City Profile: Chengdu, China

The Chinese government has actively worked to create additional economic zones for international investment.  Increasingly, these have been further inland to leverage population centers where wage inflation hasn't been as strong.  The city of Chengdu, the capital of Sichuan province, is one city that has been developing to serve the needs of multinationals.

In 2007, this city of 14 million was designated as a Special Economic Zone (SEZ) by the government to spur investment and development.  Among the incentives are favorable tax programs to promote investment.  Investment in Chengdu is being driven by both the national government as well as Foreign Direct Investment (FDI).  Much of the FDI is directed towards the information technology sector, but manufacturing, transportation and financial services have also benefited from FDI.  Chengdu is one of 21 cities designated by China's State Council to serve as a model for the outsourcing industry.

Chengdu is one of the four major international air hubs in China after Beijing, Shanghai and Guangzhou.  An Airbus 380 can land in Chengdu.  In late 2012, British Airlines established a non-stop flight from London Heathrow.  A number of other international carriers, including Air China, Lufthansa, United, Cathay Pacific and others also fly into Chendgu.  The city is not more than 2.5 hours flight from Shanghai, Beijing, and Hong Kong. 

Language capabilities in Chengdu include Japanese, Korean, English and, of course, Mandarin and Cantonese Chinese.  Other languages such as French, German, Russian and Thai are also available.  A number of companies have set up in Chengdu to establish Asian regional hubs or global service centers capable of serving operations outside of China.

Salaries are typically lower than more established cities like Shanghai or Bejing.  In Shanghai or Beijing, for instance, a college graduate can earn a salary of 3,000 RMB or more per month.  In Chengdu, an equivalent degree would bring a salary of around 1,850 RMB per month, a savings of almost 40%.

Office rent for Class A office space is very competitive with more established locations in China.  Following are typical rents in RMB/Square Meter/Month (Source: Cushman & Wakefield analysis)

• Beijing                 525
• Shanghai            415
• Shenzen              288
• Guangzhou         220
• Chengdu             161

Multinationals with operations in Chengdu include Intel, Amazon.com, ANZ Bank, Microsoft, Motorola, Toyota, GE, JP Morgan Chase, and Nippon Steel.  More than 200 of the world's top 500 enterprises has a presence in Chengdu.  Additionally, a number of companies have set up Shared Service Centers to support business in China and across Asia.  These include Siemens, DHL and Maersk.

If you're looking for an Asian city to establish a Shared Service Center, it may make sense to look at Chendgu and discover what a number of other multinationals have discovered.

China FDI falls. Are cheaper rivals to blame?

While China as been a go-to destination for all sorts of work, including back office service centers, Foreign Direct Investment (FDI) has fallen relative to last year.  No firm conclusions can be drawn from this one statistic alone, but it does raise the question of investment choices as companies evaluate where to make future investments..  

It's no secret that China's coastal cities aren't the bargin they once were.  However, they're still proven locations within China to set up shop, and there are up-and-coming locations in China's interior such as Chengdu, in the Sichuan province in Southwest China.  The challenge for China is that it's lower cost neighbors have been watching China's success and working to emulate them.  That means more choices for Western companies to invest.

A recent article from the South China Morning Post has the details.  Here's an excerpt:

China’s foreign direct investment inflows fell at their fastest rate in more than three years in January, highlighting the challenges it faces competing for funds with cheaper rivals in a sluggish global growth environment.

China Commerce Ministry data on Wednesday showed the world’s second-biggest economy drew in US$9.3 billion (HK$72.12 billion) of foreign direct investment (FDI) in January, down 7.3 per cent on a year ago.

The fall was the steepest in year-to-date inflows since a 9.9 per cent drop in November 2009, and it was the worst January performance in four years.

January FDI was down from December’s US$11.7 billion, with inflows from key Asian economies and the United States down in the latest period, reflecting what analysts say are foreign perceptions of a decline in China’s near-term growth prospects.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said the continuing fall in FDI – the longest consecutive run since the global financial crisis – was indicative of the rising competitive challenges facing the world’s biggest manufacturer of exports.

“We expect more multinational companies will increase investment in cheaper countries, such as Vietnam and Indonesia,” Zhang told said.

If nothing else, this story illustrates that companies increasingly have choices when it comes to Asian operations.  A country like Vietnam doesn't necessarily have the infrastructure or trained labor pool that China has, but it isn't for lack of trying.  These countries are making investments in these very areas and may soon be credible alternatives to China for locating operations, including back-office staff for finance and accounting.  

