Kevin Sun lets out a frustrated sigh. The Shanghainese club owner, who asked that his real name not be used, is busy preparing the opening of his latest venture, a café in central Shanghai. It hasn’t been easy: Quite apart from setting menus, he’s had to face off with the city’s bureaucracy. Sun describes a Kafkaesque sequence of applications, permits, conditional approvals, re-applications, inspections, stamped reports and mandatory training sessions.
"It’s already been two months," he said – and that just to get the permits to begin renovation.
Is the coming of the 2010 World Expo at least pushing things in the right direction? Not at all, Sun says. "Because of Expo, they’ve slowed down the release of food licenses. They say it’s good for the visitors, a food safety issue. This is the first time I’ve set up a café, and for me it’s unbelievably hard to start this kind of business in Shanghai."
Sun is nonetheless pushing ahead to open the café, even as the Expo threatens to create more problems. His club was recently visited by local government representatives, who expressed their "hope" that he might shut it down for six months, until the end of the Expo.
"I have to pay my rent. It’s like asking, ‘Oh, can you die?’" Sun said. The club will remain open.
As the city rushes to ready itself for the Expo, which begins on May 1, Shanghai’s business community is facing a growing dilemma. The city and its wealthy inhabitants remain a powerful draw, and in many ways, Shanghai leads the country in regulatory openness. Behind the Expo glitz, however, it may be more difficult than ever to find business success in Shanghai – and the reasons for this are more subtle than they first appear.
The local government has certainly made showcasing Shanghai as a commercial center a priority, and its efforts will be on full display at the Expo. The 70 million visitors it expects at the 184-day event will see not just national pavilions, but corporate ones sponsored by the likes of State Grid Corp of China, Cisco (CSCO.NASDAQ, 4333.HK), and auto firms General Motors and Shanghai Automotive Industry Corp (600104.SH).
The official theme of the Expo is "better city, better life," but given the level of commercial interest, "better business, better life" might be equally applicable.
"Shanghai is taking advantage of the Expo to promote industrial consolidation and reorganization," said Shen Siwei, a professor and researcher at the Modern Finance Research Center at Shanghai Jiao Tong University.
"Shanghai’s economic development is based on the principle of ‘four centers’ – Shanghai as an international economic center, a foreign trade center, a shipping center and a financial center," Shen said. "It’s building new manufacturing and service industries to open up sustainable development."
Examples include strengthening the city’s aviation industry – the final assembly plant for China’s C919 large passenger jet opened in Pudong in November – boosting shipbuilding and tourism on Chongming Island, and developing new research and development centers like the Zizhu Science Park in Minhang.
A growth story
It would appear that the approach has worked so far. Shanghai’s economic boom has been the stuff of breathless prose for at least 20 years of equally breathless development. Between 1992 and 2007, it recorded double-digit annual growth rates through a combination of local entrepreneurship, government support and foreign investment. The city’s GDP hit US$218.26 billion in 2009, pushing it past Hong Kong.
The news last year wasn’t all positive. As China’s export-focused manufacturing industries reeled from the collapse of global export markets, Shanghai’s coastal economy was disproportionately affected. GDP growth slowed to 8.2% in 2009 from 9.7% in 2008, and the city seemed humbled.
If that humility was real, then – true to Shanghai’s character – it didn’t last long. As construction for the Expo rose to a cacophonous crescendo at the end of 2009, and Western economies continued to stutter, talk turned once again to building Shanghai into a global business and financial center. The city’s own businesses are in the vanguard, taking advantage of what both local and foreign business people say has been one of the best business environments in China.
Mr Xu, who prefers not to give his full name or the name of his company, is one such entrepreneur. A Shanghai native, he began his business in 1995 to research, produce and sell antibiotics for animals and plants. His customers are typically farmers and fishermen in the region around Shanghai. Starting off with his own money and loans from relatives, the early years were tough. "I tried to get aid from the government, but failed," said Xu. "I once rode my bicycle more than 20 kilometers from Wujiaochang to Xujiahui just for a profit of RMB40 (US$5.85)."
Beyond the comfort zone
Years of hard work paid off, as Xu’s company grew and enjoyed the benefits of favorable taxation and of securing intellectual property rights for some of his products. However, it took expanding beyond Shanghai to exhibit the city’s advantages clearly.
