market share is set to rise four-fold to 8 per cent during this period. Tsingtao aims to be one of the 10 largest breweries in the world, although this plan may take a decade to materialise, says chairman Li Guigong.

Tsingtao's comeback is a lesson for the city as a whole. Like the brewery, Qingdao needs to keep re-inventing itself to continue generating double-digit growth. The white goods industry, which has been the main contributor to the city's new prosperity, is suffering from overcapacity and from heavy price-cutting nationwide. Even market leaders such as Haier feel the pressure to diversify in order to maintain earnings growth. Haier has recently branched out into producing personal computers, mobile phones and other fast-growing telecoms products.

In the next stage of growth, services such as tourism and shipping will play a bigger role in Qingdao than manufacturing. In the last five years, the services sector has grown from 36 per cent to 39 per cent of the city's GDP, at the expense of agriculture. This has created jobs for workers laid off by textiles and other distressed state firms.

Qingdao has great potential in tourism, given its scenic setting, clean beaches and mild climate. In 2000, it received 12.9m Chinese tourists and 260,000 foreign visitors (mainly businessmen from South Korea and Japan), who generated Yn10bn of revenue. To generate more tourist interest, Qingdao organises a number of festivals. The star attraction is the annual beer festival, held each August. In 2001, 1.3m visitors came for the cheap beer and the festivities.

Shipping is another high-growth industry, with the cargo business registering doubledigit growth annually in recent years. Last year, Qingdao handled 4.9m tonnes of cargo, 18.8 per cent more than in 1999. The port is now China's seventh largest and is its third largest container port.

Another source of growth is predicted to come from foreign companies, which have increased their investment steadily in Qingdao. By July 2001, there were 10,748 foreign- funded firms, with a combined utilised investment of US$8.9bn in the city.

Among these firms is Lucent Technologies' Qingdao Power Systems Co, which has been producing wireless power equipment for the China market since its inception in 1996. P&O Steam Navigation Co of the UK has a US$21m agreement with Qingdao Port Office to develop the second phase of Qingdao's Qianwan container terminal. Jusco and Carrefour, two retail giants, have set up outlets in downtown Qingdao. There are also many small and medium-sized firms from South Korea, involved in textiles, trading, auto parts, catering and other small-time businesses.

Other foreign firms are targeting Qingdao's expected investment in public projects built in advance of the Olympics. "We will participate in upcoming tenders for projects such as the expansion of the airport and the new subway," says Yin Tong, a Siemens manager in Qingdao

Even small-time investors like Lin Kuangju, a Taiwanese businessman selling power-charging devices for mobile phones, plans to do more business in Qingdao. "The market in the south is getting too competitive," he says. "Qingdao could be a good base for doing business in the north-east."