China passes U.S. as top FDI destination

China recently passed the U.S. as the country of choice for Foreign Direct Investment (FDI). In the first half of 2012, China (excluding Hong Kong) received FDI of $59.1 billion compared to the U.S.' $57.4 billion (Source: Global Investment Trends Monitor released by the United Nations Conference on Trade and Development).

Not all is rosy for China though. According to an article in the China Daily, China is losing some investments to neighboring countries in Southeast Asia. An excerpt:

Developing economies for the first time absorbed half of global FDI in the first half of 2012, despite a decline of 5 percent year-on-year.

"China is experiencing structural adjustments in their FDI flows, including the relocation of labor-intensive and low-end market-oriented FDI to neighboring countries," said the report.

Members of the Association of Southeast Asian Nations demonstrated strong attraction for global foreign direct investment. FDI inflows to Cambodia surged by more than 165 percent year-on-year in the first half, while inflows to Thailand rose by 62.1 percent and inflows to the Philippines increased by 10.6 percent, according to the report.

"For investment oriented with low costs, pulling out is normal and will continue in the future owing to China's rising costs and appreciation of local currency," Zhang said.

You can read the full article at: http://usa.chinadaily.com.cn/business/2012-10/29/content_15854071.htm

Friday Five: A Global Perspective | January 27, 2012

1. China-Briefing: Shenzhen and Beijing Raise Minimum Wages
   
   
2. India's Business Standard: IMF Cut World Growth Outlook as Eurozone Weighs
   
   
3. The Outsourcing Buzz Blog: Orchestrating Your Transition with Experienced Players
   
   
4. The China Digital Times: China: Slowing but Still Growing
   
   
5. Tico Times: Costa Rica Surpasses Foreign Investment Goals

Friday Five: A Global Perspective | November 18, 2011

1. China's Ex-pats: Emerging Asia Beckons.  Chris Devonshire-Ellis at china-briefing.com discusses changes in the Chinese employment system and its effect on foreign workers:

http://www.china-briefing.com/news/2011/11/18/chinas-ex-expats-emerging-asia-beckons.html

2. IASB and Japanese Regulators Work on Convergence. Inaudit.com covers the latest discussions.

http://inaudit.com/events/iasb-japan-regulators-working-on-ifrs-gaap-convergence-11166/

3. Accenture signs 5-year BPO contract for Accounts Payable outsourcing.  Accenture partners with Statoil, an international energy company with a presence in 40 countries.

http://www.offshoringtimes.com/Pages/2011/BPO_news3244.html

4.  IMF Sees "Buildup" of China Bank Risk Needing More Oversight

http://www.businessweek.com/news/2011-11-15/imf-sees-buildup-of-china-bank-risk-needing-more-oversight.html

5.  Shared Services Slash Costs.  Treasury & Risk Magazine disucsses a Hackett study that focuses on the move to multi-function shared services.

http://www.treasuryandrisk.com/2011/11/15/shared-services-slash-costs

China remaining competitive despite a rise in labor rates

One of the questions around globalization is the issue of China's continued competitiveness in the face of rising labor rates as well as regional competitors.  The conventional wisdom is that China will lose its competitive edge due to increasing pressure on labor rates.

Turns out that hasn't come true, at least not yet.  A study recently released by the global bank RBS indicates that China continues to remain competitive.  Labor rates continue to rise, but other changes in China's economic environment are offsetting some of the cost pressures.

Here's an excerpt from a Wall Street Journal article:

RBS’s top China economist Li Cui writes in a research note published Wednesday that “evidence of China losing out is still absent.” Her view is that China has been remarkably adaptive to rising labor costs and a strengthening currency.

“One would have expected that labor intensive industries should have been hurt the most given their thin margins and relatively weak pricing power in the global market. However during this period China’s exports of light manufacturing products has risen to about one-third of the world markets (from 22% in 2005), dominating other regional competitors,” she writes.

Another website, The Edge (Malaysia), expands on the shift towards capital intensive exports which has the effect of reducing the impact of rising labor rates:

“But actual evidence of China losing competitiveness is still largely absent. In fact rising labour costs have gone hand-in-hand with China's rapid growth in global market share (from 7%% in 2005 to 11% in 2010).

“The rise in capital intensive exports has been a big part of the change. Machinery and transportation is now the largest category of exports, accounting for 53% of the total Chinese exports, up from 39% in 2001. In these sectors increases in labour costs have relatively minor effects,” said the report.

Due to the dynamic nature of globalization, no country can rest on its past accomplishments.  But given the ambition and talent of the Chinese people, it's unlikely that China will be out of the game any time soon.