"Compared with Shanghai, you can not even imagine how terrible the business environment is in those places," Xu said. "The only thing that matters is relationships, and sometimes even a bribe doesn’t work."
Xu is not alone in finding Shanghai more conducive to business than other areas in China. Companies in sectors as varied as pharmaceuticals, property, trade and consumer goods questioned by CHINA ECONOMIC REVIEW all cited the city’s relative transparency as a major advantage. It’s not simply that relationships matter more than regulations outside of Shanghai, as Xu said – even determining which relationships matter can be difficult.
Corbett Wall, a Shanghai-based retail and property consultant, said firms operating in less developed markets outside of Shanghai must assume that deals will not be carried out according to expectations. When that happens, it is important to know where local power lies. "In some cases it’s a policeman, in some cases it’s a powerful individual, in some cases it’s the government, in other cases it’s the guy with short curly hair and long fingernails who can bust your knee caps without thinking about it," he said.
One area that illustrates Shanghai’s strengths is intellectual property rights (IPR). In theory, IPR laws are little different in Shanghai from elsewhere in China, but the reality can be more complex.
"It’s not so much the regulations, it’s rather the implementation by the local authorities that makes the difference," said Willi Vett, who leads the Shanghai office of German law firm Beiten Burkhardt. "Most of the IP regulations are on a national level anyway. What we see is that the big cities – and probably one of the frontrunners is Shanghai – are much more keen on enforcing these rules."
Foreign investment, says Vett, is a motivating factor behind that stricter enforcement. With Shanghai’s history as a magnet for foreign money and business, the local government is more interested than most in lowering the barriers to entry for overseas companies and investors.
"The Shanghai government is more in line with what the central government is saying, that China should protect IP rights in order to keep foreign investors happy in the long run," Vett said. He added, however, that IP piracy remains a serious problem overall.
Still, for large multinationals, the city’s pro-business attitude is paying off. "All the way along we’ve enjoyed very good support from the Shanghai government," said Alan Jope, Greater China chairman for consumer goods firm Unilever (ULVR.LSE, UNA.AS). "They’ve been very good landlords for us."
Pity the small guy
As the example of Xu, the antibiotics producer, showed, smaller companies can also benefit from a strong legal environment. Beyond that, however, private companies in Shanghai enjoy little government support. The city’s "four centers" plan focuses on large industries and companies, dominated by state-owned enterprises (SOEs). Private businesses may find themselves out of luck.
In a financial system dominated by the state, SOEs can easily raise capital through stock or bond issues, or secure bank loans; multinationals can bring in money from overseas, said Shen at Jiao Tong University. In Shanghai – and, for that matter, throughout China – the shallow pool of capital-raising options has little to offer smaller private firms.
Mr Guan, the Shanghainese owner of Qingfeng Trade, an import-export firm, is typical in his frustration at the availability of financing for private firms. Procedures to secure loans are complicated, and support of small and medium-sized enterprises is "insufficient" compared with larger firms, Guan said, adding that developing financing options – easing bank lending to small firms, in particular – would be the city’s most important step toward helping entrepreneurs.
However, while small businesses worry about the impact of an economic plan for the city based around large companies – an approach embodied by Expo’s championing of large firms while creating headaches for businesses like Sun’s club and café – the largest obstacle may paradoxically be Shanghai’s success.
"Shanghai’s economy is very advanced and many of its industries are mature," said Mr Huang, a Zhejiang native operating an online store out of Shanghai. "That makes it very difficult for new entrants to get involved and make a name for themselves."
It is a sentiment echoed by Wall, the property consultant. "All the rules to play the game seem to be easier because the cloud has lifted, but the game is moving much faster now. People have a lot more money, they don’t need you as much."
In that sense, while the city maintains geographical, operational and regulatory advantages over other cities in China, the business success of its people – Shanghai’s main attraction for both local and international businesses – is a double-edged sword.
"Some Shanghainese I’ve dealt with are just ruthless businessmen. Ruthless, ruthless, ruthless," said Wall. "Down to the 0.0001 they’ll grind you into the ground. And not just for the sake of getting a deal, but just to show you they can."