Link to the Wall Street Journal article: China Isn't Losing Its Manufacturing Competitiveness After All

Link to The Edge (Malaysia) article: No Actual Evidence China Is Losing Its Competitiveness, Says RBS

Deloitte Opens New Sourcing Center in Shanghai, China

A brief article on the Shanghai Daily website discusses a new delivery center opened by Deloitte.  It will serve China and portions of Asia and provide IT and BPO services to clients in that region.  This move was inevitable given the opportunities in that region.  Look for more service companies to set up BPO service centers as the market continues to grow.

DELOITTE Touche Tohmatsu Ltd has opened a global delivery center in Shanghai, the first of its kind in China.

The new GDC facility, located in the Zhangjiang Hi-Tech Park, is expected to employ more than 8,000 employees in future, which makes it the biggest facility among Deloitte's 11 global GDC centers.

The center will provide Deloitte's Chinese and North Asia enterprise clients information technology and business process services. It will help clients save cost and improve work efficiency.

Deloitte's biggest GDC center now is in India with 8,000 employees.

Here the link to the article: Center Opens.   (The Chinese make a lot of great products, but their journalists need to work on the creativity of their article headlines.)

China Phasing Out More FDI Tax Incentives

For years China has aggressively courted foreign owned firms with a number of tax incentives.  China has had to balance the economic incentives necessary to draw foreign firms with their desire to nurture and protect domestic firms. 

Chris Devonshire-Ellis at China Briefing has an interesting article on China's shift towards domestic firms through the phaseout of certain tax incentives for foreign-owned entities.  An excerpt from the article:

Foreign investors have long enjoyed a variety of incentives, including the once very attractive five year tax breaks, but these are now long consigned to the scrap heap as China aims to put foreign investors on the same financial platform as its domestic companies. However, in some regards this makes it harder for foreign companies to compete. While legally foreign investors should be treated the same way as domestic corporations, in reality they are not. Foreign invested enterprises are considered as Chinese companies in law, however treatment of them in administrative areas often leaves them at a decided disadvantage when compared with Chinese owned domestic businesses.

An interesting note in the article is that China is reforming its capital markets to enable foreign-owned firms to raise capital in the Chinese capital markets.  Previously foreign-owned entities have been prohibited from doing so.

You can read the full article at: China Phasing Out More FDI Tax Incentives

Asian Development Bank estimates China's growth at 10.1%

According to an article at Shanghai Daily, the ASD has revised China's expected growth.  An excerpt from the article:

THE Asian Development Bank has revised its forecast of China's economic growth this year to 10.1 percent from a September estimate of 9.6 percent.

China's faster-than-expected economic expansion will help emerging East Asia to grow 8.8 percent this year, up from a previous estimation of 8.4 percent, the ADB said in its latest edition of Asia Economic Monitor released yesterday.

The article also notes that strong capital flows into China has created inflationary pressures that have been fueling asset bubbles.  Additionally, the Asian Development Bank suggests China and other Asian countries should coordinate policies to achieve economic stability and sustained growth.

Read more: http://www.shanghaidaily.com/article/?id=456664&type=Business#ixzz17X6jpJEN

Dalian, China restricts foreign workers

Dalian, China has been a favored location for companies looking to service the Japanese market due in part to the high number of Japanese speakers in that area.  China Briefing, which covers business developments in the Chinese market, has an article discussing Dalian's move to restrict foreign workers in organizations with small capital investments.  As noted in the article, this new ruling will have little effect on manufacturing concerns as they require relatively high capital investments.  Rather, it's likely to impact IT and BPO operations that are not as capital intensive.

An excerpt from the article:

The Dalian government introduced a new policy [Effective August 1, 2010] restricting the ability of foreign investors with a registered capital of under RMB3 million to obtain work permits for their foreign staff, effectively stopping foreign employees that want to work for such companies from being able to apply for a Z visa to work in China.

This measure is likely to affect companies in the service and IT sectors more than the manufacturing sectors, as service and IT enterprises tend not to be capital intensive, relying instead on generating income to grow their operations. The policy is likely to have a particularly large negative effect on innovation and entrepreneurship in the area.

Corporations looking to locate a site in China should look at how this impacts their evaluation criteria, including the ability to use foreign workers.  You can read the full article here.

China GDP growth estimated at 11% for 2010

An article from Shanghai Daily discusses the belief of Chinese officials that GDP will rise 11% for 2010 largely due to fiscal spending by the government.  One point of interest to multi-national corporations is that part of that spending will be on infrastructure.  Not surprising since China has mad it an investment priority to build the infrastructure that not only benefits their own people but provides an incentive for North American and European companies to continue investing in China.

An excerpt from the article:

China's economy may grow 10 to 11 percent on an annual basis this year based on more fiscal spending, a senior government economist said, striking a more bullish note on the economy than other analysts.

Some fiscal expenditures are channeled as government investment into infrastructure construction, education, healthcare and subsidies for start-up businesses. More government expenditures can help raise domestic demand and stimulate the economy, Zhang said.

You can read the entire article at:

China's 2010 GDP may expand by 11%, economist says

Genpact appoints new Asia leader to focus on China

As a sign of its recognition of the importance of the Chinese market, Genpact recently announced that it has appointed a new lead for the Asia region.  Genpact has been in China, most notably Dalian, as a base for serving Japanese companies.  But it has recognized the growing importance of the China-to-China market and it gearing up appropriately.

An excerpt from the press release:

NEW YORK & BEIJING August 4, 2010:Genpact Limited (NYSE: G), a global leader in business process and technology management, announces that it has bolstered its leadership team in Asia to strengthen its growth strategy in China and Japan, including a focus on the China-to-China market. Charles Hunting has been appointed chief executive officer, Asia, reporting to President and CEO Pramod Bhasin. Hunting brings more than 17 years of services experience to Genpact and will focus specifically on growing the China and Japan markets. Mitsuru Maekawa, one of the pioneers of the business process management industry in China, will be returning to Japan as vice chairman, Japan for Genpact.

You can read the entire press release here.

Companies in China look inward to locate factories

From The Straits Times in Singapore comes an interesting article about Chinese sourcing.  Rising wages and government incentives are causing companies like Hewlett-Packard and Cisco to look inwards for new locations to locate factories.  Historically labor has migrated from the inland provinces to coastal locations like Shanghai in search of opportunities.  Now the opportunities are moving to less developed areas of China.

As the article states:

A growing number of foreign companies in China, faced with spiralling wages and a shortage of skilled workers, are moving their factories inland to contain rising costs, analysts say.

After a spate of strikes and minimum wage hikes resulted in hefty pay rises for millions of workers, firms are looking to capitalise on government incentives to shift their operations to impoverished western China.

Foreign-invested firms are also looking to tap into a young, talented labour force which no longer wants to sacrifice family ties by leaving home to work long days in the coastal industrial belt.

While wages have been increasing for years, Vajpayee said foreign and Chinese manufacturers had now reached a 'tipping point' where labour costs were growing at a faster pace than revenues. 'Investment in a new factory in an inland province is a better option than continuing with a high cost base in coastal regions,' he said.

Although the article deals specifically with manufacturing, support services such as Finance, HR, and IT will no doubt be impacted by the same factors.  Companies looking to establish or build Shared Service Centers in China will need to evaluate the migration of manufacturing labor and where support services should be located to best serve the organization. 

Shanghai continues to be top choice for regional headquarters

Shanghai continues to attract the notice of Western companies seeking to establish a regional headquarter in Asia.  An article at Shanghai Daily notes that 24 more companies have elected to establish their regional headquarters in Shanghai.  These companies include Walt Disney, Kraft Foods and Novartis International. 

An excerpt from the article:

THE Walt Disney Co, Kraft Foods Inc and Novartis International AG are among 24 multinational companies that decided to move their regional headquarters to Shanghai.

It pushed the total number to 795 - including regional research and development centers - and maintained the city's status as China's top destination for regional headquarters of multinationals.

"The growing number demonstrated foreign companies' recognition of Shanghai's overall environment for foreign investments," said Sha Hailin, chairman of the city's Commission of Commerce. "It also came at a special moment when the World Expo was held in Shanghai, which greatly boosted the city's awareness among many foreigners."

The article also notes that Foreign Direct Investment (FDI) in Shanghai grew 4.5% in 2009 (year over year) despite the global economic downturn.

World Bank forecasts 9.5% China growth

An article in the Shanghai Daily newspaper discusses new growth projections for China this year.  The World Bank is predicting 9.5% growth.  This growth will be lead by investment from the private sector as well as increased consumption and away from government led stimulus.

An excerpt:

China's economy is projected to grow 9.5 percent on an annual basis this year, with a shift from government-led investment to a mix of solid consumption, recovered exports and stable investment, the World Bank said today.

"Despite the global recession, China's economy grew 8.7 percent in 2009, and the growth momentum continued in the first months of 2010," said the World Bank's latest China Quarterly Update, a regular assessment of the China's economy.

It lay the ground for the bank to give an optimistic forecast of 9.5 percent for China's economic growth this year, which is well above the Chinese central government's target of 8 percent and United Nations' earlier prediction of 8.8 percent.

Here's a link to the full article:

World Bank Forecasts 9.5% China growth